The Singapore Stock Exchange is growing fast on many fronts, expansion through acquisition is just part of the plan.

The Singapore Stock Exchange is also attracting high profile IPO’s like Suzlon and Hutchinson Ports.

Now The Singapore Exchange (SGX) will expand their Securities Lending and Borrowing program to help boost liquidity and activity in the Singapore market.

Retail investors can currently lend their stock scrips to SGX for a return of four per cent per annum. The exchange will then allow other parties to borrow these stocks at an interest rate of six per cent per annum.

In an effort to boost market liquidity of less popular stocks on the exchange, SGX is looking to allow market forces to decide the scrip lending and borrowing rates for such counters.

The aim is to make them more attractive and competitive. This will be in line with more mature markets in the West, where such rates can range between 10 and 20 per cent.

The SGX said this will fill gaps not covered by banks currently, but has declined to give a timeframe on the rollout of its plans.

Savvy investors typically borrow stocks to cover short-selling positions in order to avoid settlement failures as part of their trading strategies.

Mr Tay Keng Kian, Vice President of Depository Services at SGX, said: “Really nothing is stopping us from doing that, in actual fact we do explore that as an alternative as to how we can actually grow the programme to support the market in terms of market activities. We are in the midst of looking at how we could do strategic lending as part of the programme as well. That’s up and coming, keep your eyes on this space and look at us for what’s going to happen in the future. But that’s definitely happening.

“We are not really competing as per se. It’s peculiar in singapore in that sense because most of the small caps and mid caps are held in individual investors’ hands. So in order to increase market activities in that kind of space, that’s where we want to come in and fill the gap and that’s where we really want to go.

“We are not competing against the agent lenders, the broker dealers because that’s not our mandate per se. Because they are better at doing what they do, and we just want to be part of the whole industry.”

In line with those plans, the SGX will be looking to build the pool of stocks it can lend. This will involve getting more retail investors to join its scheme to lend them stocks from their Central Depository accounts.

The Central Depository (CDP), which safe-keeps securities for retail investors and institutions, is the counterparty for all lenders and borrowers.

The SGX said possible ways of education could include more roadshows and seminars, and how it can work with brokerage firms.

Observers said the move will help bring the market in line with practices in mature markets like those in the West, but warn that it may take time for the local market to be ready.

Visiting Assoc Prof (Practice) Bernard Lee of SMU, said: “You’re potentially looking at a smaller company who you would be trying to increase the security lending liquidity on those names. And one of the potential issues is some of these companies may not necessarily be ready to deal with any kind of significant kind of price distortion…as with any type of shorting, there’s always a possibility of manipulation.

“The credit market looks at the stock market as to the credit worthiness of the company, so if the stock price driven down to close to zero on a unjustified basis, sometimes there are issues with lenders. One of the potential issues is like let’s just say when they first do this programme in Singapore there are a few extremely active shorters in the market, who are just targeting specific stocks, then you potentially create an issue.

“You have a situation where you have a people who potentially with the ability to sort of manipulate the stock from one side, because the market hasn’t grown used to it, you don’t necessarily have the other people jumping in and basically balancing it out.”

The SGX first rolled out its borrowing and lending programme in 2002, offering about 150 stocks. Last year, it expanded the pool to more than 600 stocks, which represent more than 80 per cent of the total listed counters on the exchange.