AUTOMATED LENDING AND BORROWING MECHANISM (ALBM) - SEBI - SMDRP/POLICY/CIR-31/2000

SECURITIES AND EXCHANGE BOARD OF INDIA SECONDARY MARKET DEPARTMENT Mittal Court, A Wing, Gr. Floor, 224, Nariman Point, Mumbai 400 021 SMDRP/POLICY/CIR-31/2000 July 27, 2000 To: The President/Executive Director/ Managing Director of All the Stock Exchanges Dear Sir, AUTOMATED LENDING AND BORROWING MECHANISM (ALBM) 1. The various issues related to ALBM have been examined by a Group constituted by SEBI under the chairmanship of Prof. J R Varma, Member, SEBI Board. This was also discussed by the Risk Management Group constituted by SEBI in its meeting held on July 13, 2000. 2. Based on the recommendations of these Groups, it has been decided that ALBM would now be permitted as a generic product. The basic purpose of ALBM would be to facilitate lending and borrowing of securities as envisaged by the Stock Lending Scheme 1997 (SLS). The ALBM however may also serve the purpose of deferral of settlement by netting off obligations in ALBM with obligations in the normal settlement. This would result in carrying forward of the positions in the normal settlement as in the case of Modified Carry Forward System. 3. ELIGIBILITY OF THE EXCHANGE TO IMPLEMENT ALBM An Exchange would be eligible to introduce the ALBM if it satisfies the following conditions : i. The exchange must demonstrate that it has a well-designed software for margin computation and well established governance structures and administrative infrastructure for monitoring and enforcing the margining system. If necessary, an inspection of the exchange would be carried out by SEBI to satisfy itself about the adequacy of its margining system. ii. The exchange or its clearing corporation must be an approved intermediary under the stock lending scheme. 4. ELIGIBILITY OF SCRIPS FOR ALBM Exchanges desirous of implementing ALBM will obtain SEBI approval for : i. The eligibility criteria for scrips to be included in the ALBM list ii. The process of choosing the scrips in the ALBM list iii. Disclosure and transparency provisions relating to the above 5. RISK CONTAINMENT 5.1 Position Limits : There will be a position limit per broker of ₹ 40 crores in the aggregate and ₹ 5 crores per scrip. These limits will be determined on the basis of gross position for the broker. These limits would apply only to trade positions that are netted against ALBM positions, and would not apply to stand-alone ALBM positions. However, the positions of pure securities borrowers as defined in point no. 6.1 below, who would be withdrawing the shares would be included in the above mentioned overall position limit of ₹ 40 crores in aggregate and ₹ 5 crores per scrip. 5.2 Short Sale Transactions A short seller receives charges in the ALBM when the lending price is below the clearing price. Such charges shall be released to the short seller only if either the seller actually owns the shares (and is using ALBM only for operational convenience or other reasons) or the seller actually has funds by which he could have taken delivery of the borrowed shares even if the ALBM transactions and trade transactions were not netted off. In other cases, the excess of the clearing price over the lending price would be credited to the Investor Protection Fund of the Exchange and shall not be released to the short sellers. 5.3 Margins 5.3.1 Margining on Gross Basis ALBM transactions, which are netted against trade positions, would be subjected to margining on the basis of gross positions i.e. positions grossed across clients. 5.3.2 ALBM Margin The margin on all trade positions that are proposed to be netted against ALBM transactions shall not be less than 10%. Further, in cases where the position so netted by a member exceeds ₹ 20 crores, the excess over ₹ 20 crores shall attract a margin which shall be at least 15% (5% above the 10% limit). The minimum ALBM margins would start applying only at the end of the ALBM session, as because of the very nature of the product it would be difficult to achieve the segregation of twin track in the case of ALBM as in the case of carry forward system. 5.3.3. Incremental ALBM Margin In case the gross position in ALBM in any exchange, in any scrip, exceeds the parameters mentioned below, the additional margin shall be levied, in addition to the ALBM margin, at a rate which is higher of the rates determined as per the tables below : Gross Outstanding Market Position (Rs. In crores) Rate of Margin Carry Forward Gross Position (in number of shares as % of total number of shares paid-up) Rate of Margin Exceeding 75 and up to 100 5% Exceeding 3% going up to 4% 5% Exceeding 100 and up to 150 8% Exceeding 4% going up to 5% 8% Exceeding 150 and up to 200 12% Exceeding 5% going up to 6% 12% Exceeding 200 and up to 300 17% Exceeding 6% going up to 7% 17% Exceeding 300 and up to 400 23% Exceeding 7% going up to 8% 23% Exceeding 400 30% Exceeding 8% 30% The positions referred to would exclude the positions pertaining to the pure securities borrowers to the extent that the collateral securities are kept with the clearing house/corporation. Once this margin is imposed by any Exchange having ALBM or MCFS facility, the other Exchanges having ALBM or MCFS will also follow the same from the start of next settlement. 5.3.4 Collection of Margins These margins would be paid 100% in cash or fixed deposits or government securities, or a combination of three. Mark to Market Margin shall be collected separately from daily/exposure margin as the purpose of the two margins is different. 6.0 RISK MANAGEMENT OF PURE SECURITIES BORROWERS' OBLIGATIONS TO RETURN SECURITIES 6.1 Pure securities borrower means a borrower of securities who does not have an offsetting long trade position. 6.2 Pure securities borrowers will have the option of depositing the collateral with the clearing corporation. A pure securities borrower who does so would not be subjected to any margin. However, if at the end of the settlement, the pure securities borrower wishes to initiate a fresh transaction to continue the pure borrowing of securities for one more week, mark to market margin would be imposed at that stage. The pure securities borrower who opt for withdrawing the shares from the clearing house/clearing corporation shall be subject to margins such as mark to market margin, exposure margin etc. in addition to ALBM margins mentioned in Para 5 of this circular. 6.3 The Stock Exchanges would be allowed to introduce ALBM after satisfying the conditions and modalities detailed above and after seeking formal approval from SEBI in this regard. Yours faithfully, P K KURIACHEN DIVISION CHIEF SECONDARY MARKET, DEPOSITORY, RESEARCH PUBLICATIONS DEPARTMENT E-Mail : [email protected]