Securities Borrowing & Lending

Securities Borrowing & Lending

SBL refers to the borrowing and lending of securities listed on the exchange. The elements of this transaction are:

  1. The borrowing of securities for a period of time or open-ended.
  2. The borrower simultaneously or previously provides the lender with collateral.
  3. The lender earns a fee (or returns on the reinvestment of cash collateral) as consideration for the loan of the securities
  4. An outright disposition of the securities by the lender of the securities to the borrower
  5. The lender may recall the loaned securities at any time during the loan, after serving adequate notice;
  6. At the end of the loan period, the borrower returns replacement securities to the lender; which are of the same number and type as the original securities.

SBL is important in managing an ETF in the following ways:

  • To facilitate PDs to perform the creation and redemption functions in the primary market.
  • To offset temporary imbalances in supply and demand of ETFs or constituent stocks.
  • Perform an important market stabilising function
  • Act as arbitrageur to ensure pricing efficiency by trading price disparity between ETFs and stocks.