Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Broker Loan Rate

What it is:

The broker loan rate is the interest rate on bank loans made to brokerage firms that are borrowing to fund transactions in their clients' margins accounts. Sometimes the broker loan rate is also called the "call money rate.” It is a rate that is usually not available to individuals.

How it works (Example):

Let's assume that Broker XYZ is a brokerage firm that wants to purchase several thousand shares of Company ABC for a large client who wants to purchase the shares on margin. The shares cost $2.5 million, and the client agrees to pay Broker XYZ for the shares in 28 days.

Because Broker XYZ trusts the client will pay the money back as planned, Broker XYZ borrows $2.5 million in call money from BigBank so that Broker XYZ and its client can purchase the shares now. BigBank does not establish a payment schedule for Broker XYZ because the transaction is expected to be completed relatively quickly. However, BigBank reserves the right to call the loan (i.e., require Broker XYZ to repay the $2.5 million immediately) at any time.

BigBank sets the broker loan rate at LIBOR + 0.15%. If the bank chooses to call the loan before the 28 days is up, Broker XYZ can issue a margin call to its client, thereby requiring the client to pay $2.5 million immediately.

Why it Matters:

The broker loan rate is the cost brokerage firms pay to finance margin accounts or trade for their own accounts. Because call loans are unsecured and callable, they are in some ways riskier than other loans, but they also provide short-term liquidity to the financial markets.