January 2013

The Securities and Exchange Board of India (SEBI), on Thursday, allowed “liquid” Index Exchange Traded Funds (ETFs) eligible for trading in the Securities Lending and Borrowing (SLB) segment.
Earlier, SEBI had allowed only securities traded in the Futures & Options (F&O) segment for lending and borrowing of securities.

Securities lending is a loan of securities by a lender to a borrower for an agreed period.

The lender earns lending fee on securities lying idle, and the objective of the lender is to maximise returns on the portfolio. Borrowers’ objective would be to use SLB to cover shortages and reverse arbitrage. SEBI has also stipulated that position limits for SLB in respect of ETFs would be based on the assets under management of the respective ETF.

“ETF shall be deemed ‘liquid’ provided the Index ETF has traded on at least 80 per cent of the days over the past six months and its impact cost over the past six months is less than or equal to 1 per cent,” SEBI added.
With the introduction of the ETFs in the SLB segment, there would be wider participation as well as increased volumes.

Further, SEBI has introduced a roll-over facility wherein the lender, who is due to receive securities in the pay-out of an SLB session, may extend the period of lending and similarly a borrower, who has to return borrowed securities in the pay-in of an SLB session, may, through the same SLB session, extend the period of borrowing.

Roll-over shall be available for three months, that is, the original contract plus two roll-over contracts. SEBI, however, said that netting between borrow and lend position would not be permitted.

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