“Take no action” borrow
In a normal stock borrow, a Lender can require the Borrower to manufacture the effect of participation in a corporate action that takes place on the Loaned Securities — see for example, Paragraph 6.7 of the 2010 GMSLA. Of course, the Lender can (and usually would) just recall the securities, but there are times where everything happens a bit quickly.
Example
Let’s say Borrower borrows Securities in Teldar Paper from Lender. Teldar announces a tender for 20% of the company. The final allocation of the tender is announced at 30%. Lender closes out 30% of Borrower’s position at the tender price. This is called being “held liable”.
An alternative is the “take no action” borrow, where the Lender promises to keep the Loan out over the period of the corporate action, but also promises to the Borrower that it will not be “held liable” — i.e., the Lender won’t exercise its rights receive Equivalent cash and assets from participating in the corporate event.
Benefits
Lenders offer TNA borrows at a much higher fee than standard borrows — fair enough, as they are giving up the right to participate in the corporate action, which might be priced attractively. On the other hand the Borrower can participate in the benefits the corporate action without taking any of the risk associated with it — they can eventually give the shares back after all.
See also
- Corporate actions under the 2010 GMSLA