August 2021

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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 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 in US fully paid programs, from client communications to technology and operations. 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.

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.

Table of Contents

  • Executive Summary
  • Hitting the Mainstream
    • – Methodology
  • Economics and Fee Splits
  • Technology, Operations and Client Communications
    • – Collateral Accounts
    • – Communications and Client Education
    • – The Account Management Interface
  • Regulatory Direction and Head-scratching
  • US Broker Inventory and Potential
    • – Holdings of US Retail Brokers
  • Best Practices and Industry Considerations
  • About the Author
  • About Finadium LLC

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