Timothy D’Arcy | senior vice president, FIS
May 12, 2020
Fully Paid Lending (FPL) programs are catching on in the capital markets industry. As more broker-dealers offer them to large retail customers, more have begun to consider them as part of their own go-to-market strategy.
The increasing interest in FPL can be attributed to the varied benefits the program provides. In brief, FPL programs allow broker-dealers to establish an agreement with larger, sophisticated retail customers to borrow their fully paid long positions and share in the revenues generated. The revenue share is negotiated between the parties and varies by program.
Once the broker-dealer has borrowed the securities, they may use them for in-house needs or lend them to external borrowers.
If the securities are lent, the broker-dealer and customer share the revenue generated according to the agreement. If the broker-dealer uses the securities in-house, they pay the customer only their portion of the typical borrowing costs.
The customer benefits by adding income to their portfolio from a fully collateralized, relatively low-risk transaction. Customers appreciate the added value and, as such, many broker-dealers use FPL to attract new customers and retain them.
In turn, broker-dealers can grow revenues by lending these securities to external borrowers. The added revenue often comprises a large percentage of the broker-dealer’s overall lending revenue.
Reduced cost further builds the case for FPL adoption. The broker-dealer only compensates the customer for their share of the average borrowing costs for the securities they use, reducing their own cost to borrow these securities from external sources. Also, the increased supply of securities from FPL improves liquidity and efficiency – making FPL programs a most welcome addition on all fronts.
In order to maximize the value of an FPL program, technology must be in place to execute, manage and automate the associated activities. The solution must ensure compliance, not only with regulatory bodies, but with the firm’s particular inventory management practices.
An integrated allocation engine is required to allot the borrows and earnings to customer accounts. The solution must provide the accounting and collateral information required to produce accurate statements and payments, as well as properly collateralize the borrows. To ensure success, the preferred solution should provide a degree of integration and automation and demonstrate a proven track record.
In today’s current low-to-zero fee environment, firms seeking alternative revenue streams to replace legacy fees are finding relief in FPL programs. As more large investors become familiar with the benefits of FPL, expect more firms to provide it as part of their service offerings.
To learn more, contact @FISglobal.com and inquire about our proven, integrated and fully automated FPL solution.