Financial Markets Operations Management

CHAPTER 12 Securities Financing

12.1 INTRODUCTION

In Chapter 7: Securities Clearing, we saw that forecasting was an important part of the clearing process. We require sufficient cash to pay for our purchases and securities availability to ensure delivery of our sales.

Recall our choices in Table 12.1.

TABLE 12.1 Financing choices

Transaction	Comments	Financing Choices
Our purchases	Our funding costs increase if we are unable to pay for our purchases. The trades might settle (incurring overdraft charges) or might be blocked by the clearing house (resulting in interest charges from our counterparties).	Rely on credit line/overdraft Sell assets Use securities financing
Our sales	We will not receive the cash proceeds as expected. We will lose re-investment opportunities and the lack of cash might also result in failed purchases.	Use securities financing

We can conclude that securities financing allows us to borrow cash for our purchases (and other funding requirements) and borrow securities to facilitate our sales (and other securities deliveries).

There are three types of securities financing:

1. Securities lending and borrowing;
2. Repurchase agreements;
3. Sell/buy-backs.

By the end of this chapter, you will be able to:

• Understand the different types of securities financing;
• Follow the lifecycle of a securities financing transaction;
• Appreciate the risks involved and how they can be mitigated;
• Understand the roles of the participants and intermediaries.