Customer Accounts Flashcards
What does Reg T not apply to
US government, agency and municipal securities
Non-marketable securities. OTC not listed on exchanges
New issues under 30 days
Who applies the initial margin and the minimum maintenance margin
Initial margin: Federal reserve
Minimum maintenance margin: FINRA
What is a requirement for opening a margin account
Signing a margin agreement that includes hypothecations in street name
What regulation controls the bank to broker relationship
Regulation U - brokerage firms cannot borrow more money from banks using customer securities as collateral than what they loan to their customers
How much are banks allowed to loan to firms for customers
70% of pledged collateral
How much collateral are firms allowed to pledge to the bank
140% of customer debits
What controls the credit from broker to customer?
Regulation T
Who sets the margins for corporate bonds
FINRA through minimum maintenance margins.
Reg T does not apply to corp bonds
Under Reg T, what are the three types of applicable accounts
Cash account
Margin account
Arbitrage account
Plus:
Omnibus accounts
BD credit account
Market functions account (proprietary accounts)
Non-securities credit account (commodities, foreign exchange)
What are the Reg T requirements for a cash account
Payment must be made in full
payment must be made no later than 2 business days after settlement (S+2 = 4 business days after trade date)
What are the terms of a Reg T extension
Exceptional circumstances
allows +2 business days
a second Reg T may be granted for +2 business days
If customer does not pay by extension date, the firm is obligated to sell out the position and freeze the account for 90 days
What are the terms of a frozen account
Customer cannot buy unless firm has cash in hand
Customer cannot sell unless firm has securities in hand
What are the terms of a margin account
Customer can buy or sell short as long as Reg T initial margin is met
If Reg T does not apply, then FINRA min maintenance margin must be met
If a security is not marginable, it must be paid in full
Payments must be collected promptly, no later than 2 business days after settlement (S+2)
What is an arbitrage transaction
Simultaneous buying and selling short of the same security (short against the box)
What margin is required for Arbitrage accounts
FINRA minimum maintenance margins
Since there is no risk, the Federal reserve does not set an initial margin
What is the Reg T for convertible bonds
50%
What is the Reg T for corporate bonds
Not applicable
(Therefore FINRA minimum maintenance applies)
Greater of 20% MV or 7% of face
What is the Reg T for long stock options
100% of premium
What is the Reg T for Long LEAPs
75% of premium; within 9 months of expiration 100% of premium
What is the Reg T for short stock options
20% of the MV of underlying security + 100% of premiums - any out the money
What is the Reg T for short LEAPS
20% of the MV of underlying security + 100% of premiums - any out the money
(same as short stock options)
De minimis rule for margin calls
Margin calls are not sent for amounts less than or equal to 1k
What if minimum margin amount is more than Reg T amount?
The higher amount applies
In what cases is the minimum margin amount higher than the Reg T margin
US Government and municipals
Day trading accounts
Leveraged ETF’s
Under FINRA What is the minimum dollar amount to open a new long margin account
2k
Minimum does not apply to fully paid securities
What is the rule for minimum dollar amounts on a short margin account
Cannot be less than 2k of equity at any time.
This is due to the potential loss being unlimited
This could require a customer depositing more than 100% of their short value
Minimum amount required for day trading accounts
25,000
Cheap short stock rule
To short a stock valued from $5-$10: minimum margin is $5 per share
To short a stock valued from $0-$5: minimum margin is 100%, but never less than $2.50pps
Minimum maintenance margins for stock (Long/Short)
25% / 30%
Minimum maintenance margins for convertible bonds (Long/Short)
25% / 30%
Minimum maintenance margins for Corporate debt
Greater of 20% of MV or 7% face
Same for both long/short
Minimum maintenance margins for Municipal bonds
Greater of 15% of the MV or 7% of face
Same for both Long/Short
Reg T and Minimum maintenance margins for options (Long/Short Naked)
Long
Reg T: Not applicable
Min Maint: 100% of the premium
Short Naked (greater of):
Reg T: 20% of the MV of underlying security + premium - out of the money
Min Maint: 10% of the MV of underlying security + premium
Minimum maintenance margins for LEAPS (Long/Short)
75% of premium; when within 9 months of expiration 100% of premium /
10% of the MV of underlying security + premium
What defines a day trader
Customers who executes 4 or more day trades in a 5 business day period
What is a day trade sale
a purchase and a sale of the same security on the same day
Minimum margin for a day trading account
The greater of 25,000 or 25% of the highest intra-day MV
How is buying power calculated in a regular margin account
2x the excess margin above Reg T 50%
How is buying power calculated in a day trading account
4x the excess margin above the minimum requirement
Minimum Margin requirement for Leveraged ETF’s
Minimum margin requirement is multiplied by the ETF’s leverage
200% is 2 times 25%
300% is 3 times 25%
etc
How often does an account need to be marked to market
Every day
What does excess equity equal
SMA (Special memorandum account)
The customer is free to borrow this amount in cash or can use the amount to buy additional shares
SMA formula in a long account
50% of MV - Debit
If borrowing SMA what happens to the debit balance in a long account
It increases
Every excess (over 50%) $1 in the long account increases SMA by
50 cents
When does an account become restricted
When the equity balance is between 49%-26%
What are the rules for a restricted long account
If purchases are made: Normal Reg T applies
If a sale is made: 50% of the proceeds must be retained to reduce debit balance (retention requirement). The remaining to SMA and can be borrowed.
