The unknown Canadian phenomenon
12 May 2026
Market participants discuss the Canadian retail environment with Hansa Tote, highlighting the lack of awareness and the need for more education for potential participants
Image: stock.adobe.com/Alexey Suloev
O Canada! Home of maple syrup, the Rocky Mountains, and Niagara Falls.
The past five years have seen Canadian retail securities lending evolving from a largely institutional, operational function, into a more democratised, platform-driven feature, with brokerages increasingly enabling fully paid lending (FPL) across retail and registered accounts, according to David Mak, managing director of Canadian fintech company, WealthSimple.
“This has driven greater awareness and participation with the perception of securities lending evolving from being viewed as an obscure yield enhancement tool into a visible client feature,” Mak notes.
Dylan Flanagan, director of securities lending at Questrade, agrees that participation has risen, observing that the past five years has seen involvement evolve from a “largely unknown phenomenon” into an increasingly important new source of supply for securities lending desks and a largely untapped source of passive income for retail clients.
As with the rest of the world, Canadian retail trading grew significantly during the Covid-19 pandemic, something Flanagan details as introducing a meaningful amount of potential inventory into the lending ecosystem, causing the opportunity to introduce or expand retail lending programmes in the region to become “hard to ignore”.
This influx of interest transformed the market, something that had previously been operationally challenging, largely underutilised, and generally unfamiliar to clients, was now seen as a feasible and mutually beneficial programme for brokers and retail investors, Flanagan explains.
Driving demand
There is a demand for retail activity in Canada, but what are the key drivers behind it?
According to Mak, it boils down to short selling, volatility, and scarcity of specific securities. He notes that demand tends to concentrate on high short-interest, volatile, or hard-to-borrow securities, with spikes around corporate actions and market events. “When markets are uncertain, or if certain Canadian equities are heavily traded or shorted, borrowing demand increases. Macro factors such as interest rates, inflation, and sector concentrations — for example banks and energy — also influence demand patterns.”
A representative from Interactive Brokers adds that high US demand for certain stocks can boost borrowing needs for their Canadian listings, reflecting the interconnected nature of cross-border equity markets. They also underscore that small cap and penny stocks are typically harder to borrow due to limited supply and lower liquidity, both factors that may provide increased lending income for retail investors that have these securities in their portfolios.
Flanagan cites specific market events such as news, earnings, or corporate actions like mergers or spin-offs as leading demand in the retail space, being used primarily to cover short selling activity.
“In the broader market place, retail assets now compliment institutional supply, especially when that institutional supply begins to get scarce. While the volume from the institutional space is still the primary source of lending activity and dictates overall market pricing and availability, retail availability is becoming more important. It is increasingly viewed not just as a marginal source, but as a viable extension of the overall lending supply,” he explains.
Dripping down
Dividend Reinvestment Plans (DRIPs) are a system that allows investors to reinvest dividend payments automatically to buy additional shares of a company, providing the chance to accumulate shares over time without manually buying on the open market. They can help investors save on transaction costs, due to the fact they pay minimal indirect transactional fees, and no sales commission to their broker on the reinvested dividends.
Mak notes that several Canadian issuers have scaled back or suspended their DRIP offerings, resulting in reduced revenue and the associated lending demand in this asset subset. This idea of scaling back is reaffirmed by a 2025 report by S&P Global which details high inflation and elevated interest rates in Canada have contributed to a decline in the number of companies that offer DRIPs. Firms are instead choosing to preserve cash due to tighter financial conditions, rather than issuing discount shares through reinvestment plans.
Despite the reduction, Mak highlights that retail investors can still have a strong presence by enabling their shares for lending and adding to the supply of DRIP eligible securities by holding dividend-paying securities, enrolling in lending programmes, and keeping shares available through record dates.
Barriers, rules, and regulations
Despite the growing size of Canada’s retail lending market, there remains a number of barriers to entry into the market.
It is the general consensus that there is a lack of awareness and education when it comes to retail lending in Canada that proves to be the biggest hurdle, with a spokesperson from trading platform Interactive Brokers saying there is a perception that securities lending is only for institutional investors.
Flanagan says that the two biggest hurdles are “access and awareness”, before highlighting that involvement is limited to clients working with brokers that offer fully paid securities lending (FPSL) programmes.
Mak agrees that awareness is a limiting factor on participation, alongside risk perception and account eligibility thresholds, with “many” investors not understanding legend mechanics, or confuse it with relinquishing ownership.
Moving on to discuss the Canadian regulatory environment, and how it shapes the development of retail securities lending programmes, Mak explains that Canada’s regulatory environment prioritises investor protection, disclosure, and collateralisation standards. “Brokers must ensure clients understand that voting rights may be temporarily waived and that securities are fully collateralised during lending. Regulation also shapes participation design — programmes must have optionality and be structured to work within registered account frameworks which naturally slows but stabilises retail adoption.”
