Phillip Securities Securities Lending Programme.

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#1
Monday, 06 August 2012 07:12

SOME YEARS ago, Veronica transferred a dozen stocks from her CDP (Central Depository) account to Phillip Securities to participate in its Securities Lending Programme.

It enables her shares to be loaned out to any third party for a fee.

The programme suits her to a T, as she holds a portfolio of stocks for the long term.

Veronica explains her investing style: "My decision to purchase a stock depends on its fundamentals. I buy stocks for their dividends and potential capital gains. My holding period usually exceeds six months and, in a few cases, several years," she says.

"I believe that to reap meaningful gains, I have to stay the course for a meaningful period of time and to invest in mid- and small-caps which have a growth story. I know they come with higher risks but this is compensated by the potential upside from their growth and by their relatively low valuations, as compared to blue chips."

The share borrowing and lending (SBL) account she opened with Phillip Securities became an avenue to earn extra passive income from her stocks.

"Over the years, the fees I have earned from my SBL account have been more than satisfactory. So far I have enjoyed upside and faced no downside from taking part in securities lending."

At the moment, she has 4 counters which are on loan (see screenshot below) and giving returns of between 3 and 4 per cent per annum, which translates into about S$200 a month.

Phillip Securities adopts a flexible rate system, in which lending fees usually vary between 0.25 percent and 5 percent per annum. The rate is determined by the supply and demand of that particular security.

For example, if stock A is readily available in the lending market and the supply of stock A outstrips demand, the rate that is paid to the lender will be lower as compared to say stock B, whose demand outstrips that of its supply.

When a client's shares are loaned out, the client will be paid 50% of the lending fee which Phillip Securities collects from the borrower or no more than the rate that Phillip Securities can obtain in the auction market.

For example, if your shares are lent out at 8%, you get 4%. If Phillip Securities is able to obtain the same counter from our institutional lender at 2%, the retail lender will then get 2% instead of 4%.

Phillip Securities says: "Every loan is unique and therefore, the interest rate can only be confirmed at the time of the loan."

In Phillip Securities, the lending fee is computed daily, based on the closing price of the counter involved.

Bonus income from SBL

By no means can any lender hope to obtain regular income from lending his shares. As Veronica says: "I consider it as a bonus income. You should not be surprised that share lending activity is neither regular nor predictable. The amount of lending fee I receive varies from month to month. Sometimes, I get nothing.

"The interesting thing is, on an annual basis, the income is not insignificant as it can amount to a four-figure sum. This is most welcome as it adds to the dividends I get from the stocks, so my total return is bumped up."

Veronica prefers to leave it in the account until a certain level, say, $5,000. Then she would go to her online account and request for a cheque to be issued to her, or for the money to be transferred to her bank account.

She says: "Sooner or later, the money goes to buying shares through my Phillip Securities trading account and the new shares end up in my SBL account, ready to be lent out. As you can see, it's a virtuous cycle!"

While her shares are on loan, she can still go ahead to sell a counter if she so wishes. It's not an issue at all.

"If a particular stock has reached my target price, or if I deem that its fundamentals are not as good as I originally thought, I will just sell it -- via my Phillip Securities trading account. I don’t even have to check my SBL account to see if it has been loaned out."

Neither does she have to be concerned about dividends and bonus issues when the stocks are on loan. She is entitled to these payouts.

Although securities lending involves a transfer of title, the beneficial ownership remains with the lender. The lender is still entitled to all economic benefits.

That includes voting rights at AGMs and EGMs -- but the lender must notify Phillip Securites in advance of his intention to attend the AGM or EGM. The stock broker would then do the necessary paperwork and send it to the company concerned.

CDP transfer fee to be borne by Phillip Securities

Phillip Securities says: "There is no additional cost at the moment as PhillipSBL is absorbing the CDP transfer charge of S$10.70 per counter, inclusive of GST, when clients transfer their shares to PhillipSBL for lending.

"However, this charge will not be absorbed if our lenders eventually decide to transfer their shares back to their CDP account. Lenders may choose to sell their shares through Phillip Securities to avoid incurring this CDP transfer cost."

A question that investors often ask is: What happens to shares that are loaned out?

Veronica reckons that the borrower is very likely planning to short the stock. "Sometimes, I get a little worried that the stock price would fall. However, as I believe in the stocks’ fundamentals, I soon become indifferent to it if I have no plans to divest the stock."

Phillip Securities mentions that some investors view that in the short-term, the lending of a security may create downward pressure on the share price due to short selling activity. "However, what is sold must ultimately be bought back. As such, securities lending will not really aid in depressing share prices in the long run."

Beside shorting, shares may also be borrowed for hedging, arbitraging or market-making activities.

In fact, some studies have shown that securities lending adds liquidity and reduces the volatility of the security concerned through the process of price discovery and transparency; hence, creating an efficient market. Lastly, it also aids in the efficiency of trade settlement.

Are there risks to lenders?


To open a SBL account with Phillip Securities, contact Rose Tay, Yvonne Goh or Ken Ang

Yes, counterparty risk.

However, it is mitigated as Phillip Securities is a reputable and strong financial institution.

Furthermore, to provide security to the lender, Phillip Securities collects collateral of at least 105% of the market value of the loan from their borrowers, marked to market on a daily basis.

