Chapter 18 Margin

Question 1

The Securities Exchange Act of 1934 granted the Federal Reserve
Board (FRB) with the power to regulate borrowing and it does so through Regulation _

Answer 1

Regulation T

Question 2

Regulation _ governs the extension of credit by broker-dealers. Although the regulation is established by the FRB,
it’s the SEC that’s charged with the responsibility of enforcing the rules.

Answer 2

Regulation T governs the extension of credit by broker-dealers. Although the regulation is established by the FRB,
it’s the SEC that’s charged with the responsibility of enforcing the rules.

Under Reg. T, the FRB determines the types of securities that may be purchased on margin through a broker-dealer, when payment is due, as well as the amount of credit that may be extended. For both long purchases and short sales of stock,
the current initial Reg. T margin requirement is 50%.

Question 3

Marginable securities include:

Answer 3

 Securities that are listed on a registered stock exchange (including ETFs)
 Securities that are listed on Nasdaq

Question 4

Can non-marginable securities be purchased in a margin account?

Answer 4

Answer: Yes, but any trades involving these securities must be paid for in full at the time of purchase.

Question 5

Question: What are examples of non-marginable securities?

Answer 5

Answer:

• OTC equities—those quoted on the OTC Bulletin Board (OTCBB) or in the OTC Markets Group Pink Marketplace
• Standard listed options (those with nine-month maturities)—buyers must deposit 100% of the premium
• New issues (e.g., IPOs)—although new issues cannot be purchased on margin, the shares become
  marginable (have loan value of 50%) if they’ve been held and fully paid for 30 days.

Question 6

Does Regulation T Apply to both Cash and Margin Accounts? Yes. Remember, Reg. T determines the following two components relating to transactions that are executed:

1. The date by which payment is due for a purchase
   - Whether the purchase is made in a cash or margin account, payment is due no later than four business days after the trade (i.e., two business days after settlement).
2. The amount of credit that may be extended by the broker-dealer for a purchase
   - In a cash account, no extension may be made; therefore, clients must deposit 100% of the purchase.
   - In a margin account, an extension of 50% is allowed; therefore, clients must deposit 50% of the purchase.

Answer 6

Remember,

Payment is due for both cash and margin accounts T+4

Extensions for cash accounts is 0% and for margin 50%

With the margin requirement set at 50%, an investor is able to purchase twice the
amount of securities in a margin account than she otherwise would with the same
amount of money in a cash account.

Question 7

Is the Use of Margin Available to All Investors?

Answer 7

No. Not all types of client accounts are permitted to
engage in margin trading. For example, the owners/custodians of IRAs, custodial accounts, and qualified
retirement accounts (e.g., such as 401(k) and 403(b) plans) are prohibited from trading on margin.

Question 8

A customer who initiates a margin transaction will receive a margin (Reg. T) call for 50% of the transaction
amount. According to Regulation T, the customer’s margin requirement must be deposited by no later than
_ business days after the trade.

Answer 8

A customer who initiates a margin transaction will receive a margin (Reg. T) call for 50% of the transaction
amount. According to Regulation T, the customer’s margin requirement must be deposited by no later than
four business days after the trade.

Question 9

A customer may meet a Reg. T call by:

Answer 9

depositing cash equal to the amount of the call or by depositing fully
paid marginable securities.

If securities are being used in lieu of cash, the customer must deposit
securities with a market value that’s equal to twice the amount of the call. The justification for the
amount of securities to be deposited is that the loan value of securities is only 50%.

For example, if a customer purchases 1,000 shares of XYZ stock at $40, he will
receive a Reg. T call for $20,000. The customer may deposit $20,000 in cash or
marginable securities with a market value of $40,000. Why $40,000? This is
because the securities have a loan value of only 50%.

Question 10

True or False. Remember, cash is able to be used dollar-for-dollar; however, it takes $2.00 worth of securities to
satisfy every $1.00 owed to the broker-dealer.

Answer 10

True

Question 11

represents the maximum amount that a broker-dealer will lend to a customer based on a percentage of the current market value of eligible securities. Since Reg. T is currently 50%, marginable securities have a _ value equal to 50% of their market value (100% – 50%).

Answer 11

Loan Value

For example, Mr. Smith purchases securities with a total market value of $20,000. The
securities have a loan value of $10,000 ($20,000 x 50%), which represents the maximum
amount the brokerage firm may lend to the customer for the purchase. If the securities
rise in value to $24,000, the loan value increases to $12,000 ($24,000 x 50%)

Question 12

To open a margin account, customers are required to sign a margin agreement which states that they’re
willing to abide by the rules and regulations of the Federal Reserve Board, the SRO, and the brokerage
firm. The margin agreement usually contains the following three separate agreements:

Answer 12

1. The credit agreement
2. The hypothecation agreement
3. The loan consent agreement

Question 13

The _ agreement is essentially an acknowledgement that a customer is borrowing funds from the firm and is responsible for both payment of interest and repayment of the loan. The agreement will disclose all of the terms, such as the fact that the interest rate is variable and is typically tied to the broker call loan rate.

