Handbook of Finance: Financial Markets and Instruments

Chapter 69. An Introduction to Securities Lending

MARK C. FAULKNER

Managing Director, Spitalfields Advisors

Abstract: Securities lending—the temporary transfer of securities on a collateralized basis—is a major and growing activity providing significant benefits for issuers, investors, and traders alike. These are likely to include improved market liquidity, more efficient settlement, tighter dealer prices and, perhaps, a reduction in the cost of capital.

Keywords: securities lending, triparty agent, buy/sellbacks, custodian banks, prime brokers, beneficial owners, repos

This chapter describes securities lending, the motivation for lenders and borrowers to participate, the role of intermediaries, market mechanics, and the risks faced by the lenders of securities.

WHAT IS SECURITIES LENDING?

Securities lending is an important and significant business that describes the market practice whereby securities are temporarily transferred by one party (the lender) to another (the borrower). The borrower is obliged to return the securities to the lender, either on demand, or at the end of any agreed term. For the period of the loan the lender is secured by acceptable assets delivered by the borrower to the lender as collateral.

Securities lending today plays a major part in the efficient functioning of the securities markets worldwide. Yet it remains poorly understood by many of those outside the market.

In some ways, the term "securities lending" is misleading and factually incorrect. Under English ...