In an example transaction, a large institutional
money manager with a position in a particular stock would allow those securities to be borrowed by a financial intermediary, typically an investment bank, prime broker or other broker-dealer, acting on behalf of one or more clients; after borrowing the stock, these clients could sell it short. The short seller would like to buy the stock back at a lower price (which would create a profit). Once the shares are borrowed and sold, it generates cash from selling the stock. That cash would become collateral for the lender. The cash value of the collateral would be
marked-to-market on a daily basis so that it exceeds the value of the loan by at least 2%. NB: 2% is the standard margin rate in the US, whereas 5% is more usual in Europe.
Source: wikipedia
