Banking Transparency: Securities Financing

Margin lending and securities lending are two widely used instruments in investment banking. Both are necessary to maintain capital market liquidity. While margin lending deals with liquidity from the capital availability side, securities lending tackles it from the equity side, thus balancing the market efficiency equation. The profitability of investments in financial assets and their derivatives can be amplified through the use of both leverage resources.

Securities lending is a service that allows clients to lend their assets in exchange for a fee. The customer retains beneficial ownership of the assets, and counterparty risk is mitigated by the receipt of collateral from the borrower. Demand for securities is driven by external factors (short sales, hedging interest, loan supply shortages, or corporate events). The higher the demand for a security, the higher the fee.

The concept of securities lending can be applied to define securities finance. Securities finance is the process of using a security to finance a particular transaction. When investors want to engage in a specific type of market activity, they enter into a securities lending contract, borrowing a series of securities on which a fee is charged, in order to earn profits.
Margin lending is a flexible secured financing solution that allows customers to increase their purchasing power by using their own portfolio as collateral. There are generally three main use cases:

  • purchase an eligible security (listed stocks, bonds, ETFs or mutual funds) with margin;
  • use the collateral value of an existing portfolio of eligible securities to purchase other eligible securities;
  • withdraw cash against the collateral value of eligible securities.

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