Answer 13

Credit Agreement

The broker call loan rate is the rate that’s charged to a brokerage firm when it borrows money from a bank to replace the funds being provided to a margin customer. The brokerage firm then charges the customer an additional percentage above this rate.

Question 14

When a margin account is opened for a customer, the member firm must send the customer a statement
that indicates the following:
- The conditions under which interest charges will be imposed
- The annual rate(s) that may be imposed
- The method of computing interest
- Whether the rates are subject to change without prior notice and the specific condition(s) under
which they may be changed
- The method of determining the debit balance on which interest will be charged

Answer 14

Note

Question 15

The _ or pledge agreement states that the customer is _ (pledging) his securities to the brokerage firm which, in turn, provides the firm with the ability to rehypothecate the securities to secure the loan received from a bank.

Answer 15

Hypothecation Agreement

The firm may pledge an amount equal to 140% of the amount that the customer is borrowing (i.e., 140% of the account’s debit balance). All of the securities in excess of 140% must be segregated.

For example, in a margin account, a customer purchases securities with a total market value of $10,000. The customer deposits 50% of the purchase, but borrows the remaining $5,000. To secure the loan from the bank, the brokerage firm is able to pledge up to $7,000 of the customer’s securities (140% x $5,000)

Question 16

If the _ agreement is signed (this is optional), the customer is
signifying that the broker-dealer is entitled to lend the customer’s securities to other customers.

Answer 16

Loan Consent Agreement

The traditional borrowers of these shares are the short sellers who seek to profit from the decline in a security’s price.

Question 17

True or False. Brokerage firms are
required to furnish all margin customers with a risk disclosure document at both the time of the account
opening and annually thereafter.

Answer 17

True

Question 18

A customer who purchases securities in a margin account establishes a

Answer 18

long margin position

The three balances that are used for all computations of a long margin position are the long market value
(LMV), the debit (loan) balance, and the equity (EQ).

Question 19

The _ reflects the current market price of the securities in the account and will fluctuate as the total
value of the securities increases and decreases. The market value of the positions purchased must be
marked-to-the-market as of the end of each trading day.

This process will determine if a customer is required to deposit additional cash (if the market value of the long positions drop) or may be able to buy additional securities (if the market value of the long positions rise).

Answer 19

Long market value (LMV)

Question 20

The _ represents the amount that a customer has borrowed from and currently owes the brokerage
firm. Assuming that there are no additional transactions, and disregarding interest charges, the _
balance will remain constant.

Answer 20

debt (loan) balanc

Any subsequent change in the current market value of the securities has no effect on a customer’s debit
balance. Of course, any interest charged on the loan by the broker-dealer increases the balance.

Question 21

The _ represents the investor’s ownership interest in the account and is computed by

Answer 21

Equity (EQ)

Long Market Value (LMV) – Debit Balance = Equity (EQ)

For example, with a Reg. T requirement of 50%, an investor purchases 1,000 shares of XYZ at $20 per share. The total cost of the purchase is $20,000 (the LMV) and the client must deposit $10,000 (the Reg. T deposit requirement of 50%). The other $10,000 is provided as a loan by the broker-dealer and represents the debit balance.

After the transaction and subsequent customer deposit, the account will reflect the following balances:
LMV – DEBIT = EQ
$20,000 - $10,000 = $10,000 (EQ)

Question 22

A client who purchases securities is hoping that the stock rises in value. If the long market value of the
securities increases, the equity in the account will increase proportionately. The increase may create a
situation in which the equity in the account is above the initial Reg. T requirement, thereby creating
_ equity in the account.

Answer 22

Excess Equity

If a margin account generates excess equity based on the increase in the LMV, the amount will be reflected
(kept track of) in a Special Memorandum Account (SMA).

Question 23

is a separate account within a margin account where excess margin, or buying power, is placed. It acts as a line of credit for purchasing securities.

• Crucial in margin trading because it provides additional purchasing power to the investor
• It’s created when the market value of securities in a margin account increases, thus creating excess margin, which is then transferred to this account
• allows an investor to leverage their investment and buy more securities without adding more cash to the account. This increases the potential for both gains and losses.
• regulated by the Federal Reserve Board’s Regulation T which stipulates this account cannot exceed the total market value of securities in the margin account.

Answer 23

Special Memorandum Account (SMA)

Question 24

An investor is generally permitted to withdraw _% of the SMA generated.
If a customer does choose to withdraw cash, the debit balance will increase by the amount withdrawn.
However, the withdrawal will also cause the equity in the account to decrease proportionately.

