Securities Lending Glossary

Glossary of Terms

American Depository Receipt (ADR) - U.S. issued and traded securities representing claims of shares of non-U.S. stocks.

Arbitrage - Buying and selling similar securities, commodities or currencies in order to profit from temporary price discrepancies between two market prices.

Basis Point - One one-hundredth of a percent.

Borrower Agreement - Securities lending contract between the lending agent and the borrowing firm.

Broker / Dealer - Securities firm that sometimes acts as broker and sometimes acts as principal in security transactions.

Collateral - Cash or other assets pledged to a lender as security until a loan is complete. Examples include cash, letters of credit and U.S. Government and Agency bonds.

Depository Trust Company (DTC) - The central U.S.depository for many lendable securities, including common and preferred stocks and corporate bonds.

Dividend Reinvestment Program (DRIP or DRP) - Automatic reinvestment of shareholder dividends into more shares of the company's stock, usually at a discount.

Emerging Market - Immature securities market in which there is not a long history of substantial foreign investment.

Equity - Lendable securities, both domestic and foreign, generally known as common and preferred stocks.

ERISA - The Employee Retirement Income Security Act, law which governs the operation of most private U.S.pension and benefit plans.

Fail - A situation where the seller does not deliver the security in proper form on settlement date.

Federal Funds Rate - Rate of interest at which federal funds are traded among banks, currently pegged by the Federal Reserve through its open market operations. Generally acknowledged as the basis upon which securities lending rebate rates are set.

General Collateral - Issues that are in significant supply and are not trading special and therefore borrowers demand higher rebate rates.

Hedge - Making an investment in a security to reduce the risk of adverse price movements by taking an offsetting position in a related security.

Hot Stock - A security that is in high demand relative to its availability in the market and is difficult to borrow. These issues generally carry lower rebate rate requirements.

Indemnification - An agreement to compensate securities lending clients for damage or loss. For example, a loss experienced due to a broker/dealer default.

Lending Agreement - Contract between a client and the lender authorizing participation in the lender’s program.

Letter of Credit - A form of collateral issued by the borrower's bank stating that the bank will guarantee the amount of the letter to the lending institution upon presentation.

LIBOR - The London Interbank Offered Rate on Eurodollar Deposits traded between banks. The basis upon which many interest rate levels are set.

Margin Call - Request by one party in a transaction for the initial margin to be reinstated or to restore the original cash/securities ratio.

Mark to Market - Daily process of pricing outstanding loans and collateral to the current market price to ensure full collateralization.

Market Value - The value of loaned securities or collateral as determined using established pricing sources.

Rebate - A percentage of a cash loan's market value which is returned to the borrower for the use of its cash in the investment of a short-term instrument. The percentage varies depending on the current short-term interest rate and demand for the loaned security.

Recall - When a lending institution notifies the borrower to return a security from loan. In a standard loan agreement, three days' notification is required for U.S.equities and corporate bonds; one day is required for U.S. Government securities. Notification requirements vary by country.

Repurchase Agreement (Repo) - A method of financing dealer positions whereby the dealer sells U.S. Government securities to an investor for cash and agrees to repurchase the securities at a future date for a fixed price. Terms of the agreement are structured to compensate the buyer of securities for a short-term loan.

Settlement - Final transfer of securities and cash in fulfillment of the obligations committed to in an executed trade.

Short Sale - A transaction in which a market participant sells a security that he or she does not own with the expectation that the price of the security will fall or in connection with an arbitrage strategy. A broker/dealer may borrow the needed security on a temporary basis to effect settlement. Eventually, however, the broker/dealer must purchase the security in order to redeliver the borrowed security.

Spread - The difference between the investment rate on cash collateral and the rebate rate of a loan; in investments, the difference between bid and asked price on a security or the difference between yields on or prices of two securities that have different characteristics or maturities.

Term Loan - Commitment for a loan for a specific time frame.

Third-Party Lending - Process where a lender lends with an agent lender and custodies their assets at a different institution.