FC Chapter 15

Question 1

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

Answer 1

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

Question 2

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

Answer 2

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

Question 3

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

Answer 3

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

Question 4

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

Answer 4

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

Question 5

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

Answer 5

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

Question 6

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

Answer 6

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

Question 7

Define Regulation T.

Answer 7

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

Question 8

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

Answer 8

False. Portfolio margin may be used for most securities.

Question 9

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

Answer 9

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

Question 10

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

Answer 10

At the time the account is opened

Question 11

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 11

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

Question 12

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

Answer 12

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

Question 13

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

Answer 13

True

Question 14

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

Answer 14

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

Question 15

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

Answer 15

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

Question 16

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

Answer 16

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

Question 17

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

Answer 17

When the client signs the loan consent agreement

Question 18

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

Answer 18

Written permission from each customer

Question 19

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 19

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

Question 20

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

Answer 20

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

Question 21

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

Answer 21

True

Question 22

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

Answer 22

False. Restricted accounts do not require immediate response.

Question 23

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

Answer 23

Prior to the initial transaction

Question 24

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

Answer 24

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

Question 25

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

Answer 25

Customers are given two business days after settlement date to pay for their portion of the trade. (S+2 or T+4)

Question 26

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

Answer 26

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

Question 27

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

Answer 27

True

Question 28

How is SMA created?

Answer 28

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

Question 29

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

Answer 29

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

Question 30

Define a day trade.

Answer 30

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

Question 31

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

Answer 31

At any time

Question 32

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

Answer 32

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

Question 33

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

Answer 33

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

Question 34

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

Answer 34

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

Question 35

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

Answer 35

The industry minimum maintenance requirement for a long account is 25%. (Equity must be at least 25% of LMV.)

Question 36

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

Answer 36

False. A special disclosure document is required.

Question 37

What are the three typical components of a margin agreement?

Answer 37

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

Question 38

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

Answer 38

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

Question 39

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

Answer 39

True

Question 40

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

Answer 40

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

Question 41

Define pattern day trading.

Answer 41

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

Question 42

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 42

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

Question 43

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

Answer 43

On the NYSE, Nasdaq, or another exchange

Question 44

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

Answer 44

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

Question 45

How is the account affected if SMA is withdrawn?

Answer 45

Debit balance increases and equity decreases.

Question 46

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

Answer 46

False. The borrower receives voting rights.

Question 47

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

Answer 47

Prior to the time the account is opened

Question 48

What section of the margin agreement is not mandatory?

Answer 48

The loan consent section

Question 49

True or False: Market declines will reduce SMA.

Answer 49

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

Question 50

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

Answer 50

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

Question 51

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

Answer 51

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

Question 52

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

Answer 52

30 days

Question 53

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

Answer 53

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

Question 54

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

Answer 54

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

Question 55

The _____________________ has the authority to regulate margin requirements.

Answer 55

The Federal Reserve Board (FRB) has the authority to regulate margin requirements.

Question 56

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

Answer 56

30 days

Question 57

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

Answer 57

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

Question 58

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

Answer 58

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

Question 59

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

Answer 59

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

Question 60

May credit be extended to purchase OTC equities?

Answer 60

No. Pink Sheets and OTCBB equities are not marginable.

Question 61

What documents are mandatory when opening a margin account?

Answer 61

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

Question 62

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

Answer 62

True

Question 63

What are the two uses of SMA?

Answer 63

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

Question 64

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

Answer 64

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

Question 65

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

Answer 65

No

Question 66

Clients must be notified of any changes in the terms of a margin account ____ days before they become effective.

Answer 66

Clients must be notified of any changes in the terms of a margin account 30 days before they become effective.

Question 67

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

Answer 67

140% of the debit balance

Question 68

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

Answer 68

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

Question 69

How long are customers given to correct margin deficiencies that may occur?

Answer 69

One payment period (four business days), unless an extension of time has been granted by the SRO.

Question 70

Upon what is portfolio margin based?

Answer 70

The greatest risk in a position

Question 71

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

Answer 71

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

Question 72

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

Answer 72

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

Question 73

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

Answer 73

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

Question 74

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

Answer 74

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

Question 75

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

Answer 75

Her account will be frozen for 90 days.

Question 76

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

Answer 76

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

Question 77

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

Answer 77

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

Question 78

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

Answer 78

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

Question 79

Are mutual funds considered marginable securities?

Answer 79

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

Question 80

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

Answer 80

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

Question 81

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 81

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

Question 82

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

Answer 82

True

Question 83

The _________________________ regulates margin requirements.

Answer 83

The Federal Reserve Board (FRB) regulates margin requirements.

Question 84

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

Answer 84

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

Question 85

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

Answer 85

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