The Taiwan Stock Exchange (hereinafter referred to as the TWSE) opened up intraday odd-lot trading on October 26, 2020, and with the increasingly active odd-lot trading market, investors’ demand for the flexible use of odd lots has gradually increased. For securities lending in the past, the unit for lending was limited to a round lot (1,000 shares) or its multiples, which restricted the participation of individual investors. Therefore, the opening of settlement-driven odd lot borrowing and lending has become an important step in market development.
In order to continuously improve the operational efficiency of the securities market and implement important measures of the inclusive finance policy, the TWSE announced amendments to relevant regulations on July 18, 2024, and officially implemented the system where “the unit for lending may be an odd lot for settlement purpose” from December 30, 2024 onward. The purpose of the new system is to activate trading on the centralized market, and increase lending opportunities for retail investors to create additional lending income, thereby expanding the supply for securities lending and optimizing market operation efficiency.
I. Introduction to the Settlement-Driven Securities Borrowing System
The TWSE implemented settlement-driven securities borrowing in September 1996, regulating that the seller’s securities firm may apply to the TWSE for securities borrowing to complete the settlement process, and maintain the stability of the centralized market operation when there is a shortage of securities for settlement due to errors of account in entrusted or self-trading, a breach of contract by the selling investor, or late settlement reported by overseas Chinese and foreigners.
In February 2009, the TWSE implemented a delivery vs. payment (DVP) system for the settlement of funds and securities on T+2 (T being the trade date), and adjusted securities firms’ securities settlement date from T+1 to T+2, in order to complete the settlement process for funds and securities on the same date and align with international practices. If a securities firm has not completed the settlement at 10:00 am on T+2, and has not applied for settlement-driven securities borrowing, the TWSE will proactively borrow securities for it. When the quantity borrowed by the securities firm is not sufficient, the TWSE will fill out a securities payment voucher for the insufficient part, and hand it over to the Taiwan Depository & Clearing Corporation (TDCC) for receipt on behalf of the buyer’s securities firm, and the securities firm shall pay the security deposit. After the securities firm completes the securities return process, the TWSE will return the security deposit to the securities firm after debiting the borrowing fee.
II. Explanation on the New System Which Allows the Unit for Lending to Be an Odd Lot for Settlement Purpose
(I) Key Points of the System Revision
- Implementation date: December 30, 2024.
- Major changes：An odd lot is allowed to be the unit for lending, and the previous restriction that only a round lot or its multiples were allowed is lifted.
(II) New System Highlights
- The unit for settlement-driven securities lending is no longer restricted, and investors may make money from lending odd lots.
After the implementation of the new system, investors may participate in settlement-driven securities borrowing and lending regardless of whether they hold round lots or odd lots. The odd lots they hold can also earn interest income through lending, making asset utilization more efficient.
- The lending threshold is lowered, and anyone can become a lender.
In the past, only investors with round lots were allowed to participate in the market of settlement-driven securities borrowing and lending. Nowadays, investors with book-entry accounts opened at TDCC, regardless of the number of shares they hold, may apply to participate in settlement-driven securities lending, and the spirit of inclusive finance is achieved.
- Flexible trading with no impact on owner’s rights.
For the securities lent by investors, either odd lots or round lots, investors may sell such securities at any time without any restrictions on trading rights, making the flow of funds more flexible.
- Fair-Distribution Lending System
The TWSE has established comprehensive fair distribution rules, and settlement-driven securities borrowing and lending is processed according to lenders’ lending rates in ascending order. When round lots are to be borrowed for settlement, if the quantity of securities available at the same rate exceeds the quantity required, the borrowing will be done randomly; when odd lots are to be borrowed for settlement, if the quantity of securities available at the same rate exceeds the quantity required, the borrowing will be done in a descending order of the quantity of securities available; for securities of the same lending rate and quantity, the borrowing will be done randomly to ensure a balance of rights between the lending and borrowing parties.
(III) Benefits of Participation in Lending
- Earning stable returns: Either odd lots or round lots, the maximum lending rate is 7%, and investors may set the lending rate flexibly according to their needs.
- Easy application procedure: The investor only needs to fill out the “Customer Authorization for Settlement-Driven Securities Lending Application/ Change/ Revocation,” and completes the lending procedure for odd lots or round lots after the setting by the securities firm, and becomes a settlement-driven securities borrowing lender.
- Higher capital efficiency: Investors can better utilize idle securities, and can receive lending income the next day after lending securities.
(IV) Impact on the Market
- Improve settlement-driven securities borrowing system: Odd-lot investors’ participation in lending can help expand the supply of securities in the settlement-driven securities borrowing and lending market, improve settlement-driven securities borrowing system, and enhancing the competitiveness of our clearing and settlement system.
- Practicing inclusive finance: Opening up opportunities for odd lot lending can allow small and medium-sized investors to share the benefits of settlement-driven securities lending, and popularize market participation.
- Encouraging investors to actively participate: The opening of the settlement-driven odd-lot borrowing and lending system provides investors with an additional passive income source, and enhances investment motivation and asset management efficiency.
(V) Application Procedure for Investors’ Participation in Lending
To become a lender of settlement-driven securities borrowing, the application procedure is very simple. Investors who have a TDCC book-entry account may contact their securities firms to fill out the “Customer Authorization for Securities Lending Application/Change/Revocation,” and the securities firms will then enter the data into the TDCC system to apply for securities lending, and complete the lending application procedure.
(VI) Market Advocacy
The TWSE has invited the TPEx and the TDCC to jointly conduct market advocacy events to encourage investors to participate in securities lending as lenders and create additional lending income to expand the supply of securities for lending. in a hope to encourage investors to participate in securities lending through the advocacy content and become lenders, thereby achieving the purpose of promotion.
III. Conclusion
The implementation of the new system can not only allow odd-lot investors to create additional lending income and improve asset efficiency, but also help to effectively allocate market resources and achieve the dual goals of “inclusive finance” and “market prosperity.” In the future, the scale of the settlement-driven securities borrowing and lending pool will expand with the increasing awareness of investors and their willingness to participate, and with the gradual improvement of the settlement-driven securities borrowing system, a more healthy clearing and settlement system will be established.
New system introductory video: https://www.youtube.com/watch?v=CU1veI1ZAcQ
New system guide for dummies: https://www.facebook.com/share/p/18WUsEbGP1/