Securities lending is a widespread practice in finance where securities are temporarily transferred between two parties – the borrower and the lender. In this process, the borrower pays a fee or interest to the lender for using their securities, typically for short-selling purposes. This collateral-based service allows traders to maximise their profits by leveraging securities they do not own.
While securities lending is commonplace in Singapore, there are several things that traders may not be aware of. This article will delve into the intricacies of securities lending in Singapore and explore crucial aspects that traders rarely know.
Table of Contents
The regulatory framework for securities lending
Securities lending activities in Singapore are governed by the Securities and Futures Act (SFA) and its subsidiary legislation, which includes the Securities and Futures (Licensing and Conduct of Business) Regulations. The Monetary Authority of Singapore (MAS), the country’s central bank, regulates securities lending activities.
Under the SFA, any person or entity wishing to conduct securities lending activities in Singapore must obtain a license from MAS. It ensures that only qualified and reputable parties are involved in securities lending and helps maintain the market’s integrity.
The SFA also outlines specific conduct requirements for licensed securities lenders, including disclosure obligations, record-keeping requirements, and risk management practices. These regulations protect investors’ interests and promote fair and efficient markets.
MAS has strict guidelines on the types of securities that can be lent and the maximum amount that can be lent out. It ensures that lenders maintain sufficient levels of liquidity and avoid excessive risk-taking.
Traders must also be aware of the reporting requirements under the SFA. Licensed securities lenders are required to submit regular reports to MAS, which include details such as the transactions conducted, collateral holdings and valuation, and any risk exposures.
The role of the central counterparty (CCP) clearing
In Singapore, securities lending transactions are typically cleared by a central counterparty (CCP) to reduce counterparty risk. CCPs act as intermediaries between the borrower and the lender, ensuring both parties fulfil their obligations.
SGX Securities Borrowing and Lending (SBL) is the only CCP for securities lending in Singapore. It provides a centralised platform for lenders and borrowers to execute their transactions, with risk management and settlement services.
One of the main advantages of using a CCP is that it allows for netting or offsetting positions between different lenders and borrowers. It helps reduce transaction costs and enhances market liquidity.
CCPs also have strict margin requirements to mitigate counterparty credit risk. Lenders are required to deposit collateral with the CCP, which is held as security in case of default by the borrower. Visit home.saxo to learn more about the margin requirements for securities lending.
Traders should also note that SBL has a pre-trade matching system to ensure transactions are conducted at market rates. It helps maintain transparency and fairness in the securities lending market.
The importance of loan recalls
Loan recalls are an essential aspect of securities lending that traders often overlook. A loan recall is when the lender requests the borrower to return the securities before the agreed-upon term expires.
Traders must be aware of this as a loan recall can happen at any time, and they must be prepared to return the securities immediately. Failure to do so may result in penalties and damage to the lender’s trust.
Loan recalls can occur due to various reasons, such as corporate events (e.g., mergers or buyouts) or changes in a company’s financial health. Traders must pay close attention to any announcements from the securities issuer that may affect the value of the borrowed securities.
Traders should also have a contingency plan in case of a loan recall. It may include having access to alternative securities or being prepared to repurchase them from the market.
Tax implications of securities lending
Traders must also know the tax implications of securities lending in Singapore. Under the Income Tax Act, any income generated from securities lending activities is subject to tax.
Borrowing fees and interest are taxable income for the lender, while the borrower can claim a deduction for these expenses as business costs. Traders must keep accurate records of their securities lending activities to comply with tax regulations.
Traders should also be aware of any potential withholding taxes when lending out securities to foreign entities. Singapore has double taxation agreements with several countries, which may provide relief from withholding taxes on interest income.
The impact of market volatility on securities lending
Market volatility can have a significant impact on securities lending activities. During times of high market volatility, lenders may become reluctant to lend out their securities, causing a shortage of available securities for borrowing.
It can lead to an increase in borrowing fees and a decrease in lending income for lenders. Traders must be aware of these potential changes in market conditions and adjust their strategies accordingly.
Market volatility can also affect the value of borrowed securities, leading to potential margin calls from the CCP. Traders must closely monitor their positions and have sufficient collateral on hand to meet any demands from the CCP.