The main reason for borrowing a security is the coverage of a short position. Because you have an obligation to provide security, you must borrow it. At the end of the agreement, you must return an equivalent guarantee to the lender. The equivalent means fungible in this context, i.e. the securities must be totally interchangeable. Compare that to the loan of a 10 euro note. They don`t expect exactly the same rating as any 10 euro note. Securities lending is an important way to eliminate “failed” transactions and allow hedge funds and other investment vehicles to sell shares. [3] Securities lending is important for short selling in which an investor borrows securities and sells them immediately. The borrower hopes to take advantage of this by selling the guarantee and later buying it back at a lower price. As the property has been temporarily transferred to the borrower, the borrower is required to pay dividends to the lender. In these transactions, the lender is compensated in the form of agreed fees and has also repaid the guarantee at the end of the transaction.

This allows the lender to increase its returns by obtaining these fees. The borrower benefits from the opportunity to make a profit by reducing the securities. The loan of securities is the act of lending to an investor or an investment company. The loan of securities is conditional on the borrower setting up guarantees, whether cash, guarantees or letters recommended. When a security is lent, the title and ownership are also transferred to the borrower. In investment banking, the term “loan of securities” is also used to describe a service offered to large investors that can allow the investment bank to lend its shares to other people. This often happens for investors of all sizes who have mortgaged their shares to borrow money to buy more shares, but large investors like pension funds often choose to do so to their non-mortgaged shares because they receive interest. In such agreements, the investor continues to receive dividends as usual, the only thing he can usually not do is choose his shares. Until early 2009, securities lending was only a revenue market, which made it difficult to accurately estimate the size of this sector. According to the inter-professional organization ISLA, the balance of loans in 2007 exceeded $1 trillion worldwide.

[4] In July 2015, the value was $1.72 trillion (with a total of $13.22 trillion in loans) – a level similar to that before the 2008 financial crisis. [5] Since then, the market has faced a huge liquidity surplus, which has had a significant impact on the securities lending and equity industry as important liquidity management instruments. When a security is transferred under the loan agreement, all rights are transferred to the borrower.