FAQ

Principally, every owner of stocks, bonds and ETFs has the right to lend them. However, for decades the practice has been largely confined to big financial institutions who have made billions of dollars from renting out their securities. Many active and passive fund managers, such as mutual funds and ETFs, engage in securities lending to help boost a fund’s performance or to offset the costs of managing a portfolio.

Securities lending is a great source of alpha as it opens up a new stream of revenue on assets you already own, irrespective of their price movement. Given the opaqueness of this industry, many investors are unaware of the hidden value of their portfolio.

Borrowers of securities are the large financial institutions – such as investment banks, brokers and hedge funds.

Typically, they are borrowing to cover short positions, facilitate other trading activities (such as an equity derivative or convertible bond), or take advantage of arbitrage opportunities.

Not at all. We appreciate the minute degree of separation here. It’s common in many industries that you have similar phrases that mean something completely different.

Securitised lending is like a cash loan secured by your investment portfolio.

Securities lending is renting out your securities – stocks, bonds, ETFs – in return for rent. Much like renting out your house or any other financial asset you own.

You can expect positive returns that entirely depend on the value of your holdings, and their respective lending rates.

The more widely available stocks produce lower returns, up to 0.5% (50 bps) annually. They are categorised as ‘general collateral’.

Hot stocks, categorised as ‘specials’, command much higher returns varying from 1.0% (100 bps) to over 100% (10,000 bps) annually in more extreme cases.

In short, lending rates are dynamic and are driven by many factors that affect the availability of lendable supply vs the demand to borrow certain securities. So, something that has no demand today can become super-hot tomorrow, and vice versa.

When you lend your securities, they are transferred to the borrower. However, you will not miss out on any additional income. Dividend/coupon payments will still be paid to you by the borrower. The only thing that changes when you lend your securities is your right as a shareholder to vote. However, if you wish to vote, you can recall the securities at any time ahead of the record date.

Short selling is not just about directional short selling. It plays an integral part of a broader investment strategy. It strengthens markets, adding liquidity and price discovery to capital markets.

Now, what happens if you lent your shares, and they have significantly fallen in price? Ask yourself; did they fall in price because you lent them to short-sellers or because those short sellers spotted a problem with the company that sadly transpired? Short-sellers may be right or wrong, and it is up to you to decide whether you think the shares are properly priced. However, wouldn’t you want to know there is a short selling activity in your shares at the time it’s actually happening, while earning rent for it, rather than reading about it retrospectively and earning nothing for it? The biggest financial institutions operate like that and have been lending securities for decades, making billions of dollars from this common practice.

Securities lending is a well-established practice, and a $2tn industry, in which owners of stocks, bonds and ETFs lend them out in return for a payment known as lending revenue- rent. Just like lending any other financial asset, the lender receives such rent while retaining all the benefits of ownership – dividends, coupons and the potential appreciation of the asset.

Securities lending plays a key role in capital markets. It brings greater liquidity and efficiency to the market, ensuring the settlement of certain trades, promoting price discovery and facilitating market making.

A repurchase agreement (repo) is a type of short-term cash loan and is widely considered the closest sibling of securities lending.

In a repo transaction, a fixed income security is sold with an obligation to buy it back in return for cash. At the end of the term, the buyer returns the security and the seller returns the cash payment plus an additional interest payment.

In this case, the seller of the securities is called the borrower and the buyer of the securities is called the lender. This refers to the movement of the cash.

In a repurchasing agreement, the lender is exposed to the risk that the borrower will not repurchase the securities. Should the borrower fail to repurchase the securities within the agreed timeframe, the lender can sell the securities on the market, but often to mitigate this risk the borrower will offer collateral in the form of securities.

The key difference for the owner of securities between a repo transaction and a securities lending transaction is that in a repo transaction they pay interest whereas in a securities lending transaction they receive interest. Furthermore, in a repo transaction, the owner of the securities is often obligated to post collateral whereas in a securities lending transaction the owner of the securities often receives collateral.

Securities lending and repo are part of the broader category of securities finance as they both facilitate the temporary transfer of securities, on a collateralised basis, in return for an agreed interest rate that is accrued daily. However, the mechanics of a repo transaction are different from those of a securities lending transaction. Also, a repo agreement is usually governed by a different contractual agreement than a securities lending transaction, which is called a Global Master Repurchase Agreement (GMRA).

ESG. Investors expect it. Regulators demand it. It’s become the most important conversation in capital markets and securities lending. How firms respond will shape their investment decisions for decades to come.

So, is it possible to run a sustainable investment strategy and also engage in securities lending?

Yes. ESG isn’t a feature. It’s an approach to managing investments which is equally applicable to securities lending.

At Sharegain we’ve designed our technology from the ground up to meet the needs of ESG-minded investors and ensure they’re fulfilling their ESG requirements, without incurring any new overheads.

There are three areas that investors need to consider as they look to begin an ESG-compatible securities lending programme:

Active ownership

The crux of every ESG conversation is control: you must have the ability to shape the future of the firm’s your invested in, with a view to creating long-term value.

Through Sharegain, you can choose how your securities are lent and in what volume. If you have securities you choose not to lend, that’s your decision to make. Active ownership doesn’t end once a security is out on loan: with Sharegain, you can terminate a loan at any time and have your securities returned within a few days.

Retaining your voting rights

Lending securities involves signing over voting rights for those securities, limiting an owner’s ability to participate in key corporate events.

Through your Sharegain dashboard, you can recall your securities from anywhere in the world, returning the assets and their voting rights to you. This allows you to fulfil your corporate governance obligations with just a few clicks.

Collateral management

Every lending transaction should be collateralised at a minimum, but how that collateral is managed can have major ESG implications on the securities lending process.

Sharegain uses a third-party collateral management model, meaning the collateral for your transaction is held and managed by a top-tier custodian for the lifetime of the loan. We also allow our clients to build a bespoke collateral schedule, so they can set their own criteria for the collateral they will receive before entering into the loan.