Stock Lending Explained
How Stock Lending works
If you participate in Stock Lending, our partner DriveWealth, LLC (DriveWealth) will be able to borrow any of your US stocks on your account. They will also re-lend these stocks to other borrowers such as institutional investors and investment banks, known as 'Tier 1' and 'Tier 2' counterparties. Ongoing monitoring is performed to ensure that these borrowers remain reputable and creditworthy.
Stake will facilitate the Stock Lending process, however, you are contracting (as the lender) directly with DriveWealth (as the borrower), pursuant to the Master Securities Lending Agreement.
DriveWealth is not obligated to borrow any of your stocks. If DriveWealth does borrow your stocks, it will arrange for cash to be placed in a bank account to secure the loan. This is known as ‘collateral’. Collateral is put away to secure repayment of your loaned stocks at an equal or greater value to that of the loaned stocks. The cash is not re-invested, it sits in the bank account solely to protect you in the event your stocks are not returned to you.
At the close of trading each business day, stocks on loan will be ‘marked-to-market’ (this means accounting for the ‘fair value’ of an asset based on the most recent market price) to determine their value. If required, the collateral will be increased or decreased to ensure the market value of the collateral is at least equal to 102% of the market value of the loaned stocks.
In return for borrowing your stocks, DriveWealth will pay Stake a ‘borrowing fee’. The borrowing fee is based on the aggregate market value of the stocks DriveWealth were able to loan out and the current ‘lending interest rate’ on the day the borrowing fee is calculated. The ‘lending interest rate’ varies depending on borrower demand, availability of stocks, interest and general market conditions. Rarer stocks and those more in demand from borrowers will generally net a higher borrowing fee. Stake will share a portion of the borrowing fee with you if your stocks are lent out in any given month.
How the Borrowing Fee is Shared
If any of your US stocks are loaned out in any month, Stake will share a part of the borrowing fee with you. This is your share (20%) of the borrowing fees paid to Stake by DriveWealth. Our share is used to cover our costs of facilitating and maintaining the Stock Lending program, plus a small margin. Our costs are covered so you can participate in Stock Lending and earn an extra income on your holdings.
Any funds you are due from the loan of your stocks will be paid in USD into your Stake account on the 15th day of each month, or the following business day.
To manage the collateral, DriveWealth has entered into agreements with a bank and independent collateral administrator who will look after the cash provided to secure the stock you loan out. These agreements are contained within the Master Securities Lending Agreement with DriveWealth and are relevant to you if you choose not to opt-out of Stock Lending. You should take the time to read over them.
BMO Harris Bank N.A. (the Bank) has been appointed by DriveWealth to be the intermediary and depository bank to hold collateral and comply with the collateral administrator’s instructions. The Bank will act as the custodian for the collateral by receiving it and holding it in a bank account.
17a-4, LLC (the Collateral Administrator) has been appointed by DriveWealth to act as administrator of the collateral as agent for you . The Collateral Administrator holds a first priority security interest in the collateral for your benefit (this means you have a first claim, over other creditors, to the collateral if the Bank goes out of business). Amongst other things, the Collateral Administrator will:
monitor the collateral held by the Bank and maintain a ledger reflecting the amount of collateral attributable to each lender participating in the Stock Lending programme;
reconcile the amount of collateral held in the bank against the stocks on loan each day and notify DriveWealth if additional collateral is required to be deposited with the bank, or if there is excess collateral;
receive a daily notice of any adjustment to be made to the collateral; and
act on your behalf if there is a default event and a ‘Notice of Default’ is submitted to claim on the collateral.
Tax implications of receiving income from Stock Lending
Generally, the borrowing fees you receive if your stocks are loaned are taxed as ordinary income. Any dividends (or distribution equivalent) that are paid whilst your US stocks are on loan are also taxed as ordinary income and subject to the same rate of US withholding tax as usual. This is not tax advice. Consider seeking appropriate advice from a professional tax adviser who will take into account your personal financial circumstances.
You can opt-out, and opt back in again, at any time
Your participation in Stock Lending is completely optional. If you decide to opt-out of the program you can still use Stake as-is for trading stocks and ETFs and DriveWealth will not be able to borrow your stocks at any time.
You can opt-out of Stock Lending at any time by opening your Wall St Account and clicking on Settings > Trade Settings > Stock Lending Settings > Turn off Stock Lending.
Please note that if you decide to opt-in to Stock Lending again in the future, DriveWealth may in its discretion choose not to offer your stocks for stock lending transactions.
