At the stock exchange, one can borrow stocks. You can either borrow them from another investor or lending your stocks to other people. By doing that, shares are actually transferred to a counterpart, who pays a fee previously agreed. In a ‘borrow’ operation, we have two parts involved: the first is the donor, who actually owns the shares, and the second is the taker. Any operation must be registered at BM&FBovespa, which determines, for instance, for how long the shares will be borrowed, an annual charge, if the operation can be renewed or not and some other details.
Investors who lend their notes to third parties are those who not intend to leave positions in the short or medium term, and for extracting the most from their portfolio, lend papers to other investors for a fee. Remember that the donor keeps receiving dividends himself, interests on own capital and bonuses, if applicable. For those who borrow, the need is just temporary, as they expect prices to go down. This way, they can sell the borrowed share at the cash market and buy them back later for a lower price, to give them back to the donors, making profits from paying less (if the difference is higher than the fees they are paying to the donor).
In order to borrow shares from other investors, a guaranty margin of 100% of the borrowed shares is required, plus 10% or 20% more, to compensate any market floats. Besides, if prices change too much, surprising the taker, the guaranty margin may increase in real time. Several assets can be used as guarantee, like public or private bonds, debentures, shares, gold and even cash. Once the contract expires, if the taker is not holding shares, the BTC calls a buying order to get shares back and give them to the donor – then it executes the guarantees from the taker. Finally, if the taker fails in giving the shares back to the donor, he needs to pay daily interests of 0.2% and pay fees in double for the period of delay.
Fees to borrow shares are determined by the market, based on supply and demand for “lease” contracts. The much donors it has, the lower should be the fees involved, but if there are many takers, so the fees tend to be higher. For shares with great liquidity, fees use to be lower, and hardly exceed DI rates. However, for those shares with low liquidity or purely speculative, such as OGX, rates can reach up to 100% per year. The donor will only receive this rate equal to the period which rented their actions. Bovespa publishes daily rental fee of stocks for this kind of operation in the following link:
Fees must be paid by the first work day after closing the deal. The donor receives the value after taxes. The donor will receive the net income discounted the tax. Income tax is calculated similarly than it is for fixed income notes. Regarding the relations between donors and takers, contracts can be set under three different methods:
Reversible for the Borrower: the taker can end the contract any time, giving the shares back to the lender and paying the fees for the period he held them.
Reversible to the Lender: the donor can end the contract any time, and the borrower is given 3 days for delivering the shares back.
Fixed dates: the contract can’t be suspended before the expiration date. Nor the donor neither the borrower are allowed to execute it beforehand. For this kind of contract, fees are usually paid upfront.