Securities lending and borrowing is a process through which you lend or borrow shares or stocks from other investors or financial firms. Borrowers participating in securities lending must provide collateral during the transaction. It can be in the form of cash or even different types of securities.
Securities lending may seem obtuse to beginners, but it is an important practice as it brings liquidity to the markets and can generate additional income for securities holders, especially with a Demat Account.
Let us learn more about this process and understand its benefits.
What is Securities Lending?
As mentioned above, the basic concept of securities lending or stock lending is the practice of loaning securities such as:
Stocks
Derivative contracts
Commodities
To complete a securities lending transaction, the involved parties must sign a securities lending agreement. This agreement specifies the lending terms, such as the lender duration, interest rate, lender fees, and collateral that the borrower must provide.
Securities lending transactions come with deadlines that borrowers must follow to return the loaned security. The lender may also demand the loaned security before the predetermined date. One current requirement, according to regulations, is that the borrower provides collateral worth 100% of the value of the security loaned.
What are the Benefits of Securities Lending and Borrowing?
Stock lending is beneficial for both lenders and borrowers; here are some of them:
Lenders can generate additional income for an idle portfolio through the fee charged to the borrower in securities lending. It can also be a form of diversification for the lender.
There are multiple stock options available that make the process of lending and borrowing securities easier and convenient.
Securities lending allow borrowers to take a short-selling position which they can take advantage of during a market downturn. The short-selling tactic is prevalent amongst veteran investors.
Securities lending and borrowing have no counterparty risk. National Securities Clearing Corporation Limited (NSCCL) guarantees all securities lending transactions.
Securities Lending in relation to market liquidity
Securities lending contributes to over-the-counter market liquidity. It aids in executing numerous trades that allow investors or institutions to hedge, take a custom position, or engage in arbitrage.
For insurance companies, securities lending is a prevalent practice. Insurers may make long-term investments to match insurance liabilities. As a result, the stocks are not actively traded. It allows insurance firms to lend the securities and collect a fee to increase returns.
Furthermore, if a lender accepts cash collateral, it is usually re-invested. Market trading is increased due to reinvestment, which leads to an increase in market liquidity.
Securities lending is the process by which you can loan different types of securities. It is a critical practise that has many positive implications in the stock market. The transaction can be beneficial to both the lenders and the borrower.
To learn more about securities lending or apply for a Demat Account at HDFC Bank, click here.
Read more about G-Sec bond investing by clicking here.
*Terms and conditions apply. The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. This is an information communication from HDFC bank and should not be considered as a suggestion for investment. Investments in securities market are subject to market risks, read all the related documents carefully before investing.