Review of Securities Lending and Borrowing (SLB) Framework - SEBI - MRD/DoP/SE/Cir- 31 /2008

Circulars CHIEF GENERAL MANAGER Market Regulation Department Division of Policy Tel: 26449370 Fax: 2644 9031 Email: [email protected] MRD/DoP/SE/Cir- 31 /2008 October 31, 2008 1. The Managing Director / CEO, National Stock Exchange and Bombay Stock Exchange 2. Managing Director, NSDL and CDSL Dear Sir, Sub: Review of Securities Lending and Borrowing (SLB) Framework The framework for SLB was specified vide circular no. MRD/DoP/SE/Dep/Cir- 14 /2007 dated December 20, 2007. SLB was operationalised with effect from April 21, 2008. Pursuant to feedback from market participants and proposals for revision of SLB received from NSE and BSE, the framework is being revised as under: Tenure Tenure for SLB may be increased to 30 days from the present 7 days. Corporate Actions during the 30 day SLB contract The SLB tenure of 30 days will result in the need for appropriate adjustments for corporate actions. The corporate actions may be treated as follows: a. Dividend: The dividend amount would be worked out and recovered form the borrower at the time of reverse leg and passed on to the lender. b. Stock split: The positions of the borrower would be proportionately adjusted so that the lender receives the revised quantity of shares. c. Other corporate actions such as bonus/ merger/ amalgamation / open offer etc: The transactions would be foreclosed from the day prior to the ex-date. The lending fee would be recovered on a pro-rata basis from the lender and returned to the borrower. Time window for SLB The time for SLB session may be extended from the present one hour (10 am to 11 am) to the normal trade timings of 9:55 am to 3:30 pm. Risk Management a. With regard to risk management in SLB, it is advised that common risk management practices shall be followed by stock exchanges for SLB. It is reiterated that the exchanges should ensure that the risk management framework strikes a balance between ensuring commercial viability of SLB transactions and ensuring adequate and proper risk management. Exchanges should satisfy themselves regarding the adequacy of the risk management system. b. Margins in SLB may be taken in the form of cash and cash equivalents as prescribed in the circular MRD/DoP/Cir-07/2005 dated February 23, 2005. Exchanges and Depositories are advised to a. take necessary steps and put in place necessary systems for implementation of the above at the earliest; b. make necessary amendments to the relevant bye-laws, rules and regulations for the implementation of the above; c. issue necessary instructions to the member brokers/clearing members and depository participants and also to disseminate the same on the website. This circular is issued in exercise of powers conferred under Section 11 (1) of the Securities and Exchange Board of India Act, 1992, to protect the interests of investors in securities and to promote the development of, and to regulate the securities market. Yours faithfully, S V MURLI DHAR RAO