Kenya’s Central Depository and Settlement Corporation (CDSC) on Tuesday unveiled the pilot phase of its Securities Lending and Borrowing platform. During the pilot phase, only liquid securities, those under the benchmark NSE 20 Share index will be lent or borrowed.
The screen-based digital platform seeks to provide investors with a vast portfolio of idle stocks or bonds, especially pension funds, and insurance companies, with a window to loan out their securities for a specific period and earn a cash return.
Securities Lending and Borrowing (SLB) is the temporary transfer of securities from a lender, to a borrower, with a simultaneous agreement to return the securities either on-demand or at a future date.
This lender can be any individual or institution holding a substantial number of shares on a long term basis.
For institutional investors, securities lending is an ideal instrument, with a low-risk profile, that can generate extra income on securities that remain idle in a portfolio for an extended period.
Securities lending and borrowing have low-risk profiles because the transactions out between market parties are in a fully collateralized manner.
By lending these securities, pension funds and other lenders receive extra income, while still maintaining the right to recall the securities any time.
Besides, securities lending helps market parties with their risk management and creates greater liquidity in the market where securities lending and borrowing is available.
The latest figures from the Central Bank of Kenya(CBK) show that Banking Institutions hold the highest percentage of public debt, made up of Treasury Bills and Bonds, at 54.88%. This is compared to insurance companies (6.03%), parastatals (5.72%), pension funds (29.09%) and other investors (4.29%).
Government bonds and equities account for the majority of the securities on loan globally.
In 2019, the global revenues from SLB transactions stood at over US$5.1Billion. The value of securities on loan in September 2019 was US$2.4 Trillion, with the USA accounting for approximately 55% of this value.
In Kenya, institutional investors such as pension funds hold a significant part of their portfolio in shares. This class of investors is not speculative due to the long term nature of pension liabilities.
While holding these securities, a pension fund may earn dividends and other corporate returns as the value of the securities changes based on market prices.
As long as securities are in the investors’ accounts, they cannot earn any additional income.
CDSC provides these investors with a window where lending and borrowing requests/orders are captured on a platform in an automated system, run by SLB agents on behalf of their clients or their behalf.
The system matches the transactions according to the specified criteria.
This process is similar to trading in Equities, where the broker captures the bids and offers, which are then automatically matched on the ATS.
The CDSC platform has been approved by the Capital Markets Authority to facilitate Securities Lending and Borrowing using this model. CDSC is the central party that will guarantee settlement of all transactions as set out in the Central Depository (Securities Lending and Borrowing) Procedures.
The lender will receive income from the securities they lend out, without having to liquidate their portfolio.
The lender does not have to look for borrowers der to lend securities since the agents re able to see all the borrowing and lending requests on the platform.
The lender does not have to manage the collateral since CDSC will perform this function. The securities are transferred automatically by the system when a transaction happens. And when securities are due for return without requiring the signing of physical documents.
The lent securities will remain in the lender’s books, and a statement of the lender’s account will reflect the shares out there.
Once an SLB transaction matched, the CDS system will automatically transfer the securities from the lender’s account to the borrower’s account and commit the collateral.
All concerned parties will receive the relevant notifications once the transfer of securities and commitment of collateral has happened.
The borrower will be required to have the securities in his CDS account on the due date.
The system will calculate the shares that are due for return if there was a bonus or split during the life of that SLB transaction.
The securities will be transferred from the borrower’s account back to the lender’s account.