Chapter 21
Stock Lending, Repos and Funding
21.1 INTRODUCTION
As well as being bought and sold, securities may be lent and borrowed, and also used as collateral for firms that need to borrow cash. There are two broad categories of transactions of this type – stock loans and repos. The word repo is short for sale and repurchase agreement.
The term “stock lending” is usually used to describe a transaction where:
1. The motivation of the borrower (of stock) is to acquire a specific quantity of a given stock to meet a commitment to deliver.
2. The motivation of the lender (of stock) is to provide the securities the borrower requires, and to attract collateral to protect itself against default.
A repo transaction, by contrast, is one where:
1. The motivation of the lender (of stock) is to borrow cash at a better rate of interest than it would if it borrowed on an unsecured basis.
2. The motivation of the borrower (of stock) is to lend cash on a secured basis.
In other words the business purpose of a stock loan is to enable one party to lend securities to another, and the business purpose of a repo is to allow one party to use securities as collateral for its cash borrowing. In processing terms the two transaction types share the following characteristics:
- They both use collateral to reduce the lender’s credit risk
- They both employ the concepts of nominal ownership and beneficial ownership which preserve the lenders rights to any income or other benefits provided by ownership of ...
