Glossary term

Securities Lending

Securities lending is the temporary transfer of securities from a lender to a borrower, usually in exchange for collateral and a lending fee.

Updated

May 25, 2026

Read time

3 min read

What Is Securities Lending?

Securities lending is the temporary transfer of securities from a lender to a borrower, usually in exchange for collateral and a lending fee. The borrower agrees to return equivalent securities later. The lender keeps economic exposure to the security, but the borrower receives temporary use of it.

The practice sits behind many ordinary market activities. Short sellers often need borrowed shares before selling short. Brokers may lend certain customer securities under margin agreements or fully paid lending programs. Mutual funds, pensions, insurers, and other institutions may lend portfolio holdings to earn extra income.

Key Takeaways

Securities lending allows one party to borrow securities from another for a fee.
The borrower usually posts collateral and later returns equivalent securities.
Borrowed shares are often used to support short selling, settlement, market making, or financing activity.
Lenders can earn incremental income, but they take counterparty, collateral, operational, and reinvestment risk.
Investors should understand whether their broker or fund may lend securities and who receives the lending revenue.

How Securities Lending Works

In a typical transaction, a securities lender transfers a stock, bond, or other security to a securities borrower. The borrower provides collateral, commonly cash or high-quality securities, and pays a fee or rebate spread. At the end of the loan, the borrower returns equivalent securities, and the lender returns the collateral.

The lender usually remains economically exposed to the security. If a dividend is paid while shares are on loan, the borrower typically makes a substitute payment to the lender. Voting rights can be more complicated because the borrower, as holder of record during the loan, may control voting unless the lender recalls the shares before the record date.

Why Securities Are Borrowed

The most familiar use is short selling. A trader who wants to short a stock generally needs shares located and borrowed so the sale can settle properly. Securities borrowing can also support market making, arbitrage, settlement management, and financing trades.

For lenders, the attraction is income. A long-only fund may hold a stock for years. Lending a portion of that holding can generate additional return, especially when demand to borrow the shares is high. Hard-to-borrow securities can command higher fees, although higher fees often signal greater market stress or scarcity.

Who Takes the Risk?

Securities lending is often described as low-risk when collateral is high quality and operations are disciplined. It is not risk-free. The borrower could default. Collateral could lose value. Cash collateral could be reinvested poorly. A lender may be unable to recall securities quickly enough for voting or portfolio-management needs.

Retail investors should pay special attention to account agreements. Margin account securities may be lendable under the broker's terms. Fully paid lending programs can pay investors a share of lending revenue, but investors should understand how collateral is held, how payments are treated for tax purposes, and what happens if the borrower fails.