Adding margin lending to a Fidelity after-tax brokerage account

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FIREchief
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Adding margin lending to a Fidelity after-tax brokerage account

Post by FIREchief »

I've never established margin lending for an account before. I used to maintain a zero balance HELOC as a source of liquidity, but no longer own a house. I'm thinking of setting up one of my Fidelity after-tax accounts to allow margin lending. This would not be for any kind of leveraged trading, but only for an immediate source of short term liquid cash if/when needed. I realize that the current Fidelity lending rates are unattractive, but that likely makes no meaningful difference in any short term scenarios that may arise. Does anybody have any advice or lessons learned? Thanks.
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jarjarM
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Re: Adding margin lending to a Fidelity after-tax brokerage account

Post by jarjarM »

Since I'm sure there will be someone coming along and ask this, why not interactive broker? Their margin rate is quite low.
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Re: Adding margin lending to a Fidelity after-tax brokerage account

Post by FIREchief »

jarjarM wrote: Tue Mar 16, 2021 6:53 pm Since I'm sure there will be someone coming along and ask this, why not interactive broker? Their margin rate is quite low.
To be honest, I knew nothing about them or competitive margin lending rates in general. If I were expecting to ever sustain any meaningful balances, I would certainly shop around like a proper Boglehead. I may need a couple grand in Nov/Dec to cap 2021 capital gains in order to allow a full $3000 reduction in ordinary income due to banked losses. It's that close. :P After that, I would likely never use it again.
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Re: Adding margin lending to a Fidelity after-tax brokerage account

Post by SlowMovingInvestor »

Definitely IB.

They also have a bonus of $1000 in IB shares if you transfer 100K to them and maintain for 1 year. Although if you expect to make use of margin during the lockup period, you should transfer more than 100K since I think margin will be counted as a withdrawal.
Last edited by SlowMovingInvestor on Tue Mar 16, 2021 7:09 pm, edited 1 time in total.
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Re: Adding margin lending to a Fidelity after-tax brokerage account

Post by 123 »

Adding margin capability to a taxable account makes a lot of things easier. If you're selling one position to buy another you don't have to wait out the T+1 or T+2 for cash to show up as long as your margin can accommodate the trade.

I've only been "burned" by margin once and it was at Schwab. I had forgotten that the purchased MMF I had moved all my cash to wasn't "sweepable" so when I wrote a (rare) check on the account for $500 it got paid from my available margin balance. When I figured out what happened and how to correct it (just sold MMF for cash to cover check) it cost me about $12 in margin interest.

I haven't had any similar issues at Fidelity, all the purchased MMFs I've used there have been sweepable, meaning Fidelity automatically liquidates shares to cover cash needs.

So having margin available is a convenience. It's use comes up so seldom for me I'm not concerned about the rate.
Last edited by 123 on Tue Mar 16, 2021 7:11 pm, edited 1 time in total.
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Re: Adding margin lending to a Fidelity after-tax brokerage account

Post by Yarlonkol12 »

Fido Margin rates can be negotiated, especially if you have been there awhile and have a large account, they should work with you, or atleast get close. IB rates start at 1.5% and get as low as 0.75%
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Re: Adding margin lending to a Fidelity after-tax brokerage account

Post by alex_686 »

FIREchief wrote: Tue Mar 16, 2021 6:46 pm Does anybody have any advice or lessons learned?
I was on the margin desk during the dot.com boom and bust. Generally it is safe. Beware of behavioral issues, which are similar to credit card debt. There is a tendency to let the balance grow, causing rot.
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Re: Adding margin lending to a Fidelity after-tax brokerage account

Post by AlohaJoe »

I have used margin a fair bit for cash flow purposes. (I use Interactive Brokers but I understand, and kind of agree, with your point that over the short term just using Fidelity despite higher rates is fine.)

There aren't really any massive surprises or gotchas. It basically works like the label says. It is almost scarily easy to use (which can be a good thing in many circumstances). Just login, click a few buttons, and voila you're $200,000 in debt. Then again, I guess using a credit card isn't really any different, we're just all so used to that it feels normal.

A few things off the top of my head:
  • Double check any kind of hold-period that your broker has. This primarily an issue with newly opened accounts and newly transferred-in positions. But best to double-check to head off any frustrations.
  • Double check any kind of daily/weekly/monthly transfer limits your broker has. Does it depend on the account it is being transferred to? Sometimes there are restrictions if the name on the brokerage account and the name on the bank account aren't identical. For instance, my brokerage is in my name but our joint bank account is in both names and there were (initially) some restrictions on the amounts of the transfer.
  • Have you ever actually done a transfer of cash out of your broker before? (Not everyone has, after all.) Make sure you have the mechanics tested, even if it is just with a $50 transfer, so you're not struggling with things under stress when you suddenly need $20,000 to pay a medical expense.
  • Keep an eye on the rate. For the most part this just means "read your monthly statement". Which seems like common sense to me but I've been surprised by the number of posts on Bogleheads over the years from people who don't seem to look at statements very frequently. It is a variable rate loan and while rates are unlikely to change super-dramatically overnight -- especially these days when rates seem pretty stable for years on end -- but we've seen they can shift by +/-1% in weeks.
I guess two gotchas is that once you have a margin account you open up two possibilities that cash accounts don't have.

1) Sometimes the broker might lend your shares. This might be in the agreement to open the margin account or it might be a separate thing. I know Robinhood Gold bundles them together but other brokers keep them separate. I don't know which Fidelity does -- I assume they keep them separate, though -- but you can check for this.

2) When you have a margin account you are subject to rehypothecation risk. Personally I don't think it is something you need to worry much about, especially given the usages you describe. But you still might be curious. Here's a page explaining it: https://www.thebalance.com/rehypothecat ... ter-357232
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Re: Adding margin lending to a Fidelity after-tax brokerage account

Post by FIREchief »

