Security Lending, Borrowing and Short-Selling Regulations

Sep 19, 2021 | Capital Markets Authority

Securities lending and borrowing

The regulation covers transactions involving the lending and borrowing of securities. These transactions must be conducted according to the regulations, and where there is a need for an exemption for a sell buy-back or a transaction similar to securities lending, the exemption must be sort from the authority.

The parties intending to take part in a securities lending and borrowing transaction need to enter into an agreement that meets the requirements of the regulations and provide the required collateral covering one hundred percent of the borrowed securities – and in certain instances with an additional margin. Though not having an entry as a sale or purchase on a traded market, the transaction will be reported to the CMA as per its conditions.

The lender will enjoy the economic benefits of the lent securities, for instance, the dividends or interests, and will be entitled to a lending fee from the borrower. On the other hand, the borrower will have full legal title to the securities borrowed, where the collateral is securities will enjoy all the economic benefits, and pay the securities lender such amount to ensure the collateral remains sufficient.

Short-selling of securities

The regulations provide that a seller may enter into a short-selling transaction if the seller has and provides documents to show that he has entered into securities borrowing agreement to cover the short sale, believes the securities will be delivered, and entered into an agreement with a third-party that has confirmed in writing to have the securities and will deliver in time to cover the short sale.

A regulated person will handle a short-selling transaction, and such a transaction will not require pre-transaction validation requirements like in other securities transactions save for the few requirements in the regulations. Further, securities exchange or trading platforms are required to develop rules to provide for buying in.

It is required that a person who holds a short position of at least five percent should report the position to the securities exchange or trading platform and the CMA. CMA reserves the right to revise the percentages per various securities products and may also suspend short sale or impose various controlling measures on the prices.

A person who contravenes the Securities Lending, Borrowing, and Short-Selling regulations will have sanctions imposed against the person should there be no other penalty provided for by law.