Equity Stock Borrow/ Lend - key risks and features

MiFID II

Securities lending/borrowing is the act of loaning a stock or other security. Securities lending requires the borrower to put up collateral (102% or 105% of the securities value), whether cash, security or other. This is often maintained through a periodical mark-to-market based on the value of the underlying securities. 

When a security is loaned, the title and the ownership are also transferred to the borrower. The borrower agrees to 'make good' the lender, as if the lender had never lent the securities. As payment for the loan, the parties negotiate a fee, quoted as an annualized percentage of the value of the loaned securities. If the agreed form of collateral is cash, then the fee may be quoted as a "rebate", meaning that the lender will earn all of the interest which accrues on the cash collateral, and will "rebate" an agreed rate of interest to the borrower.

Key risks and features

  • Market Risk

    • There is no inherent market risk associated with this product, however fluctuation in the market valuation of the underlying equity may result in an increased collateralisation requirement, see credit risk for further information.
  • Credit Risk

    • By entering into a bilateral securities lending contract a client is taking on a credit risk to Investec Bank plc on either the return of cash collateral or the equivalent equities in question. Against this exposure the client is collateralised by the equities/cash. This is managed by collateral calls as necessary in order to maintain an acceptable level of over-collateralisation in line with risk management protocols; normally 102%-105% of the equity value. In the event that Investec should default on its obligations or become insolvent a client may not receive back the equities or collateral (as appropriate); the client can monetise the equities or use the cash collateral to purchase replacement equivalent equities to minimise loss.
  • Volatility Risk

    • In adverse market conditions, volatility can increase and this will lead to greater collateralisation calls resulting in a larger placement/receipt of cash collateral. In normal market conditions, volatility in equity markets will vary between individual equities.
    • In more volatile market conditions clients may be subject to a wider spread with regards to pricing available.
  • Liquidity Risk

    • Equity Stock Borrowing & Lending market liquidity is dependent on the underlying equity in question and market appetite at the point of trade.
    • In markets with less liquidity, clients may be subject to a wider spread with regards to pricing available.
  • FX Risk

    • Equities Stock Borrow/Lends may be collateralised in different currencies to the underlying equity if agreed in the bilateral contract and, as such, you may be exposed to fluctuations in FX rates if you collateralise an equity priced in a different currency to the collateral used.
  • Concentration Risk

    • Concentration Risk is not applicable to these products.
  • Conflicts Risk

    • Investec may take and /or hold positions that conflict with those of our clients, more details around the treatment and execution of client orders can be found in the Order Execution policy which can be found on the website.
    • Conflicts arising from Investec’s business model are managed through internal controls and processes and is detailed in the Conflicts of Interest Policy.
  • Transparency

    • Equity markets are very transparent with primary issuance of equity having to comply with stringent disclosure rules and near-live prices being accessible from a number of public sources.
    • Certain emerging markets securities may have lower levels of transparency due to varying levels of regulatory requirements.
    • Equity stock lending markets are less transparent as they are OTC contracts negotiated bilaterally. It can, therefore, be challenging to form an independent assessment of a contract’s fair value.
  • Margin Risk

    • Margin Risk has been discussed under Credit Risk above.
  • Contingent Liabilities

    • Contingent Liabilities are not applicable to this product.
  • Exit Costs

    • Early exit fees are not applicable to this product.
  • Leverage

    • Leverage is not applicable to this product.
  • Interest Rate Risk

    • Interest Rate risk does not have a direct impact on equity price but may impact the profit and loss of the issuer company if they are affected by changes in interest rates.
    • The fee/rebate charged for this product is often linked to an underlying interest rate, as such the Client may be exposed to interest rate risk.