SEs start mock trial of short-selling mechanism

Apr 17, 2008
Gaurav Pai & Ashish Rukhaiyar
MUMBAI

AS the Monday deadline for introduction of short-selling approaches, India’s two stock exchanges have started mock trials with their recently installed securities lending and borrowing (SLB) mechanisms. While the initial response from most institutions are mixed, most agree that there is now a greater clarity on the norms.

“We have already started trials for the SLB mechanism,” Rajnikant Patel, MD of BSE said at a function organised to unveil its tie up with Bank of India as its clearing member for the purpose. NSE commenced its dummy runs of the system last Monday . Mr Patel clarified that initially all participants using the SLB window will have to pay the whole margin upfront while borrowing stocks, besides paying the relevant mark-to-market margins.

ET spoke to some of the largest institutions in the country who participated in these trial sessions by NSE. Most felt that single stock futures would work out cheaper. “A part of the market which exist outside is being regularised locally, which is fine. However, the mechanism that has been proposed is not necessarily the most efficient or effective,” said the head of equities at a foreign brokerage.

Under a 25% margin, a person who is borrowing shares worth Rs 100, will have to deposit Rs 125 initially, a part of which will go to the lender and the balance will remain as a deposit with the exchange. The rules at NSE are expected to be on the similar lines.

Meanwhile AC Gautam, MD of BOI Shareholding, Bank of India’s arm for this purpose said that till date around 25 members of the exchange have registered for the service and most of these are domestic players. NSE’s clearing and settlement subsdiary, NSCCL — National Securities Clearing Corporation — will also do similar functions for which it has tied up with eight major banks.