Provision of a range of financing and investment solutions using securities (for example, equity repos and buy sell back, in addition to securities lending and borrowing) all subject to appropriate written agreements.
Certain firms need to borrow securities in order to cover their settlement obligations in the event of failed trades or taking short positions, or to take advantage of arbitrage and other opportunities. Institutions with large portfolios of securities are attractive to securities borrowers. Accordingly, global custodians provide securities lending services, typically with the custodian as agent matching its clients with approved borrowers. The custodian oversees the posting of collateral by the borrower, collects dividends and other economic benefits for the lender during the life of each loan and shares in the lending fee payable by the borrower. The lender can terminate a loan at any time, generally with recall notice of three business days.
Collateral assets, while not owned by the client, are held by the service provider in a designated account so that they are safe-kept for the client's benefit and the client benefits from reporting on all such assets.
The service provider provides the client with timely reporting on collateral risks (such as timing mismatches between stock loan period and reinvestment term or exposure to long reinvestment maturities in case adverse market conditions arise and the stock loan is to be recalled).
A client may choose to release some assets to an agency stock lending arrangement but also to look to lending auctions to achieve higher returns for certain asset classes. Here, the service provider facilitates this arrangement, allowing the client to enter into deals via such auctions.