Submit Articles A Collection of Informative and Interesting Articles  
 
HOME WANT AN ACCOUNT? SUBMIT ARTICLES TOP AUTHORS Debt Collections (Advt.)
 

Understanding Securities Lending and Borrowing Transactions

BY: Vivek SHARMA | Category: Finance | Submitted: 2012-02-07 12:28:50
       No Photo
Article Summary: "The article gives an insight into how security lending and borrowing is done. Stock Lending and Borrowing is an important activity in equity and bond markets. As per BBA,UK following are benefits of securities lending and borrowing..."


Share with Facebook Share with Linkedin Share with Twitter Share with Pinterest Email this article




Stock Lending and Borrowing is an important activity in equity and bond markets. As per BBA,UK following are benefits of securities lending and borrowing:

• Increase the liquidity of the securities market by allowing securities to be borrowed temporarily; thus reducing the potential for failed settlements and the penalties this may incur.
• Provide extra security to lenders through the collateralisation of a loan
• Support many trading and investment strategies that otherwise would be extremely difficult to execute
• Allow investors to earn income by lending their securities on to third parties
• Facilitate the hedging and arbitraging of price differentials

Securities lending describes the common market practice by which securities are transferred temporarily from one party (the lender) to another (the borrower) with the borrower obliged to return them (or equivalent securities) either on demand or at the end of any agreed term.

Need for securities lending and borrowing arises for multiple reasons. One of the prime reasons for securities lending and borrowing is short selling of securities. Short selling of securities means selling securities which are not owned by an institution or individual. Since securities are not available with the institution, it creates need for securities lending and borrowing.

Let us understand the process of securities lending and borrowing through a simulating example which is as follows:

ABC Hedge Fund short sells 10000 shares of Picago Limited at price of $1000 each. This is done on 01-Jan-2012. Since it does not have securities, it approaches an Investment Manager Zenith Ltd. for the arranging the shares. The Investment Manager says that it will charge 75 bp for arranging securities, which is acceptable to ABC. Investment Manager then approaches Pension Fund Zooka Limited which asks for 115% collateral of the value for lending of securities with following hair cuts 1) Cash-Nil, 2) GSec- 2%, 3) AAA rated Bonds 7% and 4) Junk Bonds 30%.

It says that it will charge 3% on securities lent as fee and will charge additional 50 bp beyond 30 days. ABC agrees for this as well. ABC offers following cash and securities as collateral:
1) Cash= $40, 00,000
2) Gsec= $ 20, 00,000
3) Junk Bonds= $ 80, 00,000 ( The value falls by 12% on 30th day)

ABC after short selling shares buys the shares from market at price of $935 and returns security after 35 days to Zooka Ltd.

Calculate
1) Gains of ABC, Zenith Limited and Zooka Limited
2) Identify value of collateral,
3) after 30, day's additional collateral to be given.

About Author / Additional Info:
Visit my website http://www.healthofmywealth.com

Comments on this article: (0 comments so far)

Comment Comment By Comment Date

Leave a Comment   |   Article Views: 2670


Additional Articles:
•   What Every Manager Needs to Know About Delegation

•   An Hour at a Clinic

•   The Changing Scenario of Business and Marketing.

•   Endometriosis: Causes, Signs Diagnosis and Treatment


Latest Articles in "Finance" category:
•   DEMYSTIFYING THE ONTOLOGY OF TAXATION RULINGS IN THE GAMBIA: PART III

•   DEMYSTIFYING THE ONTOLOGY OF TAXATION RULINGS IN THE GAMBIA

•   Why is Wheeler Insurance Renewal Important and Beneficial?

•   Turn Your Skills Into MONEY

•   I'm Giving You a Raise

•   Public Sector: A Pride to Say Or a Price to Pay....

•   Internet as a Source of Income



Important Disclaimer: All articles on this website are for general information only and is not a professional or experts advice. We do not own any responsibility for correctness or authenticity of the information presented in this article, or any loss or injury resulting from it. We do not endorse these articles, we are neither affiliated with the authors of these articles nor responsible for their content. Please see our disclaimer section for complete terms.
Page copy protected against web site content infringement by Copyscape
Copyright © 2010 saching.com - Do not copy articles from this website.
| Home | Disclaimer | Xhtml |