How is a Lombard loan secured?

A Lombard loan is secured by a pledge: the borrower grants the lender a security interest over securities in a custody account but remains their owner. The lender may realise them — usually by selling — only on a default defined in the pledge agreement, such as an uncured margin call, and must release them once everything they secure has been repaid.

What the security allows and how it ends turn on the law of the account and on who the borrower is. This note sets out Swiss law alongside the EU and UK financial collateral rules as they stand at 20 October 2026; it is general information, not legal advice.

What does it mean to pledge securities?

A pledge is a security interest: a right over an asset that secures a debt without transferring ownership of it. The borrower who grants it is the pledgor — in the financial collateral rules, the collateral provider — and the lender who takes it is the pledgee, or collateral taker. If the loan is repaid, the pledge ends; if the borrower defaults, the lender may realise the asset — usually by selling it — and pay itself from the proceeds. That is what separates a Lombard loan from a sale.

The Swiss Civil Code — the ZGB, or CC, SR 210 — gives a creditor who is not paid “the right to satisfy his or her claim from the proceeds of the pledge”, and the security covers contractual interest, debt enforcement costs and default interest as well as the debt (Article 891; quotations from Swiss statutes here use the unofficial English translations on Fedlex). Movable things are pledged by handing possession to the pledgee (Article 884).

Handing over possession does not suit a portfolio held in a custody account, and for such holdings the Code defers to another statute: the pledging of intermediated securities “is governed exclusively” by the Federal Intermediated Securities Act (Article 901(3)).

Lombard Financing acts as an introducer and arranger. The lending and custody in a facility it arranges are conducted through, or in collaboration with, institutions holding the appropriate authorisation, and it is the lender that takes the security.

How is the pledge created over securities in a custody account?

In Switzerland, securities in a custody account are pledged under the Federal Intermediated Securities Act: by agreement with a custodian that is itself the lender, by a control agreement, or by transfer to the lender’s account.

Under the Federal Intermediated Securities Act — FISA, or BEG, SR 957.1, in force since 1 January 2010 — fungible claims or membership rights against an issuer that a custodian has credited to a securities account are “intermediated securities”, which the account holder disposes of under the Act rather than by moving paper (Article 3). The Act offers three ways to give a lender security that holds good against third parties:

• Agreement with the custodian. Where the custodian is itself the lender, an agreement in its favour is effective against third parties from the moment it is concluded (Article 26). Nothing moves.
• Control agreement. Where the lender is a third party, the account holder and the custodian agree irrevocably that the custodian will carry out the lender’s instructions “without any further consent or cooperation on the part of the account holder” (Article 25). The securities stay in the borrower’s account.
• Credit to the lender’s account. On the account holder’s instruction, the securities are transferred to an account of the lender (Article 24).

The first two may cover specific securities, the whole account, or a portion of it up to a specified value (Articles 25(2) and 26(2)). Other rights often sit alongside the facility’s own pledge and can rank ahead of it.

A custodian may retain and realise securities for a due debt arising from their custody or from financing their purchase (Article 21), and the published general terms of Swiss banks commonly add a general lien over everything the bank holds for the client and a right to set off the client’s claims against the bank, as UBS’s general terms (January 2026 edition) and Rothschild & Co Bank’s general business conditions (version 05.23) both do.

Between dispositions under the Act, the earlier ranks first (Article 30(1)), so a lien in the custodian’s own terms usually ranks ahead of a later control agreement; but a custodian that signs a control agreement without expressly telling the lender of its own earlier rights ranks behind the lender (Article 30(2)).

The EU Financial Collateral Directive — Directive 2002/47/EC — and the UK’s Financial Collateral Arrangements (No. 2) Regulations 2003 — SI 2003/3226 — ask instead whether the collateral is “in the possession or under the control” of the collateral taker; a right to substitute collateral or withdraw any excess does not undo that (Directive, Article 2(2); regulation 3). The Directive also bars member states from making the creation, validity, perfection or enforceability of an arrangement depend on any formal act (Article 3(1)). London practice is described on the page on Lombard loans in the United Kingdom.

Who owns the shares during a Lombard loan?

The borrower remains the owner of the shares during a Lombard loan. The Directive defines a security arrangement as one in which “the full or qualified ownership of, or full entitlement to, the financial collateral remains with the collateral provider” (Article 2(1)(c)). Under an agreement with the custodian or a control agreement the securities never leave the borrower’s account, and the Civil Code’s rule for pledged shares is that they are represented at general meetings “by the shareholder rather than the pledgee” (Article 905); FISA itself says nothing about voting.

