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Fidelity's1 Fully-Paid Lending Program2 allows you to lend Fidelity certain fully-paid or excess margin securities.3 In return, you gain the opportunity to earn incremental income on your portfolio through the securities lending market.
In a fully paid loan, you lend a specific security (or securities) to Fidelity.4 In return, you receive collateral in the form of cash and/or securities held at a custodial bank independent of Fidelity. In addition, you receive an interest rate-based lending fee which is calculated by multiplying the current Lending Interest Rate by the contract value of the securities on loan. The lending fee accrues daily and is credited monthly to your Fidelity account. The duration of the loan is typically indefinite, and the loan may remain open until either you or Fidelity elect to close it. You can end your participation in the Fully-Paid Program at any time by contacting Fidelity to recall the loan or by selling the securities. The existence of the loan does not restrict you from selling the securities at any time. However, the sale of the securities will terminate that particular loan. Fidelity is not obligated to borrow securities at any time, may borrow securities that you hold from you or other customers, and enrollment in the program does not guarantee that your securities will be borrowed.
Under the terms of the Master Securities Lending Agreement (MSLA) which you executed prior to your participation in the Program, you maintain economic ownership5 of the securities on loan and may recall the loan at any time. You may also sell securities on loan at any time online6 or through a representative. Under the MSLA, you relinquish your ability to exercise voting rights for securities on loan. If you wish to act on an upcoming proxy, you must contact your Fidelity representative or the Fidelity Securities Lending Desk and instruct them to return the securities prior to the record date of the proxy vote. Fidelity will recall the securities on loan and will attempt, on a best-efforts basis, to return them to your account prior to the record date of the proxy. The MSLA governs all loan transactions and gives Fidelity the right to borrow fully paid and excess-margin securities from your account. It is a separate agreement from any previously executed margin agreement and the borrowing of securities under the MSLA is a separate process from rehypothecation.
Will I still receive dividends while securities are on loan?
Distributions paid on securities borrowed by Fidelity pursuant to the Fully-Paid Lending Program will be credited to your Fidelity account in the form of a “cash-in-lieu” payment. Receipt of cash-in-lieu payments may have different taxable consequences than receipt of the actual dividends from the issuer.7
To help offset the potential tax burden associated with the receipt of cash-in-lieu payments in place of qualified dividends (as defined in Jobs & Growth Tax Relief Reconciliation Act of 2003), Fidelity will credit participating accounts with an additional credit adjustment equal to 26.98% of the qualified portion of the distribution.8 This adjustment will occur annually after all reclassification information is made available.
The Lending Interest Rate is based on several factors including borrowing demand, the overall lendable supply of the security, short-selling and hedging interest, and general market conditions, and is therefore subject to change. Generally, the Lending Interest Rate for each Loan will be 60% of a third party benchmark lending rate that is calculated daily for each security.
You can see the current Lending Interest Rate online by clicking on the information flag next to the security in the Positions grid. You will receive a confirmation from Fidelity if the Lending Interest Rate changes. Additional information about the rates can be found in the Master Securities Lending Agreement (MSLA) signed by you when you enrolled in the program or by contacting Fidelity.
Fidelity may receive compensation in connection with the use of your loaned securities, including lending your securities to other parties or facilitating the settlement of short sales. Fidelity may relend Loaned Securities to third party borrowers on a principal basis, in which case, Fidelity’s compensation for the applicable loan will be the fees paid to Fidelity by the third party borrower less the lending fee paid to you.
All securities on loan will be reflected in the “Positions” section of your account statements and will continue to contribute to your Total Account Value. You can also see the details of your securities on loan in the “Loaned Securities” page.
You can see all lending in the “Activity” section of your account statement. This will include new loans, loan returns, loan rate changes, collateral adjustments, and the monthly interest credits.
You will also receive a monthly Fully-Paid Lending statement detailing the daily contract value, Lending Interest Rate, and accrual for each security on loan, as well as the total amount of the lending fee credited to your Fidelity account for that month. This statement is available online by clicking “Statements” and then “Account Records.”
You can also see the details of your positions on loan by clicking “Loaned” next to a particular position in the security detail view or by selecting the “Loaned Securities” link next to the account name or within the “Related Links” drop-down. You can see which securities are currently on loan, the Lending Interest Rate you are earning on each loaned position, as well as the collateral provided to you for the loaned positions.
