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‹ Short Selling & Securities Lending Lesson 7 of 16
Contents Lesson 7 of 16

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What is the rebate rate, and why is it the real price of a borrow?

This is the lesson the rest of the course points at. Almost nobody explains the rebate correctly, and once you have it, every headline about "expensive borrow" becomes readable.

The setup

In cash-collateral markets — the US standard — the borrower does not simply pay a fee. The sequence is:

  1. The short seller sells the borrowed shares and receives cash.
  2. That cash (and more) is posted to the lender as collateral, typically 102% of the shares' market value for domestic loans, 105% for cross-border.
  3. The lender now holds a large pile of the borrower's cash. Cash earns interest. So the lender pays interest back to the borrower — that payment is the rebate.
  4. The lender keeps the difference between what it can earn on the cash and what it rebates. That difference is the borrow fee.

The formula

rebate rate = short-term reference rate − borrow fee

Rearranged, and this is the version worth memorising:

borrow fee = short-term reference rate − rebate rate

The fee is a spread, not a payment. The borrower's real cost is not "the rebate" and not "the reference rate" — it is the gap between them.

Worked example 1 — general collateral

Short 1,000 shares at $50. Market value $50,000; collateral posted at 102% = $51,000. Short-term reference rate 5.00%. The stock is easy to borrow, fee 0.30%.

  • Rebate = 5.00% − 0.30% = 4.70%
  • Borrower receives on collateral: $51,000 × 4.70% = $2,397 a year
  • Had the borrower simply held that cash at the reference rate: $51,000 × 5.00% = $2,550
  • Difference: $153 a year — which is exactly $51,000 × 0.30%.

Note what this means and what most explanations get wrong: in a positive-rate environment, a short seller on a general-collateral name still earns positive interest on the collateral. The cost of the short is the 0.30% spread, not the 5.00% rate.

Worked example 2 — special, and a negative rebate

Same position, but the stock is in heavy demand and the fee is 8.00%.

  • Rebate = 5.00% − 8.00% = −3.00%

A negative rebate means the cash flows the other way. Instead of receiving interest on the collateral, the borrower pays 3.00% on it — on top of forgoing the 5.00% they could have earned elsewhere. Add those together and the total economic cost is still exactly the 8.00% fee.

In money: $50,000 × 8.00% ÷ 360 = $11.11 a day, roughly $333 a month, $4,000 a year on a $50,000 position. On the 102% collateral base it is $11.33 a day. Fees accrue daily on the day's market value, on a 360-day convention in most money markets.

A negative rebate is the market's way of saying supply has run out. It is a price, and prices move.

Non-cash collateral markets

Much of Europe and Asia works differently: the borrower posts government bonds or a basket of equities as collateral, and simply pays a fee. No rebate arithmetic exists at all, and — as the last unit will show — no collateral reinvestment risk either. Same economics for the borrower, very different risk for the lender.

The same arithmetic runs in bonds, where it is the repo market from the Money Markets course. A short seller of a Treasury does a reverse repo in that issue: lends cash, receives the bond, delivers it to the buyer, and earns the repo rate on the cash. If the issue is general collateral that rate is the market rate and the borrow is close to free. If the issue is special, the rate on the cash sits below general collateral, and the gap is the borrow fee: reference rate minus rebate, the same sign as here. A special at 3.30% against 4.30% general collateral is a 100 basis point fee. Coupons paid during the loan go back to the lender as a manufactured payment, as dividends do.

Try it now

  1. Below is a current short-term rate for a major currency: the latest SOFR fixing, the dollar overnight benchmark. Use it as the reference rate in the next two steps.
Live API response: sofr overnight observation
  1. Compute the rebate rate at three borrow fees: 0.25%, 5% and 20%. Note the exact fee level at which the rebate turns negative — it is simply where the fee crosses the reference rate.
  2. Convert each into a daily cost on a $100,000 position using rate × 100,000 ÷ 360. Those three numbers are the difference between a background cost and a dominant one.