The automatic borrowing and lending program is intended to improve the settlement ratio and overall efficiency of the central securities system for settlement in Norwegian kroner (VPO NOK). The pool-based borrowing and lending facility was introduced on 3 September 1999. The program is a multilateral arrangement in which the identity of borrowers and lenders is not known to their counterparty. This is achieved by Oslo Clearing acting as a central counterparty to borrowers and lenders. Shares remain registered on the lender’s VPS accounts until the moment the loan is made. The pool is accordingly not a separate account on which all shares available for lending are registered, but is no more than a concept embracing all shares marked as lendable on lenders’ VPS accounts. The program forms part of the optimisation process that is carried out to maximise the overall value of settlement actually carried out by generating automatic loans only where this is needed to help settlement participants to fulfil their delivery commitments.

Rules for the program

The securities borrowing and lending program is regulated by the VPS Business Terms and Conditions in respect of the functions carried out by VPS, and is similarly regulated by the Oslo Clearing Rule Book for the functions carried out by Oslo Clearing.

Settlement through VPS, clearing through Oslo Clearing

Both borrowers’ transactions and lenders’ transactions are included in VPO NOK. The securities borrowing and lending program includes DvP functionality, which means that a securities loan will not be granted and the securities will not be transferred to the borrower unless the borrower has sufficient liquidity available for the loan in VPO NOK. The liquidity required represents the value of the loan plus the margin requirement. The total amount is included for settlement in VPO NOK, and cash payment is settled from the borrower’s account with Norges Bank in the same way as other settlement transactions in VPO NOK. Which lender is used for a particular loan is decided by a random picking program administrated by VPS.

VPS will generate a separate loan ISIN for each security that Oslo Clearing approves for inclusion in the securities pool. When a loan is made, this results in a negative position in the loan ISIN on the lender’s VPS account. VPS functions as the register of legal rights linked with borrowing and lending positions in the same way as for securities.

Oslo Clearing handles functions relating to contract administration, clearing, approval of which securities are included in the securities pool, collateral calculation, margin calls and follow up of the clearing representatives, calculation and settlement of interest paid to lenders, calculation and settlement of interest and fees charged to borrowers, blocking particular shares for lending when necessary as a result of dividend payments or other corporate actions, and recall of open loans up to 14 days before such a corporate action.

Who are the lenders?

In principle, any investor with securities registered on a VPS securities account can be a lender, provided that the investor's account operator has a clearing representative agreement with Oslo Clearing.

Who are the borrowers?

All broking firms that participate in VPO NOK can be members of the securities borrowing and lending program. Broking firms that use a settlement agent can also participate. The arrangement is voluntary, and is subject to the broking firm entering into what is known as a clearing representative agreement with Oslo Clearing. Settlement agents can only participate in the securities borrowing and lending program in their role as a settlement agent, and are not permitted participate in the program on their own account.

Which securities can be borrowed?

Oslo Clearing is responsible for deciding which stock exchange listed securities will be made available for borrowing through the securities borrowing and lending program.

Availability

The borrowing and lending program is available on all banking days except for New Year's Eve.

Loan terms

Loans are made on an open-ended basis, which means that they do not have a fixed maturity date. Loans are repaid when the lender calls in the loan, the borrower decides to repay the loan or Oslo Clearing calls in the loan.

Calling in lent securities

Lenders can give notice through their account operator to demand the return of all or part of the securities they have lent. If there is sufficient liquidity in the pool to replace the loan, a new lender will be selected at random. This takes place in VPO NOK Settlement 2, currently carried out at 12:00 hours. Recalls that are registered later than 12:00 hours will be processed the next business day. If there is insufficient liquidity in the pool, one or more of the borrowers, selected at random, will be called on to return the securities they have borrowed. This return delivery must take place no later than five days after the receipt of the recall message.

Automatic return of borrowed securities

Loans are automatically returned if there is sufficient cover in the broking firm's domestic account. If necessary, the broking firm may make manual transfers to this account to initiate the return of borrowed securities.

Rules of priority in securities settlement

Sales of securities from a loan account have priority before new loans from the same account. Similarly, borrowed securities that are called in by the lender or Oslo Clearing will have priority before new borrowings.

Corporate actions

The pool-based borrowing and lending scheme does not include provisions for handling corporate actions (such as mergers, bonus share issues, share splits, dividend shares, etc.) in securities that are on loan. Oslo Clearing monitors corporate actions, and stops new borrowing/lending of a security that is to be affected by a corporate action and recalls existing loans up to fourteen days before the corporate action is due to take place.