Regulatory Responses to Perceived Issues in the Securities Lending Market

Institutional investors, including pension and mutual funds, have historically viewed securities lending as a relatively low-risk method to increase the returns on their securities portfolios. In a typical securities lending transaction, one party (the securities lender) loans specific securities to the other party (the securities borrower) in exchange for collateral. To the extent that non-cash collateral is used, the securities lender receives a loan fee under the transaction. However, to the extent that cash collateral is used, the securities lender pays a cash collateral fee (also know as a rebate fee) to the securities borrower. Thus, an implicit element of cash collateralized securities loans is the reinvestment of the cash collateral by the securities lender or by an agent of the securities lender.¹