Why does the "price" on hard to borrow stocks not agree to the closing price of the stock?

In determining the cash deposit required to collateralize a stock borrow position, the general industry convention is for the lender to require a deposit equal to 102% of the prior business day's settlement price, rounded up to the nearest whole dollar and then multiplied by the number of shares borrowed.  As borrow rates are determined based upon the value of the loan collateral, this convention impacts the cost of maintaining the short position, with the impact being most significant in the case of low-priced and hard-to-borrow shares. Note, for shares not denominated in USD the calculation will differ. Find below a table summarizing the calculations per currency:

Currency Calculation Method
USD 102%; rounded up to the nearest dollar
CAD 102%; rounded up to the nearest half dollar
EUR 105%; rounded up to the nearest cent
CHF 105%; rounded up to the nearest rappen
GBP 105%; rounded up to the nearest pence

 

Account holders may view this adjusted price for a given transaction in the "Non-Direct Hard to Borrow Details"  section of the daily account statement.  Two examples of this collateral calculation and its impact upon borrow fees are provided below.

 

Example 1

Sell short 100,000 shares of ABC at a price of $1.50

Short sale proceeds received = $150,000.00

Assume the price of ABC falls to $0.25 and the stock has a borrow fee rate of 50%

 

Short stock collateral value calculation

Price = 0.25 x 102% = 0.255; round up to $1.00

Value = 100,000 shares x $1.00 = $100,000.00

Borrow fee = $100,000 x 50% / 360 days in year = $138.89 per day

Assuming the account holder's cash balance does not include proceeds from any other short sale transaction then this borrow fee will not be offset by any credit interest on the short sale proceeds as the balance does not exceed the minimum $100,000 Tier 1 threshold necessary to accrue interest.

 

Example 2 (EUR denominated stock)

Sell short 100,000 shares of ABC at a price of EUR 1.50

Assume a prior business day's close price of EUR 1.55 and a borrow fee rate of 50%

Short stock collateral value calculation

Price = EUR 1.55 x 105% = 1.6275; round up to EUR 1.63

Value = 100,000 shares x 1.63 = $163,000.00

Borrow fee = EUR 163,000 x 50% / 360 days in year = EUR 226.38 per day

 

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