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1. What is securities finance?

Securities finance is the temporary transfer of a security or bond from one market participant to another in return for a fee.  This enables the borrower, who pays the fee to meet settlement obligations and facilitate a number of market strategies involving short selling.

The loan is always transacted with full title transfer and collateral can be provided as cash or non-cash.  When collateral is non-cash this can be managed with full reciprocal title transfer or via a pledge structure

2. Why would a firm participate in securities lending?

Lenders tend to be institutions who have asset portfolios they are holding, and participate in order to generate additional revenues.

Borrowers tend to be banks that have settlement obligations on behalf of clients, or act as prime brokers for hedge funds

How do regulators view securities lending?

In recent years global regulators have increasingly recognise securities lending as a critical part of functioning markets and indeed it is a requirement to allow securities lending to be considered a developed markets.  Securities lending aid settlement of transactions and therefore contributes to efficient markets.  Regulators also recognise the transaction as a way of moving eligible collateral around the market to meet increased regulatory collateral requirements

3. What are the risks in securities lending?

The key risk in securities lending is the risk that your counterparty defaults and is unable to meet their contractual obligation to return securities that have been lent.  For this reason collateral is always provided to mitigate this risk.

Other risks include operational errors causing failing sales and missed corporate entitlements.  These are mitigated by robust controls and process

4. What is the difference between stock lending, securities lending and securities finance?

Stock lending and securities lending are the same thing, with securities and stock being the same thing.  Although securities finance is often used n the market to mean securities lending, it is recognised as including other transaction types such as repo/reverse repor and buy-sell backs

5. What is a securities lending program?

Securities lending program describes the model that lenders use to access the markets.  This could be directly or through a third part specialist firm, but the most common model is via a custodial agency lending program

6. What is a securities lending agent?

A Securities lending agent is a firm that facilitates securities lending on behalf of a client.  Agents do not take any principal risk although some may provide some level of additional protection via an indemnity

7. What is a GMSLA?

GMSLA stands or Global Master Securities Lending Agreement as is the most common form of securities lending agreement used in the European markets.  Maintained by The International Securities Lending Association, the GMSLA is a standardised master agreement that enables lenders and borrowers to agree broad terms for all future transactions prior to any trading.

8. What is SFTR?

SFTR stands for Securities Finance Transaction regulation.  It is a European wide regulation and applies to securities lending repo, margin lending and other transactions with similar characteristics.  The key articles of note are Article 13 and 14 which deals with transparency between parties of the risks incurred when giving or receiving collateral and Article 4 which deals with the obligations surrounding the reporting of transactions to the regulators.

9. Who does SFTR impact?

Under Article 4 SFTR is applicable to the following:

  • SFT counterpart established in EU and all its branches
  • Non-EU SFT counterpart where a branch is within the EU
  • Management companies & managers of UCITS/AIF
  • Counterpart engaged in collateral reuse

10. When will SFTR impact me?

The requirement to report transactions is being phased in across firms depending on their categorisation as per below.  However it should be noted that most firms will need to be able to provide certain data to their counterparty’s of their reporting timeframe precedes yours.

Report Phase 1 – 11 April 2020: Investment firms & credit institutions

Report Phase 2 – 11 July 2020: CCP & CSD

Report Phase 3 – 11 October 2020: Insurance, UCITS, AIF & pensions

Report Phase 4 – 11 Jan 2021: Non-Financial Companies

11. What is CSDR?

CSDR stands for Central Securities Depository Regulation and is directed at CSD’s as a critical part of market infrastructure.  From a practitioners perspective CSDR introduces a European wide mandatory fine and buy-in regime for the first time and via these, it has potentially costly implications for securities finance activity.

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