What is securities lending?Securities lending is the temporary loan of financial securities (stocks, bonds, exchange-traded funds and other instruments) from one institution to another. Lenders include custodian banks or third-party agent lenders (acting on behalf of beneficial owner clients), while borrowers are typically broker-dealers (acting on behalf of themselves or their hedge fund clients)—although these roles can vary.
While there are numerous reasons for an institution to borrow a security, most often broker-dealers utilize the activity to hedge risk or to avoid failing on a delivery, while hedge funds generally borrow securities to engage in short selling. Borrowers pay a fee to lenders, negotiated between the two parties and measured in basis points (bps), for loaning their securities. For the duration of the loan, lenders hold collateral (which may be cash or securities) owned by the borrower to secure the transaction.