Insurance companies' entry into segment boosts volumes
The turnover of the Securities Lending and Borrowing (SLB) scheme has hit its highest level in at least 41 months, if volumes on the National Stock Exchange which accounted for most of the activity, are anything to go by.
The securities lending and borrowing allows long-term investors to loan out their securities to those who may wish to borrow securities to cover a short-position or hedge their exposure in the derivatives segment. It allows those lending the securities to increase the yield on their long term holdings.
The daily average turnover on the NSE has seen a pick-up, tripling from a low base of Rs.10.73 crore in August last year to Rs.33.37 crore in August 2013, according to data provided by the exchange.
BSE had average daily turnover from April 2013 to August 2013 of Rs.0.66 lacs, according to data the exchange provided in response to a query by Business Standard. Figures for MCX Stock Exchange, which started equity operations only in February this year, were not available.
This is the highest level of participation since at least April 2010, according to the NSE’s data.
The previous high of Rs.32.91 crore for the exchange was hit in June 2012.
Recently, the Insurance Regulatory and Development Authority (Irda) allowed insurance companies to make use of the SLB segment subject to certain conditions.
“Insurer can only lend securities to the maximum extent of 10% quantity in the respective scrips in the respective Funds. These prescribed limits shall be adhered at all the times,” said the Irda circular. The circular was issued on July 12th.
ICICI Prudential Life Insurance announced In August that they had executed the first insurance trade in the segment on August 26th.
Stocks outside the derivatives basket and exchange traded funds were also made a part of the scheme in July and September respectively.
Yogesh Radke, head of quantitative research at Edelweiss Securities said that the new category of participants has helped perk up the market.
"The SLBS market was awaiting the lender to hit the market. Now post the IRDA's move to allow insurance players into the segment we have seen liquidity enhancing in this segment. The current outstanding positions have gone up from Rs.60 crore in 2011 to Rs.670 crore now," he said.
He expects the market to evolve as more participants tap the market and expects the market size to go beyond the Rs.6000 crore mark, which he believes will also in turn enhance the liquidity in the cash market segment.
Currently the activity is largely in the Nifty 50 stocks with an average lending fee of 5-6% per annum, he said.
"The yields are high on account of the limited supply. As more participants come into the market, these yields are expected to come down and settle in the range of 3-4% per annum," said Radke.
Some remain skeptical of how high it could go.
Aneesh Srivastava - Chief Investment Officer at IDBI Federal Life Insurance Co Ltd suggested that growth in the segment may be limited by the presence of alternatives.
“It may not be very successful considering that investors can comfortably short using stock futures and options,” he said.
“It does not seem imperative to participate in this right now,” said the head of equities at a foreign fund house, suggesting that it may be a while before participation picks up from the mutual fund segment.
The turnover of the Securities Lending and Borrowing (SLB) scheme has hit its highest level in at least 41 months, if volumes on the National Stock Exchange which accounted for most of the activity, are anything to go by.
The securities lending and borrowing allows long-term investors to loan out their securities to those who may wish to borrow securities to cover a short-position or hedge their exposure in the derivatives segment. It allows those lending the securities to increase the yield on their long term holdings.
The daily average turnover on the NSE has seen a pick-up, tripling from a low base of Rs.10.73 crore in August last year to Rs.33.37 crore in August 2013, according to data provided by the exchange.
BSE had average daily turnover from April 2013 to August 2013 of Rs.0.66 lacs, according to data the exchange provided in response to a query by Business Standard. Figures for MCX Stock Exchange, which started equity operations only in February this year, were not available.
| LENDERS ADD VOLUMES TO SLB |
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This is the highest level of participation since at least April 2010, according to the NSE’s data.
The previous high of Rs.32.91 crore for the exchange was hit in June 2012.
Recently, the Insurance Regulatory and Development Authority (Irda) allowed insurance companies to make use of the SLB segment subject to certain conditions.
“Insurer can only lend securities to the maximum extent of 10% quantity in the respective scrips in the respective Funds. These prescribed limits shall be adhered at all the times,” said the Irda circular. The circular was issued on July 12th.
ICICI Prudential Life Insurance announced In August that they had executed the first insurance trade in the segment on August 26th.
Stocks outside the derivatives basket and exchange traded funds were also made a part of the scheme in July and September respectively.
Yogesh Radke, head of quantitative research at Edelweiss Securities said that the new category of participants has helped perk up the market.
"The SLBS market was awaiting the lender to hit the market. Now post the IRDA's move to allow insurance players into the segment we have seen liquidity enhancing in this segment. The current outstanding positions have gone up from Rs.60 crore in 2011 to Rs.670 crore now," he said.
He expects the market to evolve as more participants tap the market and expects the market size to go beyond the Rs.6000 crore mark, which he believes will also in turn enhance the liquidity in the cash market segment.
Currently the activity is largely in the Nifty 50 stocks with an average lending fee of 5-6% per annum, he said.
"The yields are high on account of the limited supply. As more participants come into the market, these yields are expected to come down and settle in the range of 3-4% per annum," said Radke.
Some remain skeptical of how high it could go.
Aneesh Srivastava - Chief Investment Officer at IDBI Federal Life Insurance Co Ltd suggested that growth in the segment may be limited by the presence of alternatives.
“It may not be very successful considering that investors can comfortably short using stock futures and options,” he said.
“It does not seem imperative to participate in this right now,” said the head of equities at a foreign fund house, suggesting that it may be a while before participation picks up from the mutual fund segment.
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