Also known as stock lending, this process involves lending securities from one party to another – such as from a mutual fund or institutional investor to a hedge fund which, in the U.S., needs to have possession of a stock in order to short it.

These loans are outlined in a Securities Lending Agreement and mandate that the borrower offer collateral such as cash, government securities or a Letter of Credit in excess of the amount borrowed. In return for the loan, the borrower agrees to pay a negotiated fee. [1]