Whenever an agent lends out a certain certificate of financial protection to a party on the condition that it has to be returned at a certain point of time the process is called lending of securities. The loan often acts as a security pledge. This process enables a dealer or broker to be able to encash his properties by lending them out.
There is a possibility of increased returns from his properties, thus. It could be noted that the properties engaged in these transactions by the respective individual agents or houses are actually the ones belonging to their clients. Usually the short sellers are the biggest clients of such services.
The primary objective behind such efforts is to generate sufficient amount of funds over a short sale business. The amount generated, thus, serves as an additional income on the actual earnings. Usually the necessity for such a transaction occurs when these short sellers need to fork out a short sale.
The securities are taken from the margin-account of another client, or even borrowed from another agent at times. The stock of an agent might come in handy on such occasions as they form a viable source.
This form of transaction is an attractive way to up one’s financial assets.
The type of collaterals pledged in these transactions is usually an amount, which is equal to the market price of the securities that are on the line. This type of a business does not call for any premium or interest. The Securities and Exchange Commission has made it a law that before certain securities are engaged in transaction there has to be a permission, of the owner of that security. As if by practice the contracts as well as the respective parties involved have to be aware of the same. A mention in the contractual is expected as well.
The most creditable borrowers are given importance in such transactions. The entire process is carried out at par with or better than the present market rate. The objective of the premier companies in this field is to employ as low a rate of collateral as possible. They look to retain the principal while trying to enhance the returns. They also try to minimize the factor of the size of portfolio as much as they can while trying to lend securities.
Last Updated on : 26th June 2013