Stock lending: What you need to know

What is 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 have not been completely paid for, but whose market value exceeds 140% of the customer’s margin debit balance.

How does it work?

1. Enrollment: If you are eligible, you’ll see a notification within the web version of Frec’s platform where you can opt into Frec’s securities lending program offered through Apex, our clearing firm. You can enroll in your “Accounts settings” by selecting the “Investing” tab and clicking the link titled, “View Stock lending” in the “Stock lending” box. You will not be able to enroll within our mobile app.
2. Lending process: Once you opt into the program, all of your securities become eligible for lending. Apex will identify demand for certain securities and lend them out on your behalf.
3. Collateral & protection: While Apex lends your positions, they also deposit cash in the amount of 102% of the securities’ price rounded to the nearest dollar. The deposit is adjusted on a daily basis as the market fluctuates. The cash is held in a Trust account at JP Morgan Chase Bank. 
4. Interest payments: You will 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. You’re able to choose where you want your interest payments received within your Frec account. You can choose from depositing in your direct index accounts, Treasury, Cash or Allocation.
5. Selling & 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 are automatically returned to complete the sale or transfer. You’re also able to unenroll in the program at any time within the “View Stock lending” page found in the “Stock lending” box in “Account settings” and “Investing” tab. 

Am I eligible? 

To be eligible for Stock lending, you need to have one of the following: 

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

How do I enroll in Frec’s Stock lending program?

To get started, simply opt in by going to your “Account settings” within the web version of our platform. You can view “Account settings” in the web version of our platform (currently not accessible on mobile) by selecting the upper right-hand corner of the Overview screen and selecting “Account settings” from the dropdown menu. You’ll then select the “Investing” tab and click the link titled, “View stock lending” in the “Stock lending” box. 

From there, you can toggle on or off to enable Stock lending on your account.

If you do not see this information within the web version of our platform, you may not be eligible to participate in our program. If you have any questions, feel free to contact help@frec.com. 

What type of investments are eligible?

Fully-paid or excess margin securities within your Frec account, which includes your self-managed and direct index portfolios. The type of securities that are generally attractive to borrowers in the securities lending market, and which generate the highest loan fees, are “hard-to-borrow” securities. A stock is usually considered “hard-to-borrow” when there is high demand, limited supply, and/or high volatility. Examples of indices offered at Frec with “hard-to-borrow” securities include the CRSP US Total Market, Russell 2000 and 3000 indices. 

Can I choose which stocks I want to lend out?

No, if you enroll in our FPSL program, all of the positions in your account will be considered for lending.

How are my borrowed securities used?

When you lend your Fully-Paid Securities, it is likely that such securities will be used to facilitate one or more short sales where the borrower is selling shares in hopes that the stock will decline in value (the short seller later repurchases the stock to pay back the stock loan). Since you are holding the shares “long” in your account, the activity of short sellers potentially could affect the long-term value of your holdings. This is due to the fact that short selling activity can put downward pressure on a stock’s price, at least in the short term, which can lead to higher volatility and potentially influence the stock’s long-term value. 

When will my investments be loaned out?

There is no guarantee that any of your investments will be loaned out even if you opt-in to participating in the Stock lending 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. 

How will I know if any of my investments are loaned out?

You can see if your investments have been loaned out within the “Account settings” of your account. You can locate the “Account settings” within the web version of our platform and click on the upper right-hand corner of the screen. From there, select “Account settings” from the dropdown menu and then select the “Investing” tab. 

Under the “Stock lending” box you can select the link “View stock lending” to view which stocks are on loan. 

Key benefits

• Earn passive income: Investors can generate additional returns on their holdings without selling them.
• Maintain ownership rights: Investors retain economic benefits, such as dividends (though they may be paid as cash-in-lieu if securities are on loan).
• Liquidity & flexibility: Securities can be recalled at any time if the investor decides to sell or transfer them.

Risks & considerations

• Counterparty risk: While collateral is provided, there is still a risk associated with the borrower defaulting.
• Dividend treatment: If a stock pays dividends while on loan, investors 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 votes on your behalf and will lose the right to vote on the shares you lend out.

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.