Why borrow securities

Securities lending is the practice of loaning shares of stock, commodities, derivative contracts , or other securities to other investors or firms. Securities lending requires the borrower to put up collateral, whether cash, other securities, or a letter of credit. When a security is loaned, the title and the ownership are also transferred to the borrower.

A loan fee , or borrow fee, is charged by a brokerage to a client for borrowing shares, along with any interest due related to the loan. The loan fee and interest are charged pursuant to a Securities Lending Agreement that must be completed before the stock is borrowed by a client. Holders of securities that are loaned receive a rebate from their brokerage. Securities lending provides liquidity to markets, can generate additional interest income for long-term holders of securities, and allows for short-selling.

Securities lending is generally facilitated between brokers or dealers and not directly by individual investors. To finalize the transaction, a securities lending agreement or loan agreement must be completed. According to current regulations, borrowers should provide at least percent of the security's value as collateral. Collateral for securities also depends on its volatility. The minimum initial collateral on securities loans is at least percent of the market value of the lent securities plus, for debt securities, any accrued interest.

The more scarce the supply of available securities, the higher the cost. Typical securities lending requires clearing brokers, who facilitate the transaction between the borrowing and lending parties. The borrower pays a fee to the lender for the shares and this fee is split between the lending party and the clearing agent. Securities lending is important to short selling , in which an investor borrows securities to immediately sell them.

The borrower hopes to profit by selling the security and buying it back later at a lower price. Since ownership has been transferred temporarily to the borrower, the borrower is liable to pay any dividends out to the lender. In these transactions, the lender is compensated in the form of agreed-upon fees and also has the security returned at the end of the transaction. This allows the lender to enhance its returns through the receipt of these fees.

The borrower benefits through the possibility of drawing profits by shorting the securities. Securities lending is also involved in hedging, arbitrage , and fails-driven borrowing. In all of these scenarios, the benefit to the securities lender is either to earn a small return on securities currently held in its portfolio or to possibly meet cash-funding needs. A short sale involves the sale and buyback of borrowed securities. The goal is to sell the securities at a higher price, and then buy them back at a lower price.

These transactions occur when the securities borrower believes the price of the securities is about to fall, allowing him to generate a profit based on the difference in the selling and buying prices.

Regardless of the amount of profit, if any, the borrower earns from the short sale, the agreed-upon fees to the lending brokerage are due once the agreement period has ended. Cut-throat ETF price war is over, industry professionals say. China corporate bond index draws interest from offshore issuers.

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World Show more World. US Show more US. Companies Show more Companies. Info on security advisory notes as advised by MAS. Looking for.. Demo Login No demo account? Product Catalogue. POEMS 2. Talk to our Customer Experience Specialist Call us at What is SBL? Why Participate in SBL? Benefits of Securities Lending Potentially enhances yield of your portfolio No minimum lock-in period No disruption to trading activities Hassle free lending arrangements. Benefits of Securities Borrowing Wide variety of stocks available Ease of borrowing No upfront deposit required Ability to sell through other brokerages Potential tool to cover error trade No financing fee.

Mechanics Trading of Securities. Settlement of Securities. Collateralizing of Short Positions. Collateral must be deposited latest by the following day of the short sell trade. Borrowing of Securities. Return of Securities. Margin Ratio.