CH 15 Margins Flashcards
The industry minimum maintenance requirement for a long account is ____%.
The industry minimum maintenance requirement for a long account is 25%.
Equity must be at least 25% of LMV.
True or False: National futures exchange members may use portfolio margin-eligible securities to hedge index futures.
TRUE
True or False: ETFs are marginable and may be sold short.
TRUE
Reg X regulates the ___________ who obtain credit for the purchase of securities.
Reg X regulates the borrowers who obtain credit for the purchase of securities.
For clients to whom credit has been extended, what two disclosures must be made regarding the loan?
(1) The annual interest rate that may be charged, and (2) the method by which the debit balance is determined
How is the account affected if SMA is withdrawn?
Debit balance increases and equity decreases.
The minimum equity in a day trading account with uncovered derivatives is $________.
The minimum equity in a day trading account with uncovered derivatives is $25,000.
What are the three typical components of a margin agreement?
The credit section, the hypothecation section, and the loan consent section
True or False: Portfolio margin sets a margin requirement based on the greatest potential net loss in the portfolio.
TRUE
To meet a maintenance (in-house) call by selling securities, clients must sell ______ times the amount of the call.
To meet a maintenance (in-house) call by selling securities, clients must sell four times the amount of the call.
In a margin account, customers pay interest on the ________ balance.
In a margin account, customers pay interest on the debit balance.
Mutual fund shares have loan value after they have been owned for ____ days.
Mutual fund shares have loan value after they have been owned for 30 days.
Is an SEC-registered BD an eligible client for portfolio margin?
Yes, as are members of a national futures exchange and clients who are approved for uncovered option writing.
A restricted account has equity below ____%, but above the minimum maintenance requirement of ____%.
A restricted account has equity below 50%, but above the minimum maintenance requirement of 25%.
The buying power of a day trading account is _____ times the maintenance requirement excess.
The buying power of a day trading account is four times the maintenance requirement excess.
On Monday, Sam buys ABC stock on margin. If he sells it on Tuesday, will he still be required to pay for the purchase?
Yes. The margin requirement must still be met on the purchase. Failure to pay is a violation called free-riding.
When a customer buys on margin, how much cash may a BD borrow from a bank?
100% of the debit balance
True or False: Regulation T is a transactional requirement, not a maintenance requirement.
True. The Reg. T requirement (50%) must be met on each trade, but the account need NOT be maintained at that level.
The maintenance requirement on a long leveraged ETF position is computed by multiplying the leverage factor by ____%.
The maintenance requirement on a long leveraged ETF position is computed by multiplying the leverage factor by 25%.
To meet the minimum maintenance for day trading, ______ guarantees between accounts and/or clients are not allowed.
To meet the minimum maintenance for day trading, cross guarantees between accounts and/or clients are not allowed.
The maintenance requirement on a short leveraged ETF position is computed by multiplying the leverage factor by ____%.
The maintenance requirement on a short leveraged ETF position is computed by multiplying the leverage factor by 30%.
What is the maximum amount of securities that a BD may rehypothecate to a bank?
140% of the debit balance
To collateralize a loan, the maximum amount of stock that a broker may send to the bank is _____% of the customer debit.
To collateralize a loan, the maximum amount of stock that a broker may send to the bank is 140% of the customer debit.
True or False: Investment company shares may be purchased on margin.
False. While mutual fund shares may not be purchased on margin, the shares have loan value if owned for 30 days.
True or False: A BD must disclose to its margin clients the amount of interest that will be charged.
False. Since the rate changes, BDs cannot determine the amount of interest. Instead, the rate of interest is disclosed.
In order to utilize portfolio margin, a client must be approved for ___________ option writing.
In order to utilize portfolio margin, a client must be approved for uncovered option writing.
What documents are mandatory when opening a margin account?
A new account form, the margin (customer) agreement, and the hypothecation agreement
Where must a security trade for it to be considered marginable?
On the NYSE, Nasdaq, or another exchange
Customers are given ____ business days after settlement date to pay for their portion of a trade (i.e., S+__ or T+__).
Customers are given two business days after settlement date to pay for their portion of a trade (i.e., S+2 or T+3).
True or False: Restricted accounts must be remedied immediately by depositing the appropriate dollar amount.
False. Restricted accounts do not require immediate response.
Reg U regulates the extension of credit by ________ for the purchase of securities.
Reg U regulates the extension of credit by non-BDs for the purchase of securities.
On a stock loan between two BDs, when may the lender call the stock back?
At any time
BDs are not required to take action if a margin deficiency is less than $______.
BDs are not required to take action if a margin deficiency is less than $1,000.
When must a margin disclosure document be provided to a client?
At the time the account is opened
When buying securities in a restricted margin account, clients must deposit ___% of the trade within ____ business days.
When buying securities in a restricted margin account, clients must deposit 50% of the trade within three business days.
On margin, Dan buys $12,000 of stock, deposits $7,000, and borrows $5,000. What amount may the BD borrow from a bank?
$5,000, which is 100% of the debit balance
An account with equity below the Reg T requirement is called ____________.
An account with equity below the Reg. T requirement is called restricted.
Define a day trade.
The purchase and sale of the same security on the same day in a margin account
True or False: BDs are NOT required to provide advance notice if they change their in-house maintenance requirements.
TRUE
For a leveraged ETF, how is the maintenance requirement determined?
The 25% (long) or 30% (short) maintenance requirement multiplied by a given portfolio leverage factor
True or False: FINRA approval is required before a BD may offer portfolio margin.
TRUE
Define pattern day trading.
Executing four or more day trades over a five-day period
True or False: If a client’s margin account has been frozen, she may NOT continue to trade.