Answer 24

An investor is generally permitted to withdraw 100% of the SMA generated.
If a customer does choose to withdraw cash, the debit balance will increase by the amount withdrawn.
However, the withdrawal will also cause the equity in the account to decrease proportionately.

From the previous example, let’s assume that the investor withdraws the $2,000 of SMA
in his account. As shown below, the SMA is reduced to zero and the debit balance will
increase to reflect the additional loan.

LMV. - DEBIT = EQ. SMA
$24K. $10K. $14K. $ 2K
$24K. $ 12K. $ 12K. $0

Question 25

With a Reg. T requirement of 50%, buying power is equal to two times the SMA balance (SMA x 2).

Answer 25

Assuming the SMA was not withdrawn, the $2,000 of SMA will allow him to purchase $4,000 in securities ($2,000 X 2) See the results. LMV. - DEBIT. = EQ. SMA $24K. $10K. $14K. $2K $28K. $ 14K. $14K. $0 If investors choose to purchase an amount of Securities that exceeds their buying power, they will simply be required to deposit 50% of the net remaining amount

Question 26

**Purchases in a Restricted Account** When an account is restricted, the customer is able to make additional purchases in the account and need only meet the initial Reg. T requirement for the new purchase. There's no provision that requires the customer to deposit enough cash to bring the entire account up to the Reg. T requirement. **Same-Day Substitution** When an investor purchases and sells securities on the same day in a restricted account, it's referred to as a same-day substitution. If the amount being purchased and sold is identical, then no additional deposit is required. For example, if a customer sold $10,000 worth of ABC stock and purchased $10,000 worth of XYZ stock, no margin deposit is required. If the purchase amount is greater than the sale amount, the customer is required to deposit the Reg. T margin requirement on the difference. For example, if a customer sold $10,000 of ABC stock and purchased $15,000 worth of XYZ stock, the customer is required to deposit the Reg. T margin requirement on the $5,000 net difference, which is $2,500. If the sale amount is greater than the purchase amount, SMA is credited for an amount equal to 50% of the net sales proceeds. For example, if a customer purchased $10,000 of ABC stock and sold $15,000 worth of XYZ stock, SMA will increase by $2,500 ($5,000 x 50%).

Answer 26

If the purchase amount is greater than the sale amount, the customer is required to deposit the Reg. T margin requirement on the difference. For example, if a customer sold $10,000 of ABC stock and purchased $15,000 worth of XYZ stock, the customer is required to deposit the Reg. T margin requirement on the $5,000 net difference, which is $2,500. If the sale amount is greater than the purchase amount, SMA is credited for an amount equal to 50% of the net sales proceeds. For example, if a customer purchased $10,000 of ABC stock and sold $15,000 worth of XYZ stock, SMA will increase by $2,500 ($5,000 x 50%). ## Footnote Note

Question 27

Long margin account customers are not required to maintain a constant 50% equity level; instead, industry rules set a minimum maintenance requirement for equity to be ***at least 25% of the LMV***. Therefore a restricted account is one with equity that’s below 50%, but at or above 25% of the LMV. If the equity drops below ***25%*** of the LMV, a **maintenance call** is issued and the call must be met *promptly*. A client may satisfy the call by depositing cash equal to the amount of the call, by liquidating securities, or by depositing fully paid securities.

Answer 27

If a margin customer intends to take a withdrawal from SMA, but the withdrawal causes the account’s equity to fall below the minimum maintenance requirement, he will be unable to withdraw the funds. In this type of situation, the SMA is referred to as ***phantom SMA*** and may only be withdrawn when the equity returns to an acceptable level.

Question 28

Not all margin customers start with substantial purchases. For that reason, industry rules establish minimum equity requirements for ***initial transactions*** in their margin accounts. For a long position, the customer’s minimum required deposit is *the lesser of* **$2,000 or 100% of the purchase price**. This requirement may override the 50% Reg. T requirement for initial purchases that are less than $4,000.

Answer 28

*Example 1: A customer makes an initial purchase of $1,800 in a margin account. Although the FRB requires a 50% Reg. T deposit ($900), this amount doesn’t meet the industry requirement of the lesser of $2,000 or 100% of the purchase price. Therefore, the customer is required to deposit the full $1,800.* *Example 2: A customer makes a $3,000 initial purchase in a margin account. Again, although the FRB requires a 50% Reg. T deposit ($1,500), this amount doesn’t meet the overriding industry requirement of the lesser of $2,000 or 100% of the **purchase price***. Therefore, the customer is required to deposit $2,000.

Question 29

A customer who sells securities short must do so through the use of a short margin account. The three balances that are used for all computations in a short margin account are the

Answer 29

credit balance (CR), the short market value (SMV), and the equity (EQ).

