Stock Loan Rebate

DEFINITION of 'Stock Loan Rebate'

The amount paid by a stock lender to a borrower who has put up cash collateral to borrow a stock. The stock loan rebate comes from the reinvestment of the cash collateral by the stock lender, and offsets part of the stock loan fee. The amount of the rebate, along with other parameters of the stock loan, is decided beforehand through a Securities Lending Agreement between the lender and borrower. A stock loan rebate is only paid to the stock borrower in the case of cash collateral, otherwise a fee is charged for non-cash collateral such as Treasuries. Stock loan rebates are typically only offered to large clients and are not available for small retail accounts.

BREAKING DOWN 'Stock Loan Rebate'

For example, assume a hedge fund borrows 1 million shares of a U.S. stock trading at $20, for a total borrowed amount of $20 million. The parameters of the stock loan are as follows –

  • Collateral amount is 102%, and is paid by the borrower in cash
  • The stock loan is made for a period of 30 days
  • The stock loan fee is 3%
  • The stock loan rebate is 0.70%
  • The reinvestment rate is 1.00%
  • Net investment earnings (less the borrower’s rebate) are split 60:40 between the borrower and the lender.
  • 360-day year is assumed for the purpose of calculation.

In this case, the stock loan rebate for the 30-day period is calculated as –

[($20 million x 102% x 0.70%)] x (30/360) = $11,900

The reinvestment earnings on the collateral are –

[($20 million x 102% x 1.00%)] x (30/360) = $17,000

The net investment earnings are therefore = $17,000 - $11,900 = $5,100

This net amount is split between the borrower and lender as per the terms of the agreement (a 60:40 split) as $3,060 and $2,040 respectively.

Note that the borrower also had to pay a stock loan of 3% annually, which works out to $50,000 for a 30-day period. The net amount (reinvestment earnings on collateral less stock loan rebate) of $3,060 can be used to offset the stock loan fee, so that the overall amount paid by the stock borrower is $46,940.

RELATED TERMS
  1. Stock Loan Fee

    A fee charged by a brokerage firm to a client for borrowing shares. ...
  2. Collateral

    Property or other assets that a borrower offers a lender to secure ...
  3. Additional Collateral

    Additional assets put up as collateral by a borrower against ...
  4. 100% Mortgage

    A mortgage loan in which the borrower receives a loan amount ...
  5. After-Acquired Collateral

    Collateral for a loan obtained after the borrower has already ...
  6. Car Title Loan

    A short-term loan in which the borrower's car title is used as ...
Related Articles
  1. Credit & Loans

    What Is Collateral?

    Collateral is property or other assets that a borrower offers a lender to secure a loan. If the borrower stops making the promised loan payments, the lender can seize the collateral to recoup ...
  2. Credit & Loans

    What are the Five C's of Credit?

    The five C’s of credit are what banks and other lenders evaluate about a potential borrower when making a lending decision. The five C’s are Character, Capacity, Capital, Collateral and Conditions. ...
  3. Personal Finance

    Hidden Costs Of Product Rebates

    These cash incentives lure in consumers, who are often unable to collect on the deal.
  4. Options & Futures

    Lending Clubs: Better Than Banks?

    If you need to borrow money and your credit is making it tough, this new option may be just what you're looking for.
  5. Savings

    How Mail-In Rebates Rip You Off

    These common strategies often leave consumers holding the bill.
  6. Credit & Loans

    Explaining Non-Recourse Debt

    Non-recourse debt limits a lender as to what it can and cannot pursue for collateral.
  7. Trading Strategies

    How Does Securities Lending Work?

    Securities lending is the act of loaning a stock or other security to an investor or firm.
  8. Credit & Loans

    8 Top Alternatives to Car Title Loans

    Before you sign up for a car title loan, investigate these 8 alternate strategies.
  9. Credit & Loans

    Personal Loans vs. Car Loans

    How to tell whether a personal loan or a car loan is better for you.
  10. Home & Auto

    Financing Basics For First-Time Homebuyers

    If you're looking to get your first mortgage, there are many financing options available.
RELATED FAQS
  1. What is the difference between secured and unsecured debts?

    Learn the differences between secured and unsecured debt; discover how banks buffer risks associated with each type of loan ... Read Answer >>
  2. What is the difference between asset-based lending and asset financing?

    In the most common usage, the terms "asset-based lending" and "asset financing" refer to the same thing. Asset-based lending ... Read Answer >>
  3. What are the pros and cons of life insurance policy loans?

    Find out the pros and cons of borrowing against your life insurance policy to help you decide if this loan type is the right ... Read Answer >>
  4. How do banks measure the Five Cs of Credit?

    Learn about the five C's of credit and what qualitative and quantitative methods banks use to measure them when evaluating ... Read Answer >>
  5. What is PMI, and does everyone need to pay it?

    Also known as "Primary Mortgage Insurance," PMI is the lenders (banks) protection in the event that you default on your primary ... Read Answer >>
  6. What is the difference between a fixed annual percentage rate (APR) and a variable ...

    Fixed ARP and variable APR loans operate differently but serve the same purpose: to collect interest from a borrower so the ... Read Answer >>
Hot Definitions
  1. MACD Technical Indicator

    Moving Average Convergence Divergence (or MACD) is a trend-following momentum indicator that shows the relationship between ...
  2. Over-The-Counter - OTC

    Over-The-Counter (or OTC) is a security traded in some context other than on a formal exchange such as the NYSE, TSX, AMEX, ...
  3. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis for the reporting of earnings and the paying of dividends.
  4. Weighted Average Cost Of Capital - WACC

    Weighted average cost of capital (WACC) is a calculation of a firm's cost of capital in which each category of capital is ...
  5. Basis Point (BPS)

    A unit that is equal to 1/100th of 1%, and is used to denote the change in a financial instrument. The basis point is commonly ...
  6. Sharing Economy

    An economic model in which individuals are able to borrow or rent assets owned by someone else.
Trading Center