Will not get personal or smart anymore, but this may be of interest to the thread.
From OPES website Risks;
Home » Securities Borrowing & Lending/Equity Financing » Risks in Securities Lending and Equity Financing Risks in equity financing and securities lending Risks can never be nullified completely, but Opes Prime's experienced team treats managing risk as a priority and outsources to specialists where necessary.
The Opes Prime facility of Securities Lending and Borrowing has a high level of risk. We strongly recommend that you seek advice from a qualified professional adviser to determine whether the Securities Lending and Borrowing facility (the Facility) meets your particular investment objectives, financial situation and needs.
Below is a description of some of the significant risks involved in the use of a securities lending facility. This list does not constitute (and is not intended to constitute) a comprehensive list of all possible risks to which you may be subjected. This Financial Services Guide is not, and should not, be taken to be a recommendation to undertake any securities lending transaction.
Market risks Equity price risk, interest rate risk and currency risk are all examples of market risks that can have an effect on securities lending and related transactions.
These risks together with other market influences such as liquidity, trading halts and trading suspensions can affect your ability to buy and sell when desired, or to attain a desired price. Your ability to buy or sell securities affects your ability to close out securities lending transactions.
Unlimited losses on short positions You potentially face the risk of unlimited losses if you utilise any borrowed securities for the purposes of creating a short position and the prices of those securities increase substantially.
You will ultimately need to buy back the securities you have sold in order to meet the requirement to return the borrowed securities. If the prices of those securities are higher than when you sold, you will incur a loss.
Involuntary close out of short positions The lender of securities has the right to ask the borrower of securities to return them when requested and without reason. You will be required to return the securities within the normal market settlement timeframe. In the event the borrowed securities were sold and there are no alternative sources to borrow the securities, you will be required to purchase those securities on market at the prevailing price.
This has the potential to adversely affect the performance of your trading strategy and potentially cause a loss if you are forced to close out at an inopportune time.
Leverage through financing transactions If you lend securities and receive cash as collateral with the intention of utilising cash for other purposes, you have entered into a financing transaction. If you re-invest the cash by purchasing additional securities, you have leveraged your original investment and increased your exposure to the share market. Leverage can lead to greater profits in the event of an increase in the share prices but can also lead to greater losses if the prices of the securities in your portfolio should fall.
Interest rate risk Opes Prime can charge you interest on cash collateral provided to you. Opes Prime may increase the interest rate it charges you and this could potentially lead to losses if the shares you have purchased with that money do not sufficiently increase in price so as to offset the increase in interest rates. Opes Prime can increase the rate of interest you are charged at any time for a variety of reasons.
Foreign exchange risk If you receive cash collateral in a currency other than the currencies in which the securities you have loaned are denominated, you will potentially face foreign exchange risk.
In particular, if as a result of foreign exchange rate movements, the value of the cash collateral provided to you should increase relative to the values of the securities loaned, you could face losses and potential margin calls, even if you have invested in securities which have themselves increased in value.
Margin call risk When you enter into a securities lending transaction with Opes Prime you will either receive collateral if you lend securities, or will be required to provide collateral if you borrow securities. The amount of collateral you receive or provide is determined by the specified collateral ratio (also called Loan to Value Ratio or ‘LVR’) and is relative to the value of the securities you have loaned or borrowed.
If the market value of securities you have loaned to Opes Prime falls, you may have to lodge additional securities or return collateral to maintain your required margin. Similarly, if you borrow securities from Opes Prime and the market value of those securities increases, you will also be required to lodge additional collateral. When Opes Prime demands additional capital in this way it is known as a margin call.
You will be required under the terms of the Securities Lending and Borrowing agreement to bring your collateral balance within the limits applicable to your particular situation. You can satisfy a margin call either by decreasing the aggregate balance of your securities loan with us, or by lodging sufficient additional collateral in the form of cash or approved securities.
