Business Glossary

paying interest to a customer on the credit balance created from the proceeds of a short sale. Such proceeds are held in escrow to secure the loan of securities, usually made by another broker, to cover the customer's short position. Lending at a rate is the exception rather than the rule.

term used when one broker lends securities to another broker to cover customer's short position and imposes a charge for the loan. Such charges, which are passed on to the customer, are the exception rather than the rule, since securities are normally loaned flat between brokers, that is, without interest. Lending at a premium might occur when the securities needed are in very heavy demand and are therefore difficult to borrow. The premium is in addition to any payments the customer might have to make to the lending broker to mark to the market or to cover dividends or interest payable on the borrowed securities.

securities borrowed from a broker's inventory, other margin accounts, or from other brokers, when a customer makes a short sale and the securities must be delivered to the buying customer's broker. As collateral, the borrowing broker deposits with the lending broker an amount of money equal to the market value of the securities. No interest or premium is ordinarily involved in the transaction. The Securities and Exchange Commission requires that brokerage customers give permission to have their securities used in loan transactions, and the point is routinely covered in the standard agreement signed by customers when they open general accounts.