What is securities lending?
Securities lending is the temporary transfer of a
security by its owner to another investor or financial
intermediary. Once the securities have settled, the
title and voting rights are transferred to the borrower,
who can sell or re-lend the borrowed securities during
the life of the loan. In return, the borrower agrees to
return the loaned securities, secure the loan with
collateral of equal or greater value than the loaned
securities, and pay any user fees (implicit or
explicit), and remit to the lender any dividends, coupon
interest or other distributions that occur during the
time the securities are on loan.
Who participates in Securities Lending?
Borrowers - These will typically be Investment Banks,
broker/dealers, intermediaries or Hedge Funds.
Lenders - with assets in the form of equities and fixed
income securities, will most commonly participate in the
market in one of two ways, either directly or indirectly
through an agent.
Direct Lenders - tend to be large institutional investors
such as Pension Plans, Insurance and Life Companies.
Agent Lenders - will act for any beneficial owner
regardless of size, but where the beneficial owner does
not wish to, for reasons of cost or size, participate
directly. Agent Lenders will tend to be Global
Custodians or Asset Managers participating on behalf of
a large number of clients.
How is Securities Lending regulated?
Securities lending is a regulated activity and as such
is governed by the relevant laws, regulations and
statutes that apply in the countries where the borrower
and lender are resident. Many participants in securities
lending also adhere to a recognised code of practice,
the Stock Borrowing and Lending Code of Guidance which
is published by the UK Stock Lending and Repo Committee,
an industry body chaired by the Bank of England. Other
countries have developed similar codes of practice.
A more comprehensive guide to securities lending can be found in
'An Introduction to Securities Lending' a publication commissioned by ISLA,
the Bank of England, the British Banker's Association,
The London Stock Exchange and The London Investment Banking Association.
This document can be found by following the link of the same name, on the left hand menu.