When an entity borrows from another, legal claim on the securities owned by the borrower can be taken as security by the lender should the borrower default on its obligation. The securities' owner still has title to the securities, but the claim or lien remains on record. In the event that the securities are sold, the party with the legal claim on them must be given first opportunity to be paid back. In some cases, encumbered securities cannot be sold until any outstanding debts belonging to the owner of the securities are paid to the lender who holds claim against the securities.
Just as a house may be used as collateral for a mortgage, securities may be used as collateral for borrowing. While title does not change hands, it is limited by the extent of the lien on the assets. Contrast with "unencumbered".
Investment dictionary. Academic. 2012.
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