Flanagan adds that, as a relatively new product in Canada the regulations are still evolving, especially as more brokers begin to launch FPSL programmes and provide industry feedback.
He highlights that, in addition to proper risk disclosure, some account-type restrictions and tax considerations, particularly for registered accounts, need to be properly managed. “These client and operational safeguards are necessary in a safe and transparent marketplace; however, it is important to note that they may increase compliance demands on brokers, which can impact the successful launch and scaling of these programmes,” he adds.
“As a result, retail lending in Canada has developed more gradually and tends to be somewhat conservative, with growth driven by improvements in transparency and client education rather than rapid expansion.”
Section 4625 of the Canadian Investment Regulatory Organization’s (CIRO’s) rules details asset reuse (or rehypothecation) prohibition, with the aim of minimising the risks associated with such practices. This means neither the dealer nor client can reuse the assets provided as collateral, and the dealer cannot reuse the assets while they are set aside as collateral.
CIRO is also able to impose restrictions on securities eligible for borrowing when it is considered to be in the interest of clients and the public. To make sure of compliance with the securities eligibility restrictions, dealers are required to maintain a list of securities eligible under their FPL activity based on the restrictions criteria. They are also expected to review their FPL transactions against these criteria monthly and cease loans that do not meet the criteria as soon as possible.
Concluding Canada
With increasing participation in retail lending, the future looks bright for the size of the market.
It is likely that the market will continue on its path of steady growth, although returns will likely remain moderate as opposed to outsized, according to Mak.
The Canadian retail securities lending market is expected to grow according to Interactive Brokers, which highlights that retail FPL is now supported by formal rules taking effect from 27 April 2026, after originally being permitted on a provisional basis in 2019. This regulatory clarity can offer greater confidence in the stability and legitimacy of retail lending programmes going forward.
The market expansion will be driven by improved client education and more familiarity with FPSL programmes, especially surrounding the revenue sharing model as well as the tax and operational risks, suggests Flanagan. He adds that, once retail lending is more broadly understood and accepted, these factors should increase client participation and expand the available pool of retail supply, he does however heed that its scaling will likely be slower compared to institutional channels as a result.
“From a market standpoint, retail inventory will become a more reliable and an integrated source of overall supply as time goes on. Its impact will be particularly significant for hard-to-borrow and small/mid-cap securities, where even a small amount of additional supply can have a significant impact,” he concludes.
The past five years have seen Canadian retail securities lending evolving from a largely institutional, operational function, into a more democratised, platform-driven feature, with brokerages increasingly enabling fully paid lending (FPL) across retail and registered accounts, according to David Mak, managing director of Canadian fintech company, WealthSimple.
“This has driven greater awareness and participation with the perception of securities lending evolving from being viewed as an obscure yield enhancement tool into a visible client feature,” Mak notes.
Dylan Flanagan, director of securities lending at Questrade, agrees that participation has risen, observing that the past five years has seen involvement evolve from a “largely unknown phenomenon” into an increasingly important new source of supply for securities lending desks and a largely untapped source of passive income for retail clients.
As with the rest of the world, Canadian retail trading grew significantly during the Covid-19 pandemic, something Flanagan details as introducing a meaningful amount of potential inventory into the lending ecosystem, causing the opportunity to introduce or expand retail lending programmes in the region to become “hard to ignore”.
This influx of interest transformed the market, something that had previously been operationally challenging, largely underutilised, and generally unfamiliar to clients, was now seen as a feasible and mutually beneficial programme for brokers and retail investors, Flanagan explains.
Driving demand
There is a demand for retail activity in Canada, but what are the key drivers behind it?
According to Mak, it boils down to short selling, volatility, and scarcity of specific securities. He notes that demand tends to concentrate on high short-interest, volatile, or hard-to-borrow securities, with spikes around corporate actions and market events. “When markets are uncertain, or if certain Canadian equities are heavily traded or shorted, borrowing demand increases. Macro factors such as interest rates, inflation, and sector concentrations — for example banks and energy — also influence demand patterns.”
A representative from Interactive Brokers adds that high US demand for certain stocks can boost borrowing needs for their Canadian listings, reflecting the interconnected nature of cross-border equity markets. They also underscore that small cap and penny stocks are typically harder to borrow due to limited supply and lower liquidity, both factors that may provide increased lending income for retail investors that have these securities in their portfolios.
Flanagan cites specific market events such as news, earnings, or corporate actions like mergers or spin-offs as leading demand in the retail space, being used primarily to cover short selling activity.
