Finadium: Best Practices in US Fully Paid Securities Lending

Fully paid securities lending programs, in which the fully owned assets of a retail customer are lent to a borrower, are now widely available at US brokerages. This report investigates best practices in fully paid including a regulatory review and market sizing.

Broker-dealers are now expected to offer fully paid securities lending, and some firms are attracting customers based on program utilization and competitive fee splits. This decade-long transition to a popular business line has at times been accompanied by confusing directions from regulators, which has created uncertainty around client eligibility rules and disclosures.

The last eight months have been a booming period for fully paid securities lending technology adoption and development. Both brokers and vendors report new vendor offerings emerging and older platform vendors looking to enhance their functionality. While the current wave may subside once more firms have their plans in place, 2021 has kept the industry busy.

The Securities and Exchange Commission (SEC) No Action letter of October 2020 marked something of a turning point for fully paid. On the one hand, it was a recognition of how widespread these programs had become. On the other, it required some firms to change their practices with potential impacts throughout the organization. Whether viewed positively or negatively, it is fair to say that the letter has changed perceptions of fully paid as a sideline: it is now considered part and parcel of the US brokerage business.

This report looks at current industry best practice including client communication strategies, eligibility requirements, fee splits, technology and collateral management. It is the result of conversations with broker-dealers and technology suppliers, a review of current regulations and data collection from US brokers with over $20 trillion in customer assets. The report concludes with our assessment of best practices and considerations for the industry as fully paid continues to grow.

This report should be read by securities lending professionals interested in retail and institutional markets. On the retail side, the report provides operational details and expectations for what policies will be most in line with regulatory expectations. For institutions, the report looks at competitive dynamics for hard to borrow securities that drive revenues for beneficial owners, agent lenders and prime brokers. Regulators may also be interested to better understand how their directives and No Action letter have influenced the market and where greater clarity may be required.

A direct link for Finadium subscribers to this report is

For non-subscribers, more information is available here.

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