securities lending swissquote experience securities lending swissquote saxo degiro

Securities lending risk - The hidden risk behind the promise of "passive income"

"Earn passive income with your securities!" - Have you already seen this tempting offer from your broker? Sounds like a perfect deal, doesn't it? You already have ETFs and shares in your portfolio - why not take a little extra return with you?

But what looks like a clever financial hack at first glance actually harbours risks that are usually cleverly circumvented in the advertising promises. Find out in this article, what securities lending really meanswhich Hidden dangers and whether this deal is even worthwhile for you as a private investor.

Table of contents

What is securities lending? The car park example

To explain securities lending, imagine the following scenario:

You park your expensive car (your securities) in a garage. You pay the garage owner (your broker) a small fee for parking your car. The terms of use state that the garage owner may lend your car to other people for a fee when you are not using it - but many customers overlook this or do not fully understand it.

What exactly happens?

  • The garage owner earns CHF 50 per month from your car
  • He might give you CHF 5 per month as a "share"
  • As security, the borrower places a scooter worth CHF 55,000 in the garage (for a car worth CHF 50,000)

The hidden risk:
A "Black Swan" event happens - the borrower has a serious accident with your car and files for bankruptcy. At the same time, the market for scooters crashes and your "110% security" is suddenly only worth CHF 15,000. Your CHF 50,000 car is gone and you are left with a massive loss - for a paltry CHF 5 per month "additional income".

Securities lending works in practically the same way in the financial world:

  1. Your broker lends your Shares or ETFs to other market participants
  2. They usually use these for short selling or complex trading strategies
  3. You receive a (usually small) portion of the lending fee as "passive income" or, for example, free custody fees
  4. The borrower deposits collateral (typically 102-110% of the value)

Why do brokers offer securities lending? Follow the money

The motivations behind the securities lending offers that you see more and more frequently are manifold:

  • Lucrative source of income: Your broker can generate considerable income, only a small part of which he passes on to you
  • Clever marketing strategy: The "passive income" sounds tempting and is advertised as a special service
  • Competitive advantage: Many providers use it as a differentiating feature in the highly competitive Swiss market

With your broker you can Various models encounter:

  • Some activate securities lending by default (opt-out) - you must actively object
  • Others offer it as an optional additional function (opt-in) - you have to agree to it
  • Some link it to fee advantages or cashback programmes
  • The distribution of income varies greatly - typically you only receive a portion of the total income. However, you bear the risk.

Top recommendations for 2026

Your key to success! Discover our top recommendations from real testimonials.

Swiss bank account recommendation test experience report account
Securities lending risk - The hidden risk behind the promise of "passive income" 1
ETF buy Switzerland recommendation savings plan exchange traded funds investing
Pillar 3a Comparison Recommendation Experience Report
Swiss Online Broker Recommendation Test Comparison
Bank account recommendation best Swiss bank account test

The often concealed risks of securities lending

The asymmetric risk/return ratio

The main problem with securities lending that you should be aware of is its extremely unbalanced risk structure:

  • Your maximum profit: Typically only 0.1-0.5% p.a. on the value of your securities
  • Your potential loss: In the worst case, up to 100% of the lent assets

Let's illustrate this with concrete figures: With an ETF portfolio of CHF 10,000, you might earn CHF 10-50 per year - but in the worst-case scenario you risk a total loss of CHF 10,000. Asymmetric risk. You would never make a bet like that, would you?

Loss of special asset protection - the most critical point

The most important aspect that your broker's marketing brochures usually fail to mention: Lent securities lose their special asset protection!

What does this mean for you? Normally, your securities held with a broker are legally yours and are protected in the event of broker insolvency. However, if they are lent out, you only have a claim to their return - you become a normal creditor if something goes wrong. This legal difference can decide your assets in an emergency.

The Black Swan scenario - when everything goes wrong at the same time

The most dangerous risk arises in the event of a systemic market collapse - a so-called "Black Swan" event:

  1. The borrower of your securities suddenly files for insolvency
  2. At the same time, the global financial markets are crashing
  3. The collateral deposited loses value dramatically
  4. Your broker cannot reclaim your original papers

 

Such scenarios are not just theoretical: the Lehman bankruptcy in 2008 and other financial crises have shown that supposedly impossible risks can become real - precisely when you are most dependent on the security of your investments.

