Securities Lending and Borrowing Regulations as per Dubai Financial Market
The Securities Lending and Borrowing (SLB) refer to a temporary arrangement of a loan of securities by a lender or a borrower. In this arrangement, the borrower is entitled to return securities at any time, and the lender may recall the securities at any time. The ownership of the lent securities is passed on from the lender to the borrower, and the borrower then receives certain rights over such security. On the passage of such securities, the borrowers get entitled for benefits whereas the lender forfeits certain rights of no longer owning the security that has been passed on to the borrower. However, the borrower has to make payments to the lender for such a transaction. The SLB promotes market efficiency, liquidity and at the same time, reduces the market volatility.
The SLB transactions are carried out in the Dubai Financial Market (DFM) and the main parties included in a DFM SLB Model include the lender, the lending agent, the borrowing agent, the borrower, the agent lender and Central Securities Depository (CSD) of DFM. CSD is not a counterparty to the SLB transactions in the DFM SLB Model. CSD has to match and settle SLB transactions by moving loaned securities between the lender and borrower on a free-of-payment basis. It is also accountable for recording all SLB transactions and transferring collateral which is DFM listed securities on a free-of-payment basis. It shall also be responsible for adjusting the quantity of outstanding loans for mandatory securities type of corporate actions.
Securities lending and borrowing is a contract under which the ownership of securities is temporarily transferred from the lender to the borrower and where the borrower is committed to returning them at the request of the lender at any time during the agreed period or at the end of that period unless agreed otherwise. The lending agent shall be authorized to conduct the securities lending transactions on behalf of others, and similarly, the borrowing agent shall be authorized to conduct securities borrowing transactions on behalf of others. Whereas, a lending and borrowing agent shall be a corporate person authorized by the authority to conduct securities lending and borrowing transactions for himself or on behalf of others.
It is imperative that the lender and borrower have to be DFM investors having a DFM Investor Number (NIN). Any investor that is in possession of a DFM Investor Number (NIN) either directly with DFM or indirectly with a local custodian shall be eligible for the title of a lender and shall include investors as individuals. In case the lender has the number via a local custodian, then the name of the investor associated with the local custodian NIN shall be considered as the lender. Agent leaders are offshore intermediaries lending securities for clients who are lenders, and such leaders manage the lending of securities for lenders. In the case of onshore intermediaries such as local custodians or local brokers intending to manage or arrange securities lending activities in the UAE, the regulations on approval of lending agents must be complied with. Any investor who has a DFM NIN either directly with DFM or indirectly via a local custodian shall be eligible to become a borrower.
The role of a lending agent and a borrowing agent is limited to local sub-custodians, local brokers or any companies as may be approved by the local regulator of the Securities and Commodities Authority (SCA) of the UAE. The borrowing agent and the lending agent are responsible for instructing the CSD to move loaned securities and any applicable collateral which are DFM listed securities based on instructions from the lender and the borrower.
Securities Lending and Borrowing Rules as per DFM
The Securities lending and borrowing rules have been laid out which have to be complied with in order for a successful SLB transaction. These rules lay out the conditions that a borrower/lender and agents have to follow to carry out an SLB transaction and the same have been summarized below:
- Registration: A lending and borrowing agent shall have to register with the DFM (Dubai Financial Market as licensed by the SCA) provided that the applicant has been approved by the SCA as per the SLB regulations/directives. Any registration process shall also have to be complied with in the manner as determined by the market rules from time to time which include all regulations, circulars, guidelines or procedure as may be prescribed by the DFM from time to time.
- Notify the SLB transaction: The lender in order to lend securities shall have to instruct the lending agent to transfer loaned securities from the lender to the borrower in consonance with the market rules that are issued from time to time for the transfer of loaned securities from the lender to the borrower. Similarly, for a borrower to borrow securities, he must instruct the borrowing agent to initiate a borrow request from time to time for the transfer of loaned securities from the lender to the borrower.
- Offshore SLB Activities: The lending and borrowing agents shall be instructed by the lender and borrower as and when the need shall arise to move loaned securities to settle any offshore SLB activities and the agents shall accordingly report such offshore SLB transactions.
- Onshore SLB Activities: For any onshore SLB activities, only lending and borrowing agents shall be authorized to conduct there, and all market operational/regulatory requirements prescribed under the SCA Regulations shall have to be complied with.
- Market purpose and procedures: The DFM may prescribe the purpose for the borrowing of securities in unification with the SLB regulations, and the SLB shall not be permitted for purposed other than that as prescribed in the market procedures. The market procedures will also grant access to lending/borrowing agents or clearing members as prescribed by the market procedures from time to time. Designated SLB accounts can also be issued for a borrower under the market procedure. The transfer of borrowed securities is strictly prohibited unless permitted otherwise in the market procedures issued at recurring times.
- Fees and charges: The prescribed fees by the DFM or any relevant charges shall be paid by the lender and/or borrower from time to time and shall be collected by the lending and borrowing agents. The DFM shall have the discretion to vary or change the fees/charges from time to time.
- Penalties: In case the SCA directs the market to unwind an SLB transaction, then the DFM has the authority to do so, and such a right shall be reserved by the market. Such an SLB transaction can also be withdrawn by the DFM in accordance with the law or any government policy directive. The market will also be entitled to prescribe measures to implement such an unwind of the SLB transaction in case such an unwind seems impossible due to the insufficient securities with the borrower. The lender or borrower shall be subject to suspension by the market from creating new securities loan instructions for non-compliance with the DFM Rules.