The FCA’s client-assets sourcebook draws the same line. Under a bare security interest the asset “continues to belong to the client” until the firm’s right to realise it crystallises on default; under a right-to-use arrangement, once the firm treats the asset as its own, it “ceases to belong to the client” (CASS 3.1.7G). Short of enforcement, ownership changes hands only through a title transfer or an agreed right of use. Income and corporate actions follow ownership, subject to the facility’s terms, as the note on dividends and corporate actions in a Lombard loan explains.

What does a pledge agreement contain?

A pledge agreement sets out what is secured and what is pledged, how lending values and margin calls work, what allows enforcement, any right of use, and how income, votes and release are handled. The pledge agreement — a separate agreement or part of the credit documentation, read with the bank’s general terms — turns the statute into a working facility. The terms that matter most to a borrower:

• What is secured — usually all present and future amounts under the facility; under a general lien, often every claim arising from the banking relationship.
• What is pledged — specific securities, the whole account or a value-limited portion, with rules for adding, substituting and releasing collateral.
• Lending values and margin — how each line is valued, when a call arises and how long the cure period runs, as set out in how loan-to-value is set.
• Default and remedies — what allows enforcement, whether by private sale or appropriation, and how value is fixed.
• Right of use — whether the lender may re-use the securities at all, which the agreement should settle expressly.
• Income, votes and release — who receives dividends and votes while the facility performs, and how the security is discharged, in whole or in part.

Pledge, charge or title transfer: what is the difference?

A pledge and a charge are both security interests: the lender acquires rights over the asset to secure the debt, and the borrower stays the owner. “Pledge” is the Swiss term; English law has several forms, and the 2003 Regulations’ definition of a security interest lists a pledge, a mortgage, a fixed charge, a floating charge where the collateral is in the collateral-taker’s possession or under its control, and a lien (regulation 3).

A title transfer is different in kind: the borrower transfers “full ownership” to the lender (Directive, Article 2(1)(b)), which must transfer back equivalent securities once the debt is discharged (regulation 3). A pledge with a right of use sits between the two.

The table summarises legal structure only; the terms of a particular facility govern. In the EU, MiFID II bars investment firms, and banks when providing investment services, from concluding title transfer financial collateral arrangements with retail clients (Articles 16(10) and 1(3)(a) of Directive 2014/65/EU).

When can the lender sell pledged shares, and must it give notice?

A lender may sell pledged shares only when the conditions agreed in the security agreement are met: in practice an event of default, such as a margin call left uncured or a missed payment. The Directive calls this an “enforcement event” (Article 2(1)(l)). Until it occurs, the lender has security, not a right to sell.

FISA then lets the secured party sell the securities and set the proceeds off against the debt, or appropriate securities “whose value can be determined objectively” and credit their value against it (Article 31(1)). Appropriation is something the Civil Code does not allow for pledged chattels: it voids any agreement that the pledged item becomes the pledgee’s property on default (Article 894).

The secured party’s power of realisation survives debt enforcement, reorganisation or protective proceedings against whoever provided the collateral (Article 31(2)), and a lender that realises without the agreed conditions being met is liable for the loss (Article 31(4)); that liability is the borrower’s main protection, because the custodian is neither bound nor entitled to check whether the conditions for realisation are met (Article 31(3)).

Two further protections follow. The secured party must give notice before realisation, which only a custodian or a qualified investor — a supervised insurer, a public-law body, a pension fund or a company with professional treasury management — may waive, so an individual, or any other client that is not a qualified investor, cannot; and it must account for the realisation and pay over any surplus (Articles 32 and 5(d)).

Swiss bank terms commonly reserve a choice between private sale and formal enforcement under the Debt Enforcement and Bankruptcy Act — DEBA, or SchKG, SR 281.1 — in which the debt enforcement office issues a summons for payment allowing one month where the pledge is over movables or rights (Articles 37(2), 41(1) and 152(1)). Whether the lender may pursue the borrower’s other assets for a shortfall depends on the recourse agreed, as the note on non-recourse Lombard loans explains.

Within the Directive’s scope, appropriation requires agreement on it and on valuation, and realisation needs no prior notice, court approval, public auction or waiting period unless the agreement provides otherwise (Article 4(2) and (4)). The UK Regulations allow agreed appropriation without a court order for foreclosure, subject to a commercially reasonable valuation (regulations 17 and 18). Either way, a forced sale is a disposal, with the tax consequences set out in the note on borrowing against shares and capital gains tax.

Can the lender re-use or rehypothecate pledged securities?

A lender cannot re-use or rehypothecate pledged securities without the borrower’s consent. Re-use, or rehypothecation, means the lender lending, selling or re-pledging the securities for its own purposes against a promise to return equivalent ones. For pledged chattels and paper certificates, the Swiss Civil Code allows re-pledging only with the pledgor’s consent (Article 887) and makes a pledgee that disposes of or re-pledges the pledged item without authority liable for the resulting damage (Article 890(2)).

