In finance, securities lending or stock lending refers to securities lending by one party to another. The terms of the loan shall be governed by the "Securities Borrowing Agreement", which requires the borrower to provide the creditor with collateral, in the form of cash or non-cash security, of equal or greater value of the loan secured plus agreement after the margin. Non-cash refers to a subset of non-pure cash collateral, including shares, government bonds, convertible bonds, corporate bonds, and other products. The agreement is a contract applicable under the relevant law, which is often specified in the agreement.
As a payment for a loan, the parties negotiate a fee, which is quoted as an annual percentage of the value of the securities lent. If the agreed form of collateral is cash, then the fee may be quoted as "short discount", which means that the lender will get all the interest arising from the cash collateral, and will "rebate" the agreed interest rate for the borrower. Major lenders from securities include mutual funds, insurance companies, pension funds and other large investment portfolios.
Securities lending is an important means of eliminating "failed" transactions and enabling hedge funds and other investment vehicles to sell short stocks.
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Market size
Until the beginning of 2009, securities loans were merely a freely sold market, so the size of the industry was difficult to accurately estimate. According to industry group ISLA, in 2007 the balance of securities loan globally exceeded Ã, Â £ 1 trillion. In July 2015, the value was $ 1.72 trillion (with a total of $ 13.22 trillion available for loans) - similar to pre-crisis levels.
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Example
In a sample transaction, a large institutional financial manager with a position in a particular stock will allow the securities to be borrowed by a financial intermediary, usually an investment bank, a primary broker or another broker-dealer, acting on behalf of one or more clients. ; after borrowing the stock, these clients can sell it briefly. Short sellers want to buy back stocks at a lower price (which will result in earnings). Once the stock is borrowed and sold, it makes money from the sale of shares. The money will be a guarantee to the creditor. The cash value of the collateral will be marked into the market every day so that it exceeds the loan value of at least 2%. NB: 2% is the standard margin rate in the US, while 5% is more common in Europe.
Often banks function as lending agents, receive cash guarantees and invest them until they are returned. Revenue from reinvested cash collateral is divided by paying the rebate borrower and then dividing the remaining amount between the securities lender and the bank agent. This allows large investment funds to earn additional income on their portfolio ownership. If the lender is a pension plan, the transaction may have to comply with various exceptions under the 1974 Employee Retirement Income Act (ERISA).
Legality
Securities lending is legal and is clearly regulated in most of the major securities markets of the world. Most markets insist that securities lending is only done for specially permitted purposes, which generally includes;
- to facilitate a trade settlement,
- to facilitate the delivery of short sales,
- to fund security, or
- to facilitate loans to other borrowers who are motivated by one of these allowed purposes.
When security is lent, the title of security is transferred to the borrower. This means that borrowers have the advantage of holding security, because they become legal owners and profitable full of it. In particular, the borrower will receive all coupon and/or dividend payments, and other rights such as voting rights. In many cases, this dividend or coupon must be returned to the creditor in the form of what is called a "dividend produced".
The prime mover for securities lending business is to cover the failure of the settlement. If one party fails to send you the stock, it could mean that you can not send the stock you have sold to the other party. To avoid costs and penalties that may arise from failure to settle, stock can be borrowed at a cost, and sent to a second party. When your initial stock is finally arrived (or obtained from other sources), the lender will recover the same amount of shares in the security they lend.
The main reason for borrowing security is to close short positions. Since you are required to provide security, you must borrow it. At the conclusion of the agreement, you must return the securities equivalent to the creditor. Equivalent in this context means commensurate , ie securities must be fully exchangeable. Compare this by lending a ten euro note. You do not expect the exact same note back, because every ten euro note will do.
As a result of the SHO Regulations, adopted by the SEC, short sellers usually have to have shares that they sell short or have the right to get them to cover short sales.
Securities classification and easy borrow
In securities lending, securities are classified by their availability to be borrowed . Highly liquid effects are considered "easy"; these products are easy to find in the market if someone decides to borrow them for the purpose of selling them short. Non-liquid securities in the market are classified as "difficult". Due to various regulations, short sale transactions in the United States and some other countries should be preceded by putting the security and quantity that people want to sell short to avoid naked shorting. However, a loan broker can create a list of securities that do not need such a place. This list is referred to as a easy to borrow list (ETB abbreviated), and is also known as comprehensive warranty. This sort of list is generated by merchant brokers under "reasonable guarantees" that the securities on the list are available upon customer's request. However, if the security on the list can not be delivered as promised ("failure to deliver" will occur), the assumption of a sensible reason is no longer valid. To provide a better grounding for such assumptions, the ETB list should be a maximum of 24 hours.
