Securities Lending Agreements

The terms of the loan are governed by a “Securities Lending Agreement”[1] which requires the borrower to provide the lender with collateral in the form of appropriate cash or securities, or above the borrowed securities, plus the agreed margin. The subset of non-cash collateral, including equities, government bonds, convertible bonds, corporate bonds and other financial products, is not related to the means of payment. Unlike a buy/sell trade, a securities lending transaction has a life cycle that begins with the settlement of trading and continues until they return. During this life cycle, different life cycle events occur: securities lending is usually made between brokers and/or traders, not between individual investors. To complete the transaction, a securities loan agreement, called a loan agreement, must be concluded. It defines the terms of the loan, including the term, the lender`s fees and the nature of the guarantees. Until early 2009, securities lending was only a revenue market, which made it difficult to accurately estimate the size of this sector. According to the inter-professional organization ISLA, the balance of loans in 2007 exceeded $1 trillion worldwide. [4] In July 2015, the value was $1,72 trillion (with a total of $13.22 trillion in loans) – a level similar to that before the 2008 financial crisis. [5] A short sale involves the sale and repurchase of borrowed securities. The objective is to sell the securities at a higher price and then buy them back at a lower price. These transactions occur when the borrower believes that the price of the securities will soon fall, allowing him to make a profit based on the difference in selling and buying prices. Regardless of the amount of profit, if any, the borrower earns from the short sale, the fees agreed to at the credit intermediation are due as soon as the term of the contract has expired.

Securities lending is legally and clearly regulated in most major global securities markets. Most markets require that the bond of securities be settled only for specifically eligible purposes, which generally implies that the main reason for a security`s obligation is the coverage of a short position. Because you have an obligation to provide security, you must borrow it. At the end of the agreement, you must return an equivalent guarantee to the lender. The equivalent means fungible in this context, i.e. the securities must be totally interchangeable. Compare that to the loan of a 10 euro note. They don`t expect exactly the same rating as any 10 euro note. In the case of securities lending, securities are classified according to their ability to absorb.