HMRC rules around what is and isnāt permitted with ISAs.
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Thanks Alex appreciate the response.
āLike government bondsā does not mean government bonds - can you be more specific? What rating of assets will you accept? AAA corporate? Junk? Also you know as well as I do that the value of (long duration) bonds are extremely sensitive to interest rate changes - so even government bonds can have big swings in value in market stress if long duration. Will you have a max duration?
As to the risk disclosure this makes no mention of how long one might expect to wait for the (potentially insufficient) collateral to be returned. Can you opine on the maximum time one might expect to wait? Why is this not in the disclosure?
I also see a big contradiction between your claims that āFreetrade shall be obligated to return the lent securities to youā and the risk disclosure that says āyou may receive back collateral value that is less than the cost of replacing the sharesā - which one is it? Is Freetrade contractually obligated to return the lent securities (and therefore I can bring action for breach if you donāt) or are you going to expose me to risk of loss? The two statements are mutually exclusive as far as I can establish.
My question (5) was about how you will handle capital distributions (distinct from dividend distributions) and stock splits/consolidations/rights issues on lent shares. Itās not as simple as the manufactured dividend system.
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Appreciate you response but I still have some questions:
To summarise what will be happening:
Freetrade - will use a stock it does not own to make money while assuming none of the risk
Customer - will lose ownership of a stock and assume risk for no reward under pain of their account being limited or terminated (T&Cs to be updated). Even ISA customers must accept the terms even though their stock cannot be lent out
Risk
There are two main risks as I see it and this is where the questions come in.
Settlement - Weāve cleared up that the customer will get the correct trade price at the time of the sale transaction but that settlement may be delayed, but you said those funds could be used to buy another stock. However, given itās unsettled cash it cannot be withdrawn, which may have been the point of the sale. Highlighting that in this scenario the borrower has not failed, but is just slow returning the stock.
Question 1 - Are there any details or metrics on how long it may take for the cash to be available to withdraw?
Question 2 - In the sale transaction the customer will effectively have sold a stock they do not own at that particular point in time. If it cannot be recalled in time for settlement, would the counterparty to that transaction, for example a broker, be able to own the stock the customer does not own but has sold? And could there be any liability to the customer for any failure in this scenario?
Question 3 - If the broker does not own the stock at that point could they sell it to someone else if they werenāt holding any of that stock on their books? Or would they need to borrow from someone else to complete that second transaction?
Counterparty failure - appreciating this risk may be low, however recent history has quite a few highly rated entities which have failed and when they do it tends to have an affect on the market. Itās possible a stock may either be highly correlated to the borrower who failed or could just be volatile in itās own right, say AIM biotech or resource explorer. Appreciate this is edge case and contains two high impact but low probability events happening at the same time but wanted to highlight itās not just a dayās gain that could be lost.
Customer owns 1,000 shares at 10p each of High Risk Oil Explorer Ltd, value Ā£100. That stock is lent out, cash collateral for Ā£100 received in itās place. The stock crashes 50% on the day the counterparty fails.
At the end of that day the borrowed stock has been lost due to the borrower failure, but the customer would get collateral in itās place. Presumably that would be at the end of day value of 5p per share x 1,000 shares, so Ā£5 in cash returned and a real loss of Ā£5, rather than a paper loss if the stock hadnāt been lent at the time the borrower failed. The remaining Ā£5 collateral would be returned to the borrower who has gone bust or the receiver sorting their affairs.
Question 4 - Is that scenario correct? If so, how quickly is the collateral returned to the customer who may wish to reinvest in the stock in case of a rally?
From what Adam said above FT will generate income from cash collateral held in the same way it does from customers non invested cash at the moment. I know Plus customers may get some or all of this non invested cash interest.
Question 5 - Is there any counterparty risk, in addition to the borrower risk, which the customer would bear from FT monetising the collateral?
There will be detail in your monthly statements specifically outlining the collateral - GBP, short term gilts - that are held against any positions on loan.
On your final question I answered that above then. In the event of corporate actions stock is recalled before the record date.
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On settlement questions the standard is to receive cash/shares within T+2.
In your hypothetical itās likely that we would still hold the Ā£100 collateral in a segregated client money account. We would liquidate that go out to the market and repurchase the shares. From your perspective you would just see the change in the value of your position due to market moves - ie a 50% decline. The position would simply remain in your portfolio. It doesnāt disappear if your shares are on loan.
