Securities lending, part 1: basic transactions and participants

The lending of securities - U.S. government bonds, corporate bonds, equities, and international securities of all types - has grown dramatically in the past decade. According to a recent survey conducted by RMA's Securities Lending Committee, commercial banks in the U.S. act as agents and principals in transactions exceeding $100 billion everyday. In the early 1980s, the well-publicized failures of two securities firms, Drysdale and Lombard Wall, focused attention on the risks involved in lending securities. As the authors of this article point out, these failures extend beyond counterparty risk to include a range of operational, product, and market risk elements. The increasing globalization of the capital markets has forced participants to analyze the risks in operating in markets where settlement procedures, liquidity, and reporting may differ widely. In this two-part article (Part 2 will appear in the March issue), the authors explain the mechanics of securities lending and the risks borne by the various parties to securities lending transactions. (Reprinted by permission of the publisher.)