Wednesday, August 05, 2009

Short Selling, Securities Lending - The Prequel, The Sequel & Then Some More


Well after two and a half year of screwing around, we are back at the table on Short Selling. Only this time, the "leadership" seems to have been taken over by Securities Commission instead of Bursa ... hmmm... wonder why??!! ; ) I searched through my older posts on Restricted Short Selling and its funny how the tone of my postings have changed (or mellowed rather). I was so much more vicious and angrier then... ; ) ... Let's look at the history for a while:

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as posted on 11th October 2006 ...


Regulated Short Selling Will Fail Dismally (Again)

Bursa will not like to hear me on this. They'd probably think I have a deep vendetta against them. First, Bursa is too greedy to try and act as the Central Lending Agency. Brokers, custodians and investors all have to go through Bursa to things done. This creates an unnecessary layer which adds to cost.
Secondly, Bursa failed to appreciate why an OTC market would have been better. Not all lenders want to lend shares at 2%, some may only lend at 5% or even 10%. Take Google shares for example, at US$500, probably a lot of people would want to short it, hence the lenders could actually ask for a higher rate before lending out. A transparent and free-market OTC makes for real activity and better returns for both sides. I am not sure if Bursa even have the mechanism to change the lending rates?? (..what, change the rates... every now and then ... so much work la...). Thirdly, too much red tape, inteference, scrutiny... blah blah... Having said that, as long as people can make big money, they can withstand the trouble to invest, if they can make 30% in a month in Timbuktu exchange, you can betcha they will try to get there. But it probably won't happen in Bursa's RSS - limited shares for shorting, do you think there will be 1 million of a company's shares for shorting? Chances are, it will be sporadic and insignificant, which will turn people off. That is why an OTC would have stood a better chance to survive. Imagine the current scenario, with Genting jumping on the Macau news, I think its a good time to short Genting shares, but no one wants to lend at 2%, so I put up a willingness to borrow 50,000 shares at 4% or even 6%, I am sure someone will bite. The failure to allow for a free flowing capital markets. The shallow thinking that by being the Central Lending Agency, somehow that could prevent disasters needs to be re-examined. You mean, the 1997 implosion was due to short sellers??? Please grow up, that shows how naive the current crop of people in unthinkably high positions are... sigh... You cannot molly-coddle a capital market, it has to be relatively laissez-faire ... look at global best practices... please...

p/s btw, I totally agree there should be short selling, just do it better ... man...

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as posted on July 17, 2008 ....


RSS (restricted short selling)... it was expected to fail, it failed ... NO SHARES AVAILABLE FOR SHORTING!!! What does that tell you about the program? A learned friend disagreed with my negative assessment on RSS two years ago saying they have international consultants and exchanges helping on the product. Just because they are foreign, does not mean they are good. The Bursa is ladened with bureaucracy, red tape, nothing ever gets decided, in the end any decision will take two months to make, and the bulk of people never really touch securities before...

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Now to the present, the SC obviously said something to the effect of "I don't think you guys really know what you are doing" to Bursa... Anyway, why make more enemies? My comments in red.

Aug 4 (Bernama) — The Securities Commission (SC) and Bursa Malaysia today announced the introduction of securities borrowing and lending negotiated transaction (SBLNT), an enhanced securities borrowing and lending (SBL) model that offers an option to borrow and lend on an over-the-counter (OTC) basis. In a joint statement here today, the SC and Bursa Malaysia said the SBLNT model would be implemented on August 17 and relevant participants would be able to submit applications now.

They said the model would complement the existing SBL Central Lending Agency (SBL CLA) model which was introduced in January 2007 as the first phase of the securities borrowing and lending framework. ( Gee, this is b.s., what do you mean by "complement", it complements nothing, the existing SBL is crapufullacrap, obviously somebody devised a "better way to not lose face" by using the word "complement", just say it like it is... it IS a new way to replace the previous crap).

“Under the SBLNT framework, any eligible person who is approved by Bursa Malaysia Securities Clearing Sdn Bhd may borrow and lend securities. The lender and borrower are now given the flexibility to enter into SBL agreements, hence they can negotiate and agree on the terms of borrowing and lending directly,” they said.

These SBL transactions, they said, must be reported via onshore borrowing and lending representatives and facilitated through Bursa Malaysia Securities Clearing as the approved clearing house.

