CH 15 Margins

Question 1

The industry minimum maintenance requirement for a long account is ____%.

Answer 1

The industry minimum maintenance requirement for a long account is 25%.

Equity must be at least 25% of LMV.

Question 2

True or False: National futures exchange members may use portfolio margin-eligible securities to hedge index futures.

Answer 2

TRUE

Question 3

True or False: ETFs are marginable and may be sold short.

Answer 3

TRUE

Question 4

Reg X regulates the ___________ who obtain credit for the purchase of securities.

Answer 4

Reg X regulates the borrowers who obtain credit for the purchase of securities.

Question 5

For clients to whom credit has been extended, what two disclosures must be made regarding the loan?

Answer 5

(1) The annual interest rate that may be charged, and (2) the method by which the debit balance is determined

Question 6

How is the account affected if SMA is withdrawn?

Answer 6

Debit balance increases and equity decreases.

Question 7

The minimum equity in a day trading account with uncovered derivatives is $________.

Answer 7

The minimum equity in a day trading account with uncovered derivatives is $25,000.

Question 8

What are the three typical components of a margin agreement?

Answer 8

The credit section, the hypothecation section, and the loan consent section

Question 9

True or False: Portfolio margin sets a margin requirement based on the greatest potential net loss in the portfolio.

Answer 9

TRUE

Question 10

To meet a maintenance (in-house) call by selling securities, clients must sell ______ times the amount of the call.

Answer 10

To meet a maintenance (in-house) call by selling securities, clients must sell four times the amount of the call.

Question 11

In a margin account, customers pay interest on the ________ balance.

Answer 11

In a margin account, customers pay interest on the debit balance.

Question 12

Mutual fund shares have loan value after they have been owned for ____ days.

Answer 12

Mutual fund shares have loan value after they have been owned for 30 days.

Question 13

Is an SEC-registered BD an eligible client for portfolio margin?

Answer 13

Yes, as are members of a national futures exchange and clients who are approved for uncovered option writing.

Question 14

A restricted account has equity below ____%, but above the minimum maintenance requirement of ____%.

Answer 14

A restricted account has equity below 50%, but above the minimum maintenance requirement of 25%.

Question 15

The buying power of a day trading account is _____ times the maintenance requirement excess.

Answer 15

The buying power of a day trading account is four times the maintenance requirement excess.

Question 16

On Monday, Sam buys ABC stock on margin. If he sells it on Tuesday, will he still be required to pay for the purchase?

Answer 16

Yes. The margin requirement must still be met on the purchase. Failure to pay is a violation called free-riding.

Question 17

When a customer buys on margin, how much cash may a BD borrow from a bank?

Answer 17

100% of the debit balance

Question 18

True or False: Regulation T is a transactional requirement, not a maintenance requirement.

Answer 18

True. The Reg. T requirement (50%) must be met on each trade, but the account need NOT be maintained at that level.

Question 19

The maintenance requirement on a long leveraged ETF position is computed by multiplying the leverage factor by ____%.

Answer 19

The maintenance requirement on a long leveraged ETF position is computed by multiplying the leverage factor by 25%.

Question 20

To meet the minimum maintenance for day trading, ______ guarantees between accounts and/or clients are not allowed.

Answer 20

To meet the minimum maintenance for day trading, cross guarantees between accounts and/or clients are not allowed.

Question 21

The maintenance requirement on a short leveraged ETF position is computed by multiplying the leverage factor by ____%.

Answer 21

The maintenance requirement on a short leveraged ETF position is computed by multiplying the leverage factor by 30%.

Question 22

What is the maximum amount of securities that a BD may rehypothecate to a bank?

Answer 22

140% of the debit balance

Question 23

To collateralize a loan, the maximum amount of stock that a broker may send to the bank is _____% of the customer debit.

Answer 23

To collateralize a loan, the maximum amount of stock that a broker may send to the bank is 140% of the customer debit.

Question 24

True or False: Investment company shares may be purchased on margin.

Answer 24

False. While mutual fund shares may not be purchased on margin, the shares have loan value if owned for 30 days.

Question 25

True or False: A BD must disclose to its margin clients the amount of interest that will be charged.

Answer 25

False. Since the rate changes, BDs cannot determine the amount of interest. Instead, the rate of interest is disclosed.

Question 26

In order to utilize portfolio margin, a client must be approved for ___________ option writing.

Answer 26

In order to utilize portfolio margin, a client must be approved for uncovered option writing.

Question 27

What documents are mandatory when opening a margin account?

Answer 27

A new account form, the margin (customer) agreement, and the hypothecation agreement

Question 28

Where must a security trade for it to be considered marginable?

