When it comes to investing in securities, there are always risks involved. One of these risks is known as securities lending, where an investor lends out their securities to someone else in exchange for a fee. While this practice can yield profits for investors, there is also a risk that the borrower will fail to return the securities. That`s where the “right of recall” comes in.
What is the right of recall?
The right of recall is a provision in securities lending agreements that gives the lender the right to recall their securities at any time. This means that if the borrower fails to return the securities, the lender can demand their return immediately.
Why is the right of recall important?
The right of recall is important because it helps to mitigate the risks associated with securities lending. Without this provision, lenders would be at the mercy of the borrower, and if the borrower were to default, the lender could lose their securities permanently. The right of recall gives lenders the power to take control of the situation and protect their investments.
How does the right of recall work?
The right of recall is typically included in securities lending agreements as a standard provision. If the lender decides to exercise their right of recall, they must notify the borrower in writing, specifying which securities they want returned and when they want them returned. The borrower is required to comply with this request and return the securities as soon as possible.
What are the limitations of the right of recall?
While the right of recall can be a powerful tool for lenders, there are some limitations to its use. For example, the borrower may not be able to return the securities immediately due to market conditions or other factors. In this case, the lender may need to negotiate a new return date with the borrower.
Additionally, the right of recall may not be enforceable in all jurisdictions. Some countries have laws that restrict the use of this provision, or require lenders to provide advance notice before exercising their right of recall.
Conclusion
The right of recall is an important provision in securities lending agreements that gives lenders the power to protect their investments. While it has some limitations, it can be a powerful tool for mitigating risks associated with securities lending. As with any investment, it`s important to understand the risks involved and to carefully review the terms of any securities lending agreement before entering into it.