Singapore is home to a thriving securities lending market. Securities lending allows traders to borrow securities from lenders to trade them. It can be a helpful tool for traders who want to take advantage of market opportunities without putting up the total capital required to purchase the securities outright.
Securities lending involves an agreement between a borrower and a lender. The borrower agrees to return the securities at an agreed-upon date, plus interest. The lender agrees to provide the securities for borrowing and does not take on any market risk associated with the trade.
There are several ways that traders can take advantage of securities lending in Singapore.
Borrowing securities to short sell
Another way traders can use securities lending is by borrowing securities from a lender to short-sell them. Short selling comprises selling a security that you have borrowed and do not own in the hope of repurchasing it at a lower price so that you can profit from the difference.
Using collateral for margin trading
Margin trading refers to using borrowed funds from a lender to trade securities. It can be a helpful way to increase your buying power and take advantage of market opportunities you may not have otherwise been able to access.
Borrowing cash against securities
Traders can also use securities lending to borrow cash against your securities portfolio. It can be helpful if you need access to cash but do not want to sell your securities.
Generating income from idle securities
If you have securities you are not currently trading; you can lend them out through a securities lending program to generate income, which can be an excellent way to earn extra income from your investment portfolio without selling your securities.
Reducing counterparty risk
When you trade with another party, there is always the risk that they will not be able to meet their obligations. By using securities lending, you can reduce this risk by borrowing the securities from a third party instead of trading with the other party directly.
Enhancing your credit rating
Using securities lending can also help to enhance your credit rating because when you borrow securities from a lender, it shows that you can access capital and are, therefore, a less risky borrower.
Accessing hard-to-borrow securities
Some securities are difficult to borrow due to their high demand or low supply. However, by using securities lending, you may be able to access these securities.
How to partake in securities lending in Singapore
Find a securities lending program that suits your needs
There are several securities lending programs available in Singapore. You must find one that suits your investment objectives and trading style.
Open a securities lending account
Once you have found a suitable securities lending program, you must open a securities lending account with the program provider.
When you open a securities lending account, you will be required to deposit collateral with the program provider. It ensures that you can meet your obligations under the securities lending agreement.
Borrow the security
Once you have deposited the required collateral, you can borrow the security from the program provider.
Return the security
Once you have finished trading with the borrowed security, you must return it to the program provider.
Risks of securities lending
As with any financial transaction, there is always the risk that the other party will not be able to meet their obligations, known as counterparty risk.
You are exposed to market risk when you borrow securities from a lender, meaning if the security price falls, you may have to sell it at a loss to repay the loan.
If you borrow securities that are not easy to sell, you may find yourself in a situation where you cannot repay the loan due to a lack of liquidity.
Interest rate risk
You will be exposed to interest rate risk if you borrow cash against your securities portfolio. If interest rates rise, your loan repayments will increase; if interest rates fall, your loan repayments will decrease.
Foreign exchange risk
You will be exposed to foreign exchange risk if you borrow securities denominated in a foreign currency, meaning if the value of the foreign currency falls, the security value will also fall.
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