Answer 28

On the NYSE, Nasdaq, or another exchange

Question 29

Customers are given ____ business days after settlement date to pay for their portion of a trade (i.e., S+__ or T+__).

Answer 29

Customers are given two business days after settlement date to pay for their portion of a trade (i.e., S+2 or T+3).

Question 30

True or False: Restricted accounts must be remedied immediately by depositing the appropriate dollar amount.

Answer 30

False. Restricted accounts do not require immediate response.

Question 31

Reg U regulates the extension of credit by ________ for the purchase of securities.

Answer 31

Reg U regulates the extension of credit by non-BDs for the purchase of securities.

Question 32

On a stock loan between two BDs, when may the lender call the stock back?

Answer 32

At any time

Question 33

BDs are not required to take action if a margin deficiency is less than $______.

Answer 33

BDs are not required to take action if a margin deficiency is less than $1,000.

Question 34

When must a margin disclosure document be provided to a client?

Answer 34

At the time the account is opened

Question 35

When buying securities in a restricted margin account, clients must deposit ___% of the trade within ____ business days.

Answer 35

When buying securities in a restricted margin account, clients must deposit 50% of the trade within three business days.

Question 36

On margin, Dan buys $12,000 of stock, deposits $7,000, and borrows $5,000. What amount may the BD borrow from a bank?

Answer 36

$5,000, which is 100% of the debit balance

Question 37

An account with equity below the Reg T requirement is called ____________.

Answer 37

An account with equity below the Reg. T requirement is called restricted.

Question 38

Define a day trade.

Answer 38

The purchase and sale of the same security on the same day in a margin account

Question 39

True or False: BDs are NOT required to provide advance notice if they change their in-house maintenance requirements.

Answer 39

TRUE

Question 40

For a leveraged ETF, how is the maintenance requirement determined?

Answer 40

The 25% (long) or 30% (short) maintenance requirement multiplied by a given portfolio leverage factor

Question 41

True or False: FINRA approval is required before a BD may offer portfolio margin.

Answer 41

TRUE

Question 42

Define pattern day trading.

Answer 42

Executing four or more day trades over a five-day period

Question 43

True or False: If a client's margin account has been frozen, she may NOT continue to trade.

Answer 43

False. Trading is allowed; however, all trades must be paid for in advance.

Question 44

The ______________ agreement must be signed before a firm may lend stock belonging to a client.

Answer 44

The loan consent agreement must be signed before a firm may lend stock belonging to a client.

Question 45

Sue makes a $1 million purchase of a 2x short Gold Index ETF. What is her maintenance requirement?

Answer 45

Her requirement is based on the leverage factor times the SRO maintenance requirement (2 x 30% = 60% or $600,000).

Question 46

Jim has a $10,000 debit balance in his margin account. The BD may rehypothecate stock of $_______ and borrow $_______.

Answer 46

Jim has a $10,000 debit balance in his margin account. The BD may rehypothecate stock of $14,000 and borrow $10,000.

Question 47

When may a member firm lend the stock that belongs to a client?

Answer 47

When the client signs the loan consent agreement

Question 48

When is a client required to provide a signature when opening a margin account?

Answer 48

Prior to the time the account is opened

Question 49

Upon what is portfolio margin based?

Answer 49

The greatest risk in a position

Question 50

_____________ is when a BD takes the stock of two or more clients and uses it to secure a loan.

Answer 50

Commingling is when a BD takes the stock of two or more clients and uses it to secure a loan.

Question 51

May new issues (e.g., IPOs or mutual fund shares) be purchased on margin?

Answer 51

No

Question 52

What section of the margin agreement is not mandatory?

Answer 52

The loan consent section

Question 53

Are mutual funds considered marginable securities?

Answer 53

No. Investors must pay 100% of the purchase price.

Question 54

True or False: Firms may establish their own in-house rules relating to payment dates and minimum requirements.

Answer 54

True. However, the requirements must be at least as stringent as those established by the regulators.

Question 55

Can credit be extended to purchase OTC equities?

Answer 55

No. Pink Market and other OTC equities are not marginable.

Question 56

A client's account has an LMV of $40,000, Debit of $25,000, and Equity of $15,000. Must the account's equity be fixed?

Answer 56

No. The equity percentage is currently 37.5% (15 ÷ 40). Provided the equity is 25% or greater, no fix is required.

Question 57

The minimum equity in a portfolio margin account with unlisted derivatives is $___________.

Answer 57

The minimum equity in a portfolio margin account with unlisted derivatives is $5,000,000.

Question 58

For margin clients, a firm must provide at least ___ days written notice of changes in the method of computing interest.

Answer 58

For margin clients, a firm must provide at least 30 days written notice of changes in the method of computing interest.

Question 59

True or False: Day trading accounts do NOT require delivery of a special risk disclosure document prior to opening.

