Last time we looked at the contractual and collateral rules pertaining to securities lending by prime brokers. We’ll next explore fees, dividends and defaults as they relate to securities lending.
Recall that a Securities Lending Agreement is the contract required before shares are loaned. The agreement states that in the event that cash collateral is pledged, the borrower is entitled to a rebate on the cash at such rates as the borrower and lender agree. In the event that non-cash collateral is pledged, the borrower agrees to pay a fee to the lender at rates agreed upon by the borrower and lender. The fees and rebates are computed daily based on each trades value. This is the equivalent to the quantity (or par value in the case of government securities) multiplied by the rate in basis points annualized usually on an actual/360 basis.
The agreement may state that the fees are due by the fifteenth of the following business month (though most pay within thirty days), while for repo trades, the fee in the form of interest is due upon termination, re-price, or partial return of the repo. Continue reading “Securities Lending, Part Two” »