Help and Support

Share Borrowing

FAQ

Frequently Asked Questions

(1)          What is the process of borrowing shares?

(2)          What are the stocks available for borrowing?

(3)          How many times of leverage do I get from SBL?

(4)          How are collateral requirements computed?

(5)          How is borrowing fee calculated?

(6)          Does the borrower need to pay borrowing fee if he placed cash collateral amounting to 100% (or more) of the value of borrowed shares?

(7)          What happens if there is a situation of recall?

(8)          Does the borrower still have to pay borrowing fee when the shares were recalled?

(9)          Does the borrower need to return the securities after he has bought back the shares?

(10)       What happens if there is a corporate action such as dividend distribution, rights / bonus shares issued for the borrowed securities?

(11)       What happens if the shares you short-sold using SBL got suspended?



(1)   
What is the process of borrowing shares?

Borrowing process is as simple as 1-2-3:

1. Call your Trading Representative to enquire on the availability of the desired stock to borrow before shorting.

2. Ensure sufficient collateral is available in your SBL by either transferring from your existing account or EPS (electronic payment for shares).

3. Your TR will inform you if the loan is approved after confirmation of collateral sufficiency with Credit Department

 

(2)    What are the stocks available for borrowing?

Generally speaking, index components are readily available for borrowing while smaller cap stocks are limited. Feel free to contact your TR to enquire on the stock availability.

 

(3)    How many times of leverage do I get from SBL?

Broadly speaking, if you are using

-          cash as collateral, the initial margin requirement is 50%* of the total market value of borrowed stocks.

-          stocks as collateral, the value of collateral will depend on the valuation factor (Price Capped Factor – (“PCF)).

* For initial margin, more cash collateral will be required if the respective stock borrowed has a PCF of less than 100%. Please refer to example below for computations.


 

(4)    How are collateral requirements computed?

Abbreviations:

TBV = Total Borrowed Shares Market Value

TMV = Total Marginal Value

LDP = Last Done Price

PCF = Price Capped Factor (Valuation Factor)

 

Collateral requirements               =             150% of TBV

                                                                =             150% x LDP x Qty

Collateral means:

  1. Cash (own cash and/or sales proceeds)
  2. Marginable securities (own holdings and/or unsold borrowed securities)

 

Assumptions:

Security Name

LDP (S$)

PCF (%)

 

(1)

(2)

Ezion

1.875

90%

NOL

0.97

100%

Capitaland

3.24

100%

LDPs for all above counters remain the same on 22/9, 23/9, 24/9 and 25/9.

 

Example (1):  

If customer borrows 10,000 shares of Ezion on 22/9 and would like to use cash as collateral, how much cash does he need to have in the SBL account? Customer sold Ezion at it at $1.90.

 

   

T

T+1

T+2

T+3

   

22/9

23/9

24/9

25/9

( A ) Initial Margin Required

(1) x (3) x 150%

28,125.00

28,125.00

28,125.00

28,125.00

( B ) Less: TMV

(1) x (2) x (3)

16,875.00

16,875.00

16,875.00

0.00

( C ) Less: Sales Proceeds ($1.9/shs)

 

0.00

0.00

0.00

19,000.00

Cash Required

( A ) - ( B ) - ( C )

11,250.00

11,250.00

11,250.00

9,125.00

 

 

Example (2): 

If customer borrows 10,000 shares of NOL on 22/9 and would like to use cash as collateral, how much cash does he need to have in the SBL account? Customer sold NOL at it at $0.98.

 

   

T

T+1

T+2

T+3

   

22/9

23/9

24/9

25/9

( A ) Initial Margin Required

(1) x (3) x 150%

14,550.00

14,550.00

14,550.00

14,550.00

( B ) Less: TMV

(1) x (2) x (3)

9,700.00

9,700.00

9,700.00

0.00

( C ) Less: Sales Proceeds ($1.9/shs)

 

0.00

0.00

0.00

9,800.00

Cash Required

( A ) - ( B ) - ( C )

4,850.00

4,850.00

4,850.00

4,750.00

 


 

Example (3): 

If customer borrows 10,000 shares of NOL on 22/9 and would like to use 1,000 shares of Capitaland as as collateral, how much cash does he need to have in the SBL account? Customer sold NOL at it at $0.98.

