Posted in Finance, Accounting and Economics Terms, Total Reads: 431
Definition: Securities Lending
Securities lending or stock lending is an act where banks or any other party lends his securities, which includes stocks, derivatives or any securities, to another party, mostly large investors. This type of loan is governed by Securities Lending Agreement, enforceable under law. According to this agreement, the borrower needs to provide the lender with some collateral, in form of cash, letter of credit or government securities. The securities repayment period, schedule and method are also a part of this agreement. The agreement also has clause for the lender to recall the securities after giving a specified notice period.
The purpose of the borrower to borrow securities is mostly to earn money by short selling. In security lending, the ownership of the securities temporarily passes to the borrower. He can hence sell the securities and then buy then at a much lower price, thus making profit in this transaction. Any other profits made by borrower, for example dividends, are to be paid back to the lender.
Apart from short selling, other reasons of borrowing securities are hedging and arbitrage. Reason for a lender is extra earning that he gets as the interest on his lending.