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Series 62 > Margin > Flashcards

Flashcards in Margin Deck (31):
1

How does Regulation T affect margin and cash accounts?

Margin: specifies % of purchase price customer must deposit (currently 50%)
Cash: BD can purchase securities if good-faith belief customer will deposit funds within two days of settlement date.

2

When is a margin account frozen?

If margin requirement not deposited within 5 business days of trade date.
(securities sold and account frozen for 90 days)

3

What can be purchased on margin?

Any stock on a national exchange or Nasdaq.
New issues not eligible until 30 days after going public.

Govt and municipal issues exempt from
FRB margin requirements.

4

What creates an exception to customer requirement to meet a
Reg T call?

If it is for $1000 or less.

Gets added to debut balance.

5

What's the debit balance?

The amount the BD lends to the customer - difference between total purchase price and required margin deposit.

6

How is interest on debit balances calculated?

Adds charge to broker's loan rate.
Calculated daily and posted monthly.

7

A margin agreement contains three separate agreements...

1. Credit agreement to borrow money and pay interest
2. Hypothecation agreement pledging securities to the broker as collateral for any loan
3. Loan consent so broker may loan securities

8

Why are securities in a margin account held in street name?

Held in brokerage name as nominal owner - so broker may sell if the beneficial owner (customer) does not meet a margin call.

9

What's the basic formula on customer equity?

Market value of securities minus debit balance

10

If a customer has a margin call of $10k and wishes to meet it with fully paid securities, how is the amount calculated?

Loan value of securities is market value x Reg T

So need to deposit securities with market value of $20k

11

How is excess equity calculated?

Account Equity is market value minus debit balance.

Excess equity is (Account Equity – Reg T requirement)

12

SMA is equivalent to "excess loan equity".

Where a customer has $20k current market value and $2k debit balance, how calculated?

Think of "excess loan value". Firm could lend $10k and has only lent $2k, so customer has excess of $8k

13

SMA or excess is the same as the amount of cash that can be withdrawn.
What happens if it is?

SMA decreases and Debit Balance increases by same amount as customer is taking an additional loan.

14

What's the buying power of SMA with Reg T at 50%?

Double

Calculated as SMA/Reg T

15

How do cash dividends affect SMA?

Full amount of cash dividend credited to SMA

16

What reduces SMA?

Cash withdrawal or using its buying power.

Note: decline in market value will not impact SMA

17

What's a restricted account and what must a customer do to make purchases?

Decline in market value means account doesn't meet initial Reg T requirement.
Can purchase if they deposit full Reg T requirement for that purchase (ie don't need to fix overall account)

18

What happens if a sale is made in a restricted account?

50% of proceeds are credited to SMA and can be withdrawn.

19

Two ways a customer can satisfy Reg T margin call on a short sale....

1. Deposit cash of 50%
2. Deposit securities whose loan value is equal to the call

So for a $3k call it's $3k cash or $6k securities

20

Customer's equity in a short margin account is...

Credit balance (proceeds of short sale plus margin deposit) MINUS
Current short market value

Initially it will equal margin deposit

21

How does SMA appear in a short account?

Market price falls, opening up profit.
SMA is difference between actual equity and Reg T requirement on the current short market value.

22

How is combined equity across long and short accounts calculated?

(Long market value + credit balance) – (debit balance + short market value)

23

What's the minimum equity on a long margin account's initial transaction?

Lesser of $2k or 100% of purchase price

24

What's minimum equity in a short margin account?

Greater of $2k or Reg T requirement.

25

What's the minimum maintenance requirement for long account?

Equity must be at least 25% of current market value.

(multiplying debit balance by 4/3 shows the floor for market value after which maintenance call will be made)

26

Maintenance calls must be met promptly by...

- cash equal to call
- selling securities in the account of 4x the call
- depositing full paid securities to value of 4/3 x the call

27

What's minimum maintenance call on short account?

For stock at $5/share or above: equity equals 30% of short market value

Find ceiling on short market value by multiplying credit balance (short sale proceeds PLUS Reg T deposit) by 10/13

28

What's maintenance requirement for short account with short stock at less than $5/share?

Minimum maintenance of greater of $2.50/share or 100% of short market value

29

What's the initial / maintenance requirement on non-convertible corporate bonds?

Greater of 20% of current market value or 7% of face value

30

What's the threshold for a customer to be deemed a pattern day trader?

4 day trades executed in one week

31

When must a customer be notified about change of interest in a margin account?

Within 30 days