can someone explain in lamens terms, what is security lending?

Question

and how does it work??????? I don't get it

Answer 1

I assume that you mean "lay man's terms"

I assume that you are talking about the Repo Market. In the Repo Market two parties enter into a contract. One agrees to sell a security now and buy it back at a slightly higher price in the future.

While this is technically a sale and a repurchase, in reality it is a short term collateralized loan.

Let's examine why someone might want to sell a security only to buy it back. Suppose you are a large bank and your deposits went up. You are required to deposit more cash with the Federal Reserve. You could sell some of your securities to raise cash for this -- but you might not be able to unwind some of your positions at a good price. Instead, you can lend out some of your securites in the Repo Market for a few days. You take that cash & deposit it with the Fed. Then -- over the next couple of days you sell something else to get the cash that you need & buy back the security. Because your loan is backed by securities, you can get a really favorable rate.

Who would be on the other side of this? Suppose you are a corporation with extra cash. Instead of putting it into the bank, you can lend out your money in the Repo Market. Because you get the security in return, you know your investment is safe.

Here is another situation -- suppose that you are an investment bank and you just agreed to sell a treasury bond to a client. You need to deliver the bond the next day. But you are having trouble finding this bond in the market (or for some reason the market is trying to charge too much). Instead, you can borrow the bond in the Repo Market and deliver it to your client. Then in a few days, you buy the bond in the market & sell it back to the Repo counterparty.

The reason for the trade affects the repo rate. If the trade is being driven by people who want to borrow the security, then the interest rate charged is lowered -- this is called "On Special." If it is driven by people who want money -- then the rate is not put on special.

There are lots of other reasons to trade in the Repo Market. The Fed does it to control interest rates. Others do it to fund positions and get exposure to a market.

Answer 2

In the most general term, the term securities refers to stocks and bonds.

Securities lending is a practice where one party lends the stocks or bonds they own to another party. For this, the borrower of the securities agree to pay some fee (you may think of it as "rent") to the lending party.

There are several reason why this practice happens. The most common reason is because the practice of "shorting". Shorting happens when one sells securities they don't own with the hope that they can buy the securities in the future at a cheaper price than the price they sell them now. Since they don't own the security they want to sell, what they do is they borrow the securities and sells them now, and simply pay the "fee" for borrowing the securities. Later when the price of the securities have gone down (as they hoped), they will re-purchase the securities and return them to the lending party.

Answer 3

collateral (secured asset) is used in the lending/borrowing of money