Securities lending is the market practice of temporarily transferring securities, for a fee, from their holder (the lender) to another party (the borrower), with the borrower agreeing to return the securities to the lender either on-demand or at the end of the agreed loan term. This practice usually requires the borrower to collateralize the transaction with cash or other securities of a value equal to or greater than that of the lent securities, in order to protect the lender against counterparty credit risk.
Securities lending plays an important role in capital markets by providing liquidity, which in turn reduces the cost of trading and promotes price discovery. Global Master Securities Lending Agreement (GMSLA) and its Nigerian Addendum is the standard contract document that binds lender and borrower in a Securities Lending arrangement.
Short selling, or “shorting,” is the practice of selling securities that the seller does not currently own, and subsequently repurchasing them (“covering”). If a broker has sold securities short, it must borrow those securities in order to fulfil its settlement obligation in the securities settlement system.
The short-seller hopes to profit from a decline in the price of the assets between their sale and repurchase, as, in that scenario, the seller will pay less to buy the assets than it received when selling them. On the other hand, the short-seller will incur a loss if the price of the assets rises, as it will have to buy them at a higher price than it sold them. There is no theoretical limit to the loss that a short seller can incur.
Short selling is a legitimate trading strategy on the floor of NGX, provided that, prior to initiating a trade on a security, that security has been borrowed and is in the account of the seller. Naked short selling – the practice of selling shares a broker does not own without borrowing them or making arrangements to borrow them – is banned for all participants on NGX.