Fidelity's Share Loan System: What Investors Need To Know

Fidelity's Fully Paid Lending Program allows investors to lend out their securities and earn incremental income. The program is invite-only, and investors can lend out their fully-paid or excess margin securities to Fidelity in exchange for collateral and an interest rate-based lending fee. The interest rate is based on factors such as borrowing demand, the overall lendable supply, and general market conditions. While investors maintain full economic ownership of the loaned securities, they relinquish their voting rights and assume the risk of counterparty default. The program offers little advantage in terms of income, and the yield is lower than selling covered calls against shares.

The Fully Paid Lending Program

Fidelity's Fully Paid Lending Program allows eligible clients to lend fully-paid or excess margin securities from their portfolio to Fidelity and earn incremental income. The program is voluntary and provides benefits such as the ability to retain full economic ownership of the securities on loan and the potential to receive income from lending shares.

To be eligible for the program, clients must have at least $25,000 in each Fidelity brokerage account they wish to enrol and complete digital enrolment for all eligible accounts. Once enrolled, there are no additional steps, and all eligible securities in the account will be considered for borrowing based on demand in the lending market. The income earned through the program will be credited to the client's Fidelity account on a monthly basis.

The length of the loan and the income earned will depend on short-selling demand and available lending supply. It is important to note that shares on loan are not covered under the Securities Investor Protection Corporation (SIPC). However, Fidelity provides collateral at a minimum of 100% of the loan value, and clients can view their collateral online on the Loaned Securities Page.

While participating in the program, clients can sell their shares or recall the loan at any time. They can also sell covered calls against their loaned position if their account is approved for options trading. However, they will relinquish their ability to exercise voting rights on the loaned shares.

How lending affects ownership

Lending shares can be a good way to earn passive income. It is a common practice, and several share lending programs are available for this purpose. However, it is not without its drawbacks, and it is important to understand how it can affect your ownership of the securities.

Fidelity, for example, offers a Fully Paid Lending Program that allows you to lend securities in your portfolio and earn income. This program is designed to meet the demand in the securities lending market, often due to short selling, scarce lending supply, or corporate events. While you maintain full economic ownership of the securities on loan, there are certain rights associated with ownership that you may need to relinquish during the loan period.

One important consideration is your voting rights. When you lend your shares, you also transfer the voting rights that come with owning those shares to the borrower. This means that if your shares are on loan over a proxy record date, you will not be able to exercise your voting rights. However, if you wish to vote, you can recall your loan before the record date.

Another consideration is the tax implications. Lending shares that pay dividends will result in a different form of payment. Instead of receiving dividend payments, you will get a cash equivalent, which may be taxed differently, potentially increasing your tax burden. Therefore, it is advisable to consult a tax expert before participating in stock lending to understand the tax consequences better.

Additionally, while you maintain the right to sell your shares or recall the loan at any time, there may be risks associated with lending. Counterparty default is one such risk, and while Fidelity provides collateral at a minimum of 100% of the loan value, it is held at a third-party bank. Therefore, in the event of a default, there is still a chance of loss.

Risks and downsides

There are several risks and downsides to Fidelity's Fully Paid Lending Program, which allows investors to lend out securities they own and earn income. Firstly, shares on loan are not covered under the Securities Investor Protection Corporation (SIPC). This means that in the event of a loss, investors may not have the same level of protection as they would if the shares were not loaned out. However, Fidelity does provide collateral at a minimum of 100% of the loan value, which can be held at a third-party bank to mitigate the risk of default.

Another downside is the relinquishment of voting rights associated with the loaned shares. Investors who wish to exercise their voting rights must recall their loan in advance of the record date. Additionally, dividends are paid as "cash-in-lieu" payments, which may have different tax consequences than actual dividends. It is important to consider the potential tax implications of participating in the Fully Paid Lending Program.

The lending rate may also change due to changing market conditions, which could impact the income earned from the program. While investors have the right to recall their shares at any time, a change in the lending rate may affect their decision-making. Furthermore, there is a risk of counterparty default in any securities lending transaction. If the counterparty is unable to return the loaned shares, investors may face losses.

While the program can provide additional income, it is important to consider the potential risks involved. The yield on lending stock is typically lower than selling covered calls against shares, especially if the shares are in high demand from short sellers. Additionally, investors must consider the impact of short-selling activity on the price of their securities.

Collateral and compensation

When you lend your shares through Fidelity's Fully Paid Lending Program, you receive compensation in the form of collateral and lending fees. The collateral is provided by Fidelity and held at a third-party custodial bank, independent of Fidelity. This collateral is equal to or greater than 100% of the loan value of the shares, and it can be in the form of cash, securities, or both. The collateral value is adjusted daily to account for market changes and lending activity.

Fidelity also provides you with an interest rate-based lending fee. This fee is calculated by multiplying the current Lending Interest Rate by the contract value of the securities on loan. The Lending Interest Rate is subject to change, and you will receive a trade confirmation detailing any rate adjustments. All lending fees are credited to your Fidelity account, and you will receive a monthly Fully-Paid Lending statement detailing the daily contract value, Lending Interest Rate, accrual, and total lending fee credited for each security on loan.

It's important to note that while you maintain full economic ownership of the loaned securities, you relinquish your ability to exercise voting rights during the loan period. Additionally, shares on loan are not covered under the Securities Investor Protection Corporation (SIPC). However, the collateral held at a third-party bank helps to mitigate the risk of counterparty default.

Fidelity also receives compensation in connection with the use of your loaned securities. When lending to other parties or facilitating short sales, Fidelity's compensation is the fees paid by the third-party borrower, less the lending fee paid to you. This compensation structure ensures that Fidelity benefits from facilitating the lending program while also providing you with an opportunity to earn incremental income on your portfolio.

Lending rates

Fidelity's Fully Paid Lending Program allows investors to lend out securities in their portfolio and earn income. The lending interest rates are variable and may change at any time based on market conditions. The rate is determined by several factors, including borrowing demand, the overall lendable supply of the security, short selling, hedging interest, and general market conditions.

Investors can monitor their securities on loan through the Loaned Securities page on Fidelity.com, where they can view their securities on loan and real-time lending rates. They will also receive a detailed monthly statement available on the Statements page. If there are any changes to the lending rates, investors will be notified through a detailed trade confirmation.

It is important to note that while investors can sell their shares or recall the loan at any time, they relinquish their ability to exercise voting rights if the shares are on loan over a proxy record date. Additionally, shares on loan are not covered under the Securities Investor Protection Corporation (SIPC). However, Fidelity provides collateral at a minimum of 100% of the loan value, and the collateral is marked to market daily.

Fidelity also offers margin loans, which are a form of short-term financing where investors can borrow money to buy securities. The current base margin rate is 11.325%, and an 8.25% rate is available for debit balances over $1,000,000. It is important to note that margin trading entails greater risk, including the risk of loss and the incurrence of margin interest debt. Investors should carefully assess their financial circumstances and risk tolerance before engaging in margin trading.

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