# Securities Lending and Stock Loan

> Securities lending lets short sellers borrow shares from owners for a fee. Learn how stock loans work, collateral, borrow fees, recalls, risks and who benefits.

Source: https://learn.tradelabsai.com/industry/securities-lending/  
Track: The Trading Industry · Level: Advanced · Updated: 2026-10-03  
Publisher: TradeLabs AI (https://tradelabsai.com). Education, not financial advice.  
Cite as: TradeLabs Learn, "Securities Lending and Stock Loan", https://learn.tradelabsai.com/industry/securities-lending/

To sell a stock short, you must first borrow it. Securities lending is the market that makes this possible: owners of securities, such as pension funds, index funds and brokerage customers, lend them to borrowers in exchange for a fee and collateral. The borrower returns equivalent securities later. Securities lending supports short selling, market making, settlement and hedging, and it earns meaningful extra income for long term holders.

## How a stock loan works

1. **A lender,** such as an index fund, makes shares available through an agent lender or custodian.
2. **A borrower,** such as a hedge fund via its prime broker, requests shares to short or deliver.
3. **Collateral is posted,** typically cash or high quality securities worth more than the shares, often around 102% for domestic stocks and 105% for foreign ones.
4. **The loan is marked to market daily;** collateral is adjusted as the share price changes.
5. **The borrower pays a fee,** expressed as an annual rate on the loan value.
6. **Dividends and other payments** are passed back to the lender as manufactured payments.
7. **Either side can end the loan;** the lender can recall shares.

## Who takes part

| Participant | Role |
|---|---|
| Beneficial owners | Pension funds, insurers, mutual and index funds, endowments |
| Agent lenders | Custodian banks and specialist firms that manage lending programs |
| Prime brokers | Borrow shares for hedge fund clients. See [Prime Brokerage](https://learn.tradelabsai.com/industry/prime-brokerage/) |
| Borrowers | Hedge funds, market makers, broker dealers |
| Retail brokers | Some lend customers' fully paid or margin shares and may share revenue |

## Borrow fees

| Category | Typical annual fee |
|---|---|
| General collateral (easy to borrow) | Very low, often a fraction of a percent |
| Warm | Moderately higher |
| Hard to borrow (special) | Can range from several percent to over 100% for heavily shorted stocks |

**Example: The cost of a hard to borrow short**
A trader shorts $50,000 of a heavily shorted stock with an annual borrow fee of 40%. The daily cost is roughly $50,000 times 40% divided by 360, about $56 a day. Holding the short for a month costs around $1,700, meaning the stock must fall more than 3% just to cover the borrow. If the lender recalls the shares, the trader may have to buy them back at a bad moment, potentially during a squeeze. See [Borrow Fees and Stock Loan Costs](https://learn.tradelabsai.com/orders/borrow-fees-and-stock-loan-costs/).

## Risks

| Risk | For whom | Example |
|---|---|---|
| Recall risk | Borrowers | Shares recalled, forcing a buy back |
| Squeeze risk | Borrowers | Rising price plus recalls and rising fees. See [Short Selling](https://learn.tradelabsai.com/markets/short-selling/) |
| Borrower default | Lenders | Collateral may fall short if prices jump |
| Cash collateral reinvestment | Lenders | Losses on investing cash collateral, as some lenders experienced in 2008 |
| Voting rights | Lenders | Loaned shares cannot be voted unless recalled |

## Short interest and lending data

Securities lending data, such as utilisation (the share of lendable supply on loan), borrow fees and days to cover, shows how crowded short positions are. Very high utilisation and fees can signal squeeze risk, as in early 2021 for some heavily shorted stocks. See [Sentiment Data](https://learn.tradelabsai.com/alternative-data/sentiment-data/) and [Factor Timing, Crowding and Crashes](https://learn.tradelabsai.com/research/factor-crowding/).

## Regulation

| Rule | Purpose |
|---|---|
| US Regulation SHO | Requires brokers to locate borrowable shares before shorting and addresses fails to deliver |
| EU Short Selling Regulation | Requires borrowing arrangements and reporting of significant net short positions. See [Position Limits and Regulatory Reporting](https://learn.tradelabsai.com/industry/position-limits/) |
| SEC Rule 10c 1a (2023) | Requires reporting of securities loans to FINRA for greater transparency |

## Frequently asked questions

### What is securities lending?

Lending shares or bonds to a borrower, usually for short selling or settlement, in exchange for a fee and collateral.

### Who earns money from securities lending?

The owners of the securities, such as funds and pensions, plus agent lenders and brokers who take a share of the fees.

### What is a hard to borrow stock?

A stock with limited lendable supply relative to demand from short sellers, resulting in high borrow fees and recall risk.

Next, learn how brokers lend money to traders in [Margin Financing](https://learn.tradelabsai.com/industry/margin-financing/).

## Continue learning

- Next lesson: [Margin Financing](https://learn.tradelabsai.com/industry/margin-financing/)
- Previous lesson: [Clearing, Settlement and Custody](https://learn.tradelabsai.com/industry/clearing-settlement-and-custody/)
- Related: [Clearing, Settlement and Custody](https://learn.tradelabsai.com/industry/clearing-settlement-and-custody/): After a trade, clearing confirms and guarantees it, settlement exchanges cash and securities and custody holds assets safely. Learn the process, T+1 and key players.
- Related: [Short Selling](https://learn.tradelabsai.com/markets/short-selling/): Short selling means selling a borrowed asset to profit if its price falls. Learn how shorting works, borrow costs, short squeezes and why the risk is so high.
- Related: [Borrow Fees and Stock Loan Costs](https://learn.tradelabsai.com/orders/borrow-fees-and-stock-loan-costs/): Short sellers pay to borrow shares. Learn how borrow fees are set, easy and hard to borrow stocks, recalls, dividend payments and how fees affect a short trade.
- Related: [Prime Brokerage](https://learn.tradelabsai.com/industry/prime-brokerage/): Prime brokers give hedge funds financing, stock lending, clearing, custody and reporting. Learn the services, how prime brokers earn money and the risks.
- Related: [Short and Long-Term Reversal](https://learn.tradelabsai.com/research/short-and-long-term-reversal/): Reversal effects describe recent losers beating recent winners over very short and very long horizons. Learn the evidence, the causes and the link to momentum.