Securities Lending in the World of Financial Services
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In the world of finance, Securities Lending simply means the lending of stock or securities by one participant to another. The basic terms of that loan are administrated by a lending agreement, which compels the borrower to provide to the lender some form of collateral, such as government securities, cash, or a letter of credit, equal to or higher than the value of the securities that are lent.
The lending agreement is a legal contract that is duly enforceable under applicable state law, as per the agreement. The participants agree upon a set fee, figured as a percentage charged annually based upon the aggregate worth of those securities that are loaned, as payment for the loan.
Should the accepted mode of collateral be cash, the fee can be in the form of a rebate, which would signify that the lender would receive all of the total accruing interest on said cash collateral, but will pay the borrower an agreed upon interest rate.
Securities Lending is essentially an over-the-counter market, involving the lending and borrowing of securities, mainly for the objective of hedging short-sale positions. The Securities Lending players involved frequently include foundations, pension funds and mutual funds, which loan their security holdings to qualified borrowers, such as hedge funds, option traders and additional asset managers.
All parties will usually rely heavily on their own intermediaries to negotiate their transactions and manage individual risk. Many also rely on Risk Management Software as additional assurance that they are fully covered in their transactions. More and more, investors and traders alike depend more each day upon financial services technology and specifically Risk Management Software for this purpose.
Standard & Poor has introduced an innovative index sequence intended to track the average cost involved in borrowing U.S. equities. This will be the very first public index that will make available to everyone valuable insight into the average expense related to the Securities Lending market, as calculated via the weighted average rebate per all equity constituents in the S&P 500, MidCap 400 and SmallCap 600.
Data quality involved is improving, along with several other financial services technology markets as well as Risk Management Software. In fact, during recent years, market transparency has amplified because of the appearance of data aggregators whose job is collecting transaction data and providing data back to those contributors. Standard & Poor is currently trying to deliver further transparency to the financial services technology market.
Collateral management is the practice of confirming, agreeing, and advising regarding collateral transactions. Collateral refers to property or assets offered for the purpose of securing a loan or other form of credit. Collateral will only be subject to seizure upon default on the loan. Collateral Management is in charge of reducing the credit risk involved in unsecured financial transactions. The lending parties in transactions have actually utilized collateral for hundreds of years for the purpose of providing necessary security against any possibility of default in payment.
Collateral is utilized predominantly as mutual insurance in many over the counter financial transactions in the contemporary banking industry. Collateral Management has swiftly evolved in the past 20 years along with escalating utilization of modern technology, aggressive pressures amongst financial institutions, and the expanded risk created by the widespread use of secured asset pools, leverage and derivatives. Consequently, Collateral Management now includes various multifaceted and interconnected functions as well as improved legal safeguards with the use of International Swaps and Derivatives Association collateral agreements.
