What is securities lending?22 November 2019
Although we do not actively participate in stock lending, the underlying fund managers of our Aegon/Scottish Equitable linked funds may do so.
Securities lending is a process used by some funds to generate additional returns by temporarily lending some of the shares, bonds or derivatives it holds.
Not all funds are allowed to lend securities – you can find out whether your fund can or cannot, by looking at the underlying fund’s Key Investor Information Document (KIID) and fund prospectus.
How securities lending works
Some of the underlying funds that your fund invests in lends some of the shares and bonds they hold to another financial institution (e.g. a bank) for a short period of time. The financial institution (borrower) pays the lending funds a fee for borrowing shares or bonds.
At the end of the loan the financial institution pays the shares and bonds back in full, with interest, with the aim of potentially boosting returns - although these returns aren’t guaranteed.
How we mitigate securities lending risk
There is a small risk that the financial institution will fail to pay back the shares or bonds it lends at the end of the loan. To minimise this risk, the lending fund conducts securities lending only with select financially stable institutions.
The lending fund also holds indemnity insurance as a safeguard, to cover any losses in the unlikely event that the loan isn’t paid back. This insurance would reimburse the fund in full under the terms of the indemnity, which acts as an extra layer of security to protect investors in the fund.