Question 30

There are two components which make up the ***credit balance***—the total proceeds generated by the short sale plus the margin requirement on the value of the sale. For a short sale, the initial Reg. T margin requirement of 50% is the same as if a margin purchase had been made. ***The SMV*** represents the current market value of the securities that have been sold short and will fluctuate as the value of the securities increases or decreases. The short seller wants the SMV to decline, but has a potential unlimited loss if the stock rises. ***The EQ*** balance initially represents the amount that has been deposited by the customer. The EQ is the CR balance minus the SMV. - Credit Balance (CR) – Short Market Value (SMV) = Equity (EQ)

Answer 30

*For example, an investor sells short 1,000 shares of ABC at $20 which generates proceeds of $20,000. The customer must deposit margin of $10,000 ($20,000 x 50%). After making the deposit, the credit balance is $30,000 ($20,000 of short sale proceeds plus the margin deposit of $10,000). The account will be established as follows:* - CR – SMV = EQ $30,000 $20,000 $10,000 ## Footnote If the SMV decreases, the EQ will increase; on the other hand, if the SMV increases, the EQ will decrease. Interestingly, the CR balance (i.e., all of the cash) is not influenced by the fluctuation in the market value; it remains the same. Due to the potential upside risk, customers may choose to hedge their short positions by either purchasing calls or placing buy-stop orders.

Question 31

The amount of excess equity for a short position is determined by the difference between the

Answer 31

current equity balance and the amount of equity that’s required by Reg. T.

Question 32

A restricted account is one with Equity that's below _%, but at or above _% of the LMV

Answer 32

A restricted account is one with Equity that's below **50%** but at or above **25%** of the LMV.

Question 33

True or false. If the equity in a margin account drops below 25% of the LMV, a maintenance call is issued and the call must be met promptly.

Answer 33

True A client May satisfy the call by depositing cash equal to the amount of the call, by liquidating securities, or by depositing fully paid securities.

Question 34

For a long position, the customer's minimum required deposit is the lesser of $_or _% of the purchase price.

Answer 34

For a long position, the customer's minimum required deposit is the lesser of $2,000 or 100% of the purchase price. However, this requirement May override the 50% regulation T requirement for initial purchases that are less than $4,000

Question 35

The *equity* (EQ) in a short margin position is calculated as

Answer 35

Credit balance - Short Market Value

Question 36

What is the main difference between long and short positions within a margin account?

Answer 36

The difference between long and short positions is at the equity of a long position increases when the LMV rises, but the equity of a short position increases when the SMV drops.

Question 37

For a short margin position account. Industry rules set a minimum maintenance requirement for equity to be at least _% of the SMV.

Answer 37

For a short margin position account. Industry rules set a minimum maintenance requirement for equity to be **at least 30%** of the SMV. If a client has a shirt account in which SMA exists, she may not withdraw SMA if the withdrawal brings the account below the minimum maintenance requirement of 30%. Ex: CR. - SMV. = EQ $30k. $20k. $10k $30k. $25k. $5k Based on the SMV increase to $25k, the min maintenance requirement is $7,500 ($25k x 30%). Since the EQ is $5k, which is less than the maintenance requirement, the client receives a maintenance call for the $2,500 difference.

Question 38

For a short margin position, the customers minimum required deposit is the _ of $2,000 or the required reg T deposit.

Answer 38

Greater of $2,000 or the required reg T deposit. *Ex: A customers initial transaction in a margin account is a $1,600 short sale of stock. Although the FRB required a 50% reg T deposit ($800), this amount doesn't meet the industry requirement of the greater of $2,000 or 50% of the transaction. Therefore the customers deposit is $2,0000.*

Question 39

If a customer made a purchase and a short sale in a margin account, it may be necessary to calculate the combined equity of the account. What are the 2 formulas to do so?

Answer 39

LMV + CR - DR - SMV or (LMV - DR) + (CR - SMV)

Question 40

What's the maintenance requirement for a customer who has made a $1 million purchase of 2x Long Gold Index ETF?

Answer 40

*To calculate the maintenance requirement, the standard long requirement of 25% is multiplied by the leverage factor of 2. Therefore, in this example, the customer must maintain a 50% margin requirement: $1,000,000 x 50% = $500,000.* Special maintenance requirement on leveraged ETFs

Question 41

What's the maintenance requirement for a customer who had a $1 million short position of a 3x Inverse Gold Index ETF?

Answer 41

*To calculate the maintenance requirement, the standard short requirement of 30% is multiplied by the leverage factor of 3. Therefore, in this example, the customer must maintain a 90% margin requirement: $1,000,000 x 90% = $900,000.* Special maintenance requirements on Leveraged ETFs

Question 42

What is minimum equity requirement for a day trader?

Answer 42

$25,000. This must be deposited into the account before any day trading begins.