AlohaJoe wrote: Tue Mar 16, 2021 7:22 pm I have used margin a fair bit for cash flow purposes. (I use Interactive Brokers but I understand, and kind of agree, with your point that over the short term just using Fidelity despite higher rates is fine.)
Thanks.
A few things off the top of my head:
  • Double check any kind of hold-period that your broker has. This primarily an issue with newly opened accounts and newly transferred-in positions. But best to double-check to head off any frustrations.
  • Double check any kind of daily/weekly/monthly transfer limits your broker has. Does it depend on the account it is being transferred to? Sometimes there are restrictions if the name on the brokerage account and the name on the bank account aren't identical. For instance, my brokerage is in my name but our joint bank account is in both names and there were (initially) some restrictions on the amounts of the transfer.
  • Have you ever actually done a transfer of cash out of your broker before? (Not everyone has, after all.) Make sure you have the mechanics tested, even if it is just with a $50 transfer, so you're not struggling with things under stress when you suddenly need $20,000 to pay a medical expense.
  • Keep an eye on the rate. For the most part this just means "read your monthly statement". Which seems like common sense to me but I've been surprised by the number of posts on Bogleheads over the years from people who don't seem to look at statements very frequently. It is a variable rate loan and while rates are unlikely to change super-dramatically overnight -- especially these days when rates seem pretty stable for years on end -- but we've seen they can shift by +/-1% in weeks.
Good suggestions. Any transfers would be from Fidelity to an identically titled account at a major nationwide bank. I do these at least monthly and regardless of size, it's generally same day transfer. Fidelity does have a nice feature where transfers over a certain size require independent back-office review. That's almost real time, and IMHO a great security feature.
I guess two gotchas is that once you have a margin account you open up two possibilities that cash accounts don't have.

1) Sometimes the broker might lend your shares. This might be in the agreement to open the margin account or it might be a separate thing. I know Robinhood Gold bundles them together but other brokers keep them separate. I don't know which Fidelity does -- I assume they keep them separate, though -- but you can check for this.

2) When you have a margin account you are subject to rehypothecation risk. Personally I don't think it is something you need to worry much about, especially given the usages you describe. But you still might be curious. Here's a page explaining it: https://www.thebalance.com/rehypothecat ... ter-357232
This sounds like graduate level margin stuff, and mine will never get beyond margins 101. :P The affected account owns only Fidelity mutual fund shares, and as I mentioned earlier I would likely use it only for some year end liquidity to push some equity sales into the next January (or even just after December dividend distributions). Due to TLH in 2020 during the huge drop, I have an opportunity to offset all 2021 capital gains plus $3000 in ordinary income (I did the same in 2020). I just might need to defer selling a few grand of appreciated shares prior to year end in order to not exhaust my carryover losses from 2020. Hopefully that makes sense. 2022 will be a zero capital gains bracket year (TGH), so sales of appreciated shares will be tax free. I mentioned previously holding a zero balance HELOC for the same purpose (which I never actually borrowed against). 8-)
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Re: Adding margin lending to a Fidelity after-tax brokerage account

Post by MarkerFM »

Make sure all marginable securities get transferred to "Margin" type from "Cash" type. I think Fidelity has to do this manually initially. It won't count towards your borrowing limit unless it is in Margin type.

Some mutual fund purchases will not be transferable into Margin for 30 days (I don't know the reason for this). I have had one instance where it didn't automatically convert from Cash to Margin and had to be done manually.
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Re: Adding margin lending to a Fidelity after-tax brokerage account

Post by alex_686 »

MarkerFM wrote: Wed Mar 17, 2021 7:44 am Some mutual fund purchases will not be transferable into Margin for 30 days (I don't know the reason for this).
You can’t margin Initial Public Offerings (IPOs) for the first 30 days. This is to reduce the chaos of a new offering. Generally this is considered a good idea.

However, any purchase of a mutual fund is a new issue - technically speaking. So they fall under these rules.
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Re: Adding margin lending to a Fidelity after-tax brokerage account

Post by Chip »

I have a margin account at Fidelity, but I don't think I've ever used the feature. A couple of things of note:

1. You can move specific positions to your "cash" account if you don't want them lent out. Of course they won't be used to calculate available margin. Right now I only have two positions out of six that are in the margin side of the account.

2. If qualified dividends are paid on a loaned security you'll receive "cash-in-lieu" instead, which is ordinary income. I haven't checked recently, but I believe Fidelity compensates you for the potential extra taxes and assumes the maximum federal tax rate.
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Re: Adding margin lending to a Fidelity after-tax brokerage account

Post by TheTimeLord »

I am having trouble picturing the scenario where this is necessary, unless someone wants to be virtually 100% equity in their taxable accounts. Can anyone educate me.
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Re: Adding margin lending to a Fidelity after-tax brokerage account

Post by MarkerFM »

alex_686 wrote: Wed Mar 17, 2021 7:49 am
MarkerFM wrote: Wed Mar 17, 2021 7:44 am Some mutual fund purchases will not be transferable into Margin for 30 days (I don't know the reason for this).
You can’t margin Initial Public Offerings (IPOs) for the first 30 days. This is to reduce the chaos of a new offering. Generally this is considered a good idea.

However, any purchase of a mutual fund is a new issue - technically speaking. So they fall under these rules.
Thanks, that explains it!
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Re: Adding margin lending to a Fidelity after-tax brokerage account

Post by MarkerFM »

Chip wrote: Wed Mar 17, 2021 7:50 am I have a margin account at Fidelity, but I don't think I've ever used the feature. A couple of things of note:

1. You can move specific positions to your "cash" account if you don't want them lent out. Of course they won't be used to calculate available margin. Right now I only have two positions out of six that are in the margin side of the account.

2. If qualified dividends are paid on a loaned security you'll receive "cash-in-lieu" instead, which is ordinary income. I haven't checked recently, but I believe Fidelity compensates you for the potential extra taxes and assumes the maximum federal tax rate.
As of last year, Fidelity did indeed gross up the cash in lieu payments. They become miscellaneous income on a 1099.
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Re: Adding margin lending to a Fidelity after-tax brokerage account

Post by MarkerFM »

TheTimeLord wrote: Wed Mar 17, 2021 8:01 am I am having trouble picturing the scenario where this is necessary, unless someone wants to be virtually 100% equity in their taxable accounts. Can anyone educate me.
You don't have to be 100% equity. You can margin bonds and bond funds. In fact, they provide more borrowing ability than equities.
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Re: Adding margin lending to a Fidelity after-tax brokerage account

Post by TheTimeLord »

MarkerFM wrote: Wed Mar 17, 2021 9:23 am
TheTimeLord wrote: Wed Mar 17, 2021 8:01 am I am having trouble picturing the scenario where this is necessary, unless someone wants to be virtually 100% equity in their taxable accounts. Can anyone educate me.
You don't have to be 100% equity. You can margin bonds and bond funds. In fact, they provide more borrowing ability than equities.
That not what I meant. I could see using margin for cash if you wanted to be 100% equities and did not want to incur cap gains by selling, I guess the same could also be true of bond holdings. What I am missing is in what circumstance would someone need such a facility to provide liquidity.
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Re: Adding margin lending to a Fidelity after-tax brokerage account

Post by alex_686 »

TheTimeLord wrote: Wed Mar 17, 2021 9:28 am
MarkerFM wrote: Wed Mar 17, 2021 9:23 am
TheTimeLord wrote: Wed Mar 17, 2021 8:01 am I am having trouble picturing the scenario where this is necessary, unless someone wants to be virtually 100% equity in their taxable accounts. Can anyone educate me.
You don't have to be 100% equity. You can margin bonds and bond funds. In fact, they provide more borrowing ability than equities.
That not what I meant. I could see using margin for cash if you wanted to be 100% equities and did not want to incur cap gains by selling, I guess the same could also be true of bond holdings. What I am missing is in what circumstance would someone need such a facility to provide liquidity.
I used to do this. I did not have a checking account, rather just a brokerage account with cash writing privileges. I ran cash lean. If I had extra dollars I would shove them in my 401k or IRA - which is where I kept the bonds. If I ran short a hundred dollars at the end of the month no big deal, I just went on margin until the next paycheck.

