Stockborrowing is the process whereby one party "borrows"
securities from another party for a period and provides that other
party with collateral in the meantime. A repo is a "repurchase
agreement" whereby one party agrees to sell stock under an
agreement and to repurchase it at a later date.
Last year, the then Chancellor announced his intention to extend
stamp duty relief to stock borrowing and repo transactions in UK
equities conducted on-exchange. He received advice from the SIB on
the regulatory implications of this proposal, the main thrust of
which was that stock borrowing did not require regulation, but that
there should be some standards of market conduct in place to ensure
that potentially abusive activities were prevented. The SIB also
asked for advice from the Market Conduct Group and on 24th October
it issued a press release stating that it accepted the advice which
the Group had given.
The advice was in step with the Government's intention to
liberalise the stock borrowing market, allied with a need to keep
on top of potentially abusive practices. The Group
- Stock borrowing can be beneficial to the trading process and
thus contribute to market efficiency. However, it is essential that
the stock borrowing practice does not distort the market itself.
- It is possible to employ stock borrowing to restrict the supply
of a stock in order to manipulate its price. The Group thinks that
the regulators should keep this possibility in mind, and the
creation of rules to combat it under review.
- Stock borrowing may be used by firms seeking to profit from
on-lending. If this on-lending does not take place reasonably
quickly, the Group expects regulators to take an interest in why a
firm was continuing to hold stock, and whether it had changed its
on-lending policies so as to secure an improper benefit.
- Short selling is an acceptable feature of the market and one
which can usually benefit it by adding to its liquidity. However,
regulators should be aware of the possibility that short selling
might create a disorderly market.
Whilst accepting the above advice, the (now) FSA has said that it
will keep the developing market under review, and address the
question of formal action or rules in the light of these