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R. Anand: A lot of changes have been introduced in the Indian
market with regard to both domestic and global investors, but
there are still reforms to carry out. One is deepening the secu-
rities lending market. There is a securities lending and borrow-
ing mechanism in place, but it has yet to take off. Nor is there
a fully-fledged corporate debt market. We need to develop the
ecosystem around this market.
Richard Schwartz: How constrained is the securities lending mar-
ket?
Atul Badkar: The total open interest will be approximately $500 -
750 million and the total ADV will not be more than $40 million.
This is probably because there is a very active single stock futures
market. All categories of investor that exist in mature global
markets are here too, such as retail, HNI, domestic prop, mutual
funds, insurance and FPIs (HFT, hedge funds, quant funds, long
only, etc). Out of these categories, whoever wants to or can short
stocks, usually uses single stock futures. India is probably the
largest single stock futures market in the world.
David Jaegly: Either you do it through the derivatives market with
a stock lending contract or through the OTC market, which is not
available here. In Europe this is how the market works. It’s a very
secure framework and agency lending is very popular in Europe.
Hans Prakash: Entities like us used to have an OTC stock lending
licence. In 2003-4, we were almost at $2-3 billion of OTC business
and it was doing phenomenally well. At that time, the futures
markets had just started off. Later, stock lending was channelled
through exchange platforms rather than the OTC route. Both
exchanges are doing their best, but it is really taking time for it to
work out, largely because of the limited revenue an intermediary
can make out of it as a new segment.
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Global Custodian
Summer 2018
David Jaegly: We have a steady and growing mutual funds industry
here. One of the key players in Europe in this market is mutual
funds. They lend out their portfolio and receive fees from that. We
have this capacity too. I think it’s a question of education, because
mutual funds are risk-averse. If you have a very sound process
and can convince the local infrastructure of the potential scope
of the business, securities lending could be a way of encouraging
additional flows and liquidity from domestic players.
Hans Prakash: Insurance companies are still not allowed to trade
in equity derivatives and mutual funds have restrictions in terms
of trading in derivatives. So, you’re right as far as risk aversion is
concerned. Eventually the regulators may open up. I think they
are moving in the right direction.
Viraj Kulharni: As Atul mentioned, the size of the securities lend-
ing business is not what it can potentially be. David mentioned
Europe, but a closer-to-home analogy is Korea. Korea has close
to $800 billion of securities lending activity. Technically, India
could have a larger market. It all boils down to how the regulator
wanted the market to develop; when securities lending started,
there was a lot of paperwork, which discouraged potential partic-
ipants. Another inhibiting factor was the roll over of settlements,
which limits the demand for borrowing. There is scope to grow
the segment.
R. Anand: Also bear in mind the cost involved in running a securi-
ties lending desk, when there are already attractive opportunities
in the cash, derivatives and other markets.
Richard Schwartz: The explosive growth of derivatives has been
mentioned several times, Is it sustainable?
Atul Badkar: There is no doubt that the equity derivatives market
in India has exploded. While we speak about this growth, we are
also leaders in terms of volume in certain
instruments. SEBI has also been proactively
putting out discussion papers managing
this growth with caution. For example,
globally there have been HFT accidents, so
SEBI is asking for suggestions on how we
can keep growing without having similar
accidents. We also need to learn from oth-
ers’ mistakes.
To make sure that derivatives are not
mis-sold in the market and the smallest
investor is protected, the lot size of certain
contracts had been increased to make sure
that it’s mainly accessible to a slightly more
advanced and well-informed investor. We
have been taking steps intermittently and
are gathering a lot of industry suggestions
and implementing them in phases. From
that perspective, I think there’s much more
to do. We could grow five times from here
in the next five to seven years as long as
the appropriate risk control measures and
technology are in place.