Securities Lending
Candlefocus EditorAlthough they are similar, securities lending is distinct from other lending activities in the financial markets. It differs from margin accounts, where a customer borrows funds directly from the brokerage firm, in that the borrower does not acquire ownership of the securities involved nor put up cash as collateral.
When a party loans a security, the terms of the loan are set. Loan fees and interest rates vary depending on the type, difficulty, and availability of the security being borrowed. Generally, lenders will receive some sort of rebate from the borrower for the duration of the loan.
The lender of the security has the risk of failing to receive the funds from the borrower either in time or in amount and, therefore, must have adequate collateral from the borrower to secure the loan. The borrower of the security, meanwhile, is exposed to the risk of the lender selling the security before the borrower returns it. In some cases, the borrower may be at risk of a revenue drop due to lower market prices or a change in interest and dividends associated with the security loaned.
Securities lending is a lucrative and important investment tool that is used by a wide range of investors. It enables borrowers to generate revenue and profit from a variety of strategies, while providing lenders with an additional way to earn fee income. It is important to remember, however, that this form of trading carries some risks which must be taken into consideration before entering a securities loan agreement.