Question 43

is a risk-based margin policy that aligns margin requirements with the overall risk of a portfolio. This type of margin allows for real-time risk management that can offer lower margin requirements than traditional methods, especially for large and sophisticated investors who have diversified portfolios

Answer 43

Portfolio-based Margin The primary principle behind portfolio margin is that securities that are part of the same portfolio often have offsetting risks. This means that a decline in one security may be offset by the gain in another, leading to a lower overall risk for the portfolio. By taking this into account, portfolio margin can result in significantly lower margin requirements than traditional methods which consider each security in isolation. The calculation of portfolio margin involves sophisticated risk assessment techniques. Portfolio margin uses an SEC-approved computer modeling system to perform risk analysis and multiple pricing scenarios to measure risk in order calculate the appropriate margin requirements.

Question 44

True or False. Portfolio margin is not available to small retail clients.

Answer 44

True. Its only allowed for the following entities: 1. Any broker or dealer that's registered with the SEC under the Securities Exchange Act of 1934 2. Any member of a National Futures exchange to the extent that listed index options, unlisted derivatives, ETF options, index warrants or other underlying instruments hedge the members index futures 3. Any person approved to engage in uncovered options contracts. If a customer intends to trade unlisted derivatives, the customer must maintain Equity of at least 5 million at all times. Prior to offering portfolio margining methodology, a broker-dealer must develop a profile customers were eligible to use it. The broke a dealer must establish an approval process and Implement minimum Equity requirements for customers that are eligible to use portfolio margining

Question 45

A _ is any customer who executes four or more day trades over in a five-business-day period.

Answer 45

A ***pattern day trader*** is any customer who executes four or more day trades over in a five-business-day period. ## Footnote If a customer meets the definition of a pattern day trader, but the number of day trades is 6% or less of total trades for the five-business-day period, the customer is not considered a pattern day trader. On the other hand, if the broker-dealer knows, or has a reasonable basis to believe, that a customer who is opening an account or resuming day trading will engage in a pattern of day trading, the firm may immediately impose special day trading margin requirements.

Question 46

A _ is defined as the purchase and sale—or the sale and purchase—of the same security on the same day in a margin account

Answer 46

A ***day trade*** is defined as the purchase and sale—or the sale and purchase—of the same security on the same day in a margin account

Question 47

Portfolio margin uses an SEC-approved computer modeling system to perform risk analysis and multiple pricing scenarios to measure risk in order to calculate the appropriate margin requirements.

Answer 47

Each eligible product will have a different theoretical valuation range, including the following: - Highly capitalized broad-based indices use a potential market increase of 6% and a decrease of 8%. - Non-highly capitalized broad-based indices use a potential market increase of 10% and a decrease of 10%. - Equity options, narrow-based index options, and/or security futures use a potential market increase of 15% and a decrease of 15%. ## Footnote The goal of portfolio margining is to reduce excess margin calls and to lower the risk of forced position liquidations. The end result is that if positions are hedged appropriately, there’s normally a reduction in net margin requirements.

Question 48

Portfolio margin is not available to small retail clients; instead, it’s only allowed for the following entities:

Answer 48

1. A financial broker or dealer that’s registered with the SEC under the Securities Exchange Act of 1934 2. A member of a national futures exchange who uses listed index options, unlisted derivatives, ETF options, index warrants or other underlying instruments to hedge their index futures 3. A person approved to engage in uncovered option contracts. If you want to trade unlisted derivatives, you must maintain equity of at least $5,000,000 at all times. Before offering portfolio margining methodology, a broker-dealer must identify customers who are eligible to use it, establish an approval process, and implement minimum equity requirements for eligible customers.

Question 49

Mr. Green, a new client, decides to short 100 shares of JRF at $18 per share. What is the initial margin requirement for this trade? A. $2.50 per share B. 30% of current market value C. $1,800 D. $2,000

Answer 49

Answer: D ## Footnote *If the initial transaction in a margin account is a short sale, industry rules require a minimum equity deposit of $2,000 or the required Reg. T deposit, whichever is greater. Since $2,000 is greater than $1,800, the required deposit is $2,000. For a purchase, the minimum equity requirement is the lesser of $2,000 or 100% of the purchase price.*

Question 50

A client purchased $50,000 worth of a security in her margin account and deposited the Regulation T minimum. A few days later, the market value of the security was $60,000. What action can the client take in her account? A She can use the SMA in the account to pay down the debit balance. B The account is restricted and the client is prohibited from taking any action unless she brings the equity back to the Regulation T minimum. C. She can buy $10,000 worth of stock or withdraw $5,000 in cash. D. She can buy $20,000 worth of stock and can take out $5,000 in cash.

