Cross-currency Lombard loans.

A cross-currency Lombard loan is a portfolio-backed loan drawn in one currency against collateral denominated in another — for example, borrowing US dollars against a pledged portfolio of Swiss-franc or sterling shares. The structure is deliberate, and it introduces a second variable that the borrower and the lender both watch closely: the exchange rate between the loan currency and the collateral currency.

Why borrow in a different currency

Most cross-currency facilities exist because the borrower’s need and the borrower’s assets are in different currencies. A founder whose wealth sits in a US-listed technology holding may need Swiss francs to complete a Geneva property purchase; a family whose portfolio is denominated in euros may want US dollars to meet a dollar commitment. Selling the shares to raise the right currency would end the position and trigger a disposal. A Lombard loan raises the cash instead, and it can be drawn in whichever currency the liability is in — the collateral does not have to match.

There is also a pricing dimension. The reference rate differs by currency — SOFR for US dollars, SONIA for sterling, EURIBOR for euros, SARON for Swiss francs — so the currency a facility is drawn in changes the base cost of the money before any spread. Borrowers sometimes weigh that in choosing the drawing currency, though the reason for the loan usually settles the question.

How FX exposure feeds the loan-to-value

The lender’s security is the collateral; the loan is the liability. When the two are in different currencies, the ratio between them — the effective loan-to-value — moves with the exchange rate as well as with the share price. If a portfolio is priced in euros and the loan is in dollars, a fall in the euro against the dollar raises the loan-to-value even though the shares have not moved, because the same collateral now covers a larger dollar debt when translated.

Lenders answer that risk in two ways. First, they monitor the facility in a single reference currency, translating both sides at the prevailing rate so the true coverage is always visible. Second, they apply a more conservative loan-to-value at the outset — a currency haircut — so there is room to absorb an adverse move before the facility comes under pressure. The larger and more volatile the expected mismatch, the larger that haircut tends to be. A dollar loan against a portfolio of dollar-denominated shares carries no such haircut; a dollar loan against collateral in a thin, volatile currency carries a substantial one.

When an FX move triggers a margin call

Because currency feeds the loan-to-value, currency can trigger a margin call on its own. If the collateral currency weakens far enough against the loan currency, the effective loan-to-value can climb through the agreed threshold even in a flat or rising equity market. The borrower then faces the same choices as in any margin event — post additional collateral, repay part of the loan, or see collateral realised — but the cause is the exchange rate, not the shares. This is the central risk of an unhedged cross-currency facility, and it is why the structure is arranged conservatively.

How the currency risk is hedged

The exposure can be managed rather than simply carried. The most direct hedge is to match the loan currency to the borrower’s own cash flows: if the loan will be serviced and repaid from income in the loan currency, the mismatch that matters is reduced. Where that is not possible, a forward contract can fix the exchange rate for the term, converting an uncertain future rate into a known one; a currency option can cap the downside while leaving room to benefit if the rate moves favourably, in exchange for a premium.

Each of these has a cost, and that cost has to be weighed against the reason for borrowing across currencies in the first place. Hedging a mismatch away entirely can erode the advantage that made the cross-currency draw attractive; leaving it open exposes the facility to margin risk from the exchange rate. The right balance is specific to the borrower, and it is a decision taken deliberately rather than by default.

How the facility is arranged

A cross-currency Lombard loan is structured the same way as any Lombard facility — a pledge of the securities to a custodian, a defined loan-to-value, an agreed recourse profile, and a term — with the currency mismatch handled explicitly in the documentation and the monitoring. The loan-to-value is set with the currency risk in view, the reference currency for monitoring is agreed, any hedge is documented alongside the facility, and the pricing follows from there. Where a facility spans a Swiss-franc base and international collateral, it is arranged the same disciplined way as a single-currency loan; the mismatch is a parameter, not an obstacle.