Securities Lending Recall

A securities lending recall is the notice a lender gives to end a securities loan and require the borrower to return the securities, or equivalent securities, within an agreed time. Most securities loans are open-ended, meaning the lender can recall at any time, and market agreements typically require the borrower to redeliver within the normal settlement cycle for that security. Lenders, usually pension funds, insurers, mutual funds and other institutional investors, often recall through an agent lender such as their custodian.

Recalls are the mechanism that lets long-term holders earn extra income by lending while keeping the ability to sell or use their securities. They matter to borrowers, especially those covering short selling, who may need to find the securities elsewhere at short notice. A recall that is not met can lead to a failed settlement and, eventually, a buy-in procedure.

Lending a neighbour your ladder is easy when you do not need it. But one day you want to paint your own house, so you knock on their door and ask for it back by the weekend. If they cannot return it in time, you have to buy or rent another one, and you expect them to pay for that.

A securities lending recall works the same way. Big investors lend shares and bonds they are holding for the long term, earning a fee. When they want to sell those securities, or vote with them at a company meeting, they ask for them back. The borrower must return them quickly, or find another lender so the original owner is not left short.

• Sale of the securities. The most common reason: the lender's portfolio manager sells shares that are on loan, and the loan must be recalled so the sale can settle on time.
• Voting. Lenders recall shares before the record date of a general meeting so that they hold the voting rights, an issue for investors with stewardship commitments and proxy voting policies.
• Corporate actions. Some elections, such as taking up rights or tendering into an offer, can only be made by the registered holder, so the lender may recall to participate, which links recalls to corporate action processing.
• Risk and programme changes. A lender may recall because of concerns about a borrower's credit, changes to its lending limits or the end of a lending programme.

1. The lender or its agent issues a recall notice to the borrower, specifying the securities and the required return date.
2. The borrower returns the securities from its own holdings, borrows them from another lender, or buys them in the market.
3. On redelivery, the lender returns the borrower's collateral, adjusted for any changes in value, usually on a delivery-versus-payment basis.
4. If the borrower fails to return on time, the lender's sale may fail; the agreement then allows the lender to claim costs, charge fees, close out the loan or buy in the securities.

Agent lenders often try to avoid disrupting a client's sale by reallocating the loan to another lending client's holdings rather than recalling from the borrower, a common practice in pooled lending programmes.

Most cross-border securities lending is documented under industry master agreements, such as the Global Master Securities Lending Agreement in Europe, which set out recall rights, redelivery timing, remedies for failure and collateral arrangements, often structured as a financial collateral arrangement. In the European Union, securities lending transactions must be reported under the Securities Financing Transactions Regulation, a regime similar in purpose to trade repository reporting for derivatives, and CSDR penalties for late settlement add a cost to unmet recalls. In the United States, the SEC adopted Rule 10c-1a in 2023, requiring securities loans to be reported to FINRA, and shorter settlement cycles have tightened the time available to meet recalls.

Recalls can affect prices. Large recalls in heavily shorted stocks can force short sellers to buy shares if they cannot re-borrow, contributing to sharp price rises, sometimes called short squeezes. Waves of recalls before contested shareholder votes reduce lendable supply and raise borrowing fees. For lenders, the main trade-off is between lending income and the flexibility to sell or vote; for borrowers, the risk that a loan will be recalled at an awkward time is part of the cost of borrowing, which is why some prefer term loans with fixed end dates.