Securities Lending
Securities lending is when an investor temporarily transfers securities, like stocks or bonds, to another party in exchange for a fee. The borrower agrees to return the securities at a later date along with any agreed-upon interest payments.
Example #1
An investor lends their shares of a company to another investor who wants to short sell those shares. In return, the borrower pays a fee to the lender for the duration of the loan.
Misuse
One potential misuse of securities lending is when the borrower fails to return the securities as agreed, leading to a situation known as 'failure to deliver.' This can create market distortions and pose risks to the lender, especially if the borrowed securities were sold but not repurchased for return.
Benefits
Securities lending can benefit investors by providing an additional income stream through the fees earned on lending out their securities. Institutional investors, like pension funds, often engage in securities lending to enhance their returns.
Conclusion
Securities lending can be a valuable tool for investors looking to generate additional income on their investments. However, it is crucial for investors to be aware of the risks involved, especially the potential for misuse that could harm their portfolios.