chapter 21 Flashcards by ray Offenburger

What does Regulation SHO regulate?

short sales

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The _________________________ regulates margin requirements.

Federal Reserve Board

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In order to sell short, Regulation SHO requires that securities be easy or hard to borrow?

easy to borrow

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Secondary market trades involving U.S. Government securities settle _____________________.

next business day (T+1)

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The _____________________ has the authority to regulate margin requirements.

Federal Reserve Board

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____________ governs the extension of credit by BDs.

Regulation T

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The current Reg T margin requirement is ____%.

50%

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Define Regulation T.

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

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Does the payment date requirement of Regulation T apply to cash or margin accounts?

Payment is required within 5 business days for both (100% in a cash account, 50% in a margin account).

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What stocks does the FRB deem to be marginable?

Those stocks listed on major exchanges and on Nasdaq

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What document allows a BD to lend customer securities to someone wishing to sell them short?

Loan Consent Agreement

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True or False: Customers are required to sign the Loan Consent Agreement.

False, signature is optional

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Hypothecation is synonymous with what term?

pledge

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The ________________ Agreement describes the customer’s pledging of securities as collateral to the BD.

Hypothecation

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

100% of the debit balance

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

140% of the debit balance

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What is the rate of interest that a bank charges a BD on margin loans?

call rate

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What is a customer using when she borrows funds to increase the size of her position?

leverage

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Customers are given ____ business days after settlement date to pay for their portion of the trade.

Customers are given two business days after settlement date to pay for their portion of the trade. (S + 2 or T + 5)

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

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

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The formula for determining equity in a long margin account is: ____________ - __________ = Equity

Long Market Value (LMV) - Debit Balance = Equity

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

debit balance

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Any amount of equity greater than 50% is called _______________.

excess equity

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Where will excess equity be recorded?

The Special Memorandum Account (SMA)

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Calculate SMA using the following balances: LMV $40,000, Debit $10,000 and Equity $30,000

Equity - 50% of the LMV = Excess Equity ($30,000 - $20,000 = $10,000)

How is the account affected if SMA is withdrawn?

Debit balance increases and equity decreases.

True or False: Market declines will reduce SMA.

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

A client with $3,000 of SMA has buying power of $________.

$6,000

How is buying power calculated?

SMA divided by Reg T of 50% (just remember SMA x 2)

A client buys stock on margin and makes no cash deposit because he uses SMA. How are the account balances affected?

LMV and Debit both increase by the full purchase price; no change is made to equity.

Existing account: LMV $40,000, Debit $10,000, Equity $30,000, SMA $10,000. SMA is used for a $20,000 purchase. Result?

LMV $60,000 - Debit $30,000 = Equity $30,000 and SMA is $0

Existing account: LMV $40,000, Debit $10,000, Equity $30,000, SMA $10,000. If SMA is withdrawn, what are the balances?

LMV $40,000 - Debit $20,000 = Equity $20,000 and SMA is $0

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

restricted

By how much is the following account restricted? LMV $40,000, Debit $25,000, Equity $15,000

Restricted by $5,000. The equity should be $20,000 (50% of $40,000), but there is only $15,000.

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

False

How will the sale of securities from an account affect the account balances?

LMV and Debit decrease by the sales proceeds, Equity stays the same, and SMA increases by 50% of the sales proceeds.

Existing account: LMV $40,000, Debit $25,000, Equity $15,000. If $5,000 is sold from the account, how is SMA affected?

SMA would be credited with $2,500 (50% of the sales proceeds).

How would a $2,000 cash dividend or voluntary cash deposit affect a margin account's balances?

LMV is unchanged, Debit is reduced by $2,000, Equity is increased by $2,000, and SMA is increased by $2,000.

Existing account: LMV $40,000, Debit $25,000, Equity $15,000. How is SMA affected by receiving a $5,000 cash dividend?

SMA would be credited with $5,000 (100% of the deposit).

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

25%. (Equity must be at least 25% of LMV.)

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

promptly

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

No, have to wait 30 days

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

30 days

Securities that are acceptable as collateral have a loan value that equals ____%.

50%

What amount of fully paid securities must be deposited to meet a margin requirement?

two times the margin call

To meet a $20,000 Reg. T call, a customer could deposit cash of $________ or fully paid securities of $________.

cash of $20,000 or securities of $40,000

The maximum potential loss when selling short is ____________.

unlimited

How long can a short stock position be maintained?

unlimited

True or False: If a stock is shorted and a dividend is declared, the short seller must pay the lender the dividend.

True

What is the Reg T margin requirement for short sales?

50%

The formula for determining equity in a short margin account is: ____________ - ____________ = Equity

Credit Balance - Short Market Value (SMV) = Equity

The credit balance is made up of what two components?

Short sales proceeds plus the Reg. T requirement

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

30%. Equity must be at least 30%

A long margin account's minimum initial equity requirement is _____% of the purchase or $______ , whichever is less.

100% or $2,000

The minimum equity requirement for the initial short sale in a margin account is $_______ .

$2,000

What is the formula for finding equity in a combined margin account?

(LMV + Credit Balance - Debit Balance - SMV)

Calculate the combined equity in the following account: LMV $24,000, Debit $10,000, Credit $18,000, SMV $9,000

(24,000 + 18,000 - 10,000 - 9,000) = $23,000

Upon the purchase of an option, Regulation T requires payment to be made within ____ business days.

What is the margin requirement when buying options?

100% of premium

If an investor writes a covered call, is there a margin requirement on the option position?

On margin, an investor buys 100 shares of ABN at 50 and sells 1 ABN Oct 55 call at 3. What is the margin requirement?

$2,500, which is 50% of the stock position. Since this is a covered position, there's no requirement on the short call

On margin, Ben buys 100 shares of ABN at 50 and sells 1 ABN Oct 55 call at 3. What is Ben's required cash deposit?

$2,200, which is 50% of the stock position minus the $300 premium received on the sale of the call

On margin, Henry sells short 100 shares of DEF at 68 and sells 1 DEF Oct 60 put at 4. What is the margin requirement?

$3,400, which is 50% of the short position. Since this is a covered position, there is no requirement on the short put.

On margin, Emma shorts 100 shares of DEF at 68 and sells 1 DEF Oct 60 put at 4. What is Emma's required cash deposit?

$3,000

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

30 days

What may a BD lend to a customer in a margin account?

The complement of the Reg T margin call. In other words, 50%.

What formula can be used to determine how far the LMV can fall to be at the minimum maintenance requirement?

Debit Balance x 4/3 or Debit Balance ÷ 75%

What formula can be used to determine how high the SMV can rise to be at the minimum maintenance requirement?

Credit Balance x 10/13

What is the special minimum margin and maintenance requirement when selling short stock priced below $5 per share.

$2.50 per share or 100% of the market value - whichever is greater

True or False: Short against the box is considered being long and short the same position at the same time.

True

What is the margin requirement for a short against the box position?

5% of the long position

True or False: Uncovered option positions have a margin requirement, while covered positions do not.

True

Identify this: Long a security convertible into an equal number of shares of a short position being carried.

Arbitrage in a margin account

Is there a margin requirement when engaging in arbitrage in a margin account?

Yes, 10% of the current market value of the long position.

True or False: An investor is able to protect a profit on a long position by being short against the box.

True. "Short against the box" refers to investors who have sold stock short that they currently hold in their portfolio.