Critical analysis of security promises - what your broker doesn't tell you

What does "110% collateralisation" really mean for your security?

Your broker probably advertises with a reassuring "Overfuse from 102-110%" - but this figure can be misleading and gives you a false sense of security:

  • Collateral is valued at the current market value - which can change quickly
  • In the event of market turbulence, collateral can drastically lose value within hours
  • The quality of the collateral is crucial - there is a huge difference between Swiss government bonds and complex securities that are difficult to value

 

Always remember that: No return without risk.

The dangerous limits of risk protection

Even with daily Adjustments to collateral (known as "marking to market"), you are still exposed to considerable risks:

  • Time delays in the realisation of collateral - particularly problematic in times of crisis
  • Serious liquidity problems if everyone wants to sell at the same time
  • The underestimated correlation risk - when all asset classes suddenly collapse at the same time
  • Complicated legal hurdles in international transactions that can delay your reclaims

Our financial tips for 2026

"Intelligent people learn from the mistakes of others".

We have compiled our top selection for you from all our tests and experience reports:

Online broker comparison trading platforms comparison Swiss broker comparison test
Swiss bank account recommendation test experience report account
swiizerfranke ebook investment guide switzerland pdf download
Pillar 3a Comparison Recommendation Experience Report
Crypto Broker Switzerland Comparison Buy Bitcoin
swiss online finance course investing pensions online learning live calls swiss online finance course

What the terms and conditions say - and what the broker skilfully conceals

The important details on securities lending can usually be found buried deep in the General Terms and Conditions. Pay particular attention to these typical formulations:

  • "The broker is authorised to lend the customer's securities..."
  • "The income from securities lending is distributed according to a fixed formula..."
  • "Assets of at least the same value are deposited as collateral..."
  • The Swissquote securities lending experience shows the following in the GTCs: "In particular, the customer loses all ownership rights to the financial instruments lent by the bank. "
  • The following can be found on Saxo Securities Lending: "You lose ownership of the securities".

What is often missing in your contract documents or only in the Small print stands:

  • Clear indications of the loss of special asset protection
  • Precise information on the quality of the collateral accepted
  • Concrete scenarios of what happens to your securities in the event of a crisis
  • The exact percentage split of income between you and the broker

Fair enough: When securities lending might work for you

To give you a balanced picture, you should also consider the potential advantages know:

  • The security mechanisms function reliably in normal market phases
  • Major failures have been relatively rare to date
  • Established Swiss brokers often have additional safety buffers built in
  • The risk/reward ratio may be acceptable for your "play money" portfolio or for short-term trading strategies

 

In certain situations, securities lending can therefore make sense for you - provided you are fully aware of the risks and have a correspondingly high risk appetite. Especially if you are already pursuing more speculative strategies with a small portion of your assets, the additional return could justify the risks you are taking.

Practical part: How to find out whether your securities are being lent secretly

Would you like to know, whether your broker lends your securities? This is the best way to proceed:

  1. Search your broker's terms and conditions for key terms (tip: CTRL+F/CMD+F)
  2. Read your securities account opening documents carefully - especially the small print
  3. Check for securities lending functions in the online customer portal under "Settings" or "Account options"
  4. If in doubt, ask customer service directly: "Will my securities be lent?"

Pay particular attention to these suspicious clues:

  • Strikingly favourable fees or attractive cashback offers
  • Technical terms such as "securities lending", "securities lending" or "lending transactions"
  • References to "additional income" or "passive income" in connection with your securities account
  • Small incoming payments to your account, which are referred to as "lending fees" or "lending income"

You can find a detailed overview of various broker models in our Online broker comparison Switzerlandthat can help you make a decision.

Securities lending checklist: Decide with these 8 points

Are you about to decide whether you should authorise securities lending? Use this practical checklist to make an informed decision:

✓ TransparencyHow openly and honestly does your broker communicate the risks?

✓ Income shareWhat percentage of the rental fees do you actually receive?

✓ Collateralisation ratioIs the overfuse at least 105-110%?

✓ Collateral qualityWhat kind of collateral is accepted? (Government bonds are better than corporate bonds)

✓ Control option: Can you flexibly exclude certain securities from the loan?

✓ Activation methodIs securities lending activated by default (opt-out) or do you have to actively agree (opt-in)?

✓ Asset shareHow much of your total assets are you exposing to this risk?

