Securities financing
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SFTR Anatomy™
Regulation on Transparency of Securities Financing Transactions and of Reuse (2015/2365/EC (EUR Lex)), aka the securities financing transactions regulation Article 3(11), SFTR
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There are (at least) four uses for a stock loan:
- Shorting: Stock 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 stock 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.