Formula to calculate the required MV to be at 25% maintenance margin for long accounts
Debit balance / .75
In a long account what happens to SMA when the MV changes
MV increases = SMA increases by 50 cents for every excess dollar
MV decreases = SMA stays the same (due to market crash acceleration risk)
In a long account what happens to SMA when cash is deposited
SMA increases with every dollar of excess equity
In a long account what happens to SMA when dividends are received
SMA increases with every dollar of excess equity
If the monies are not taken out within 30 days, they leave SMA and cannot be borrowed
A firm can avoid a net capital charge when acting as an agent on loans of securities if it: (3)
Discloses the identity of each party to the other (lender / borrower)
has each party agree in writing that the obligations of the BD does not include a guarantee of performance relating to the stock loan
Has each party expressly agree in writing that the other party’s remedies in the event of default are limited as to the BD
What happens if there is dividends or stock split on borrowed stock
The borrower must provide the consideration to the true owner
What type of account can short sales be performed in
Margin accounts
On a short account How does excess equity affect SMA
It increases SMA
What happens to SMA when MV changes on a short account
MV decreases = SMA increases by $1.50 for every dollar of decline in excess equity
MV increases = SMA stays the same
What is the formula for SMA on a short account
Equity - 50% of MV
When is a short account restricted
between 49% and 31%
What are the rules to a restricted short account
Short sale made: Normal Reg T initial margin rules apply
If purchase made: 50% of proceeds must be retained to increase equity (retention requirement)
What happens if minimum maintenance margin is breached on both long and short
A call will go out to the customer to bring back to minimum maintenance promptly (25/30)
What is the formula to calculate the minimum MV required for minimum margin on short account
Credit balance / 1.3
What is the margin and cash deposit for naked calls and puts
20% of the MV of the underlying stock
+ premium
- out the money
=Reg T (margin requirement)
- premium received
= cash deposit (Margin call)
What is the minimum maintenance margin for naked stock options
10% of the MV of the underlying stock
+ premium
= Min maintenance requirement
Must always have the higher of initial margin or maintenance margin on what type of transactions
Options
Deep out of the money transactions end up using 10% formula while in the money transactions use 20% formula
What is the margin in a broad based stock index
The higher of:
Initial margin:
15% of MV
+ 100% of premium
- Out of money
Min Maintenance
10% of the MV
+ 100% of the premium
Short call covered by long margin requirement
No margin on short call. Long margin applies
Short put is covered by short stock margin requirements
No margin on short put, only on short stock position.
What is the margin and cash deposit on a straddle
20% of MV of in the money side
+ both premiums
= Reg T
- premium received
= cash deposit
What is the margin on a spread
Margin = Max potential loss
Debit spread max loss = is debit balance (difference between premiums)
Credit spread max loss = Difference in strike prices - difference between premiums
Regulation that controls credit from bank to broker
Regulation U
Regulation that controls credit on securities on all lenders other than banks and BD’s
Regulation D
Regulation that places responsibility of Federal Reserve regulations on both borrower and lender
Regulation X
How much tentative NC must a clearing broker have to enter a joint bank office (JBO) arrangement?
25,000,000 tentative net capital
How much NC must a clearing broker have to enter a joint bank office (JBO) arrangement?
1,000,000 min NC per participant (exclusive of its ownership interest in the JBO)
Regulation SHO - Rule 203 dictates on short sales
the security had been borrowed or an arrangement has been entered
There is reasonable grounds to believe the security could be borrowed and delivered on settlement
BD must create an easy borrow list - updated daily
Exchanges must have a hard to borrow list, updated daily
Securities on the hard to borrow list have the following characteristics
Clearing short position at NSCC of 10,000 shares or more
Clearing short position represents at least .5% of the total shares outstanding
Must meet these tests for 5 business days to be on the list
Under Reg SHO, when do securities need to be bought in if on the threshold list
If on the threshold list for 13 consecutive days following trade date
(35 days for restricted threshold securities)
ALL Fails to deliver buy out rule under SHO
Long: no later than market opening on T+5 (S+3)
Short: No later than market opening on T+3 (S+1)
Purchasing power created by a maintenance margin excess in a pattern day trading account is:
400% of the maintenance excess
