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Dividend and Interest Accrual

Dividend and Interest Accrual

Many trading firms, especially ones that are not self-clearing, use prime brokerages to maintain accounting books and records on the trading firm’s behalf. Accrual accounting is used: items are recognized when they are earned and expenses recognized when they are incurred. Because accrued-based accounting is used, in some cases accruals are set up in theRead more about Dividend and Interest Accrual[…]

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Copyright 2011 Eric Bank, Freelance Writer
Securities Lending, Part Three

Securities Lending, Part Three

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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.

Continue reading “Securities Lending, Part Three” »

Securities Lending, Part Two

Securities Lending, Part Two

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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.

Fees

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” »