COVID-19 has ravaged the entire global financial markets and upended numerous industries. To tackle the massive fallouts, US Federal Reserve pull out all stops to contain the explosive impacts of this unprecedented black swan event in modern days. Arising from this interest rates has plummeted to abysmal levels yet again, leading to “cash is trash”. Against such backdrop, the interest rate of SGX Securities Borrowing and Lending (SBL) program could be lucrative.
How does SGX Securities Borrowing and Lending (SBL) work? In Singapore, investors can either lend their existing shares to brokerage firms or SGX. By lending out shares, they can earn interest fees. Conversely, investors can also borrow shares to do short-selling. In the course of doing so, you need to pay borrowing fees.
In this article, I will provide my insights on the pros and cons of lending shares to SGX Securities Borrowing and Lending (SBL) program. Something that needs to be highlighted is that this article will touch on only the lending program of SBL. As I am not into short-selling activities, the borrowing facility of the SBL is not covered in this article.
Disclaimer for this article: SGX did not pay me to write this article nor am I promoting SGX Securities Borrowing and Lending program. In addition, the information contained in this article is based entirely on my research obtained from content provided in SGX website. I do not have experience lending shares to SGX. So investors should seek advice from financial consultants before lending out shares.
Earn and invest with SBL?
Some people may compare bank savings interest rates earned to lending out shares. Technically, this is not wrong. However, in my perspective, I view it more of hedging against investment losses. Apart from the capital gains and dividend income, the 2.8% lending income from SBL will provide additional income for investors. Given the current volatility in the stock market and the collapse of interest rates, the idea of side income from shares is indeed attractive.
SBL lending fee used to be even more lucrative. Previously, the lending fee rate is fixed at 4% per annum. With effect from 2 December 2019, SGX replaced the fixed rates for its Securities Borrowing and Lending (SBL) programme. The borrowing rates for index stocks, REITs and business trusts will be at 0.5% and the rest of securities at 4%. Lenders’ fees will be calculated based on 70% of the borrowing fee.
The fees for SBL lending fee is based on the total number of loan days and the closing share price at end of each day. The lending fee accrues from the day SGX lend out your securities, until the day they are returned to your securities account. Below is an example on how the fee is calculated. It is extracted from SGX Website:
Source: SGX Website:
Lending Fee = Rate % x Loan Value x Days / 365
Where Rate % = Prevailing lending rate (see indicative rates here)
Loan Value = No. of shares x share closing price at end of each day
Days = Loan duration
If the loaned securities are 10,000 XYZ shares and the lending rate is 2.8%:
Start date of Loan : 1/10/2019 (Effective date)
Return date of Loan : 4/10/2019 (Expiry date)
Closing price on 1/10/2019 = S$10.00 Market Value of Loaned Securities = 10,000 x S$10.00 = S$100,000
Closing price on 2/10/2019 = S$10.20 Market Value of Loaned Securities = 10,000 x S$10.20 = S$102,000
Closing price on 3/10/2019 = S$10.40 Market Value of Loaned Securities = 10,000 x S$10.40 = S$104,000
Daily fee computation
Fee accrued on 1/10/2018 = 2.8% x S$100,000/365 = S$7.67
Fee accrued on 2/10/2018 = 2.8% x S$102,000/365 = S$7.82
Fee accrued on 3/10/2018 = 2.8% x S$104,000/365 = S$7.98
Lending fee = S$7.67 + S$7.82 + S$7.98 = S$23.47
Merits of SBL
Apart from earning some side income from lending out your shares, registration for SBL is free and are not required to pay any fee to participate in the SGX Securities Lending programme. Furthermore, the lending fee received is exempt from income tax unless derived through a partnership in Singapore or from the carrying on of a trade, business or profession.
The advantage of SGX SBL over other brokerage firms’ SBL is that you are dealing with CDP as the principal counterparty. This is very important as CDP acts as a principal to both the lender and the borrower, and the lender takes on the counterparty risk of CDP and not the borrower. Under the terms and conditions for lenders, CDP is contractually required to ensure the return of equivalent loaned securities or their cash value equivalent upon termination of loan to the lender.
Last but not least, I like the autonomy of SGX SBL because you do not need to inform CDP before selling the loaned securities. The sale of the loaned securities is deemed as a notice of loan termination by the lender, upon which CDP will deliver the loaned securities into the lender’s CDP securities account for settlement. This means that you can sell on the upside and at the same time, mitigate the downside risk.
How does it work?
You need to sign up with SGX if you are interested to lend out your shares through the SBL programme. After signing up, the shares will [This is a premium article. The rest of the content is blocked and can be accessible by SG Wealth Builder Members only. To read the full content, please sign up as member.]
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