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)