Borrowing stock requires that the borrower post collateral of the quantity x underlying share price to the lender in exchange for the shares. Collateral is returned to the borrower when the shares are returned to the lender. The lender is required to pay any applicable interest on the collateral to the borrower.
In determining the cash deposit required to collateralize a stock borrow position, US industry convention is for the lender to require a deposit equal to 102% of the prior day's settlement price, rounded up to the nearest whole dollar and then multiplied by the number of shares borrowed. As borrow rates are determined based on the value of the loan collateral, this convention impacts the cost of maintaining the short position, with the impact being most significant in the case of low-priced and hard-to-borrow shares. Account holders may view this adjusted price for a given transaction in the "Non-Direct Hard to Borrow Details" section of the daily account statement.
Click here to see an example of this collateral calculation and its impact on borrow fees.
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