“This reporting is imperative for the movement of the loaned securities to take effect from the lender’s depository account to the borrower’s depository account. In addition, only securities that are specified by the approved clearing house are eligible for borrowing and lending transactions and the purposes for which the borrowing and lending have also been specified,” they said.

The statement said the SBLNT framework would also enable Bursa Malaysia Securities Clearing to ensure orderly and transparent borrowing and lending. Besides that, the SC also released the revised SBL Guidelines while Bursa Malaysia issued the relevant rules, procedures and guidelines to provide for SBLNT. (All things being equal, transparency is good, but in such a small market such as the Bursa, with an even smaller number of "players", the transparency rule actually inhibits, scares and restricts the players. A better rule would be, as long as the investor is "approved and has an account with an approved broker", if client borrows or lends, it should be referred to by a number, and not the actual client. The unique structure of short selling/ lending give rise to excessive spotlight and focus on these transactions - no clients will want to be shamed publicly by its fraternity for having shorted at the wrong levels or lent securities which have since collapsed in price.)

In the SBL CLA model, Bursa Malaysia Securities Clearing acts as the central lending agency for all SBL activities conducted in Malaysia and participants need to comply with the terms and conditions as directed by Bursa Malaysia Securities Clearing.

Both the current SBL CLA and the new SBLNT models will operate concurrently. The revised SBL Guidelines by SC also provide clarification on the tax treatment applicable to SBLNT. The revised SBL Guidelines and rules are available on the SC website at www.sc.com.my as well as Bursa Malaysia website at www.bursamalaysia.com.

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My Worthless Views: It is a better model in that it allows for negotiated terms of borrowing or lending. However, it will fail just as dismally as the earlier model because:

a) The model still requires investors to borrow the securities first before selling. In many places, the investor has the option of selling the shares first, and then having 3 days (in the US) to borrow the shares. Naturally that is risky as one might not be able to borrow the shares, but herein lies the shortcoming, there isn't sufficient liquidity on the lending side here. Chicken and egg thingy, no liquidity, smaller share caps, low free float ratios, and you cannot sell first then borrow later which is an important option.


b) The vast majority of stocks borrowed by brokers (in most markets) come from loans made by the leading custody banks and fund management companies. Depending on specific account agreements, brokers are able to borrow stocks from their customers who own "long" positions, particularly those in "margin" accounts. I don't think our custody banks and fund management companies are "up to speed" with the nature and benefits of short-selling. I don't think many of the trust deed of local fund management companies even allow them to do that.


c) It isn't clear to the borrowers that the lenders may ask for the return of shares, and the borrower will have to return them to the lender or borrow the shares from elsewhere. Its cumbersome and most participants are not savvy or patient enough to go through all the trouble.
A successful short selling model requires a critical mass of institutional players, which we do not have. We need hedge funds players, we need astute local funds that trade and hedge, we need a lot of local funds that are willing to lend securities, we need... (fill in the blanks).

d) The only savvy short selling / lending players are the local brokers. Right now MOST LOCAL BROKERS are "lending shares" to cover short positions, many without even telling their clients - its a loophole the SC and Bursa must plug. My strong recommendation is for all brokers be required to get "expressed permission of the customer" before they can "deploy or lend" the securities belonging to the clients, and that the clients must be properly compensated for it.



p/s photos: Rita Rudani

3 comments:

Richard Cranium said...

How does a local broker lend shares to cover a client's short sale?

As far as I know, transfer of shares from elsewhere into a client's trading or clearing account needs to be proven to be from the same beneficial owner.

Otherwise, it is clearly illegal, is it not? It was the common practice pre-Asian crisis for a secondary market clearing involving the large custodian banks in SGX.

The "loophole" you talk about may be just that there is no way human monkeys can eyeball-verify the sheer volume of transfer data.

But hey, like you said, no one can tell Bursa anything. They think they are gods or something.

METALRAGE said...

From my POV, short selling serves no purpose, or has no net positive effect on the economy.

I see that it only serves the purposes of the parties involved whether as lender, borrower, or broker to make money.

But I'm not so sure I have a full picture.

From your assessment, does it facilitate any transaction?

Trashed said...

Having being involved in the first foray in SBL et al in the 90s, the same issues still arise.

Liquidity, liquidity, liquidity.