How are fees calculated and quoted?
Fees in a securities lending transaction are calculated as an annual percentage rate of return on the market value of the loaned securities. These fees accrue daily from the settlement date to the maturity or termination date, and are often paid net of rebate interest on any cash collateral. Fees are paid separately from rebate interest on cash pool trades, while securities loans against non-cash collateral only pay a fee. Fees and rebate interest are typically paid on the same monthly schedule. It's important to note that the fee is not the only determinant of securities lending revenue; how much is earned also depends on the utilisation rate. The market value used for calculating fees is called the "loan value," which changes infrequently. The all-in fee is the fee that a securities lender estimates they need to earn to improve the after-tax dividend received on a particular security.
How are fees determined?
Securities lending fees are determined by several factors, including the intrinsic value or "specialness" of a security, the term of the loan, borrower confidence in the lender, willingness of a borrower to accept a wider range of collateral, and supply and demand. However, there is no accepted quantitative theory, and fee curves are constructed by data aggregators from information reported to them by their subscribers. Fees tend to become particularly sensitive when lending reaches about 60% of a security issue.
What interest must be paid on cash collateral to the borrower (rebate interest)?
Interest on cash collateral must be paid. Rebate rates for open loans are linked to benchmark indices with a spread. For US dollars, the index is the Overnight Bank Funding Rate (OBFR), for sterling, it's SONIA and for euros, it's €STR. The spread to the index reflects the expected reinvestment rate and should be close to the GC repo rate.
