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
I assume when you sign up for the Stock loan program for full paid for securities, they provide a disclose with the risks. Ask for it.
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...
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.
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...