Global Securities Lending Market Put At Around $50m

The international market for securities lending is estimated to be between $40 - $ 50 million. According to a study done by M Thiripalraju, dean, UTI Institute of Capital Markets, the top 10 equity lenders (international) are State Street Bank, Wells Fargo, UBS, London Global Securities, JP Morgan, Barclays Cater Allen, Paribas, SBC Zurich, Paine Webber, and Bankers Trust Company.

The key lenders in stock lending worldwide are pension funds, investment banks, insurance companies, custodian banks and government institutions. Borrowers include broker/dealers, investment banks and hedge funds.

The intermediaries in the international market are generally called lending agents, brokers (who are addressed as principal) and special settlement institutions. However, in India there has to be an intermediary registered with Sebi.

 

According to Thiripalraju, it is the convention in the international markets that the lending and borrowing of equity is called securities lending or stock borrowing, and the lending and borrowing of funds is called repo or reverse repo. In reality, the picture is more complex because tax and legal constraints can be important determinants of whether lending of equity is structured around repo, buy or sell language or borrow or lend language.

Within the securities trading arm of a bank there are desks. Those which lend or borrow securities are called securities lending or borrowing desks while those which are lending and borrowing funds are called repo desks. An institution such as a pension fund, insurance company or asset manager on the other hand, will view securities lending as an umbrella term embracing the lending out of both bonds and equity, often predominantly bonds.

The core group of markets in the international securities lending are US, Germany, Japan and to a lesser extent, France. There is a group of markets such as Italy, Spain and Sweden where borrowing demand is events-driven. For example, by arbitrage opportunities in relation to rights issue. In South East Asian markets the size of foreign holdings willing to lend is small and thus so is the typical deal size.

Till 1983, securities lending was not possible in Switzerland because a loan of securities was regarded as a disposal and hence subject to stamp duty. In 1983, the tax authorities decided that a securities loan be treated as a cash loan and was therefore, no longer liable to stamp duty.

However, it only allowed the lending of securities, which were not subject to withholding tax. The tax authorities were concerned that in case of securities loan over the recorded date, the withholding tax would be reclaimed by both the lender and the holder of the security, despite having only been paid once.

The securities lending in Switzerland is legally a loan. This means that the beneficial ownership of the loaned securities changes.