Clear DefinitionsSecurities Lending
1 min read
Pronunciation
[si-kyoor-i-teez len-ding]
Analogy
Like lending a rare book to someone who pays a fee and leaves a deposit until they return it.
Definition
The practice of loaning securities to borrowers, typically for short selling, in exchange for collateral and lending fees.
Key Points Intro
Securities lending provides market liquidity but carries counterparty risk.
Key Points
Collateral: borrower provides cash or securities as security
Fees: lender earns a lending rate on collateral
Recall rights: lender can demand return of securities
Counterparty risk: reliance on borrower’s solvency
Example
Technical Deep Dive
On-chain lending uses smart contracts to lock collateral in escrow, mint wrapped tokens for the borrower, and track interest accrual. Off-chain tri-party arrangements use custodians to settle securities lending transactions and enforce recall procedures.
Security Warning
Default by the borrower can lead to collateral liquidation at unfavorable prices.
Caveat
Market disruptions can impair recall processes and collateral valuation.
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