I might be able to give a more concert example. On impulse a bought a new car. Not exactly impulse. I had been looking for 2 months, visiting auto dealerships. Ah, the joys of pre-internet days. Anyways, I found the car that I wanted on Saturday and wrote a check out of my margin account. It was going to take at least until Wednesday for me to shuffle stuff around so the cash would be there - but I had no worries. The margin account would cover.

In a taxable account equities tend to be the most tax efficient. Should I liquidate those equites and take the tax hit to cover a cash flow issues that is days or weeks in duration?
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Re: Adding margin lending to a Fidelity after-tax brokerage account

Post by alex_686 »

AlohaJoe wrote: Tue Mar 16, 2021 7:22 pm I guess two gotchas is that once you have a margin account you open up two possibilities that cash accounts don't have.

1) Sometimes the broker might lend your shares. This might be in the agreement to open the margin account or it might be a separate thing. I know Robinhood Gold bundles them together but other brokers keep them separate. I don't know which Fidelity does -- I assume they keep them separate, though -- but you can check for this.

2) When you have a margin account you are subject to rehypothecation risk. Personally I don't think it is something you need to worry much about, especially given the usages you describe. But you still might be curious. Here's a page explaining it: https://www.thebalance.com/rehypothecat ... ter-357232
I don't consider this a gotchas, but this is really all one thing.

In order to margin a brokerage has to lend out your shares. So that is tied together. Rehypothecation is a mechanic behind securities lending.

2 small issues here.

First, lent securities do not receive dividends. They receive a equivalent cash payment that is not a recorded as a qualified dividend. So a tax hit.

Second, there is a case where counterparty that the shares are lent out goes bankrupt. When that happens you get cash back instead of the security. This is treated as a sale and can trigger capital gains. This is very very rare.
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Re: Adding margin lending to a Fidelity after-tax brokerage account

Post by Caduceus »

alex_686 wrote: Wed Mar 17, 2021 10:04 am
TheTimeLord wrote: Wed Mar 17, 2021 9:28 am
MarkerFM wrote: Wed Mar 17, 2021 9:23 am
TheTimeLord wrote: Wed Mar 17, 2021 8:01 am I am having trouble picturing the scenario where this is necessary, unless someone wants to be virtually 100% equity in their taxable accounts. Can anyone educate me.
You don't have to be 100% equity. You can margin bonds and bond funds. In fact, they provide more borrowing ability than equities.
That not what I meant. I could see using margin for cash if you wanted to be 100% equities and did not want to incur cap gains by selling, I guess the same could also be true of bond holdings. What I am missing is in what circumstance would someone need such a facility to provide liquidity.
I used to do this. I did not have a checking account, rather just a brokerage account with cash writing privileges. I ran cash lean. If I had extra dollars I would shove them in my 401k or IRA - which is where I kept the bonds. If I ran short a hundred dollars at the end of the month no big deal, I just went on margin until the next paycheck.

I might be able to give a more concert example. On impulse a bought a new car. Not exactly impulse. I had been looking for 2 months, visiting auto dealerships. Ah, the joys of pre-internet days. Anyways, I found the car that I wanted on Saturday and wrote a check out of my margin account. It was going to take at least until Wednesday for me to shuffle stuff around so the cash would be there - but I had no worries. The margin account would cover.

In a taxable account equities tend to be the most tax efficient. Should I liquidate those equites and take the tax hit to cover a cash flow issues that is days or weeks in duration?
I did not realize, having never used margin myself, that you could draw cash from a margin account using borrowed money. I just assumed that whatever you borrowed on margin had to stay in the account, so that you could withdraw actual profits but not the original sum borrowed. I mean, otherwise, what's to stop you from drawing $200,000 and escaping to Mexico or wherever.
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Re: Adding margin lending to a Fidelity after-tax brokerage account

Post by alex_686 »

Caduceus wrote: Wed Mar 17, 2021 10:10 am I did not realize, having never used margin myself, that you could draw cash from a margin account using borrowed money. I just assumed that whatever you borrowed on margin had to stay in the account, so that you could withdraw actual profits but not the original sum borrowed. I mean, otherwise, what's to stop you from drawing $200,000 and escaping to Mexico or wherever.
Because you can only borrow a percentage of your assets - 50% to 75% depending on the situation. So yes, if you had $400k you could withdraw $200k and go to Mexico. Not sure why you would want to do that. :happy

On a more serious note, I did see some heavy cash withdrawals from Las Vegas ATMs using margin. As I noted above, there are behavioral issues similar to credit cards. Margin is very coinvent to use - and for some too coinvent.
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Re: Adding margin lending to a Fidelity after-tax brokerage account

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TheTimeLord wrote: Wed Mar 17, 2021 8:01 am I am having trouble picturing the scenario where this is necessary, unless someone wants to be virtually 100% equity in their taxable accounts. Can anyone educate me.
I am virtually 100% equity in my taxable account. Why would you find that unusual? Even that said, I don't think Margin is necessary. It may be a good source of liquidity for the occasional scenario where it is beneficial to borrow for a short term rather than to sell appreciated assets. I thought I explained that earlier in the thread. :confused

There are of course other sources of liquidity. I could pull forward some qualified HSA distributions. I could borrow on a credit card (jk :P ). I could borrow from my brother. We could take out a 401k loan. Etc. Just trying to understand the alternatives. 8-)
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Re: Adding margin lending to a Fidelity after-tax brokerage account

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alex_686 wrote: Wed Mar 17, 2021 10:09 am In order to margin a brokerage has to lend out your shares. So that is tied together. Rehypothecation is a mechanic behind securities lending.
Is this true of margin on a Mutual fund holding?
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Re: Adding margin lending to a Fidelity after-tax brokerage account

Post by alex_686 »

FIREchief wrote: Wed Mar 17, 2021 2:04 pm There are of course other sources of liquidity. I could pull forward some qualified HSA distributions. I could borrow on a credit card (jk :P ). I could borrow from my brother. We could take out a 401k loan. Etc. Just trying to understand the alternatives. 8-)
The primary benefits are speed (instant), no credit check, certainty, (can't be canceled) and the relative low after tax rate for a unsecured loan. You sign the margin agreement.

