Final answer:
When a Broker-Dealer lends stock to another, they retain the right to demand the return of the securities. The stock lending is a means for Broker-Dealers to ensure liquidity and facilitate short selling, while also receiving interest on the lent securities.
Step-by-step explanation:
When a Broker-Dealer (BD) lends stock to another BD, the lender has the right to call in the loan and demand the return of the securities, typically with notice. This right is important as it allows the lender to maintain a level of control over their securities while earning interest on the loan. The arrangement is central to the practice of securities lending, which facilitates short selling and provides liquidity to the markets. However, when firms are considering how to access financial capital, they often weigh the options of borrowing from a bank, issuing bonds, or issuing stock. Issuing bonds or borrowing from a bank commits the firm to scheduled interest payments regardless of income, while issuing stock involves selling off company ownership and becoming accountable to shareholders and a board of directors.