A failure to meet a margin call can lead to Opes Prime taking measures to eliminate the margin call. Such action could include selling any of the securities which you have lodged with Opes Prime as collateral or by taking cash collateral sufficient to meet the margin call.
Change in collateral ratio or Loan to Value Ratio (LVR) Collateral ratios or LVRs are determined by a number of factors and can apply at both an individual account level and an individual security level. Opes Prime can change the collateral ratios or LVRs at anytime at your account level and at an individual security level.
A change in the collateral ratio or the LVR could lead to your account being in margin call and thereby requiring you to provide additional collateral if you are borrowing securities or return collateral where you are lending securities (see Margin call risk).
Credit risk In the event of insolvency by Opes Prime then you will rank as an unsecured creditor in respect of any excess value of collateral you have lodged with Opes Prime over and above the value of any securities you have borrowed from Opes Prime or the excess of the value of securities you have loaned to Opes Prime and the cash that has been delivered to you as collateral.
Obligations You have an obligation to repay to Opes Prime any amounts outstanding as a result of any securities lending transaction with us.
Corporate actions and dividends If you have borrowed securities over a dividend period you will be required to deliver any dividends, distributions and entitlements you have received to the lender of securities. When a dividend or distribution occurs the borrower must pay an equivalent amount to the lender to restore the lender’s position to what it would have been if the securities lending transaction had not occurred.
If franking credits are applicable in relation to a particular dividend, the borrower may also have to pay the equivalent value of those franking credits to the lender. Likewise if a corporate action occurs to the securities the borrower must pay the lender an amount which restores the position that the lender would have faced if the transaction had not taken place.
In relation to rights issues the borrower must pay the lender an amount which would equate to the value of the rights issue, or upon redelivery of the borrowed securities provide additional securities equivalent to the amount which the lender would have been entitled to receive had the rights issue been exercised by the lender (with the calculated amount being adjusted in accordance with the applicable exercise price).
The borrower of securities should always be aware that reinstating the lender’s position as a result of a dividend or corporate action can add significantly to the borrowing costs involved in the transaction.
Dividend Re-Investment Plans and Share Purchase Plans In respect of any borrowed securities or collateral lodged, Opes Prime will offer participation in Dividend Re-Investment Plans. Opes Prime has custody arrangements with external custodians and due to the restrictions in the custody arrangements, we are not able to offer participation in Share Purchase Plans.
Guarantee and Indemnity Agreement Opes Prime may ask you to execute a Guarantee and Indemnity Agreement if you are applying for a securities lending facility in the name of a company (client). The guarantor guarantees to Opes Prime, the payment and performance of the company’s (client’s) obligations under the Guarantee and Indemnity Agreement and the Securities Lending and Borrowing Agreement.
The guarantor also agrees to indemnify, and to keep indemnified, Opes Prime and its employees, agents and representatives against all liabilities or loss arising from, and any reasonable costs, damages, charges and expenses incurred by Opes Prime arising out of any default, whether by act or omission of the client. The guarantor(s) must pay Opes Prime, on demand, a sum equal to all monies due and payable by the client.
Opes Prime may make this demand without first claiming payment from or proceeding against the client. Opes Prime may set-off or apply any indebtedness it owes to the company (the client) or the guarantor against all amounts due by the company (client). We strongly recommend that you and the guarantor(s) obtain independent legal advice in respect of the terms of the Guarantee and Indemnity Agreement.
By entering into a Guarantee and Indemnity Agreement the company (client) and the guarantor(s) agree and acknowledge that if the guarantor becomes insolvent or any event occurs which in Opes Prime’s opinion does or is likely to have a material adverse effect on the guarantor’s ability to comply with its obligations under the Guarantee and Indemnity Agreement then Opes Prime may treat that as an event of default under the Securities Lending and Borrowing Agreement and, among other things, terminate the Securities Lending and Borrowing Agreement and any outstanding securities loans.
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