Fully-Paid Stock/​Securities Lending

If you’re an investor who owns stocks or ETFs in an investment account at an investment dealer, your shares might be doing more than just sitting there. As an investor, you may have noticed an option in your self-directed investing account that may enable you to lend your fully-paid securities/shares and earn income. Many Canadians may not be aware that they can loan out their shares and may be asking – “What does this mean, how does it work, and what are the risks?”

What is Securities/Stock Lending?

Securities or stock lending occurs when an investor temporarily loans the eligible shares they own to other investors. By loaning their shares, an investor may be entitled to receive a fee in return. As an investor, you still own the investment, but someone else is borrowing your shares behind the scenes.

If an investor chooses to participate in a fully-paid securities lending program, the lending process is automatically handled by your dealer. This means that the shares that are loaned and returned, as well as the money you may receive, are all coordinated by your dealer. Since the process is automated and hands-off, retail investors who opt-in this program would not be required to find other investors to loan their shares to.

In Canada, fully-paid securities lending is regulated by CIRO. Dealers are required to comply with CIRO rules and policies on fully-paid securities lending. It is important to check with your dealer and/or advisor to see if this option is available for you.

What is the Purpose of Securities Lending?

Shares that are loaned out are typically used by the recipient for the purposes of short selling a company or investment product, to meet collateral requirements, and fulfill settlement obligations.

Why Do Retail Investors Lend Their Securities/Stocks?

For retail investors, securities lending offers a way to earn passive income from the securities you own and have fully paid for. The income you receive through this program may add to your portfolio’s returns over time. Not all securities are in high demand, and securities will have different lending fees depending on the supply and demand of it.

Securities that are volatile, heavily shorted, and/or have low liquidity are typically higher in demand for the purposes of stock lending. This may result in higher fees that an investor can potentially earn if they do lend out their shares. It is important to know that not all dealers provide this option or share the lending income with you. You should review your dealer’s policy and fee structure for more information.

What You Should Know as an Investor

As an investor, there are other important considerations related to securities lending that you should be informed about.

• Participation in a dealer’s securities lending program is voluntary.
• Dealers are required to provide a clear description of their securities lending program and must disclose all applicable risks to their clients.
• The dealer is required to obtain a client’s consent to opt-in to the securities lending program.
• A client is allowed to opt-out of the program at any time.
• A client may exclude specific securities in their account from being lent.
• The dealer must provide a confirmation to the client whenever securities have been lent, the loan is terminated, or there is a change in the fees and/or rates.

How it Works: Case Example

What Are the Benefits of Securities/Stock Lending?

1. Earn Extra Income: You may receive a portion of the lending fee from your dealer and earn passive income.
2. You Still Own Your Investments: Your investments stay in your account and continue to increase, decrease, or stay the same amount in value. As an investor, you have the option to include or exclude which securities of yours are loaned.
3. Hands-Off: If you opt-in, the lending process is automatically handled by your dealer.

What are the Risks of Securities/Stock Lending?

1. No Investor Protection Fund Coverage: The Canadian Investor Protection Fund (CIPF) does not provide coverage for shares that are loaned out under a dealer’s securities lending program.
2. Risk of Default: There is a risk that the borrower defaults. However, dealers are required to keep collateral on the market value of your shares.
3. Dealer Insolvency: If your dealer goes insolvent, you may not receive your lent securities back and may have limited recourse to the collateral.
4. Dividend Impact: If the shares you own pay a dividend, you get a substitute cash payment instead of an actual dividend. This may have tax implications for you as an investor.
5. No Voting Rights: As a shareholder, you cannot vote on corporate matters while you lend out your shares.
6. Unclear Revenue Sharing: Revenue sharing may differ as each dealer may have their own structure on how earnings from the securities lending program is split with a client. It is important to review your dealer’s securities loan agreement to understand how much of the borrow fee you will receive.

Some Questions You May Ask Your Dealer:

Conclusion

Securities lending for Canadian investors may offer flexibility and a low-effort way to earn extra income from the investments you already hold. However, there are various risks involved that you as an investor should be aware of. It is important to always conduct your due diligence and ask questions to see if participating in this program fits within your risk tolerance and overall investment goals.