BLESS and ALBM unraveled

What do BLESS and ALBM stand for?
BLESS stands for The Borrowing and Lending Securities Scheme. ALBM stands for Automated Lending and Borrowing Mechanism. What are BLESS and ALBM?
As the names suggest they are systems through which lending and borrowing of securities can be done so that members can meet their obligation for the trades done and also allow the members to borrow / lend eligible securities at market determined rates.

BLESS replaces the traditional system of Badla or Modified Carry Forward System (MCFS) that used to be followed on the BSE.

Why are BLESS and ALBM different?
Though conceptually the same, as they are proprietary systems of BSE and NSE respectively they differ in procedural rules.

What is Badla?
The term Badla is a generic term covering three kinds of activities:

• Share Badla: Lending of shares (to carry forward short positions)

• Vyaj Badla: Lending of money (basically to carry forward long position)

• Carry forward: Postponing delivery of shares bought or sold during the settlement period.

• Book-closure Badla: Badla during the no-delivery period that has now been disallowed by the SEBI (Securities Exchange Board of India).
  

Why would someone need to borrow or lend securities / money in the stock market?
Many a times the markets are overbought or oversold. During trading no delivery takes place (the delivery takes place only at the end of the settlement period i.e. at a fixed date). Also, there is no binding people can buy only if they can take delivery. Therefore, the number of shares bought can be more than the actual capacity to take delivery or vice versa.

If the number of shares bought is more than the willingness to take delivery, there will be demand for cash (to pay the interest on the money due to the seller) which was traditionally lent through the Vyaj Badla system and now the BLESS or ALBM. The condition is known as over bought.

Similarly the number of shares if sold is greater than the number of shares available the condition is known as oversold. Then shares are lent through the Share Badla system and now the BLESS or ALBM.

Suppose there are two conditions:

• Participants buy shares worth much more than they can take delivery for.

  Suppose you buy 10 shares of Infosys @ Rs 5,000 each therefore, to take delivery of the shares at the end of the settlement cycle you need to have Rs 50,000. If you do not have the money you can

  • Square off your position before the settlement takes place i.e. sell the shares or

  • Carry forward your position by borrowing money from a Vyaj badla financier

    For this please refer to our earlier article

• Participants sell shares much more in number than they actually have with them.

  Again suppose you have sold 10 shares of Infosys in the market and do not actually own the shares then you can

  • Borrow the shares at a particular interest rate make your delivery

  • Pay interest charges to carry forward your short position.

The scrips in which there are outstanding positions are listed along with the quantities outstanding. Depending on the demand and supply of money, the carry forward (CF) rates are determined. If the market is over bought, there is more demand for funds and the CF rates tend to be high. However when the market is oversold the CF rates are low or even reverse (undha badla) i.e. there is a demand for stocks and the person who is ready to lend stocks gets a return for the same. The computer screen continuously shows the yield, which is available at a particular rate. Depending on the amount you wish to invest, the scrip and quantities are selected.

Why was the Badla System changed to BLESS?
Though BLESS does the same thing as Badla fundamentally there is a major difference. In the Badla system the shares were not delivered to the financer and were kept with the clearing- house of the exchange. This gave rise to a situation where there was a possibility of misuse, which actually took place in 1998. Some of the lien marked shares were illegally taken from the clearing house and re-introduced into the markets to rig prices. Therefore, to avoid this a new system was introduced wherein the shares would actually be delivered to the Badla financer.

The idea of delivering the shares to the Badla financer was to maintain control, reliability and credibility. But SEBI has currently disallowed the delivery of shares to the badla financier (fearing misuse) and the shares are still lodged with the clearing house till delivery.

However, there was a far more pressing reason. NSE's ALBM was very efficient and catching up fast with the broker community. BSE needed to introduce a competitive product that was as good.

So what's different between the BLESS and the Modified carry forward system (Badla)?
The Badla system was governed by SEBI's carry forward guidelines and the BLESS is governed as per the Securities Lending Scheme, 1997 of SEBI.

The terminology will be different from now on. The havala rate will become the lending price and the badla or the CF interest rates will become the lending/borrowing charges.

The most important difference between the BLESS and the MCFS is that BLESS is a securities borrowing and lending mechanism whereas the MCFS was a money borrowing or lending mechanism.

Also, during MCFS there were two types of brokers Type I and Type II. The Type I members could enter into the badla transactions while the Type II were not allowed to do so. This was for carrying out the daily margining for carry forward trades. Now the trades are not separated into those for carry forward and those that are not. Therefore, the daily marking and reporting of segregated positions is no longer required.

So what's different between the BLESS and the ALBM?
None. Infact conceptually they are the same. However, there are some operational differences.

If you lend Rs 100 to carry forward a position at a lending price of Rs 100 and your targeted return is an annualised yield of 20% and assume a brokerage of not more than 0.12% (brokerages normally ranges from 0.03% per cent to 0.12%). On Rs 100 the amount works out to Rs 0.50.

For the same transaction

• In the BLESS you will enter a sell order for Rs 0.50.

• But in the ALBM you will enter a buy order for the share at Rs 99.50 (Rs 100 minus Rs 0.50).
  

While the NSE permits ALBM in 175 stocks BLESS allows only BSE 'A' group stocks, which are only 142. On the 24th of February the BSE decided to add additional 34 scrips to 'A' group. All of these scrips would be eligible for trading under BLESS. This brings the total number to 176. Does that make BSE one up?