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Series 27 > Customer Accounts > Flashcards

Customer Accounts Flashcards

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1
Q

What does Reg T not apply to

A

US government, agency and municipal securities

Non-marketable securities. OTC not listed on exchanges

New issues under 30 days

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2
Q

Who applies the initial margin and the minimum maintenance margin

A

Initial margin: Federal reserve

Minimum maintenance margin: FINRA

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3
Q

What is a requirement for opening a margin account

A

Signing a margin agreement that includes hypothecations in street name

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4
Q

What regulation controls the bank to broker relationship

A

Regulation U - brokerage firms cannot borrow more money from banks using customer securities as collateral than what they loan to their customers

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5
Q

How much are banks allowed to loan to firms for customers

A

70% of pledged collateral

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6
Q

How much collateral are firms allowed to pledge to the bank

A

140% of customer debits

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7
Q

What controls the credit from broker to customer?

A

Regulation T

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8
Q

Who sets the margins for corporate bonds

A

FINRA through minimum maintenance margins.

Reg T does not apply to corp bonds

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9
Q

Under Reg T, what are the three types of applicable accounts

A

Cash account
Margin account
Arbitrage account

Plus:

Omnibus accounts
BD credit account
Market functions account (proprietary accounts)
Non-securities credit account (commodities, foreign exchange)

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10
Q

What are the Reg T requirements for a cash account

A

Payment must be made in full

payment must be made no later than 2 business days after settlement (S+2 = 4 business days after trade date)

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11
Q

What are the terms of a Reg T extension

A

Exceptional circumstances

allows +2 business days

a second Reg T may be granted for +2 business days

If customer does not pay by extension date, the firm is obligated to sell out the position and freeze the account for 90 days

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12
Q

What are the terms of a frozen account

A

Customer cannot buy unless firm has cash in hand

Customer cannot sell unless firm has securities in hand

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13
Q

What are the terms of a margin account

A

Customer can buy or sell short as long as Reg T initial margin is met

If Reg T does not apply, then FINRA min maintenance margin must be met

If a security is not marginable, it must be paid in full

Payments must be collected promptly, no later than 2 business days after settlement (S+2)

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14
Q

What is an arbitrage transaction

A

Simultaneous buying and selling short of the same security (short against the box)

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15
Q

What margin is required for Arbitrage accounts

A

FINRA minimum maintenance margins

Since there is no risk, the Federal reserve does not set an initial margin

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16
Q

What is the Reg T for convertible bonds

A

50%

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17
Q

What is the Reg T for corporate bonds

A

Not applicable

(Therefore FINRA minimum maintenance applies)

Greater of 20% MV or 7% of face

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18
Q

What is the Reg T for long stock options

A

100% of premium

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19
Q

What is the Reg T for Long LEAPs

A

75% of premium; within 9 months of expiration 100% of premium

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20
Q

What is the Reg T for short stock options

A

20% of the MV of underlying security + 100% of premiums - any out the money

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21
Q

What is the Reg T for short LEAPS

A

20% of the MV of underlying security + 100% of premiums - any out the money

(same as short stock options)

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22
Q

De minimis rule for margin calls

A

Margin calls are not sent for amounts less than or equal to 1k

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23
Q

What if minimum margin amount is more than Reg T amount?

