Trading of Securities Lending

Stock Loan Trade Fundamentals

• Structure of the Trade
  • The Fee and how its paid
  • The Stock being loaned
  • Basic Haircut
  • Shares as Collateral
  • USA Stock Loans (Cash as Collateral)
    • Rebate rates
  • Case studies
• Lenders
  • Pension Funds
  • Insurance Co’s
• Borrowers
  • Hedge Funds
  • Investment Banks
• Agents
  • Global Custodians
  • Their role and how much of the fee do they get?

Sell / Buy Backs

• Very similar product, but it can very different
• Sell / Buy Back pricing

Repo

• Sale and Repurchase Agreements
• Similar, but not the same

How do you make money from Trading Securities Lending?

• Matched trades … sourcing liquidity
• Principal … buying portfolios from clients
• Agency … taking a fee from best efforts lending

MSLA (Master Securities Loan Agreement)

• How it works
• Legal v Beneficial Ownership
• Who gets the dividends?
• Manufactured Dividends
• Dividend Arbitrage
  • Price Arbitrage
  • Tax Arbitrage
  • Case studies

Short Selling

• Borrowing to Cover Short sales
• Profiting from short selling
• Exercise: Calculating the profit …. Or loss !

Securities Settlement Basics

• RTGS at a CSD
  • DvP
  • DFoP
• Multilateral Netting at the CCP
• Fails
  • Impact on Short Selling
  • Cost of fails

 Collateral

• Cash or securities?
• Margining
• Haircuts
  • Haircut calculations
  • Exercise: calculating the haircut
• Margin Calls
  • Exercise: calculating the call
  • Who makes the call and when?
• Why the Stock loan securities are delivered after the collateral

Corporate Actions

• Its not just dividends…
  • Rights Issues
  • Bonus issues
  • Stock Splits and Reversals
  • Etc
  • Missed dividends… chasing the dividend

Collateral Management

• Types of Collateral
  • Top quality Collateral v poor Collateral
  • Haircuts based on types of Collateral
  • Eg: Treasuries 2% -  Stocks 15%
  • Volatility
• Advantages and disadvantages of different types of Collateral

The Risks

• Credit Risk
  • Who is your counterparty?
  • Who is your Custodian
    • Sub Custodians
  • Operational Risk
    • Collateral is always delivered first before the loaned stock
    • Missed margin payments
    • Period of risk
  • Legal Risk
    • Trading without the correct documentation
  • Regulatory Risk
    • Breaking the Rules
    • Illegal Tax Arbitrage
  • Concentration risk
    • Collateral Management Teams
  • Liquidity Risk

• Gain a deep understanding of how a securities loan is structured
• Appreciate the role of the Securities Lending Agreement and how it affects “Legal” and “Beneficial” ownership
• Understand how “Haircuts” are used to reduce the risk to the lender
• Gain knowledge of the collateral types that can be used in trading
• Learn who is involved in these trades, such as Pension funds, Custodians , Hedge funds etc and understand their motivations
• Understand the fundamental differences between Securities Loans and Sell Buy Backs and Repos
• Appreciate the role of short selling and the potential costs
• Gain a thorough knowledge of how these trades are settled through DFoP settlement at the CSD
• Learn how Securities are traded through lending and borrowing for negotiated fees in the active market

• Securities Lending and Borrowing is essential for traders and investors who wish to take short positions. In this course we look not only at the structure of these trades but also who is involved and what are their motivations.
• You will learn how Pension Funds and Insurance Co’s are often the lenders of stock and how this dictates the structure of the trade, with collateral always being delivered first, to protect the lender.
• Course participants will learn and understand about how the Securities Lending markets operate, with Custodians playing a big role in the supply of stock.
• They will appreciate how prices of stocks to be loaned out are decided upon, and how the market is becoming increasingly digital.
• You will understand how Corporate Actions can have a big impact on trades and “Manufactured Dividends” operate.
• Participants will appreciate how Dividend Arbitrage can be achieved and the risks involved.
• gain a deep understanding of all the risks, from Credit and Market Risk, to Settlement and Operational Risk.
• This is a very practical and interactive course with many examples and exercise to ensure participant understanding.

• Traders
• Investment Managers
• Custodians
• Settlements
• Middle Office
• Risk
• Audit
• Compliance

This course takes and in-depth look at the participants and their motivations for being involved in the Securities Lending market.

We look at how the market operates, how the trades are structured and settled. We take a very hands-on approach to each step in the process and examines the benefits to different parties and the risks!

We examine every detail, from the fees charged, to how to calculate a “Margin Call” when more collateral is required.

This course is an in-depth look at the Trading of Securities Lending, right through the life cycle. From Trading to Settlement, Collateral Management, Risk and more.