(broker)The amount of this note is placed to the broker's credit at once and the check presented is certified. This note is presented about ro or II o'clock, and must be paid by 3 o'clock on the afternoon of the same day. No interest is charged on it; all the bank's profit is from the balances which the brokers agree to carry with it; the broker has the use of the funds for a business day, that is, for a few hours, and, except for the custom to the contrary, banks could legitimately ask interest, since the broker gets as much value out of the use of those funds for the few hours as if it were named a call loan and he had the use of it a full day.
In Ioro the New York Stock Exchange organized the Stock Clearing Corporation, which took over the functions previously performed by the clearing house of the exchange. It introduced a day clearing, whereby it clears stock contracts and money loans. Contributions from members are received by it for a clearing fund. The scheme is designed to reduce the demand . for day loans or overcertification at the banks. It reduces to a minimum the advances of banks to brokers for the purpose of paying off loans. Under the former system when a loan was called which the broker desired to reborrow, it was necessary for him to secure an intermediate credit from his bank for the pur pose of paying off the loan. Under the new plan the banks send to the Stock Clearing Corporation the collateral of the loans to be paid off, and while the securities are there the old loans are paid and the new loans made, and at the same time changes in the collateral are effected. These operations are executed through a system of checks drawn on the clearing fund. By this means it was expected that the reduction of balances required at his bank would compensate the broker for his contribution to the clearing fund.
Margins on Stock Brokers' Loans Margin may be defined as the excess of the market value of collateral security over the principal of the loan, which security the borrower is required to deposit for the lender's protection. The margin is usually stated in percentage of the market value of the collateral, and the percentage varies with the kind or kinds of collateral, with the steadiness of the market price of the col lateral, with the bank, with the borrower, and with the special conditions attending the loan.
On regular stock exchange loans the custom of Wall Street is to require a 20 per cent margin on stocks or bonds or both.
This margin has become so fixed, as the general estimate which bankers place on the safety limit, that competition as between the banks does not tend to reduce it; inducements to customers are made by reductions in the interest rate rather than by reduc tions in the margin. Favors are scarcely ever shown in regard to margin; a firm having a good balance with the bank is required to keep its loans fully margined in the same way as the broker who has no account with the bank. However, the condition of the broker's box (the receptacle in which the broker keeps his securities in his office) has a great deal to do with the bank's liberality toward him with respect to margins and collateral. In the case of an "all-bond" loan, of which there are relatively few, the amount of margin may vary from 7 to ro per cent on United States government bonds or approved municipal bonds, to 20 per cent on second-class railroad bonds. If a broker borrowing money offers the bank collateral made up entirely or principally of bonds of the mixed variety, the bank will require the regular zo per cent margin. The majority of brokers figure fairly closely on margins, but a few make a practice of keeping, say, 25 per cent or more, on their loans at all times.
Requirements as to Collateral Stocks and bonds have become the most common form of collateral, and the stocks and bonds most approved as collateral have until recently been the issues of railroads of good standing. In recent years securities of certain industrial corporations have attained to a rank co-ordinate with railroad securities. During the transition period it was the custom of Wall Street to require for loans at the best rates that at least a certain minimum per centage of the collateral consist of railroad securities, permitting the rest to be made up of industrials. Several things raised the status of industrials: (I) the increasing proportion of stock exchange transactions that were concerned with industrials rather than rails; (2) the greater steadiness of values and proved stability and soundness of certain industrials; (3) the dearth of rails for collateral purposes, so many having been absorbed and removed from the market by the public. The ratio shifted from 65:35 to 50:50, and in 1919 certain banks began to make no discrimination between "mixed" and "all-industrial" and "all rail " loans.