Answer 50

Answer: C ## Footnote *The Reg T minimum is 50% of the market value of the purchase. At the time of the initial trade, the client's account had $50,000 in market value and she deposited $25,000 in cash (i.e., equity). This also means the customer borrowed $25,000 (i.e., debit). When the market value of the securities increased to $60,000, the debit stayed at $25,000, but the equity increased to $35,000 ($60,000 LMV - $25,000 Debit). Based on the increase of the market value to $60,000, the Reg T minimum is $30,000, which means that the account has $5,000 of excess equity ($35,000 Equity - $30,000 Reg T minimum). As a result, the client can withdraw the $5,000 in cash or use it to purchase $10,000 of securities.*

Question 51

What is the SRO maintenance requirement on a $1 million purchase of a 2x Long Gold Index ETF?

Answer 51

Answer: $500,000 ## Footnote *Leveraged ETFs have maintenance requirements in excess of the typical SRO thresholds of 25% on long positions and 30% on short positions. The process for determining the margin requirement on these securities uses the standard SRO maintenance requirement and multiplies by the portfolio leverage factor. In this case, the standard long requirement is 25% which is multiplied by a factor of 2; therefore, the client must maintain a 50% margin. $1,000,000 x 25% = $250,000. $250,000 x 2 = $500,000.*

Question 52

The margin disclosure document describes the different types of risk associated with margin accounts and includes the following declarations. - You can lose more funds than you deposit. - The firm can force the sale of securities in your account. - The firm can sell your securities without contacting you. - You are not entitled to choose which securities are liquidated in order to meet a margin call. - The firm's house maintenance margin requirements may change without providing you advance written notice. - You are not entitled to an extension of time on a margin call. The firm definitely needs to provide advance written notice if the method of calculating interest charges is changed.

Answer 52

Note

Question 53

A customer's margin account has a current market value of $10,000, a debit balance of $8,000, and SMA of $1,000. The customer could meet a maintenance call with:

Answer 53

Answer: $500 Cash ## Footnote *A long margin account must maintain equity equal to 25% of the market value. The account is $500 below the minimum ($2,500 required minus $2,000 equity). Using SMA will increase the debit balance and, therefore, may not be used to meet a maintenance call.*

Question 54

"You don't lose it till you use it" Refers to

Answer 54

SMA

Question 55

True or False. SMA is a line-of-credit. There is no actual cash in the account. Its buying power is 2x the equity in the account. If you withdraw funds from SMA, your debt (loan) increases and your equity decreases

Answer 55

True

Question 56

When an investor shorts a stock, they borrow the shares from the brokerage to sell in the market with the expectation that they can buy them back at a lower price in the future. The proceeds from the short sale are credited to the investor's margin account, creating a

Answer 56

Credit balance

Question 57

What are the two components that make up the credit balance in a short margin position?

Answer 57

Total proceeds generated by the short sale + the margin requirement on the value of the sale. (50%) *Ex: an investor sells short 1,000 shares of ABC at $20 which generates profit of $20,000. The customer must deposit margin of $10,000 ($20,000 x 50%). After making the deposit, the credit balance is $30,000 ($20,000 of short sale proceeds + margin deposit of $10,000). The account will be established as follows: CR. - SMV. = EQ $30,000. $20,000. $10,000

Question 58

is when an investor borrows money from their broker to buy more stocks than they could afford with just their own money. The investor is betting the stock price will go up. If it does, they can sell the stock, repay the loan, and keep the profit. However, if the stock price goes down, the investor will still owe the loan amount to the broker.

Answer 58

A long margin position

Question 59

is when an investor borrows stocks from their broker and sells them, hoping the price will go down. If the price goes down, they buy the stock back at the lower price, return the shares to the broker, and keep the difference. However, if the stock price rises, the investor will have to buy back the stock at a higher price and lose money.

Answer 59

A short margin position

Question 60

is a demand from a brokerage for an investor to add money to their margin account to meet the minimum account balance requirement. If the investor can't meet the margin call, the broker may sell their securities to cover the shortfall.

Answer 60

What is a margin call?

Question 61

is the minimum amount of equity that must be maintained in a margin account. It is usually expressed as a percentage of the total value of the securities in the account.

Answer 61

What is a maintenance margin?

Question 62

What is initial margin requirement?

Answer 62

Answer: The initial margin requirement is the percentage of the total purchase price of a security that the investor must have in their account at the time of purchase. The Federal Reserve's Regulation T sets this requirement at 50%.

Question 63

is an investor who executes four or more "day trades" within five business days in a margin account, provided the number of day trades is more than six percent of the total trades in the account during that period. Pattern day traders are subject to special rules and requirements.

Answer 63

What is a pattern day trader according to FINRA rules?

Question 64

What does it mean to have a debit balance in a margin account?

Answer 64

A debit balance in a margin account represents the amount you owe to your broker for loans used to purchase securities.

Question 65

What is a credit balance in a margin account?

Answer 65

Answer: A credit balance in a margin account refers to the amount of money or value of securities an investor has after all debts have been paid. In the context of a short sale, it's the amount of money received from selling borrowed shares.

Question 66

What is a restricted margin account?

