That effectively means that for there to be a shortfall in collateral the borrower would have to default and - in the same c. 24 hour period - the value of the collateral would have to dip below the value of your shares (either the shares rise in value or the collateralās value falls).
Given how unlikely that is, have you considered taking out insurance to guarantee customers the value of the loaned shares? That would go a long way to alleviating customersā fears as evidenced in this forum + on social media.
To give you added reassurance, we have committed to taking all reasonable measures to return the equivalent shares to you should this occur.
Could you please elaborate on those reasonable measures?
I also learned last night while doomscrolling that some of your competitors in Sweden split the profit from share lending with their customers (source: https://twitter.com/etfmarknaden/status/1503145172066054157). Perhaps consider that as an incentive, which would both help with your overall value proposition and fall more in line with the freetrade ethos?
Weāre confident that the protections and processes that we have in place are more than sufficient. Nevertheless, we will always look at ways that we can enhance these protections further, so long as they make sense for our customers and for us as a business.
Weāve said above (@adam posted somewhere) that weāre going to look at productising this feature in the future to offer a revenue share option.
While this is a long and sometimes difficult thread, I think it has been useful for a lot of reasons. I think it really taps into some fundamental questions around what weāre actually doing when we invest while explaining some of the underlying mechanics of what is actually happening.
To its credit, Freetrade has made investing much more accessible but, at least to me, the move to share lending has exposed a disconnect between what we think weāre doing when we invest and what weāre actually doing.
Freetrade makes it feel like youāre buying actual company shares with lines like: āInvest commission-free in the stock market.ā and āinvest in over 6000 stocksā.
The app makes it feel like youāre buying shares. The small print makes it clear what youāre actually buying - the beneficial ownership of the underlying security, held in trust by a custodian.
Now, most people can get their heads around that and accept it as an efficient way to make trading possible. But, I would argue, that share lending lifts the perception of ownership to an entirely different level.
In this case, the shares you thought you owned are lent out by a third party (Freetrade) for their benefit. While theyāre on loan, you are the beneficial owner of a claim on a portion of a pool of unspecified collateral provided by an unspecified borrower who wants to use your shares for unspecified purposes.
Itās hardly surprising that, in this context, people could find themselves struggling to adjust to this new level of trust. When you boil it down, youāre now looking at quite a few layers of promises that should be OK, but actually might not. The companyās terms and conditions acknowledge that all of the risk resides with you, the customer, admittedly supported by the Governmentās Ā£85K guarantee (which may, or may not, be enough to cover your losses and could take a long time to deliver in the event of a failure).
I realise that āinvest in unspecified collateral linked to a security that you previously had a beneficial interest in and should be able to be recalled if you want to trade that beneficial ownershipā doesnāt really have a catchy marketing ring to it but shining a light on the reality of it may be enough for some folks to pause and think again about what it is that weāre actually doing here.
Are you speaking from professional experience or just stating your own opinion?
Letās be clear on the worst case scenario
May be it helps some people in the thread to reflect on this.
Letās imagine the VERY worst case - 1) the borrower defaults, 2) FT can not provide your securities back (I can only see this happening in some edge cases I mentioned above but for the sake of exercise letās imagine this happens)
So in the VERY worst case you have cash or bond collateral (you literally own this collateral according to the terms) which exceeds the value of your shares in the previous trading day, so in the VERY worst case you are taking a one day price variation risk on your stocks.
Very worst case scenario 1:
If the lent out stocksās value falls during the day you have more collateral than the value of the stocks lent out.
Very worst case scenario 2:
If the lent out stocksās value gets higher during the day than you are exposed to missed day (or days depending on how quickly the collateral can be used) growth of the stocksā being lent out***
One day positive price movement loss of the stockās lent out is the VERY worst case scenario I can see if FT does not return your shares despite being contractually obligated to do so, so I honestly donāt understand what all the fuss is about.
Moving your portfolio or switching back to paying 10 pounds per trade to mitigate this risk seems like a bad financial move in my eyes.
In return, you are getting to use one of the best price/quality brokerage on the market which is a great deal imo.
Would indeed be great if people with large portfolios on the premium tier get a piece of the pie as mentioned above
***would argue that the very worst case scenario is implying a default of a top tier financial institution in which case I highly doubt that āVery worst case scenario 2ā is even theoretically possible
On that last point, in my case and Iām sure in many more cases, I would most probably use that share of the proceeds to buy more shares, enabling FT to lend more out, giving them more income, me another pie slice, and increase the value of my FT shares to boot. Then repeat ad infinitum.
