Securities lending
Lending portfolio securities, usually to short sellers, against collateral and for a fee. The income can offset an index fund's costs, but it brings counterparty and collateral reinvestment risk.
Where you will meet it
Securities lending appears in 4 learning outcomes on the CFA syllabus. A few of them:
- Set out where ETF tracking error comes from
“Transaction costs when the index changes and cash drag from dividends awaiting reinvestment widen the gap, while securities lending income, which can offset costs, narrows it.”
- Explain why an index portfolio can drift from its benchmark and how that tracking error is kept in check
“Controls include equitising cash with index futures or ETFs, trading at the rebalancing close, anticipating reconstitution, replicating fully where cost allows and keeping turnover low; securities lending income can offset costs.”
- Discuss why bond managers use leverage, the instruments that create it, and the dangers it brings
“Leverage can be created through futures, interest rate swaps, structured notes such as inverse floaters, repurchase agreements and securities lending.”
- Identify where the returns and the risks of an index-tracking equity portfolio come from
“The manager can add a little through securities lending fees, and index investors also carry stewardship duties through proxy voting and engagement.”
See also
Practise it
Practise securities lending until it is automatic: questions that explain every wrong option.
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