Securities Financing Agreements

Securities lending is legally and clearly regulated in most major global securities markets. Most markets require that the bond only be for specifically authorized purposes, which generally implies that, in this case, the seller of the securities is designated as a borrower and the purchaser of the securities as a lender. This refers to the movement of cash. The term „loan of securities“ is sometimes used correctly in the same context as an „equity loan“ or a single „guaranteed loan.“ The first relates to actual loans made by banks or brokers to other institutions to cover short selling or other temporary purposes. The latter is used in private or institutional-backed lending agreements for a wide range of securities. In recent years, the Financial Industry Regulatory Authority (FINRA) has warned all consumers that they will not avoid non-regressive equity loans, but they had a short popularity before the SEC and IRS were able to close almost all of these suppliers between 2007 and 2012 and immediately classified the non-recreational transfer of equity credits as fully taxable sales (see bottom of the consultation). Today, it is generally accepted that the only legally valid consumer credit programs that involve shares or other securities are those in which the shares and account of the customer remain in ownership and account without sale through a fully licensed and regulated institution, which is a member of SIPC, FDIC, FINRA and other major regulatory organizations with their own audited accounts. These are usually in the form of securities-based lines of credit. Securities financing operations in the shadow banking system would therefore be subject to appropriate supervision and regulation. Their use would not be prohibited or restricted by specific restrictions as such, but would benefit from greater transparency. 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 lenders, often referred to simply as dry lenders, are institutions that have access to „loanable“ securities. These may be asset managers with a large number of securities, custodian banks holding third-party securities, or third-party lenders who automatically access securities through the asset holder`s deposit bank. The international securities lending trade organization is the International Securities Lending Association. According to a survey carried out in June 2004, its members had 5.99 billion euros in securities for the granting of loans.

In the United States, the Risk Management Association publishes quarterly surveys of its (U.S.) members. As of June 2005, they had $5.77 billion in securities. Other interprofessional organizations are the Australian Securities Lending Association (ASLA), the Canadian Securities Lending Association (CASLA), the Pan Asia Securities Lending Association (PASLA) and the South African Securities Lending Association (SASLA). In the case of securities lending, securities are classified according to their ability to absorb. High-liquidity securities are considered „light“; these products are easy to find on the market, someone should decide to borrow them for the purpose of selling them briefly. Securities that are illiquid in the market are considered „hard.“ Due to various rules, short selling in the United States and some other countries must be preceded by the location of security and the amount that one wants to sell briefly to avoid bare short circuits. However, the lender can establish a list of securities that do not require such a location.

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