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Stock loan: Difference between revisions
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{{fullanat|gmsla|2.3|2010}}A strange beast. Actually a type of financing transaction, though it is clothed it the language of [[buy]] and [[sell]]. | |||
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 {{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 [[Fungible|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 {{gmsla}} is a [[title transfer]] arrangement, and not really a {{gmslaprov|loan}} at all. Clause {{gmslaprov|2.3}} (see panel) clears this up. The {{gmslaprov|Lender}} title-transfers the security, but at the end of the Loan, the {{gmslaprov|Borrower}} has to [[title transfer]] one back. In the mean time the {{gmslaprov|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 {{gmslaprov|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 {{gmslaprov|Borrower}} goes on risk by subsequently selling the stock it has borrowed. | |||
{{seealso}} | |||
*[[Stock lending]] | |||