Securities Lending: The Hidden Risk of Modern Brokers – What Investors Need to Know in 2026

I have two DEGIRO accounts – a Custody account and a standard account – and today I started questioning the real difference between them: how my ownership rights change depending on the account type, and what consequences that has if the broker lends out my holdings or faces a counterparty default. My research revealed that many brokers, especially discount and neo-brokers, engage in securities lending, lending client stocks to third parties to generate revenue. Even ETFs participate, meaning passive investors are indirectly exposed. While this can increase returns, it carries hidden risks: legal ownership shifts, counterparty defaults, reduced dividend payments, and amplified losses during market stress. Historical crises, from Lehman Brothers and MF Global to GameStop and Archegos, illustrate these dangers.

Most retail investors do not realize that their stocks often do not truly “belong” to them, at least not in a legal sense. Many modern brokers – especially those with low fees – engage in securities lending, i.e., lending out clients’ securities.

At first glance, this seems harmless: the stock remains visible in your account, you receive dividends, and your broker earns some additional revenue. But beneath the surface, the model carries risks that can become critical during market stress.

This article explains what securities lending is, how it works, why it is widespread, and most importantly, how you as an investor can assess whether your broker uses it and what it means for you.

In securities lending, a broker or custodian lends clients’ securities to third parties – usually hedge funds, short sellers, or other financial institutions. In exchange, the broker receives collateral and a lending fee.

As long as everything works smoothly, the client notices nothing. However, legally, something critical changes: you are no longer the legal owner of the stock, but hold only a claim against your broker for its return.

This means that if the broker or borrower defaults, you could theoretically lose access to your securities, at least temporarily.

Securities lending is highly attractive for brokers because it allows them to generate extra revenue from client assets without increasing trading fees. This is why discount and neo-brokers like Trade Republic, DEGIRO, or Scalable Capital could offer extremely low-cost trading.

In practice: the lower the trading fees, the more likely the broker engages in lending. For clients, this means you are paying indirectly for “free” trades with increased custody risk.

In Europe, securities lending is now common among discount and neo-brokers and rare among traditional banks.

Traditional banks usually hold client securities separately, often via Clearstream or SIX. Neo-brokers often pool assets and reserve the right to reuse them.

Securities lending is not a theoretical risk – it has caused real losses for investors and institutions multiple times. The following examples illustrate how complex and dangerous the system can become under stress.

Before the 2008 financial crisis, Lehman Brothers was one of the largest players in global securities lending. When the firm collapsed, millions of borrowed stocks were suddenly not returned. Pension funds, banks, and retail investors whose brokers had lent securities via Lehman were left with claims instead of actual shares.

The settlement took years. Many investors received only fractions of their original holdings because collateral was missing or had lost value. Lesson: If the borrower defaults, you are no longer a shareholder but a creditor in a bankruptcy estate.

MF Global, a US brokerage under former Goldman Sachs executive Jon Corzine, used client funds and borrowed securities to leverage risky sovereign bond positions.
When these positions collapsed during the Eurozone crisis, over $1.6 billion of client funds and collateral were missing.

Although regulators deemed this illegal, the case highlighted how securities lending, proprietary trading, and liquidity management are often intertwined. Thousands of clients waited years for compensation.

During the GameStop rally in early 2021, securities lending played a key role.
Many short sellers had borrowed shares to bet against the stock, often exceeding the free float. When the price exploded, hedge funds had to unwind positions, and brokers like Robinhood faced massive margin calls from clearinghouses.

Robinhood restricted trading to protect liquidity. Retail investors were frustrated, even though the root cause was the lending system itself, which amplified volatility and systemic risk.

Archegos, a family office, used total return swaps – a synthetic form of securities lending. Multiple banks (Credit Suisse, Nomura, Morgan Stanley) lost over $10 billion when collateral proved insufficient.

Even without physical stock lending, this case demonstrates that “borrowed” or synthetically replicated positions can propagate default risk throughout the system.

In Europe, securities lending was exploited for tax optimization. Through complex lending chains around dividend dates, the same stock could be counted multiple times for tax refund claims.

This was systematic abuse, not accidental. In Germany and Denmark, damages exceeded €30 billion. Trust in securities lending declined significantly as a result.

Whether due to insolvency, misuse, or systemic stress, the common theme is clear:
Securities lending shifts ownership, responsibility, and risk invisibly. It is efficient in calm times but can trigger crises before markets collapse.

Many investors think ETFs are unaffected because only brokers lend out stocks.
Incorrect. Major ETF providers like BlackRock (iShares), Vanguard, Amundi, DWS/Xtrackers, and Lyxor actively engage in securities lending to boost returns and reduce expense ratios.

ETF providers hold the physical securities of the index in a separate fund.
A portion – usually 5–30% of the portfolio – can be lent to institutional borrowers (hedge funds or banks).

Lending fees mostly flow back to the fund, benefiting investors, though providers often keep a percentage. Example: BlackRock generally passes 62.5% of fees to the fund, keeping 37.5% itself.

This can add a few basis points of return relative to non-lending ETFs.

ETFs are structured as separate assets, so they are protected from provider bankruptcy. However, they are not protected against borrower default.

If a borrower defaults, the ETF relies on collateral, which may lose value or be illiquid under stress. Thus, ETF investors are indirectly exposed to lending risk, even if they hold no individual stocks.

Lending ETFs are not inherently dangerous, provided risk management is robust.
They are not risk-free.

Investors seeking maximum safety should prefer providers with minimal or no lending activity, such as Vanguard.

The key distinction between safe and risky models lies in legal ownership.
In traditional banks, you are co-owner of pooled custody – the shares truly belong to you. In lending brokers, you are only a creditor with a return claim.

This distinction is critical in a crisis: immediate recovery versus years of legal proceedings.

“My broker is regulated. Aren’t I protected?”
– Only partially. Deposit insurance protects cash, not securities.
Securities are protected only if they are not lent or held separately.

“Do I receive part of the lending fee?”
– Some brokers (e.g., Interactive Brokers) share it.
Many retain it entirely. You bear the risk but often get no share.

“What happens to dividends?”
– During lending, you may receive substitute payments, which are taxed differently and sometimes smaller.

From my experience with both DEGIRO accounts, I’ve learned how crucial it is to understand not just fees and returns, but also the legal nuances and risks of securities lending. I hope sharing these insights helps other investors make more informed decisions and choose the structures that best protect their assets in today’s complex markets.