False. Trading is allowed; however, all trades must be paid for in advance.
The ______________ agreement must be signed before a firm may lend stock belonging to a client.
The loan consent agreement must be signed before a firm may lend stock belonging to a client.
Sue makes a $1 million purchase of a 2x short Gold Index ETF. What is her maintenance requirement?
Her requirement is based on the leverage factor times the SRO maintenance requirement (2 x 30% = 60% or $600,000).
Jim has a $10,000 debit balance in his margin account. The BD may rehypothecate stock of $_______ and borrow $_______.
Jim has a $10,000 debit balance in his margin account. The BD may rehypothecate stock of $14,000 and borrow $10,000.
When may a member firm lend the stock that belongs to a client?
When the client signs the loan consent agreement
When is a client required to provide a signature when opening a margin account?
Prior to the time the account is opened
Upon what is portfolio margin based?
The greatest risk in a position
_____________ is when a BD takes the stock of two or more clients and uses it to secure a loan.
Commingling is when a BD takes the stock of two or more clients and uses it to secure a loan.
May new issues (e.g., IPOs or mutual fund shares) be purchased on margin?
No
What section of the margin agreement is not mandatory?
The loan consent section
Are mutual funds considered marginable securities?
No. Investors must pay 100% of the purchase price.
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.
Can credit be extended to purchase OTC equities?
No. Pink Market and other OTC equities are not marginable.
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?
No. The equity percentage is currently 37.5% (15 ÷ 40). Provided the equity is 25% or greater, no fix is required.
The minimum equity in a portfolio margin account with unlisted derivatives is $___________.
The minimum equity in a portfolio margin account with unlisted derivatives is $5,000,000.
For margin clients, a firm must provide at least ___ days written notice of changes in the method of computing interest.
For margin clients, a firm must provide at least 30 days written notice of changes in the method of computing interest.
True or False: Day trading accounts do NOT require delivery of a special risk disclosure document prior to opening.
False. A special disclosure document is required.
The _________________________ regulates margin requirements.
The Federal Reserve Board (FRB) regulates margin requirements.
If a BD extends credit to a client, what must it disclose to the client?
The annual interest rate to be charged and the method of determining the debit balance on which interest is charged
For a client to use portfolio margin, when must he receive, and acknowledge receipt in writing, a disclosure document?
Prior to the initial transaction
For a BD carrying a client’s margin account, what amount of stock may be rehypothecated?
140% of the debit balance
Under Regulation T, does the payment date requirement apply to cash or to margin accounts?
Both. Payment is due within three business days for a cash account (100% payment) and a margin account (50% payment).
If owned for ____ days, open-end investment company (mutual fund) shares may be used as collateral in a margin account.
If owned for 30 days, open-end investment company (mutual fund) shares may be used as collateral in a margin account.
Along with listed common stock, name some of the other securities that are deemed marginable by the FRB.
Closed-end funds, warrants, convertible bonds, REITs, and leveraged ETFs
How many days advance notice is provided to clients if a BD changes loan terms (e.g., interest rate)?
30 days
Regulation T regulates the extension of credit by _____ for the purchase of securities.
Regulation T regulates the extension of credit by BDs for the purchase of securities.
How long must new issues be held before they may be used as collateral?
30 days
How is SMA created?
Appreciation in the value of securities, cash or dividend deposits, or sales of securities from the account
True or False: Market declines will reduce SMA.
False. The only way to lose SMA is to use SMA.
If a client’s equity falls below 25%, the maintenance call must be met __________.
If a client’s equity falls below 25%, the maintenance call must be met promptly.
What must be obtained for a firm to commingle the securities of two or more customers?
Written permission from each customer
True or False: Portfolio margin may be used for only one type of security.
False. Portfolio margin may be used for most securities.
If a client’s margin account has an equity balance greater than the Reg. T requirement, the account has ____.
If a client’s margin account has an equity balance greater than the Reg. T requirement, the account has SMA.
Define Regulation T.
The percentage a customer must deposit when purchasing securities or selling short
Under portfolio margin rules, margin requests must be satisfied within ______ business days of request.
Under portfolio margin rules, margin requests must be satisfied within three business days of request.
True or False: Hedge funds are the typical investors that take advantage of the benefits of portfolio margin.
TRUE
True or False: On a stock loan between two BDs, the lender retains voting rights.
False. The borrower receives voting rights.
For margin accounts, the maximum amount that a firm may borrow from the bank is _____% of the debit balance.
For margin accounts, the maximum amount that a firm may borrow from the bank is 100% of the debit balance.
According to Reg T, what happens to a client’s account if she fails to pay in a timely manner?
Her account will be frozen for 90 days.
What are the two uses of SMA?
1) To buy additional securities, and 2) for a loan advance
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?
$8,000, which is 100% of the debit balance.
The lender of stock retains all ownership rights, with the exception of the right to ____.
The lender of stock retains all ownership rights, with the exception of the right to vote.
Due to lower margin requirements, portfolio margin affords investors with greater __________.
Due to lower margin requirements, portfolio margin affords investors with greater leverage.
Jim makes a $1 million purchase of a 3x long Gold Index ETF. What is his maintenance requirement?
His requirement is based on the leverage factor times the SRO maintenance.
What right does the lender of stock retain?
The lender of stock retains all ownership rights, with the exception of the right to vote.
What advantage does portfolio margin provide to investors?
Due to lower margin requirements, portfolio margin affords investors with greater leverage.
What is Jim’s maintenance requirement for a $1 million purchase of a 3x long Gold Index ETF?
His requirement is based on the leverage factor times the SRO maintenance requirement (3 x 25% = 75% or $750,000).
