Securities lending is the market practice where securities are transferred temporarily from a securities lender to a securities borrower for a fee.
Securities lenders are generally large institutional investors including investment companies (for example, mutual funds or ETFs), central banks, sovereign wealth funds, pension funds, endowments, and insurance companies. Securities lending can generate income for the lender. This income may come from the fees paid by the securities borrowers. It may also come from reinvesting the cash paid by the securities borrowers as collateral for the loan. The securities lender may reinvest this cash collateral, usually in low-risk interest-bearing securities.
Securities borrowers are primarily brokers and dealers. Brokers and dealers borrow securities for their market making activities or on behalf of their customers. Brokers and dealers who borrow securities typically re-lend those securities or use the securities to cover fails to deliver or short sales arising from proprietary or customer transactions. While the identities of the ultimate securities borrowers are usually unknown, hedge funds are understood to rank among the largest securities borrowers. Brokers and dealers may also lend (1) securities that are owned by the broker or dealer, (2) customer securities that have not been fully paid for (i.e., have been purchased with a margin loan from the broker or dealer), and (3) the securities of customers who have agreed to participate in a fully paid securities lending program offered by their broker or dealer.