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Bank Negara Malaysia revises Policy Document on Securities Borrowing and Lending of RENTAS Securities

27 December 2022

Bank Negara Malaysia (‘BNM’) issued the revised Guidelines on Securities Borrowing and Lending of RENTAS Securities (‘Revised Policy Document’) on 2 December 2022 that came into effect on its date of issuance.
 
The Revised Policy Document supersedes the policy document of the same name that was issued on 1 July 2016 (‘Superseded Policy Document’).
 
As in the case of the Superseded Policy Document, the objectives of the Revised Policy Document are three-fold, namely to: 
  • provide the regulatory requirements to govern the conduct and obligations of market participants who enter into Securities Borrowing and Lending (‘SBL’) transactions in respect of the RENTAS Securities; 

  • assist market participants in understanding and complying with the regulatory framework governing the SBL market; and 

  • stipulate the terms and conditions, procedures and practices to be observed by market participants in the SBL market. 
The Revised Policy Document applies to licensed banks, licensed investment banks, prescribed development financial institutions and any other person who enters into a SBL transaction in respect of RENTAS Securities (‘market participants’).
 
A SBL transaction is a transaction for the borrowing and lending of Ringgit-denominated debentures, bills, notes, bonds and any other debt securities deposited in the RENTAS system (‘RENTAS Securities’) for a limited period of time, in exchange for collateral and lending fee (‘SBL transaction’). RENTAS refers to the Real-Time Electronic Transfer of Funds and Securities System operated by BNM (‘RENTAS’).
 
The main amendments made to the Superseded Policy Document under the Revised Policy Document include the following: 
  1. the requirement in the Superseded Policy Document for RENTAS Securities1 to have a minimum outstanding threshold of RM1.0 billion has been removed; instead, paragraph 8.9 of the Revised Policy Document now stipulates that the standard lot for a SBL transaction is RM10 million but allows parties to a SBL transaction to transact for a different amount; 

  2. the definition of RENTAS has been updated2; 

  3. the maximum tenor of a SBL transaction has been increased from one month to one year (paragraph 8.8 of the Superseded Policy Document and the Revised Policy Document); 

  4. paragraph 8.6 of the Superseded Policy Document which allows an institution (other than a Principal which maintains RENTAS Securities in their portfolios and SSDS Participants3) to act only as a Lender in a SBL transaction has been replaced by the requirement that at least one principal in a SBL transaction must be a licensed bank or licensed investment bank (paragraph 8.3 of the Revised Policy Document); 

  5. the prohibition against non-residents (as defined in section 213 of the Financial Services Act 2013) from dealing in any SBL transaction and/or accepting collateral involving RENTAS Securities and the prohibition against any person from facilitating non-residents to deal in any SBL transaction and/or accepting collateral involving RENTAS Securities in paragraphs 8.3 and 8.4 respectively of the Superseded Policy Document has been liberalised in the following respects: 
  • non-residents (defined as aforesaid) are allowed to act as Lender in any SBL transaction (paragraph 8.4 of the Revised Policy Document); 

  • non-residents registered with BNM under the Dynamic Hedging Framework are permitted to act as Borrower in any SBL transaction, subject to compliance with applicable plain vanilla forward contract limits applicable under the Dynamic Hedging Framework (paragraph 8.5 of the Revised Policy Document); and 

  • licensed banks and licensed investment banks are prohibited from facilitating the entry by non-residents into any SBL transaction or from accepting collateral which involve RENTAS Securities in contravention of paragraphs 8.4 and 8.5 of the Revised Policy Document (paragraph 8.6 of the Revised Policy Document). 
  1. Paragraph 12.1 of the Superseded Policy Document required the Lender and the Borrower to establish internal guidelines to assess and manage the credit and market risks involved in undertaking SBL transactions. This obligation has been significantly expanded as paragraphs 8.10, 11.1 and 11.2 of the Revised Policy Document set out more detailed requirements which licensed banks and licensed investment banks must comply with in relation to SBL transactions; 

  2. the prohibition under paragraph 11.2 of the Superseded Policy Document against a Borrower using cash as collateral under a SBL transaction has been liberalised as paragraph 9.7 of the Revised Policy Document permits a Borrower to use cash to post margin for the purposes of margin maintenance; 

  3. paragraph 16.1 of the Superseded Policy Document required market participants to enter into a SBL agreement before entering into any SBL transaction. Paragraph 10.1 of the Revised Policy Document expressly stipulates that all SBL transactions must be subject to the Global Master Securities Lending Agreement (GMSLA). In addition, paragraph 10.2 of the Revised Policy Document also requires the agreement to, inter alia, provide for haircut and margin maintenance when mark-to-market reveal material change and for full set off of claims between the parties in the event of default; and 

  4. the following three new provisions have been introduced under the Revised Policy Document in relation to the reporting and settlement of SBL transactions: 
  • licensed banks and licensed investment banks are required to disclose details of their SBL transactions in BNM’s Statistical Mart for Analysis and Reporting (STATsmart) (paragraph 12.2 of the Revised Policy Document); 

  • SBL transactions that use RENTAS Securities for margin maintenance must be settled through RENTAS (paragraph 12.5 of the Revised Policy Document); and 

  • cash payments for maintenance of margin may be transferred through RENTAS or any other mode of transfer as agreed between the parties to the SBL transaction (paragraph 12.6 of the Revised Policy Document). 
Apart from the above-mentioned amendments, a number of provisions in the Superseded Policy Document have been redrafted and rearranged in the Revised Policy Document.
 
Comments
 
The Revised Policy Document expands on some of the obligations of licensed banks and licensed investment banks seeking to participate in SBL transactions. It has also liberalised several of the restrictions imposed on SBL transactions under the Superseded Policy Document.
 
Alert by Kok Chee Kheong (Partner) of the Corporate Practice of Skrine.
 
 
1 RENTAS Securities was defined as ‘Securities’ in the Superseded Policy Document. The RM1.0 billion threshold was included in this definition.
2 RENTAS was operated by Malaysian Electronic Clearing Corporation Sdn Bhd (‘MECC’), a wholly owned subsidiary of BNM) when the Superseded Policy Document was issued. MECC was merged into Payment Network Malaysia Sdn Bhd subsequently. The operation of RENTAS was taken over by BNM from 1 July 2021 (Source: BNM Annual Report 2021 @ page 59).
3 The expression ‘SSDS Participants’ is defined in the Superseded Policy Document and the Revised Policy Document as participants in the RENTAS system that are permitted to hold RENTAS Securities for their own account and, if applicable, on behalf of their clients.

This alert contains general information only. It does not constitute legal advice nor an expression of legal opinion and should not be relied upon as such. For further information, kindly contact skrine@skrine.com.

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