Schwab Securities Lending Fully Paid Program
Help your clients earn additional monthly income by putting their stocks to work.
Discover a new way for your clients to reach their financial goals
With Schwab's Securities Lending Fully Paid Program, your clients can loan their eligible shares to other investors or financial institutions when there is a demand for them, often driven by short selling. In exchange, your clients will receive interest based on this demand.
Passive income—activated
Monthly income potential for your clients. No enrollment1 fees or hidden costs.
You're always in control
Your client maintains full ownership by remaining invested in their securities. They can sell or opt out at any time.
Reassurance made easy
Securities backed with cash collateral at 102%. You apply, we do the rest.
How much can my clients earn by lending their securities?
When securities are loaned out, interest is accrued daily and will be automatically paid into your clients' accounts each month.2 The interest paid out will depend on the demand for the shares on loan. Below is an example of how income is calculated.
How much can my clients earn by lending their securities?
| Shares on loan | 10,000 |
| Market price | $10 |
| Market value | $100,000 |
| Annualized lending interest rate2 | 8.50% |
| Daily accrual ($100,000 x 8.50% / 360 days) | $23.61 |
|
Hypothetical monthly income ($23.61 x 30 days)
|
$708.30 |
A few important considerations
Before participating in Schwab's Securities Lending Fully Paid Program, there are some potential risks that you and your clients should be aware of.
Market risks
When securities are borrowed to facilitate a short sale, there's a chance that the market price of that security will go down.
Voting rights
Your clients will temporarily forfeit their voting rights; however, they can always recall the loan to regain their voting privileges.
SIPC protection
Because borrowed securities may not be covered by SIPC, loans are backed at 102% by cash collateral and held at Charles Schwab Trust Company.3
Dividends
For dividend-paying securities, your client may receive a cash-in-lieu instead of your regular dividend payment, which is taxed at a different rate.
Loan term
Schwab can end the loan at any time. You and your client will receive a notification if this has occurred.
Frequently asked questions
The SLFP program allows eligible clients who do not have a margin debit balance in their account to earn income by loaning securities to Schwab. Fully paid securities are securities not being used as collateral for a margin loan. In addition to being fully paid, the securities Schwab borrows are considered in high demand by other investors (hard-to-borrow securities) for short sales. Schwab typically loans the shares to third parties (brokers, traders, hedge funds) for a fee, which is then shared with the client. The principal reason for borrowing securities is to facilitate short sales; however, Schwab also lends securities to facilitate other trading strategies or to fulfill settlement obligations. Clients who hold hard-to-borrow securities in fully paid accounts and who have at least $100,000 in total household assets at Schwab maybe eligible and may be invited to apply.
Short selling occurs when someone believes a stock price is too high and they want to capture any potential profits due to a drop in the price of the stock. Short sellers have to locate and borrow shares before executing their sale, and if the stock drops in price, they buy back the shares at the lower price. Short sellers have unlimited risk due to the potential of the stock rising in price or the stock being bought back in at any time if shares are no longer available. In the securities lending market, when the demand to borrow shares of a particular security exceeds the available supply, the shares are classified as hard-to-borrow and lenders charge a daily stock borrow fee for borrowing them. Since a client's loaned shares can be used to facilitate short sales and/or meet settlement obligations, there is a potential the price of the stock will decrease while it is on loan.
Schwab attempts to notify advisors with clients who are eligible to enroll when they hold an eligible security for the SLFP program. Once enrolled in the program, if additional securities in the client's account become eligible, Schwab may borrow them at any time. Schwab will notify the client of all borrows, rate changes, and returns by email. Generally, only hard-to-borrow securities are eligible for the SLFP program. Hard-to-borrow stocks are in high demand from short sellers, who are willing to pay to borrow shares. Since stock eligibility is based on market demand, not all securities in your account are eligible. Note that most large cap securities are easy-to-borrow and therefore not eligible for the SLFP program.
Enrollment1 into the SLFP program is by invite only. Advisors are contacted via phone by a Schwab representative and presented with opportunities to enroll when clients in their practice hold eligible securities and meet the program requirements.
The length of time a security is borrowed for varies and because this is based on market demand, there is no guaranteed amount of time that stocks remain on loan. Some stocks are only needed for a few days while others remain on loan for months.
