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:
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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.
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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.
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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
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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 is an established process both in the UK and globally, with the necessary controls and regulatory oversight. Here’s a breakdown of everything you need to know and the controls in place.
The key risk to be aware of with securities lending is the risk that the borrower does not return the shares borrowed.
However, the risk of this happening is small.
Freetrade only lends shares to a select few of the world's largest banks which are subject to extensive ongoing risk assessments and due diligence. These banks are central to the functioning of global financial markets.
To put this risk in context, the asset manager BlackRock has been lending securities since 1981*. In that time period, they have only experienced three borrower defaults and they were able to use the collateral on hand to repurchase the shares on loan.
At Freetrade, there are also processes in place to protect you and should mean you don’t end up out of pocket. Before any shares change hands a borrower must set aside cash or cash like assets, worth more than the shares on loan as collateral. The value of this collateral is then checked on a daily basis to ensure that it remains sufficient.
Freetrade’s borrowers will be large established banks.
Once a trade is executed, borrowers must deliver something known as collateral to the lender before any securities change hands.
Collateral is something many of us will know about even if we don’t recognise the name. It’s simply something that provides backup to the lender in case a borrower can’t pay back their loan. E.g. when you buy a house with a mortgage, the house itself often becomes collateral for the bank. This means if the mortgage payments can’t be met, the bank shouldn’t lose out.
For securities lending, the collateral is generally high quality liquid assets like cash or government bonds and borrowers are required to provide collateral worth more than the value of what’s on loan. This means in the unlikely scenario a borrower can’t return the securities, the lender shouldn't be out of pocket.
The value of both the lent shares and the collateral held will move continually, as a result of movements in market prices.
Lenders and borrowers compare what’s on loan daily. The checks cover the value of the lent shares and the collateral (should more collateral be provided or should some be returned?), the loan rates (is the price of the loan correct?) and returns (do lenders need their securities back or do borrowers want to give them back?).
Customers' accounts are covered by the provisions of the Financial Services Compensation Scheme (FSCS) and this remains the same for any investments involved or not involved in Freetrade’s securities lending process.
This means that in the unlikely event of Freetrade failing, together with a failure to safeguard your assets or some other failure, the value of your assets held with Freetrade is protected by the FSCS up to a maximum of £85,000.
It is worth bearing in mind that, while you are protected under the FSCS scheme as above, your investment might fall as well as rise due to movements in market prices and any such fall wouldn't be covered by the FSCS.
If you want to learn more about the FSCS and how it operates, you can visit the FSCS website here: https://www.fscs.org.uk/.
The short answer is yes.
Securities lending is now part of our standard terms of service, which means all Freetrade customers will need to accept the new terms and conditions, giving consent to securities lending. While only shares in a SIPP and GIA are eligible to be lent, ISA customers will also be asked to agree to the new T&Cs.
To start with, Freetrade will only be lending UK-listed shares held by customers in GIAs or SIPPs.
US and European-listed securities are not currently part of the loanable pool of assets, although they may be added in the future.
Securities held in an ISA are not eligible for securities lending.
The two main reasons institutions borrow shares are to help create efficient markets and to support an investing strategy, like short selling.
Some brokers (known as market makers) support day-to-day trading on the London Stock Exchange and they will frequently borrow shares to be able to continuously quote two-way prices.
Some investment strategies involve selling shares or other securities short. Here, an investor has the view that a security’s value will fall and aims to profit on this price change. Shorting is a common practice in global markets and is essential for the share price of a company to accurately reflect its true value.
When your shares are lent, they are transferred to the borrower. While they are lent, you still get all the economic benefits of owning the shares. Put simply, you’ll still benefit from any rise in the value of your shares and receive any dividends.
The key difference is that when you lend your securities you lose your right as a shareholder to vote. However, as mentioned above if there’s a corporate action that Freetrade supports, we’ll recall your shares so you can participate.
ISLA (or The International Securities Lending Association) is a good place to head to for more information. Start with their video guide: Securities Lending Explained.
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.
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