chapter 15 study notes

Question 1

Regulation U

Answer 1

Regulation U pertains to lenders making loans to investors who use securities as collateral for the
loan. Regulation U would apply to partners of a member firm who are buying for their own account
as well as for customers. The limits that normally apply under Regulation U do not apply to transactions
by broker-dealers acting as market makers or underwriters. The ability of these dealers to use credit
to carry their positions is limited only by the lender’s own credit standards.

Question 2

Uniform Practice Code VS. Reg T

Answer 2

ettlement refers to the timing of payment and delivery between member firms and is
governed under the Uniform Practice Code. The Reg T payment requirement refer to when customer
payment is due. Do not get these two concepts confused.

Question 3

Margin Risk Disclosure Document

Answer 3

 The customer could lose more funds than the amount deposited in the margin account.
 The firm can force the sale of securities or other assets in the account(s).
 The firm can sell the securities or other assets without contacting the customer.
 The customer is not entitled to choose which securities or other assets in your account(s) are
liquidated or sold to meet a margin call.
 The firm can increase its house maintenance margin requirements at any time and is not required to
provide the customer with advance written notice.
 The customer is not entitled to an extension of time on a margin call.

Question 4

Rule 15c2-1

Answer 4

Hypothecation

Question 5

Hypothecation

Prohibited Practices

Answer 5

Some of these prohibited practices include:
 Commingling of securities carried for the account of a customer with those of another customer
without obtaining the written consent of each customer
 Commingling the securities of a customer with those of any person who is not a customer of the
broker-dealer, including securities owned by the broker-dealer
 Hypothecating customer securities for a sum that exceeds the total indebtedness of all customers

Question 6

rehypothecation.

Answer 6

With permission, broker-dealers are allowed to use their customers’ securities as collateral for bank
loans under a process termed rehypothecation.

Question 7

Rehypothecation LImit

Answer 7

The broker dealer can use stock worth 140% of the debit balance to secure a loan that is equal to or lesser then the debit balance.

Question 8

Stock Loans

Answer 8

If a broker-dealer intends to lend a customer’s stock to another broker-dealer, it may
do so only if the customer has signed a loan consent agreement.
Note that a customer does not need to sign the loan
consent agreement in order to open a margin account; it is optional. If the stock is fully paid, the
customer would be required to sign a separate written consent, in addition to the signed loan
consent in the margin agreement, before the broker-dealer could lend the stock.

Question 9

reg t deposit requirement

Answer 9

Reg T requires both stock buyers and short sellers to put up an initial deposit of 50% of the trade.
This is the initial funding requirement often referred to as a Reg T call or a fed call.
Regulation T does not require the investor to deposit additional money if the price of the stock should decline.

Question 10

Excess equity

Answer 10

refers to equity in a margin account that is greater than the Reg T requirement.
Long Market Value - Debit balance = Equity
Equity - Reg T amount = Excess Equity

Question 11

SMA

Answer 11

Special Memorandum Account. Created by appreciation in securities, cash dividends or sale of securities and deposit of securities or cash.
Excess Equity - Reg T Requirement = SMA Created

Question 12

Usefullness of SMA

Answer 12

SMA becomes apparent when there is a decline in excess equity. Although an increase
in excess equity can create an SMA entry, the SMA does not decrease when excess equity declines.

Question 13

Restricted Account

Answer 13

If an account’s equity falls below 50%, it is referred to as a restricted account.
However, there is no requirement to deposit additional funds
Also, additional purchases could be made as
long as the customer deposits the amount required by Regulation T on the new purchase.
SMA can still be withdrawn in a restricted account.

Question 14

Sales in a Restricted Account

Answer 14

In addition, a customer who sells stock in a restricted account may
withdraw 50% of the amount sold. The balance of the amount sold must be maintained in the
account in accordance with the retention requirement.