Downside are speed (reclaiming lost funds due to fraud can be interesting) and uncertainty. During market crashes cash available may drop, collateral requirements could increase, and you may get a margin call. IIRC, the well diversified fund QQQ dropped by 80% during the dot.com crash.

Like I said, I was on the margin desk, and knowing the risks generally think it is a good tool to have in one's pocket.
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Re: Adding margin lending to a Fidelity after-tax brokerage account

Post by alex_686 »

FIREchief wrote: Wed Mar 17, 2021 2:11 pm
alex_686 wrote: Wed Mar 17, 2021 10:09 am In order to margin a brokerage has to lend out your shares. So that is tied together. Rehypothecation is a mechanic behind securities lending.
Is this true of margin on a Mutual fund holding?
I personally think the risk for a retail client is pretty close to zero. Personal experience, having had a ring side seat on a few brokerage bankruptcies. But yes, the risk is lower for a mutual fund.

Let us go down the rabbit hole.

Brokers are not banks. Generally they are not going to use the equity on their balance sheet to fund your loan. Instead they borrow money from a bank - after all this is what banks do. They secure the loan by pledging out your shares as collateral. This is called securities lending because the shares move from your segregated cash account into the broker's co-mingled account, to the bank. This is hypothecation. You will note that most security lending operations are subsidiaries of banks.

Once the bank / security lending unit have the shares they can lend them out again. This is Rehypothecation.

There are 2 primary reasons why people want to borrow the shares. The first is during a proxy battle. I have never heard of a mutual fund having a proxy battle. The second is to short the shares. It is theoretically possible to short a mutual fund, but once again I have never seen it done.
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Re: Adding margin lending to a Fidelity after-tax brokerage account

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Chip wrote: Wed Mar 17, 2021 7:50 am 2. If qualified dividends are paid on a loaned security you'll receive "cash-in-lieu" instead, which is ordinary income. I haven't checked recently, but I believe Fidelity compensates you for the potential extra taxes and assumes the maximum federal tax rate.
Hypothetical: I borrow $10,000 on Margin in an account that holds only FZROX (Fidelity zero total US market) on December 1. FZROX pays its entire annual dividend of $180 (1.8%) on Dec 7. Fidelity pays me this as cash-in-lieu on Dec 10 and I pay off the margin loan on Dec 14. That's 2 weeks of interest @ 8.325% = $32. Are you saying that Fidelity will pay me extra, assuming the 37% top marginal rate vs. 20% top qualified dividends rate? If I understand correctly, they would pay me $180 plus $180 x (.37 - .20) = $210.60? If true, I would essentially be paying zero interest for the margin loan. Am I understanding this correctly?
Last edited by FIREchief on Wed Mar 17, 2021 2:32 pm, edited 2 times in total.
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Re: Adding margin lending to a Fidelity after-tax brokerage account

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alex_686 wrote: Wed Mar 17, 2021 2:25 pm Let us go down the rabbit hole.

Brokers are not banks. Generally they are not going to use the equity on their balance sheet to fund your loan. Instead they borrow money from a bank - after all this is what banks do. They secure the loan by pledging out your shares as collateral. This is called securities lending because the shares move from your segregated cash account into the broker's co-mingled account, to the bank. This is hypothecation. You will note that most security lending operations are subsidiaries of banks.

Once the bank / security lending unit have the shares they can lend them out again. This is Rehypothecation.

There are 2 primary reasons why people want to borrow the shares. The first is during a proxy battle. I have never heard of a mutual fund having a proxy battle. The second is to short the shares. It is theoretically possible to short a mutual fund, but once again I have never seen it done.
Thanks alex_686! As I indicated in the OP, I'm just trying to learn about this as a possible tool for the tool box. 8-) Your posts have been very educational. :beer
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Re: Adding margin lending to a Fidelity after-tax brokerage account

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FIREchief wrote: Wed Mar 17, 2021 2:29 pm Hypothetical: I borrow $10,000 on Margin in an account that holds only FZROX (Fidelity zero total US market) on December 1. FZROX pays its entire annual dividend of $180 (1.8%) on Dec 7. Fidelity pays me this as cash-in-lieu on Dec 10 and I pay off the margin loan on Dec 14. That's 2 weeks of interest @ 8.325% = $32. Are you saying that Fidelity will pay me extra, assuming the 37% top marginal rate vs. 20% top qualified dividends rate? If I understand correctly, they would pay me $180 plus $180 x (.37 - .20) = $210.60? If true, I would essentially be paying zero interest for the margin loan. Am I understanding this correctly?
Nope, they would pay you $180. On your 1099 this would populate under "miscellaneous income" (a.k.a. cash in lieu) instead of $180 in the qualified dividends bucket.

This is a major reason why dividend payouts from funds are less than 100% qualified income.
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Re: Adding margin lending to a Fidelity after-tax brokerage account

Post by FIREchief »

alex_686 wrote: Wed Mar 17, 2021 2:42 pm
FIREchief wrote: Wed Mar 17, 2021 2:29 pm Hypothetical: I borrow $10,000 on Margin in an account that holds only FZROX (Fidelity zero total US market) on December 1. FZROX pays its entire annual dividend of $180 (1.8%) on Dec 7. Fidelity pays me this as cash-in-lieu on Dec 10 and I pay off the margin loan on Dec 14. That's 2 weeks of interest @ 8.325% = $32. Are you saying that Fidelity will pay me extra, assuming the 37% top marginal rate vs. 20% top qualified dividends rate? If I understand correctly, they would pay me $180 plus $180 x (.37 - .20) = $210.60? If true, I would essentially be paying zero interest for the margin loan. Am I understanding this correctly?
Nope, they would pay you $180. On your 1099 this would populate under "miscellaneous income" (a.k.a. cash in lieu) instead of $180 in the qualified dividends bucket.

