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.

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