Loaning shares to Schwab?
Rocky
I made it to the board. Thanks for the reply, my basic take of the stock loan is that the MM’s are short and need shares. Here is a copy of a section that was sent to me.
Questions about Schwab SLFP
I was wondering if any one else has gotten a Fedx package from schwab or any one else. My gut feeling is not to do this, but I would like some input on what other people think. The following is some of what Schwab sent me. There is a lot more of legal papers. Sorry for any typing errors
Frequently Asked Questions”
Schwab Securities Lending Fully-Paid (“SLFP”) Program
1. How does the SLFP work?
Schwab set up a new Securities Lending Fully Paid (SLFP) account in the client’s name (and address). Schwab borrows the client’s fully paid securities and moves these securities into this new SLFP account. Schwab will obtain a ‘Letter of Credit’ issued by a large national bank independent of Schwab, as collateral for the loan. This Letter of Credit will be mailed to the client’s home or place of business as indicated on the SLFP account. Monthly SLFP account statements will provided for the client. Client will receive an agreed-upon Loan Fee. This Loan Fee is calculated daily based on the closing market value of the securities and credited directly to the client’s Schwab account on a monthly basis.
Example Shares X price x 7% x 30/360 = monthly rate
2. Why does Schwab use this process?
Schwab is required to segregate ‘fully paid’ securities and thus is prohibited from borrowing a client’s securities unless the client either (1) incurs a debit balance or (2) gives Schwab written authorization to borrow the client’s shares. In the event that a debit balance is held in a margin account, Schwab may, without notification, borrow securities up to 140% of the value of the debit balance.
Schwab has recognized that in certain specific situations, a client can increase their return on fully paid securities by lending them to Schwab under this SLFP program. Because these securities are fully paid, Schwab must get written consent from the client. Additionally, moving these securities to a new SLFP account allows Schwab to track the program, generate statements for the positions in the program and calculate the Loan Fee.
3. What are the advantages to the client?
The client receive a monthly loan fee, which increases the effective yield of the security
4. What are the disadvantages to the client?
The client may receive Substitute Payments in Lieu of Dividends (“PIL”), which are taxed at the client’s income tax rate as opposed to the qualified dividend tax rate under the Tax Relief Act of 2003. Schwab recognizes that some clients may be tax-disadvantaged as a result of receiving a PIL. So, starting in 2004, Schwab plans to make an additional payment as a goodwill gesture into some taxable accounts that receive a PIL. The spirit of this credit from Schwab is to "make up the difference” to clients who may pay a higher tax rate on a PIL than they would have on a qualified dividend given changes to the tax law. However, we will not make this payment when we can identify instances where a dividend is not qualified due to hedging, holding period limitation, or similar situations. The client loses SIPC protection for the security on loan. To offset this risk, the loan is secured by a ‘Letter of Credit’ issued by a Large National Bank unaffiliated with Schwab. The client in the event of default by Schwab can draw upon this Letter of Credit may be the only source of satisfaction of Schwab’s obligation to the client in the event that Schwab fails to return the loaned securities.
The client waives the right to vote on corporate actions regarding the loaned security
5. Who does Schwab Lend the shares to?
Schwab lens the shares to other clients or financial institutions to facilitate their trading strategies (e.g. short selling) and to fulfill settlement obligations (e.g. fails to deliver).
6. How long will the loan last?
The term of these loans varies significantly; some last for many months, while others may be very short term(less than one month). Typically, as long as there is demand for the security in the market, the shares will remain on loan.
7. What does the client need to do to participate in the SLFP program?
1. Read the “Securities Loan Agreement”, sign it and date it.
2. Sign the Letter of Authorization (giving Schwab permission to move shares to the client’s SLFP account)
3. Complete the “New Account Application”, sign it and date it.
4. Enclose and return all documents in the self-addressed return envelope.
8. Who is eligible for the SLFP?
Are there any coast associated with this program?
No.
9. How is the client compensated?
Schwab will pay the client an agreed-upon loan fee as set forth in the confirmation for such loan. The loan fee will be computed daily based on the market value of the loaned securities and on a 360- day year. Loan fees will be payable by Schwab to the client by the fifteenth (15th) day of the month following the month in which the loan fee was incurred.
10. Can the client sell his shares at any time?
Unless Schwab and the client have agreed upon a specific term (or end date), the client may sell the loaned securities at any time. Any sales by the client will be deemed a termination event and will end the loan. However, if the client has short-term plans to sell the security, Schwab requests that the client, in good faith, decline this offer.
