Stock Lending Explained
How Stock Lending with Stake works
If you participate in Stock Lending with Hellostake Ltd (Stake), our partner DriveWealth, LLC (DriveWealth) will be able to borrow any of your US stocks on your Stake account. They will also re-lend these stocks to other borrowers such as institutional investors, investment banks and the like.
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 stock from you, it will arrange for cash and/or other assets 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.
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 current 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 actually loaned out in any given month, Stake will earn the revenue generated (the borrowing fee) and then share a part of it with DriveWealth, as well as sharing a part of the remaining revenue with you for the loan of your stocks each month. Any funds you are due from the loan of your stocks will be paid in USD into your Stake Wall St 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 and other assets 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. It will keep the collateral assets safe and they may be invested.
17a-4, llc, has been appointed by DriveWealth to act as administrator of the collateral as agent for you (Collateral Administrator). The Collateral Administrator holds a first priority security interest in the collateral for your benefit. 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 Stock Lending via Stake;
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 or capital gains implications of receiving income from Stock Lending
Generally, the borrowing fees you receive if your stocks are loaned are taxed as ordinary income. Any franked dividends (or distribution equivalent) that are paid whilst your US stocks are on loan are also taxed as ordinary income. Unfranked dividends are treated case-by-case and may be subject to withholding taxes.
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 the Stock Lending is completely optional. If you decide to opt-out of the program you can simply continue using 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 > Uncheck the ‘Stock Lending Income Program’ button.
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 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 dividend payments, so you receive dividends as normal. However, if there is a dividend payment or other distribution made while stocks are being lent, you will receive an equivalent cash payment to reconcile that. This income is generally subject to the same rate of US withholding tax as usual dividends paid for your US stocks.
While your stocks are on loan, you won’t be able to exercise voting rights. If you want to participate in an upcoming vote, you can opt out of Stock Lending at least three business days prior to the record date to end the loan and vote. Simply opt back in again afterwards to resume participating in Stock Lending.
Keep an eye on which stocks have been lent and your earnings
In your Stake Account and on the US markets section, and go to Settings > Tax and Documents > Account Statements. On the 15th day of each month, under Activity, you’ll be able to view any income earned on 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.
Accounts that can participate in Stock Lending
Stock Lending is available to customers with a Wall St account in Australia, New Zealand and the United Kingdom.
Stocks that aren’t included in Stock Lending
Any stocks that are held pursuant to 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
When you lend out your stocks there is a risk that the borrower will not be able to return them. To protect consumers, 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 or the final borrower defaults, 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.
Please ensure you have read the Disclaimers which outline the other risks involved, as well as Stake's Terms and Conditions, DriveWealth's Risk Disclosures and the Master Securities Lending Agreement before considering if Stock Lending is right for you.