SECURITIES LENDING AND BORROWING (SLB)

UNDERSTANDING SLB, RISK EXPOSURES AND

MITIGATION MEASURES

FRANCIS KIBATHI
Risk Manager - CDSC
Overview of Securities Lending and Borrowing
Securities Lending and Borrowing (SLB) is the temporary transfer of shares from one party (lender) to

another (borrower), with an agreement to return the shares either on demand, or at a future date. The

lender can be an individual or an institution that Lorem ipsum dolor

holds shares on a long term basis.

How to Lend How to Borrow

Contact an SLB Agent. Contact an SLB Agent.

Submit your lending instructions (The shares you are willing Submit your borrowing request (The shares you are
to lend, the lending fees and the period you wish to lend) want to borrow and the borrowing period)
The SLB Agent upon confirmation of the availability of The SLB Agent upon receiving your collateral and 10%
shares in your account, shall capture the lending request in initial margin, shall capture the borrowing request in the
the CDS CDS
The securities shall then be reserved and your lending The request is added to the pool or matched with an
request added to the lending pool or matched with an existing lending request
existing borrowing request

In case matching does not happen within the set time (expiry date), the requests will be automatically removed from the pool
and the shares and collateral released.
Overview of Securities Lending and Borrowing
Benefits of SLB to Participants

Lenders Borrowers

 Additional Income through Lending Fees dolor

Lorem ipsum Additional income in bear market conditions

 Automated transfer of Securities  Supports investment strategies like short selling

 Lender receives all corporate actions that take  With screen based model, borrowers can view

place during an SLB transaction securities on offer and take advantage of

opportunities that arise

Lenders and Borrowers

No Counterparty risk as transactions are guaranteed

by CDSC

Lenders and borrowers transact in a common platform

(Central Depository System)

APPROVED SLB AGENTS

AIB-AXYS AFRICA KCB BANK KENYA LTD

The Promenade, 5th Floor, Kencom House, Moi Avenue
General Mathenge Drive Tel: 3270000 / 0711012000
Tel: 2212206/0711047000 Email: [email protected]
Email: [email protected]

DYER & BLAIR INVESTMENT BANK KESTREL CAPITAL (EAST AFRICA)

Goodman Tower, 7th Floor, Orbit Place, 2nd Floor
Waiyaki Way Westlands Road
Tel: 3240000/227803/4/5 Tel: 2251758/2210719
Email: [email protected] Email: [email protected]

FAIDA INVESTMENT BANK LTD STANDARD INVESTMENT BANK

Crawford Business Park, JKUAT Tower, 16th Floor
Statehouse Road Kenyatta Avenue
Tel: 0724721014/ 0733243811 Tel: 2220225/2228963/7/9
Email: [email protected] Email: [email protected]

Delta Corner Annex, 5th Floor

Ring Road - Westlands
Tel: 2213914/2244077
Mobile: 0723153219/0734219146
Email: [email protected]
CDSC Risk Management Framework
CDSC’s Risk Management Framework is based on globally recognized standards
Information &
Governance Strategy & Objectives Risk Assessment Review & Revision
Reporting

 Oversight through the  Analyzing Risk and  Risk Identification

Lorem ipsum dolor Annual Risk Policies  Periodic reporting of

Board’s Risk Business context review risk posture

 Risk Analysis
Committee & ExCo.
 Defined Risk Appetite  Continuous
 Risk Evaluation and
 Framework and Tolerance assessment of risk
Prioritization
benchmarked on performance

international  Risk Mitigation

standards – CPMI-

IOSCO, COSO, ISO

 Organization-wide

Risk-aware culture

Settlement Risk Cyber & InfoSec Risk Credit Risk Regulatory Risk InfoTech Risk

Operational Risk Strategy Risk Market & Liquidity Risk Compliance Risk Agency Risk
Securities Lending and Borrowing Risk Management

Custody and
Agency Risk

Market Risk Credit (Default)

Risk

SLB Risk Key

Management

Legal and Liquidity Risk

Compliance

Operational Risk
 Credit (Default) Risk

The risk that a party (Borrower, Lender, CDSC), will be unable to meet fully its funds and securities
obligations when due

Risk Mitigation Measure(s)

Collateral and Securities Settlement: Borrower could  Borrower is required to provide collateral before placing a borrowing
fail to provide collateral or the lender may not avail the request and this collateral is reserved immediately an SLB transaction is
lent security at the beginning of the contract. executed/matched.

 The lender to ensure that securities are unencumbered before CDSC

can approve the lending order/request.

 DVP-3 settlement of the matched SLB orders with simultaneous

blocking of collateral and transfer of borrowed securities from the
lender to Borrower.

Margin: Failure by the borrower to deposit the additional  Daily mark-to-market of the lent securities and non-cash collateral with

margin calls. daily margin calls and Prompt contract closeouts.

 SLB transaction to be terminated a day after borrower default to limit

exposure to the lender of securities.
 Credit (Default) Risk…

The risk that a party (Borrower, Lender, CDSC), will be unable to meet fully its funds and securities
obligations when due

Risk Mitigation Measure(s)

 Buy-in and Cash equivalent compensation for failed return of securities

Failed delivery: Failure by the borrower to return paid by the collateral provided.
securities to the lender at the end of the contract period  Centrally Cleared SLB Contracts with Collateral to be maintained at
110% of the value of the securities borrowed.