   

T

T+1

T+2

T+3

   

22/9

23/9

24/9

25/9

( A ) Initial Margin Required

(1) x (3) x 150%

14,550.00

14,550.00

14,550.00

14,550.00

( B ) Less: TMV (NOL)

(1) x (2) x (3)

9,700.00

9,700.00

9,700.00

0.00

( B ) Less: TMV (Capitaland)

 

3,240.00

3,240.00

3,240.00

3,240.00

( C ) Less: Sales Proceeds ($1.90/shs)

 

0.00

0.00

0.00

9,800.00

Cash Required

( A ) - ( B ) - ( C )

1,610.00

1,610.00

1,610.00

1,510.00

 

(5)    How is borrowing fee calculated?

Borrowing fee is accrued (but not compounded) on a daily basis based on the <LDP x Quantity Borrowed>. The fee is then collected on a monthly basis.

 

(6)    Does the borrower need to pay borrowing fee if he placed cash collateral amounting to 100% (or more) of the value of borrowed shares?

Yes, because borrowing fee is calculated based on (1) an agreed rate and (2) market value of the borrowed shares. It is independent of the type of collateral placed.

 

(7)    What happens if there is a situation of recall?

In the unfortunate event that there is a recall, the SBL Desk will attempt to find replacement supply. If it is not possible to find replacement, the borrower will be issued a recall notice. The borrower will have to within one settlement cycle returned the shares (free & available) to SBL. This means if the borrower were to buy back from the market, he would have to buy back on the day when the recall notice was issued.

 

(8)    Does the borrower still have to pay borrowing fee when the shares were recalled?

Yes, borrowing fee is payable until the day the shares (free & available) are finally returned to SBL.

 

(9)    Does the borrower need to return the securities after he has bought back the shares?

Yes, because a buy-back does not translate to an automatic return since the borrower can choose to re-sell the borrowed shares. If the borrower wishes to return the securities, he can inform the TR to call the SBL Desk to perform the return.

(10)What happens if there is a corporate action such as dividend distribution, rights / bonus shares issued for the borrowed securities?

The borrower will have to reimburse the lender for any loss of such entitlement if he borrowed the shares over the Record Date (commonly known as Books Closure Date (“BCD”)).

In the case of dividend, the borrower will have to reimburse the lender the full amount of dividend that the lender was expecting to receive as if he was holding the borrowed shares. You may like to note that where there is an option of scrip dividend, the lender has the right to decide whether he wants to receive cash or scrip dividend.

In the case of rights issue, the borrower will have to reimburse the lender the number of rights shares that the lender was expecting to receive as if he was holding the borrowed shares. The rights shares (free & available) will have to be returned to the lender by T+3 days from the listing date of the rights shares.

In the case of bonus issue, the borrower will have to reimburse the lender the number of bonus shares that the lender was expecting to receive as if he was holding the borrowed shares. Borrowed position will automatically be adjusted to reflect the additional bonus shares owing by borrower on the listing day of the new shares.

 

(11)What happens if the shares you short-sold using SBL got suspended?

The stock loan (interest accruable) will remain open until the shares (free & available) are finally returned to the lender. The borrower may propose to the lender (vice versa) on cash settlement of the borrowed shares. The cash settlement amount will depend on several factors. As a rule of thumb, the last done price will normally be used as one of the key determinants of the cash settlement price.

 

(12)Do I have to mark my sell orders even if I have borrowed shares to sell?

Yes, marking of “short-sell” order is necessary for selling of borrowed shares.

Interest rates and charges

The borrowing fee charges yearly are 10% of the market value of the borrowed stock i.e. about 0.192% weekly (the market value will be marked daily based on the previous closing price). The fees are subject to GST.

Example:

Let’s assume that the market value of the borrowed stock is constant throughout the borrowing period. Hence, the borrowing fees of a $10,000 stock for 7 days (10% X 10,000 x 7/365) is about S$19.18 (excluding GST).

The fees will be deducted monthly from the cash balances in your Share Borrowing Account and you will receive monthly statements.

You will be charged interest on any negative balances which could result from:

i.            Monthly share borrowing fees debited

ii.            Buy-back of the borrowed shares at a higher price

iii.            Forced buy-back by the company

iv.            Any other circumstances that results in a negative balance

 

The negative balance will be charged at an interest rate of 2 % above OCBC Prime rate.

You are required to settle all negative balances immediately upon receipt of the monthly statements.

