The Risks of Shorting Series, Part III: Borrow Fees and Dividends 

In this chapter of The Risks of Shorting Series, we will dive into the impact that corporate actions can have on borrow fees. As noted in Part II, borrow fees are indicative and subject to change intra-day due to supply and demand, as well as other market conditions. Corporate actions such as dividend distributions, tender offers, mergers, etc. can cause spikes in the borrow fee. Oftentimes a corporate action’s impact on borrow fees is due to changes in the supply of the instrument, making it more challenging to borrow, and therefore more expensive to borrow.  

Take for example, a dividend distribution. Lenders receive payments-in-lieu of dividends (“PIL”) if their shares were lent over the record date. Unless the borrower sold short, they are recorded as the “holder of record” of the shares on record date and subsequently receive the dividend. If the borrower sold the shares short, then the buyer would become holder of record and receive the dividend from the issuer. The lender will then “claim” the dividend amount from the borrower. The amount of the claim is the same as the amount of the dividend, but the credit is classified as PIL because it was not received directly from the issuer. If the borrower sells the shares, they are still responsible for paying the PIL to the lender, even though they do not receive the dividend from the issuer. To avoid the tax implications of receiving PIL, many lenders restrict new loans and recall existing loans prior to the dividend record date. This is because payments-in-lieu are ineligible for qualified dividend tax treatment. When the shares are recalled or kept out of the lending market in anticipation of a record date, the quantity of loanable shares contracts, and the borrow fee may increase in response to the decrease in supply. 

A real-world example of this scenario was the SiriusXM (NASDAQ: SIRI) special dividend. On February 1^st, 2022, SiriusXM declared a $0.25 special dividend payable to shareholders of record as of February 11, 2022. SIRI closed at $6.36 the day before the announcement and closed 6% higher on February 1^st, 2022, following the announcement. The special dividend was about 4% of SIRI’s share price, so taxes were considered impactful. As mentioned previously, when shares are lent, the lender does not receive the dividend but rather PIL. Since PILs are not recognized as qualified dividends by the IRS, lenders may be inclined to avoid payments-in-lieu and its concomitant tax implications by recalling their shares. This is represented graphically below, when SIRI’s borrow fee spiked following the announcement of the special dividend, as loan recalls constricted the quantity of Shortable Shares. As the quantity of Shortable Shares decreased during the first half of February, the borrow fee climbed because the quantity of Shortable Shares demanded exceeded the quantity supplied.  

Sirius XM (NASDAQ: SIRI) Historical Fee Rates 

Source: IBKR Trader Workstation – SLB Rates 

Staying short through the special dividend was expensive. Short position holders were held liable for $0.25 per share to the lender, meaning that their accounts were debited $0.25 per share, or around 4% of SIRI’s stock price at the time. Shorts also paid up to 60% in borrow fees. In addition to the supply and demand effect that impacts borrow fees at the time of a dividend distribution, borrowers may be expected to compensate lenders for the negative tax implications of receiving PIL. This “gross-up” to cover the additional taxes incurred would be reflected in an even higher borrow fee rate on the record date.

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Originally Posted on July 15, 2025