At the highest level we know there are those that have securities to lend. We know there are those who need those securities
Motivations of the Buy side
Let us understand the motivation of each of these players in the SBL marketplace.
The Nature of Agent Lenders
As the term agent suggests, the dealer is NOT the owner. It is an AGENT of the principal – the principal is the Beneficial Owner
Understanding Borrowers & End Users
In contrast to the agent lenders, the borrowers, can assume principal risk, offer credit intermediation and take a position in the securities they borrow.
The more the brokers/ dealers that are there in the market, the more is the choice for the client. Therefore clients would like to cast their nets wider in the markets. Let us first consider the operational rationale in prime broking
Understanding Broker Dealers
Brokerages (especially the Investment Banking houses) tend to have large portfolios in their proprietary book (i.e. their own money). Learn how Broker-Dealers take positions
Drivers of SBL Transactions
The demand for repos are driven by Risk aversion among lenders and the need for liquidity among borrowers
Let us look at the required standards from the perspective of entities involved. The three entities to consider are lenders borrowers and intermediaries.
Entity Perspectives On Market Practices
In the event perspective it is important to understand the nuance of business day in a cross border operation
The lender has the exposure (to the borrower). The lender holds collateral to offset the exposure. Let us understand the important of collateral management
Defaults & Close-Outs
A borrower may default by not returning securities. A lender may also cause a default by not returning collateral. Let us look at how Defaults and Close-outs occur.
Economic Ownership & Taxation
The Securities actually move from the lender to the borrower. Only then can the borrower actually deliver the securities in settlement; that is the logic of the borrowing.
Short Sales & Cost Basis Reporting
In SBL, the customer sells first and then buys. Till the buy back is done, it cannot be known if the transaction yield in a profit or not. This session is specific to USA market practice
Securities Finance Transactions Regulation
SFTR has Three Main Themes. Transparency with Investors. Transparency on Re-Use. Transaction Reporting