We act as a securities borrowing and lending broker for our clients. Securities lending is available for institutional investors while securities borrowing is offered to all investors. Restrictions in lending is based on local legislation. The securities lending activity is fully collateralized. Collateral positions are monitored and marked to market on a daily basis.
Securities lending can also be used for financing purposes. The client lends the securities and uses the received collateral for financing purposes. The loan-to-value depends on the underlying security as well as the client credit quality.
In securities lending the beneficial owner delivers the securities to a borrower who needs them temporarily. The lender receives a premium from the loan. The securities remain on the beneficial owner’s balance sheet and the lender retains the price risk of the loaned securities. The lender retains all key rights to the securities throughout the course of the loan, and the borrower compensates the lender for all dividends or coupons paid during the loan. If the lender wants to sell the securities or attend the shareholder’s annual general meeting, for example, the lender can always recall the loaned securities at any time during the loan. The securities are then returned within three banking days. The maximum length of a securities loan is limited to one year by the Finnish legislation.
The securities loan can be collateralized with cash. The cash collateral is transferred from the borrower to the lender.
Securities are always borrowed for a specific reason. The most common motivations are listed below:
Failure to deliver
Securities are often borrowed to ensure the settlement of trades. A broker does not always own the securities they have sold and these securities have to be purchased from the market. If the broker cannot for some reason obtain the securities in time, they may be borrowed so that the sales to their clients can be completed. Delivery failures usually only last a few days and the borrowed securities are returned once the settlement issues have been resolved.
An investor can profit from decreasing prices by selling the security short. Short selling is the selling of a security that the seller doesn’t own. The security is borrowed, so that the sale can be completed on the settlement day. The loans are kept open until the price is low enough, after which the securities are bought from the market and the loans are returned. The investor makes a profit from the difference between the sale and purchase price. It is important to note that if the price does not fall expectedly, but rather increases, the maximum loss is unlimited.
Short selling is a common tool for hedge funds. The securities loans covering short selling are usually open for several months.
Market makers provide liquidity to the market by setting both buy and sell quotations for a security. The market maker’s inventory may not be sufficient to cover all sales, so the securities are borrowed to complete the delivery.
Usually market makers are used only for non-liquid stocks. The problem that often arises is that there are not enough lenders for non-liquid stocks, which then lowers the importance and impact of market making.
A broker may have sold a call option and is obligated to sell securities at a fixed price. If the broker doesn’t own the securities at the time the securities are borrowed to complete the delivery. Stocks may also be borrowed to hedge derivative positions.
A borrower may borrow securities to use them as collateral in another transaction (e.g. another securities loan). Highly rated bonds are often borrowed for collateral purposes. Large institutions often make so called collateral transformations, where highly rated government bonds are borrowed and bonds with lower rating are pledged as collateral.
Collateral transformation –arrangements are not possible in Finland, because the current legislation does not recognize securities transfers for collateral purposes. The general view, however, is that collateral securities transfers should be recognized, and in a recent ruling by the Finnish Supreme Administrative Court collateral transfers under a CSA were recognized tax-exempt trades http://www.kho.fi/paatokset/60540.htm.
If a security is listed on multiple exchanges the prices may differ momentarily. In this case the investor can sell the more expensive stock and replace it with the cheaper one from another market. Converting the securities may take several days so the sales are covered with borrowed securities.
A lender can also make a reverse securities loan, where the motivation of the loan is to get financing and the loaned securities are essentially transferred as collateral. In a reverse securities loan the revenues come from the cash loan’s interest and margin. The degree of financing depends on the security’s liquidity and the client’s credit quality. A lender can receive better financing terms than in traditional pledged account –arrangements (often over 80% loan-to-value).
Scrip dividends have gained popularity in Europe. In a scrip dividend the shareholders are able to choose whether to receive the dividend as cash or shares. When making this decision the size of the cash dividend is usually known, but the price of the new shares will be determined based on a set price evolution. Brokers borrow shares from counterparties choosing the cash dividend, and the cash is paid to the lender as a manufactured dividend. The broker then takes the stock dividend and attempts to make a profit from selling these shares.
A good example of using scrip dividends are index funds, which always choose the cash option in a scrip dividend as the new shares would increase the fund’s shares. Index funds usually lend the securities and receive additional revenue from the lending fees.
In Finland a securities lender must be a company, whose portfolio is under the corporate tax law (Laki elinkeinotulon verottamisesta). This allows the tax-exempt transfer of securities and the securities loans are not, under certain conditions, seen as sales or purchases. The loaned securities remain on the lender’s balance sheet and the lender can always, at any time recall the loaned securities during the loan.
Securities may be loaned on all markets where the local legislation recognizes securities lending.
Securities borrowers are Finnish and international brokers, who use the securities for their own needs.
In Finland a borrower may also be a private person looking to form a short position. This can be done in all markets where the local legislation recognizes securities lending.
Securities lending is generally an OTC-business. The loan premiums are determined on the market by supply and demand, so there is no official marketplace or public price information available. Markit Securities Finance collects data from the biggest counterparties and this information is published with a two-day delay. Markit Securities Finance charges for this service.
Lago Kapital provides its clients with frequent updates on loan premium levels and securities with high demand. Lago Kapital Ltd also actively re-rates open loans to secure that clients receive the highest possible premium levels.
Company & People
Located in Finland, Lago Kapital Ltd is a leading provider of securities lending and financing services.
The company is fully bank independent and owned by its key personnel.
Lago Kapital Ltd is regulated by and has a license from the Financial Supervisory Authority FIN-FSA.
Founding Partner, CEO
+358 10 320 8950
+358 10 320 8959
Junior Trader - Delta one
+358 10 320 8956
+358 10 320 8954
We are constantly looking for new talents to our team
Please contact us at: email@example.com