What happens if your shares fall?

If the value of pledged shares falls, the loan-to-value ratio rises, and the lender may issue a margin call — a request to add collateral or repay part of the loan to restore the agreed ratio. If it is not met, the lender can sell some of the collateral. Understanding these thresholds is central to using Lombard credit safely.

How a margin call is triggered

A margin call is a consequence of arithmetic. A Lombard loan advances a fixed sum against collateral whose value moves. The relationship between the two is the loan-to-value ratio — the loan divided by the current market value of the pledged securities. When the collateral falls, the denominator shrinks while the loan stays put, so the ratio rises. Every facility carries a maximum LTV; when the ratio reaches it, the lender issues a margin call to bring it back down.

Two things besides the share price can push the ratio up. Interest that is rolled up rather than paid adds to the loan, lifting the numerator over time. And where the loan and the collateral are in different currencies, a fall in the collateral currency against the loan currency raises the effective LTV even if the shares themselves are steady. This is why the advance rate is set with headroom: the gap between the opening LTV and the trigger is the cushion that absorbs a fall. How that opening rate is calibrated is the subject of how much you can borrow against shares.

A worked example: a 20% and a 30% fall

An example makes the mechanics concrete. The figures below are illustrative and rounded; they are not an offer, a quotation, or a statement of the firm’s terms — they simply show how the ratio moves. Take a portfolio worth 100 against which a loan of 50 has been drawn: an opening loan-to-value of 50%, within the broad ~20%–65% envelope these facilities operate in. Assume the facility carries a margin trigger at an LTV of 65%.

A 20% fall leaves the ratio uncomfortable but inside the trigger; the holder keeps a thinning cushion and no action is required. A 30% fall carries it through the trigger, and a call follows. To return to the opening 50% ratio against a collateral value of 70, the holder could repay about 15, pledge roughly 30 of further collateral, or accept the sale of part of the pledged stock to the same effect. The lesson is in the asymmetry: a 30% fall in the shares demands a repayment of nearly a third of the loan, and it tends to arrive precisely when selling is least welcome. It is also why the opening ratio matters so much: had the loan been drawn at 40% rather than 50%, the same 30% fall would have lifted the ratio only to about 57%, comfortably inside the trigger, and no call would have arisen at all.

Warning thresholds and cure periods

In practice a well-structured facility does not wait for the trigger to be breached before anyone speaks. Lenders typically set a warning or buffer level below the hard trigger, at which the borrower is notified that headroom is thinning — a chance to act before a formal call. When the trigger is breached, the lender issues the margin call and sets a cure period: a defined, usually short window — often a small number of business days, and sometimes shorter in fast-moving markets — within which the borrower must restore the ratio.

The exact levels, the notice, and the cure period are set out in the facility documents and agreed at the outset, not improvised in the moment. Reading and negotiating them before signing is part of using the instrument well; how interest accrues, which quietly affects the ratio, is covered alongside pricing in Lombard loan interest rates and costs.

Communication in practice runs off the custodian’s daily mark-to-market. The pledged portfolio is revalued each business day, so both lender and borrower can see the ratio move well before it approaches a limit. A borrower who watches that figure — rather than waiting to be told — is rarely surprised by a call, and keeps the most time to choose how to respond. The worst position is not a falling market; it is a falling market discovered late.

Your options when a call is made

When a call arrives, there are three ways to meet it, and they can be combined.

Top up the collateral. Pledging additional securities or cash raises the denominator and restores the ratio without touching the loan. This is often the least disruptive route for a holder with other assets to hand.

Repay part of the loan. Paying down principal lowers the numerator directly. It reduces leverage as well as curing the call, which can be the wiser response if the fall looks structural rather than temporary.

De-risk the position. Selling part of the pledged portfolio — whether by your own choice or, failing action, by the lender — brings both the loan and the collateral down together. Doing it yourself, early and in order, is almost always better than leaving it to a forced sale.

The one option that does not exist is inaction. A call that is ignored is met by the lender on its own terms, which is the very outcome every other option is designed to avoid.

How to structure a loan to reduce the risk

Most margin-call trouble is designed out at the start, not managed at the end. Four measures do most of the work.

Borrow below the maximum. The single most effective defence is to draw well under the available advance rate, so the opening LTV sits far below the trigger and a large fall is needed to reach it. The headroom you decline to use is the headroom you keep.

Diversify the collateral. A broad, liquid portfolio falls less sharply and less suddenly than a single stock, and it is far less likely to gap through a trigger on one company’s bad day. Concentrated single-name pledges carry the most margin risk, and the most conservative advance rates, for exactly this reason.

Keep a buffer. Holding cash or unpledged securities in reserve means a call can be met at once, from assets already earmarked, rather than by a forced sale into a falling market.

Mind the interest and the currency. Servicing interest rather than rolling it up keeps the loan from creeping upward, and matching the loan currency to the collateral removes a second source of LTV drift. Together these measures turn a margin call from a crisis into a manageable event, and often prevent it arising at all. The wider mechanics of the instrument are set out in our guide to what a Lombard loan is.

Non-recourse, and how it changes the picture

A non-recourse structure changes the consequences of a fall, though not the call itself. In a conventional full-recourse loan the borrower is personally liable for any shortfall: if the collateral is sold and does not cover the loan, the lender can pursue the borrower for the difference. In a non-recourse loan the lender’s claim is limited to the pledged collateral; if it proves insufficient, the lender bears the shortfall, not the borrower.

This matters at the extremes. Non-recourse caps the borrower’s downside at the collateral, which is valuable protection against a severe, permanent fall. But it does not remove the margin call, and it does not stop the lender selling the collateral to protect itself — if anything, a non-recourse lender monitors and acts more promptly, because it cannot look beyond the collateral. Non-recourse terms are also priced for the risk the lender retains, so they carry lower advance rates and a wider spread. Whether recourse or non-recourse suits a given holder is a structuring decision, examined in non-recourse Lombard loans.