The Colombo Stock Exchange (CSE) is pleased to announce a groundbreaking development in the Sri Lankan stock market with the launch of Regulated Short Selling (RSS) through Stock Borrowing and Lending (SBL), with effect from 06 November 2023.
The initiative aims to promote market efficiency, liquidity, and investor confidence while fostering economic growth, aligning with international standards and practices.
Stock Borrowing and Lending (SBL)
SBL, a groundbreaking initiative by the CSE, connects lenders and borrowers of shares for a predetermined period, allowing them to capitalize on market trends as in prevailing interest rates.
Only eligible securities specified by the CSE will be allowed for SBL transactions, and the eligibility of these securities will be reviewed by the CSE on a quarterly basis.
All investors who maintain Central Depository System (CDS) accounts will now have the privilege of engaging in SBL transactions as lenders and borrowers via the CDS through their respective trading participants and custodian banks (CDS participants).
CDS participants are empowered to act as intermediaries for SBL transactions. Investors can seamlessly carry out SBL transactions by submitting the lending/borrowing orders using the participant pool account or by submitting orders directly to the CDS through their participants.
Advantages of SBL mechanism
For lenders, SBL offers a unique opportunity to leverage a portion of their portfolio that may not be actively used for regular trading, while simultaneously earning an additional fee-based income. On the other hand, borrowers can leverage the potential of price movements in a declining market, amplifying their gains.
Investors can take advantage of this opportunity by establishing a SBL agreement with the relevant lending or borrowing participant.
Regulated Short Selling (RSS) with Uptick Rule
The CSE is also introducing RSS with checks and balances designed to address risk management and market stability in the short selling practices. Only the shares of specific listed companies meeting liquidity criteria will be eligible for RSS.
Further, RSS can only be carried out through the Automated Trading System (ATS), using the services of a trading participant. RSS will not be permitted for orders submitted by clients via internet.
A key feature of RSS is the Uptick Rule, which will come into effect when the price of a share eligible for RSS declines by 10% from its previous closing price. In such instance, the system will validate short sale orders based on the Uptick Rule. Under the Uptick Rule, a short sell order must be at least one tick size above the last traded price of the share, ensuring that short sales are executed at a price higher than the most recent trade. The Uptick Rule prevents short selling at excessively low prices, reducing potential market manipulation and volatility.
If a share’s price depreciates by 20%, RSS for that particular share will not be permitted until the price appreciates above the designated threshold.
Commenting on the initiative, CSE Chairman, Mr. Dilshan Wirasekara stated that “The introduction of regulated short selling through stock borrowing and lending is a testament to our commitment to fostering a dynamic and resilient financial market ecosystem here in Sri Lanka. This new initiative not only enhances our market’s attractiveness to both local and international investors but also reinforces our position as a progressive exchange.”