Answer 59

False. A special disclosure document is required.

Question 60

The _________________________ regulates margin requirements.

Answer 60

The Federal Reserve Board (FRB) regulates margin requirements.

Question 61

If a BD extends credit to a client, what must it disclose to the client?

Answer 61

The annual interest rate to be charged and the method of determining the debit balance on which interest is charged

Question 62

For a client to use portfolio margin, when must he receive, and acknowledge receipt in writing, a disclosure document?

Answer 62

Prior to the initial transaction

Question 63

For a BD carrying a client's margin account, what amount of stock may be rehypothecated?

Answer 63

140% of the debit balance

Question 64

Under Regulation T, does the payment date requirement apply to cash or to margin accounts?

Answer 64

Both. Payment is due within three business days for a cash account (100% payment) and a margin account (50% payment).

Question 65

If owned for ____ days, open-end investment company (mutual fund) shares may be used as collateral in a margin account.

Answer 65

If owned for 30 days, open-end investment company (mutual fund) shares may be used as collateral in a margin account.

Question 66

Along with listed common stock, name some of the other securities that are deemed marginable by the FRB.

Answer 66

Closed-end funds, warrants, convertible bonds, REITs, and leveraged ETFs

Question 67

How many days advance notice is provided to clients if a BD changes loan terms (e.g., interest rate)?

Answer 67

30 days

Question 68

Regulation T regulates the extension of credit by _____ for the purchase of securities.

Answer 68

Regulation T regulates the extension of credit by BDs for the purchase of securities.

Question 69

How long must new issues be held before they may be used as collateral?

Answer 69

30 days

Question 70

How is SMA created?

Answer 70

Appreciation in the value of securities, cash or dividend deposits, or sales of securities from the account

Question 71

True or False: Market declines will reduce SMA.

Answer 71

False. The only way to lose SMA is to use SMA.

Question 72

If a client's equity falls below 25%, the maintenance call must be met __________.

Answer 72

If a client's equity falls below 25%, the maintenance call must be met promptly.

Question 73

What must be obtained for a firm to commingle the securities of two or more customers?

Answer 73

Written permission from each customer

Question 74

True or False: Portfolio margin may be used for only one type of security.

Answer 74

False. Portfolio margin may be used for most securities.

Question 75

If a client's margin account has an equity balance greater than the Reg. T requirement, the account has ____.

Answer 75

If a client's margin account has an equity balance greater than the Reg. T requirement, the account has SMA.

Question 76

Define Regulation T.

Answer 76

The percentage a customer must deposit when purchasing securities or selling short

Question 77

Under portfolio margin rules, margin requests must be satisfied within ______ business days of request.

Answer 77

Under portfolio margin rules, margin requests must be satisfied within three business days of request.

Question 78

True or False: Hedge funds are the typical investors that take advantage of the benefits of portfolio margin.

Answer 78

TRUE

Question 79

True or False: On a stock loan between two BDs, the lender retains voting rights.

Answer 79

False. The borrower receives voting rights.

Question 80

For margin accounts, the maximum amount that a firm may borrow from the bank is _____% of the debit balance.

Answer 80

For margin accounts, the maximum amount that a firm may borrow from the bank is 100% of the debit balance.

Question 81

According to Reg T, what happens to a client's account if she fails to pay in a timely manner?

Answer 81

Her account will be frozen for 90 days.

Question 82

What are the two uses of SMA?

Answer 82

1) To buy additional securities, and 2) for a loan advance

Question 83

A margin account has Market Value of $20,000, Debit of $8,000, Equity of $12,000. What may the BD borrow from a bank?

Answer 83

$8,000, which is 100% of the debit balance.

Question 84

The lender of stock retains all ownership rights, with the exception of the right to ____.

Answer 84

The lender of stock retains all ownership rights, with the exception of the right to vote.

Question 85

Due to lower margin requirements, portfolio margin affords investors with greater __________.

Answer 85

Due to lower margin requirements, portfolio margin affords investors with greater leverage.

Question 86

Jim makes a $1 million purchase of a 3x long Gold Index ETF. What is his maintenance requirement?

Answer 86

His requirement is based on the leverage factor times the SRO maintenance.

Question 87

What right does the lender of stock retain?

Answer 87

The lender of stock retains all ownership rights, with the exception of the right to vote.

Question 88

What advantage does portfolio margin provide to investors?

Answer 88

Due to lower margin requirements, portfolio margin affords investors with greater leverage.

Question 89

What is Jim's maintenance requirement for a $1 million purchase of a 3x long Gold Index ETF?

Answer 89

His requirement is based on the leverage factor times the SRO maintenance requirement (3 x 25% = 75% or $750,000).