Stock loan
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GMSLA Anatomy™
Notwithstanding the use of expressions such as “borrow”, “lend”, “Collateral”, “Margin” etc. which are used to reflect terminology used in the market for transactions of the kind provided for in this Agreement, title to Securities “borrowed” or “lent” and “Collateral” provided in accordance with this Agreement shall pass from one Party to another as provided for in this Agreement, the Party obtaining such title being obliged to deliver Equivalent Securities or Equivalent Collateral as the case may be.
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A strange beast. Actually a type of financing transaction, though it is clothed it the language of buy and sell.
Why?
Start out with what it is for. Let’s say a well-meaning hedge fund wants to bet against the price of a security. It does that by “short selling”. The key economic feature of a short sale is that you sell a security you don’t own in the first place. If you own it and sell it — well, that’s just a sale.
How do you short sell a security, then? By borrowing it. Borrowing in a manner of speaking. This is where the 2010 GMSLA comes in. It is the master contract under which short sellers borrow securities so they can short sell them.
But hold on. Can you sell something you only borrowed from someone? Nemo dat quod non habet, right?
Well yes, but no. Now in the financial markets, all cats are grey in the dark. Thanks to the principle of fungibility, one stock is the same as another, so the guy who lends you a security doesn't really care what you do with it, as long as you find an identical one to give back to when he wants it back.
Therefore the 2010 GMSLA is a title transfer arrangement, and not really a loan at all. Clause 2.3 (see panel) clears this up. The Lender title-transfers the security, but at the end of the Loan, the Borrower has to title transfer one back. In the mean time the Borrower is free to sell the security it has borrowed. It is now short the security, in that it doesn’t own the security, but it still has an obligation to go out an buy the security to return it to its Lender and close out the stock loan.
Therefore the stock loan itself isn’t a market transaction. No one goes on risk to the stock by entering into a stock loan. the Borrower goes on risk by subsequently selling the stock it has borrowed.
Does a stock loan count as borrowed money?
According to Simon Firth on derviatives, no. Nor does a repo.