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13. What is the difference between repo and securities lending?
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Securities lending, like repo, is a type of securities financing transaction (SFT). The two types of instrument have many similarities and can often be used as functional substitutes for each other.

In a securities lending transaction in the international market, as in repo, one party gives legal title to a security or basket of securities to another party for a limited period of time, in exchange for legal ownership of collateral (although it is also possible for the collateral to be pledged and there are still uncollateralized securities loans). The first party is called the lender, even though he is transferring legal title to the other party. Similarly, the other party is called the borrower, even if he is taking legal title to the security.

The collateral in securities lending can be either other securities or cash (securities lending against cash collateral looks very much like repo). The borrower pays a fee to the lender for the use of the loaned security. However, if cash is given as collateral, the lender is obliged to reinvest the cash and ‘rebate’ an agreed proportion of the reinvestment return back to the borrower. In this case, the lender usually deducts the borrowing fee he owes from the rebate interest that he pays to the borrower, rather than paying it separately, so the fee is implicit in the rebate rate.

A key difference between repo and securities lending is that the repo market overwhelmingly uses bonds and other fixed-income instruments as collateral, whereas an important segment of the securities lending market is in equities.

Because the securities lending of equity transfers not only the legal ownership, but also the attached voting rights and corporate actions, it has become convention in the securities lending market for loaned securities (both fixed income and equities) to be subject to an express right of recall by the lender, so that he can recover securities if he wishes to exercise voting rights or respond to corporate actions. In contrast, unless a termination open is specifically agreed between the parties, repo does not allow a seller to recall his securities during the life of a transaction.

Another difference between repo and securities lending is that most repo is motivated by the need to borrow and lend cash, whereas securities lending is typically driven by the need to borrow securities. However, there is an overlap between securities lending and the specials segment of the repo market, which is also driven by the demand to borrow particular securities. And securities lending is sometimes used by securities investors to raise cash.

The repo market in Europe is represented by the European Repo and Collateral Council (ERCC) of the International Capital Market Association (ICMA), which publishes the most widely-used model contract for international and many domestic repos, the Global Master Repurchase Agreement (GMRA) (see question 19). The securities lending market in Europe is represented by the International Securities Lending Association (ISLA), which publishes the most widely-used model contract for international securities lending, the Global Master Securities Lending Agreement (GMSLA).


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