tastyworks customers will now have the opportunity to earn additional income on their long stock and ETF positions by participating in tastyworks’ Fully Paid Securities Lending program! Check out the video and article below for more information.
What is Fully Paid Securities Lending (FPSL)?
Before diving into Fully Paid Securities Lending (FPSL), it is good to understand the basics of shorting a stock. Bullish investors can go long or buy stocks when they believe the price will increase. Conversely, investors with a bearish bias can short stock when they speculate the price will go down. When an investor decides to short stock, brokers must locate shares to lend to the short seller. When a broker locates shares, they are sold to the open market and establish a short stock position for the investor. In essence, short sellers are selling borrowed shares. All this occurs instantaneously after an investor sends their short stock order.
When demand for shorting a particular stock elevates, locating shares to lend may become more complex. As a result, a hard-to-borrow (HTB) fee may be charged to the investor shorting shares. When you opt in for our Fully Paid Securities Lending Program, you will be taking a fifty-fifty split on tastyworks' revenue from your shares being lent out.
Additionally, even if your shares are lent out, you still own the shares and can close your long shares through our platforms. After you close your shares, you are no longer entitled to receive any lending income on the closed underlying.
Eligible Account Types
- Individual (Cash and Margin) - International customer included
- Retirement (Individual, Roth, SEP)
There are no position or account balance requirements/minimums to opt in for FPSL.
Ineligible Account Types
- Entities (Trust, LLC, C-Corp, S-Corp) (coming soon)
- Joint Accounts (coming soon)
- Residents of India and Singapore
Advantages & Disadvantages of Fully Paid Share Lending (FPSL)
Not sure if you want to opt in or out from Fully Paid Share Lending (FPSL)? We’ve laid out the advantages and disadvantages for FPSL.
1. The value of shares collateralized by our clearing firm. The main risk lies with the counterparty, or the lendee cannot return shares in the [rare] event of insolvency. Your securities account at tastyworks, held at Apex Clearing, is still covered by SIPC.
2. Qualfied dividend treatment only applies to U.S.-based taxable accounts.
How do I Opt-in to Fully Paid Securities Lending?
tastyworks customers can opt-in to fully paid securities lending via the account management website at https://manage.tastyworks.com/. Navigate to the My Profile drop-down and then click on the fully paid securities lending tab. You will be taken to the FPSL opt-in page, where you can find out more info on the program and the opt-in button at the bottom. You must read and agree to the agreements in the confirmation popup to opt in. Opt-in processing times take 1- 2 business days.
How do I opt out of FPSL?
You can opt out from fully paid stock lending (FPSL) by logging in to your account at tastyworks.com ® My Profile ® Fully Paid Stock Lending. The opt-out button is located at the top right of the FPSL page, as illustrated below.
After opting out from FPSL in an account, you will no longer be eligible to receive lending income. However, it is important to note that in a margin account your shares can still be lent out due to the hypothecation of your shares. Hypothecation is the practice of pledging your long shares as collateral, which is what allows a margin account access to leverage. You will not be able to opt back into FPSL 4-5 business days after opting out of fully paid stock lending due to back-end processing. You may opt back in for FPSL any time afterward.
Opt Out Timing/Opt In Timing
Opt-in 1-2 business days to activate FPSL
Opt-out 2-3 business days to deactivate FPS
Are there any additional costs for FPSL?
There are zero fees to opt-in for FPSL, and there are no additional maintenance fees afterward. Additionally, if you decide to opt-out of FPSL, there is no cost to opt out of FPSL.
Frequently Asked Questions (FAQs)
Can I still close my shares if they are lent out?
Yes! If any shares in your account are lent out, you may close them anytime. We do not require any notice if you plan on closing any shares that are lent out. You can close your long stock positions just as you usually would by following the steps in this video here.
How do I track my Fully Paid Share Lending income?
You can check how much lending income you have accrued by logging in to your account at tastyworks.com ® My Profile ® Fully Paid Stock Lending. Any of your long shares will become eligible for lending once your shares settle. That means your shares will not get lent out and potentially receive lending income immediately after you purchase them until two business days after you purchase the shares, commonly referred to as T+2.
