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)
