We're updating our terms - Securities Lending

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312

At the least an email with the title “Important Changes” clearly explaining the changes and protections they have put in place for users (There doesn’t seem to be much guaranteed protection).

If I was the CEO, I might have considered a quick keynote video explaining the change and why it was necessary, and again, what protections are in place for users. Certainly as an FT shareholder I would expect something too.

I only found out when I opened the app this morning and was asked to agree to “lending shares”. I was like what is this all about.

The blog post has the title “We’re Updating Our T&Cs”, hardly a post anyone is going to click into, even if they did somehow discover it.

The content of the post also avoids the detail or bigger problems of the move. It tries to paint the impression as business as usual and that the risk is normal risk in light of investing. When in fact it is quite a serious change, with risk external to your investment decisions.

What does “reasonable measures” constitute? What is the real risk here? Why not guarantee no losses if it is so “safe.”?

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313

Hey, JB.

I appreciate where you are coming from.

That’s why we posted about these changes in our community way, way ahead of the rollout: to educate.

It’s also why we are doing an exceptionally long, 90-day grace period.

Over the years, we have also spoken frequently about our intentions to introduce this revenue stream as we grew as a company.

When it comes to securities lending itself, you’re right that this feature of the markets has been thrust into the spotlight in the last year. But it’s often being mischaracterised and misunderstood, so it’s important to give you some balance here.

Short-selling is barely one use case for securities lending. I could link to the educational webpage again, but to save everyone a click, a big use case, from which you all as UK-based retail investors likely benefit, is market-making.

For retail investors to execute smaller sized orders with a tighter spread, market makers are obliged to continuously quote “two-way” (bid-ask) prices throughout the trading day. Oftentimes, market makers can end up selling you stock that they don’t have in their inventory so they have to go to a bank to borrow this stock for settlement.

This makes markets like the LSE more liquid, which influences the efficiency of price discovery and lowers some of the costs associated with trading, like the difference between the bid and ask prices.

To say that it’s “less reputable” institutions that engage in securities lending is also misleading.

This is a closely monitored segment of global markets and it is subject to strict rules and disclosure requirements. According to the International Securities Lending Association the biggest lenders are pension plans, mutual funds and sovereign entities (like sovereign wealth funds and governments).

There’s also often this “us vs. them” narrative when it comes to short-selling that can be much more nuanced. An asset owner (you) and a short-seller are not entering into a zero-sum transaction where one of you must profit at the other’s expense. If you’re holding a stock for the next year and someone borrows it for a month expecting the price to decline in that period, it’s possible that both you and the borrower could end up with a profit over your respective holding periods.

I hope this colour helps.

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314

I’ll close this today, if you haven’t voted this is just an interesting hmmmm poll. It has a much weight on Freetrade as the polls on Taco fillings, favourite wrestlers or best breakfast (which I never got to post sigh)

It’s interesting to see that on a 6 figure portfolio (not crazy in terms of a SIPP) many people are happy to pay up to £100 per year.

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315

Thank you @Viktor, I appreciate the time you have taken to write an informative comprehensive reply.

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316

Wait, does this mean I wouldn’t be able to sell my shares if they’ve been lent out?

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No. You will be able to buy and sell as normal. If your shares are on loan and you sell we recall the shares to deliver in time for settlement (two business days after execution) or we can look to reallocate the loan to other shares in our inventory.

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318

So
 that’s effectively a ‘yes’?

If the shares are on loan, you have to recall the shares, which can take two days?

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No. As has been explained several times above from your point of view nothing changes. You sell when you want to sell. You get dividends as normal.

(Stuff happens behind the scenes and Freetrade deals with that stuff.)

I just noticed you were replying to my email from above which was referring to Nominee accounts. To be clear whether or not share lending occurs your shares are held in a nominee account. All the major brokers hold your shares in nominee accounts. This is a way to protect you. You can of course at extra expense hold shares directly in your name but most usual brokers do not provide such a service - cumbersome and expensive.

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320

Normal settlement for a transaction is two days (T+2). You press the sell button and a trade executes. Then that trade needs to settle where the shares and money change hands. This is a two day process as normal on most equity markets. There is not a two day delay because of securities being on loan.

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321

Right. So nothing changes in terms of how long it takes to sell?

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322

Correct

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323

Ah gotcha, that wasn’t clearly expressed enough imo. But good to know.

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For us aka me who don’t have a big portfolio at all I couldn’t pay even the 3 a month as that would cost more than my portfolio even makes :frowning:

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That’s why fixed cost is usually worse for those starting out over a % cost

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No issue from me at all after reading the thread and clear explanation. I want Freetrade to be successful long term and if this helps their business model turn a profit and keep providing the service that most of us are enjoying then that’s good.

I think there will be a small vocal minority who are outraged their shares are being lent out to short and therefore hurt their position. However in my simple mind when you buy a share there is someone out there selling and therefore does not think it’s going any higher. It always takes two sides to make a trade regardless of which side your on.

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327

Quick question - Are all Shares Loan out?

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It’s only UK-listed securities to start with. And we only lend shares held in a GIA or a SIPP.

Anything held in an ISA cannot be lent.

329

Speculation? I don’t recall FT saying this.

Obviously, because you cannot legally do this, can you?

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No.

Currently UK listed shares held in either : GIA, Plus, SIPP.

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It won’t be all of those either, they’ll be eligible for loan but doesn’t mean they are always on loan.

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