Repurchase agreements (repos), reverse repos and securities lending markets allow many institutions to conduct a broad variety of financial transaction more effectively. The article discusses the related concepts.
The
concept of "securities lending transactions",
though not of recent origin, is novel and pioneering
with its new dimensions. Across the globe, many committees
were constituted to survey and study the implications
and complications in the activity of securities lending.
On the basis of the recommendations of the committees,
countries are adopting securities lending transactions
initially in the government securities (repos) and later
in the equities. In reality, the participants were retail
investors and later, the institutional investors are
also allowed to adopt this concept with some guidelines
and regulations. As early in 1989, the financiers and
economists recognized the advantages of the securities
lending and borrowing mechanism and advocated short
selling. The increased volumes in cross-border investment
flows, the extended and expanded trading, hedging policies
and strategies, the launching of derivative products
resulted in the demand for securities lending transactions.
In recent years, there has been a significant volume
in securities lending transactions, involving securities
loan and repurchase agreements, as they contribute to
the speed of the daily settlement systems in a substantial
way, across the globe, thereby playing a crucial role
in facilitating market liquidity. It is projected that
the securities lending transactions will continue to
increase as an integral part of existing securities
markets.
Many
definitions were put forth by financiers and economists
in respect of securities lending transactions. According
to BD Shah Committee, a securities lending transaction
involves "selling of the shares without having
the physical possession of the shares unless it is either
for squaring-up of an earlier purchase in the same settlement
of the same stock exchange or against the pending deliveries
from the same stock exchange pertaining to previous
settlements". This creates additional revenue commonly
known as `commission' to the seller. The transaction
is generally termed as short selling and connotes selling
of the securities which the seller does not own. It
has been one of the long-standing securities market
practices. Short selling may be defined as "selling
a stock which the seller does not own at the time of
trade". The SMAC (Securities Market Advisory Committee)
noted that the commonly used definition of short sales
in international jurisdictions and in finance literature
is "sale of a stock by an investor which he does
not own". Ever since the concept of securities
lending is adopted, it has been subjected to debates
and divergent views. People who advocate short selling
consider it as a desirable one on the ground that it
strengthens the market liquidity. The critics discourage
short selling following the potential destabilizing
risks it carries with it, which in turn may destabilize
the market. Short selling of securities is neither complex
nor simple to understand. An investor can make profits
only when the shorted security falls in value. The mechanism
of a short sale is relatively complicated as compared
to a normal transaction. |
