Securities lending is a well-established tool in Singapore’s financial landscape and can offer many advantages to traders. By understanding the benefits of securities lending, traders in Singapore can position themselves for success. Securities lending offers opportunities to build your bottom line, manage risk and access otherwise unavailable liquidity. This article will discuss why traders should consider securities lending when trading in the Singaporean markets.
Generate additional revenue streams
Through securities lending, investors can use their portfolios to find new opportunities without taking on additional risk. When a lender agrees to loan out their stock, they are compensated with interest payments for the duration of the loan agreement, which can represent an attractive income source for investors looking to maximise their return. Moreover, as the interest rate payment is based on the value of the stock loaned, investors with higher-value portfolios will have access to increased yields.
Access liquidity when needed
By lending out securities, investors can provide much-needed liquidity to the market and benefit from increased trading activities. Securities lending Singapore also offers an alternative source of liquidity for those unable to access traditional sources such as banks or other financial institutions. It helps traders who may be short on funds but are still looking to invest in Singapore’s markets. Moreover, securities lending offers access to securities that would be otherwise unavailable due to their rarity or not being listed.
Hedge against volatility
Securities lending gives traders a potential hedge against market volatility by allowing them to borrow stocks they would not usually buy outright. By getting exposure to stocks they may not otherwise be able to, traders can hedge against the risks associated with sudden market changes. Furthermore, securities lending can be used as a hedging tool to reduce the cost of trading securities.
Using securities lending offers significant cost savings compared with other financing forms, such as margin loans or other forms of borrowing. Also, securities lent through securities lending do not incur capital gains tax until they are returned, meaning investors can benefit from a significant tax advantage. Furthermore, securities lending allows investors to access securities and execute trades at a fraction of the cost.
Improve portfolio management
Securities lending is an effective tool for portfolio diversification and risk management. By borrowing securities, investors can spread their investments across a broader range of assets, reducing their overall exposure to risk. Moreover, securities lending allows investors to take advantage of new opportunities without reallocating their portfolios or liquidating existing positions. Moreover, investors can use securities lending to reduce portfolio concentration, which can help traders manage their exposure to specific securities or sectors.
Securities lending risks
While securities lending has several advantages, it is crucial to be aware of the risks involved. Traders should also ensure they understand their securities lending agreement before committing to any trades to protect their assets.
Securities lending involves taking on a counterparty, meaning traders are exposed to the possibility of default from their counterparties. Investors should ensure they conduct due diligence when selecting securities lending partners to minimise the risk of loss in the event of a default.
Securities lending is subject to regulatory restrictions, varying depending on the jurisdiction. For example, securities borrowers may be required to hold minimum capital or collateral requirements that need to be met for securities trading to occur. It is crucial for investors and traders to know and understand these regulations before engaging in securities lending activities.
Securities lending is subject to market risk, which means that securities may move in value while they are lent out. It can result in losses or gains for both securities lenders and borrowers, depending on the direction of the securities’ price movement.
Securities lending can also lead to concentration risk, where securities are over-concentrated in one particular sector or market. It increases the chances of losses if securities move against the investor’s expectations.
Securities lending agreements should include liquidity provisions if securities become illiquid due to market conditions. It ensures that the securities lending party returns the securities promptly to avoid losses.