The main objective of SGX`s SBL program is to improve the liquidity of shares traded on SGX. The program was launched in January 2002 by Central Depository (CDP), a subsidiary of SGX. The structure of the CDP`s accounts is the foundation of the SBL programme. The holdings of a large number of direct deposit accounts provide a regular supply of the credit pool. Guarantee agreements protect the cash flow available to the customer to repay the facility. In an effective hedging program, when prices move against the customer, it leads to profits for the customer from the hedges. If the customer defaults, the lender wants the opportunity to mitigate the losses by asserting its guarantee and applying the profits to the amounts owed to it. Collateral used in financing transactions can be hedged in two ways: by using exchange-traded derivatives (ETDs) or over-the-counter derivatives (OTC). While exchanges offer central markets where multiple counterparties provide common liquidity and transparent prices, OTC transactions refer to bilateral transactions, which are usually limited to two counterparties. Here are some of the most important issues to consider when structuring a hedge for an exchange or otc financing transaction, and the impact of using either option: If a lender is experiencing financial difficulties, a broker usually wants to have the option to terminate the separate account and should therefore consider whether their brokerage contracting rights would make this possible. The lender will often try to get collateral through this account. If it is agreed, the title will be included in a tripartite agreement between them, commonly referred to as a “tripartite agreement” or “APT”.
This warning will highlight the main concerns and common areas of negotiation from the perspective of the three parties. Commodity finance lenders often require borrowers to hedge their exposure to commodity price movements. Hedging can protect the borrower from the inconvenience of a change in the price of a commodity and help the borrower repay the loan. It is common for the borrower to hedge their exposure with exchange-traded derivatives that are concluded with a clearing broker. Cleared hedges with UK or European brokers are usually principal-to-principal transactions between the broker and his client, the borrower. Transactions are held in a futures brokerage account held with the broker. Under English insolvency law, floating securities have several disadvantages, including the fact that the holders of these securities are behind the following entities: (1) holders of fixed securities; (2) the cost of the insolvent succession; and (3) certain “preferred” creditors. In addition, disbursement is subject to the prior division of the fund, which may be distributed to unsecured creditors, and subsequent fixed guarantees take precedence over previous variable guarantees. Second, hedging could reduce counterparty risk, as borrowers who hedge tend to be exposed to lower price risk. This allows lenders to increase their exposure to certain businesses if they wish. Most SBL transactions are made against collateral, which can take the form of cash, securities or other assets. The eligible collateral is agreed between the parties from the outset, including the initial margin, the sustaining margin and the concentration limits (i.e.
to ensure that the collateral can be liquidated if necessary). The collateral is often held by a tripartite agent to whom the borrower pays a fee. This agent, usually a large custodian bank or an international CSD, receives the borrower`s eligible collateral and keeps it in the lender`s account. The tripartite agent marks the collateral on the market and distributes the information to lenders and borrowers. Tripartite agreements define the different guarantees and contingencies between the three parties in the event of default. If a broker loses its solvency or, if the relevant legal and regulatory system allows, defaults or is subject to insolvency proceedings, the client may be able to transfer its positions to another broker. In this case, the lender would likely attempt to enter into tripartite agreements with the new broker and would have to review its rights under the facility agreement if it does not agree on satisfactory terms with the new broker. Under most current clearing models in the UK and Europe, client margin is not transferred with positions. Therefore, the client (or lender) must fund the margin that covers the positions with the new broker. TSEC offers three types of SBL transactions: the bond transaction, the competitive auction transaction and the negotiated transaction. The exchange offers a correspondence system for bond transactions and competitive auction transactions. After the reconciliation, details of the order will be shared with Taiwan Securities Central Depository (TSCD), a subsidiary of TSEC.
As a result, TSCD will transfer the securities from the lender`s account to the borrower`s account. The borrower returns the securities by notifying his securities dealer, who in turn notifies the exchange. The borrower must deposit a guarantee on the stock exchange. For negotiated transactions, borrowers and lenders agree on the securities, guarantees, associated fees and beneficial owners of the securities. The exchange does not provide a guarantee for this type of transaction. Details of traded transactions are sent to the exchange, which informs TSCD of the processing. SBL transactions are mainly fixed-rate transactions (57%) and competitive transactions (42%). Only one percent of transactions are negotiated transactions. It is generally agreed in the tripartite agreement that the broker will provide the lender with copies of all statements and confirmations relating to the secured account. The lender will want to take over the collateral on transactions and other properties on the brokerage account.
He will also want to take care of the security of the client`s rights vis-à-vis the broker in relation to the account (for example.B. the rights to receive payments in connection with the transactions transferred to the account). In the past, settlement coverage was the origin of securities lending. For less liquid securities such as corporate bonds and limited floating shares, settlement coverage still accounts for a large portion of credit demand today. Borrowing to cover the settlement is essential to the resolution process. This has led some securities custodians to enter the automated securities lending industry, where clients automatically make their securities available to the custodian for loan from the depositary. The article first describes SBL as it is practiced in international markets and in Hong Kong. It summarizes HKEx`s experience in implementing an equity loan program to cover resolution. The Article also takes into account the experience of foreign clearing houses and other institutions in providing centralised SBL services. Finally, the relevance of international experiences for Hong Kong will be discussed. Hong Kong`s regulatory system, which includes restrictions on short selling (including criminal penalties) and stamp duty, for which an exemption must be requested by filing the share loan agreement with the tax department, is not particularly practical for the industry, but players have generally adapted to it. Subrogation, as set out in a typical tripartite agreement, clarifies the requirements for the transfer of ownership in the event that the borrower fails to pay his debts or dies.
Direct holders are the largest lenders. Currently, about 6,000 direct custodians have registered to lend their shares. You can specify that (1) all stocks, (2) only certain stocks, or (3) some stocks only with quantitative limits. The assets remain in the accounts of potential lenders. CDP uses a separate system to track the loan pool. .