 Provided collateral to be used.

Lending Fees: The borrower’s inability to settle
 Settlement Guarantee Fund in place.
outstanding lending fees at the end of the contract.
 Liquidity Risk

The risk that a counterparty will not settle an obligation for full value when due. Liquidity risk does
not imply that a counterparty or participant is insolvent since it may be able to settle the required
debit obligations at some unspecified time thereafter.
Risk Mitigation Measure(s)

Illiquid stocks: Inability of the  Only liquid securities (constituents of the NSE 20-Share Index) can be lent/borrowed.

Borrower/CDSC to get securities  A notice of 14 days by the lender to give the borrower adequate time to source for the
securities.
(shares) in the open market.
 SLB Rules/procedures allows for cash settlement (compensation to the lender) incase of
failure to get securities.

Collateral: Inability to liquidate  Collateral required in a securities lending or borrowing transaction is restricted to Cash (in

borrower’s collateral on default by Kenya shillings) and Government securities.

 SLB regulation restricts reuse of collateral to: interest bearing accounts in case of cash and
the borrower.
overnight repo transactions for GoK Securities.
 Operational Risk

Loss to SLB participants resulting from inadequacy in internal processes, people and systems

 SLB Rules and Procedures are in place and approved by CMA.

 Periodic communication with the SLB parties, their agents and the regulator on SLB transactions including daily
Processes reporting on executed SLB transactions.
 Indemnification mechanisms by the agents and CDSC provided for in the SLB Rules and contracts.
 Accounting Treatment for SLB Transactions already provided for in IFRS 9.

 A CDS system in place to support the SLB framework has been tested and noted to be adequate.
Systems
 Benchmarking of the Screen-Based SLB Model done.

People  Training and capacity development for staff and participants conducted and continuing.
 Legal and Compliance Risk Management

Uncertainty in application of regulations or contractual terms, unfavorable regulatory

changes, freezing or delay in recovery of assets because of a court orders, or voiding of
contracts resulting from non-compliance to laws and regulations

Uncertainty in Regulations - SLB Regulations, Rules and Procedures have been exposed to stakeholders
and approved by CMA. CMA has admitted CDSC to deploy SLB in the regulatory sandbox.

Regulators support - SLB to be carried out by regulated entities who may act as intermediaries (SLB Agents)
for securities borrowers and/or lenders with CMA conducting continuous compliance monitoring.
RBA issued a Letter of No Objection to allow Retirement Benefit Schemes to participate subject to their IPS

SLB Master Agreements - SLB Master Agreements are in place (between lender and borrower,
Lender/Borrower and the SLB Agent and CDSC and SLB Agents) spelling out obligations, responsibility,
dispute mechanism etc.
 Other Risks and Mitigation Measures

Custody Risk Settlement Risk Market Risk

Loss of collateral due to Delay in receiving securities or Loss arising from price
insolvency of collateral collateral fluctuation in security
custodian lent/borrowed

• CDSC is limiting the custodian • Transfer of security to the • Marking to Market,

of borrower collateral to Tier I borrower is simultaneous with
banks with a low credit risk the blocking of collateral • Initial Margin requirements,
rating • Limitation on collateral re-use
• SLB Guarantee Fund in place
• Collateral is distributed among
various commercial banks
Residual Risks

While there are adequate risk mitigation mechanisms provided in the Rules and
Operational Procedure, the Borrowers, Sellers, and their Agents need to note the
following
Borrowers Lenders

• Market can go against borrower • May lose control when the borrower fails and
compensation is made on cash basis
• Increased cost due to manufactured dividend
• Inability to promptly exploit opportunity due to
• Premature wind-up of contract on call by lender the 14 days notice period
or default on margin calls
• Premature return of securities
• Illiquidity in the market when return is due
• Impact of delisting and suspension of securities in
• Impact of delisting and suspension of securities in an open SLB contract
an open SLB contract
THANK YOU!
APPROVED SLB AGENTS

AIB-AXYS AFRICA KCB BANK KENYA LTD

The Promenade, 5th Floor, Kencom House, Moi Avenue
General Mathenge Drive Tel: 3270000 / 0711012000
Tel: 2212206/0711047000 Email: [email protected]
Email: [email protected]

DYER & BLAIR INVESTMENT BANK KESTREL CAPITAL (EAST AFRICA)

Goodman Tower, 7th Floor, Orbit Place, 2nd Floor
Waiyaki Way Westlands Road
Tel: 3240000/227803/4/5 Tel: 2251758/2210719
Email: [email protected] Email: [email protected]

FAIDA INVESTMENT BANK LTD STANDARD INVESTMENT BANK

Crawford Business Park, JKUAT Tower, 16th Floor
Statehouse Road Kenyatta Avenue
Tel: 0724721014/ 0733243811 Tel: 2220225/2228963/7/9
Email: [email protected] Email: [email protected]

Delta Corner Annex, 5th Floor

Ring Road - Westlands
Tel: 2213914/2244077
Mobile: 0723153219/0734219146
Email: [email protected]