Freetrade to introduce securities lending

Koloto

I got notification freetrade are changing their terms to introduce securities lending.

I didn’t accept as I’m not sure of the implications.

if I don’t agree by June I can hold my stocks but not buy anymore.

I’ve googled it but the info is not clear.

is this okay or not ? Does it pose major risks ? 

masonic

It introduces counterparty risk - if the institutions they lend your investments to can't pay them back, then Freetrade would have to stump up the cash to buy you some more shares. That might cause Freetrade to go bust. The other impact is that the shares are being lent so that they can be shorted, which is probably not good for the companies in which you are invested. So it is not something to be celebrated. Other brokers do it, quite a number of funds do it. I'm surprised Freetrade wasn't already doing it.

DireEmblem

Deleted_User said:

I thought most UK brokers don't do this. So it's not exactly standard. Though not too surprising that they might want to do this to give themselves some revenue from their "free" service.

Its not entirely a free service.  Nor is stock lending purely used for shorting shares.  Similarly there are multiple inverse stocks and ETFs out there.  Its all about choice really.  If people dont buy them, they won't be packaged and sold.

I'm not sure on the most brokers 'dont', but perhaps we are confusing terms between 'broker' and 'platform' here.

masonic

Deleted_User said:

DireEmblem said:

I'm not sure on the most brokers 'dont', but perhaps we are confusing terms between 'broker' and 'platform' here.

Well, it might be more useful to say which brokers/platforms (aimed at UK-based investors) do do securities lending. The only other ones I recall as doing it are Degiro and Interactive Brokers.

Freetrade's two main rivals, Trading212 and Robinhood (postponed their launch in the UK due to the pandemic) also do it, as does the more expensive broker ITI Capital (took over accounts from SVS securities).

I don't think Jarvis X-O does. eToro does not currently, but has already reserved the right to do so in the future.

Platforms (focusing on funds) generally do not.

adindas

Deleted_User said:

I thought most UK brokers don't do this. So it's not exactly standard. Though not too surprising that they might want to do this to give themselves some revenue from their "free" service.

AFAIK almost all are doing that. If they have not implemented it they reserve the right to do that whenever they want in the future. Even the investment platform for long term investors like Vanguards, Fidelity are doing that.

Differentiate between Security lending and Payment for order Flow (PFOF). PFOF is illegal in the UK, but security lending is not.

There is an argument that security lending is actually a good thing as doing this they could sustain the low fee structure. Like Bank (loaning money), the broker/platform are making additional money by lending security. Security lending is mainly used for  "trading" and for short term rather than to be used for long term.

adindas

Deleted_User said:

adindas said:

AFAIK almost all are doing that. If they have not implemented it they reserve the right to do that whenever they want in the future. Even the investment platform for long term investors like Vanguards, Fidelity are doing that.

This is inaccurate.

E.g. Vanguard's terms clearly say they don't reserve the right to do this. See https://www.vanguardinvestor.co.uk/content/documents/legal/terms-conditions.pdf under 2.2, where it says Vanguard Funds (which have been defined to include Vanguard ETFs) are held "as client assets".

I think this one is more clear.

https://investor.vanguard.com/client-benefits/margin-disclosure-statement

I read somewhere from Vanguard UK investor but still need to find it.. But this was the news.

https://www.investorschronicle.co.uk/2017/01/12/funds-and-etfs/etfs/vanguard-starts-securities-lending-7HJYOLEZz4Y1IwpHuSMHUI/article.html

Vanguard starts securities lending
16 London-listed Vanguard ETFs will start to boost their income via securities lending

Deleted_User said:

OK, so many of the new "free" (with the emphasis on the quotation marks) providers are doing it. And a few other very obscure providers. But nobody I would call mainstream.

It will depend on what you call Mainstream. The one like Vanguard, HL AJ Bell, might be mainstream for long tern S&S ISA, SIPP investors. But it is hardly used as the mainstream for trading or short term investment.

GeoffTF

Vanguard sometimes lends the securities held by funds. When it does that, the fees for lending the securities are credited to the funds. Other managers take a percentage for themselves. Vanguard does not lend out clients' fund holdings. I do not believe that HL, AJ Bell, II or HSDL lend client securities.

bostonerimus

Be careful not to mix up Vanguard's US and UK operations. Vanguard does  not even offer a full service brokerage in the UK....Vanguard US funds does indulge in securities lending.

Thrugelmir

masonic said:

Deleted_User said:

DireEmblem said:

I'm not sure on the most brokers 'dont', but perhaps we are confusing terms between 'broker' and 'platform' here.

Well, it might be more useful to say which brokers/platforms (aimed at UK-based investors) do do securities lending. The only other ones I recall as doing it are Degiro and Interactive Brokers.

Robinhood (postponed their launch in the UK due to the pandemic) 

Robinhood gets paid for order flow in the US. An activity which is outlawed in the UK. Very different business model. 

adindas

Deleted_User said:

adindas said:

Deleted_User said:

Vanguard's terms clearly say they don't reserve the right to do this. See https://www.vanguardinvestor.co.uk/content/documents/legal/terms-conditions.pdf under 2.2, where it says Vanguard Funds (which have been defined to include Vanguard ETFs) are held "as client assets".

I think this one is more clear.

https://investor.vanguard.com/client-benefits/margin-disclosure-statement

That's not clearer, it's about something completely different: buying securities on margin. Investors who buy on margin do run the risk that their positions will be liquidated without their say-so. This is irrelevant to investors who pay for the securities they buy in full up front, as most of us do; it doesn't say they can lend out your securities in that situation. It is also from Vanguard's US website, and I don't know if they even offer margin accounts to UK investors.

I read somewhere from Vanguard UK investor but still need to find it.. But this was the news.

https://www.investorschronicle.co.uk/2017/01/12/funds-and-etfs/etfs/vanguard-starts-securities-lending-7HJYOLEZz4Y1IwpHuSMHUI/article.html

Vanguard starts securities lending
16 London-listed Vanguard ETFs will start to boost their income via securities lending

That is about something different, too. It is about Vanguard-managed funds/ETFs lending out the securities they hold (something which applies regardless of which broker/platform you hold Vanguard funds/ETFs with). It is not about Vanguard lending out your securities when you hold them on their platform. They don't do the latter, because of the terms I referred to above.

Securities lending by a fund/ETF and by a platform/broker are different things. The former is a widespread practice. The latter is not common in the UK, except for the so-called "free" brokers.

E.g. Vanguard's terms clearly say they don't reserve the right to do this. See https://www.vanguardinvestor.co.uk/content/documents/legal/terms-conditions.pdf under 2.2, where it says Vanguard Funds (which have been defined to include Vanguard ETFs) are held "as client assets".

I am referring to security lending in general. Whether it is margin account or not as the statement is about security lending. And where do you think they get all of the shares they loan to other parties do you think they need to buy all of them before lending it ?? To me it does not make sense where they could easily loan out their client shares.

Your previous link only say "as client assets".

When you buy share not on margin, it must be your assets as you already bought with your own money (not borrowing); so no clarification is needed.

But your link still not clear, as it does not particularly say they can not lend out your shares (assets) to third party. We need to find out a paragraph particularly saying " they can not (or will not) lend your shares" to be 100% sure.

I remember read somewhere they did loan out your asset although not common as their platform are mainly for long term investing.

mattywallace121

Happy for them to do it to keep the fees low. 

Everyone wants an all singing all dancing service for free these days.