What is securities lending?

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Securities lending is a process used by some funds to generate additional returns by lending some of the shares and bonds it holds.

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.