Answer 66

A restricted margin account is one where the account's equity is less than the maintenance margin requirement, but more than the minimum amount at which a margin call would be issued. The investor can still trade, but must follow certain rules and restrictions.

Question 67

What is marked to market in relation to a margin account?

Answer 67

Marked to market refers to the daily settling of gains and losses in a margin account due to changes in the market value of the securities. If the market value decreases significantly, it may trigger a margin call.

Question 68

What is day trading margin?

Answer 68

Answer: Day trading margin is the amount an investor must maintain in their account to engage in day trading. According to FINRA rules, the minimum equity requirement for a pattern day trader is $25,000. If the account falls below this amount, the trader won't be able to day trade until the minimum equity level is restored.

Question 69

What is Short Market Value (SMV) in a margin account?

Answer 69

Answer: SMV refers to the total market value of all short positions in a margin account. It fluctuates with changes in the market price of the shorted securities.

Question 70

What happens when the SMV increases in a margin account?

Answer 70

Answer: When the SMV increases, it means the market price of the shorted securities has risen. This is unfavorable for the investor holding the short position, as it would cost more to buy back the shares to cover the short position.

Question 71

Question: What happens when the LMV decreases in a margin account?

Answer 71

Answer: When the LMV decreases, it means the market price of the securities has fallen. This reduces the investor's equity in the margin account and increases the risk of a margin call.

Question 72

What is the relationship between SMA and buying power in a margin account?

Answer 72

Answer: SMA directly affects the buying power in a margin account. Buying power refers to the maximum value of securities that an investor can purchase without depositing more money. In a margin account, buying power is typically twice the sum of the investor's equity and the SMA.

Question 73

Sales tax is an example of a _____________________ tax.

Answer 73

Sales tax is an example of a regressive or flat tax.

Question 74

When dealing with institutional client suitability, what are two important considerations?

Answer 74

The client's ability to evaluate independently the risk and the extent to which they are exercising that ability.

Question 75

What is the formula for calculating an individual's personal discretionary income?

Answer 75

Income - Expenses = Discretionary Income

Question 76

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

Answer 76

30 days

Question 77

Securities that are acceptable as collateral have a loan value that equals ____%.

Answer 77

Securities that are acceptable as collateral have a loan value that equals 50%.

Question 78

How long can a short stock position be maintained?

Answer 78

Unlimited, provided the account maintains the minimum required equity.

Question 79

What is the formula for finding equity in a combined margin account?

Answer 79

(LMV + Credit Balance - Debit Balance - SMV)

Question 80

Define Regulation T.

Answer 80

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

Question 81

How is buying power calculated?

Answer 81

SMA divided by Reg T of 50% (just remember SMA x 2)

Question 82

Calculate SMA using the following balances: LMV $40,000, Debit $10,000 and Equity $30,000

Answer 82

Equity - 50% of the LMV = Excess Equity ($30,000 - $20,000 = $10,000)

Question 83

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

Answer 83

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

Question 84

The ________________ Agreement describes the customer's pledging of securities as collateral to the BD.

Answer 84

The Hypothecation Agreement describes the customer's pledging of securities as collateral to the BD.

Question 85

On margin, Ben buys 100 shares of ABN at 50 and sells 1 ABN Oct 55 call at 3. What is Ben's required cash deposit?

Answer 85

$2,200, which is 50% of the stock position minus the $300 premium received on the sale of the call

Question 86

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

Answer 86

No

Question 87

What may a BD lend to a customer in a margin account?

Answer 87

The complement of the Reg T margin call. In other words, 50%.

Question 88

What is the Reg T margin requirement for short sales?

Answer 88

50% Remember this 50% comes from the initial sale proceeds. So if the Short sale produced $10,000 then this becomes $15,000. ($10,000 ✗ 50%)

Question 89

Existing account: LMV $40,000, Debit $25,000, Equity $15,000. How is SMA affected by receiving a $5,000 cash dividend?

Answer 89

SMA would be credited with $5,000 (100% of the deposit).

Question 90

What amount of fully paid securities must be deposited to meet a margin requirement?

Answer 90

Securities with a loan value equal to the margin call (in other words, two times the margin call)

Question 91

Existing account: LMV $40,000, Debit $10,000, Equity $30,000, SMA $10,000. SMA is used for a $20,000 purchase. Result?

Answer 91

LMV $60,000 - Debit $30,000 = Equity $30,000 and SMA is $0

Question 92

The credit balance is made up of what two components?

Answer 92

Short sales proceeds plus the Reg. T requirement

Question 93

What stocks does the FRB deem to be marginable?

Answer 93

Those stocks listed on major exchanges and on Nasdaq

Question 94

On margin, Emma shorts 100 shares of DEF at 68 and sells 1 DEF Oct 60 put at 4. What is Emma's required cash deposit?

Answer 94

$3,000, which is 50% of the short position minus the premium received on the sale of the put

Question 95

True or False: Short against the box is considered being long and short the same position at the same time.