This is a major reason why dividend payouts from funds are less than 100% qualified income.
Chip said:
2. If qualified dividends are paid on a loaned security you'll receive "cash-in-lieu" instead, which is ordinary income. I haven't checked recently, but I believe Fidelity compensates you for the potential extra taxes and assumes the maximum federal tax rate.
The bolded is the part I was trying to understand.
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Re: Adding margin lending to a Fidelity after-tax brokerage account

Post by alex_686 »

FIREchief wrote: Wed Mar 17, 2021 2:44 pm Chip said:
2. If qualified dividends are paid on a loaned security you'll receive "cash-in-lieu" instead, which is ordinary income. I haven't checked recently, but I believe Fidelity compensates you for the potential extra taxes and assumes the maximum federal tax rate.
The bolded is the part I was trying to understand.
I missed that. I don't see how that would work. Fidelity would have to be reaching into their own pockets to compensate you. That would be a very sweet deal.
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Re: Adding margin lending to a Fidelity after-tax brokerage account

Post by Chip »

FIREchief wrote: Wed Mar 17, 2021 2:29 pm Hypothetical: I borrow $10,000 on Margin in an account that holds only FZROX (Fidelity zero total US market) on December 1. FZROX pays its entire annual dividend of $180 (1.8%) on Dec 7. Fidelity pays me this as cash-in-lieu on Dec 10 and I pay off the margin loan on Dec 14. That's 2 weeks of interest @ 8.325% = $32. Are you saying that Fidelity will pay me extra, assuming the 37% top marginal rate vs. 20% top qualified dividends rate? If I understand correctly, they would pay me $180 plus $180 x (.37 - .20) = $210.60? If true, I would essentially be paying zero interest for the margin loan. Am I understanding this correctly?
It was years ago that this was offered, though MarkerFM confirmed above that they were still doing it as of last year. And yes, it was supposed to work about the way you outlined. But I never experienced it. I looked at the current margin agreement and there isn't anything in there about it. Also, interestingly, they say they aren't even obligated to make the substitute payments.
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Re: Adding margin lending to a Fidelity after-tax brokerage account

Post by TheTimeLord »

FIREchief wrote: Wed Mar 17, 2021 2:04 pm
TheTimeLord wrote: Wed Mar 17, 2021 8:01 am I am having trouble picturing the scenario where this is necessary, unless someone wants to be virtually 100% equity in their taxable accounts. Can anyone educate me.
I am virtually 100% equity in my taxable account. Why would you find that unusual? Even that said, I don't think Margin is necessary. It may be a good source of liquidity for the occasional scenario where it is beneficial to borrow for a short term rather than to sell appreciated assets. I thought I explained that earlier in the thread. :confused

There are of course other sources of liquidity. I could pull forward some qualified HSA distributions. I could borrow on a credit card (jk :P ). I could borrow from my brother. We could take out a 401k loan. Etc. Just trying to understand the alternatives. 8-)
Didn't say it was usual or unusual to be virtually 100% equity in taxable accounts, I said the only scenario I could think of to use margin for liquidity was if you wanted to be virtually 100% in your taxable account. I personally always had an emergency fund, but that was my preference, others don't see an emergency account as a necessity.
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Re: Adding margin lending to a Fidelity after-tax brokerage account

Post by JackoC »

alex_686 wrote: Wed Mar 17, 2021 11:05 am
Caduceus wrote: Wed Mar 17, 2021 10:10 am I did not realize, having never used margin myself, that you could draw cash from a margin account using borrowed money. I just assumed that whatever you borrowed on margin had to stay in the account, so that you could withdraw actual profits but not the original sum borrowed. I mean, otherwise, what's to stop you from drawing $200,000 and escaping to Mexico or wherever.
On a more serious note, I did see some heavy cash withdrawals from Las Vegas ATMs using margin. As I noted above, there are behavioral issues similar to credit cards. Margin is very coinvent to use - and for some too coinvent.
IBKR offers you a debit card on which you could just do that, directly borrow>spend for whatever amount anyone will accept as a charge on that card. It might be true with other brokers too, but I would not even contemplate margin borrowing with the guys (almost everyone else) charging a multiple of IB's rates. I've never opted for their debit card though and never would (besides not needing it, it would turbocharge the issue of a debit card being hacked and it being your money you wait to get back, as opposed to CC fraud which is the bank's money).

The main reason to set this up personally IMO is no fee contingent liquidity for money you might need outside that account. Which means you can hold less (than otherwise, not none necessarily) cash at near 0%. And if you're counting on being able to borrow say 25% of the current value of a broad index ETF/MF in your planning that's a pretty reliable source. Not absolutely reliable, but nothing is literally *absolutely* reliable. OTOH it's obviously (to me and most people here I'd guess) not desirable to use it as a way to boost consumption. And it's also not that efficient to leverage financial asset investment even if that suits one's risk appetite. If you have sufficient IRA space to avoid the tax drawbacks of futures, leveraging stocks or government bonds with stock index or bond futures will almost always be more efficient, implied borrowing rate lower than even IB's margin rates.

But one might also do it in a separate entity. My real estate LLC has REIT ETF shares at IB as well as physical properties. Borrowing on margin at IB is far less expensive than any borrowing from a bank secured by a physical property, and the other tax issue with personal margin borrowing, whether the interest will be entirely deductible, goes away: the interest is LLC's business expense. And completely unleveraged rental properties are too far down the risk/return scale for many investors, some leverage is common.

Subject to unlikely problems as already outlined.
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Re: Adding margin lending to a Fidelity after-tax brokerage account

Post by MarkerFM »

FIREchief wrote: Wed Mar 17, 2021 2:29 pm
Chip wrote: Wed Mar 17, 2021 7:50 am 2. If qualified dividends are paid on a loaned security you'll receive "cash-in-lieu" instead, which is ordinary income. I haven't checked recently, but I believe Fidelity compensates you for the potential extra taxes and assumes the maximum federal tax rate.
Hypothetical: I borrow $10,000 on Margin in an account that holds only FZROX (Fidelity zero total US market) on December 1. FZROX pays its entire annual dividend of $180 (1.8%) on Dec 7. Fidelity pays me this as cash-in-lieu on Dec 10 and I pay off the margin loan on Dec 14. That's 2 weeks of interest @ 8.325% = $32. Are you saying that Fidelity will pay me extra, assuming the 37% top marginal rate vs. 20% top qualified dividends rate? If I understand correctly, they would pay me $180 plus $180 x (.37 - .20) = $210.60? If true, I would essentially be paying zero interest for the margin loan. Am I understanding this correctly?
Here's more information about the payment. https://www.fidelity.com/tax-informatio ... e-payments

I but I don't recall ever having a payment in lieu on the one large position I have in a Vanguard mutual bond fund (held at Fidelity). I mostly hold ETFs (not individual stocks) and have very little payments in lieu on them. It is never a replacement for the entire dividend, just a portion. Individual stocks could be different. YMMV. Note that you can have securities loaned out and receive payments in lieu even if you do not carry a margin load balance. It is having assets in the Margin type that makes this possible.
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Re: Adding margin lending to a Fidelity after-tax brokerage account

