Legal Title & Benefits

When securities are lent, the legal title of the securities passes from the lender to the borrower. The lender regains title when the securities are returned from loan.

Although the lender temporarily loses ownership, he still retains the benefit of any corporate actions or income payments associated with the securities on loan. However, a lender will lose the voting rights associated with the stock.

The lender has the right to recall securities on loan at any time, unless otherwise agreed with the borrower.

Contractual Agreements

An SBL transaction can be entered in as either agent or principal. An agent lends securities on behalf of the beneficial owner and takes no position on their books. However, when acting as principal, positions are reflected across their books.

Before any SBL transaction is entered into, contracts between the lender and the borrower must be in place. There are two types of contracts:

• Master Securities Lending Agreement
  
• Securities Lending Authorisation Agreement

a) The Master Securities Lending Agreement

The Master Securities Lending Agreement exists between the lender and the borrower. Most industry participants use standard industry agreements that outline the relationship and responsibilities of the lender and the borrower. These standard agreements cover the lending of securities in any market (e.g. France, Germany, Japan). Examples of these standard agreements are the PSA agreement in the United States and the international OSLA agreement.

If there are any market anomalies that are not covered by the standard agreement, it is necessary to draw up an additional document (commonly known as a rider or addendum). Read in conjunction with the master agreement, an addendum covers the point in question.

b) Securities Lending Authorisation Agreement - required when acting as agent only.

The second type of agreement is the Securities Lending Authorisation Agreement. This agreement is required where a lender lends the securities on behalf of the owner of the securities. The lender is acting as an agent.

This agreement outlines the relationship between the owner of the securities and the agent lender, and the responsibilities of the agent. The authorisation agreement also covers which types of collateral and cash collateral investment policies are acceptable to the owner.

Risk Management

Although securities lending is a low risk activity, there are risks that must be taken into consideration before entering into any SBL arrangement. These risks include but are not limited to counterparty risk, regulatory risk and market risk. The management of these risks should be an ongoing process and is imperative to the success of any lending programme.

• Counterparty Risk

Lenders seek to only lend securities to high quality borrowers, to minimise the possibility of default. Factors considered are the financial strength of the borrower and quality of it's management and financial controls. After a credit review, the lender determines a credit limit for each borrower relationship. Borrowers may also limit the amount of securities borrowed from any lender.

• Regulatory Risk

When entering into a securities lending transaction, participants should at all times be aware of any regulatory constraints.

• Market Risk

Market risk is made up of many components including price volatility, market liquidity and exchange rate fluctuations. Due to the global nature of the SBL business, strong trading/operations and control systems are essential in managing this risk.