SECURITIES LENDING

- P R I T I PA R M A R
WHO BORROWS? INTRODUCTION TO WHO
SECURITIES LENDS?
 Brokers
 Dealer Firms
LENDING
Every transaction in the stock market made intends to earn more returns.
Mutual Funds 
Insurance Companies 
Sometimes, when the Stock market is rising high, an opportunist finds it an
 Institutional Investors excellent time to book profits and be merry. Nevertheless, to sell the stocks, one Endowment Funds 
first needs to own them. But then does that mean that one has missed this
 Hedge Funds opportunity only to wait until the market returns to its buying levels? NO! Pension Funds 

+
SECURITIES LENDING
WHY DO THEY BORROW? WHY DO THEY
A security is a financial instrument, To give something to someone for
typically any financial asset that can be
traded like stocks, bonds, debentures etc.
temporary use on condition that the
same or its equivalent will be
LEND?
returned as agreed
 To cover a failed transaction Incremental returns 
 Price arbitrage Utilization of dormant securities 
 Hedging Offset Custody fees 
 To cover short position = SECURITIES LENDING is a transaction in which securities
are transferred temporarily from one party (LENDER) to another
(BORROWER). In return, the borrower transfers other shares, bonds or
Low risk method 
 Tax arbitrage cash to the lender as collateral and pays a borrowing fee. This mechanism
Transparency 
helps both the Lender and the Borrower in many ways.
 Market making Requirements
 1 The global securities lending market size was USD 12.6 Billion in 2022

Securities lending transactions facilitate asset redistribution in financial markets by supporting global
2 capital market activities and trade settlement, and therefore play an important role in managing
financial risk.

The European Central Bank (ECB) outlines, that the aim of securities lending is to help the financial
markets keep functioning smoothly. The ECB shows that securities lending contributes to capital
3 market efficiency by enhancing market liquidity and stability. In the case of illiquid markets, bid-ask
spreads are wider and lead to costlier trades.

ROLE OF SECURITIES
LENDING IN International Securities Lending Association (ISLA) in their report - ‘Framing securities lending for the
sustainability era’ said that securities lending and the related practice of short selling play an important
role in capital markets. Securities lending has been used as a means of meeting settlement and

FINANCIAL MARKETS 4 collateral requirements, as well as providing vital liquidity and efficiency to secondary markets. It also
promotes price discovery and market making, as well as facilitating important hedging and investment
strategies, such as short selling and arbitrage.

McGill and Patel, in their academic paper ‘Securities Financing & Lending’, proved the need for
securities lending in financial markets. They explained that securities lending provides liquidity to the
5 equity, bond and money markets, placing it at the heart of today’s financial system. The increase in
liquidity reduces the cost of trading, thereby increasing market efficiency and benefiting all.
 KEY PARTICIPANTS

LENDE CUSTODIAN BANK BORROWER

R S
BENEFICIAL OWNER INTERMEDIARIES INTERMEDIARIES END USER
A Stock investor, who has securities A custodian acts as principal These are usually the market The primary borrowers of specific
portfolios of sufficient size to make intermediary between Borrowers makers and prime brokers. securities are the major securities
securities lending worthwhile like and Lenders. Custodians arrange Key prime brokerage services dealers most active in domestic and
pension funds, insurance trades, issue instructions to include financing of securities and global financial markets. They
companies, mutual funds and discharge settlement and manage all access to a ready supply of both borrow securities for multiple
endowments who can avail the the operational and administrative liquid and illiquid securities for reasons as a part of their trading
opportunity of earning higher aspects associated with lending. borrowing at competitive rates. The strategy like hedging, short selling
returns over the stocks lying in the Prior to conducting loans, prime broker offers cash settlement, etc. In cross-border transactions, it
Demat account by lending them for custodians review potential securities lending, settlement is often more efficient to borrow a
a shorter term as per the overall borrowers, negotiate terms & services, custodian services, & security than to deal with risk and
demand in the market.  perform due diligence additional administrative services.  costs of settlement failure
 REQUIREMENT OF SECURITIES LENDING
Today, securities lending is an integral
1 component of nearly all active securities
markets, both domestic and international.
From the lender’s point of view, the benefits
of securities lending include the ability to earn 2
additional income.
From the borrower’s point of view, it allows
3 them to take positions like short selling. It also
gives investors more options to take different
views on the market.
For the market as a whole, it helps to increase
liquidity. Increasing liquidity in the market tends
to also tighten spreads, which is beneficial to all 4
market participants.

This helps markets operate more smoothly and

5 efficiently, which enables better price discovery
and can reduce price volatility.

It also facilitates investment and trading strategies

that wouldn't be possible without a liquid supply 6
of securities available for borrowing.
Securities lending also plays a big role in
hedging, where investors simply look to capitalize
7 on fees and interest payments when loaning
securities to other investors.
Overall, it is reasonable to expect that securities
lending activity will become an ever more deeply
embedded part of contemporary securities 8
markets.
KEY STATS OF
INVESTMENT
BANKS

Global Investment Banking Fees

 REGULATORY BODY & KEY DOCUMENTATION

REGULATORY BODY KEY DOCUMENTATION

The legal, regulatory & tax frameworks relevant to securities lending transactions • LOR Agreement
vary significantly from market to market & Country to Country. Below are the • Data Site Comparison Report
Regulatory bodies of few countries. • Expected Report
• LOR Comparison Report
• Deal Closing Report
• Expected Report
v
USA Securities and Exchange Commission (SEC) • Deal Site Comparison Report
• Repurchase Agreement
• Collateral Documents
INDIA Securities & Exchange Board of India (SEBI) • Credit Score & History
• Credit Agreement
• CP Notice
EUROPE The Securities Financing Transactions Regulation (SFTR) • Commitment Letter
• Commitment Schedule
• Amended and Restated
CHINA The China Securities Regulatory Commission (CSRC)
• Fee Letter
• Funding Notice
UK The Financial Conduct Authority (FCA) • Structural approval
• CCC memo
• Etc.
AUSTRALI Australian Prudential Regulatory Authority (APRA)
A
UAE Securities and Commodities Authority (SCA) 
 FLOW OF SECURITIES LENDING TRANSACTION
10
Dail
Reinvestment y
adju MTM
s tm e
ed l) nt
e t urn ollatera
a l R a sh C
er
l l at e o f
C
C o te i n c a s 9
e ba
(+R
13 Collateral Earnings
Invested
3 Delivery of Collateral

Division of
14
1 Loan is initiated Earnings
Borrower Lenders Agent Lender
2 Terms are negotiated

4
5
Re

ns
c
e ip

o
6

cti
tI

tru
ns
Securities are returned

Matching

Ins
tr

12 Securities are returned

uc

Instructions

ry
ti o

ve
ns

li
Sub Custodian De

Movement of Securities Movement of Securities

8 7 *Note*
Borrowing Day - Steps 1 to 10
11

Return Day – Steps 11 to 14

THANK YOU