Am I guaranteed lending income?
It is important to note that you will only receive lending income when there is heightened shorting demand. That means if shorting demand is not high and there is no hard-to-borrow fee, then you may not receive lending income. It’s worth noting that shares you have lent out that did not receive any lending income could start generating lending income if short demand elevates.
When will I start receiving lending income?
Only settled shares are eligible to be lent out and are subject to lending income. Stock trades and options assignments take two business days to settle.
Can I determine the lending rate?
Lending rates are determined by the market and cannot be determined by the customer. Market conditions will determine the rate you receive on any shares. Lending rates can increase, decrease, or stop at any time due to lending demand.
How is FPSL paid out?
Fully paid lending income is paid out monthly and will post to your account in the first week of the next month. For example, if you received lending income in January, it will be paid out the first week of February. Your lending income for January will list on your February monthly statement.
When lending income posts to your account, it will reflect in your cash balance, and you can view it on the History tab on the desktop trading platform.
Example of Lending Income posting to your account
Additionally, lending income will also appear on your monthly statement.
Example of Lending Income listed on a monthly statement
Can I choose when to lend shares out?
When opting in for FPSL, all your portfolio’s long (settled) shares will become eligible for FPSL. Opting in for FPSL is an account-level election. As a result, you cannot determine which stocks you would like to be eligible for lending income and which stocks not to lend out.
Are there any tax implications?
By taking part in FPSL, you will be loaning out a dividend-paying security. Hence, you will be receiving cash instead of your regular dividend payout. This is important because the marginal tax rate (or the capital gains tax) is often higher than the rate that dividend income is taxed at, which means that earnings from loan interests are taxed at ordinary income rates (like wages). However, you may consider consulting your tax advisor for further clarification.
What is shorting a stock?
Shorting a stock means you will be borrowing a security whose price you think will fall and selling it on the market.
Can I sell covered calls on my lent out shares?
Yes, with FPSL enabled it will not interrupt your covered options positions.
Will I always receive income for lending out shares?
In the period when you’ve loaned out your shares, you will accumulate daily interest that will be paid out to you on a monthly basis. The rate is determined based on market demand and the actual value of the security. There is a possibility that the rate will be 0%. In this case, you will not receive income from lending out shares if an abundance of shares is available to be shorted.
How is Fully Paid Securities Lending program protected?
SIPC will not cover securities positions on loan. However, the remainder of your securities account at tastyworks, held at Apex Clearing, is still covered by SIPC. To find out more on SIPC coverage, see this article here. However, Apex Clearing holds collateral (usually cash) of 102% of the value of the loaned securities. This collateral is held at a third-party financial institution to hedge the risk of default.
Do I still receive dividends?
Yes! If your portfolio owns any stocks that pay a dividend, special dividend or has any other cash distribution with Fully Paid Stock Lending enabled, you will still receive them in addition to any lending income, when applicable. This also applies to non-cash dividends, such as receiving a right or warrant for owning a certain share.
Please click here to learn about the potential tax implications of receiving dividend payments while your shares are lent out.
If you are opted-in for FPSL on the ex-dividend date, there may be a tax implications on the dividend.
Substitute Dividend Payment
Did you receive a dividend from shares held in your margin account but see the dividend payment listed in your 1099-Miscellaneous (1099-MISC) instead of your 1099-DIV? If so, this isn't an error. Instead, it indicates that your shares were lent out to aid a short sale or you have participated in our Fully Paid Share Lending program.
Although you technically own the shares ("in street name"), once lent out, the IRS requires Broker-Dealers to treat dividend payments on loaned securities positions as payments received in lieu of dividends (substitute dividend payment on Form 1099-MISC) for 1099 tax reporting purposes. This is commonly referred to as hypothecation in the brokerage industry, which allows for leverage, and you may read more about this in your Margin Agreement.
As a result of your shares being lent out, any special tax treatment on dividend payments, such as qualified dividend treatment, is potentially foregone. However, you may consider consulting your tax advisor for further clarification.