When you invest in a stock or an Exchange Traded Fund (ETF), you generally expect to generate a return in one of two ways: dividends and price increase of the security. There is now a third possibility with the Fully-paid Securities Lending program, as lending your shares provides you an opportunity to make an extra income.
What is Fully-paid Securities Lending?
Fully-paid lending is straightforward. Investments that are otherwise passive/non-managed, can potentially be put to work to earn additional returns, while you continue to own those assets. It’s like owning a property that you’re not using, rather than let it sit empty – there is an opportunity to rent it out and earn income. Lenders receive 50% of the revenue earned on their loaned shares, and retain benefits of ownership, such as dividends. The securities are also guaranteed with a collateral that provides a 102% protection1.
Learn more about the Fully-Paid Securities Lending Program in less than 2 minutes
Is Securities lending new?
Securities lending or stock loan is a well-established practice in the finance industry. For many years it was only available to big financial organizations such as pension funds, insurance companies and asset managers like mutual fund companies or ETF providers. Now, fully-paid lending is offered to retail clients who can lend out their securities for a fee that is based on the market forces. Fully-paid lending is a common and transparent practice that is very popular in the U.S. and it’s growing exponentially in Canada. NBDB is the first bank owned direct broker to offer it in Canada.
Securities lending is not a new practice. First lending transactions took place in London in 1960. Within 30 years, it evolved from administrative and support business to a common practice designed to increase investments returns for large financial companies. In the 2000s, the securities lending market developed globally. For the past 15 years, it’s been widely used by investment vehicles like investment funds and ETFs. If you hold these investments, you are already participating in securities lending.
How does the loan of securities work?
There are no guarantees about which securities will be in demand - or when. Shares being requested for loan depend on what is in demand in the market. Shares of big companies like Walmart, Bell Canada, Royal Bank2, known as “general collateral,” generally produce lower returns, as opposed to “hot” stocks like Canopy Growth and Sphere 3D Corporation2 that can also be known as “hard to borrow”, which typically may generate higher revenues. Generally, easy to borrow securities have loan rates below 1%, while warm to borrow ones range from 1% to 10%. The hard to borrow securities can go above 10%.
What are loaned securities used for?
Normally, banks and brokers borrow securities to deliver them quickly and efficiently to another buyer. Some investors may speculate and sell shares of a company that they don’t own who expect to buy them back later at a lower price. In order to deliver those shares to another investor who bought them, banks borrow securities from lenders. The revenue received from lending your shares can increase your overall investments returns without extra effort and additional risk.
Why should you lend your fully-paid securities?
You built your portfolio having in mind your financial objectives. Fully-paid Securities Lending allows you to have additional revenue despite price fluctuations, without you having to do anything. Even if the revenue is not guaranteed and can be random, it is revenue that you would not have otherwise and for free!
Get ready to potentially earn more revenue with the Fully-paid Securities Lending program.
1 The Canadian Investor Protection Fund (CIPF) does not provide any coverage for fully-paid securities lending transactions. Your securities will not be protected by the CIPF while on loan since they will not be held in your securities account. Your fully-paid securities lending account is not considered a "securities account" or a "customer" account within the meaning of CIPF's coverage policy. Instead, Natcan Trust Company will hold 102% high-quality collateral for you while your securities are out on loan. This collateral will be updated daily.
2 For information only.
Tatiana Kaufmann Associate Director, Wealth Management Securities Lending.
Tatiana is an Associate Director for National Bank Independent Network where she leads the Fully-paid Securities Lending (FPL) program for all National Bank Wealth Management business lines. Tatiana has been in the securities lending industry since 2013. Her mission is to educate the public about the opportunities of lending securities to earn additional returns and make the program available to all clients who want to lend their securities.