Answer 95

True

Question 96

True or False: Market declines will reduce SMA.

Answer 96

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

Question 97

If an investor writes a covered call, is there a margin requirement on the option position?

Answer 97

No, the long stock position covers the sale of the call.

Question 98

What is the margin requirement when buying options?

Answer 98

100% of the premium

Question 99

By how much is the following account restricted? LMV $40,000, Debit $25,000, Equity $15,000

Answer 99

Restricted by $5,000. The equity should be $20,000 (50% of $40,000), but there is only $15,000.

Question 100

The _____________________ has the authority to regulate margin requirements.

Answer 100

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

Question 101

Calculate the combined equity in the following account: LMV $24,000, Debit $10,000, Credit $18,000, SMV $9,000

Answer 101

(24,000 + 18,000 - 10,000 - 9,000) = $23,000

Question 102

How is the account affected if SMA is withdrawn?

Answer 102

Debit balance increases and equity decreases.

Question 103

What is a customer using when she borrows funds to increase the size of her position?

Answer 103

Leverage

Question 104

How would a $2,000 cash dividend or voluntary cash deposit affect a margin account's balances?

Answer 104

LMV is unchanged, Debit is reduced by $2,000, Equity is increased by $2,000, and SMA is increased by $2,000.

Question 105

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

Answer 105

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

Question 106

What is the maximum amount of securities that a BD may rehypothecate to a bank?

Answer 106

140% of the debit balance

Question 107

True or False: Customers are required to sign the Loan Consent Agreement.

Answer 107

False. Signing the agreement is optional.

Question 108

The minimum equity requirement for the initial short sale in a margin account is $_______ .

Answer 108

The minimum equity requirement for the initial short sale in a margin account is $2,000.

Question 109

When a customer buys on margin, how much cash may a BD borrow from a bank?

Answer 109

100% of the debit balance

Question 110

What is the margin requirement for a short against the box position?

Answer 110

5% of the long position

Question 111

How will the sale of securities from an account affect the account balances?

Answer 111

LMV and Debit decrease by the sales proceeds, Equity stays the same, and SMA increases by 50% of the sales proceeds.

Question 112

A client buys stock on margin and makes no cash deposit because he uses SMA. How are the account balances affected?

Answer 112

LMV and Debit both increase by the full purchase price; no change is made to equity.

Question 113

What document allows a BD to lend customer securities to someone wishing to sell them short?

Answer 113

Loan Consent Agreement

Question 114

The formula for determining equity in a long margin account is: ____________ - __________ = Equity

Answer 114

The formula for determining equity in a long margin account is: Long Market Value (LMV) - Debit Balance = Equity

Question 115

On margin, Henry sells short 100 shares of DEF at 68 and sells 1 DEF Oct 60 put at 4. What is the margin requirement?

Answer 115

$3,400, which is 50% of the short position. Since this is a covered position, there is no requirement on the short put.

Question 116

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

Answer 116

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

Question 117

What is the rate of interest that a bank charges a BD on margin loans?

Answer 117

Call rate

Question 118

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

Answer 118

The industry minimum maintenance requirement for a short account is 30%. (Equity must be at least 30% of SMV.)

Question 119

Existing account: LMV $40,000, Debit $10,000, Equity $30,000, SMA $10,000. If SMA is withdrawn, what are the balances?

Answer 119

LMV $40,000 - Debit $20,000 = Equity $20,000 and SMA is $0

Question 120

Existing account: LMV $40,000, Debit $25,000, Equity $15,000. If $5,000 is sold from the account, how is SMA affected?

Answer 120

SMA would be credited with $2,500 (50% of the sales proceeds).

Question 121

A long margin account's minimum initial equity requirement is _____ % of the purchase or $_____ , whichever is less.

Answer 121

A long margin account's minimum initial equity requirement is 100% of the purchase or $2,000, whichever is less.

Question 122

____________ governs the extension of credit by BDs.

Answer 122

Regulation T governs the extension of credit by BDs.

Question 123

To meet a $20,000 Reg. T call, a customer could deposit cash of $________ or fully paid securities of $________.

Answer 123

To meet a $20,000 Reg. T call, a customer could deposit cash of $20,000 or fully paid securities of $40,000.

Question 124

The formula for determining equity in a short margin account is: ____________ - ____________ = Equity

Answer 124

The formula for determining equity in a short margin account is: Credit Balance - Short Market Value (SMV) = Equity

Question 125

Hypothecation is synonymous with what term?

Answer 125

Pledge

Question 126

On margin, an investor buys 100 shares of ABN at 50 and sells 1 ABN Oct 55 call at 3. What is the margin requirement?

Answer 126

$2,500, which is 50% of the stock position. Since this is a covered position, there's no requirement on the short call

Question 127

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

Answer 127

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