Collateral Management

CHAPTER 10Securities Lending & Borrowing and Collateral – Principles of SL&B

In the first chapter of Part 3, the principles of 1) securities lending, 2) securities borrowing, and 3) the participants in the marketplace, are described. The collateral aspects of securities lending & borrowing (SL&B) are introduced within this chapter.

Note #1: For readers that are new to this subject, it is strongly recommended that the prior chapter (Chapter 9 ‘Securities Lending & Borrowing and Collateral – Introduction to SL&B’) is read first.

Note #2: A variety of methods exist by which SL&B trades can be executed. However, to enable readers’ understanding of fundamental principles, in this chapter the trade characteristics and market practices are intentionally described from a generic (bilateral) perspective. A number of SL&B trade execution methods are described within Chapter 12 ‘Securities Lending & Borrowing and Collateral – Accessing the SL&B Marketplace’.

10.1 PRINCIPLES OF SECURITIES LENDING

The particular circumstances giving rise to securities lending include:

• increasing the return on investment
• reducing the cost of holding securities, and
• reducing taxation through arbitrage strategies.

It is important to remember that throughout the period of any SL&B trade, the securities lender retains an investment (or economic) interest in the particular security; consequently, the securities lender remains exposed to fluctuations in price and value (despite the fact that the security ...