My account was debited for a dividend payment (Payment in Lieu) for a short stock position which I don’t recognize. How did this occur?

Overview: 

 

A short stock position may originate from an option position which you held in your account.  For example, if you hold a long put position in your account, that position may be subject to automatic exercise by the clearinghouse if it is in-the-money by a defined threshold at expiration.  This put exercise will generate a short stock position in your account (assuming you do not have an offsetting long position), and you are obligated to pay any dividends should you maintain a short stock position on the ex-dividend date. 

 

Similarly, a short call position in your account is subject to assignment should a call purchaser elect to exercise their right to purchase the stock and your account be allocated through the random clearinghouse and broker assignment process.  This call assignment will generate a short stock position in your account (assuming you do not have an offsetting long position), and you are obligated to pay any dividends should you maintain a short stock position on the ex-dividend date. 

 

These payments will be reflected on your Activity Statement as a 'Payment In Lieu Of Dividend'.

What does Payment in Lieu refer to?

Overview: 

A Payment in Lieu, or Pil, typically refers to a cash debit or credit made to an account in recognition of a stock dividend.  A Pil in the form of a debit will be made when an account is holding a short position in a stock on its ex-dividend date. This debit occurs as the lender of the shares which facilitated the short sale remains entitled to all dividends paid throughout the duration of the loan period.   

Conversely, a Pil in the form of a credit is made when a long stock position in an account has been loaned out on its ex-dividend date.  Account holders should note that shares which are held long and which are the subject of a margin lien may be eligible to be loaned by the broker.  In this situation the credit originates from payment by the borrower of the shares rather than from a dividend by the share issuer.   U.S. taxpayers who are recipients of Pil credits should discuss the tax implications of Pils and non-qualified dividends with their tax adviser.

Interest credit on short stock proceeds

Overview: 

How to determine the interest credit or fee associated with a stock borrow position

Background: 

When an accountholder sells shares short, IBKR borrows equivalent shares on behalf of the accountholder in order to satisfy the accountholder’s obligation to deliver shares to the purchaser. The stock loan agreement through which these shares are borrowed requires that IBKR provide the lender of the shares with cash collateral for the loan. The amount of cash collateral is based on an industry standard calculation of the value of the shares called the Collateral Mark.

The lender of the shares provides interest to IBKR on the cash collateral and also charges a fee for providing this service by adjusting the interest paid to an amount less than the prevailing market interest rate for cash collateral deposits (typically the rate is pegged to the Fed Funds Effective rate for USD denominated cash deposits). For hard to borrow shares, the lender’s fee for providing the shares may result in a net negative interest rate charged to IBKR.

While many brokers pass a portion of this rebate only to institutional clients, all IBKR clients receive an interest credit on short stock sales proceeds that exceed USD 100,000 or the equivalent in another currency. When the supply of a given security available to borrow is high relative to its borrow demand, account holders can expect to receive an interest credit on their short stock balance equal to the Benchmark Rate (e.g., Fed Funds Effective overnight rate for USD denominated balances), less a spread (currently ranging from 1.25% on balances of USD 100,000 to 0.25% for balances over USD 3,000,000). The rates are subject to change without notice.

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 result in a charge to the account. The rebate or charge will be passed on to the accountholder in the form of a higher borrow fee, which may exceed short sale proceeds interest credits and result in a net charge to the account. As rates vary by both security and date, IBKR recommends that customers utilize the Short Stock Availability tool accessible via the Support section in Client Portal/Account Management to view indicative rates for short sales. Customers can also add the Rebate Rate column to their TWS screen. Note that the indicative rates reflected in these tools are intended to correspond to the short sale proceeds interest IBKR pays on Tier III balances, that is, additional short sale proceeds of USD 3 million or greater. For lower balances, the rate is adjusted based upon the tier and the Benchmark Rate associated with the trading currency. The exact rate can be viewed by using the Interest Paid to You on Short Sale Proceeds Cash Balances calculator.

 

EXAMPLE

Assume that for Apple Inc. (NASDAQ: AAPL) the Short Stock Availability Tool and TWS show an indicative Current Rebate Rate of 1.60% and a Current Fee Rate of 0.25%.
This implies the account will receive net credit interest of 1.60% for shorting AAPL.

Tier III Short Stock Proceeds Interest Rate (Credit):  1.85%
AAPL Borrow Fee Rate (Debit): -0.25%
Net Rebate to Account: +1.60%

 

Please see more examples and a calculator on the Securities Financing page.

IMPORTANT NOTE
Information provided within the Short Stock Availability Tool and TWS 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 generally 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). Please see Operational Risks of Short Selling for more details.


IMPORTANT NOTE

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).

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