If you are a do-it-yourself investor, you may have noticed a new option to lend your securities and earn income. This article from CIRO’s Office of the Investor explains what securities lending is and the risks investors should understand before participating.
Securities lending involves an investor temporarily lending their shares to other investors, typically for short selling. You still own the shares, but someone else is borrowing them behind the scenes. In return, you may receive a fee.
Although it can provide additional income, there are important risks to consider:
- Participation is voluntary: Your investment dealer must obtain your consent before lending your shares.
- Risk of loss: If the borrower defaults or your dealer becomes insolvent, you may not recover your shares and could have limited access to the collateral backing the loan.
- No insurance coverage: The Canadian Investor Protection Fund (CIPF) does not cover shares on loan.
- Dividend impact: If the shares you own pay a dividend, you get a substitute cash payment instead, which may have tax implications.
- No voting rights: You cannot vote on corporate matters while your shares are on loan.
- Revenue sharing may be unclear: Dealers have different ways of splitting earnings from securities lending with clients. It may be difficult to determine if the fee you receive is fair.
- Conflicts of interest: Brokers earn fees by lending out client shares, creating an incentive for them to promote participation, even when the risks to investors may outweigh the benefits.