A Low-Risk Avenue for
In an environment of low interest rates and tempered market expectations, it’s no wonder that investors are looking for new ways to generate additional income from their portfolios. Now they can by allowing their brokers to lend out their shares.
Interactive Brokers Group Inc. (IBKR), a Greenwich, Connecticut-based securities firm in business for 41 years, offers clients access to its Stock Yield Enhancement Program (SYEP), a tool that provides them with the opportunity to earn additional cash on the fully-paid securities in their accounts. It does this by lending these shares out to a third party, and then splitting the proceeds from fees with the client 50/50. IBKR clients with equity accounts of $50,000 or more are eligible to participate, and enrollment is simple and can be completed online. After enrolling, IBKR handles all the details and there are no SYEP related restrictions on a client’s ability to trade their shares.
Perhaps one of the most attractive features of this offering is that it essentially enables eligible clients to make money without taking any action post enrollment. Clients who participate receive cash collateral to secure the return of their shares as well as interest on the cash collateral provided by the borrower for any day the shares are on loan. They also maintain the ability to sell their stock at any time in order to realize any profits and losses.
IBKR has been offering its SYEP in the U.S. since 2011, and in April, was the first brokerage to expand the program to include Canadian assets as well. Stocks listed on U.S. or Canadian exchanges can be loaned, while municipal bonds, non-U.S., and non-Canadian securities are not eligible.
The program is fairly straight-forward for clients. IBKR uses its highly automated trading systems to identify the shares in a client’s account that other market participants are looking to borrow. Once a match is made, IBKR credits the client for loaning the shares and provides a daily activity statement. This includes all the related information the client will need, including how many shares were actually loaned, the collateral amount, the market interest rate being used, IBKR charges, and the net interest.
At the end of each day, clients receive payouts for half of the gross amount earned from lending out the shares to borrowers. IBKR keeps the other half as its fee for coordinating the program and guaranteeing the return of the shares. The income that a client receives in exchange for lending out their shares depends on how many were actually loaned and the rates established in the over-the-counter securities lending market. For instance, if Interactive Brokers earns 15% annualized income from lending shares with a value of $10,000, it would post $10,000 cash collateral to the participating client’s account. The normal daily interest rate IBKR would pay to the client would be $2.08.
One of the more frequent questions that comes up is whether a participating client can select which shares will be loaned out. The answer is no, according to IBKR. The program is entirely managed by the firm and it determines which shares are in demand and how many shares it will use from any one client’s account. For example, if it needs 100 shares of Apple, it may borrow 75 shares from one client and 25 from another.
But even when those shares are on loan to a borrower, they can be sold at any time, without any related restriction. In other words, the shares do not need to be returned to the client in time to settle the sale. The proceeds from any sale will be credited to the client’s account on the normal settlement date.
The risks associated with SYEP are minimal. The most serious would be if the brokerage goes out of business. Given the firm’s financial strength and emphasis on the safekeeping of customer assets, investors may feel more comfortable knowing the numerous proactive steps IBKR takes to ensure customer protection is a top priority.
SYEP is just one of the ways that Interactive Brokers enables customers to help maximize their income. The company also pays 1.40% on idle cash in qualifying client brokerage accounts, among the highest in the industry. For investors wanting to get the most out of their portfolios, Interactive Brokers has the right solutions.
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