This article is educational content explaining how securities markets generally function. It is not investment advice and does not describe any specific company, security, or current event.
Every time a trader in Johannesburg sells a share they do not yet own, or a settlement chain threatens to break because one counterparty is late to deliver, a piece of market plumbing that almost nobody outside back-office operations ever thinks about has to work perfectly and invisibly. That plumbing is Strate, South Africa’s central securities depository (CSD), and the way it processes securities lending and borrowing explains how short selling functions and how the market absorbs the ordinary friction of trades that do not settle on schedule.
How a Loan of Shares Actually Settles
Strate is the licensed CSD for securities listed on the Johannesburg Stock Exchange (JSE), operating under South Africa’s Financial Markets Act and supervised by the Financial Sector Conduct Authority (FSCA). It maintains the electronic, dematerialised record of who owns what, and it settles trades on a delivery-versus-payment (DvP) basis, meaning securities and cash (or securities and other securities) move at the same time so that neither side of a transaction is left exposed.
Securities lending fits into this same infrastructure. When one institution, such as an asset manager or pension fund, agrees to lend shares to another party, often a broker or another institutional investor seeking to borrow, that agreement is captured and settled through Strate’s central system rather than through some parallel, informal channel. The borrowed shares move from the lender’s account to the borrower’s account within the depository’s books, and because Strate applies the same DvP-style logic used for cash trades, the transfer of shares and the posting of collateral are designed to occur together rather than as two disconnected steps.
Collateral: The Price of Borrowing Someone Else’s Stock
Lending a share to another party is not done on trust alone. Borrowers are required to post collateral worth at least as much as the market value of the securities they borrow, and often somewhat more, to cushion against price movements during the life of the loan. That collateral can take the form of cash, other eligible securities, or a bank guarantee, depending on the terms agreed between the parties or their lending agent.
Because share prices move constantly, collateral is not a one-off deposit. Positions are marked to market, typically daily, and if the value of the borrowed shares rises relative to the collateral held, the borrower is called on to top it up. This ongoing reconciliation is what allows lenders to part with their shares for a period without taking on open-ended credit risk against the borrower, and it is what makes institutional securities lending a routine, largely automated function rather than a bespoke, high-risk arrangement.
Bridging Short Sales and Settlement Fails
The most familiar use of borrowed shares is short selling. A trader who sells shares they do not own is still obliged to deliver those shares to the buyer on the agreed settlement date. Borrowing the shares through the lending market, settled via Strate, is what allows that delivery obligation to be met, separating the economic bet on a falling price from the mechanical requirement to hand over actual stock.
A less visible but equally important function is preventing settlement fails from spreading. In any market, a seller can occasionally find itself unable to deliver shares on time, perhaps because an earlier leg of a chain of trades has not yet settled, or because a custodian’s own transfer is delayed. Rather than let that single delay cascade into a missed delivery to the next buyer in line, a market participant can borrow the needed shares temporarily to complete its own settlement obligation on schedule, then return the borrowed shares once its original position finally arrives. Exchanges and depositories, including the JSE and Strate, also maintain formal buy-in procedures for trades that remain unsettled beyond a set period, but the ready availability of a lending market reduces how often those more disruptive procedures are actually needed. In this sense, securities lending acts less like a speculative tool and more like a shock absorber built into the everyday mechanics of settlement.
