Securities lending is a financial transaction in which an investor lends out securities, such as stocks or bonds, to another party in exchange for a fee. Securities lending is typically used to facilitate various types of financial transactions, such as short selling, which is the practice of selling securities that the seller does not own in the hopes of buying them back at a lower price in the future.

In a securities lending transaction, the borrower (the party receiving the securities) agrees to return the same number and type of securities to the lender at a later date. The borrower also pays a fee to the lender for the use of the securities. Securities lending can be carried out by financial institutions, such as banks and broker-dealers. A number of custodians are also involved into this business providing such services to both funds (pooled) and segregated accounts.

Securities lending is regulated by various regulatory bodies and it is important for investors to carefully consider the risks and potential rewards of securities lending, as there are a number of potential risks involved, main risk being a default by the borrower. Most of the developed markets have the instruments to limit such risks, however the extreme market events can result in losses due to credit risk (i.e. borrower’s default).

Please note, none of the information on this blog represents the opinion of my employer and all information does not represent a financial advice.