A list of CDP charges, handling charges and other charges is appended below for your information.

Charges Amount
Deposit of securities as collateral into OCBC Securities S$10* per counter (charges levied by CDP)currently absorbed by OCBC Securities Pte Ltd
Withdrawal of securities as collateral from OCBC Securities into your CDP account S$10* per counter (charges levied by CDP)
Rights application fee Handling fee: S$10*
Cashier’s order: S$5
Dividend collection fee 1% on net dividend
Minimum: S$5 / US$5*
Maximum: S$200 / US$200*
All taxes, duties and levies (including without limitation, GST) imposed by Singapore law Stipulated by Singapore law

*All fees are subject to GST. Charges are subject to change without prior notice.

Education Article 1: The Fallacy of Shorting

Can you name one taboo subject that comes to your mind about stocks trading? Well, often enough for many, it is short selling

Have you ever wondered why “short selling” was causing so much commotion during the crises? 

When we talk about short selling, it is important that we discern the difference between naked short selling and covered short selling. Naked short selling refers to selling shares that are not in possession without first borrowing the shares and subsequently failing to deliver on settlement day. On the other hand, covered short selling refers to the selling of borrowed shares. Another point to note when evaluating the “impact” of short selling is the context and market structure in which one is trading. 

It is often believed that short selling is detrimental to the capital markets. In 2008, the SEC in the United States banned “abusive naked short selling”. Just how much do we know about short selling in the United States and how is it different from that in the Singapore market before generalizing that short selling is “evil”?

 

Differences between US and Singapore markets in Short Selling 

When short selling was banned in the United States, it was mainly the banning of naked short selling. Naked short selling in the United States is not necessary illegal if the broker-dealers have grounds to believe that the sale securities can be delivered. If the seller fails to deliver the sold securities on settlement day, it will be labeled as “failure to deliver”.  Given a limited period, the transaction can remain unsettled until short seller closes out the position (buy-back) or borrows the shares to deliver. The sales will be sitting opened and in this case, the buyer will not be receiving the shares and seller will not be receiving the sales proceeds. 

By allowing the short to sit open, it is actually creating phantom shares in the market, which has been argued that this dilutes the company’s shares. This could be a reason that share prices are artificially depressed for as long as the short is unsettled. “Abusive naked short selling” is arguably “evil”. The SEC hence enacted Regulation SHO in January 2005 to address this issue by requiring broker-dealers to close out the “failure to deliver” position after 13 consecutive days. 

On the contrary, short selling in Singapore market is a totally different game.  

Besides compulsory buying-in on settlement day on “failure to deliver” transactions by the Singapore Exchange to avoid creating “phantom shares”, it has to be noted that naked short selling is forbidden in Singapore. The Singapore Exchange penalizes the naked short sellers through various means of enforcements. Hence, covered short selling here is not necessary “evil” for the market because it leads to efficient capital allocation in the capital market facing an unsustainable upward trend. It also helps buyers who want to go long on the company’s securities but want to be limited in their risk exposure to buy at lower prices. 

Is short selling necessarily the cause of the declining value of a quality stock?  

Not really, because if the company is fundamentally strong, the efficient market hypothesis tells us that the stock is less likely to lose its value in the long run. The case of the declining value of a stock price is likely due to the substandard quality of the stock that loses its investors’ willingness to acquire the stock for more than its worth after a price correction. 

There is a saying “The market takes the stairs up and the elevator down”, as an investor, do you prefer to only participate in the trek up the stairs or would you also like to capitalize on the elevator down. If your answer is the latter, there are various ways for you to do so. In OCBC Securities, you can enter into a covered short selling transaction by borrowing shares.

 

Call your Trading Representative now to know how to borrow shares and be prepared for the downward trending market.

Education Article 2: The Tool for Shorting

The existence of the capital markets is to allocate capital efficiently. No one will be betting on the continuation of an un-sustainable upward trend. There is always a saying “What goes up must come down”. Covered short selling is not necessary bad because it helps to send price signals and correcting / reallocating resources to improve the efficiency in the capital market and thus bringing the supply and demand of the company’s stocks to equilibrium. 

Covered short selling is the act of borrowing the respective stocks first before engaging into a “selling without possession” activity. So, what is borrowing of stocks all about? 

