Deutsche Bank is set to launch securities lending in India from next month as the market draws increased interest from global custodians. It comes amid expectations that the regulator will permit insurers to enter, a segment where the German bank has a strong market share.
Deutsche will become the second foreign custodian to provide such a service in the country after US rival Citi did so earlier this month, as reported by AsianInvestor.
Anand Rengarajan, head of direct securities services for Deutsche in India, confirms that the bank’s global transaction team will deploy at least two sec-lending traders in Mumbai to carry out trades directly for clients.
Sec-lending has picked up in India since 2010 and hit $100 million in monthly turnover for the first time this January, as registered by the nation’s two primary exchanges – the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE).
Total notional value of sec-lending transactions in India surged to $160 million in June this year, a smart recovery from around $40 million this March (which was a six-month low).
Market participants generally point to two key regulatory relaxations from the Securities and Exchange Board of India (Sebi) that have fuelled market interest: it extended the maximum transaction tenor to 12 months, from seven days when the service was launched in 2009; and lenders are now allowed to recall loaned securities prior to maturity.
India is one of the few markets in Asia where sec-lending transactions are done on exchange mandatorily: the NSE’s and BSE’s clearing houses act as central counterparties to guarantee settlement and manage counterparty risk exposure of borrowers.
This contrasts with Taiwan, Hong Kong and Australia, where sec-lending is done over-the-counter and borrowers post securities/cash to lenders directly to secure bilateral transactions.
Rengarajan says his team came up with its sec-lending offering after months of discussions with the clearing houses of the NSE and BSE.
At present the major participants in the market are India’s leading mutual fund firms (typically with more than $1 billion in assets under management).
But Rengarajan notes that insurance firms may also be eager to participate on the lender side. Although they are not allowed to do so at present, a proposal has been submitted to India’s Insurance Regulatory and Development Authority (IRDA) to seek a relaxation from the regulator.
In August, IRDA issued draft guidelines proposing to allow insurers to lend up to 10% of their total equity holdings. And at least one market source expects them to be allowed to participate in the market as soon as next month.
Sources notes that Deutsche Bank claims over a 50% market share of private sector life insurance firms in India in terms of asset under custody – so this move by Deutsche looks timely.
Rengarajan says sec-lending in India will be dominated by local players, as foreign investors await a certain level of transaction volumes going through the exchanges and need assurance that the risk processes and controls are in place before participating in earnest.