Finance Domain - Securities Lending 1

Hi,

In addition to the previous post on Securities Lending, this post summarizes who are involved and what are all operations involved in the “Securities Lending”.

LENDER	BORROWER
- Lends securities to Borrower against some Collateral. - Collateral can be Cash or Non Cash (other securities – movable collateral which has monetary value equal or greater than securities lend)	- Borrows securities from Lender against Collateral
- Lender can earn or make money out of the stock which he does not want to sell. - Also, he can earn more from the type of collateral provided by Borrower	- Borrower can use this stock to fulfill his requirements like – to get position of directors or to elect his candidate etc. - Also, he can lend these shares to someone else with more charges.
- Lender can ask to return the securities at any point of time between the contract period - It is call “Recall”	- Borrower can return the borrowed securities any point of time between the contract period - It is call “Return” or “Borrow Return”
CASH COLLATERAL	NON-CASH COLLATERAL
- In case of Cash collateral, Lender have to pay a rebate to the borrower - It may be a small % of profit Lender earns during the contract period by investing the cash in the market. - This is called rebate.	- In case of Non-Cash collateral Borrower have to pay lending fee
- In cash collateral Lender may ask for cash more than the loan value for credit default risk - Say if loan value is 2000, then borrower has to pay 2200 - This excess 200 amount is called “Margin”	- In non-cash collateral, Lender may consider the security value as less than its present value - E.g. if X security is given as collateral - Value of X is 20, then lender may consider it as 18 - So borrower has to give 2000/18 no of shares as collateral - Then 2 will be the “Haircut” for that securities given as collateral
- If lender lends 50 shares and share price is Rs 100, then - Loan Value – 5000 - Loan Price – 50	-
EQUITY	BOND
- When Companies requires money, they opens two types of shares, Equity and Bond
- Holder is nothing but an owner of the company with that much amount. - Holder gets the profit share called Dividend - It is not mandatory to pay Dividend to the holder; company may invest that amount in expanding. - If profit is more then after giving Coupon, Dividend can be more than the % of profit per share - Holder involved in Profit or Loss share.	- Holder is the creditor of the company - Gets the fixed amount of returns based on the number of Bonds, called Coupon - Company has to pay Coupon - If profit is more then Bond holder still gets the same amount. - Holder does not takes part in the Profit or Loss, company is bonded towards paying Coupon else one can sue against company.

Thanks,

Paresh Bhole