Chapter 8 Flashcards
What is Reg T?
Sets the minimum initial requirements that must be met to purchase securities on margin.
Greater of $2k or 50% of purchase price must be deposited by customer to purchase on margin. If that number is > pp, then pp is deposited.
What value of customer securities, as a percentage of the customers debit balance, can the broker dealer pledge to get a loan for the customer?
140%
What securities can be purchased on margin?
Exchange listed stocks & bonds
Nasdaq stocks
Securities on FED approved list
What securities can’t be purchased on margin?
non Nasdaq OTC
IPOs and new issues for 30 d
What securities are exempt from the basic Reg T margin requirements?
US gov (margin requirement is 1-7% of par value), munis (greater of 7% of par or 15% of MV), nonconvertible corp. debt
How long do investors purchasing on margin have to deposit the required amount?
< 4 biz days. Extension can be filed before deadline to NYSE or FINRA
In what case can a broker dealer waive a call?
BDs can waive a call < $1k
What are the ways an investor can meet the margin requirement initially?
-Depositing cash equal to requirement (50% or $2k)
-Depositing marginable securities with loan value equal to amount of requirement (100%)
How do you calculate the equity and excess equity in a long margin account?
Equity = Long MV - Debit
Excess Equity = Equity - Reg T requirement
What can the customer do with excess equity?
With EE, customer can withdraw equal amount, purchase 2x amount of marginable sec. or use equal amount to purchase non-marginable sec.
How does excess equity impact the customers margin account balance sheet?
If EE is taken out => higher debit
What is the customers buying power?
Buying power = EE * 2
What is Special Memorandum Account in Long Margin account? How is it created? When can customers access it?
When customer equity increases above 50% of LMV => credited to SMA
SMA created:
-Increase in LMV
-Non-required (1) cash deposit or (2) deposit of fully paid marginable sec
-Div or interest
-50% of proceeds of sale
Customers can use SMA unless they fall below minimum equity requirement
What is a restricted account? What can be done in a restricted account? How can a customer withdraw from one?
Equity falls below 50% of LMV
Can still buy (sell) and deposit (withdraw) 50%
If customer wants to withdraw:
-Securities => deposit 50% cash or 100% other securities
-Cash => deposit 100% securities
Minimum equity requirement for long account? What happens when it is not met?
25% of LMV
If below => margin call / maintenance call. Customer must:
-deposit cash
-deposit marginable sec 2 * call
-sell securities 4 * call (that’s because 50% of sale goes to SMA)
To what level can LMV fall such that minimum equity requirement is met?
debit / 0.75
EXCESS EQUITY < …….? < RESTRICTED < ……..? < MARGIN CALL
50% REQUIREMENT
25% MIN EQ
What is the equity and the minimum equity requirement in a short account?
Equity = credit balance - short MV
MER = SMV * 30%
What are the rules surrounding customers that want to sell low priced stocks short?
If stock is less than $5 per sh, required deposit is greater of 100% of MV or $2.50 per sh.
To what level can SMV rise such that minimum equity requirement is met?
debit /1.30
What is a Pattern day trader? What is MER in this case? What happens if a margin call is not met in this case?
Trades > 4 times in 5d period, and day trades are > 6% of all account trades in same period
MER: $25k instead of $2k
-Margin call not met < 5 biz days => restricted for 90 d
-Deposits to meet MC must stay in account > 2 biz days
What are combined accounts?
Both longs & shorts
Add both equity requirement (LMV-debit)+(credit-SMV)
What are Portfolio margin accounts? Who can have one? What is the margin call deadline?
For sophisticated investors who properly hedge their positions. Margin requirements are calculated based on all of the positions and offsetting hedges.
Institutional investors and accounts > $5M + approved for uncovered
3 biz days to meet margin call
What is the Minimum margin for leveraged ETF?
MER * leverage factor
