Business and Personal Finance Dictionary

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• SECURITIES LENDING
  
  The temporary transfer of securities from an investor’s portfolio to a counterparty borrower. The counterparty may borrow to cover securities transaction fails (securities sold but for some reason unavailable for delivery to the buyers), short sales, or other trading activities such as arbitrage. While corporate stocks used to be the most common securities lent, U.S. government and agency securities now comprise a major portion of this activity. Securities loans are usually secured by the pledge of U.S. government or agency bonds. Alternatively, cash or letters of credit may back some securities loans. The value of the collateral pledged exceeds the value of the securities lent by an agreed-upon collateral margin. When a securities loan is terminated, the securities are returned to the lender and the collateral is returned to the borrower. The two main risks in securities lending are counterparty risk (a form of credit risk) and reinvestment risk (a form of interest rate or market risk).
  
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