Finally I think youāve misinterpreted Adamās point. The revenue we generate is from the fees paid by borrowers on loaned stock.
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Hi all
Weāll try to keep up with questions here but we might take a bit longer.
Please do take a look back through this thread as there is a lot of additional detail.
As ever our community members have been really helpful in jumping in with questions about this change to our terms.
Thank you for keeping the debate respectful and constructive 
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In @EuanGās example where the share value drops to Ā£5, the customer owns the collateral worth Ā£10 and the borrower goes bust you say that Freetrade will use the collateral to repurchase the shares. Since the collateral is now worth more than the shares, which of these scenarios would happen?
- Freetrade purchases Ā£5 of shares and gives the remaining Ā£5 to the customer
- Freetrade purchases Ā£5 of shares and returns the remaining Ā£5 to the borrower
- Freetrade purchases Ā£5 of shares and pockets the remaining Ā£5
It would be No 2. The company that went bust would have debtors that would expect any unused collateral to be returned to go towards settling itās debts.
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Thank you, I understand how settlement normally works, Iām trying to square it with the terms and conditions and what risks it may bring. In particular this delayed settlement point, which presumably means I cannot withdraw and itās still uncertain what happens to the other party if I sell.
24.2.10.
If your Lendable Securities are already on loan (i.e. we have exercised our right to use your Lendable Securities under this section 24.2) and you decide to sell an amount of the securities in your Freetrade Account that will mean selling the Lendable Securities, a recall process will be initiated. The recall process will involve returning your Lendable Securities to you, at which point your sell instruction will be completed. This recall process may delay the time it takes to settle your sell instruction (however this should not normally be the case).
Tāhis is good news. So Iād have the shares returned, facilitated by FT buying using the borrowers collateral, and therefore back to a uncrystallised/paper loss of 50% due to the market movement on the day.
ā[quote=āacamp, post:553, topic:59760ā]
Finally I think youāve misinterpreted Adamās point. The revenue we generate is from the fees paid by borrowers on loaned stock.
[/quote]
Iād read the post from Adam youād linked in a previous response to someone before posing the question, and I donāt think Iāve misinterpreted the statement as highlighted above. I agree it is at odds with the T&C linked to below. It may have been the case that Adamās response was meant to be more relatable to something that already happens, but respectfully, having statements from FT in here that are at odds with T&Cs isnāt helping.
24.2.8.
Freetrade will be paid a fee by the Borrower in relation to any lent securities under this clause 24.2. This allows Freetrade to provide you with the ability to invest in stocks on a commission-free basis. Other applicable charges will continue to apply, as referred to at section 6 of this Agreement.
Based on Alexās answer it might be easier to think of it as youād get your 1,000 shares back. The price likely wonāt be Ā£5 at that point due to market movements, but youād be no worse off than if the stocks hadnāt been lent out.
Iām a tax advisor, and (possibly despite that) I havenāt got a clue whatās going on here. I think the mood needs lightening (apologies to anyone that disagrees)
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SHOCKING, EYE-CATCHING HEADLINE!!!
Use these products insteadā¦not because they make me money, but because theyāre greatā¦honest!
ā¦
That about cover it?
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Iām surprised this thread is still going,
If you donāt like securities lending, then you have three choices.
- Suck it up, accept the tiny tiny risk and continue investing with FT
- Take your money and go to an company that doesnāt do securities lending.
- Chuck all your money in an ISA, (which I expect is what the vast majority of investors on FT do anyway)
Not rocket science is it.
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To be fair as the terms are currently incorrect I can understand why the thread be kept open. Shouldnāt be agreeing to terms that arenāt correct.
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I havenāt āsignedā the agreement yet because after reading through it Iām more confused than before.
If someone could explain in simple terms what it means for me in money making terms that would be great.
A before and after scenario would help.
I think Iām right in saying most people are concerned about a very small risk of loosing their shares when lent out.
Or
- Donāt accept the new conditions, and get banned from buying anything. *
Itās not perfect, but itās an option for some
*From 1 July
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The option I am following at the moment 
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For the time being me as well. I may re-adapt my stance more long term but in the short term thatās how Iām choosing to proceed.
Over a longer term period I may sell assets in one account and move to another platform in a gradual way. Of course nothing is set in stone yet.
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Once they update their terms 