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Lent securities can be recalled by the lender "whenever they want, for whatever reason they want, and they do not have to provide an explanation" Unfor

Lent securities can be recalled by the lender "whenever they want, for whatever reason they want, and they do not have to provide an explanation" Unfortunately, the borrower does not lend the shares to keep them in their drawer. They sell them. If they cannot buy them back, the lender cannot get them back.

JumpCrisscross 4y ago
> if they cannot buy them back, the lender cannot get them back In the history of post-Securities Act American stock lending, I don't think this has once happened for a public stock. The lender's broker is entitled to buy the stock in the open market at any price (e.g. [1]) and stick the bill to the borrower's broker. The borrower's broker will chase the borrower. But the broker is immediately responsible. For every share in oversupply there is someone naturally short. Between them and the market are layers of collateral and covenant, from the broker to the borrower to their clearing broker, from the clearinghouse to the banks mutualizing it. [1] https://www.contractscounsel.com/t/us/securities-loan-agreement#toc-covenants https://www.contractscounsel.com/t/us/securities-loan-agreem... § 13.1(a)
- ArtTimeInvestor 4y ago
  In the past 100 years it has not happened that a borrower of stock has gone bankrupt? Could be. I don't know. But I wouldn't expect that there is no risk that a certain thing will happen just because it has not happened for 100 years.
  - JumpCrisscross 4y ago
    > In the past 100 years it has not happened that a borrower of stock has gone bankrupt? No. This has happened. What hasn't is the lender of the stock not getting their securities back. Those stacked layers of covenant and collateral absorbed the damage. > I wouldn't expect that there is no risk that a certain thing will happen just because it has not happened for 100 years The risk isn't zero. But someone worrying about their lent Tesla stock never coming home is in the same category as a freestyle mountain climber becoming paranoid about meteors hitting them.
- TuringNYC 4y ago
  >> In the history of post-Securities Act American stock lending, I don't think this has once happened for a public stock. Not sure about that, but we were about a day away from that happening in 2008. AIG lent out high-grade bonds and invested the proceeds into illiquid higher-yield mortgage backed securities: https://insight.kellogg.northwestern.edu/article/what-went-wrong-at-aig https://insight.kellogg.northwestern.edu/article/what-went-w... AIG's near collapse was partly due to CDS and party due to sec lending.
colechristensen 4y ago
The borrower puts up more than 100% the value in collateral to borrow stock and they are also insured. The risk of stock lending is very low. Anything you do with a securities broker, the risk of losing something due to the other side of the trade going bankrupt, etc is very very low. Your broker has to have collateral to support closing your position, likewise for the other side of the transaction. A broker ends up holding the bag if something goes wrong and it’s their fault for allowing a customer to open a position they couldn’t close.

JumpCrisscross 4y ago

> if they cannot buy them back, the lender cannot get them back In the history of post-Securities Act American stock lending, I don't think this has once happened for a public stock. The lender's broker is entitled to buy the stock in the open market at any price (e.g. [1]) and stick the bill to the borrower's broker. The borrower's broker will chase the borrower. But the broker is immediately responsible. For every share in oversupply there is someone naturally short. Between them and the market are layers of collateral and covenant, from the broker to the borrower to their clearing broker, from the clearinghouse to the banks mutualizing it. [1] https://www.contractscounsel.com/t/us/securities-loan-agreement#toc-covenants https://www.contractscounsel.com/t/us/securities-loan-agreem... § 13.1(a)

ArtTimeInvestor 4y ago
In the past 100 years it has not happened that a borrower of stock has gone bankrupt? Could be. I don't know. But I wouldn't expect that there is no risk that a certain thing will happen just because it has not happened for 100 years.
- JumpCrisscross 4y ago
  > In the past 100 years it has not happened that a borrower of stock has gone bankrupt? No. This has happened. What hasn't is the lender of the stock not getting their securities back. Those stacked layers of covenant and collateral absorbed the damage. > I wouldn't expect that there is no risk that a certain thing will happen just because it has not happened for 100 years The risk isn't zero. But someone worrying about their lent Tesla stock never coming home is in the same category as a freestyle mountain climber becoming paranoid about meteors hitting them.
TuringNYC 4y ago
>> In the history of post-Securities Act American stock lending, I don't think this has once happened for a public stock. Not sure about that, but we were about a day away from that happening in 2008. AIG lent out high-grade bonds and invested the proceeds into illiquid higher-yield mortgage backed securities: https://insight.kellogg.northwestern.edu/article/what-went-wrong-at-aig https://insight.kellogg.northwestern.edu/article/what-went-w... AIG's near collapse was partly due to CDS and party due to sec lending.

colechristensen 4y ago

The borrower puts up more than 100% the value in collateral to borrow stock and they are also insured. The risk of stock lending is very low. Anything you do with a securities broker, the risk of losing something due to the other side of the trade going bankrupt, etc is very very low. Your broker has to have collateral to support closing your position, likewise for the other side of the transaction. A broker ends up holding the bag if something goes wrong and it’s their fault for allowing a customer to open a position they couldn’t close.