The Stock Yield Enhancement program is a unique opportunity for Interactive Brokers (IBKR) customers to earn additional income. But your assets must be on fully-paid and excess margin securities positions. By allowing IBKR to lend out these securities to third parties, you can earn extra income on the fully-paid shares of stock held in your account. In exchange, IBKR will lend the shares to traders who want to sell them short and are willing to pay interest to borrow them.
Who are eligible for Stock Yield Enhancement Program?
You must have been approved for a margin account or have a cash account with equity greater than USD 50,000 (or equivalent). Once enrolled, IBKR will automatically examine the fully-paid stock portfolio. Then it borrows your stocks if they are attractive in the securities lending market. IBKR will then secure the loaned shares with collateral (either US Treasuries or cash) and lend the shares.
How much can I earn?
The interest rate paid on the collateral value for the loan is based on market rates. You will receive a portion of the interest paid on the cash collateral by the borrower as loan compensation. The interest rate is transparent and visible to the customers. So you can see the amount earned by IBKR from lending those shares. IBKR pays customers 50% of its income from lending the shares. You will continue to own the stock, which means you continue to have market risk and will recognize any profit (or loss) if the stock price moves. You can sell the shares without restriction and terminate their participation at any time for any reason.
An example
To illustrate how the program works, suppose Acme Company is trading at USD 100.00/share, and a customer is long 5,000 shares of Acme Company, with a market value of USD 500,000.00. If IBKR loans out the customer’s 5,000 shares of Acme Company at 9%, IBKR will pay interest on the U.S Treasury or cash collateral of USD 500,000.00 x 4.5% = USD 22,500.00. The customer could earn USD 22,500.00/year on their stock.
It would be best to remember that loan rates change frequently. So the interest they receive may go down (or up) by 50% or more. Loans may be terminated at any time by IBKR. Thus IBKR does not guarantee that it will lend all eligible shares. During any period your securities are loaned out, you will forfeit their right to vote those shares by proxy. If you sell the fully paid shares that have been lent out, or if you borrow or withdraw cash in a margin account, the loan will terminate, and you will stop receiving loan interest.
Is the Stock Yield Enhancement Program safe?
It’s important to note that shares loaned out may not be protected by SIPC. In other words, the Securities Investor Protection Act of 1970 may not protect them. However, under SEC rules, IBKR must provide customers with U.S Treasury or cash collateral in the same amount as the value of their shares to protect them in the improbable event that the stock is not returned to them.
Why do other investors borrow your assets?
The loaned shares are typically used to facilitate short sales. They are attractive in the stock loan market because other traders want to borrow and sell them short. On the other hand, that possibly affects the value of the shares. By participating in the Stock Yield Enhancement program, you are helping to facilitate short sales. That may or may not align with your investment strategy or beliefs.
What about dividends?
The good news is that IBKR generally recalls lent-out shares before the ex-date. Why? Because IBKR wants to capture the dividend and avoid payments in lieu of dividends (PIL). However, in some cases, a PIL may still be received. It’s important to note that the securities lender is entitled to receive the amount of all dividends and distributions made on loaned securities. However, they may receive cash payments in lieu of dividends instead of dividends. Receiving PIL could have an adverse tax impact on certain U.S. taxpayers.
IBKR attempts to mitigate the cost of PILs by recalling loaned shares before the dividends. But they cannot guarantee that the borrower will be able to return the shares in time. Sometimes, IBKR may intentionally keep shares out on loan over the dividend record date if the account would not be tax disadvantaged by receiving a PIL, such as an IRA account.
In conclusion
In conclusion, the Stock Yield Enhancement Program is a simple and automatic way for eligible IBKR clients to earn extra income on their fully-paid and excess margin securities without additional effort. By allowing IBKR to lend out your securities to third parties in exchange for collateral, you can receive a portion of the interest paid on the cash collateral by the borrower as loan compensation for any day the loan exists. With complete transparency, you can see the interest rate they are being paid on the collateral value and the amounts earned by IBKR from lending those shares. Therefore there are risks and limitations associated with the program. Still, it can be a valuable tool for clients looking to maximize their returns on their existing stock holdings.
I hope this information will be helpful to you. Goodbye.