All securities on loan will be reflected in the “Holdings” section of your statement and all activity will be reflected in the “Investment Activity” section. Additionally, you will receive a monthly Fully-Paid Lending Program statement detailing the daily contract value, Lending Interest Rate and lending fee accrual for each security on loan, as well as the total amount of the lending fee credited to your Fidelity account for that month.
On the day the securities are borrowed, you will receive a confirmation, detailing the position being loaned, the initial Lending Interest Rate on the loan, the custodial bank holding collateral on your behalf, and the value of that collateral. In addition, if the Lending Interest Rate changes, you will receive a trade confirmation detailing the change.
Fully paid securities on loan to Fidelity are treated like "cash" positions for the purposes of regulatory margin calculations (Fed and Exchange requirements). Options positions written against a position on loan will be considered uncovered from a margin standpoint. However, the value of the positions on loan may still be used towards house margin requirements.
On settlement date of the fully-paid loan, the collateral will appear as a new position in your Fidelity account. The collateral value does not contribute to the market value calculated for your account and is not a marginable security. Fidelity will send a confirmation for the original amount of the collateral against the fully-paid loan.
On a daily basis, Fidelity will adjust the collateral position for you in order to maintain adequate collateral in your account (e.g., marks to market on the loan position[s], changes to the quantity of the loan position[s], etc.) Each time a change is made to your collateral, Fidelity will send a confirmation to you setting forth the incremental change to the collateral value.
Fidelity will provide collateral to a third-party custodial bank, and the bank will hold the collateral as a customer deposit in cash or cash-equivalent form. However, according to the terms of the MSLA and applicable law, the only securities that will be permitted to serve as collateral will be those securities that are allowable investments under Rule 15c3-3 of the Securities Exchange Act of 1934. These include U.S. Treasury bills and notes, negotiable bank certificates of deposit and other securities approved by the U.S. Securities and Exchange Commission that have similar characteristics in terms of liquidity, volatility, market depth and location, and the issuer's creditworthiness.
The principal risk in any securities lending transaction is counterparty default. Fidelity is your counterparty on all fully paid lending transactions. If Fidelity were to default on its obligations as defined in the MSLA, you would have the right to withdraw the collateral from the collateral account at the custodial bank by contacting the bank in the manner described in the MSLA. In the event you make a withdrawal request, the bank will transfer to you an amount equal to your current collateral amount (or such lesser amount as you may have requested). If you were to choose to use the collateral proceeds to repurchase the same type of securities that were on loan and not returned, this would be considered a new purchase and potentially a taxable event9.
As described above, you relinquish voting rights on borrowed securities and distributions paid on loaned securities are credited to your account in the form of a cash-in-lieu or substitute payment. Additional risks include that during the life of the loan the securities are not covered by the Securities Investor Protection Corporation (SIPC).
For more information, contact the Securities Finance Desk at (800) 481-8313 or contact a Fidelity Customer Service Representative at 800-544-6666.
All references to Fidelity include National Financial Services LLC ("NFS") and Fidelity Brokerage Services LLC ("FBS"), Members NYSE, SIPC. All references to Fidelity Accounts refer to accounts carried by NFS on behalf of introducing brokers.
This information is intended to be educational and is not tailored to the investment needs of any specific investor.
Fully-paid securities are securities in a customer's account that have been completely paid for. Excess-margin securities are securities that have not been completely paid for, but whose market value exceeds 140% of the customer's margin debit balance to National Financial Services LLC. Securities on loan are not covered under the provisions of the Securities Investor Protection Act of 1970 (SIPC).
Securities on loan are not covered under the provisions of the Securities Investor Protection Act of 1970 (SIPC).
The Fully-Paid Lending Program is only a means for increased income on certain securities and does not provide any downside protection or "hedge" against the customer's lending position(s) or portfolio.
Securities on loan are available to sell online from the “cash” account type. Positions held in cash must be sold separately from positions held in margin. Proceeds from sales of securities on loan may not be immediately available for new purchases.
Fidelity does not provide legal or tax advice. Consult with an attorney or tax professional regarding any specific legal or tax situation.
The credit adjustment percentage may be increased or decreased from time to time by Fidelity due to changes in federal and/or state tax law and the classification of the dividend distribution. Fidelity does not guarantee that this adjustment will be sufficient to eliminate the full additional tax burden associated with all dividend distributions. Fidelity reserves the right to deny credit adjustments to any customer which Fidelity determines would have been otherwise ineligible to receive the tax benefit of a reduced dividend tax rate.
Fidelity does not provide legal or tax advice. Consult with an attorney or tax professional regarding any specific legal or tax situation.
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