Securities Lending

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Commonly Used Terms

All-in dividend – The sum of the manufactured dividend plus the fee paid by the borrower to the lender, expressed as a percentage of the dividend on the stock on loan.

Buy-in – A purchase of securities in the open market in order to replace loaned securities that a borrower has been unable to return.

Demand or intrinsic spread – For loans vs. cash collateral, it is a risk-free rate such as Federal Funds Open or Target less the rebate rate. It represents a measure of the demand value of the loaned security. For loans vs. non-cash collateral it is equal to the premium paid by the borrower.

General collateral – Issues that are in significant supply and are not trading special and therefore borrowers negotiate higher rebate rates.

Gross earnings – Income earned from the collateral portfolio less the amount of the rebate owed to the borrower. The difference is split between the lender and lending agent.

Gross spread – For loans vs. cash collateral, it is the difference between the yield generated on the reinvestment portfolio and the rebate paid to the borrower. This spread is comprised of the demand spread and reinvestment spread.

Indemnification – An agreement to compensate for damage or loss resulting from borrower default or operational losses. In the event that a borrower fails to return identical securities, lending agents typically provide for either the full return of the lent securities or the cash equivalent of the securities the borrower failed to return at the time of default.

Manufactured payment – When securities that have been lent out pay a cash dividend, the borrower of the securities is generally contractually obligated to pass on a payment equal to the distribution to the lender of the securities. This payment “pass through” is known as a “manufactured payment.”

Maturity gap – The difference in days between the duration of the reinvestment portfolio and the duration of the loan portfolio.

Rebate rate – The interest rate paid by a lender to the borrower on the cash collateral. This rate is negotiated and will be based on supply and demand dynamics of the loaned security.

Reinvestment portfolio – Investments with a specified yield and expected term to maturity that are purchased by a lender with cash collateral received in connection with securities on-loan.

Reinvestment spread – For loans vs. cash collateral, it is the yield on the reinvestment portfolio less an estimated risk-free rate of return.

Revenue split – The revenue sharing relationship between an account and its securities lending agent, as in a 75/25 split (i.e., 75% to lender and 25% to lending agent).

Specials – Securities that have high borrowing demand. These types of loans have lower rebate rates and higher demand spreads or intrinsic value.

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