Securities Lending Executive Summary

A step-by-step guide

  1. Credit Union's available securities are lent, (via Reverse Repurchase Agreement) to an approved counterparty designated in the credit union's investment policy. Securities loaned are collateralized with cash at 102% of their market value. The term of the loan can vary, but will usually be 7-35 days.

    This fulfills NCUA investment regulation 703 requirement to establish "adequate" margin for securities loaned.

  2. Cash collateral is reinvested in permissible investments at a higher rate than the interest being charged by the counterparty who has provided the cash collateral.

    This reinvestment is finalized at the same time as the loan of the securities, ensuring that the credit union's securities will be loaned at a positive earnings spread.

    All collateral purchased/pledged must be permissible under NCUA investment regulation 703.

  3. The term of the loan and the reinvestment of cash collateral is matched in terms of maturity, mitigating reinvestment, and interest rate risk.

    This operationally and contractually ensures compliance with NCUA Regulations, and mitigates risk.

  4. When the securities loan (Reverse Repurchase Agreement) matures, the cash collateral plus interest is returned to the counterparty, and delivery is taken of the credit union's securities. The tri-party custodian redeems securities that have been purchased, collects principal and interest, and transmits the securities lending income to the credit union.

This process is repeated, with the term of the loan and the reinvestment always matched, as often as possible during a calendar quarter.

Typical Transaction

transaction flowchart

Securities lending checks and balances

  • Only those securities specified by credit union investment policies are available for loan
  • Only permissible investments approved by the credit union may be used as collateral
  • Only credit union approved counterparties may borrow securities
  • Standard industry agreements are in place with counterparties protecting the credit union's legal rights of ownership to their securities
  • Credit union is responsible for ensuring compliance with NCUA securities lending investment regulations
  • Credit union leverages its investment portfolio to improve return on assets thereby supporting member service

Securities lending revenue calculator

  • Investment allocation customized to suit risk parameters
  • Reinvestment and loan maturities are matched
  • Income is 60%/ 40% fee split to credit union