Securities lending

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In finance, securities lending or stock lending refers to the lending of securities by one party to another.

The terms of the loan will be governed by a "Securities Lending Agreement",^[1] which requires that the borrower provides the lender with collateral, in the form of cash or non-cash securities, of value equal to or greater than the loaned securities plus an agreed-upon margin. Non-cash refers to the subset of collateral that is not pure cash, including equities, government bonds, convertible bonds, corporate bonds, and other financial products.

The agreement is a contract enforceable under relevant law, which is often specified in the agreement. As payment for the loan, the parties negotiate a fee, quoted as an annualized percentage of the value of the loaned securities. If the agreed form of collateral is cash, then the fee may be quoted as a "short rebate", meaning that the lender will earn all the interest that accrues on the cash collateral and will "rebate" an agreed rate of interest to the borrower. Key lenders of securities include mutual funds, insurance companies, pension plans, exchange-traded funds and other large investment portfolios.^[2]

Securities lending is an important means of eliminating "failed" transactions as well as enabling hedge funds and other investment vehicles to sell short their shares.^[3]