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What is stock lending?

Stock lending is the temporary transfer of securities, by a lender to a borrower, with


agreement by the borrower to return equivalent securities to the lender at pre-agreed time.
There are two main motivations for stock lending; securities-driven, and cash-driven. In
securities-driven transactions, borrowing firms seek specific securities (equities or
bonds), perhaps to facilitate their trading operations. In the cash-driven trades, the lender
is able to increase the returns on an underlying portfolio by receiving a fee for making its
investments available to the borrower. Such transactions may boost overall income
returns, enhancing, for example, returns on a pension fund.

What sorts of securities can be used in stock lending?


Securities lending covers all sorts of securities including equities, government bonds and
corporate debt obligations.
What are the legal underpinnings for stock lending?
Parties to a stock lending transaction generally operate under a legal agreement such as
the Global Master Securities Lending Agreement that sets out the obligations of the
borrower and lender. In securities lending the lender effectively retains all the benefits of
ownership, other than the voting rights. The borrower can use the securities as required -
perhaps by lending them on to another party - but is liable to the lender for all the benefits
such as dividends, interest, or stock splits.
What are the benefits of stock lending?
There are many positive aspects of stock lending. It can:

• increase the liquidity of the securities market by allowing securities to be borrowed


temporarily; thus reducing the potential for failed settlements and the penalties this
may incur.
• provide extra security to lenders through the collateralisation of a loan
• support many trading and investment strategies that otherwise would be extremely
difficult to execute
• allow investors to earn income by lending their securities on to third parties
• facilitate the hedging and arbitraging of price differentials

Can stock lending be harmful?


Stock lending, is not a harmful practice. Many feel that securities lending could aid
market manipulation through short selling, which can potentially influence market prices.
Short selling as such is not wrong (although market manipulation certainly is) and stock
lending can assist those that have sold stock short, thus adding liquidity to the market.
Another alleged potential abuse is that of tax evasion. Stock lending does not assist tax
evasion.
In the UK those involved in securities lending will generally be supervised by the
Financial Services Authority (FSA). They will be subject to the FSA's Handbook,
including the Inter-professional Conduct Chapter of the Market Conduct Sourcebook; and
also subject to the provisions of the Financial Services and Markets Act on, among other
things, market abuse.
They will also have regard to the provisions of the Stock Borrowing and Lending Code,
produced by the Stock Lending and Borrowing Committee, a committee of market
participants, chaired by the Bank of England and including a representative of the FSA.
What if the lender wants to vote at a company meeting on stock that has been lent?
The voting rights are transferred to a borrower in a stock lending transaction. If the lender
wants to exercise its right to vote it should recall the stock in good time so that a proxy
voting form can be completed and returned to the registrar by the required deadline.
Who are the major stock lenders?
Institutional investors holding investments on behalf of the pension funds, collective
investment schemes and insurance portfolios are the major lenders of stock, often using
an agent such as a custodian to manage the mechanics of the process.
What are the tax consequences of stock lending?
The tax position in relation to stock lending is complex and varies from country to
country. If in doubt those involved in stock lending should obtain professional advice
their tax specialist.
How does stock lending differ from repo?
Economically stock lending and sales/repurchase agreements (repo) are very similar. A
stock lender however charges a fee, whereas a repo counterparty pays (or receives) a rate
of interest.
Where can I obtain further information about stock lending?
The Stock Lending and Repo Committee's website gives more information about the
stock lending market, please see link below