For those wondering how Vanguard gives back 95% and many others give back much less. I believe it boils down to two things:
1.) Value strategy vs. Volume Strategy - Vanguard targets lending on the high margin hard to find securities that have very high profit margins (250 bps). Many other funds go for Volume (think MegaCaps/S&P500) where the profit margins are 1/10th (20bps)
2.) Vanguard acts as its own lending agent at least in the USA and does not share revenue with the Fund. So 100% of revenue is returned to the fund. Other companies either use 3rd parties that require fee or operate their own agent that takes a fee for the house.
This paper (the one I remembered above) goes into great detail of the Securities Lending environment in the industry and Vanguard's approach in particular.
Here is the punch line on Vanguards approach. The difference in margins is pretty clearly laid out....
Two lending strategies: Value and volume
Securities-lending strategies can be characterized as either value or volume lending.
Value lending, also known as intrinsic-value lending, seeks to capture a scarcity premium by lending hard-to-borrow securities, or “specials.” The scarcity premiums provide the lender with a high return per dollar of securities lent, though with fewer opportunities to lend. In volume lending, also known as general collateral lending, the owner seeks to lend many securities, independent of scarcity value. Per-loan fees are lower, but there are
more opportunities to lend.
In 2015, general collateral loans—some 80% of global loans by volume—generated annualized lending fees of 20
basis points (0.20%) or less. The most valuable specials, by contrast, represented just 4.4% of loan volume, but commanded fees of 250
basis points or more. These loans accounted for 62% of the gross fees from securities lending in 2015.
Vanguard’s approach to securities lending Vanguard serves as the lending agent for the Vanguard funds’ securities-lending program in the United States. Outside the United States, Vanguard works with an independent lending agent. Vanguard funds do not lend fixed income securities.
All Vanguard portfolios—mutual funds, UCITS (Undertakings for Collective Investment in Transferable Securities), OEICs (Open-Ended Investment Companies)—follow the same policies and risk constraints.
Our program seeks to capture the scarcity premium found in hard-to-borrow securities. We minimize risk in the reinvestment of cash collateral by investing in a money market fund managed by Vanguard Fixed Income Group. The fund’s average weighted maturity is capped at 60 days.
Outside the United States, Vanguard accepts sovereign debt as non-cash collateral and invests any cash collateral in overnight repurchase agreements, subject to daily monitoring by Vanguard’s Risk Management Group. Vanguard has developed a monitoring program and lending limits for individual securities to ensure that any securities on loan can be recalled for important proxy votes.
To reduce the risk of counterparty default, Vanguard lends to a limited number of pre-approved broker-dealers and maintains strict internal guidelines on the aggregate dollar amount of loans to any one borrower. In addition, Vanguard ensures proper collateral coverage by valuing the loaned securities on a daily basis—using current market prices—and by calling for additional collateral when necessary to bring the coverage up to the 102% or 105% floors for U.S. or foreign securities, respectively. Vanguard’s agency agreement requires the lending agent to indemnify our fund in the case of a counterparty default by replacing either the security or the security’s current market value to the fund.
Consistent with Vanguard’s client-owned structure, Vanguard returns all net lending revenues—after subtracting program costs, agent fees (on non-U.S. securities), and any broker rebates—to the funds. In 2015, program costs amounted to about 5% of gross revenue.