The holder of record...
6.13 The holder of record on the ex-dividend date gets the dividend. You are not the holder because you delivered the shares to the buyer. Assuming the buyer still owns the shares, the company will pay the dividend to that holder. The company will not pay a dividend to the lender of the shares because the lender passed ownership to you. You must, therefore, make a substitute payment of $25,000 to the lender to compensate the lender for the dividend forgone. The payment reduces the dividend income you report on your fund.
6.14 The market value of the 50,000 shares after the split should approximately equal the market value of the 25,000 shares before the split. The cash collateral should therefore remain adequate. You must eventually return 50,000 shares to the lender.
6.15 The lender of the shares loses the right to vote the shares when title is passed to the borrower. Because the proxy vote is announced well before the record date, the lender can recover the right to vote by closing out the financing trade before the record date on the vote. Or, the lender could require a premium (lower rebate rate) to compensate for the lost vote. If the lender had committed to lend the shares for a fixed term prior to the proxy announcement, the borrower pays no compensation to the lender.
6.16 The security lender treats the income the same as if the payment was received from the corporation or Treasury directly. Likewise, a borrower reduces dividend income or Treasury interest by the amount of these substitution payments.
6.17 The counterparty on a futures contract is the clearing corporation, not the entity that actually bought or sold the contract on the floor of the exchange when the hedge fund established the position. The clearing corporation has several advantages in protecting itself from loss compared to a lender in the cash market for the underlying security. First, the clearing corporation has daily margin (both initial and maintenance), which may be more frequently maintained than in other markets. Second, the updated price of the asset is easy to verify because the same standardized asset trades frequently. Third, because the asset trades frequently, it is relatively easy for the clearing corporation to liquidate or buy in a trade if a customer fails to maintain margin.
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