Letters of Securities
Securities lenders , often referred to as lenders , are institutions that have access to securities that can be "lent". It can be an asset manager, which has many securities under management, a custodian bank holding securities to a third party or third party creditors who access securities automatically through a custodian of the asset holders. The international trade organization for the securities lending industry is the International Securities Lending Association. According to a June 2004 survey, their members had securities of 5.99 billion euros available for loans. In the US, the Risk Management Association publishes quarterly surveys among members (based in the US). In June 2005, it had securities of USD 5.77 billion available. Other record industry associations include the Australian Securities Lending Association (ASLA), the Canadian Securities Lending Association (CASLA), the Pan Asia Securities Lending Association (PASLA), and the South African Securities Lending Association (SASLA).
Common borrowers include hedge funds and investment bank ownership trading desks.
Use of the term
In investment banking
In investment banking, the term "securities loan" is also used to describe the services offered to large investors that can allow investment banks to lend their shares to others. This is often done for investors of all sizes who have promised their shares to borrow money to buy more stocks, but big investors like pension funds often choose to do this to their uncoated stock because they will receive interest income. In this kind of agreement, investors still receive dividends as usual, the only thing they generally can not do is choose their shares.
In private securities loan securities
The term "securities lending" is sometimes used correctly in the same context as an individual "stock loan" or "asset-backed loan". The former refers to an actual loan from a bank or broker to another institution to cover short sales or for any other temporary purpose. The latter is used in loan agreements supported by private securities or institutions across various securities spectrum. In recent years, FINRA has warned all consumers to avoid lending non-contract-of-title shares, but they enjoy short popularity before the SEC and IRS come to close almost all of these service providers between 2007-2012, reclassify non-recursive transfers of stock title title loan as full taxable sales at the beginning (See FINRA advisory link below). Today, it is widely accepted that the only legitimate legal consumer lending program that involves shares or other securities is the only where the shares remain in the title and client accounts without sale through a fully licensed and governed body with membership in SIPC, FDIC, FINRA and other key regulatory organizations, with self-audited financial statements. This is usually in the form of securities-based credit lines.
In 2011, the Financial Industry Regulatory Authority (FINRA) issued an investor warning about a stock-based lending program. In caution, FINRA recommends investors to ask a few questions, including: 1) What happens to my shares after I pledge as collateral? (FINRA states that securities may not be sold to fund the loan); 2) Have the creditor audited the finances? (FINRA notes that any openly traded brokers/banks that report need to audit financial data available to investors); and 3) Does the agency manage loans and accounts are fully licensed and reputable?
Currently, such institutional credit programs are only available through long-term depository relationships with institutional brokers and their banking arm, and usually come with a large minimum depository. However, there are some securities-based credit programs that are currently available in the public market that allow access at competitive rates and terms without such a depository or client relationship. (Search terms such as "wholesale stock loans" or "no title transfer transfer loans" usually display a list of providers.)
Securities lending cycle
Unlike the buy/sell trade, securities loan transactions have a life cycle that begins with a trade settlement, and continues until finally returned. During this life cycle, life cycle events will occur:
Securities lending vendors
Historically, the market for securities lending has become very intensive manually, with post-trading processing involving many hours of human labor. In recent years, various vendors have emerged to help provide much-needed automation in the industry. The market leader in Europe for post-trade processing, Pirum, has been providing such automation services to its clients since 2000, who recently worked with Eurex to automate the CCP service. With pressure in the driving industry for more transparency and balance sheet optimization since the 2008 global financial crisis more technology vendors are creating solutions to meet the upcoming regulations.
See also
- Loan agreement
References
External links
- "Response to Frequently Asked Questions about SHO Rules". Securities and Exchange Commission - Market Regulation Division.
- The website of the International Lending Association
- The Risk Management Association website
- The Canadian Securities Lending Association website
- The Australian Securities Lending Association website
- Pan Asia Securities Lending Association website
- The South African Securities Lending Association website
Source of the article : Wikipedia
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