Automated Lending and Borrowing Mechanism (ALBM)

 

 

 Press Release 

July 04,  2000

 

 

 SMDRP DEPARTMENT

Subject : Automated Lending and Borrowing Mechanism (ALBM)

1. NSCCL, an Approved Intermediary (AI) under Securities Lending Scheme, 1997 (SLS) has been operating the ALBM in its present form for a few months. To examine the various issues related to the ALBM scheme of NSCCL in particular in the risk containment measures, SEBI constituted a group under the chairmanship of Prof. J R Varma, Member, SEBI Board. The other members of the Group were Shri L K Singhvi – Sr. Executive Director, SEBI, Shri Pratip Kar – Executive Director, SEBI and Shri P K Bindlish – Division Chief, SEBI (Member Secretary)

2.       The terms of reference of the aforesaid Group were as follows: 

1. To examine the above comments regarding the ALBM system. 
2. Whether the ALBM scheme is in conformity with the existing rules, regulations and circulars of SEBI.
3. The risks in the ALBM system; and 
4. Whether these risks have been addressed and if not what precautions should be prescribed now.

3.            The Group met the representatives of the BSE and NSE several times. Today also, the Group met with the representatives of NSE and considered their submissions. 

4. RISK CONTAINMENT  

1. The Group was of the view that the ALBM is not a pure cash market product and that it has some quasi derivative features. Therefore, the Group looked at the recommended risk containment measures in the MCFS as well as the index futures market. The Group was of the view that the key risk containment measures that needs to be mandated by SEBI for the ALBM are:

• Position limits
• Eligibility of scrips for ALBM 
• Eligibility of the exchanges to implement ALBM
• Short sale restrictions 
• Gross margins 
• Margining system
• Risk management of financiers’ obligation to return collateral

•  
  1. The eligibility criteria for scrips to be included in the ALBM list
b) Based on the recommendations of the Group it has been decided that

i) the same position limits as in the carry forward system, namely a limit per broker of Rs 400 million in the aggregate and Rs 50 million per scrip. These limits would apply only to trade positions that are netted against ALBM positions, and would not apply to stand-alone ALBM positions. It was felt that the scrip wise and aggregate position limit on brokers and scrip wise market wide position limits are essential to maintain market integrity and guard against manipulation of the underlying cash market. However, keeping in mind the conscious decision taken by the SEBI Board that quasi-derivative products on individual stocks should be subject to tighter norms than products on the index, the above limits have been placed.

ii)Since ALBM would now be a generic product, , stock exchanges desirous of implementing ALBM should obtain SEBI approval for:

ii) The process of choosing the scrips in the ALBM list  iii) Disclosure and transparency provisions relating to the aboveiii)Any exchange could introduce the ALBM if it satisfies the following conditions:
iv) 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. 

v)The exchange or its clearing corporation must be an approved intermediary under the stock lending scheme.

1.  
   1. In the case of the NSE, which has already implemented ALBM, the exchange must satisfy SEBI that it meets these conditions within one month. 
   2. Receiving of charges by an uncovered short seller would be prohibited as per the circular already issued by SEBI on May 30, 2000.
   3. ALBM transactions, which are netted against trade positions, should be subjected to gross margins as in index futures and MCFS. This would initially be implemented on the basis of self-certification.
   4. The margin on all trade positions that are proposed to be netted against ALBM transactions shall not be less than the limit of 10% mandated by the GS Patel and Varma Committees for the carry forward system. Further, in cases where the position so netted by a member exceeds Rs 200 million, the excess over Rs 200 million shall attract a margin which shall be at least 15% (5% above the 10% limit). 
   5. The minimum ALBM margins would start applying only at the end of the ALBM session. The rationale for this is that 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. 
   6. The financiers in the ALBM system (i.e. a borrower of securities who does not have an offsetting long trade position) will have the option of depositing the collateral with the clearing corporation. A financier who does so would not be subjected to daily mark to market and other margins. However, if at the end of the settlement, the financier wishes to initiate a fresh transaction to continue the financing for one more week, mark to market margin would be imposed at that stage. 

The above decision is based on the rationale that in the carry forward system financiers have to deposit collateral shares with the clearing house, but are not then subjected to daily mark to market and other margins. In the ALBM, the financier (a borrower of securities who does not have an offsetting long trade position) receives the shares but is subjected to the same mark to market and other margins as a seller. From the point of view of risk containment, there is not much difference between the obligation of a financier to return the collateral, the obligation of a securities borrower to return the borrowed securities, and the obligation of a seller to deliver the shares. Therefore the risk containment system in the ALBM relating to financiers (securities borrowers) is considered adequate. Further more, since a member could be using the ALBM to borrow securities to meet obligations outside the NSE/NSCCL system, it would not be feasible to mandate that all financier shares should be compulsorily deposited with the clearing corporation.

1. The legal issues related to the launch of the ALBM Scheme by NSE are being separately examined and the course of action following from such examination could be dealt with separately. 
2. SEBI would issue the above guidelines on ALBM shortly.