Security Lending Agreement Template for the United States

A Security Lending Agreement is a specialized contract that governs the temporary transfer of securities from a lender to a borrower in exchange for collateral. Under United States securities law, this agreement creates a legal framework that allows institutional investors to monetize their securities holdings while maintaining economic exposure to the underlying assets. The borrower typically uses the securities for short selling, covering settlement failures, or other legitimate trading purposes.

When do you need this document?

You need a Security Lending Agreement when your institution wants to lend securities to generate additional revenue from existing holdings. Investment managers, pension funds, and other institutional investors commonly enter these arrangements to enhance portfolio returns. The agreement becomes essential when establishing relationships with prime brokers, hedge funds, or other qualified borrowers who need temporary access to specific securities. You'll also require this document when participating in securities lending programs offered by custodian banks or when engaging lending agents to facilitate transactions on your behalf.

Key legal considerations

Several critical provisions require careful attention in your Security Lending Agreement. Collateral requirements must specify acceptable types, minimum values, and daily marking-to-market procedures to protect against borrower default. The agreement should clearly define events of default and provide remedies including immediate recall rights and collateral liquidation procedures. Income payment provisions must address how dividends, interest, and other distributions will be handled during the loan period. Corporate action clauses should specify procedures for stock splits, mergers, and other events affecting the loaned securities. Additionally, the agreement must establish clear termination procedures, including notice requirements and return obligations.

Legal requirements in United States

United States securities lending agreements must comply with comprehensive federal regulations. The Securities Exchange Act of 1934 provides the foundational regulatory framework, while SEC Rule 15c3-3 mandates specific customer protection requirements for broker-dealers engaged in securities lending. Regulation T governs margin requirements and lending activities by broker-dealers, establishing limits on loan values and collateral requirements. FINRA Rule 4314 imposes detailed requirements on member firms conducting securities lending transactions, including documentation, disclosure, and operational standards. FINRA Rule 4330 specifically governs the permissible use of customer securities in lending arrangements. Your agreement must also address state securities law requirements, which may impose additional fiduciary duties or disclosure obligations depending on the parties' domicile and the nature of their relationship.