When a client is enrolled in the SLFP program, a supplemental account is created to house the shares on loan. The supplemental account will be given a default labeling of Securities Lending at account opening (which can be changed at any time). Since SIP insurance does not cover loaned shares, Schwab provides cash collateral of at least 100% of the market value of the securities on loan. The cash collateral is custodied at Charles Schwab Trust company (CSTC). The cash collateral is increased or decreased daily as the share price fluctuates. While it is not reflected directly in the account, this adjustment is made with CSTC, and it is set aside. The current collateral amount can be reviewed next to current loans on the SLFP dashboard at SchwabAlliance.com/SLFP. The cash collateral will be the only restitution in the event Schwab defaults (i.e., Schwab declares bankruptcy) and shares cannot be returned.
Your client can sell loaned securities in the SLFP account, at any time. Sale proceeds within the SLFP account will be available for transfer and/or use upon settlement of funds. If securities are borrowed or returned, unexecuted limit sell orders will be cancelled and notification will be sent via email. If your client intends to use the sale proceeds immediately, you will need to call Securities Lending Services at 877-793-8872 (Monday through Friday, 8:30 a.m. 4:00 p.m. Eastern Time) to have the position(s) taken off loan first and then returned to the primary account before selling.
The income earned is calculated on a daily basis by taking the market value of the position multiplied by the interest rate divided by 360 (market value × interest rate / 360). Interest accrues not only when markets are open, but also on weekends and holidays for as long as the stock is on loan. Any changes to the interest rate or loan are communicated to the client by email, potentially daily. The status of the loans and the month-to-date accrued interest can be viewed on the SLFP Dashboard at SchwabAlliance.com/SLFP.
The interest income is paid once a month into the SLFP account (viewed in History/Transactions) on the evening of the first business day or no later than the second business day. On the second business day of the month, the income is automatically journaled to the primary account.
With taxable accounts (e.g., brokerage, trust, corporate), any income payments of $600 or more a year will generate a 1099-MIS while any trades that you execute within the SLFP account will be reported on a 1099 specifically for the SLFP account. There is also a possibility of receiving a Payment in Lieu (PIL) of a dividend if a security is on loan past the record date for a dividend. Note that unlike qualified dividends, PILs are taxed as ordinary income.
For qualified dividends in taxable accounts, Schwab may make an additional credit payment (referred to as a Schwab creditor gross-up payment in lieu) of 27% of the PIL into a client's account if they have experienced adverse tax effects due to receiving a PIL. This credit is a goodwill gesture to compensate the client for paying a higher tax rate on a PIL than they would have on a qualified dividend. These credits are discretionary, and Schwab may discontinue them at any time, with or without notice. If Schwab determines the dividend is not qualified or the client is not being tax-disadvantaged, the credit will not be made.
Consult a tax professional for further details. On non-taxable accounts (e.g., Contributory IRA, Roth IRA, Inherited IRA), all incomes and PILs occur within the non-taxable account. Journals between the SLFP and original non-taxable accounts are non-reportable events, and all regular distributions from the original account still apply.
No. While the securities are on loan, Schwab will act as owner on the securities, including the right to vote on corporate actions and the right to transfer the loaned securities to others.
If your client is no longer interested in participating, you may unenroll them at any time. Securities Lending Services is available Monday through Friday, from 8:30 a.m. – 4:00 p.m. ET (Eastern Time), at 877-793-8872 to process your request. There are no time minimums or commitments necessary, and once we return the shares, your client will be entirely unenrolled from the program. The request is processed in real time, and your client will still receive income payments for any period the securities were on loan until the day prior to unenrollment. At this time, clients are unable to choose which stocks are borrowed within an enrolled account. While they can always sell or request the shares to be returned at any time, if shares are returned, then it is possible that they can be borrowed again the following day. Please keep in mind that if you decide to enroll the account again in the future, a new application will be required.
Still have questions? We're here to help.
If you want to know more about our Securities Lending Fully Paid Program, you can reach us by calling 877-793-8872 between 8:30 a.m. and 4:00 p.m. EST.
1 Enrollment in the program is subject to approval. Not all clients will qualify. Employer-sponsored retirement plan accounts like 401(k)s are not eligible under ERISA rules. Clients must meet specific appropriateness requirements in order to be eligible to enroll in the program.
2 Not all securities will be eligible to loan. Demand and pay rates vary by security and over time. Schwab may terminate a loan at any time. Shares loaned out are not protected by SIPC. However, Schwab will maintain cash as collateral, which will amount to at least 100% of the loan. In the unlikely event of Schwab filing for bankruptcy, you can draw on this collateral, which may be the only source of resolution. Each security will have its own lending rate based on demand. The annualized lending interest rate is a portion of the total interest earned on the loaned shares. Shares on loan often support short trading strategies.
3 Clients receive cash collateral held at Charles Schwab Trust Company (CSTC) for the securities loaned, which is at least equal to the securities' market value as of the prior day's market close.