Most transactions for securities lending and borrowing (SBL) involve cash, securities, or other assets. These assets will be agreed upon in advance. The lender will hold the collateral while the borrower will return the securities on the due date or take the collateral in exchange for the loan. In addition, SBL requires that both parties make up their losses by making the lenders whole through dividends and other benefits. This type of financing is a complicated business.
To avoid the costs and penalties of a failed settlement, securities lending is a great solution. Borrowers pay a fee to borrowing securities, and the amount varies by lender and type. Other costs may include additional fees for upgrading securities, raising extra cash, or switching lenders. All of these fees can add up. It's important to understand the costs and fees before securities borrowing. And be sure to understand the risk factors involved in the transaction.
The transaction between the borrower and the lender is similar to that of a loan, with the lender paying the borrower's interest. However, the interest on the cash collateral will be deducted from the remuneration for the securities lent. Generally, the lender will remunerate cash at market rate without spread and may reinvest the money during the duration of the transaction at a higher rate. There may be several variations to the contract, with some being fixed throughout and others being subject to periodic revaluation.