Does Freetrade re-hypothecate or loan out client securities?

TL;DR: Loaning out client securities may screw brokerage clients during financial crises. It’s legal anyway. Do Freetrade do this, or plan to do this as a monetisation method?

Round 3 investor who put in 5,000 quid. I’ve searched the forums 2 times, as well as the Terms & Conditions, but nothing came up in search. Please read the following 2 articles if interested in reading up on what I’m looking for:

Hypothecation = You pledge home for your mortgage from Bank 1
Re-hypothecation = Bank 1 borrowing from Bank 2 and pledging your house for its loan
So What = if Bank 1 blows up, You still lose your house

Re-hypothecation figured prominently in the 2011 MF Global implosion (albeit on futures contracts). But leading stock brokers regularly engage in the practice today, as well.

TD Ameritrade (following Charles Schwab in offering zero-fee) and Interactive Brokers (USD 1 / trade + zero-fee when they launch IBKR Lite) have terms which allow them to do this: the former with margin accounts specifically, and the latter with all accounts, it seems.

Right now, there are 3 primary ways a zero-fee stock broker makes money: 1) selling order flow to market makers / HFTs, 2) interest on client cash, 3) margin fees. In the future, if and when FT enables margin accounts, will it 4) pledge client securities as collateral for its own leverage? So that it can enable proprietary trading?

No. Is the simple answer. As it’s XO it doesnt trade it’s own account (fractions might complicate this matter depending who takes the other fractions of the whole share). Securities Lending under Uk (rather than US) laws are complex and barely worth the effort without significant scale (like, Blackrock scale) as lending fees on all but the most illiquid assets are way down on years ago. You can get a securities lending program running via Equilend or eSecLending pretty easy but the costs will outweigh the demand at FT for some time yet. You can easily settle the securities lending transaction via Crest that FT already operate. But serious, it ain’t worth it until at serious scale. Under FCA rules you need clients to opt into this lending and your capital adequacy requitemrnts are likely to be hiked. All in all… nah.

To your other points.

1 is illegal in the uk
2 is how FT disclose they make a portion of income
3 is not relevant as there’s no activity that requires margin
4 is not relevant as FT doesn’t trade it’s own book

Your main exposure to this type of activity via FT will be indirect via the ETFs you trade who almost certainly securities lend. They usually pocket the bulk of the income … which seems a little rich… but, whatever, you sometimes get a little benefit or at least a lower OCF

Securities lending in the UK at least is usually fully collateralised and usually marked to market everyday. It’s s legitimate operation to cover shorts, dividend and dividend tax arbitrage and so on… perfectly fine and perfectly safe if managed correctly. That’s not to say it’s bulletproof. But as to how it relates to FT… I don’t see it’s relevant


Thank you, finki, for the comprehensive point-by-point reply.