Securities lending
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GMSLA Anatomy™
Defined in the Capital Adequacy Directive as
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Securities lending
/sɪˈkjʊərɪtiz ˈlɛndɪŋ/ (n.)
Also a “stock loan”, “stock borrow loan” or “SBL”.
The collateralised transfer — called a “loan”, since economically it resembles one, even if legally it does not — of equity securities under a 2010 GMSLA or a Master Securities Lending Agreement with the expectation that the borrower will return equivalent securities at a point in the future (often undefined but on demand), for a fee. Stock loans are often mentioned in the same breath as repos as “securities financing arrangements”.
Under a securities loan or stock loan,[1] a “lender” transfers securities to a “borrower” in return for the borrower’s promise to return equivalent securities to the lender in the future.[2] In return, the borrower provides agreed collateral to the lender equal to the value of the borrowed securities. If the value of the borrowed securities rises, the borrower must provide more collateral (and if it falls, the borrower may ask for some of the collateral back). The lender keeps market exposure to the borrowed securities at all times: the borrower only has to return what it has borrowed, even if it has fallen in value. Therefore, stock loans are used to short-sell securities.
Applications for securities loans
There are (at least) four uses for a securities loan:
- Shorting: securities lending done as a means to effecting an outright short position in a stock. Here you borrow the stock, immediately sell it, hope like made the price goes down, buy it back, and return it to the lender for profit. This is usually done by end users like hedge funds, and is done by means of:
- A Margin loan under a prime brokerage arrangement of some kind — here the broker is also financing the hedge fund on its position.
- A collateralised GMSLA: here the broker is typically not financing the investor on its position, as the investor is fully (and usually over-) collateralising the loan.
- Inventory management: Brokers in the market managing their brokerage flow to make sure they have the securities they need to settle short-term brokerage business, satisfy demand for short sellers etc. This is usually done by inter-dealer GMSLAs
- Yield enhancement: Here the lender is sitting long a fully paid for stock with no plans to sell it, and wants to earn some extra yield on the security by lending it into the market to someone (for example a short seller) who is prepared to pay a fee to borrow it, and will eventually return it. The usual candidates for this kind of lending are wealth management customers and asset management vehicles (UCITS, ETFs and so on) both of whom tend to be "structurally long" securities that they just sit on for extended periods, and might as well "put to work". These arrangements usually happen through "agent lending" programmes where a global custodian (who happens to be safekeeping assets for these structurally long investors) enter into securities lending arrangements in the market on their behalf (as agents - hence "agent lending"). The usual documents here are:
- A normal title-transfer 2010 GMSLA with an "agency annex" or, increasingly commonly,
- The new 2018 Pledge GMSLA
- Together with, in either case, a tri-party collateral arrangement managed by a triparty agent.
- Inventory financing: Prime brokers and margin lenders offsetting the cost of financing their lending activities by taking the assets their clients have bought on margin, and using them as collateral when borrowing higher-credit quality assets they can return to their treasury departments to pay down their borrowings. These are typically the counterparties to agent lending arrangements described above in yield enhancement trades. This they do by:
- Rehypothecation/reuse: reusing customer assets held as collateral in physical prime brokerage.
- Swap hedge inventory: sending out the swap dealers’s hedge inventory, for synthetic prime brokerage. In practice these two uses are almost the same, and the broker/dealer will have an automated pipeline of assets into the tri-party collateral management system so it can manage this process on an industrial scale.
- Reuse: In a way, the act of rehypothecation or reuse is a sort of pre-collateralised securities loan, too, though it is better to think of it as a prelude to an inventory financing arrangement. Reuse is really just to convert a pledge arrangement into a title transfer one.
See also
- ↑ in EU speak, “securities or commodities lending and securities or commodities borrowing”. Elegant, huh?
- ↑ It may be at an agreed date, or on the lender’s request, or at the borrower’s option.