Lesson 9 of 20 · 6 min
What a securities-backed line is, and who offers them
A credit facility secured by a pledged brokerage account, offered by banks, brokerages and their affiliates.
With the eight terms in hand, the product itself is easy to describe. A securities-backed line of credit is a revolving credit facility secured by a pledge over a brokerage account, generally usable for purposes other than purchasing securities.
The categories of provider, described generically:
- Private banking and wealth divisions of large banks, usually for existing clients above an asset threshold.
- Bank affiliates of large brokerages, where the pledged account sits at the brokerage and the loan at the affiliated bank.
- Brokerages themselves, offering a non-purpose loan against an account they custody.
- Independent lenders that take a pledge over an account held elsewhere, through a control agreement.
The structural distinction that matters is whether the lender also custodies the collateral. When the same institution holds the account and makes the loan, monitoring and liquidation are internal operations, executable immediately. When a third party custodies, the lender's control runs through a control agreement, which adds a step to the process and does not remove the outcome.
Common features across the market: a revolving structure so amounts can be repaid and redrawn, interest-only servicing with no principal amortisation, a variable rate tiered by balance, no origination fee in many cases, and the eight terms from lessons 1 through 8 in some form. The absence of a fee is worth noticing precisely because the compensation is in the terms rather than in the pricing.
The genuinely distinguishing feature against margin, from Track 1 lesson 17, is the permitted use of proceeds. These facilities exist to fund spending outside the securities markets, and agreements commonly prohibit using the money to purchase securities.
Key terms
- Securities-backed line of credit
- A revolving credit facility secured by a pledged brokerage account, generally not usable to purchase securities.
- Non-purpose loan
- Borrowing secured by securities where the proceeds may not be used to buy securities. The regulatory basis for the distinction from margin.
- Control agreement
- A three-party agreement letting a lender control a pledged account held at a different custodian.
Worked example
The same loan through two structures
A $300,000 line against a $600,000 pledged account.
- Structure A: custodian and lender are affiliated
- Monitoring internal
- Structure A: liquidation process
- Internal operation, same session possible
- Structure B: account held elsewhere
- Monitoring via control agreement and reporting
- Structure B: liquidation process
- Instruction to the custodian, then execution
- Difference in eventual outcome
- None
- Difference in speed
- Real, and not a protection
The structure changes how many steps stand between a breach and a sale. It does not change whether the sale can happen.
Check yourself
What distinguishes a securities-backed line from a margin loan, and does the identity of the provider change the eight terms?
Saved in this browser only. No account, nothing sent anywhere.
Educational only. Nothing in this lesson is investment, legal or tax advice, or a recommendation to enter into any transaction. Figures are illustrative and computed from the inputs stated in the lesson.