The Securities Lending Program

Traditionally when you’re holding an investment, the stock or ETF will sit in your account while the underlying asset (usually the issuing company) makes you money through growth and dividends.

But what if you could put that stock to work?

With Questrade’s Securities Lending Program, you can.

The Securities Lending Program is a way for the average investor to make a bit of extra money off of the stocks they already have in their account. This is done through Fully Paid Securities Lending, or FPSL.

Think of it like real estate. If you have a property that is going to sit idle for a few months, you can AirBnB it for the period that you aren’t using it. 

The Securities Lending Program basically does the same thing with your held securities: it loans them out to investors who need them for advanced trading strategies for as long as they sit in your account.

You still own the shares and can sell them at any time through your trading platform, and dividends are still paid out to you. 

Who is borrowing these shares?

Borrowing shares is required for certain advanced trading strategies. The most common of these strategies is short selling, where an investor borrows and sells shares in hopes that the price will decline before they have to buy them back and return them.

Borrowers may also need the shares for more advanced reasons, like to fulfil contracts, meet obligations, or to leverage their voting rights.

Does short selling mean securities lending is harmful to the stock’s value?

Academic research has shown that stock lending does not have a significant negative impact on the value of the underlying security ¹. The shorting strategy is supposed to benefit when the price of a security goes down, not actively drive down the price. A short only lowers the share’s value as much as the sale of those shares. It is unlikely that a short-sale enabled by your securities will have a significant impact on the underlying price.

Anybody with a Questrade account can loan securities through the Securities Lending Program. All you need is a qualifying account type.

The Securities Lending Program uses Fully Paid Securities Lending, which means that to qualify a security must be fully paid. This means that the security can’t be borrowed, and you can’t lend a fractional share or a share that was bought on margin.

Fully paid securities qualify for the Securities Lending Program if they meet the following criteria:

• They must be listed on one of the major U.S. exchanges (NYSE or NASDAQ)
• They must have either a 6-month volume weighted average price of $2.00 or more, or they must have a 6-month average daily trading volume of 100,000 shares or more, or they must have a 6-month average free float market capitalization of $200 million or more

Currently, most listed U.S. stocks and ETFs qualify. Currently, bonds, precious metals, options contracts, currency swaps, and other derivatives cannot be lent out through the Securities Lending Program.

Canadian-listed securities do not currently qualify for the Securities Lending Program.

For the most part, the Securities Lending Program is completely automated—once you’re signed up, we take care of the rest:

• We find borrowers
• We manage the payments and collateral
• We end the loan when you want to suspend lending for the share, end participation in the program, or sell your position

How do I know if I’m opted in?

If you haven’t opted out, then you’re already in. You can check status and change your settings through your Securities Lending settings page described below.

You can check your settings by logging into your web platform and going to Management > Securities lending.

From here you can check your program status and opt in or out of the Securities Lending Program.

You can also check reports and statistics by going to Reports > Lending confirmation

Here you can check which securities are currently on loan and keep track of payments you receive.

That’s all there is to it. When lending is enabled for a security, all qualifying shares will be automatically made available for loan at the start of the next business day.

Now that you know what the Securities Lending Program is and how it works, it’s time to get into the fun part: how you get paid.

Determining borrow rates

How much you make on a particular loan can vary depending on the security. It basically boils down to supply and demand: more demand raises the price, more supply lowers the price, and your earnings are where supply and demand meet.

Since the most common reason for borrowing is to short shares, volatile securities often have greater demand (and therefore higher lending rates) than stable counterparts, but even blue chip stocks have some level of demand.

How you are paid

Every month, you will receive a payment for all of the money you made borrowing shares as a single lump sum. This will show up as Securities Lending Payment in your transaction history.

This monthly payment isn’t a limit; if you sell a share between Securities Lending Program payments, you will still be compensated for the time that your shares were lent out.

How your dividends are paid

Dividends for shares loaned out will appear in your transaction history as Manufactured Dividend. They will be the same amount as the dividend you would’ve received had the shares not been loaned.

While lending securities can be a great way to earn additional passive income, it does have some impact on your investments, each with their own work-around.

• You will not be able to vote with shares that are actively loaned out. Voting power is one of the reasons an investor might want to borrow your shares. If you wish to exercise the full voting rights of your holdings, you can temporarily exempt them from the Securities Lending Program before the vote to regain your voting rights.
• Lent shares will temporarily lose CIPF coverage. To compensate for this, we place a cash collateral to make sure you’re covered in the unlikely scenario that the shares are not returned.

For a full list of trade offs, please refer to the Securities Lending Program risk disclosure.

How the cash collateral works

Whenever a share is lent, we ensure that a cash collateral of 100% of the share’s value is placed in a secure third-party account. 

This collateral is updated daily to make sure that the collateral held for your shares keeps up with the previous day’s growth of the security value. This means you’re still covered no matter how long the security is borrowed.

If you want to make sure you’re enrolled, or to manage your securities lending settings, log in to the web platform and click Management > Securities lending.

If you want to learn more about how the Securities Lending Program works, check out our Securities Lending Program FAQ.

Not a Questrade customer yet? Click below to open an account today and enjoy the benefits of this exciting program.

Note: The information in this blog is for educational purposes only and should not be used or construed as financial or investment advice by any individual. Information obtained from third parties is believed to be reliable, but no representations or warranty, expressed or implied, is made by Questrade, Inc., its affiliates or any other person to its accuracy.