Post by alex_686 »

MarkerFM wrote: Wed Mar 17, 2021 4:45 pm Note that you can have securities loaned out and receive payments in lieu even if you do not carry a margin load balance. It is having assets in the Margin type that makes this possible.
How confident are you of this statement? When I was on the margin desk, which was some time ago, the brokerage could only lend out securities worth 120% of the margin value by regulation. Now, things may have changed, but it would surprise me.
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Re: Adding margin lending to a Fidelity after-tax brokerage account

Post by FIREchief »

MarkerFM wrote: Wed Mar 17, 2021 4:45 pm
FIREchief wrote: Wed Mar 17, 2021 2:29 pm
Chip wrote: Wed Mar 17, 2021 7:50 am 2. If qualified dividends are paid on a loaned security you'll receive "cash-in-lieu" instead, which is ordinary income. I haven't checked recently, but I believe Fidelity compensates you for the potential extra taxes and assumes the maximum federal tax rate.
Hypothetical: I borrow $10,000 on Margin in an account that holds only FZROX (Fidelity zero total US market) on December 1. FZROX pays its entire annual dividend of $180 (1.8%) on Dec 7. Fidelity pays me this as cash-in-lieu on Dec 10 and I pay off the margin loan on Dec 14. That's 2 weeks of interest @ 8.325% = $32. Are you saying that Fidelity will pay me extra, assuming the 37% top marginal rate vs. 20% top qualified dividends rate? If I understand correctly, they would pay me $180 plus $180 x (.37 - .20) = $210.60? If true, I would essentially be paying zero interest for the margin loan. Am I understanding this correctly?
Here's more information about the payment. https://www.fidelity.com/tax-informatio ... e-payments
Thanks for the link. As a point of clarification, that 26.98% rate in the link equates exactly to reimbursement for increasing taxes from the 20% qualified dividends rate to the 37% top marginal rate.

The plot thickens. I borrow that same $10,000 on margin and miss out on the $180 dividend.
Fidelity pays me:
$180 in lieu
$48.56 credit
$228.56 total ordinary income to replace the $180 qualified dividend that I otherwise would have received.

I'm up $48.56 until:
-$32 interest
-$27.85 additional taxes (15% div vs. 24% ordinary)

This means that the two week loan actually cost me $11.29 out of pocket, or an annual rate of 2.94% instead of the 8.325% rate on margin. That's even better than the "rate" a person can get by underpaying estimated taxes.
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.
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Re: Adding margin lending to a Fidelity after-tax brokerage account

Post by FIREchief »

MarkerFM wrote: Wed Mar 17, 2021 4:45 pm Note that you can have securities loaned out and receive payments in lieu even if you do not carry a margin load balance. It is having assets in the Margin type that makes this possible.
This is starting to sound like two different things:
a) a situation where a security is loaned out by the brokerage and the owner is compensated with substitute payments plus tax credit
b) a situation where an account owner takes a margin loan and pays the brokerage's interest charge while their shares provide collateral

Are you certain that "b" necessarily invokes "a," or could they be independent situations? If the later, than my simply taking a margin loan would not imply receipt of substitute payments plus tax credit. You guys know a lot more than I do about this. That's why I asked the original questions. Thanks. :happy
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Re: Adding margin lending to a Fidelity after-tax brokerage account

Post by todaysBob »

alex_686 wrote: Wed Mar 17, 2021 4:59 pm
MarkerFM wrote: Wed Mar 17, 2021 4:45 pm Note that you can have securities loaned out and receive payments in lieu even if you do not carry a margin load balance. It is having assets in the Margin type that makes this possible.
How confident are you of this statement? When I was on the margin desk, which was some time ago, the brokerage could only lend out securities worth 120% of the margin value by regulation. Now, things may have changed, but it would surprise me.
I would also like to know for certain on this. I have had margin account at IB since March of last year and benefited tremendously from it but since someone mentioned rehypothecation here I am feeling uneasy about it.

How likely is rehypothecation/other practices leading to bankruptcy for someone like IBKR?
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Re: Adding margin lending to a Fidelity after-tax brokerage account

Post by alex_686 »

todaysBob wrote: Wed Mar 17, 2021 7:24 pm
alex_686 wrote: Wed Mar 17, 2021 4:59 pm
MarkerFM wrote: Wed Mar 17, 2021 4:45 pm Note that you can have securities loaned out and receive payments in lieu even if you do not carry a margin load balance. It is having assets in the Margin type that makes this possible.
How confident are you of this statement? When I was on the margin desk, which was some time ago, the brokerage could only lend out securities worth 120% of the margin value by regulation. Now, things may have changed, but it would surprise me.
I would also like to know for certain on this. I have had margin account at IB since March of last year and benefited tremendously from it but since someone mentioned rehypothecation here I am feeling uneasy about it.

How likely is rehypothecation/other practices leading to bankruptcy for someone like IBKR?
So, I feel that there is some weirdness in the margin polices at IB which I don’t understand. They are doing some unique things.

Anyways, low. There have been few cases over the past 40 years.

The margin loan is over collateralized. The broker can liquidate the account basically whenever they want. I have done this. The regulations favor the brokerage- they really don’t want a few clients to blow up and bankrupt the firm.

Then there is a risk committee sitting on top if that, looking at the overall risk. This is generally low. Most brokers lending portfolios are heterogeneous. Even during the dot.com crash brokers did not feel any real heat. 9/11 was a different story but even that didn’t blow things up. That being said, I could feel the desperation at Robinhood during the GameStop short squeeze.

This more or less sure you get your shares back. However...

Your account is backed by all of the firm’s equity, the SIPC and (often) their insurance company. I can’t think of a case where a client wasn’t made whole.
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Re: Adding margin lending to a Fidelity after-tax brokerage account

Post by AlohaJoe »

MarkerFM wrote: Wed Mar 17, 2021 4:45 pm
Chip wrote: Wed Mar 17, 2021 7:50 am 2. If qualified dividends are paid on a loaned security you'll receive "cash-in-lieu" instead, which is ordinary income. I haven't checked recently, but I believe Fidelity compensates you for the potential extra taxes and assumes the maximum federal tax rate.
I but I don't recall ever having a payment in lieu [...] It is never a replacement for the entire dividend, just a portion.
I've had the same experience (at IBKR). I've had a margin balance of 7-10% of my portfolio for 2+ years and never received a payment-in-lieu. I also take part in securities lending and only once did I receive a payment-in-lieu instead of the actual dividend. And it wasn't the entire dividend, it was like $12 or something; I guess there were 5 shares they couldn't get back in time for the dividend for some reason. The brokers are pretty good about getting shares back around dividend times, though no guarantees obviously.

