Interest credit on short stock proceeds


How can I determine the interest credit or fee associated with a stock borrow position?



When account holders initiate a short position, IB must borrow the shares on their behalf in order to satisfy its settlement obligation with the clearinghouse.  The agreement through which these shares are borrowed requires that IB provide the lender with a cash deposit in an amount equal to or greater than the value of the loaned securities as loan collateral.  The lender charges a fee for providing this service, generally expressed as the difference between the interest which accrues to the lender on the cash deposit and the agreed upon rate of interest which is rebated back to the borrowing broker (typically pegged to the Fed Funds overnight rate for USD denominated cash deposits). 


While many brokers will pass a portion of this rebate only to institutional clients, all IB clients are eligible to receive an interest credit on their short stock sales proceeds to the extent those proceeds exceed the equivalent of USD 100,000.  When the supply of a given security available to borrow is high relative to it’s borrow demand, account holders can expect to receive an interest credit on their short stock balance equal the Benchmark Rate (e.g., Fed Funds Effective overnight rate for USD denominated balances), less a spread ranging from 1.25% on balances of USD 100,000 to 0.25% for balances over USD 3,000,000.


When the supply and demand attributes of a particular security are such that it becomes hard to borrow, the rebate provided by the lender will decline and may even become negative. These factors will be passed on in the form of either a lower rate at which credit interest is paid or a rate at which interest is charged (i.e., a cost to borrow). As rates vary by both security and date, IB recommends that customers utilize the Short Stock (SLB) Availability tool accessible via the Support section in Account Management. Note that the indicative rate reflected in this tool is intended to correspond to the amount paid on Tier III balances, that is, short sale proceeds of USD 3 million or greater. For balances which are less, the rate is adjusted based upon the tier and the Benchmark Rate associated with the trading currency.



Assume, for example, that the SLB tool reports an indicative rate of 3.00% for the hypothetical USD-denominated stock 'ABC'.  This rate implies a Fed Funds Effective Benchmark Rate of 3.25% (as the rate paid on Tier III balances equals the Benchmark Rate less 0.25%); a rate paid on Tier I balances (amounts between USD 100,000 and 1 million) of 2.00% (Benchmark Rate less 1.25%); and a rate paid on Tier II balances (amounts between USD 1 million and 3 million) of 2.75%.


Information provided within the SLB tool, particularly that relating to shares available to borrow and indicative rates, is offered on a best efforts basis without warranty as to its accuracy or validity. Share availability includes information from third parties which is not updated in real time. Rate information is indicative only. Trades executed in the current trading session typically settle in 2 business days and the actual availability and borrow costs are determined on settlement day. Traders should be aware that rates and availability can change significantly in the time between trade and settle dates, particularly in thinly traded stocks, small cap stocks, and classes of stock that have an upcoming corporate action (including dividends).