"Applied Credit Enhancement in the Commercial Sector"
SECTION 5 - Securities Lending from a Securities Owner’s perspective
Securities lending is an additional, relatively low-risk option for investors to unlock the full potential of their portfolio. In decades of lending securities Investors and Securities owners have focused on competitive returns while balancing return, risk and cost. But if an Investor lends his securities to you, there is a Capital at Risk!
If companies like BlackRock engage their investor clients into Securities Borrowing and Lending transactions, BlackRock has to engage and guarantee to cover such potential borrower default risks in order not to lose their reputation because of "bad apple" borrowers. So whenever you try to be accepted for a transaction involving valid and highly rated securities, you should always remember that there are risks involved and you will have to be financially qualified to be accepted to be served.
With securities lending there is a risk of loss should the borrower default to return the securities, or due to market movements, the value of collateral held may have fallen and/or the value of the securities on loan has risen.
The market is organised through platforms which build and enable a proprietary securities lending infrastructure so that a lending activity is executed in the Investor or Securities Owner’s best interests and with prudent risk management. A basis for skilful risk management builds the Securities Borrowing and Lending Agreement. There is a conservative, low-risk approach and the integration of capabilities of our dedicated research, trading and risk management.
Only highly creditworthy borrowers based on conservative credit standards defined by a risk assessment team can qualify and are considered to be served in this Securities Borrowing and Lending Transaction.
Benefits of Securities Lending
Securities lending is a way to unlock additional value of a portfolio of an Investor or Securities Owner. The Securities Lender will collect higher returns than would otherwise be received. Investors may benefit from securities lending in the form of better performance. How? Additional income is generated through the fee that it charges for loaning securities to a borrower.
Risks of Securities Lending
But there is a clear borrower default risk. Since the process involves the actual lending securities, there is a risk that a borrower fails to return a borrowed stock or bond. You can easily see that there is also another side of the coin. It is true, an investor aims for additional profits if he provides his own securities or if he actually buys additional securities to back up a client’s Bank Guarantee or Standby Letter of Credit, but he actually carries great risks:
- if a client does not follow through with a transaction
- if a client’s receiving bank does not send the conditional payment
- if the receiving bank does not return the instrument in case the beneficiary client defaulted on loan re-payments
If companies like Blackrock engage their investor clients into Securities Borrowing and Lending transactions, they engage and guarantee to cover such potential borrower default risks in order not to lose their reputation because of “bad apple” borrowers.
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