Staff Working Paper No. 1,214
Evangelos Benos, Gerardo Ferrara, Angelo Ranaldo and Vittorio Vergano
Securities lending – the temporary transfer of securities in exchange for collateral – is essential to the modern financial system, facilitating short selling, market making, and efficient liquidity management. Yet, little is known about how these contracts are priced. Using comprehensive transaction-level data, we identify the determinants of returns from lending the same security against cash or securities collateral. We develop a model in which lending returns compensate for security risk, illiquidity, and the use of scarce dealer balance-sheet capacity. We also define a return wedge between the two market segments. Consistent with the model, the wedge widens with risk, illiquidity, dealer constraints, and collateral reusability but narrows as participation across both segments increases.
Price efficiency in securities lending 