The primary goal of most institutional investors, such as public pension funds, is to prudently invest their assets and develop a portfolio that will accommodate long-term financial needs. Accordingly, these investors typically hold large blocks of individual securities in their portfolio, hoping that the value of those securities will appreciate over time. Over the past twenty years, institutional investors and other large stock holders have increasingly used these long-term holdings to reap short-term profits through “securities lending” programs.

Securities lending utilizes long-term stock holdings that would otherwise sit idle by temporarily lending them out on a cash-collateralized basis and investing the cash in safe, short-term investments for a modest return. Borrowers typically use the securities to cover short positions, to hedge positions or to take advantage of arbitrage opportunities. Although the concept of securities lending dates back more than a century, the practice became widespread in the 1970s when custodial banks initiated formal programs to broker loans involving their custodial clients.

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