Single Stock Futures

Abstract

Securities lending is primarily a back-office function that effectively is an over-the-counter derivative transaction. Mutual funds and pension plans (Funds) lend (actually sell) assets today with an agreement that they will get the asset back at some point in the future. During the interim they will not lose economic exposure to the position and will receive additional compensation for participation. This transaction is substantially similar to an EFP (Exchange Future for Physical) transaction using Single Stock Futures (SSFs) but with some very important differences: the SSF EFP is a trade on a regulated exchange; SSFs trade in a competitive environment where finance rates are established by multiple market participants; there is transparency in pricing; and there is no counterparty risk, as all trades are cleared through the AAA rated Options Clearing Corporation (OCC). Securities lending is currently an operations function. However, it should be viewed as a trading strategy and therefore be included in the investment manager's responsibility. There are substantial profits being ceded to intermediaries that could accrue to the funds and their clients instead.