Chapter 13.1

Question 1

Special Cash Account

Answer 1

Payments for purchases must be received by the B/D by the 4th business day following trade date. If payment is not received by then, the B/D must either:

• Obtain an extension of time for payment from FINRA, a stock exchange or a federal reserve bank or
• Cancel or liquidate the transaction
• *This rule does not have to be applied if the customer owes $1,000 or less
• *Extensions are a privilege granted to customers and are not “required” simply because a customer requested an extension.

Question 2

What must happen in a special cash account if a transaction is canceled or liquidated for failure to make a prompt payment?

Answer 2

The account must be frozen for 90 days. Any purchase by a customer during this period require funds to be in the account before the order is placed.

Question 3

If a REG T call in a special cash account has been outstanding for 4 business days and the client wants to avoid having the account frozen, the client could:

Answer 3

• Sell other securities in the account to cover the amount owed
• Request an extension of time for payment
• Deposit other securities which have a loan value equal to the amount owed

**The customer could not deposit a personal check for the amount due since “cleared funds” would be required in the account

Question 4

Cash on Delivery or Payment on Delivery

Answer 4

Are frequently used by large institutional traders that use large commercial banks as the clearing agent to settle trades. The purpose is to ensure simultaneous prompt delivery of securities and full payment of cash. A book entry settlement system is used. COD is used when the customer is the purchaser. POD is used when the customer is the seller.

• Prior to accepting this type of order from a customer, the name and address of the agent and the time and account number of the customer on file with the agent and institution involved in the transactions must be obtained. The member must provide the customer with a confirmation not later than the close of business the next business day after trade date.
  - In the case of a purchase by the customer where the agent is to receive the securities against payment, the close of business on the first business day after the date of execution of the trade.
  - In the case o fa sale by the customer where the agent is to deliver the securities against payment, the close of business on the first business day after the trade date.

Question 5

Margin Accounts

Answer 5

The term “margin” is the Reg T percentage(50%) that customers must deposit when they purchase a security on a credit basis. The loan value(50%) is the maximum percentage that the B/D will loan the customer.
-Payments must be received by the 4th business day after trade date.

Question 6

Changes in the terms and conditions of how interest will be calculated or charged on the debit balance in a margin account require what?

Answer 6

30 days prior notice to the customer.

**The actual rate may be changed without notice

Question 7

The current market value of a margined security is determined by what?

Answer 7

The last closing price or quotation

Question 8

Margin calculations must be made when?

Answer 8

On trade date and are marked to market daily thereafter

Question 9

What is required to be disclosed when a margin account is opened?

Answer 9

• All trades are subject to the rules and regulations of the SROs
• The securities are subject to rehypothecation
• The method of calculating interest on the debit balance

**The broker call loan rate changed to the B/D by a bank does not have to be disclosed.

Question 10

Under federal reserve regulations, the following securities can be purchased on margin:

Answer 10

• Registered security - A security listed on a national securities exchange
• OTC Margin stock - Is a listed of OTC companies which the federal reserve board has determined may be purchased on margin.

**OTC stock with no loan value must be purchased in a cash account.

Question 11

The following cannot be purchased on margin:

Answer 11

• New issues of stocks or bonds
• Open end investment companies
• Traditional or standard listed put and call options

Question 12

The following types of accounts may be margin accounts:

Answer 12

• Individual accounts
• Joint accounts
• Corporate accounts
• Discretionary accounts

**UGMA accounts cannot be margin accounts

Question 13

Initial equity in a margin account

Answer 13

The minimum initial equity in a margin account is $2,000.

**Exception to the minimum: On a purchase of less than $2,000, the customer must pay for the purchase in full.

Question 14

Short sales in a margin account

Answer 14

On a short sale of any amount, at least $2,000 must be deposited. Short sales in any securities, can only be made in a margin account. Short sales may never take place in a cash account. If a client has no positions in their account and executes a long sale of a security in their account, such sale would be considered to be a “short sale” in the investor:

- Owns a security that is convertible into or exchangeable for it but has not tendered such security for conversion or exchange
- Has an option to purchase or acquire it but has not exercised such option
- Owns rights or warrants to subscribe to it but has not exercised such rights or warrants

Question 15

SMA

Answer 15

Represents a line of credit that originates from having had excess equity. Customers can use their SMA to withdraw cash or make new purchases, even if the account is restricted

Question 16

Restricted Margin Accounts

Answer 16

Must abide by federal retention rules. The retention requirement in a margin account is the percentage of value which must be held in a restricted account upon the sale of withdrawal of securities. In a restricted margin account, 50% of the net sales proceeds may be withdrawn on trade date.

**If a restricted margin account, if a customer makes new purchases, a deposit of cash equal to the current initial margin requirement(50%) is required.

Question 17

Minimum maintenance equity:

Answer 17

Long Margin Account: 25% of the current market value long.

Short Margin Account: 30% of the current market value short.

Question 18

Same day substitutions of securities

Answer 18

Are allowed in a margin account if they are equal dollar value

Question 19

Foreign Equity securities that are listed on the FTSE world index are traded here, in the U.S., as securities which have a:

Answer 19

“Ready Market”. The FTSE world index is a European benchmark index which is similar to the S&P 500 in the U.S.