Securities lending is a process that allows investors to lend their securities to others to generate income. In Singapore, the securities lending market is still relatively small compared to other major markets such as the United States and Europe. However, there are several advantages of securities lending in Singapore for traders, and this article will explore the pros and cons of securities lending in Singapore.
What is securities lending, and why is it essential to the market?
Securities lending is the process of temporarily transferring securities from one party to another. The lender receives a fee for lending the security, and the borrower pays a fee for borrowing the security. The transaction is typically completed through a broker-dealer; click here to read more.
In general, securities lending helps to promote liquidity in the market. More trades can take place by making it easier for traders to borrow securities, increasing market activity and making it easier for investors to buy and sell securities. In addition, securities lending helps create a more efficient market by reducing the cost of trading.
For instance, if a trader wants to sell a stock short, they may have difficulty finding someone willing to lend them the stock. Securities lending allows the trader to borrow the stock from another investor and sell it. The trader can then repurchase the stock at a lower price and return it to the lender. The difference between the price at which the stock was sold and the price at which it was bought is the profit made by the trader.
The benefits of securities lending for investors
Investors who loan their securities can generate income from the fees they receive. This income is typically paid out in the form of dividends. For example, if an investor owns 100 shares of ABC Company and loans them to a trader, the investor would receive a dividend for each share loaned out.
In addition, investors can use securities lending to hedge their portfolios. For instance, if an investor is worried about a stock market crash, they could loan their stocks to traders and then repurchase them at a lower price after the crash. It would help to offset any losses incurred in the stock market.
Another benefit of securities lending is that it allows investors to diversify their portfolios. By lending their securities to traders, investors can earn income without selling their securities. It can benefit investors who do not want to cash out their investments.
The risks of securities lending
While securities lending can be beneficial for both investors and traders, there are also some risks involved. For instance, if the stock market crashes, the value of the securities loaned out may decline significantly. In addition, if the borrower defaults on their loan, the investor may not be able to recover their securities.
Another risk is that the investor may not receive their dividend payments if the borrower does not make them on time, which could lead to a loss of income for the investor.
Lastly, it is essential to note that securities lending is regulated in Singapore. Investors should know the rules and regulations governing securities lending before entering into any transactions to significantly reduce the risk of jeopardising their trades.
How does securities lending work in Singapore?
The Securities and Futures Act (SFA) governs securities lending in Singapore. The SFA requires all securities lenders to be licensed by the Monetary Authority of Singapore (MAS).
In addition, lenders must comply with specific rules and regulations, including the following:
- Lenders must maintain a minimum balance of SGD 1 million in their account with MAS.
- Lenders must provide MAS with a list of securities they are willing to loan out.
- Lenders can only loan out securities that they own. They cannot loan out securities that they are holding for another person.
- Lenders can only loan out securities to borrowers who MAS also licenses.
- The maximum loan period is one year.
- Both parties must agree on the interest rate on the loan.
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