Financial Markets: Securities Lending and Borrowing

Securities or Stock Lending and borrowing (SLB) involves borrowing of shares by traders that they do not own.  Similarly, they can lend the stocks that they own but do not want to sell immediately.  SLB transactions carry an interest rate on the borrowing or lending of loans.  Moreover, the lending period/borrowing period is mutually fixed by the two concerned parties.  There are differences as well between SLB and loans.  The rate of interest is not under any form of control in the case of SLB and is totally dependent on the market.  Stocks in the futures and options segments are the ones that can be a part of the SLB process.   

Euroclear Group provides securities lending and borrowing solutions that enable the client firms to focus on increasing returns, liquid generation or enhanced risk management.  The true potential of the business firm’s portfolio while at the same time conforming to the regulations as they have changed over time.  Their automated securities lending and borrowing programs which are literally risk-free are secure and extremely flexible.  Settlement failures, as well as counterparty claims, are avoided by targeting the borrowing demand.  Clients are thus able to get confidential, flexible, risk-focused and secure solutions.

Time Tested Efficiencies

The robust securities and lending programs offered by Euroclear’s UK and Ireland are time-tested and proven that deliver settlement efficiencies that have not been available before to the client firms. The SLB programs fund different collateral operations, optimize settlements, and cover shorts.  For those firms that are opportunity lenders and borrowers, the GC Access Product from the Euroclear Group through Euroclear Bank allows for the baskets of HQLA lending and borrowing against different collaterals at the street level.  

Clients are encouraged to outsource the management of their collateral aspects related to activities regarding street lending to the Triparty Securities Lending service of the Euroclear group.  This enables businesses to firmly focus on their business opportunities in the market leading to better business performance.

There are many reasons which propel the business organizations to avail the securities lending and borrowing services (for example in the Australian market).  If a trader has ended up selling his securities short, there is a requirement to borrow those securities because it has an obligation to fulfill in the settlement required for the securities.  As per the rules prevalent in Australia, for this to happen, the trader must possess the securities and deliver them to the buyer within 3 days after the trade took place.  

Short selling might be reflective of the direction of the price of the security or it could be related to the view of the relative price.  Another reason to get involved in SLB is that in the derivatives market, the trader might want to sell securities that are not owned by it to hedge a derivatives position linked to equity.  This trader too must borrow securities to fulfill the settlement obligation that follows.  On a similar note, arbitrage and falls -driven borrowing can lead to situations in which the lending and borrowing of securities would be necessitated.