Brief History Of Securities Lending
Securities lending happens whenever an owner of a financial tradable asset loans his or her asset to a borrower, most often with a fee.
As a refresher, securities are financial instruments proving possession of whether ownership in a company, i.e.
like shares and the equity markets, to ownership of debts like bonds.
There are a lot of reasons why Securities Lending is used, but the main purposes are:
- To hasten the settlement of a trade (buying and selling stocks or debts.)
- To give a quick cash intake for the lender (both regarding the lending fee and the interest of lending the security) and a temporary ownership of securities for the borrower.
- To ensure timeliness of financial movements (brokers do this so that their clients portfolio will show the
changes even if settlement may take days)
Brief Historical overview
The first securities lending transaction was made in London in the 1960s. This happened since brokers did not have
enough certificates to settle short-term trades as per this paper and this introduction.
In the 1970s, strategies relying on borrowing security like arbitrage and short selling came up. In fact, US financialindustry top movers, brokers and banks, have a great agreement where bank loan capital so that banks will not be
charged by capital charges and that brokers can get a quick infusion of needed cash.
In the 1980s, securities lending is starting to get global; hedge funds started getting bigger and more connected to
the industries and banks while countries start legislation for short-term cash and money market security lending
(by money market we mean financial transactions that lasts for a short time like a day or two.)
In the 1990s, Investment banks started to increase their international exposure by increasing their portfolios to
include currencies and government debts. Central banks have great say over the rise and fall of securities with the
control of key interest rates; volatility is increased tremendously. The Asian currency crisis has led to countries
imposing restrictions over short selling, particularly currencies.
The new millennium, 2000s, shows large development. More specializations arose, i.e. forex swaps, an almost 24/7
financial operation and deregulation and harmonization of taxes and interest rate. Outsourcing has developed,
creating third parties as the securities lending agents and increasing reliability of the delivery of financial instruments.
Securities lending has improved leaps and bounds, but one thing has remained; the possibility of profits.
Knowledge is the best weapon one can have in the financial world.
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