The gradual and well-thought-out introduction of securities
lending models plays a key role in boosting liquidity across
emerging markets, says one of the world’s largest
financial service trade bodies.
Providing a diverse and active investor base exists, along
with and a large pool of securities and solid pre-and
post-trade infrastructure, the World Federation of Exchanges
(WFE) says securities lending can benefit emerging markets
which have already moved beyond early stages of
"Securities lending and borrowing (SLB) is an important
enabler for the successful introduction off short-selling, as
well as market-making programs, the introduction of products
such as equity derivatives, and exchange traded funds," experts
at the main trade association for global bourses wrote in a recent whitepaper.
"While short-selling enjoyed some notoriety during the 2008
financial crisis, the ability to engage in short-selling is
generally regarded as contributing positively to price
discovery, increasing market liquidity, and facilitating risk
Several emerging markets have already or are in the process
of implementing frameworks for SLB and short-selling.
WFE’s analysts, along with experts at Oliver Wyman
who co-authored the study, claim details vary depending on
specific policy and regulatory concerns and stage of market
Kuwait introduced rules in 2005 to allow short-selling in
conjunction with allowing the trading of derivatives. In 2012,
the UAE’s Securities and Commodities Authority
(SCA) issued rules to authorize both stock lending and
short-selling, but restricted their adoption by limiting the
ability to short-sell to licensed market makers. South Africa,
India, and Turkey all enable SLB and short selling, while
Morocco is in the process of implementing an SLB framework.
Tim Smollen, global head of agency lending at Deutsche Bank,
recently wrote that more beneficial owners, such as pension
funds and investment managers, are turning to markets like
India, China, Brazil and Indonesia in their quest for yield.
"When a client buys assets in a new market, it prompts a number
of questions: does that country allow for securities lending?
And is the infrastructure in place to allow it?" he noted in a
recent Deutsche Bank study.
That said, for markets looking to implement SBL, WFE and
Oliver Wyman say the emphasis must be on creating a
well-managed and safe environment. "There are several risks
associated with SLB that may have systemic implications. These
include counterparty credit risk, operational risk, collateral
risk, settlement risk, and market risk. There is no
However, broad principles apply, such as introducing SLB
gradually, beginning with only a few of the most liquid
counters and restricting participants to regulated entities.
"Understand what, if any, legislative or regulatory
changes may need to be made, e.g. allowing pension funds to
engage in SLB and necessary insolvency protections. Require the
use of internationally-aligned Master Agreements (GMSLA)
adapted for the local market and approved by the securities
In addition, WFE says careful consideration must be given to
what would constitute suitable collateral for SLB transactions.
Initially, it may be best to limit this to cash. "Either impose
regulatory restrictions on the ability to rehypothecate
collateral, or ensure that what is acceptable with regard to
rehypothecation is clearly articulated in the master
agreement," the report adds.