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

Call Money Rate

What it is:

The call money rate is the interest rate on the loans banks make to brokerage firms that are borrowing to fund transactions in their clients' margins accounts. Sometimes the call money rate is also called the "broker loan rate," and it is a rate that is generally not available to individuals.

How it works (Example):

Let's assume that Broker XYZ is a brokerage firm that is going to purchase several thousand shares of Company ABC on behalf of 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 believes 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 buy the shares now. BigBank does not establish a payment schedule for Broker XYZ because Broker XYZ expects to complete the transaction 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 call money 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 repay the $2.5 million immediately as well.

Why it Matters:

The call money rate is a 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.

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