Call Loan Rate

The interest rate charged by banks on the loans made to the brokers for funding the margin loans granted by the brokers to their clients

What is the Call Loan Rate?

The call loan rate refers to the interest rate that the banks charge on the loans made to brokers for funding the margin loans by the brokers to their clients. Since brokers seek to make a profit on their own margin loans, they provide margin loans at the call loan rate premium. The margin loan rate is quoted relative to the call loan rate that is published daily in various periodicals. A call loan rate is sometimes referred to as the broker’s call.

 

Call Loan Rate

 

Summary

  • The call loan rate refers to the interest rate that the banks charge on the loans made to the brokers for funding the margin loans granted by the brokers to their clients.
  • It is the interest rate charged on call loans that are payable by the brokers immediately or on-demand once requested by the bank.
  • Sometimes even a fairly well-funded margin account can be called back by the broker-dealer if the bank calls the loan that was made to the broker-dealer.

 

Understanding Call Loan Rates

The call loan rate is the interest rate charged on call loans that are payable by brokers – immediately or on-demand – once any such request is received from the bank or other lending institution. If the broker-dealers suspect that their loan may be called by the bank, they can execute a margin call on traders who have borrowed money from them.

The call loan rate is determined on a regular basis and can vary based on variables, such as supply and demand of funds, market interest rates, and economic conditions. The call loan rate is usually issued in publications every day, including the Investor’s Business Regular (IBD) and the Wall Street Journal (WSJ). The call loan rate then includes a risk premium dependent on the presumed credit risk of the broker, along with other considerations.

The call loan rate is an essential aspect of the supply chain responsible for supplying leverage to traders from their margin accounts. From the point of view of the margin broker-dealer, the loan originates from their brokerage firms, and the broker-dealers must ensure that there’s sufficient collateral in their account to make sure that their margin loan is not called by the broker.

Sometimes even a fairly well-funded margin account can also be called back by the broker-dealer if the bank calls the loan made to that broker-dealer. Therefore, a margin trader can face a call for a margin for reasons not linked to the degree of risk of his/her own account. While such incidents are uncommon, they do arise in circumstances where financial anxiety extends through economies, such as an economic slowdown.

 

Working of a Margin Account

A margin account is a form of trading account in which the broker-dealer loans cash to the clients for buying the securities. The loan is backed by shares invested in the portfolio and by cash needed to be deposited by the holder of the margin account. A margin account allows clients to take advantage of leverage.

Investors are allowed to borrow funds equivalent to half of the purchase price of a security, and therefore trade a greater position than they would’ve otherwise been able to. Although it comes with the potential to maximize earnings, margin trading can also result in increased losses.

Investors should be authorized to maintain margin accounts and must make a certain initial deposit in the margin account. The required initial deposit is known as the minimum margin. If a loan’s been accepted and financed, borrowers can repay up to 50% of the purchasing price of the loan. If the value of the account falls below the specified minimum – known as the servicing margin – the broker may force the account manager to invest additional funds or to liquidate the securities to repay the loan.

Margin is perfect for retail investors where markets are growing with little volatility, and risky while volatility is growing and markets are heading south. Losses are compounded, and the only alternative at such a stage is to sell and cover the needs for margins.

 

Additional Resources

CFI is the official provider of the global Certified Banking & Credit Analyst (CBCA)™ certification program, designed to help anyone become a world-class financial analyst. To keep advancing your career, the additional resources below will be useful:

  • Credit Risk
  • ECN Broker
  • Lender
  • Market Risk Premium