Securities borrowing (and lending) or also known as SBL has come a long way. Popularized since the 1970s, it is now a long-established practice and has become an integral part of today’s capital markets. SBL is a temporary loan of securities by a lender to a borrower where in return, the lender receives a fee. The lender may at anytime recall the securities and the borrower is obliged to return the securities on demand or at the end of any agreed term. 

The word “lending” can be misleading in some ways because in law, securities lending transaction is in fact an absolute transfer of title against an undertaking to return equivalent securities. Therefore, the lender no longer owns the securities and the economic benefits of owning the securities such as dividends. To guard the interest of the lender as a shareholder, the borrower is obliged to make (“manufacture”) equivalent payments back to lenders for the economic benefits which the lender is entitled to. Also, the lender is given the contractual right to recall the securities from the borrower at any time. In addition, the borrower will have to collateralize the transaction with cash or equivalent to protect the lender against counterparty credit risk. 

On the supply side of the equation, the market participants of securities lending consists of beneficial owners who are mainly the owners of pension funds, mutual funds, insurers, corporations, high net worth and government investment companies. On the demand side, one will see market makers, hedge funds, individual traders, brokers, proprietary traders.

 
Figure 1: Market Participants in Securities Lending

 

The most common motivations of borrowing securities are for (covered) short selling. However, do you know short positions are taken not only on a simple directional view that the market is riding on a downward trend but it can also be used with a directional view on a single stock in an upward tending market. Other reasons for short selling include:

  • reactions to earnings announcement
  • reactions to change in index compositions
  • arbitrage between underlying and rights/company warrant/merger/convertible bonds/options/index/single stock futures
  • hedging for impending share placement, bonus shares crediting
  • hedging for market making

 

Typically, a stock loan transaction involves confirming availability and ensuring sufficiency of collateral, margin levels before the borrowed stocks can be sold in the market. After the checks have been done, the shares can be sold in the cash equities market using the SBL account listed in your iOCBC trading platform or through your trading representative. 

The main risks that are associated with SBL are investment risk, recall risk as well as counterparty risk. Regardless of long stock or short stock, one is subject to investment risks – the possibility of experience losses due to factors that affect the performance of the financial market or the particular security. Whether or not the risk to short selling is “unlimited” is debatable. In theory, a stock can increase in price with unlimited ceiling that results in “unlimited” loss but in practice, if one sets a target and a stop loss, you define your risk and reward. Going long in this case will have the same risk as going short. 

In borrowing securities, the borrower is also faced with recall risk. Recall risk is the risk of lender recalling the loaned stocks during the period when the short position is still opened. In this case, the borrower will have to buy back from the market to meet the recall deadline. Typically, the intermediary facilitating the loan will attempt to find replacement lender before recalling. Hence, it is important to use a reputable intermediary such as OCBC Securities to borrow stocks. 

Lastly, counterparty risk is the credit risk that a borrower has to face because the borrower in order to borrow the stocks provides collateral (typically with margin) to the lender. Hence it is important that one looks to a counterparty with strong credit standing for maximum protection. In OCBC Securities’ context, you only look to us (and not the lender) for credit risk. 

No matter what your trading strategies are, in OCBC Securities, you can go long as well as go short. For short selling, we have comprehensive list of securities available for loan.
 

Call your Trading Representative now to find out more about OCBC Securities’ SBL services.

Education Article 3: The Mechanics of Shorting in OCBC Securities

Short selling (covered) in OCBC Securities can be as easy as 1-2- 3.

 

With the borrowed securities, you can now sell first without owning the shares and buy back at a later time yet not having to fear the mandatory buying-in by the Singapore Exchange.

 

Step 1:  Check Availability for Respective Stocks via your Trading Representatives

Step 2:  Deposit in sufficient collateral into your SBL account

 

How much collateral is sufficient? In OCBC Securities, you can borrow up to two (2) times the value of your collateral provided. Collateral is accepted in the form of cash or securities.

 

Step 3:  Flag and short sell in cash market

After you have bought back the shares using your SBL account, you can choose to return or hold on to the borrowed securities for future uses.

Why OCBC Securities? 

  • SBL account is FREE
  • ZERO admin fee
  • ZERO account maintenance fee
  • Minimum loan is ONLY 3 market days

 

Standby your SBL account for the right moment for short selling

Call your Trading Representative now to find out more about OCBC Securities’ SBL services.