Handbook of Short Selling

Handbook of Short Selling

2012, Pages 329-336
Handbook of Short Selling

Chapter 22 - Sourcing Securities for Short Sales: The Proper Legal Characterization of Securities Loans

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This chapter considers the operation of securities loans as well as a recent decision of the Australian court that has tried to address the question of the proper legal characterization of securities loans. A securities loan, basically, involves the transfer of securities (shares or bonds) from a “lender” to a “borrower” in exchange for the borrower paying a fee to the lender. Securities loans effectively separate the legal incidents of ownership of securities from the economic incidents of ownership. The initial transfer of securities that takes place under a securities loan vests clear title to the securities in the borrower and that title carries with it enjoyment of the economic incidents that ordinarily flow from title, but the borrower is obligated, under the terms of the loan, to pay to the lender amounts equivalent to any distributions received by the borrower during the term of the loan in respect of the securities. While the court in that particular case clearly decided that transfers of securities under a securities loan were absolute transfers or sales and did not constitute an in-substance secured loan, the authority of that case is weakened by the court's seeming indifference to two related factors. The two related factors include substantive differences between, as opposed to different legal forms of, sales of securities and mortgages of securities; and the use, in that case, of securities loans by the various participants as margin loans. Thus the legal nature of securities loans cannot therefore be said to have been completely settled by that case.

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