Stock Loan Rebate

AAA

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.

INVESTOPEDIA EXPLAINS '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 = $17,100 - $11,900 = $5,200

This net amount is split between the borrower and lender as per the terms of the agreement (a 60:40 split) as $3,120 and $2,080 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 $3,120 can be used to offset the stock loan fee, so that the overall amount paid by the stock borrower is $46,880.

RELATED TERMS
  1. Short-Interest Theory

    A theory which holds that a security with a high degree of short ...
  2. Short Covering

    Buying back borrowed securities in order to close an open short ...
  3. Short Selling

    The sale of a security that is not owned by the seller, or that ...
  4. Weak Shorts

    Traders or investors who hold a short position in a stock or ...
  5. Short Squeeze

    A situation in which a heavily shorted stock or commodity moves ...
  6. Short Sale

    A market transaction in which an investor sells borrowed securities ...
RELATED FAQS
  1. How can an investor profit from a fall in the price of bank stocks?

    Investors can profit from a fall in the price of bank stocks by shorting the stock or buying put options on bank stocks. ... Read Full Answer >>
  2. How can an investor profit from a fall in the utilities sector?

    The utilities sector exhibits a high degree of stability compared to the broader market. This makes it best-suited for buy-and-hold ... Read Full Answer >>
  3. How can an investor profit from a decline in the real estate sector?

    Speculation enables investors to profit from a decline in the real estate sector. The most popular forms of speculation for ... Read Full Answer >>
  4. How can I evaluate if a stock is a short squeeze?

    To evaluate whether a stock is a short squeeze, traders should examine its fundamentals, short interest and price history. ... Read Full Answer >>
  5. What is the difference between a short squeeze and short covering?

    "Short covering" and "short squeeze" are different terms to describe a situation involving short positions. A short squeeze ... Read Full Answer >>
  6. How does days to cover a short position relate to a short squeeze?

    Days to cover a short position reveals the intensity and duration of a potential short squeeze. A short squeeze occurs when ... Read Full Answer >>
Related Articles
  1. Active Trading Fundamentals

    Short Selling: Making The Ban

    Short selling has been around as long as the stock market, and it hasn't always been looked on favorably.
  2. Investing Basics

    Difference Between Short Selling And Put Options

    Short selling and put options are essentially bearish strategies used to speculate on a potential decline in a security or index, or to hedge downside risk in a portfolio or specific stock.
  3. Active Trading Fundamentals

    When To Short A Stock

    Learn how to make money off failing shares.
  4. Active Trading Fundamentals

    The Short Squeeze Method

    The short squeezed strategy can be risky - but also very rewarding - for those who master it.
  5. Professionals

    Helping Clients Navigate Short Sales And Foreclosures

    Both buyers and sellers can benefit from a real estate professional experienced in dealing with short sales and foreclosures.
  6. Fundamental Analysis

    Short Sales For Market Downturns

    This strategy can help in market downturns, but it's not for inexperienced traders.
  7. Mutual Funds & ETFs

    Shorting ETFs: Profit Or Peril?

    Although more detail and attention may be needed, ETFs can be shorted - and at a great profit.
  8. Active Trading Fundamentals

    Short Interest: What It Tells Us

    This figure can be a real eye-opener about the market sentiment surrounding a given stock.
  9. Options & Futures

    Questioning The Virtue Of A Short Sale

    This controversial strategy is blamed for making and breaking markets. Read on to learn more.
  10. Active Trading Fundamentals

    Short Selling Tutorial

    Want to profit on declining stocks? This trading strategy does just that.

You May Also Like

Hot Definitions
  1. Bogey

    A buzzword that refers to a benchmark used to evaluate a fund's performance. The benchmark is an index that reflects the ...
  2. Xetra

    An all-electronic trading system based in Frankfurt, Germany. Launched in 1997 and operated by the Deutsche Börse, the Xetra ...
  3. Nuncupative Will

    A verbal will that must have two witnesses and can only deal with the distribution of personal property. A nuncupative will ...
  4. OsMA

    An abbreviation for Oscillator - Moving Average. OsMA is used in technical analysis to represent the variance between an ...
  5. Investopedia

    One of the best-known sources of financial information on the internet. Investopedia is a resource for investors, consumers ...
  6. Unfair Claims Practice

    The improper avoidance of a claim by an insurer or an attempt to reduce the size of the claim. By engaging in unfair claims ...
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!