Under the Federal Reserve’s Regulation T, a security can be loaned at a minimum of 100% of its value for a permissible purpose. The purposes are to cover shorts, assure settlements or to loan to another.
In Part Two of this series, we documented how fees, dividends and defaults relate to securities lending by prime brokers. In this installment, we’ll discuss how counterparties transfer securities between borrower and lender.
Transfers are either physical, by way of a clearing organization, or by other means agreed upon between the counterparties. Physical transfers must be delivered along with duly executed stock or bond transfer powers with guaranteed signatures by a bank or member firm of the New York Stock Exchange.
Last time we looked at the contractual and collateral rules pertaining to securities lending by prime brokers. We’ll next explore fees, dividends and defaults as they relate to securities lending.
Recall that a Securities Lending Agreement is the contract required before shares are loaned. The agreement states that in the event that cash collateral is pledged, the borrower is entitled to a rebate on the cash at such rates as the borrower and lender agree. In the event that non-cash collateral is pledged, the borrower agrees to pay a fee to the lender at rates agreed upon by the borrower and lender. The fees and rebates are computed daily based on each trades value. This is the equivalent to the quantity (or par value in the case of government securities) multiplied by the rate in basis points annualized usually on an actual/360 basis.
The agreement may state that the fees are due by the fifteenth of the following business month (though most pay within thirty days), while for repo trades, the fee in the form of interest is due upon termination, re-price, or partial return of the repo. Continue reading “Securities Lending, Part Two” »
Prime brokers offer a variety of services to investors, from providing credit to clearing trades. One important service offered is known as Securities Lending. In Part One of this article, we’ll look at the contractual and collateral rules pertaining to Securities Lending.
As an investor or hedge fund, you may wish to borrow shares for a variety of reasons, such as shorting the stock or hedging a long position. An executed Securities Lending Agreement is the documentation required before shares are loaned. Continue reading “Securties Lending, Part One” »