A

The higher amount applies

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24
Q

In what cases is the minimum margin amount higher than the Reg T margin

A

US Government and municipals

Day trading accounts

Leveraged ETF’s

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25
Under FINRA What is the minimum dollar amount to open a new long margin account
2k Minimum does not apply to fully paid securities
26
What is the rule for minimum dollar amounts on a short margin account
Cannot be less than 2k of equity at any time. This is due to the potential loss being unlimited This could require a customer depositing more than 100% of their short value
27
Minimum amount required for day trading accounts
25,000
28
Cheap short stock rule
To short a stock valued from $5-$10: minimum margin is $5 per share To short a stock valued from $0-$5: minimum margin is 100%, but never less than $2.50pps
29
Minimum maintenance margins for stock (Long/Short)
25% / 30%
30
Minimum maintenance margins for convertible bonds (Long/Short)
25% / 30%
31
Minimum maintenance margins for Corporate debt
Greater of 20% of MV or 7% face Same for both long/short
32
Minimum maintenance margins for Municipal bonds
Greater of 15% of the MV or 7% of face Same for both Long/Short
33
Reg T and Minimum maintenance margins for options (Long/Short Naked)
Long Reg T: Not applicable Min Maint: 100% of the premium Short Naked (greater of): Reg T: 20% of the MV of underlying security + premium - out of the money Min Maint: 10% of the MV of underlying security + premium
34
Minimum maintenance margins for LEAPS (Long/Short)
75% of premium; when within 9 months of expiration 100% of premium / 10% of the MV of underlying security + premium
35
What defines a day trader
Customers who executes 4 or more day trades in a 5 business day period
36
What is a day trade sale
a purchase and a sale of the same security on the same day
37
Minimum margin for a day trading account
The greater of 25,000 or 25% of the highest intra-day MV
38
How is buying power calculated in a regular margin account
2x the excess margin above Reg T 50%
39
How is buying power calculated in a day trading account
4x the excess margin above the minimum requirement
40
Minimum Margin requirement for Leveraged ETF's
Minimum margin requirement is multiplied by the ETF's leverage 200% is 2 times 25% 300% is 3 times 25% etc
41
How often does an account need to be marked to market
Every day
42
What does excess equity equal
SMA (Special memorandum account) The customer is free to borrow this amount in cash or can use the amount to buy additional shares
43
SMA formula in a long account
50% of MV - Debit
44
If borrowing SMA what happens to the debit balance in a long account
It increases
45
Every excess (over 50%) $1 in the long account increases SMA by
50 cents
46
When does an account become restricted
When the equity balance is between 49%-26%
47
What are the rules for a restricted long account
If purchases are made: Normal Reg T applies If a sale is made: 50% of the proceeds must be retained to reduce debit balance (retention requirement). The remaining to SMA and can be borrowed.
48
Formula to calculate the required MV to be at 25% maintenance margin for long accounts
Debit balance / .75
49
In a long account what happens to SMA when the MV changes
MV increases = SMA increases by 50 cents for every excess dollar MV decreases = SMA stays the same (due to market crash acceleration risk)
50
In a long account what happens to SMA when cash is deposited
SMA increases with every dollar of excess equity
51
In a long account what happens to SMA when dividends are received
SMA increases with every dollar of excess equity If the monies are not taken out within 30 days, they leave SMA and cannot be borrowed
52
A firm can avoid a net capital charge when acting as an agent on loans of securities if it: (3)
Discloses the identity of each party to the other (lender / borrower) has each party agree in writing that the obligations of the BD does not include a guarantee of performance relating to the stock loan Has each party expressly agree in writing that the other party's remedies in the event of default are limited as to the BD
53
What happens if there is dividends or stock split on borrowed stock
The borrower must provide the consideration to the true owner
54
What type of account can short sales be performed in
Margin accounts
55
On a short account How does excess equity affect SMA
It increases SMA
56
What happens to SMA when MV changes on a short account
MV decreases = SMA increases by $1.50 for every dollar of decline in excess equity MV increases = SMA stays the same
57
What is the formula for SMA on a short account
Equity - 50% of MV
58
When is a short account restricted
between 49% and 31%
59
What are the rules to a restricted short account
Short sale made: Normal Reg T initial margin rules apply If purchase made: 50% of proceeds must be retained to increase equity (retention requirement)
60
What happens if minimum maintenance margin is breached on both long and short
A call will go out to the customer to bring back to minimum maintenance promptly (25/30)
61
What is the formula to calculate the minimum MV required for minimum margin on short account
Credit balance / 1.3
62
What is the margin and cash deposit for naked calls and puts
20% of the MV of the underlying stock + premium - out the money =Reg T (margin requirement) - premium received = cash deposit (Margin call)
63
What is the minimum maintenance margin for naked stock options
10% of the MV of the underlying stock + premium = Min maintenance requirement
64
Must always have the higher of initial margin or maintenance margin on what type of transactions
Options Deep out of the money transactions end up using 10% formula while in the money transactions use 20% formula
65
What is the margin in a broad based stock index
The higher of: Initial margin: 15% of MV + 100% of premium - Out of money Min Maintenance 10% of the MV + 100% of the premium
66
Short call covered by long margin requirement
No margin on short call. Long margin applies
67
Short put is covered by short stock margin requirements
No margin on short put, only on short stock position.
68
What is the margin and cash deposit on a straddle
20% of MV of in the money side + both premiums = Reg T - premium received = cash deposit
69
What is the margin on a spread
Margin = Max potential loss Debit spread max loss = is debit balance (difference between premiums) Credit spread max loss = Difference in strike prices - difference between premiums
70
Regulation that controls credit from bank to broker
Regulation U
71
Regulation that controls credit on securities on all lenders other than banks and BD's
Regulation D
72
Regulation that places responsibility of Federal Reserve regulations on both borrower and lender
Regulation X
73
How much tentative NC must a clearing broker have to enter a joint bank office (JBO) arrangement?
25,000,000 tentative net capital
74
How much NC must a clearing broker have to enter a joint bank office (JBO) arrangement?
1,000,000 min NC per participant (exclusive of its ownership interest in the JBO)
75
Regulation SHO - Rule 203 dictates on short sales
the security had been borrowed or an arrangement has been entered There is reasonable grounds to believe the security could be borrowed and delivered on settlement BD must create an easy borrow list - updated daily Exchanges must have a hard to borrow list, updated daily
76
Securities on the hard to borrow list have the following characteristics
Clearing short position at NSCC of 10,000 shares or more Clearing short position represents at least .5% of the total shares outstanding Must meet these tests for 5 business days to be on the list
77
Under Reg SHO, when do securities need to be bought in if on the threshold list
If on the threshold list for 13 consecutive days following trade date (35 days for restricted threshold securities)
78
ALL Fails to deliver buy out rule under SHO
Long: no later than market opening on T+5 (S+3) Short: No later than market opening on T+3 (S+1)
79
Purchasing power created by a maintenance margin excess in a pattern day trading account is:
400% of the maintenance excess
80

Series 27 (7 decks)

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