Securities lending is an established practice that involves the lending of securities from a lender (“Fund”) to a third-party (“Borrower”). In return, the Borrower posts collateral — typically cash or Government securities — in an amount equal to more than 100% of the value of the borrowed securities. Over the course of the loan term, the Fund will receive any interest or dividends on the securities loaned. Moreover, the Borrower will pay a fee, as well as any interest earned on the investment of the cash collateral.
The primary risk in securities lending is that a Borrower may default on its commitment to return securities that are on loan. If this occurs and the value of the liquidated collateral does not exceed the cost of repurchasing the securities, the Fund may suffer a loss with respect to the shortfall. This risk and others are described in more detail in the sales prospectus.