CFM17055 - Stock loans: background

Introduction to stock lending

Stock lending is a practice that has developed to assist market makers and other security dealers to obtain securities (shares and loan securities) to meet deliveries on sales of those securities, when the dealer has insufficient stock of its own to meet the delivery. As well as having the right to have the `borrowed' stock replaced at a future date with securities of the same kind and amount, the lender will normally:

• receive payments (known as manufactured payments - CFM17305) equivalent to any dividends, interest or other rights that have arisen on the securities in the meantime.
• receive a fee for `lending' the security. The fee will normally be calculated at an annual rate and will be based on the value of the securities borrowed. The amount of the fee will also depend on the demand for borrowing the particular securities at the time.
• require collateral from the borrower, either in the form of cash or other securities.