About Securities Lending
Investment Strategy
Securities lending is an
investment strategy in which
investors make short-term
loans of their securities to
generate incremental
revenues from their
portfolios. The loan results
in a transfer of
title/ownership to the
borrower who is obligated to
return the same type and
amount of securities. Loaned
securities are
collateralized (typically
102 or 105%), reducing the
Lender's credit exposure to
the borrower. Revenue is
generated based on the
demand for the security
loaned, known as intrinsic
earnings, and also from the
reinvestment of cash
collateral, if applicable.
Some Lenders choose to
accept non-cash collateral
such as Government Debt and
Supranational Bonds rated
Aaa/AAA indemnified or other
forms can be accepted based
on Lender preference
Securities lending is a long
established practice and,
according to the
International Securities
Lending Association (ISLA),
the balance of securities on
loan exceeds $2 trillion
globally. The market for
securities lending is driven
by the demand of large banks
and broker/dealers and their
hedge fund clients around
the world. This demand is
fuelled by the many
different trading and
arbitrage activities they
engage in, plus the
underlying need to borrow
securities to alleviate
fails and shortages in the
market. Lenders participate
to achieve incremental
returns on their portfolios
and increase overall
performance for portfolio
managers (increase alpha).
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