Securities lending arrangements

A securities lending arrangement entails a lender advancing shares to a borrower to enable such borrower to on-deliver the marketable security in terms of a sale or on-lending transaction. The borrower is obliged to deliver the equivalent marketable security (in kind, quality and quantity) to the lender within a specified period of the original advance and to compensate the lender for any distributions to which he would have been entitled to during such period.

Often the borrower is required to transfer collateral to the lender to secure the underlying value of the securities lent. The transfer of collateral enhances liquidity in this market but carries the burden of securities transfer tax (STT) and capital gains tax (CGT).

It is proposed that Government review the tax treatment of the temporary transfer of beneficial ownership of collateral with a view to reducing the adverse tax consequences on acceptable business practices such as the provision of collateral security; while simultaneously limiting the potential use of collateral in tax avoidance arrangements, such that STT and CGT consequences may be reserved for the out and out provision of security.

Special Edition Budget Alert – 25 February 2015 (197KB)