Question 15

Buying Power in a margin account

Answer 15

Equals the SMA divided by the REg T requirement 50%

Question 16

maintenance call or a margin call. - Long Margin Account

Industry Rules not SEC or FED

Answer 16

The minimum maintenance requirement for a long account is 25%.

Question 17

maintenance call or a margin call. - Short Account

Industry Rules not SEC or FED

Answer 17

30%

Question 18

maintenance call or a margin call. - Leveraged ETF

Industry Rules not SEC or FED

Answer 18

The margin requirement on these securities can be computed by multiplying the portfolio
leverage factor by the standard SRO maintenance requirement.

Question 19

In-House Maintenance Margin Requirements

Answer 19

broker-dealer may have in-house maintenance
margin requirements that are greater than regulatory requirements. These maintenance
requirements may be increased, at any time, without advance written notice.

Question 20

Guarantees

Answer 20

The account of a customer may be guaranteed by another customer. This means that
if a customer’s account becomes undermargined, the equity in the other account may be used as
collateral for the undermargined account. The guarantee must be in writing.

Question 21

Minimum Initial Equity Requirement

Answer 21

The minimum initial margin deposit must be $2,000
unless the amount of the purchase is less than $2,000, in which case the customer must deposit the
full purchase price

Question 22

credit balance

Answer 22

The customer’s account will be credited with the sale proceeds plus the cash margin deposit required. This total is called the credit balance (CR)
Based on the time the stock is borrowed and does not change with MV of the underlying security

Question 23

short market value (SMV).

Answer 23

the market value of the borrowed security

Question 24

The minimum maintenance

requirements for a short account is:

Answer 24

 $2.50 per share or 100% of the current market value, whichever is greater, if the short stock is valued
at less than $5.00 per share
 $5.00 per share or 30% of the current market value, whichever is greater, if the short stock is valued at
$5.00 per share or above

Question 25

patter day trader

Minimum Equity REquirement

Answer 25

25,000.

Question 26

Pattern Day Trader Margin Call

Answer 26

If a day trader exceeds her buying power
limitations, she must meet a day-trading margin call within five business days. During the time the
margin call is outstanding, the account is restricted to buying power of two times maintenance
margin excess. If the margin call is not met by the fifth business day, trading in the account is
restricted to a cash-available basis for 90 days or until the call is met. Funds deposited to meet the
minimum equity requirement or a day-trading margin call must remain on deposit in the account
for at least two business days.

Question 27

Pattern day traders

Cross-Guarantess

Answer 27

Prohibited
This prohibits crossguarantees
not only between accounts of different customers, but also between different accounts
of the same customer.

Question 28

Strategy-Based Margin

General Idea

Answer 28

The calculation of traditional margin requirements is based on each
portfolio position individually. Long and short stock positions require a 50% Regulation T deposit,
long options positions require a 100% deposit of the premium, while an uncovered options writer’s
deposit requirement varies based on the degree of in-the-money or out-of-the-money positions

Question 29

Portfolio margin eligible securities

Answer 29

 All margin equity securities
 Listed options
 Security futures products
 Unlisted derivatives
 Warrants
 Index warrants and related instruments

Question 30

Portfolio Margin Client signature Statement REquirement

Answer 30

This statement must describe the special risks associated with portfolio margin accounts, which
include the following:
 Portfolio margining normally allows for greater leverage in an account, which may lead to larger
losses in the event of adverse market movements.
 Because the maximum time for meeting a margin deficiency is shorter than in a standard margin
account, the risk is greater that a customer’s portfolio margin account will be liquidated involuntarily.

Question 31

Equity in a short account

Answer 31

credit balance - SMV = Equity

Question 32

Short account minimum maintenance for lower priced securities

Answer 32

 $2.50 per share or 100% of the current market value, whichever is greater, if the short stock is valued
at less than $5.00 per share
 $5.00 per share or 30% of the current market value, whichever is greater, if the short stock is valued at
$5.00 per share or above