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Securities lending and repurchase agreements (repos)

Securities lending as an additional source of income

Securities lending is an increasingly important additional source of income for many institutional investors. Banks also use securities lending to meet the regulatory requirements for collateralization of OTC capital market transactions.

In a securities lending transaction, the lender transfers securities – bonds or shares – from its portfolio to a borrower (counterparty) for a limited or unlimited period of time, and the borrower pays a lending fee. While legal ownership is transferred from the lender to the borrower, the securities generally remain the economic property of the lender. Dividend and coupon payments, for example, are to be passed on to the lender.

In a collateralized securities lending transaction, the borrower provides the lender with collateral – money or other securities – to secure the underlying transaction and minimize the risk of the loan. In a lending transaction that is not collateralized, the lending fee to be paid by the borrower – and thus the earnings potential of the lender – is generally higher.

Securities lending as an additional source of income

Bilateral securities lending at Metzler – tailored to client requirements

Metzler Bank handles all settlement and management tasks according to the client’s individual requirements – ranging from contract initiation to settlement, collateral management, and SFTR reporting. Lending fees are credited to the lender on a monthly basis. Metzler Capital Markets works together with the client to compile the most important components of securities lending as follows:

  • A collateral matrix: a list of the client’s individual collateral wishes
  • An asset spectrum: securities to be lent
  • Use of organized systems or central counterparts

Repurchase agreements (repos) offer advantages for refinancing

What are repos?

A repurchase agreement – repo for short – is a form of short-term borrowing in which the holder (lender) sells securities to a third party (the borrower) for an agreed period – usually less than one year – and at the same time agrees to repurchase them.

Advantages for the lender

As a rule, refinancing is significantly cheaper than trading on the unsecured money market. An interest rate advantage results from the difference between the individual unsecured rate for money market refinancing and the rate for a specific dependent security. Moreover, due to money borrowing, the balance sheet is extended for the lender.

Securities lending as an additional source of income

Legally, repos are defined in Section 340 of the German Commercial Code as "two interdependent trading transactions". For the lender and the borrower, a repo is a financial transaction in which the lender assumes a repurchase obligation for the securities in question. Repo transactions are based on a standardized framework agreement published by the Association of German Banks between the lender and the borrower.

There are generally the following two submarkets, depending on the type of collateral:

General collateral

In this case, the focus is not on specific securities, but on the quality of the asset classes. General collateral is normally used for collateralizing money market transactions.

Special collateral

Greater interest rate advantages can be achieved on the Specials market where very specific securities are sought, for example, to cover short positions or for arbitrage purposes.

  • 20 million DE0001102606 DBR 1.7% 
  • 08/15/32 price 96%
  • Repo rate: 2.30%
  • Term: 90 days
  • Initial amount: EUR 19,200,000
  • Redemption amount: EUR 19,311,627
  • Interest: EUR 111,627

Your contacts

For more information on Metzler's securities lending and repo offerings, please contact the securities lending team at Metzler Capital Markets.

Christian Bernhard
Christian Bernhard

Head of Fixed Income Trading

Dirk Lagler
Dirk Lagler

Fixed Income Trading