Sec Lending Agreement

The main reason for borrowing a security is the coverage of a short position. Because you have an obligation to provide security, you must borrow it. At the end of the agreement, you must return an equivalent guarantee to the lender. The equivalent means fungible in this context, i.e. the securities must be totally interchangeable. Compare that to the loan of a 10 euro note. They don`t expect exactly the same rating as any 10 euro note. Until early 2009, securities lending was only a revenue market, which made it difficult to accurately estimate the size of this sector. According to the inter-professional organization ISLA, the balance of loans in 2007 exceeded $1 trillion worldwide. [4] In July 2015, the value was $1,72 trillion (with a total of $13.22 trillion in loans) – a level similar to that before the 2008 financial crisis. [5] Titles are ranked according to their possibility of admission. High-liquidity securities are considered “light”; these products are easy to find on the market, someone should decide to borrow them for the purpose of selling them briefly.

Securities that are illiquid in the market are considered “hard.” Due to various rules, short selling in the United States and some other countries must be preceded by the location of security and the amount that one wants to sell briefly to avoid bare short circuits. However, the lender can establish a list of securities that do not require such a location. This list is designated as an easy-to-borrow list (short for ETB) and is also called flat-rate insurance. This list is compiled by brokers on the basis of “reasonable assurance”[8] that the securities on the list are readily available at the client`s request. However, if a guarantee on the list cannot be provided as promised (a “delivery failure” would occur), acceptance of reasonable grounds no longer applies. In order to improve the basis of these assumptions, the ETB list must have a maximum duration of 24 hours. The term “loan of securities” is sometimes used correctly in the same context as an “equity loan” or a single “guaranteed loan.” The first relates to actual loans made by banks or brokers to other institutions to cover short selling or other temporary purposes. The latter is used in private or institutional-backed lending agreements for a wide range of securities. In recent years, the Financial Industry Regulatory Authority (FINRA) has warned all consumers that they will not avoid non-regressive equity loans, but they had a short popularity before the SEC and IRS were able to close almost all of these suppliers between 2007 and 2012 and immediately classified the non-recreational transfer of equity credits as fully taxable sales (see bottom of the consultation). Today, it is generally accepted that the only legally valid consumer credit programs that involve shares or other securities are those in which the shares and account of the customer remain in ownership and account without sale through a fully licensed and regulated institution, which is a member of SIPC, FDIC, FINRA and other major regulatory organizations with their own audited accounts. These are usually in the form of securities-based lines of credit.

Securities lending is important for short selling in which an investor borrows securities and sells them immediately. The borrower hopes to take advantage of this by selling the guarantee and later buying it back at a lower price. As the property has been temporarily transferred to the borrower, the borrower is required to pay dividends to the lender.

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