Lending and borrowing of securities start soon
Lending and borrowing of securities start soon
JAKARTA (JP): The Jakarta Stock Exchange (JSX) and the Indonesian Securities Clearing Depository (PT KDEI) are currently preparing a mechanism for the lending and borrowing of securities on the capital market.
A director of the JSX, Stanyslaus Say, told The Jakarta Post yesterday that the new capital market law, which will come into force next month, allows the lending and borrowing of securities.
The new law defines a securities transaction as a contract entered into by a brokerage firm (a member of the stock exchange) to buy, sell, lend or borrow securities, or to enter into other contracts relating to securities or the price of securities.
The move to allow securities to be borrowed is aimed at helping brokerage firms to complete the settlement of transactions on time, he said.
Another JSX director, Mas Achmad Daniri, told the Post that the existing trading rules requires the settlement of a transaction within four days of the transaction date (T+4).
Sometimes brokers fail to complete the settlement of a transaction within period allowed, he said, meaning that a short- selling transaction may have occurred. It follows that the new law indirectly authorizes short-selling practices.
Daniri explained that, when lending and borrowing becomes possible, brokers who are short of stock for a settlement will be allowed to borrow stocks from another broker in order to avoid a delay of the settlement.
The new law also states that any share transaction must have been settled before another transaction involving the same shares can be effected, since the first transaction is a basis for the second. This means that the lending mechanism will also help to boost market liquidity, Daniri said.
Stanyslaus said that the lending of securities will be based on two contracts: one between a share-lending brokerage and a share-borrowing one; and one between the lending broker and the investor who is the real owner of the stocks.
The first contract will stipulate the fee and the term of the loan. The second contract will be the stock owner's guarantee that he will get his stocks back, together with the fee charged for the loan.
Alternative
For big investors, the lending and borrowing of securities will create an alternative for stock market transactions, Daniri said.
"But it doesn't mean that the borrowed stocks will come only from investors. Brokerage firms will be able to lend not only their client's stocks but also their own stocks," he said.
KDEI director Cyrill Nurhadi told the Post that, while the new capital market law provides the legal basis for securities lending, the practice is unlikely to take place for several months.
Cyrill said clarification is needed on some points, such as the functions of lenders and borrowers, the commission or interest payable on such transactions, taxation of such transactions and trading rules.
Cyrill added that, although the JSX is working on each aspect of the mechanism, the final decision rests with the Capital Market Supervisory Agency.
Another problem, he said, is related to the new law's division of KDEI into two new bodies: the Clearing and Guarantee Agency (Lembaga Kliring dan Penjaminan) and the Settlement and Custodian Agency (Lembaga Penyelesaian dan Penyimpanan). The former is to be responsible for clearing and settlement, while the latter will serve as the central custodian.
Cyrill declined to comment on which of the two new bodies would handle lending and borrowing transactions, saying that the division of KDEI is still being processed.
Daniri predicted that the practice of lending and borrowing would become more important when transaction settlement goes scripless next year.
He said that preparations for the introduction of scripless trading will be completed during the first half of next year.
In scripless trading, securities transactions and settlement will be processed very quickly, increasing the importance of stock availability. (08)