Not all funds are permitted to lend securities — refer to the Key Investor Information Document KIID and the fund prospectus to see whether your chosen funds can or cannot.
Securities lending involves a transfer of securities to a third party the borrower , who will provide the lender with collateral in the form of shares, bonds or cash. The borrower pays the lender a fee — typically monthly — for the loan and is contractually obliged to return the securities on demand, or at the end of the agreed loan period.
Essentially, the lender retains all ownership rights of the security. In lending agreements, collateral is a borrower's pledge of specific property to a lender, to secure repayment of a loan. Investors can benefit from securities lending in the form of better performance.
The fund can generate additional income through the fees that it charges for lending securities. This additional return can help offset management fees, for example. BlackRock periodically benchmarks its securities lending performance versus competitors using data from independent third-party providers.
Over more than three decades, BlackRock has utilised securities lending to focus on delivering competitive returns while balancing return, risk and cost. As with all investment strategies, lending securities involves risk that needs to be considered. If both of these were to occur, the lender would suffer a financial loss equal to the difference between the two.
This includes high-quality federal and provincial government bonds as well as sovereign debt from other approved countries. The value of the collateral we receive from the borrower will always exceed the market value of the securities we loan.
The borrower must return the loaned securities to the fund on demand. To protect investors, it guarantees all loans the funds make. A fund earns income on the securities it lends out. In addition, the fund also continues to earn the return on any securities that are lent out.
Exchange traded fund providers are particularly interested in the practice because ETFs — like pension funds and sovereign wealth funds, which are also big securities lenders — tend to be long-term owners. Lending out their securities, which would otherwise be untraded, gives them an opportunity to generate additional earnings that can help keep management fees down and improve returns for investors.
Securities lending is controversial for several reasons. One concern is that when the securities are on loan their ownership title transfers to the borrower along with any voting rights.
This means that if the ultimate owner wants to exert an influence on a company by attending its AGM and voting on executive pay, for example, or seeks to engage with its leadership over climate change issues, it has to wait until its securities have been returned. Critics claim that short sellers effectively manipulate pricing. By borrowing shares in a company in order to sell them the critics argue it can create downward pressure.
Proponents of short selling say it helps to provide liquidity and price discovery and that buyers will enter the market once the price of a security falls to an attractive level. The practice of securities lending has also raised concerns because it introduces counterparty risk. One potential risk is that the short seller miscalculates and the security it has shorted rallies very strongly driving the short seller to default.
This would be a risk, however, only if the value of the collateral was not enough to cover the cost of buying back the lent out securities. Another risk arises when the lender, for example an ETF provider , is given cash collateral which it invests in money market securities to earn interest on the cash. This introduces the risk that the value of those securities could fall. During the financial crisis some funds lost money from their securities lending programmes.
Select personalised content. Create a personalised content profile. Measure ad performance. Select basic ads. Create a personalised ads profile. Select personalised ads. Apply market research to generate audience insights. Measure content performance. Develop and improve products. List of Partners vendors. Securities lending is the practice of loaning shares of stock, commodities, derivative contracts , or other securities to other investors or firms.
Securities lending requires the borrower to put up collateral, whether cash, other securities, or a letter of credit. When a security is loaned, the title and the ownership are also transferred to the borrower. A loan fee , or borrow fee, is charged by a brokerage to a client for borrowing shares, along with any interest due related to the loan.
The loan fee and interest are charged pursuant to a Securities Lending Agreement that must be completed before the stock is borrowed by a client. Holders of securities that are loaned receive a rebate from their brokerage. Securities lending provides liquidity to markets, can generate additional interest income for long-term holders of securities, and allows for short-selling.
Securities lending is generally facilitated between brokers or dealers and not directly by individual investors. To finalize the transaction, a securities lending agreement or loan agreement must be completed. According to current regulations, borrowers should provide at least percent of the security's value as collateral.
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