NEWS

Fully Paid Lending for Stock Loans Gaining Momentum

Fully paid lending is increasing in popularity as the industry strives to broaden the pool of securities that broker-dealers can lend. Fully paid lending is beneficial in helping your clients manage liquidity and enhance their investment returns. However, there are a number of complexities in the process that make it a challenge to implement.

Under Rule 15c3-3, fully paid securities in a client's account must be segregated. In order to lend fully paid securities, the firm must have a signed lending agreement from the client, and the portion of securities lent to the street must be recorded and disclosed on a monthly statement.

The challenge in accomplishing the proper segregation and bookkeeping stems from the fact that these securities originate in the client's margin or cash account. The broker dealer needs to recognize fully paid shares that are available for lending, reduce the fully paid requirements in order to deliver the shares to the borrower, to somehow record in the client's account the lending of the securities, maintain those securities free of segregation in subsequent days' processing while the loan is outstanding and incorporate the definition of the securities loaned on the client's month-end statements. Automation is needed to manage this cumbersome process.

There are many approaches to handling fully paid lending. SunGard is addressing portions of the problem with its Loanet and Smart Loan solutions, by interfacing with other back-office systems to help customers structure the bookkeeping and segregation end of fully paid lending.

Loanet has been enhanced to actually generate the entries and move positions from one account to another, or one type of account to another. Smart Loan currently provides processing that supports the lending of fully segregated shares, as defined by 15c3-3. Smart Loan Fully Paid processing eliminates essentially all of the manual steps currently performed by customers to execute these transactions through Loanet and DTCC. In addition, the elimination of manual steps helps reduce the risk of errors associated with any manual procedure.

With short selling becoming a popular trading strategy, the demand for inventories of certain securities is extremely high, making fully paid lending the next resource for securities. Even with substitution applications helping to maximize the availability of hard stocks in margin accounts, the potential revenue opportunity of full paid lending is significant.