Securities Lending Law and Legal Definition

Securities lending is a market practice in which the securities are temporarily transferred from one party [lender] to another party [borrower]. It is loan of a security. The terms of the loan will be governed by a Securities Lending Agreement. This is to ensure that the borrower provides the lender with collateral, in the form of cash, government securities, or a Letter of Credit of value equal to or greater than the loaned securities. The borrower is under an obligation to return the loan either on demand or at the end of any agreed term.

Lending of security is legalized and it is being regulated by the securities market. Most securities market mandate that the borrowing of securities should be conducted for special purposes like:

1. to facilitate settlement of a trade;

2. to facilitate delivery of a short sale;

3. to finance the security; or

4. to facilitate a loan to another borrower who is motivated by one of these permitted purposes.

When a security is loaned, the title and the ownership is also transferred to the borrower. The ownership and the possession of the security need to be returned on a specified date or on demand [RSA 402:28[m]].