Securities lending is the practice of a lender temporarily transferring ownership of a security to a borrower while collecting collateral or fees. It allows investors to gain access to securities they may otherwise be unable to trade or hedge while also providing lenders with additional revenue streams. Securities lending has become increasingly popular in Singapore due to its potential for mitigating risk, finding new opportunities, and improving liquidity for traders. For those who are interested in getting started, you can check out what Saxo Bank Group offers.
Gain access to hard-to-borrow securities
Securities lending gives Singaporean traders access to hard-to-borrow securities that would not otherwise be available to trade, making it easier for investors to capitalise on opportunities and benefit from potential market gains. Additionally, counterparty default risk is significantly reduced since all securities are held in segregated accounts, and insurance coverage is provided. In addition, the borrower pays a fee to the lender, which often results in higher returns for Singaporean traders.
Improved liquidity in Singapore’s markets
Securities lending can improve liquidity in Singapore’s markets by increasing the number of investors with access to specific securities. It helps create more efficient trading environments and allows lenders to earn more money on their investments. Furthermore, increased liquidity enables investors to actively manage their portfolios without worrying about being stuck with illiquid positions.
Generate additional income
Traders can also use securities lending to generate additional income for Singaporean traders. Lenders can earn interest on their loans and often receive favourable terms from borrowers due to the risk reduction associated with securities lending. In addition, lenders can offset some of the costs associated with trading specific securities by collecting fees or other forms of compensation from borrowers.
Increase portfolio diversification
Securities lending provides investors with more significant diversification opportunities since they can tap into a much broader range of assets than would otherwise be available. It helps reduce overall portfolio risk and allows investors to take advantage of unique market opportunities without taking on excessive levels of risk. Moreover, it allows investors to generate additional income while diversifying their portfolios.
Hedge positions more effectively
Traders can use securities lending to hedge positions more effectively by providing a source of liquidity in times of market volatility or unexpected events. It is especially beneficial for Singaporean traders since it helps reduce the risk associated with investing and allows them to protect their investments from potential losses. Moreover, it gives investors greater flexibility when managing their portfolios by enabling them to take advantage of short-term opportunities without liquidating existing long-term holdings.
Lower transaction costs
Securities lending can help Singaporean traders lower their overall transaction costs by providing access to various instruments. Since lenders often receive favourable terms from borrowers, they can receive higher returns than traditional investments and potentially reduce the overall cost of trading. Additionally, lenders can gain access to specific securities without needing to pay the total asking price or incur additional fees associated with buying and selling securities.
What are the risks involved?
While securities lending has several benefits, traders must know about the risks associated with the practice. Knowing the risks will help traders make informed decisions when investing in securities and protect their investments from potential losses.
Counterparty risk
When lending securities, there is always a chance that the borrower will default on their loan. To mitigate this risk, Singaporean traders should ensure that all trades are conducted through reputable brokers and lenders with a good track record of honouring their obligations.
Market liquidity risk
Securities lending can increase market liquidity, but it also carries the potential risks associated with increased volatility in Singapore’s markets. Investors must assess the overall market conditions before engaging in securities lending practices to avoid taking on excessive levels of risk.
Credit Risk
When engaging in securities lending, investors must consider whether or not they are comfortable taking on any additional credit risk associated with the transaction. It includes assessing how secure the collateral is, whether or not the borrower will be able to honour their obligations and how any losses may impact the investor’s overall portfolio.
Regulatory Risk
Singaporean traders must also know any applicable laws and regulations governing securities lending before engaging in the practice. It includes ensuring they comply with any local or international regulations and understanding the potential repercussions if they fail to adhere to them.