In the case of securities lending, securities are classified according to their ability to absorb. High-liquidity securities are considered “light”; these products are easy to find on the market, someone should decide to borrow them for the purpose of selling them briefly. Securities that are illiquid in the market are considered “hard.” Due to various rules, short selling in the United States and some other countries must be preceded by the location of security and the amount that one wants to sell briefly to avoid bare short circuits. However, the lender can establish a list of securities that do not require such a location. This list is designated as an easy-to-borrow list (short for ETB) and is also called flat-rate insurance. This list is compiled by brokers on the basis of “reasonable assurance” that the securities on the list are readily available at the client`s request. However, if a guarantee on the list cannot be provided as promised (a “delivery failure” would occur), acceptance of reasonable grounds no longer applies. In order to improve the basis of these assumptions, the ETB list must have a maximum duration of 24 hours. Securities lending is usually made between brokers and/or traders, not between individual investors. To complete the transaction, a securities loan agreement, called a loan agreement, must be concluded.
It defines the terms of the loan, including the term, the lender`s fees and the nature of the guarantees. Historically, the securities rental market has been very manual, with post-processing being many hours of work. In recent years, it seems that many suppliers have learned to ensure the automation that the sector sorely needs. Securities lending is legally and clearly regulated in most major global securities markets. Most markets require that securities be borrowed only for specifically authorized purposes, which generally implies: Suppose an investor thinks that the price of a stock will fall from $100 to $75 in the near future. The stock is not very volatile and generally trades in defined areas. To take advantage of her thesis, she borrows 50 shares of the company from an investment company by establishing a cash guarantee of $5,000. The investor repurchases the shares at a reduced price after the share price falls at the expected price and receives a stock credit discount from the lender. In 2011, FINRA issued an investor alert for equity-based credit programs.  In the warning, FINRA recommended that investors ask several questions, including: 1) What will happen to my action as soon as I guarantee it? (FINRA states that securities should never be sold to finance loans); 2) Did the lender control the finances? (FINRA found that all major publicly traded brokers/banks that should have had verified financial data for investors) and 3) Is the institution that manages the loan and accounts fully authorized and reputable? In an example of a transaction, a large institutional money manager with a position on a given stock allows these securities to be borrowed through a financial intermediary, usually an investment bank, a premium broker or another broker acting on behalf of one or more clients.