If the proceeds from share lending on premium tiers could be automatically reinvested in your own portfolio (as part of the auto investment product being developed by FT) that would be great indeed.
Can you point me to the section where is specifies we are the owners of the collateral. I can only see āFreetrade will be holding it on our behalf.ā. If we owned it, there wouldnāt be the need for the āreasonable measuresā to return it to us. They would simply return it to us.
Iād also like to know what other forms the liquid collateral takes. It mentions Government Bonds, but iām guessing that is just one example.
Iād also like to know if the collateral actually change hands or is it just on paper. So if a lender defaulted, FT would need to retrieve the collateral via administration or legal process. Such as a mortgage lender would do when if a mortgage borrower failed to pay the loan. They could be way down a list of creditors. This is surely not an overnight job and could take many months of stress and pain for customers.
I fail to believe in the events you are describing we would simply āmiss one day of growthā and we could have immediate liquidity on our securities. It would be a long, painful and protracted process to return our ācollateralā.
The majority of other brokers allow you to choose not to participate in share lending, letās be honest FT have been pretty vocal about being against shorting stocks. What exactly do FT think lending these stocks is? Itās literally to allow people (get institutional investors) to short themā¦ā¦
Thanks James. I think this discussion is a great example of the benefits of this community
24.2.5
5. If Freetrade exercises its right to use the Lendable Securities, we will ensure that we have received liquid collateral of greater value in return for the securities lent. You will therefore become the beneficial owner of the collateral, as set out at clause 24.2.6 below. This means that during this time:
For you second question would be hard to answer as I donāt work for FT. I am managing cash collateral that we post to financial institutions as part of my day to day. There is an actual cash transaction involved, so I can only speculate that it is same for FT
Bear Stearns, Lehman Bros both went bust. Merrill Lynch, AIG, Freddie Mac, Fannie Mae, HBOS, Royal Bank of Scotland, Bradford & Bingley, Fortis, Hypo and Alliance & Leicester all came very close and would have gone busy without government bailouts. The fact is that the big banks are in general not that resistant to drastic market change because of the way in which they operate.
A lot has changed since those events in 2008. Banks are now heavily regulated to avoid a repeat. As someone said before, if you have issues with the ābig banksā then why would you trust them with your everyday current account?
So, my reading of the above is that if there is an issue with Securities Lending (however likely/unlikely) than the FSCS will not cover any losses but only kicks in if Freetrade goes bust.
That was my understanding but several on this thread seem to incorrectly believe that the FSCS will cover any potential losses related to securities lending - which is a false belief.
FT is contractually obligated to return the security to you. Not sure what losses you are referring to. If they donāt return your security they are legally accountable.
24.2.5.
If Freetrade exercises its right to use the Lendable Securities, we will ensure that we have received liquid collateral of greater value in return for the securities lent. You will therefore become the beneficial owner of the collateral
You become the owner of the collateral and Freetrade then has to ātake reasonable measuresā to return your security.
Thatās not the same thing as:
FT is contractually obligated to return the security to you. If they donāt return your security they are legally accountable
FT is contractually obligated to return the security to you. If they donāt return your security they are legally accountable
If they donāt get you the security back how do they argue they took reasonable measures
I think this is the point where we actually need some legal backed advice to be able to discuss and provide opinions
However, disregarding the legal opinion on this we are talking about being exposed to loosing out on your daily gains on the lent out stocks in case of a default of a top tier financial institution which is theoretically close to impossible (losing out on your daily gains at this moment is impossible not the default of the institution) See my post above for a more detailed explanation. This is the level of discussion we are seriously having here.
Sergey, you talk of securities as if they were somehow constant. If I want to sell my security on a Thursday when itās worth, say, Ā£10, Iām not so sure I want it sheepishly returned the next again Tuesday when itās dropped to Ā£6.50 and Iāve missed out.
People want to know that when they press the sell button, theyāre getting the price in that moment. According to 24.2.10 in the Ts & Cs your sell instruction isnāt completed until the security is returned.
I also donāt know how can say that default of a ātop tier financial institutionā is ātheoretically close to impossibleā when a) you donāt actually know who the borrower is and b) the list of now bankrupt formerly top tier financial institutions is pretty long ā¦
I literally just use my current account to get paid, then take all my money out. My balance is 0 70% of the time.