Guide to securities lending in Singapore

The securities lending market is constantly evolving and has been growing steadily over the years. As more investors and traders seek to lend and borrow assets to gain additional sources of return and liquidity, the market is more important than ever.

If you are looking to employ strategies that require you to own a substantial amount of assets to begin with, you may be interested in securities lending. In this article, we will look at what it is, why people participate in it, and how you can choose a securities lending intermediary regardless of whether you are a lender or a borrower.

What is securities lending?

Securities lending is a process by which a lender loans a security, such as stocks and bonds, to a borrower. The borrower is then able to sell the borrowed securities, on the agreement that they will return an equivalent number of the same securities later. On the other hand, the lender receives a fee and collateral (typically cash or other securities) in exchange for the securities.

Lending agents such as banks and brokers can facilitate securities lending, acting as intermediaries or middlemen. In this case, the banks and brokers handle the administrative tasks that come with lending, such as drawing up legal agreements and handling collateral and custody management. These agents usually also cut a fee from the lending process.

Why do people participate in securities lending?

There are many reasons traders participate in securities lending. They include short selling, increasing liquidity, and, for lenders, generating extra income.

Short-selling

Short selling also goes by the name ‘shorting’, and it is a trading strategy where an investor borrows a share of an asset to sell them in the market. Traders usually short assets when they believe their market price will drop. They aim to sell the assets at a higher price, wait for the price to further drop, and buy back the assets at a lower price, profiting from the price difference in between.

Short-selling is a high-risk strategy, because potential losses are (theoretically) unlimited as a stock price can increase forever. However, it remains a popular trading strategy because of its relatively simple concept.

Increasing liquidity

A hedge fund may also lend out a security, such as a stock, to traders so they can settle a trade. Alternatively, they may lend out a stock to brokers to meet regulatory requirements.

Generating extra income

Finally, lenders participate in securities lending because they want to generate some extra income. They charge a fee to borrowers. This is especially helpful for lenders who hold onto long-term positions in certain securities, such as those in pension funds, endowments, and insurance.

There is a risk involved in this process, though, and it is the risk of the borrower not being able to return your assets after they have borrowed them. In this case, the lender may have to take legal action. Therefore, it is important that the lender lays out clear borrowing terms and gets a written agreement from the borrower on those terms.

How to participate in securities lending in Singapore?

People participate in securities lending through dedicated platforms. In Singapore, this is the Singapore Exchange Limited (SGX). SGX provides a central counterparty service that allows market participants to lend and borrow securities through a centrally-cleared model. This makes sure processes are safe and efficient for all parties involved.

SGX also facilitates a tri-party collateral management service. This allows market participants to pledge colalteral electronically and automatically.

Is securities lending regulated in Singapore?

Securities lending follows close regulations around the world, as various governments and industry bodies ensure the process is safe and transparent. These bodies also ensure there are proper procedures and mechanisms in place to manage the risks associated with securities lending.

In Singapore, the Monetary Authority of Singapore (MAS) is the country’s central bank and financial services regulator. MAS oversees security lending processes between brokers, individual lenders, hedge funds, individual borrowers, and other institutions, to protect the interests of all parties involved in the process.

How to choose a securities lender

When choosing a securities lender, it is important to consider several factors, as outlined below:

Reputation of the lender

The most important thing for both lenders and borrowers is to look for a lender with a strong industry reputation. Usually, these are large financial institutions that have decades of experience. You can choose a local Singaporean bank or an international one with local branches. For example, Saxo Bank Group is widely acclaimed in all forms of financial services they offer, including securities lending.

Creditworthiness of the lender

Next, you should ensure the creditworthiness of the lender. This is their track record, and if you are a lender, it will be indicative of how good they are at holding your securities as collateral. You want to choose someone you can trust with your assets and can handle the administrative tasks that come with securities lending.

Lender’s services

Next, you should also consider the lender’s services. If you are a borrower, this could be the type of securities you can borrow through their facilitation. If you are a lender, this may be the type of administrative services they will handle on your behalf, as the middlemen of your transactions with borrowers.

You can also see if the institution has the technology in place to handle sophisticated securities lending and record keeping. For example, do they have systems and good reporting mechanisms to keep track of your collateral? Are they flexible with the process and how quickly do they process transactions?

Lending terms

Lending terms include borrowing fees, commissions, loan-to-value ratios, recall terms, timeframes, and more. Regardless of whether you are a lender or a borrower, you should make sure the institution charges no hidden fees that can eat into your potential profits. If you have special needs regarding trading, you should also choose institutions with more flexible lending terms.

Legal and regulatory compliance

An extremely important step when selecting a provider is to make sure they fit legal and regulatory compliances. In Singapore, the MAS oversees securities lending. Therefore, make sure the institution you select is regulated by the MAS. You should also make sure they respect all local laws outside of direct financial regulations.

Customer support

Finally, one factor you should also consider is the amount and quality of customer support the institution can offer you as both lenders and borrowers. If something goes wrong, will you be able to get in touch with them immediately? Is their team professional and has expertise in securities lending as well as local laws?

The bottom line

Singapore is a great place for securities lending, as the country is technology developed and has a well-established securities lending market. There are many securities landing platforms and firms locally, including various banks, securities firms, and independent agents, as well as international brokerages and firms. There is certainly a diverse and competitive market, so it is important to shop around before settling on the firm you would like to work with.

Finally, it is worth mentioning that the securities lending market is a dynamic one. This means regulations can change, so it is essential that you do your research and have the most updated information on regulations and guidelines, so you comply with regulations.