Soon, brokerage houses will be exempt from posting collateral when contracting securities lending executed in the OTC market through broker dealer accounts.

Soon, brokerage houses will be exempt from posting collateral when contracting securities lending executed in the OTC market through broker dealer accounts. Certification for this began on April 17 and the implementation plan will be disclosed by the end of the month.

Securities lending is a tool used by investors in long-term strategies who have assets sitting idle, i.e., without the intention of selling. They may choose to lend those assets to other investors who, in return, pay a compensation fee for that loan.

The borrower, mostly institutional investors, may adopt various strategies, such as long and short strategy and short selling, and deliver assets from other markets via securities lending. Investors wishing to lend must execute the transaction via a brokerage house, which acts as an intermediary between both parties.  

To connect individual investors with institutional investors, brokerage houses consolidate investor contracts into a single contract through a broker dealer account. At this phase, a collateral deposit was necessary to ensure the settlement of the assets, which were free to be transferred.

What changes

The improvement allows securities lending directly from the loan coverage portfolio (portfolio 22) to the broker dealer account, thus eliminating the need for posting collateral. Therefore, brokerage houses are free to transfer a larger volume of lending and withdraw the collateral already deposited in the broker dealer accounts that enables the execution of transactions.

Contracts borrowed from the broker dealer account will be directed to the loan coverage portfolio. If the brokerage house wishes to withdraw the assets, it will then be necessary to carry out a contract unhedging process. At the end of the contract period, the assets will be returned to the free portfolio (21).

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