What is a 'Stock Loan Rebate'

A Stock Loan Rebate is a cash-back payment to an investor who puts up cash collateral in borrowing a stock.

BREAKING DOWN 'Stock Loan Rebate'

A Stock Loan Rebate is paid by a stock lender to a borrower who uses cash as collateral. When the lender reinvests the borrower’s cash collateral and earns a profit, a rebate is issued to the borrower. Under most circumstances, the lender will continue to accrue all interest on the properties. After paying out the stock loan rebate, the lender is entitled to the remaining funds.The amount of the rebate is determined by the Securities Lending Agreement established between the borrower and lender, and the rebate typically offsets all or some of the lender’s fee.  

Stock borrowers who do not use cash as collateral are not entitled to stock loan rebates. Those borrowers who put for collateral other properties, such as treasuries, will typically be responsible for a lender’s fee. Usually this type of arrangement is not available to the small individual investor. Stock loan rebates are typically only available to larger clients with sufficient cash on hand.

Example of a Stock Loan Rebate

Consider a scenario in which a hedge fund borrows 1 million shares of stock worth $20 per share for 30 days. The loan agreement stipulates that the collateral owed on this loan is 102 percent, so the hedge fund puts up $20,400,000. The contracted loan fee is three percent, with a rebate of .7 percent and a reinvestment rate of one percent. Additionally, the the net investment earnings after the rebate will be split, with 60 percent going to the borrower and 40 percent to the lender. For the purposes of calculation, a 360-day year is assumed.

In this example, the stock loan rebate for the 30-day loan is $11,900, calculated as follows:

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

The reinvestment earnings are $17,000, calculated as follows:

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

The net investment earnings are $5,100, subtracting the rebate from the reinvestment earnings. These earnings are then split 60:40, meaning that $3,060 goes to the borrower, and the lender retains $2,040.

The borrower is also responsible for an annual stock loan fee of three percent, which in this case is a $50,000 fee for the 30-day period. Their portion of the net investment earning offsets this fee, so the borrower’s monthly fee for this period would be $46,940, calculated as follows:

$50,000 - $3.060 = $46,940

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