Borrowing against securities can be a strategic financial tool, but it’s crucial to understand it may not suit every investor. A securities-based loan comes with inherent risks, notably the possibility of maintenance calls on short notice, and the amplification of potential losses due to market volatility. Morgan Stanley Private Bank offers securities-based lending solutions, and it’s vital to be fully aware of the implications before proceeding.
Key Risks of Securities Based Lending at Morgan Stanley Private Bank
Before engaging in securities-based lending with Morgan Stanley Private Bank, it is imperative to consider the following significant risks:
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Collateral Requirements: Maintaining sufficient collateral is mandatory to secure your loan and any future advances. This means the value of your pledged securities must consistently meet Morgan Stanley Private Bank’s requirements.
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Potential for Margin Calls: You might be required to deposit additional cash or eligible securities promptly. These maintenance calls can occur with little warning, often due to market fluctuations that decrease the value of your collateral.
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Liquidation of Securities: Morgan Stanley Private Bank reserves the right to sell some or all of your securities without prior notification to maintain the required account equity levels. Critically, you will not have the autonomy to select which securities are liquidated. This forced selling can disrupt your long-term investment strategy, potentially lead to adverse tax consequences, and may incur additional fees.
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Discretionary Funding: Morgan Stanley Private Bank retains the discretion to deny any advance request if there’s insufficient collateral or for any other reason. An exception exists for any portion of a securities-based loan explicitly identified as a committed facility.
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Changes in Collateral Maintenance Requirements: Morgan Stanley Private Bank can increase your collateral maintenance requirements at any time, without prior notice. This means you could be asked to provide more collateral even if your initial loan terms are unchanged.
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Loan Recall: Morgan Stanley Private Bank reserves the right to call securities-based loans at any time and for any reason. This means they can demand immediate repayment of the loan principal, regardless of whether you are in default or not.
Understanding the Line of Credit (LOC) Product from Morgan Stanley Private Bank
Morgan Stanley Private Bank, National Association, an affiliate of Morgan Stanley Smith Barney LLC, offers a securities-based line of credit product known as LOC. It’s important to note that all LOC lines of credit are subject to Morgan Stanley Private Bank, National Association’s underwriting standards and independent approval process.
The Annual Percentage Rate (APR) for LOC is calculated based on a 360-day year and encompasses both the interest rate and certain associated fees. A processing fee, currently $10, applies to LOC payments made by check. Additional bank fees that might be applicable are detailed here.
Your LOC interest rate is variable, based on an index plus a margin. The index is currently composed of two parts: 1) the 30-day rolling compounded average Secured Overnight Financing Rate (SOFR), published by the Federal Reserve Bank of New York, and 2) a variable rate adjustment. The SOFR rate can be reset every business day (or the next business day if a holiday occurs). The margin, or interest rate spread, is a percentage added to the index. Consequently, your interest rate will fluctuate with changes in the index. Current rates can be found here.
LOC availability may be geographically restricted, and all rates, terms, and conditions are subject to change without notice. If your Line of Credit collateral includes assets in a managed portfolio, failing to meet a maintenance call could result in the termination of the advisory agreement linked to that portfolio.
Eligibility for a LOC requires clients to hold a brokerage account at E*TRADE from Morgan Stanley containing eligible securities, which will serve as loan collateral. Other restrictions may apply. The information provided here should not be interpreted as a loan commitment. Morgan Stanley Private Bank, National Association is a Member FDIC and is primarily regulated by the Office of the Comptroller of the Currency.
Crucially, proceeds from a LOC, including draws and advances, are restricted. They cannot be used to purchase, trade, or carry margin stock; repay margin debt incurred from purchasing, trading, or carrying margin stock; or be deposited into any brokerage account at E*TRADE from Morgan Stanley, Morgan Stanley Smith Barney LLC, or any other brokerage.
In conclusion, securities-based lending, especially through products like Morgan Stanley Private Bank’s LOC, presents both opportunities and significant risks. A thorough understanding of these risks and restrictions is essential before considering such financial instruments. Prospective borrowers should carefully evaluate their financial situation and investment goals in light of these factors and consult with a financial advisor at Morgan Stanley Private Bank to determine if securities-based lending aligns with their needs.
