Loaning out stocks I own to the broker (or someone else)...What can go wrong??

C

Cabin111

At Fidelity they offer this...I am sure Schwab offers it too.

It looks like steady income...But what are the downsides to doing this?

If the other side goes bankrupt, would my stock be tied up in the courts??

I can see the benefits of the income (with stocks I do not wish to option).

Can you tell me the downsides. Please, no guesses. Links would be nice too...

Thanks
 
Cabin111 said:
At Fidelity they offer this...I am sure Schwab offers it too.

It looks like steady income...But what are the downsides to doing this?

If the other side goes bankrupt, would my stock be tied up in the courts??

I can see the benefits of the income (with stocks I do not wish to option).

Can you tell me the downsides. Please, no guesses. Links would be nice too...

Thanks
More...


Where do you think short sellers get access to stocks? Do you have a margin account or cash? I had a stock that was 1000% locate borrowing cost. Why not collect half?
 
Pieces off the net...

Potential borrower default
Perhaps the biggest risk, though, is the instance where the institution borrowing your shares defaults and can’t give the shares back to you. While your investment is no longer SIPC-insured while it’s being lent out, Sideris notes that institutions borrowing shares must put up collateral that’s equivalent to 105% of the value of the shares they’re borrowing. This money would be used to pay you back if the institution defaults.

“So if I’m a hedge fund and I’m borrowing your $1,000 worth of stock, I have to set aside $1,050 in cash in a separate account and leave it there for the duration of the time I borrowed it,” Sideris says. “You get access to that collateral so it mitigates that risk of default.”

However, even if you get back the value of the borrowed shares, you’ll have to repurchase those stocks if you want to own them again. This means you could miss out on any potential upward movement in the stock’s value.

Again, the risk of a borrower defaulting is low but it’s still good to educate yourself on the possible scenarios and make sure you can emotionally stomach the risk.

Question from the above story...Is it always cash in the separate account? Could they put in junk bonds? Will Schwab or Fidelity watch closely and margin call them if necessary, to try and make me whole on my lending??

https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=&cad=rja&uact=8&ved=2ahUKEwi4wu2D4MSCAxXWJkQIHXdbCMIQFnoECA0QAw&url=https://money.usnews.com/investing/investing-101/articles/things-to-know-about-lending-shares&usg=AOvVaw32sMUbixEvHb7XKpXpWna1&opi=89978449

It's funny...My QQQ would earn diddly/squat. But my Terumo TRUMY (Japanese company, I bought on the Tokyo Exchange), can earn over 14% yearly!! I'm going to chew on TRUMY a bit. It rose over 8.5% today...
 
Last edited:
Cabin111 said:
Pieces off the net...

Potential borrower default
Perhaps the biggest risk, though, is the instance where the institution borrowing your shares defaults and can’t give the shares back to you. While your investment is no longer SIPC-insured while it’s being lent out, Sideris notes that institutions borrowing shares must put up collateral that’s equivalent to 105% of the value of the shares they’re borrowing. This money would be used to pay you back if the institution defaults.

“So if I’m a hedge fund and I’m borrowing your $1,000 worth of stock, I have to set aside $1,050 in cash in a separate account and leave it there for the duration of the time I borrowed it,” Sideris says. “You get access to that collateral so it mitigates that risk of default.”

However, even if you get back the value of the borrowed shares, you’ll have to repurchase those stocks if you want to own them again. This means you could miss out on any potential upward movement in the stock’s value.

Again, the risk of a borrower defaulting is low but it’s still good to educate yourself on the possible scenarios and make sure you can emotionally stomach the risk.

Question from the above story...Is it always cash in the separate account? Could they put in junk bonds? Will Schwab or Fidelity watch closely and margin call them if necessary, to try and make me whole on my lending??

https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=&cad=rja&uact=8&ved=2ahUKEwi4wu2D4MSCAxXWJkQIHXdbCMIQFnoECA0QAw&url=https://money.usnews.com/investing/investing-101/articles/things-to-know-about-lending-shares&usg=AOvVaw32sMUbixEvHb7XKpXpWna1&opi=89978449

It's funny...My QQQ would earn diddly/squat. But my Terumo TRUMY (Japanese company, I bought on the Tokyo Exchange), can earn over 14% yearly!! I'm going to chew on TRUMY a bit. It rose over 8.5% today...
More...
I read about a ETF that added 4% to his performance(-60% vs -64% without.) through loaning. Sharing is caring!
 
This smells of derivatives!!


4. Which assets may be provided as collateral?

• Fidelity will provide you with collateral held at a third
party custodial bank. The bank will serve as your collateral
agent and hold your collateral in cash or cash-equivalent
form. Under the terms of the MSLA and applicable law,
other securities that qualify under Rule 15c3-3 of the
Securities Exchange Act of 1934 are also permissible
forms of collateral. These include U.S. Treasury bills and
notes, negotiable bank certificates of deposit, and other
securities approved by the U.S. Securities and Exchange
Commission that have similar characteristics in terms of
liquidity, volatility, market depth and location, and the
issuer’s creditworthiness.
• With respect to FDIC insurance coverage for cash
collateral deposits held at the custodial banks, please
refer to the Exhibits in the Collateral Administration
Agreements entered into by Fidelity and the banks.
If you do not want to have your collateral held at a
particular bank, you may refrain from signing the collateral
agreement for that particular bank.


5. What are the risks associated with fully paid
lending?

• The principal risk in any securities-lending transaction
is counterparty default. Fidelity is your counterparty
on all fully paid lending transactions. If Fidelity were to
default on its obligations as defined in the MSLA, you
would have the right to withdraw the collateral from
the custodian bank in the manner described in the
Collateral Administration Agreements. In the event that
you make a withdrawal request, the bank will transfer
an amount equal to your current collateral amount (or
such lesser amount as you may have requested) to your
specified delivery instructions. If you were to choose to
use the collateral proceeds to repurchase securities, this
would be considered a new purchase and, potentially, a
taxable event.
 
Much of the short interest is used in put option market making.
It's reflected in put/call parity.
140% of the spot is required.
Most size institutions earn a multiple of commissions in short rebates.
It is all electronic entries in the clearing network and in many cases, it isn't even moving to a different clearing entity.
A huge profit center for the member firm community.
 
ajacobson said:
Much of the short interest is used in put option market making.
It's reflected in put/call parity.
140% of the spot is required.
Most size institutions earn a multiple of commissions in short rebates.
It is all electronic entries in the clearing network and in many cases, it isn't even moving to a different clearing entity.
A huge profit center for the member firm community.
More...


Tell me if I have this right/correct...I'm thinking of a 2008-2009 situation.

You/I could be dealing with:

1. A person on the other side of a trade situation.
2. A clearinghouse...Maybe two.
3. A market maker or another broker.
4. At least one bank.
5. FDIC if the bank goes under.
6. Fidelity, if there is a problem.
7. No SIPC.
8. The US government if they needed to step in...

KISS...
 
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