What is Call Money?
How Does Call Money Work?
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. The client 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 Does Call Money Matter?
Call money is a way for brokerage firms 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 that lubricates markets.
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