I expect that if you have multiple holdings (i.e. not just a single ETF or mutual fund in the account) then the broker's fancy computers can rotate what securities are pledged for the margin (on a daily basis even) so that pledged securities are never the ones that have dividends coming today. But I don't actually know how it all really works and I'm just making stuff up :mrgreen:
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Re: Adding margin lending to a Fidelity after-tax brokerage account

Post by AlohaJoe »

alex_686 wrote: Wed Mar 17, 2021 8:16 pm
todaysBob wrote: Wed Mar 17, 2021 7:24 pm I would also like to know for certain on this. I have had margin account at IB since March of last year and benefited tremendously from it but since someone mentioned rehypothecation here I am feeling uneasy about it.

How likely is rehypothecation/other practices leading to bankruptcy for someone like IBKR?
So, I feel that there is some weirdness in the margin polices at IB which I don’t understand. They are doing some unique things.

Anyways, low. There have been few cases over the past 40 years.
To add to alex_686's point, every single brokerage failure is public information at the SIPC. You can go to their website and see what's what; they have annual reports where they detail what brokerages have failed this year and what they've done about it. I haven't checked every case or anything (there have been several hundred failures since SIPC was put in place in the 1970s) but I don't remember seeing a single problem with rehypothecation in the last 20 years or so in the cases I've skimmed (I have weird hobbies).

These days brokerages basically never fail for something as "simple" as the stuff around securities lending and margin. Usually it is for weird counterparty lending stuff that is well away from segregated retail accounts.
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Re: Adding margin lending to a Fidelity after-tax brokerage account

Post by todaysBob »

AlohaJoe wrote: Wed Mar 17, 2021 8:39 pm
MarkerFM wrote: Wed Mar 17, 2021 4:45 pm
Chip wrote: Wed Mar 17, 2021 7:50 am 2. If qualified dividends are paid on a loaned security you'll receive "cash-in-lieu" instead, which is ordinary income. I haven't checked recently, but I believe Fidelity compensates you for the potential extra taxes and assumes the maximum federal tax rate.
I but I don't recall ever having a payment in lieu [...] It is never a replacement for the entire dividend, just a portion.
I've had the same experience (at IBKR). I've had a margin balance of 7-10% of my portfolio for 2+ years and never received a payment-in-lieu. I also take part in securities lending and only once did I receive a payment-in-lieu instead of the actual dividend.
I had $1,238 as payments-in-lieu from IB last year while only holding ETFS(ITOT/VTI/VXUS/VWO). That will cost me $210 in extra taxes(taxed at ordinary income at 37% vs 15% for the qualified dividends, although due to VWO all of them may not have been qualified). I assumed it was all due to stock yield program(which produced $130 before taxes :oops: ) that I just turned off few days ago. I still have ~$200k in margin(18% of the equity) though, so we will see if there will still be "payment-in-lieu" for 2021.
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Re: Adding margin lending to a Fidelity after-tax brokerage account

Post by todaysBob »

alex_686 wrote: Wed Mar 17, 2021 4:59 pm
MarkerFM wrote: Wed Mar 17, 2021 4:45 pm Note that you can have securities loaned out and receive payments in lieu even if you do not carry a margin load balance. It is having assets in the Margin type that makes this possible.
How confident are you of this statement? When I was on the margin desk, which was some time ago, the brokerage could only lend out securities worth 120% of the margin value by regulation. Now, things may have changed, but it would surprise me.
Looks like IB can't use fully paid off securities for hypothecation even if securities are in a margin account.
See https://ibkr.info/node/1966, am I reading it right?
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Re: Adding margin lending to a Fidelity after-tax brokerage account

Post by todaysBob »

todaysBob wrote: Wed Mar 17, 2021 10:56 pm
alex_686 wrote: Wed Mar 17, 2021 4:59 pm
MarkerFM wrote: Wed Mar 17, 2021 4:45 pm Note that you can have securities loaned out and receive payments in lieu even if you do not carry a margin load balance. It is having assets in the Margin type that makes this possible.
How confident are you of this statement? When I was on the margin desk, which was some time ago, the brokerage could only lend out securities worth 120% of the margin value by regulation. Now, things may have changed, but it would surprise me.
Looks like IB can't use fully paid off securities for hypothecation even if securities are in a margin account.
See https://ibkr.info/node/1966, am I reading it right?
And here(https://ibkr.info/node/1967) they explain how much of the equity is subject to a lien and may be pledged or loaned by them.
alex_686 - looks like it is now 140% of the margin money.
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Re: Adding margin lending to a Fidelity after-tax brokerage account

Post by MarkerFM »

alex_686 wrote: Wed Mar 17, 2021 4:59 pm
MarkerFM wrote: Wed Mar 17, 2021 4:45 pm Note that you can have securities loaned out and receive payments in lieu even if you do not carry a margin load balance. It is having assets in the Margin type that makes this possible.
How confident are you of this statement? When I was on the margin desk, which was some time ago, the brokerage could only lend out securities worth 120% of the margin value by regulation. Now, things may have changed, but it would surprise me.
100%. I haven't been carrying a margin balance for awhile and still get payments in lieu. Are you sure "margin value" doesn't equate to house surplus as opposed to loan balance?
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Re: Adding margin lending to a Fidelity after-tax brokerage account

Post by alex_686 »

todaysBob wrote: Wed Mar 17, 2021 11:04 pm
todaysBob wrote: Wed Mar 17, 2021 10:56 pm
alex_686 wrote: Wed Mar 17, 2021 4:59 pm
MarkerFM wrote: Wed Mar 17, 2021 4:45 pm Note that you can have securities loaned out and receive payments in lieu even if you do not carry a margin load balance. It is having assets in the Margin type that makes this possible.
How confident are you of this statement? When I was on the margin desk, which was some time ago, the brokerage could only lend out securities worth 120% of the margin value by regulation. Now, things may have changed, but it would surprise me.
Looks like IB can't use fully paid off securities for hypothecation even if securities are in a margin account.
See https://ibkr.info/node/1966, am I reading it right?
And here(https://ibkr.info/node/1967) they explain how much of the equity is subject to a lien and may be pledged or loaned by them.
alex_686 - looks like it is now 140% of the margin money.
It has been 20 years - I could have misremembered 120% for 140%.
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Re: Adding margin lending to a Fidelity after-tax brokerage account

Post by alex_686 »

MarkerFM wrote: Thu Mar 18, 2021 7:30 am
alex_686 wrote: Wed Mar 17, 2021 4:59 pm
MarkerFM wrote: Wed Mar 17, 2021 4:45 pm Note that you can have securities loaned out and receive payments in lieu even if you do not carry a margin load balance. It is having assets in the Margin type that makes this possible.
How confident are you of this statement? When I was on the margin desk, which was some time ago, the brokerage could only lend out securities worth 120% of the margin value by regulation. Now, things may have changed, but it would surprise me.
100%. I haven't been carrying a margin balance for awhile and still get payments in lieu. Are you sure "margin value" doesn't equate to house surplus as opposed to loan balance?
What is house surplus? Do you mean Excess Margin? If so, that is just the opposite side of the coin.

