[2] Securities lending is an important means of eliminating "failed" transactions as well as enabling hedge funds and other investment vehicles to sell short their shares.
The NYSE used to operate a loan post, but ceased doing so in 1933 as a result of public pressure over short selling.
Until the start of 2009, securities lending was only an over-the-counter market, so the size of this industry was difficult to estimate accurately.
[6] In an example transaction, a large institutional money manager with a position in a particular stock allows those securities to be borrowed by a financial intermediary, typically an investment bank, prime broker or other broker-dealer, acting on behalf of one or more clients.
Where the lender is a pension plan, the transaction may need to comply with various exemptions under the Employee Retirement Income Security Act of 1974 (ERISA).
In order to avoid the costs and penalties that can arise from settlement failure, stock could be borrowed at a fee, and delivered to the second party.
When your initial stock finally arrived (or was obtained from another source) lender would receive back the same number of shares in the security they lent.
Highly liquid securities are considered "easy"; these products are easily found on the market should someone decide to borrow them for the purpose of selling them short.
In these types of agreements, the investor still receives any dividends as normal, the only thing they cannot generally do is to vote their shares.
The former refers to the actual lending typically of banks or brokerages to other institutions to cover short sales or for other temporary purposes.
In recent years, the Financial Industry Regulatory Authority (FINRA) has cautioned all consumers to avoid non-recourse transfer-of-title stock loans, but they enjoyed a brief popularity before the SEC and IRS came to shut almost all such providers down between 2007–2012, reclassifying non-recourse transfer-of-title title stock loans as fully taxable sales at inception (See FINRA advisory link below).
Today, it is widely accepted that the only legally valid consumer lending programs involving stocks or other securities are those in which the stocks remain in the client's title and account without sale through a fully licensed and regulated institution with membership in the SIPC, FDIC, FINRA and other mainline regulatory organizations, with their own audited financial statements.
(FINRA noted that any publicly traded major brokerage/bank that reports will need to have audited financial data available for investors); and 3) Is the institution managing the loan and accounts fully licensed and in good standing?
However, there are a few securities-based credit line programs currently available in the general market that allow access at competitive rates and terms without such advance depository or client relationships.
[12] With pressures in the industry driving for more transparency and balance sheet optimization since the global financial crisis of 2008 many more technology vendors are creating solutions to meet the impending regulations.