✓ Emergency planDoes your broker have a clear plan for crisis scenarios?

Securities lending with ETFs - another aspect

While we are mainly concerned with securities lending by brokers in this article, it is important to note that most ETFs themselves operate securities lending. Almost all major providers such as iShares (BlackRock), Vanguard, UBS or Xtrackers use this practice to slightly improve the performance of their funds.

The ETF However, securities lending differs from brokerage in important respects:

  1. Higher safety standardsETF providers typically require collateral of 102-110% of the value lent.
  2. Limited volumesReputable ETF providers limit the proportion of securities lent. Vanguard, for example, often lends less than 5% of the portfolio, while for iShares Core ETFs the proportion varies between 0.5% and 15%.
  3. Transparent reportingThe providers regularly publish details on securities lending in their factsheets or annual reports.
  4. Return on earningsA large part of the borrowing fees flows back into the ETF. With Vanguard, as much as 100% of the net income is returned to the fund, whereas with other providers it is usually 60-70%.

For investors who want to avoid securities lending completely, there are also "non-lending" ETFs. These completely dispense with this practice, but can sometimes have slightly higher total costs.

In practice, the Securities lending with established ETF providers This represents a manageable risk due to the strict regulations and security measures - significantly lower than securities lending via many brokers.

Our financial tips for 2026

"Intelligent people learn from the mistakes of others".

We have compiled our top selection for you from all our tests and experience reports:

Online broker comparison trading platforms comparison Swiss broker comparison test
Swiss bank account recommendation test experience report account
swiizerfranke ebook investment guide switzerland pdf download
Pillar 3a Comparison Recommendation Experience Report
Crypto Broker Switzerland Comparison Buy Bitcoin
swiss online finance course investing pensions online learning live calls swiss online finance course

My personal conclusion: Why I do without the securities lending risk

As someone who deals with the financial markets on a daily basis and pursues a scientifically sound, long-term investment strategy, I am extremely critical of securities lending.

The crucial question you should ask yourself is: Is a measly additional yield of 0.1-0.5% per year worth the enormous potential risk?

For my main portfolio and my long-term investments, my answer is clear: No. The strong asymmetric risk profile is disproportionate to the minimum return. Particularly worth considering: In turbulent market phases - precisely when you want to rely on the value of your investments - securities lending could become a fatal problem.

Your personal risk assessment may be different for smaller "play money" deposits. Here you could argue that the additional return is worth the risk. But even then, you should be fully aware of the possible consequences.

My specific advice to you: Prioritise security over minimal improvements in returns. The solid foundation of any successful long-term investment strategy should be stability and reliability - the very qualities that securities lending potentially undermines.

What are your experiences with securities lending? Have you decided in favour or against it? Share your thoughts in the comments!

6 responses

  2. Hello Eric

    Thank you for the detailed article. What is also worth mentioning: According to a brief search, securities lending is activated by default with certain brokers (Degiro and Interactive Brokers), i.e. if you do not want this, you have to deactivate this option manually (opt-out).

    With other brokers (Swissquote, Saxo), however, it must be consciously activated (opt-in).

    Reply

    1. Hello Kili,
      That's a very good question! You raise an important point, because most large ETFs do in fact engage in securities lending themselves.
      In the case of ETFs, however, securities lending differs from securities lending via brokers in a number of important respects:

      Better hedging: ETF providers such as iShares, Vanguard or UBS typically require overcollateralisation of 102-110% of the value lent.
      Limited shares: The major providers tend to lend only a controlled portion of their portfolio - for example, with Vanguard FTSE All-World it is often under 5%, with iShares Core ETFs it varies between 0.5-15%.
      Income return: Unlike with many brokers, some of the income flows back into the ETF (with Vanguard even 100% after costs), which benefits all investors.

      This practice is standard for almost all major ETF providers, not just for niche products. There are also special "non-lending" ETFs for investors who want to avoid securities lending altogether - although these are in the minority and sometimes somewhat more expensive.
      Personally, I see securities lending with reputable ETF providers as less problematic than with brokers, as transparency is higher and security standards are stricter.
      I have added a paragraph on ETF securities lending to the article.

      Best regards
      Eric

      Reply
Write a comment

Your e-mail address will not be published. Required fields are marked with * marked.

Get your free
Investment Guidebook
receive!
No thanks.