Securities Lending is an investment activity that allows an owner of whole-shares of securities to earn extra income
Securities lending is an investment activity that allows an owner of whole-shares of securities to earn extra income by “renting” out their investments.
An investor (aka the lender) temporarily loans securities to a financial institution, such as a brokerage firm, a bank, or hedge fund (aka the borrower). The borrower pays some income back to the lender (as a loan fee) in exchange for the securities. This fee varies based on market demand.
Confused? Here’s more background on securities lending and how it works.
What is a security?
“Security” is a technical name for an investment. On Stash, that means single stocks and ETFs. You can learn more about the difference between these two investment types here.
What are the benefits of securities lending?
The benefit of securities lending is the interest payments (typically paid at month’s end) that the lender will receive on top of owning the investments. The lender still maintains the ability to sell the security at any time and still makes (or loses) money when the investment loses or gains value.
What are the drawbacks?
While the securities are being lent, the lender waives voting rights, may receive payments in lieu of dividends, and those investments may not be covered by SIPC protection.
Are loaned securities SIPC protected?
The securities that are loaned to a borrower may no longer be protected by Securities Investor Protection Corporation (SIPC) coverage, which is usually available to protect customers in instances where a brokerage firm that has custody of his/her assets goes bankrupt.
Can my investments be lost in a securities lending program?
All investments borrowed through a securities lending program are collateralized at least 100%. This means that the borrower is providing cash, or other value, to protect the lender.
What’s a dividend in lieu?
In securities lending, the borrower technically receives dividends due to a given security. The borrower then passes the lender the same amount as “Payments In Lieu of Dividends”, or “Dividends in Lieu”.
These are the same value as the regular dividends but may receive a different tax treatment.
Can I still vote on my loaned securities since I still own them?
The borrower of the securities, not the lender, has the right to vote, or provide consent to take any similar action with regard to the loaned securities if any deadlines associated with such actions falls within the term period of the loan.