Handbook of Finance: Financial Markets and Instruments

Chapter 71. Securities Lending, Liquidity, and Capital Market-Based Finance

STATE STREET CORPORATION

Abstract: As the advantages that deep, liquid capital markets offer to national economies—most notably, enhanced capacity for economic growth—become more evident, policy makers in nations around the world are seeking ways to foster capital market growth. As capital markets evolve, they divide risk even more finely—by evolving new financial instruments such as options and futures (derivatives) and new investment vehicles and strategies such as mutual funds and hedged investments. The single most important quality that securities markets need to function successfully and to grow is liquidity—the ability to buy or sell substantial investment positions quickly, smoothly and with minimal market impact. One of the most important factors in fostering liquidity is the evolution of a broad array of securities lending functions. The ability to borrow securities is, in fact, a key element in the development of advanced capital markets. Wherever securities lending has not yet become accepted practice, the evolution of national or regional capital markets is stunted—limiting their ability to allocate capital more efficiently to economic development.

Keywords: bank, borrowing, borrowing of securities, capital market, counterparty risk, financial services, lending, lending of securities, lending securities, securities borrowing transactions, securities finance, securities lending, securities lending ...