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Stock lending

Learn how Frec's stock lending program works, who's eligible, how interest is paid, and the risks to weigh before enrolling.

Understanding stock lending

Stock lending, also known as fully paid securities lending, is a program that allows investors to lend out their fully paid or excess margin securities to other market participants, typically short sellers, in exchange for interest payments. This program enables investors to generate additional income on their holdings while still maintaining ownership of their securities.

Excess margin securities are securities that haven't been completely paid for, but whose market value exceeds 140% of the customer's margin debit balance.

How stock lending works

Once you opt in, all of your securities become eligible for lending. Apex, Frec's clearing firm, identifies demand for certain securities and lends them out on your behalf.

Collateral and protection: While Apex lends your positions, it also deposits cash collateral, currently equal to at least 100% of the securities' market value, as required under your Master Securities Agreement with Apex. Apex may require more at its discretion if applicable laws or market custom call for it. The deposit is adjusted daily as the market fluctuates. The cash is held in a collateral account at JPMorgan Chase Bank, N.A., with Wilmington Trust, National Association acting as trustee for the benefit of lenders.

Interest payments: You'll receive payments for lending out your securities, with interest rates varying based on market demand for the stock. Stocks that are harder to borrow will earn you more interest than those that are easier to borrow. Under the terms of the Master Securities Lending Agreement, you're guaranteed at least 25% of the total net proceeds Apex earns from lending your shares; the remainder is split between Apex and Frec. You can choose where you want your interest payments deposited: your direct index accounts, Treasury, Cash, or Allocation.

Selling and transferring stock on loan: You can trade or transfer your lent-out stock as normal. If securities are sold or transferred while on loan, they're automatically returned to complete the sale or transfer. You can also unenroll from the program at any time.

Enrolling in stock lending

Stock lending is only available in the web version of Frec's platform, not the mobile app. If you're eligible, you'll see a notification where you can opt in.

  1. Select your name in the upper right-hand corner of the Overview screen.
  2. Select Account settings from the dropdown menu.
  3. Select the Investing tab.
  4. In the "Stock lending" box, select View stock lending.
  5. Toggle stock lending on for your account.

If you don't see this option, you may not be eligible to participate. Contact us if you have questions.

Eligibility

To be eligible for stock lending, you need one of the following:

  • A direct index portfolio, or
  • A minimum of $20,000 and some investment experience

Eligible investments

Fully paid or excess margin securities within your Frec account are eligible, including those in your self-managed and direct index portfolios.

The securities generally most attractive to borrowers, and which generate the highest loan fees, are "hard-to-borrow" securities. A stock is usually considered hard-to-borrow when there's high demand, limited supply, or high volatility. Examples of indices offered at Frec with hard-to-borrow securities include the Morningstar CRSP US Total Market, Russell 2000, and Russell 3000 indices.

Choosing which stocks to lend

You can't choose individual stocks. If you enroll in Frec's stock lending program, every position in your account is considered for lending.

How borrowed securities are used

When you lend your fully paid securities, they're likely used to facilitate one or more short sales, where the borrower sells shares hoping the stock will decline in value (the short seller later repurchases the stock to pay back the loan). Since you're holding the shares "long" in your account, short-selling activity could potentially affect the long-term value of your holdings: it can put downward pressure on a stock's price, at least in the short term, which can lead to higher volatility.

When investments are loaned out

There's no guarantee that any of your investments will be loaned out, even if you opt in to the program. There may not be a market to lend out your positions, or our clearing firm may loan out securities from other participants in the program instead.

Viewing your loaned investments

Follow the same steps as above to reach the "Stock lending" box (Account settings > Investing tab), then select View stock lending to see which stocks are currently on loan.

You'll also receive a fully paid securities lending confirmation daily, once the stock loan allocation process for that day is complete. You can find these confirmations by selecting your name in the upper right-hand corner, selecting Account settings from the dropdown menu, and then selecting the Documents tab.

Key benefits

  • Earn passive income: Generate additional returns on your holdings without selling them.
  • Maintain ownership rights: Retain economic benefits, such as dividends (though these may be paid as cash-in-lieu if securities are on loan).
  • Liquidity and flexibility: Securities can be recalled at any time if you decide to sell or transfer them.

Risks and considerations

  • Counterparty risk: While collateral is provided, there's still a risk associated with the borrower defaulting.
  • Dividend treatment: If a stock pays dividends while on loan, you receive cash-in-lieu, which may have different tax implications.
  • Market conditions impact returns: The lending fee (interest paid) fluctuates based on supply and demand for the security.
  • Loss of voting rights: Frec Advisers typically votes on your behalf, but shares on loan as of a shareholder vote's record date aren't voted at all, not by you or by Frec. You can recall your shares before the record date if you want to retain that vote.

You can read more about the risks of stock lending in our disclosure document.

Is stock lending right for you?

Investors looking to earn additional income on their securities without selling them may find stock lending an attractive option. However, it's essential to weigh the potential risks, such as dividend tax treatment and counterparty exposure, before enrolling.