SECURITIES FINANCE

SECURITIES LENDING

Securities lending or stock lending refers to the temporary transfer of securities from one party to another:

⎆ It is a large and thriving sector of the financial services industry
⎆ It is legal and clearly regulated in most of the world's major securities markets
⎆ Securities lending monetizes the intrinsic value of a portfolio of securities

SECURITIES LENDERS

The key lenders include funds, endowments, foundations, central banks, and other investment institutions:

⎆ Beneficial owners who have access to securities portfolios and agree to lend it to another party
⎆ Private and Institutional Investors with banks and specialist lenders acting as intermediaries
⎆ Third-Party Custodian Lenders who have direct access to custodians’ lendable securities

SECURITIES BORROWERS

The key borrowers include such investment management companies as prime brokers, and broker-dealers:

⎆ Active Traders borrow securities in order to meet a delivery obligation
⎆ Hedge Funds employ prime brokers to source securities, performing a short sale
⎆ Arbitrage Teams borrow securities as part of an “arbitrage” strategies

SECURITIES COLLATERAL

Securities lending requires the borrower to put up collateral, whether cash, letter of credit, or other securities:

⎆ The collateral required has to be valued higher than the value of the lent securities
⎆ The borrower will collateralize the transaction in order to protect the lender against counterparty default
⎆ Cash collateral represents approximately 80% of the collateral received in securities lending programs

SECURITIES LENDING BENEFITS

Borrowers borrow securities for a wide range of reasons:

⎆ It is an incredibly effective way to monetize an equity position
⎆ Possibility of continuing to exercise voting rights
⎆ Generating both liquidity and enhancing an investment portfolio’s return