This article first appeared in Personal Wealth, The Edge Malaysia Weekly on March 18, 2019 - March 24, 2019

What is it?

Securities borrowing and lending (SBL), as an instrument for investors to maximise returns on securities sitting idle in their portfolios, has been gaining traction in recent years. Essentially, it allows retail investors to earn interest income, on top of the dividends they would normally receive, by lending out their securities such as equities, bonds and derivatives to other investors.

According to Singapore-based online share trading platform Phillip’s Online Electronic Mart System, the SBL mechanism is important because it provides greater liquidity, tighter spreads, better risk management and the possibility of reducing the cost of capital.

How does it work?

The SBL mechanism allows, say, a borrower who expects the price of a stock to fall to hold a short position for a prescribed duration. The borrower immediately sells the securities in the hope of profiting from the sale and buys them back later when price falls.

During this period, ownership of the securities is provisionally transferred to the borrower, who pays all dividends due to the lender. The lender also receives an agreed-upon fee — which is usually an annualised percentage of the value of the loaned securities — from the borrower. The securities are returned to the lender at the end of the deal.

What is available to retail investors?

To boost retail participation in the domestic market, Bursa Malaysia and Affin Hwang Investment Bank Bhd teamed up in January to launch the first SBL facility for retail investors. Through this facility, retail investors are able to lend securities that they own but do not intend to sell immediately to Affin Hwang, which serves as the borrower.

Borrowers are typically large financial institutions such as prime brokers and hedge funds while lenders are generally large institutional investors such as pension and sovereign wealth funds.

The Edge Financial Daily quoted Affin Hwang’s SBL equity finance senior associate director Karu Ramesh Kumar as saying that retail investors could earn interest income of 0.5% to 12% per year, depending on the supply of and demand for the stocks they own.

To participate in the scheme, each SBL tranche requires a minimum of RM100,000 on a single counter. Bursa says there are currently 239 stocks eligible for the SBL mechanism and it is looking at enabling more.

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