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Flashcards in Chapter 11 Margin Deck (23)
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Margin Account Documents
New Account Form

Credit Agreement
-Terms of the loan
-Disclose interest amount, how computed, when charged

Loan Consent (not mandatory)
-B/D can lend the customer’s securities to others

Hypothecation (Pledge) Agreement
-Customer hypothecates securities to B/D as collateral
-B/D borrows money from a bank to replace loan to customer



Margin Accounts
Accounts may be subject to different requirements:

Day trading accounts

Accounts subject to Portfolio Margin

Accounts with concentrated positions

Accounts consisting of securities other than listed equities

Certain accounts may not utilize margin, such as IRAs, custodial accounts, and pension plans
At the time a margin account is opened and annually thereafter, all clients must be provided with the Margin Risk Disclosure document


Marginable Securities
Only specific securities are deemed marginable according to the Federal Reserve Board

Listed securities: NYSE or Nasdaq securities
Regulation T sets the margin requirement on these securities at % of the transaction amount

Deposit Cash (equal to the Reg. T Call)

Deposit Stock (equal to 2 times the Reg. T Call)
Not marginable:


Unlisted non-Nasdaq securities

New issues: IPOs and mutual fund shares •These shares do have loan value after days •The loan value is 50% of the current market value




the process in which a customer pledges securities in margin account to the broker dealer.


Long Margin Account
An investor borrows the portion of the purchase price of securities not made up of the Reg. T margin call from the B/D

The broker-dealer monitors the account using three balances:

Long Market Value - Debit Balance = Equity

Long Market Value (LMV): Current market value of securities held in account

Debit Balance - Loan amount by B/D to customer, secured by LMV

Equity: Customer’s ownership interest in the account


Short Margin Account
Investor borrows securities from B/D in anticipation of decline, with the B/D holding customer cash as collateral for the borrowed stock (bearish strategy)

Credit Balance - Short MKT V = Equity

Credit Balance: Customer’s cash that is held by B/D as collateral 
Total short sale proceeds plusReg. T on sale
•Customer must deposit an amount equal to 50% of short sale proceeds

Short Market Value - Current market value of the securities sold short
Short Market Value (SMV): - Customer’s ownership interest in the account Equity:


Margin Requirement
For test purposes, there are four important requirements to remember:

Initial Reg T requirement for long and short positions:

Minimum equity requirement for long positions:

Minimum equity requirement for short positions:

Treasuries based on maturity:



Meeting Calls
A client buys 1000 shares of XYZ in a cash account at 9:45 am. He then sells those 1000 shares at 2:15 pm. May he use the proceeds of the sale to meet his Reg T requirement on the purchase?
Accounts that fall beneath minimum equity requirements receive a maintenance call. When must this be met?
A client has no cash and must sell securities to meet the call. How much must she sell?



Special Memorandum Account (SMA)
SMA is a credit made to a margin account when the market value of the account’s securities moves favorably
SMA may be withdrawn by the client for any purpose provided it would not put the account into a maintenance call
If SMA is used to buy securities, the purchase may be two times the amount of SMA
Example: If a client has $2,000 of SMA and wants to buy shares of ABC Corporation, how much may she purchase?



Regulation SHO
Regulates the practice of selling short (i.e., the sale of a security that the seller does not own)
Order marking –sell order tickets must be marked longor short

Tickets may be marked long if: •Client or client’s agent has title (DTCC, prime broker) •Customer has unconditional contract / not yet settled •Convertibles have been tendered •Options, warrants, or rights have been exercised •Futures contract has settled resulting in delivery of shares

And B/D believes security will be delivered promptly
Locate requirement –applies if sell order ticket is marked short

Easy-to-Borrow list may be used if less than 24-hours old



Regulation SHO –Threshold Security
An equity security of a reporting issuer with substantial fail- to-deliver positions that have existed for 5 consecutive business days
Included on a list published by an SRO
A mandatory close-out for fail-to-deliver positions is required if the position has been open for consecutive settlement (business) days



Red Flag Issue
A client owns 1,000 shares of XYZ in a cash account. They have also written 10 XYZ calls against that position. You discover that an RR has entered an order to sell those 1,000 shares. What is your primary concern?

check slides

Weather covered?


Covered versus Uncovered
When writing (selling) calls or puts, the writer is either covered or uncovered, which refers to the writer’s obligation

Covered means that the writer has either the stock or cash to cover his obligation to buy or sell the stock

Uncovered means that the writer has neither the stock nor the cash to cover his obligation to buy or sell the stock
Margin is not required for covered calls



11-1 The extension of credit by a broker-dealer to a customer is regulated by:

Federal Reserve Board


11-2 Currently, the initial margin requirement under Reg. T is



11-3 The credit agreement stipulates that a customer pledge his securities to the broker dealer

True or False


Credit agreement stipulates that the customer recognized that he is borrowing funds from the firm and is responsible for payment of interest and repayment of loan. The hypothecation agreement states that the customer pledge his securities to the brokerage firm and gives the firm the right to rehypothecated the securities to secure a loan from a bank


Customers may meet a Reg. T call by depositing

c. both cash and fully paid marginable securities


11-5 All of the following are used for computation of margin account, EXCEPT:

a. Long market value
b. Short market value
c. Debit balance
d. Equity

All below used:
a. Long market value
c. Debit balance
d. Equity


b. Short market value


11-6 Finra is prohibited from maintaining margin rules aside from those set forth by FRB



11-7 The min maintenance requirement for long margin position is ____ %



8 According to Reg T excess equity is the amount by which the equity account of is

Above the initial margin requirement


11-9 $1K SMA may used to purche

$2K additional stock

Clients may use SMA to purchase up to two times the amount of additional marginable securities.


Short sale of 100 shares

True statement

Short sales must be executed in a margin account and require 50% deposit under Reg T