Share Lending Agreement Defined

A share lending (or securities lending) agreement allows a party with title to certain securities to lend them to another in exchange for collateral. The collateral -- which can consist of cash, government securities or a letter of credit -- is put into the hands of a third party and remains there until either an event of default or the return of the borrowed shares.

Standard Contract

The standard contract for such a loan is the Global Master Securities Lending Agreement (GMSLA), most recently amended in 2009, updating an earlier (2000) master agreement. One of the changes was a warranty from the borrower that it is not borrowing chiefly for the purpose of obtaining voting rights: So-called "empty votes" had become a matter of controversy in the intervening years.

Industry Association

The GMSLA is the work of the International Securities Lending Association (ISLA), an industry association established in 1989 and headquartered in London.

ISLA's members include pension funds, insurers, asset managers, banks, securities dealers and firms that provide services to them.

Significance

These contracts have received a certain amount of scrutiny because they play a crucial role in the practice of "short selling." This is the practice of using the equity of a company to place a bet on a coming decline in the price of that equity.

References

• California Debt and Investment Advisory Commission: Securities Lending Agreements
• International Securities Lending Association: ISLA Publishes Global Master Securities Lending Agreement
• International Securities Lending Association: About Us

Resources

• Stanford University: Securities Lending, Shorting, and Pricing
• Pittsburgh Post-Gazette: How Borrowed Shares Swing Company Votes