In securities lending, legal title of a security is temporarily transferred from a lender to a borrower. The lender retains all the benefits of ownership, other than the voting rights. The borrower is entitled to utilize the securities as required but is liable to the lender for all benefits (e.g. dividends, interest or rights). Securities lending began as a means to cover short sales, but has since evolved as a means of facilitating sophisticated trading strategies. Security lending occurs when a holder of securities or their agent lends eligible securities to borrowers in return for a fee. The absence of a formal market for securities lending had been felt for a while. Responding to market needs SEBI introduced a scheme for Securities lending and Borrowing in 1997.

Securities lending program is used by the lenders to maximize yields on their portfolio. Borrowers use the securities lending program to avoid settlement failures. Security lending provides income opportunities for securities holders and creates liquidity to facilitate trading strategies for borrowers. Securities lending is particularly attractive for large institutional holders of securities, as it is an easy way of generating income to offset custody fees and requires little, if any, of their involvement or time. Securities lending give borrowers access to lender portfolios, which provide the flexibility necessary when borrowing for strategic positioning and financing inventories.

NSE’s Automated Lending and borrowing mechanism (ALBM)

ALBM is a scheme envisaged specifically for Participants (Trading members / Clearing members). This scheme caters to the need of clearing members / trading members to provide a facility to lend / borrow securities / funds for weekly market as well as for rolling market, at market determined rates. All clearing members of NSCCL / trading members of NSE are eligible to become participants to ALBM, subject to signing of securities lending agreement and completion of other necessary documentation and procedure.

ALBM basics

Securities lending price: This is the benchmark rate at which all lending and borrowing transactions are effected by NSCCL. It is the closing price of the security in the NSE on the day prior to the ALBM session. The SLP is downloaded as a message broadcast on the day of the ALBM session.

Transaction price: This is the rate at which transactions are executed in the spot book of the NEAT system of NSE.

Funds: This is nothing but the 100% cash collateral to be deposited by the borrower of securities towards the loan.

Eligible securities: Securities that are traded in compulsory demat and form part of S&P CNX NIFTY & CNX NIFTY JUNIOR are eligible securities for lending / borrowing in the ALBM sessions.

How ALBM works?

The spot book of the NEAT system of NSE is used for transacting in ALBM. A participant who wishes to borrow security / lend funds for a particular security executes a borrow transaction / buy order. Similarly, the participant who wishes to lend security / borrow funds executes a lend transaction / sale order. At the end of each ALBM session the net obligation of a participant in a particular security determines the net intention to lend or borrow. A net buy position for a security implies a firm and irrevocable intention to borrow, whereas a net sale position for a security implies a firm and irrevocable intention to lend. Based on
this NSCCL will give effect to lending/borrowing transactions by settling these along with the obligations of the relevant settlement, at the Transacted Price.

The net obligations of these lending/borrowing transactions and obligations of relevant settlement have to be honored on the settlement date of respective settlement by making pay-in of required securities / funds to the NSCCL.

Securities lent, are returned by creating reverse obligation of the lending/borrowing transactions in the concurrent relevant settlement for the ALBM session conducted for weekly market and in the next immediate rolling market for the rolling ALBM session of NSE at Securities Lending Price (SLP). The return of loaned securities / cash collateral are effected along with the respective settlement. NSCCL thereby ensures the return of borrowed securities and the cash collateral.

Presently, NSCCL offer short fixed term loan of seven days through weekly market ALBM sessions and two days or four days (depending on the ALBM session day) tenure loan through its rolling ALBM sessions. At present ALBM session for weekly market is conducted on Wednesdays and rolling ALBM sessions are conducted on all trading days.