Securities Borrowing & Lending
SBL refers to the borrowing and lending of securities listed on the exchange. The elements of this transaction are:
- The borrowing of securities for a period of time or open-ended.
- The borrower simultaneously or previously provides the lender with collateral.
- The lender earns a fee (or returns on the reinvestment of cash collateral) as consideration for the loan of the securities
- An outright disposition of the securities by the lender of the securities to the borrower
- The lender may recall the loaned securities at any time during the loan, after serving adequate notice;
- 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.