Fully Paid Securities Lending Programs at US Retail Broker-Dealers

Finadium
September 2013

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Fully paid securities lending programs for retail investors continue to be a topic of significant interest to US brokerage firms. As changes in retail investment activity and financial regulation affect their industry, US brokers are looking for additional revenue streams that can serve their clients and themselves, while working to optimize upcoming rules on costs of capital and counterparty exposure. Fully paid securities lending offers one opportunity, but this is not free money; these programs require integrated technology, good planning and efficient operational processes.

In this report, Finadium documents the current state of fully paid securities lending programs at US retail brokers including retail-focused clearing firms. We review the revenue potential and internal economic considerations, how brokers are communicating with clients verbally and electronically, and the regulatory and operational considerations that brokers must consider in running or launching their programs.

This report is based on primary Finadium interviews with retail brokers and our collection of financial information from 14 US retail brokerage firms. It is an update to our 2010 report, “Unlocking the Supply of Fully Paid Assets in Securities Lending.”

This report should be read by US retail broker-dealers, by US prime brokers with fully paid lending programs for their hedge fund clients, and by international retail brokers looking at best practices for client engagement.

This report is 30 pages with 13 exhibits.

TABLE OF CONTENTS

■ Executive Summary

■ A Renewed Interest in Fully Paid Lending
– Methodology

■ Sizing the Market
– Margin Loans
– Holdings of Major US Retail Brokers and Clearing Firms
– The Revenue Opportunity for Retail Brokers

■ Internal Economics of Fully Paid Lending
– Fee Splits with Retail Clients
– Compensation for Financial Advisors

■ Communications with Retail Investors
– Benchmarking Loan Rates
– The Client Account Management Interface

■ Regulations, Operations and Technology
– The Mechanics of Accessing Securities

■ Four Key Takeaways for Program Success

■ About the Author

■ About Finadium