Securities held in an account fall under FISA instead (Article 901(3)), which regulates only the custodian’s right of use; a third-party lender’s position turns on the pledge agreement, which should exclude re-use expressly.

Where the lender is the custodian of the account, FISA requires the account holder to authorise any such right of use; unless the account holder is a qualified investor, the authorisation must be in writing and “may not be included in general terms and conditions” (Article 22). A custodian that re-pledges collateral it holds must return securities of the same number and kind no later than the date the secured debt falls due (Article 23).

In the EU a right of use exists only “if and to the extent that the terms” of the arrangement provide for it, with equivalent collateral due by the due date (Directive, Article 5).

Where the Securities Financing Transactions Regulation applies — to collateral arrangements between financial and non-financial undertakings, so not usually to an individual’s own pledge — re-use also requires written disclosure of the risks and the provider’s prior express consent (Article 15(1) of Regulation (EU) 2015/2365), and MiFID II requires investment firms, and banks when providing investment services, to prevent the use of client securities for their own account without express consent (Articles 16(8) and 1(3)(a) of Directive 2014/65/EU).

The UK Regulations likewise recognise a right of use only where the arrangement provides one (regulation 16). Once securities are re-used they no longer belong to the client, as the FCA guidance quoted above explains; what remains is a claim for equivalent securities.

Does it matter whether the borrower is an individual or a company?

Whether the borrower is an individual or a company matters: the EU and UK financial collateral regimes are written for institutions and companies, and an individual borrower falls outside both. Under the Directive both parties must belong to listed categories — public bodies, central banks, supervised financial institutions, central counterparties and, last, “a person other than a natural person” dealing with one of them (Article 1(2)) — so an individual is outside it, and national law decides.

The UK Regulations require both parties to be “non-natural persons” (regulation 3). An individual’s security over shares therefore falls back on the general law, without the Regulations’ relaxed formalities or their appropriation remedy; a family holding company can be inside them, and the Companies Act 2006 charge-registration provisions, sections 859A and 859H, then do not apply to the arrangement (regulation 4(4)).

As of October 2026 the UK Regulations remain in force, although the Financial Services and Markets Act 2023 provides for their revocation (section 1(1) and Schedule 1, Part 2, to be commenced by Treasury regulations under section 86(3)).

FISA, by contrast, applies to intermediated securities credited by a custodian whoever holds them (Article 2(1)), but reserves its relaxations — waiving notice before realisation, or granting a right of use without a stand-alone written authorisation — to qualified investors. A holding structure of the kind described in the note on portfolio-backed credit in family-office structures can change which of these rules apply.

Swiss, EU and UK rules side by side

The table compresses the statutory texts; the arrangement, its governing law and the status of the parties decide how they apply.

What happens to the pledge when the loan is repaid?

Once everything the pledge secures has been repaid and the facility is closed, it ends and the securities are released. For pledged chattels, the Civil Code’s rule is that the pledgee must return the pledged item once the pledge is extinguished by payment of the debt or for another reason, but need not do so, in whole or in part, until its claim has been fully satisfied (Article 889).

FISA has no equivalent rule for securities in an account, so whether a partial repayment frees any securities depends on the pledge agreement, as does the form of the release: ending the custodian agreement or the control agreement, or transferring the securities back.

One point is easily missed. A bank’s general lien commonly secures claims arising from the whole banking relationship, not only the Lombard loan, so repaying the loan may not free the assets if other amounts are owed; a borrower moving a portfolio elsewhere should expect them to be settled first. The firm’s process treats release as the closing step of a facility.

What to settle with counsel before signing

Four points are worth settling with counsel before signing: the governing law and perfection of the security, any right of use, the default, notice and appropriation terms, and any custodian lien or set-off ranking ahead. This note describes the statutes, regulations and published terms as they stand at 20 October 2026. It is general information, not legal advice, and the primary texts govern wherever a summary differs. The questions most worth putting to counsel:

• Which law governs the pledge and the account, and which route creates and perfects the security?
• Does anyone have a right of use, and if so, what is returned and when?
• What is an event of default, what notice is given, and may the lender appropriate rather than sell?
• Does the custodian hold a general lien or set-off right that ranks ahead of the facility, and has it been waived or subordinated?

For Swiss custody and security in more detail, see the page on Lombard loans in Switzerland; for why a pledge is not a stock loan, the comparison of Lombard, margin and stock loans; and for what the borrower keeps, the note on how to borrow against shares without selling. Sourcing is explained in the editorial standards, and the legal position in the disclosures.