Margin Lending

Margin Lending

Banks and other financial institutions offer a variety of financial arrangements to investors wishing to finance investments.

 

Some of the financial arrangements have been specifically developed for the purpose of financing investments, while other arrangements are general purpose loan facilities that may be used to finance investments.

 

Regardless of categorisation, each facility on offer seems to vary from any other. This may be a significant difference or a variation in minor details. Care must be exercised to ensure that those using loan facilities are familiar with the terms and conditions attaching to the facilities they have chosen to utilise.

Margin Loans

A financial institution lends an investor a percentage of the market value of the investments nominated by the investor and approved by the financial institution. The difference between the market value of the investments and the amount of the loan is the margin. The margin must be contributed by the investor.

 

A typical margin lending facility would operate as follows:

 

Amount of Loan

The financial institution would lend between 35 - 70 percent of the market value of the investments.

The financial institution would generally assess the investments nominated by the investor and advise the percentage it was prepared to lend. It is likely that the percentage the financial institution would be prepared to lend would vary over time - a response to numerous factors.

Term of the Loan

There is generally no fixed term. Such loans can often be terminated on 7 days’ notice.

Interest Rate

Facilities tend to be floating rate facilities. However, the majority allow investors to pay interest annually in advance.

Security

 

A mortgage is taken by the lender over the investments.

In many cases, the lender will require the investments to be registered in the lender’s name.

Margin Calls

 

The investor will be required to restore the margin within a stated period by:

i)      repaying part of the loan; or

ii)     lodging additional securities acceptable to the investment.

 

If the investor does not meet a margin call, the lender is generally empowered to:

i)      sell the investments;

ii)     pay out the loan; and

iii)    seek payment of the difference of the proceeds of sale and   the loan from the investor.

Credit Assessment

The lender does not require the investor to provide it with detailed information about the investor’s financial position prior to the commencement of the loan.

Source:  Integratext July 2002 Edition