“In the broader market place, retail assets now compliment institutional supply, especially when that institutional supply begins to get scarce. While the volume from the institutional space is still the primary source of lending activity and dictates overall market pricing and availability, retail availability is becoming more important. It is increasingly viewed not just as a marginal source, but as a viable extension of the overall lending supply,” he explains.
Dripping down
Dividend Reinvestment Plans (DRIPs) are a system that allows investors to reinvest dividend payments automatically to buy additional shares of a company, providing the chance to accumulate shares over time without manually buying on the open market. They can help investors save on transaction costs, due to the fact they pay minimal indirect transactional fees, and no sales commission to their broker on the reinvested dividends.
Mak notes that several Canadian issuers have scaled back or suspended their DRIP offerings, resulting in reduced revenue and the associated lending demand in this asset subset. This idea of scaling back is reaffirmed by a 2025 report by S&P Global which details high inflation and elevated interest rates in Canada have contributed to a decline in the number of companies that offer DRIPs. Firms are instead choosing to preserve cash due to tighter financial conditions, rather than issuing discount shares through reinvestment plans.
Despite the reduction, Mak highlights that retail investors can still have a strong presence by enabling their shares for lending and adding to the supply of DRIP eligible securities by holding dividend-paying securities, enrolling in lending programmes, and keeping shares available through record dates.
Barriers, rules, and regulations
Despite the growing size of Canada’s retail lending market, there remains a number of barriers to entry into the market.
It is the general consensus that there is a lack of awareness and education when it comes to retail lending in Canada that proves to be the biggest hurdle, with a spokesperson from trading platform Interactive Brokers saying there is a perception that securities lending is only for institutional investors.
Flanagan says that the two biggest hurdles are “access and awareness”, before highlighting that involvement is limited to clients working with brokers that offer fully paid securities lending (FPSL) programmes.
Mak agrees that awareness is a limiting factor on participation, alongside risk perception and account eligibility thresholds, with “many” investors not understanding legend mechanics, or confuse it with relinquishing ownership.
Moving on to discuss the Canadian regulatory environment, and how it shapes the development of retail securities lending programmes, Mak explains that Canada’s regulatory environment prioritises investor protection, disclosure, and collateralisation standards. “Brokers must ensure clients understand that voting rights may be temporarily waived and that securities are fully collateralised during lending. Regulation also shapes participation design — programmes must have optionality and be structured to work within registered account frameworks which naturally slows but stabilises retail adoption.”
Flanagan adds that, as a relatively new product in Canada the regulations are still evolving, especially as more brokers begin to launch FPSL programmes and provide industry feedback.
He highlights that, in addition to proper risk disclosure, some account-type restrictions and tax considerations, particularly for registered accounts, need to be properly managed. “These client and operational safeguards are necessary in a safe and transparent marketplace; however, it is important to note that they may increase compliance demands on brokers, which can impact the successful launch and scaling of these programmes,” he adds.
“As a result, retail lending in Canada has developed more gradually and tends to be somewhat conservative, with growth driven by improvements in transparency and client education rather than rapid expansion.”
Section 4625 of the Canadian Investment Regulatory Organization’s (CIRO’s) rules details asset reuse (or rehypothecation) prohibition, with the aim of minimising the risks associated with such practices. This means neither the dealer nor client can reuse the assets provided as collateral, and the dealer cannot reuse the assets while they are set aside as collateral.
CIRO is also able to impose restrictions on securities eligible for borrowing when it is considered to be in the interest of clients and the public. To make sure of compliance with the securities eligibility restrictions, dealers are required to maintain a list of securities eligible under their FPL activity based on the restrictions criteria. They are also expected to review their FPL transactions against these criteria monthly and cease loans that do not meet the criteria as soon as possible.
Concluding Canada
With increasing participation in retail lending, the future looks bright for the size of the market.
It is likely that the market will continue on its path of steady growth, although returns will likely remain moderate as opposed to outsized, according to Mak.
The Canadian retail securities lending market is expected to grow according to Interactive Brokers, which highlights that retail FPL is now supported by formal rules taking effect from 27 April 2026, after originally being permitted on a provisional basis in 2019. This regulatory clarity can offer greater confidence in the stability and legitimacy of retail lending programmes going forward.
The market expansion will be driven by improved client education and more familiarity with FPSL programmes, especially surrounding the revenue sharing model as well as the tax and operational risks, suggests Flanagan. He adds that, once retail lending is more broadly understood and accepted, these factors should increase client participation and expand the available pool of retail supply, he does however heed that its scaling will likely be slower compared to institutional channels as a result.
“From a market standpoint, retail inventory will become a more reliable and an integrated source of overall supply as time goes on. Its impact will be particularly significant for hard-to-borrow and small/mid-cap securities, where even a small amount of additional supply can have a significant impact,” he concludes.
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