Final answer:
In a securities lending transaction, it is incorrect that the borrower keeps all income distributions, as the lender retains the right to them. Standard characteristics of such transactions include providing collateral, agreeing to return identical securities, and the borrower's unrestricted use of the security. The correct option is b.
Step-by-step explanation:
A securities lending transaction is the temporary transfer of a security to a borrower, which usually includes several key characteristics.
However, the borrower keeps all income distributions is not one of these characteristics; rather, during the tenure of the securities lending transaction, the lender retains the right to income distributions, such as dividends or interest payments, which are typically compensated to the lender via other mechanisms in the agreement.
In a standard securities lending transaction:
- The borrower provides collateral (such as cash, other securities, or a letter of credit) to the lender.
- The borrower agrees to return identical securities at the end of the lending period.
- The borrower has unrestricted use of the securities during the loan period.
This system exists to enhance liquidity in the markets, allowing borrowers to use the borrowed securities to facilitate trading strategies like short selling. In contrast, the lender benefits from the collateral and any fees associated with the loan.
Understanding this helps elucidate the incentives and potential risks involved in lending practices, such as the tendency for banks to issue subprime loans and then sell them as part of the securitization process. The correct option is b.