Demystifying the economy | The pros and cons of the action loan

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The action loan (or securities lending In English) is a fairly widespread practice in the financial world, especially around liquid and very negotiated titles.

The broker will lend the titles you hold, and in return you receive interest paid by the borrower. That said, we are not talking about prodigious sums, reports Raymond Kerzérho, principal researcher at PWL Capital.

“We must not get carried away with the loan of titles: at most, this activity can add a few centesimal points to the performance of a wallet,” he said.

A study carried out several years ago suggested that, in some cases, the action loan can enhance the yield from 0.23 to 0.28 % per year thanks to the loan of titles, underlines Mr. Kerzérho.

“In the case of an individual, income is shared 50/50 with the broker. So, at best, we are talking about 0.115 to 0.14 %. In my opinion, it is above all the brokerage house that makes money with the loan of titles, because this activity garnered income without mobilizing a lot of capital. Borrowers sometimes use this maneuver in order to sell an uncovered title, that is to say to bet on an imminent drop in its value.

A detail that can be important: when you lend an action, it is the borrower who is entitled to the dividend. “Of course, this will be compensated by the borrower, but you will collect interest rather than dividends, which could be disadvantageous for you from a tax point of view. »»

Is practice risky? The risk of counterpart is controlled, says Mr. Kerzerho.

“For each dollar in loaned title, the borrower generally provides more than 100 % of the value of the cash title. Collateral is adjusted daily. The risk is also managed, of course, lending to solvent and credible counterparts. »»

That said, zero risk does not exist during the action lending, notes Ian Gascon, president of investments Idema.

“Several financial institutions suffered from this practice during the 2008 financial crisis in part because of the collateral which was not of good quality,” he said. That said, you have to be comfortable with the rules put in place by the broker since the investor generally does not have his say on what is happening in his account once he has given his authorization. »»

Mr. Gascon says it uses this practice for certain customer accounts with the interactive broker broker. “I believe they have the systems to properly manage the risks associated with this practice. My accounts only have negotiated funds on the stock market [FNB]and the advantages are sporadic; Several FNBs are used, but not all and it varies a lot over time. »»

The financial advantages are not to be overlooked, according to him. “For some customers, these income can cover more than a third of our management fees which are already among the lowest on the market. »»