You may have to pay just 40% margin to borrow shares

In an attempt to boost the securities lending and borrowing mechanism, stock exchanges are considering a proposal where market participants may not have to pay the whole margin upfront. Internationally, players have to deposit cash (or some equivalent) equal to, or slightly higher than the amount of shares borrowed. A stock exchange official said, to begin with, this may be restricted to roughly around 40% of the worth of securities. Recently, capital market regulator Sebi had asked stock exchanges and depositories to put in place a screen-based system for implementation of the stock lending and borrowing mechanism by April 21. However, most players are awaiting further clarity or details on the scheme. One of the most-awaited clause is the amount of cash (or equivalent called as margin) that participants have to pay upfront. If this is fixed at 40%, it would mean that for a crore of stocks borrowed from the exchange window, only Rs 40 lakh will have to be kept with the exchange (or more accurately its clearing house) as the deposit. Once these borrowed stocks are returned within seven days, the deposit would be returned and only the pre-fixed interest will be paid to the lender. This, of course, if the contract for borrowed securities is not ‘rolled over’. The official further explained that the 40% initial margin will have, among others, 10% value at risk (VaR) and 5% extreme loss margin, (ELM), among others.
However, for a person who wants to bet against a rising share by selling it, the futures & options segment is likely to be a cheaper bet than the cash market. While selling futures on a stock, one has to pay only a fifth of the total exposure as initial margin. However, the mark-to-market transactions are likely to be calculated in both scenarios. The market is no stranger to the lending borrowing mechanism. After Sebi reintroduced Badla in 1996, NSE had introduced the Automated Lending and Borrowing Mechanism (ALBM), which was soon followed by the BSE’s Borrowing and Lending of Securities Scheme (BLESS). Both were essentially sophisticated forms of badla. However, once derivatives was introduced in 2000, ALBM and badla were banned as it was felt that the purpose of leverage was well served by individual stocks futures. “Given the considerable similarities in software requirements between the proposed securities lending mechanism and the old ALBM system, I would think that the exchanges should not need more than 2-3 weeks to get this off the ground,” JR Verma of IIM-A had said recently.