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Securities lending


Gopinath
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I am not familiar with it from the standpoint of retail investors.  I have some familiarity with it on the institutional size, but it's been a while.  The biggest risk is counterparty risk.  That is, that you lend the securities, whoever you lent them to fails (goes bankrupt) and you don't get your securities back or only with tremendous cost, delay and aggravation.  Frankly, for the minimal amounts I am sure you would get doing it retail, I just don't see the point in doing it.  But then again, as I said, I have no familiarity with it being done on the retail side.

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I am not familiar with it from the standpoint of retail investors.  I have some familiarity with it on the institutional size, but it's been a while.  The biggest risk is counterparty risk.  That is, that you lend the securities, whoever you lent them to fails (goes bankrupt) and you don't get your securities back or only with tremendous cost, delay and aggravation.  Frankly, for the minimal amounts I am sure you would get doing it retail, I just don't see the point in doing it.  But then again, as I said, I have no familiarity with it being done on the retail side.

So on the institutional side is it safe to say that you would only lend through a reputable party who either asborbs the counter party risk or alternatively to a counter party whose credit is not in anyway suspect?
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I am not familiar with it from the standpoint of retail investors.  I have some familiarity with it on the institutional size, but it's been a while.  The biggest risk is counterparty risk.  That is, that you lend the securities, whoever you lent them to fails (goes bankrupt) and you don't get your securities back or only with tremendous cost, delay and aggravation.  Frankly, for the minimal amounts I am sure you would get doing it retail, I just don't see the point in doing it.  But then again, as I said, I have no familiarity with it being done on the retail side.

So on the institutional side is it safe to say that you would only lend through a reputable party who either asborbs the counter party risk or alternatively to a counter party whose credit is not in anyway suspect?

 

 

I am not sure what you mean by lending through a reputable party who absorbs the credit risk.  Do you mean that a 3rd party guarantees the transaction?  In terms of a counterparty whose credit is not in anyway suspect, after the financial crisis who would that be?  There isn't anyone that is 100% immune from bankruptcy.  Remember that Lehman would have fallen into that category before they pulled the plug.  With all the big banks whenever someone questioned the status as a counterparty, everyone used to say "c'mon, it's Lehman [or insert name of bank], what's gonna happen?"  I never really liked securities lending to be honest.  There are uses for it, but generally people do it as a way of making a few extra bp.  So you lend out tons of your securities and you make pennies.  I only thought it was ok if it was fully cash secured, but for obvious reasons no one wants to cash secure it.  Sometimes you could do it though and that minimized the counterparty risk; at least you had something to bargain with when the trustee came calling.  On the retail side, who is going to cash secure.

 

 

 

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So who the heck is doing all the lending then where is the borrow if many institutional shareholders feel this way. I frankly have never understood why someone would want to lend out their positions unless they were willing to buy said shorted securities from the party doing the borrowing. Selling the rope to the guy wanting to hang himself so to speak.

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Sorry, I don't know the answers.  The original question was about someone doing it as a retail investor.  Obviously the brokerages are lending to each other on the equity side.  They will have master securities lending agreements in place.  At that level there will be some kind of collateral provision.  On the debt side for securities that weren't necessarily fungible, it was trickier.  Someone else on the board may have more current experience with all of this than I do.  Mine is a bit dated.

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The one time I lent out securities, the brokerage provided a letter of credit for the full value of the securities +25%. I was receiving something around 12% per year, on a monthly basis. The broker was lending it out at around 25%. Unfortunately, this didn't last long because the shorts covered roughly 4 months after I started lending and the broker was no longer interested in borrowing my stock.

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