When lending government securities, market practice requires collateral equal to what percentage of the loaned security market value to be posted?

In the context of lending government securities, the market practice dictates that a borrower must provide collateral that exceeds the value of the loaned securities. This is primarily to protect the lender against potential default and fluctuations in the market value of the loaned securities.

The standard requirement is generally to post collateral at a level of at least 102% of the market value of the loaned securities. This means that if government securities worth $1,000,000 are lent, the borrower must provide collateral valued at $1,020,000. This higher collateral percentage serves multiple purposes: it cushions the lender against time lags in valuing the securities, accounts for any potential price volatility, and serves as a safeguard in the event of a default.

In practice, this mitigates risk for the lender and ensures there is sufficient collateral to cover potential losses. The market often uses this standard of 102% as a benchmark for transactions involving government securities, making it a critical understanding for professionals in finance and securities lending.