Securities lending has evolved into a vital component of the financial markets. As of December 2024, more than USD 40.0 trillion of assets were available for lending globally, with over USD 2.5 trillion on loan on an average day (Source: S&P Global Market Intelligence, 2 December 2024 to 31 December 2024).
Capital at risk. All financial investments involve an element of risk. Therefore, the value of your investment and the income from it will vary and your initial investment amount cannot be guaranteed.
Frequently asked questions
What is securities lending?
Securities lending is an investment tool utilized to generate incremental income on a fund’s assets. The transaction involves the transfer of fund securities, such as shares or bonds, to a third party (the borrower). In exchange, the borrower pays the lender a fee and provides the lender with collateral.
The extra revenue generated can be used to effectively reduce the Total Cost of Ownership1 of a fund and therefore increase the cost effectiveness of fund ownership for investors, while also seek to improve the investment performance.
How does it work?
Funds participating in a securities lending program may lend out their securities to borrowers, traditionally large financial institutions, in exchange for a fee, providing additional income for the fund’s shareholders.
To borrow a security the borrower must pay a fee and provide collateral for the entire period that the security is out on loan. The value of the collateral must exceed the value of the loaned security to provide the lending fund with a ‘safety cushion’. This ‘safety cushion’ acts as a shock absorber for changes in asset values.
Why do investors participate in securities lending?
Securities lending is a way to unlock additional value from a portfolio through the fee charged for loaning its securities. This differentiated income stream can result in better investment performance for investors investing in lending funds and help them reach their objectives faster.
What are the risks of Securities Lending?
There are two main risks associated with securities lending:
- Counterparty Risk: The risk that a borrower defaults on their loan and is unable to return the lent securities. Lending agents may require collateral to mitigate this risk.
- Collateral Risk: The risk that provided collateral falls below the replacement cost of the loaned securities. To reduce this risk, lending agents may require collateral that exceeds the loan value and ensure that the collateral is of high quality and liquidity.
1Total Cost of Ownership: Refers to the comprehensive expenses associated with owning and operating a portfolio of securities, including the initial purchase price, ongoing operational costs like maintenance fees, and potential costs and revenues associated with securities lending programs.