"And our borrowers are also obliged to return the shares either on demand or at the end of the loan term."
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#2
Whats the difference between CDP's lending programme and Philips ?
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#3
(07-08-2012, 09:18 AM)flinger Wrote: Whats the difference between CDP's lending programme and Philips ?

I am with CDP lending program, and had gone thru few rounds of lending.

I recalled it is not much the diff vs Philips, moreover i need to transfer to Philips account for my share if i opt for Philips. I got 4% annual rate for my lending. It is fully managed by CDP, and almost transparent to me, except that i received interest once a month. Tongue
“夏则资皮,冬则资纱,旱则资船,水则资车” - 范蠡
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#4
(07-08-2012, 09:18 AM)flinger Wrote: Whats the difference between CDP's lending programme and Philips ?

Philips may have demands for certain shares. So you can contact them to check if they're keen to borrow your shares. Also, remember to check the rates they offer. Sometimes the rate is pathetic, then just leave it inside your CDP and wait for SGX to borrow.
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#5
(07-08-2012, 09:18 AM)flinger Wrote: Whats the difference between CDP's lending programme and Philips ?

There are a few pros and cons on each.

1. as I understand it, for the brokerage programs the rate you get is not guaranteed 4% and base on each stocks supply and demand. on the other hand with CDP you get guaranteed 4%.

2. CDP has a wider base of lenders and borrowers whereas for the brokerages it depends on those who are their clients that pledge their shares.so the chances is much better to get borrowed

3. the brokerages are more aggressive in their SBL program(more turnover more $ for them) whereas for the CDP they don't push it as hard. it's there if you want to make us

4. if you pledge with your broker you can only sell it through them whereas with CDP you can sell it through any broker. make sure you don't mix up or it might be costly

I am on the CDP SBL and base on the above i really don't think it's worth it to pledge your shares with the broker.
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#6
Well, I think there is some risks involved.

What if your shares is lend out to a third party, who
cannot return back the shares ?

Need to be careful especially when markets took a sudden
downturn.Dodgy
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#7
(07-08-2012, 10:31 AM)ken Wrote: Well, I think there is some risks involved.

What if your shares is lend out to a third party, who
cannot return back the shares ?

Need to be careful especially when markets took a sudden
downturn.Dodgy

No, there is no risk for you. the risk is bourne by the broker or CDP if borrower goes belly up. to me it is a no brainer to participate in the CDP SBL.
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#8
(07-08-2012, 10:43 AM)Jacmar Wrote:
(07-08-2012, 10:31 AM)ken Wrote: Well, I think there is some risks involved.

What if your shares is lend out to a third party, who
cannot return back the shares ?

Need to be careful especially when markets took a sudden
downturn.Dodgy

No, there is no risk for you. the risk is bourne by the broker or CDP if borrower goes belly up. to me it is a no brainer to participate in the CDP SBL.

From CDP SBL,

Risks

What happens when the borrower defaults on the return of the securities or on the SGX Securities Borrowing Terms and Conditions?
We require all loans to be fully collaterised and manage all collateral pledged by borrowers. In the event of a default, we'll use the collateral to buy back the borrowed securities. However, if we are unable to buy back the securities from the market, you will be paid the cash value equivalent based on the last traded price on or preceding the date of default.

What do you mean "cash value equivalent"?
You may wish to note that while we guarantee the return of your loaned shares, we have the right to return the cash equivalent in the event that we are unable to. This could happen if we are unable to procure the shares in the market to meet your request.

For example, if you expect to receive your loaned securities on 1 June, and we are unable to return them to you, you'll be paid the cash equivalent. When the closing price for that security on 31 May is available, we'll use that price to determine the cash equivalent. However, if the last known closing price or last traded price is on 28 May, then we'll use that closing price to determine the value of your loaned securities.
Luck & Fortune Favours those who are Prepared & Decisive when Opportunity Knocks
------------ 知己知彼 ,百战不殆 ;不知彼 ,不知己 ,每战必殆 ------------
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#9
(07-08-2012, 10:31 AM)ken Wrote: Well, I think there is some risks involved.

What if your shares is lend out to a third party, who
cannot return back the shares ?

Need to be careful especially when markets took a sudden
downturn.Dodgy

We should always remind us that we should not be confused by "perceived" risks.

There are only 2 risks IIRC

- Recall risk
IMO, most of the time, the risk is less of concern as minority holder. You still get the $ back, even borrower defaulted and share can not be bought-back from market. But you may ease as shareholder with no more voting right.

- Counter-party risk
This is less likely risk when CDP becomes insolvent or is no longer able to meet its obligations as they fall due.

You can limit the number of share to loan by option during application.

Full detail should be available from SGX web site
“夏则资皮,冬则资纱,旱则资船,水则资车” - 范蠡
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#10
I have participated in CDP's lending programme for more than 9 years but never once was my shares being borrowed. So I check out what are the 4 counters mentioned in the article that are on loan giving returns of 3-4% pa. They are China Gaoxian, Hafary, Junken, World Precision, not counters that I would want to hold long term.

If you have shares that are being borrowed, would appreciate it if you can share which counters.

fyi, the original article was posted in nextinsight.
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