TAILIEUCHUNG - Securities lending: Still no free lunch

In an economic system that is based upon individual behaviour and not upon conformity, that is to say, it is based upon, “the absence of mutual interest amongst the factors of production” no law prohibiting abusive speculation is possible. The period of time between delivery and payment, being the condition of lending and of trade, produces a risk to production and to the transportation of goods. Proudhon observes that, as a consequence of the prominence of random chance in the mechanics of the economy and due to the lake of the sharing of risks, gambling becomes the norm: ―Collective interests. | Vanguard Securities lending Still no free lunch Vanguard research July 2011 Executive summary. Securities lending continues to be much in the news. The practice refers to the temporary transfer lending of a security by one party to another in exchange for cash collateral that can in turn be reinvested to produce income for the Thus securities lending can be an attractive source of revenue. Because securities lending is a rather straightforward process many investors have perceived it as a relatively risk-free way to increase the return on an equity or bond portfolio. However there are pitfalls. This paper examines these risks which were highlighted during the late-2000s credit crisis and also compares the two approaches to securities lending. In one approach volume-oriented strategies lend out a large percentage of easy-to-find securities and then attempt to boost revenues by reinvesting the cash collateral in more aggressive investment pools. Conversely the strategy that Vanguard believes is more prudent and more likely to provide a superior risk-reward trade-off is known as value lending. This strategy involves lending only those securities that generate significant revenue and minimizing the risk by investing the collateral in low-risk money market securities. 1 The term securities lending may be a bit of a misnomer in the sense that absolute title over the lent securities passes between the parties. Author Karin Peterson LaBarge . CFP Connect with Vanguard Mechanics of securities lending The two main participants in a securities-lending transaction what we call the base case see Figure 1 are the lender and the borrower. Also known as the beneficial owner the lender may make its securities available to offset expenses such as custody costs or brokerage commissions associated with maintaining a portfolio to maximize overall portfolio performance 2 or to lower a portfolio s effective tax rate through dividend Typical motives .

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