Are you in their securities lending program - where they pay you a cut of the securities lending program? That would explain it because you have to waive your rights / protection to get into the program. Then they can just lend out whatever.
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Re: Adding margin lending to a Fidelity after-tax brokerage account

Post by JackoC »

alex_686 wrote: Thu Mar 18, 2021 8:49 am
MarkerFM wrote: Thu Mar 18, 2021 7:30 am
alex_686 wrote: Wed Mar 17, 2021 4:59 pm
MarkerFM wrote: Wed Mar 17, 2021 4:45 pm Note that you can have securities loaned out and receive payments in lieu even if you do not carry a margin load balance. It is having assets in the Margin type that makes this possible.
How confident are you of this statement? When I was on the margin desk, which was some time ago, the brokerage could only lend out securities worth 120% of the margin value by regulation. Now, things may have changed, but it would surprise me.
100%. I haven't been carrying a margin balance for awhile and still get payments in lieu. Are you sure "margin value" doesn't equate to house surplus as opposed to loan balance?
What is house surplus? Do you mean Excess Margin? If so, that is just the opposite side of the coin.

Are you in their securities lending program - where they pay you a cut of the securities lending program? That would explain it because you have to waive your rights / protection to get into the program. Then they can just lend out whatever.

See this explanation from IBKR about lending out your shares:
https://ibkr.info/article/1967#:~:text= ... %206%2C000.

Excess margin shares, defined as the whole market value of your shares minus 1.4 times the margin loan balance, "cannot be pledged or loaned to finance the activities of the firm or other customers without specific written permission from the customer" per SEC regs, according to IBKR. In case of no margin loan balance then all the shares are excess margin aka 'fully paid securities'. The written permission at IBKR is known as the Yield Enhancement Program by which they share with you stock lending revenue on excess margin shares you allow them to lend.

So just having a margin account does not allow IBKR to loan out your excess margin or fully paid shares, and not having shares lent out makes PIL's very unlikely. However, IBKR does not guarantee no PIL's on shares not lent out.

To begin with PIL's are generally avoided they say:
"Stock Yield Enhancement Program shares that are lent out are generally recalled from the borrower before ex-date in order to capture the dividend and avoid payments in lieu (PIL) of dividends."
https://ibkr.info/article/1838

However, in the explanation of PIL's it's stated:
"The firm first allocates PIL [it received] to those accounts who hold the shares as collateral for a margin loan. If, after PIL is allocated to all shareholders whose accounts are not fully paid, any portion of PIL remains to be paid, it is allocated on a pro-rata basis to each remaining client account."
https://ibkr.info/article/2713
The preceding sections hint at how the firm could possibly receive PIL's on more shares than were actually lent out, thus throwing PIL's onto excess margin/fully paid shares which could not have been lent out, but it must be rare. It's never happened to me in years of having an IBKR margin account as source of standby liquidity, but all the shares always fully paid in practice, and I have not signed up for Yield Enhancement (I looked at it once and it didn't seem worth it). But as to grossing up PIL's to cover any tax impact I see nothing about that from IBKR. Same link just says:
"Account holders should be aware that a PIL may have different tax consequences than an ordinary dividend and should consult a tax advisor to understand such differences and whether they apply to their particular situation."
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Re: Adding margin lending to a Fidelity after-tax brokerage account

Post by michaeljc70 »

A margin account is a great tool for cash flow. As others noted, IB has the best rates of well known brokerages. 1.6% for the most expensive tier (<$100k) for a Pro account. The Lite account has a rate of 2.6%. The Pro account has monthly fees if the net balance of the account is <$100k that may kick in if you don't have other commissions/fees. One thing I noticed at IB is they lend out my shares (index fund) and pay me monthly for it. If they did that at the other brokerages I've been at (most of them) I didn't notice it. It isn't a lot (I calculated .1% per year) but better than nothing. EDIT: just saw the post above referencing this.

If you are using this for very short periods for small amounts, like you said the rate probably won't matter much.
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Re: Adding margin lending to a Fidelity after-tax brokerage account

Post by MarkerFM »

alex_686 wrote: Thu Mar 18, 2021 8:49 am
MarkerFM wrote: Thu Mar 18, 2021 7:30 am
alex_686 wrote: Wed Mar 17, 2021 4:59 pm
MarkerFM wrote: Wed Mar 17, 2021 4:45 pm Note that you can have securities loaned out and receive payments in lieu even if you do not carry a margin load balance. It is having assets in the Margin type that makes this possible.
How confident are you of this statement? When I was on the margin desk, which was some time ago, the brokerage could only lend out securities worth 120% of the margin value by regulation. Now, things may have changed, but it would surprise me.
100%. I haven't been carrying a margin balance for awhile and still get payments in lieu. Are you sure "margin value" doesn't equate to house surplus as opposed to loan balance?
What is house surplus? Do you mean Excess Margin? If so, that is just the opposite side of the coin.

Are you in their securities lending program - where they pay you a cut of the securities lending program? That would explain it because you have to waive your rights / protection to get into the program. Then they can just lend out whatever.
"A House Surplus is the amount of margin equity in the account above the Fidelity minimum requirement (which ranges from 30% to 100%). If the margin equity in the account falls below Fidelity's minimum requirement, this value will be reflected as a House Call. Generally, house calls must be met within 5 business days, but Fidelity may cover the call at any time."

I'm not in their securities lending program, this is just a standard margin agreement.

I did think of one thing. I don't currently borrow on the margin balance, but I do use margin to support some short option positions. I was told by my Fidelity person that having securities in Margin type is what exposes me to payments in lieu, but perhaps that is wrong and it is using the margin by carrying short options positions that results in their lending the securities out. Dividends in lieu total a small amount of money, so I don't get too worked up about it.
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