IB Stock Yield Enhancement Program
You can earn extra income on the fully-paid shares of stock held in your account by joining IB's Stock Yield Enhancement Program. This plan allows IB to borrow shares from you in exchange for cash collateral, and then lend the shares to traders who want to sell them short and are willing to pay a fee to borrow them. Each day that your stock is on loan, you will be paid a loan fee based on market rates. You share a percentage of this with IB (currently 50%) as a fee for managing the program.
This program is available to eligible IB customers1 who have been approved for a margin account, or who have a cash account with equity greater than 50,000 USD.
- Earn Supplemental Income
Each day that your stock is on loan, IB deposits a percentage of any loan income directly into your account.
- Simple and Automatic
IB manages all aspects of share lending. Once you register, IB will examine your fully-paid stock portfolio automatically. If you have stocks that are attractive in the securities lending market, IB will borrow the stocks from you, deposit collateral into your account and lend the shares. It's that simple.
- Complete Transparency
When your stock is loaned out, you will see the fee rate that you are being paid on the loan along with the exact management fee you pay to IB. Other brokers with similar programs generally do not disclose the market rates to you, which allows them to pay you a small piece of the pie while holding on to most of the profits.
|XYZ is currently trading at $75.00/share. You're long 5000 shares
of XYZ, with a market value of $375,000.00. XYZ is in demand and
commands a loan fee of 9%.
|You sign up for IB's Stock Yield Enhancement Program, and IB loans out your
5000 shares of XYZ at 9%. The loan income on the transaction is $375,000.00 x 9%
= $33,750.00, minus the 50% IB Management Fee = $16,875.00 to you.
- Trade Your Loaned Stock with No Restrictions
You will see the loaned shares on your account statement, indicating that they are being loaned out. You are still the owner of the stock, which means you continue to have market risk and will recognize any profit (or any loss) if the stock price moves. You can sell your shares at any time without any restriction. If you are not happy with the extra yield you are receiving from the program, you can terminate your participation at any time.
Considerations and Risks
- Shares loaned out may not be protected by SIPC
The Securities Investor Protection Act of 1970 may not protect shares loaned out. This is why under SEC rules IB must provide you with cash collateral in the same amount as the value of your shares to protect you in the very unlikely event that the stock is not returned to you.
- Shares loaned out are typically used to facilitate short sales
Shares are attractive in the stock loan market because other traders want to borrow and sell them short, possibly affecting the value of the shares.
- Loan rates (and the fees you will receive) change frequently and may go down (or up) by 50% or more
- Potential adverse tax consequences from receiving cash Payments in Lieu of Dividends on loaned shares
When you lend stocks, you receive the full equivalent of all dividends. However, because you have loaned the stock, the cash you receive "in lieu of" dividends may be taxed as ordinary income instead of at the qualified dividend rate of 15%.2 IB will try to return shares to you prior to a dividend to reduce or avoid any potential negative tax consequences.
- Loans may be terminated at any time by IB
Also, IB does not guarantee that it will lend all eligible shares.
- Voting rights go to the borrower
During any period in which your securities are loaned out, you will forfeit your right to vote those shares by proxy.
- Selling your shares or borrowing against them or withdrawing cash in a margin account will terminate the loan transaction
If you sell the fully paid shares that have been lent out, or if you borrow the shares or withdraw cash in a margin account (such that the securities become margin securities and are no longer fully paid or excess margin securities) the loan will terminate and you will stop receiving the loan fee.
For a complete discussion of the risks and characteristics of the program, click here.
Stocks that are eligible to be loaned out are all "fully-paid" stocks (stocks not held on margin) and "excess-margin" stocks (stocks held on margin but whose market value exceeds 140% of your margin debit balance).
Sign up for IB's Stock Yield Enhancement Program on the Trading Configuration or Trading Permissions page in Account Management.
1. Not all customers are eligible to participate. Currently customers of IB Canada, IB India and IB Japan are NOT eligible. Customers of IBLLC and IB UK are eligible, as are Japanese and Indian customers who trade with IBLLC.
2. U.S. federal tax rates quoted here are for 2011 and are subject to change.