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14. 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 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. 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 though he is taking legal title of the security.

The collateral in securities lending can either be other securities or cash (securities lending against cash collateral looks very much like a 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 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 most repo is for general collateral (GC) and is therefore motivated by the need to borrow and lend cash (see question 11), whereas securities lending is typically driven by the need to borrow securities. But there is therefore an overlap between securities lending and the ‘specials’ segment of the repo market, which is also driven by the demand to borrow particular securities (see question 12).

Another important difference 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 securities lending transfers not only the legal ownership of equities, 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 a right of recall by the lender, so that he can recover securities if he wishes to exercise his voting rights or respond to corporate actions. In contrast, unless a right of substitution is specifically agreed between the parties at the point of trade, repo does not allow a seller to recall his securities during the life of a transaction.

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 legal contract for international 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 legal contract for international securities lending, the Global Master Securities Lending Agreement (GMSLA).

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