Securities Lending

Securities lending is process in which the owner of a stock (lender) lend the security to a borrower, on specified terms. Under a securities lending arrangement, the lender actually sells the stock to the borrower, who agrees to return (i.e. sell back to the lender) equivalent securities at the end of the loan period. To offer security to the lender the borrower transfers collateral to the lender for the duration of the loan. In addition the lender is not entitled to receive any dividends from the shareholding while it is on loan. However, it is usual for the agreement between the lender and the borrower to provide that the borrower must pay a manufactured dividend to the lender to compensate for this loss of income. Another consideration which may be important in some cases is that the lender does not have the right to vote in respect of the loaned stocks. Finally the lender cannot sell the stock while it is on loan.

 

Most markets mandate that the borrowing of securities be conducted only for specifically permitted purposes, which generally include

 

·         To facilitate settlement of a trade

·         To facilitate delivery of a short sale

·         To facilitate a loan to another borrower who is motivated by one of these permitted purposes.