Securities lending will provide Freetrade with a steady and new revenue stream once implemented. This is an important step in building our business, allowing us to keep fees low and continue to improve our product and services as we scale.
Securities lending will only apply to customers with shares held in a general investment account (GIA) or a self-invested personal pension (SIPP). Shares held in an ISA will not be lent.
Our guide helps to answer any questions that you might have about securities lending.
Securities lending plays an important role in global financial markets. A wide range of financial institutions are involved from pension funds and investment managers, to global banks and brokers.
The securities lending process involves the owner of a share (the investor - that could be you, a pension fund or an ETF) temporarily transferring the share and its associated rights to a borrower.
In return, the lender charges a fee to the borrower during the life of the loan, so the process generates an income for the lender.
To manage the risk that a borrower might not return the shares, the borrower must set aside highly liquid assets such as cash or government bonds that are greater in value than the borrowed shares as collateral.
Here's an example:
Your ETF
ETFs invest across different underlying securities, including shares.
Underlying shares
Some ETFs lend the shares or other securities they hold. They receive a fee from the borrower which is used to enhance returns.
Financial institution
The borrower pays a fee to borrow the securities and sets aside cash or government bonds as collateral, until the shares are returned.
Some ETFs lend the shares or other securities they hold. They receive a fee from the borrower which boosts returns.
ETFs invest across a range of underlying securities,
including shares.
The borrower pays a fee to borrow the securities and sets aside cash or government bonds as collateral, until the shares are returned.
of lendable securities
of securities on loan
Source: International Securities Lending Association, as of December 2021.
Our mission has always been to get everyone investing, by offering a low-cost and simple product. Securities lending plays an important role in building our business model around a low-cost service, and ensuring we keep developing our product.
Securities lending happens behind the scenes. You won’t notice anything different in how you use Freetrade.
You’ll be able to buy and sell thousands of US, UK and EU shares as normal.
You’ll receive any dividends owed to you.
This is something that we will look to offer in the future but it’s not part of the initial rollout.
If your shares are on loan and there’s a corporate action which Freetrade supports, we’ll recall your shares before the record date so that you’re able to participate.
We’ll send you a monthly statement that includes details of any of your shares that have been on loan and the collateral that we hold for you.
Shares can only be lent from GIAs and SIPPs. ISAs are not eligible to lend securities under HMRC regulations.
Securities lending plays an important role in today’s global financial markets.
Lenders tend to be investors who hold the securities for the long term.
Pension Funds
Asset managers
Investment funds -
ETFs, mutual funds, trusts.
Central banks
Banks
Stockbrokers
Insurers
Borrowers tend to be institutions who need access to certain securities for various reasons and don’t hold them physically.
Banks
Broker dealers
Hedge funds
Despite the controls noted above, it’s important you understand the risks that securities lending introduces. Securities lending introduces another party into the investment process and this means there is an additional risk of loss should the borrower fail to return any securities.
This could occur because the borrower defaults. There is also a chance that there is a shortfall between the value of the shares lent and the collateral - this can occur because of movements in market prices of either the lent securities or the collateral between revaluations of collateral, or due to operational errors.
If there is a shortfall, Freetrade will take all reasonable efforts to return the equivalent securities to you.
Each step described in the section above helps mitigate this risk and means securities lending can continue to help make markets more efficient while providing income opportunities for lenders.