Selling, voting and getting paid dividends during loans
You can still sell your stocks while they are on loan, however, doing so will terminate the loan on or before the settlement date of the sale of the loaned stocks.
If there is a dividend payment or other distribution made while your stocks are on loan, you will still receive those payments. DriveWealth will generally recall loans ahead of corporate actions such as stock splits and dividend payments, so you receive dividends as normal. However, in case there is a dividend payment or other distribution made while stocks are being lent, you will receive an equivalent cash payment to reconcile that.
You cannot vote while a stock is on loan. If you'd like to vote, you can opt-out of Stock Lending at least five business days before the record date for the vote. You can opt back in at any time to Stock Lending. You can opt-out and opt-in to Stock Lending in your Wall St Account by clicking on Settings > Trade Settings > Stock Lending Settings > Turn off Stock Lending.
Keep an eye on which stocks have been lent and your earnings
When you participate in Stock Lending, any U.S. stocks in your Stake Wall St portfolio can be borrowed. The loans will occur automatically – you won’t get notice or be asked to approve each loan. Whether a stock in your portfolio is lent will depend on borrower demand and other market factors. Note that there is no guarantee that any of your stocks will be lent.
To see which of your stocks have been lent, open Stake Wall St on the app or web platform, and go to Settings > Tax and Documents > Account Statements. Here, you'll be able to view any Stock Lending payments made to your account in the previous month. If any of your stocks have been lent, you’ll also see a section “Fully Paid Securities Lending Supplemental Report”, which details any stocks that were on loan.
Pattern day trading and Stock Lending
If your Stake account equity value is less than $25,000 (including cash and stocks) and you execute four day trades in a consecutive five trading day period, you may be classified as a Pattern Day Trader in accordance with US regulations. Pattern Day Traders are subject to certain conditions on their account, including restrictions on placing trades. You can read more about Pattern Day Trading here.
When your stocks are on loan, their value will not count towards the minimum $25,000 equity required in your account to be exempt from Pattern Day Trading restrictions.
Stocks that aren’t included in Stock Lending
Any stocks that are held via a US employee benefit plan are not eligible for Stock lending with DriveWealth, and you must notify us immediately at email@example.com if this applies to you.
Stock Lending isn’t risk-free
Risk of borrower default
When you lend out your stocks there is a risk that the borrower will not be able to return them. To protect lenders, the US Securities and Exchange Commission requires DriveWealth to set aside assets at least the same value of the stocks in a separate collateral account (see 'The Collateral' section above). In the event that DriveWealth can't return your stocks or otherwise defaults on a loan, you can still be paid back from the collateral. Some of the situations where a default can occur are:
if loaned stocks are not transferred back to you when you opt-out;
if DriveWealth fails to deposit collateral in the collateral bank account; or
if DriveWealth becomes insolvent.
Any lent stocks are backed by at least 102% cash collateral, adjusted every day. However, if the market value of the lent stocks increases by more than 2% during the same day the borrower defaults, the collateral may be insufficient to fully cover the market value of the unreturned stocks, resulting in a shortfall. The borrower has a contractual obligation to reimburse you if this shortfall occurs, so any potential losses in this scenario are covered. Stake will step in and liaise with the borrower directly on your behalf if this happens.
Risk associated with loss of SIPC protection
Your U.S. brokerage account at Stake is insured for up to US$500,000 in total equity value if the broker DriveWealth becomes insolvent. When your U.S. stocks are borrowed, they move out of this brokerage account, so those stocks aren’t insured that way during the loan. Instead, the cash collateral is your source of protection. If you’re part of the Stock Lending program but your stocks are not out on loan, the stocks in your account remain insured for up to US$500,000 total equity value as usual.
Risk of stock value fluctuations
While your stocks are on loan, you still have full economic ownership of them. You have a contractual right to their return, and to sell them at any time (which will end the loan). This means that you are still exposed to market fluctuations and the value of your stocks may go up or down whilst they are on loan. You should be aware that borrowers may borrow your stocks for investing strategies like short selling, arbitrage and hedging, which could potentially put downward pressure on the price of the loaned stocks.
When you invest, your capital is at risk. Please ensure you have read the Stake's Terms and Conditions, DriveWealth’s Risk Disclosures and the Master Securities Lending Agreement and consider factors such as your financial situation and needs, tax status, investment objectives and timeframes, liquidity needs and risk tolerance, before considering if Stock Lending is right for you.