Series 7 – Margin Accounts

Margin Accounts
 Long margin: customer borrow money
 Short margin: customer borrows securities
Margin Agreement *Mandatory
 Credit agreement *
 Hypothecation agreement*: gives permission to B/D to pledge customer margin securities as collateral. All customer securities
must be held in street name.
 Loan consent form: permission to the firm to loan customer margin securities to other customers or B/D
 Interest paid by margin customers on money borrows is a variable rate based on broker call rate
 Risk disclosure: before opening acct and on an annual basis
Regulation T (Act of ’34)
 Customer must deposit min 50% of MV within 2 days of settlement (both cash and margin accts)
 Margin: amount of equity that must be deposited to buy securities
 Marginable: securities that can be used as collateral – FRB determines
o Exchange-listed stocks, bonds
o Nasdaq stocks
o Non-Nasdaq OTC issues approved by the FRB
o Warrants
 Cannot be purchased on margin nor used as collateral
o Put/call options
 Need to deposit 100% of premium (exception with LEAPS w/ 9+ months to expiration for
initial/maintenance requirement of 75%, then 100% when less than 9 months)
 Option spreads: deposit max loss
o Rights
o Insurance contracts
 Cannot be purchased on margin, but can be used as collateral
o Mutual Funds / Open-end funds / new issues if fully held for > 30 days
 Exempt from Reg T: T-bills/notes/bonds, gov agency and munis
FINRA
Purchase Deposit
<$2,000 100%
FINRA
$2,000-4,000 $2,000
>$4,000 50% Reg T
 If a short sale margin requirement is less than $2,000, the required deposit is still $2,000
 Deposit must be made in 4 business days after trade date (settlement + 2 days)
 Exceptions granted only by FINRA, registered stock exchanges, Federal Reserve banks
Deadline for Margin Calls
 In cash or fully paid marginable securities valued twice (200%) the amount of Reg T cash call
 If payment is late, B/D may apply to designated examining authority (FINRA, exchange or FRB) for an extension, as it may do on
behalf of cash acct customers
 If no extension is requested the morning of the 5 biz day, the firm must sell the securities and freeze the acct for 90 days
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 Freeriding: securities purchased and sold before making payment for purchase. Prohibited. Acct frozen for 90 days
Margin Accounting
 Marking to the market: recalculation to check equity, done every biz day at closing price
Long Accounts
 LMV – DR = EQ
o Long Market Value – Debit Register = Equity
 Minimum maintenance:
o Reg T: 50% of LMV
o Min Maintenance: 25% of LMV
 Market value at maintenance formula = DR / 0.75
 Maintenance call: when accounts falls below min maint. If not met, B/D will liquidate securities to meet maintenance
 House min: firms may impose higher minimums than FINRA
 Debit balance
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 Series 7 – Margin Accounts

o Increased by interest charges

o Decreased by dividends/interest and sales proceeds
Special Memorandum Account
 Excess equity: equity exceeding the Regulation T requirement
 SMA: for every $1 increase in market value. $0.50 of SMA is created
o SMA = greater of excess equity or amount already in SMA
 Excess equity creates SMA, buying power, in the account
o Buying power: 2x SMA  $1 SMA = $2 stock
 SMA does not decrease as a result of a market value decline. It decreases when a customer uses it to borrow from the account or
purchase securities
 SMA can always be used, even in a restricted account, as long as its use does not bring the account below minimum
 The following also generates SMA:
o Nonrequired cash deposits
o Dividends: customer can withdraw them, even if the account is restricted. Must be done within 30 days of receipt,
otherwise it is applied against the debit balance, increasing the equity in the act
o Loan value: nonrequired deposit of marginable stock, the stock’s loan value is credited to SMA. The credit is equal
to half the value of a cash deposit
o Sale of stock: 50% of sales proceeds go to SMA
 SMA can be used as long as it does not cause a maintenance call
 SMA cannot be used to meet a maintenance margin call
 Exempt securities are not subject to Reg T, but are subject to FINRA min maintenance
Restricted Accounts: Equity < Reg T. No action needed.
 To purchase additional securities, need to deposit 50% of new purchase
 To withdraw securities, customer must deposit cash equal to 50% of the value of securities withdrawn
 Retention requirement: If securities are sold in a restricted acct, at least half of proceeds must be retained to reduce debit
balance. The other 50% of proceeds are credited to SMA
 If securities are sold in a restricted acct, LMV, DR and SMA are affected. Equity is only affected if the customer elects to remove
half of the proceeds
Pattern day trader
 Executes 4 or more day trades in a 5-business day period
 $25,000 min equity requirement on day they trade, then 25% maintenance (same as regular traders)
 Buying power = x4 excess equity / maintenance margin excess (equity above 25% minimum)
 Approval for day trading accounts: Before opening acct, firm must provide risk disclosure. Approve the acct for day trading or
receive from the customer a written statement that the customer does not intent to engage in day trading
 Must pass 3 months w/o day trading to remove designation
Short Sale
 On dividend payment date, short seller’s acct is debited the amount of cash dividend remittance to stock lender
 CR – SMV = EQ
o Credit Register – Short Market Value = Equity
 Minimum deposit of $2,000. Regulation T is also 50%
o Shorting stock that is below $5 per share requires an initial deposit of $2,000 or $2.50 per share, whatever is
greater
 FINRA minimum maintenance is 30% (vs 25% for long positions)
 EE (excess equity) / credit to SMA: amount decrease in SMV x 1.5
 SMV at maintenance formula = CR / 1.3
 Minimum maintenance:
o Stock <$5: greater of 100% of SMV and $2.5/sh
o Stock >=$5: greater of 50% of SMV and $5/sh
Combined Accts
 LMV + CR – DR – SMV = EQ
Pledging customer securities for loans
 B/D rehypothecates
 Regulation U oversees the process of banks lending money to B/D based on customer securities as collateral

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 B/D are limited to pledging 140% of a customer’s debit balance as collateral. Any customer securities in excess of this amount
must be physically segregated
 Firms can only commingle one customer’s securities with another for hypothecation if customers have given specific permission
by signing the hypothecation agreement. Cannot be commingled with firm’s securities

SMA
Activity
↑ M.V.
Sale of Securities
Deposit of Cash
Deposit of marginable securities
Dividends/Interest
Purchase of Securities
Withdrawal of Cash
Fall in long acct M.V.
Interest charges to acct
Stock dividend or split
Effect on SMA Remarks
↑ Only if new EE > old SMA
↑ Entitled to EE in the account after the sale, or 50% of sale proceeds,
whichever is greater
↑ Full amount of deposit is credited to SMA
↑ SMA increased by loan value of securities (Reg T=50%)
↑ 100% credited to SMA
↓ Margin requirement of new purchases is deducted from SMA. If SMA is
insufficient to meet the charge, a Reg T call is issued
↓ The full amount of the cash withdrawal is deducted from SMA. Remaining
equity may not fall below FINRA rules
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Margin on options
 Buy an option – Deposit 100% of premium
 Covered call writing
o Reg T = 50% of stock
o No margin required on covered call (you receive a premium)
o Deposit is requirement for stock less premium received