Stock Loan Rebate

What Is a Stock Loan Rebate?

A stock loan rebate is a cash payment conceded by a brokerage to a stock customer as cash collateral to short sellers who need to borrow stock.

At the point when a security is loaned out, a loan fee is charged to the borrower of the shares, alongside any interest due connected with the loan. Holders of the securities that were loaned receive a portion of this fee as a rebate from their brokerage.

Understanding Stock Loan Rebates

At the point when a short seller borrows shares to make delivery to the buyer, the seller must pay a rebate fee. This fee relies upon the dollar amount of the sale and the availability of the shares in the marketplace. Assuming that the shares are troublesome or costly to borrow, the rebate fee will be higher.

In certain instances, the brokerage firm will force the short seller to buy the securities in the market before the settlement date, which is alluded to as a forced buy-in. A brokerage firm might require a forced buy in the event that it accepts that the shares won't be accessible on the settlement date.

Before going short, a trader ought to check with their broker what the short sale rebate fee is for that stock. In the event that the fee is too high, it may not be worth shorting the stock.

In simple terms, a stock loan rebate is a payment to larger investors possibly accessible from a broker as the contrary side of the interest charged for borrowing on margin. For investors who never buy stocks on margin, this might be a foreign concept.

Traders who really do buy stocks on margin or sell short will quite often know that when they buy shares on margin their broker charges interest for the funding used to purchase those shares. In the event that the trade just is held for a couple of days, the charge can be minimal and essentially inconspicuous, as it ordinarily amounts to an annual rate compared to a lower-rate credit card.

The lending broker will continue to accrue all interest on the money utilized by the investor to buy the stock on margin. Yet, who is qualified for those interest payments? More often than not it is the broker, however there could be another scenario where those payments could go to another person.

Why Are Stock Loan Rebates Offered?

Think about the following scenario: Investor A, with a $100,000 account balance, buys 1000 shares of stock XYZ, yet at $200 per share, must do as such on margin, incurring the equivalent of a $100,000 loan on the fly. The interest Investor A will pay is equivalent to a rate of 6% annually.

Next, consider that Investor B ended up wanting to open a short position in XYZ of 500 shares simultaneously. So the 500 shares Investor B sold short are half of the shares that Investor A purchased. In this scenario, Investor B has given the cash collateral important to open the short position, so at last, the cash from Investor B is being utilized to manage the cost of Investor A to take the margin position in XYZ.

In light of this scenario, it appears to be just right that Investor B ought to be offered the interest payments from their short position. This scenario is the very thing that drives brokers to offer a stock-loan rebate to a portion of their more sizable customers. As a matter of fact, they frequently do, however just for select customers, and not after substantial fees have been taken.

Special Considerations

A retail trader or investor without an extremely large account will probably not be offered a rebate on the off chance that they open a short trade, however a larger institutional customer may be offered such a rebate in order to draw in their sizable accounts or order flow. The amount of the rebate is determined by the Securities Lending Agreement laid out between the borrower and lender, and the rebate regularly balances all or a portion of the lender's stock loan fee.

The terms and size of the stock loan fee and the rebate are illuminated in the Securities Lending Agreement given by a brokerage to their clients.

The stock loan rebate is a sweetener in securities lending. Securities lending is a key feature of short selling, wherein an investor borrows securities to quickly sell them, hoping to profit by buying them back later at a lower price. The lender is compensated by the fees, which improve its returns on the securities; it additionally has the security returned toward the finish of the transaction.

Generally, this type of arrangement isn't accessible to the small individual investor. Stock loan rebates are regularly simply accessible to larger clients with adequate cash close by, like professional traders, institutional investors, and other broker/sellers.

Furthermore, borrowers who don't involve cash as collateral are not qualified for stock loan rebates. Those borrowers who put up different kinds of assets as collateral will regularly still be responsible for a lender's fee, even assuming that that collateral is in the form of securities that are practically comparable to cash, for example, Treasury bonds or bills.

Illustration of a Stock Loan Rebate

Consider a scenario where a hedge fund borrows 1 million shares of stock worth $20 per share for 30 days. The loan agreement specifies that the collateral owed on this loan is 102%, so the hedge fund puts up $20,400,000. The contracted loan fee is 3%, with a rebate of .7% and a reinvestment rate of 1%. Moreover, the net investment earnings after the rebate will be split, with 60% going to the borrower and 40% to the lender. For this model, we should expect a 360-day yearly period.

So the stock loan rebate for the 30-day loan is $11,900, calculated as follows:

[($20 million x 102% x 0.70%)] x (30 \u00f7 360) = $11,900

The reinvestment earnings are $17,000, calculated as follows:

[($20 million x 102% x 1.00%)] x (30 \u00f7 360) = $17,000

Subtracting the rebate from the reinvestment earnings, the net investment earnings are $5,100. These earnings are then split 60/40, meaning that $3,060 goes to the borrower, and the lender retains $2,040.

The borrower is likewise responsible for an annual stock loan fee of 3%, which in this case is a $50,000 fee for the 30 days. Their portion of the net investment earning balances this fee, so the borrower's month to month fee for this period would be $46,940, calculated as follows:

$50,000 - $3.060 = $46,940

Highlights

• Stock loan rebates might be offered to certain key customers to draw in and retain their business.
• A stock loan rebate is a payment received by those brokerage customers who loan stock to other people.
• This payment will come from the interest payments and loan fees paid by margin borrowers.
• As a general rule, it very well may be hard for individual traders or retail investors to fit the bill for a substantial rebate as it requires holding large amounts of shares in their trading accounts.