Security Lending-Pool

The Norwegian securities Borrowing and Lending Program improves the efficiency of securities settlement and consequently liquidity in the market. The Program is a multilateral arrangement in which the real borrowers and lenders are unknown to each other. The lenders make securities collectively available to a pool and the pool acts as lender to the borrower and as borrower to the lender. Technically, the securities will be marked available for lending on the investors account, and will stay there until a loan takes place. The Program matches the borrowing demand with the lendable supply of securities, enabling a participant to meet its settlement needs or to support its trading activity by automatically borrowing securities.

Purpose and applications

The need to borrow securities will primarily arise when there are insufficient holdings of securities and delivery cannot be effected. As a part of the endeavours to improve risk management in securities trading and to increase the efficiency of securities settlement, VPS and Oslo Clearing (former NOS) introduced a pool-based borrowing and lending facility for shares and bonds on September 3rd 1999. The purpose of this programme is to cover short positions that arise in securities settlement between brokers.

Settlement in VPS, clearing in Oslo Clearing

In the event of a short position and provided sufficient liquidity in the pool, an ordinary trade will be set up between the borrower and the pool as the lender. Furthermore, an ordinary trade will be set up between the pool as borrower and the actual lender. Both transactions will be included in the ordinary securities settlement in VPS and payment settled in Norges Bank (The Central Bank of Norway). VPS will also function as the register of legal rights linked to borrowing and lending.

Oslo Clearing will act as the counter party on behalf of the pool in all borrowing and lending positions. For each position established, Oslo Clearing will generate a loan derivative position for the number of securities borrowed. An investor with a lending position of 100 shares will thus also have a corresponding positive book entry of loan derivatives. Conversely, a borrower will have a negative book entry of loan derivatives. Oslo Clearing will handle functions relating to contract administration, clearing, regulation of which securities that can be lent, as well as collateral calculation and financial remuneration. The standard conditions for securities borrowing and lending set the rules for participation in the pool and Oslo Clearing’s liability.

Who are the lenders?

In principle, any investor with a securities account in VPS can be a lender, provided that the investor's account operator has a clearing agreement with VPS Clearing. The investor must also have a lending agreement with its account operator, as well as a deposit account agreement with its deposit bank linked with interest payments.

Who are the borrowers?

Borrowing is initially restricted to brokers, which participate in the DVP settlement in Norges Bank. The arrangement is voluntary and requires a representative agreement with Oslo Clearing. Borrowing also requires collateral. This is furnished by establishing a 'delivery-versus-payment functionality' linked with the establishment of the loan that will guarantee the market value of the loan at the date of borrowing and collateral calculated by Oslo Clearing

Which securities can be lent?

Oslo Clearing will regulate at all times which equity and fixed income issues listed on the Oslo Stock Exchange that will be made available for borrowing.

Accessibility

The borrowing and lending program will be accessible on all banking days, except for Christmas Eve and New Year’s Eve.

Term of the loans

Loans are set up as open-ended loans and they mature either when the borrower returns the loan or when the lender or Oslo Clearing calls in the loan.

Calling back lent securities

Lenders can demand all or part of the lent securities returned through their account operators. If a new lender exists, a book entry is made of the call on C+1, where C is the day of the call for return. If there is insufficient liquidity in the pool, one or more of the borrowers will be called on to return the securities.

Automatic return of borrowed securities

Loans are automatically returned if there is sufficient cover in the broker's domestic account. If necessary, the broker may make manual transfers to this account to initiate the return of borrowed securities.

Rules of priority in securities settlement

Borrowing requests from the lending account will have priority after ordinary trades with the same settlement period. Borrowed securities called in by the lender or Oslo Clearing will reduce the pool's holding and they will have priority before new borrowings. Automatic returns of borrowed money have priority before all trades that are included in the day's holdings check.

Corporate actions

The handling of corporate actions in underlying securities, such as mergers, bonus issues, share splits, dividend shares, etc., is not included in the pool-based borrowing and lending scheme. Oslo Clearing will follow up these corporate actions and stop borrowing/lending of the securities in question for up to fourteen days before such a situation arises.