Customer Accounts Flashcards
When opening an options account, the customer must return the signed Options Agreement:
A 15 days prior to opening the account
B 5 days prior to opening the account
C at or prior to opening the account
D 15 days after opening the account
When opening an options account, the customer must return the signed Options Agreement:
A 15 days prior to opening the account
B 5 days prior to opening the account
C at or prior to opening the account
D 15 days after opening the account
The best answer is D.
A copy of the options new account form is part of the Options Agreement that is sent to the customer, to be signed and returned within 15 days of account opening. The Options Agreement is a recap of the customer new account profile including the suitability determination and it qualifies the customer for a level of options trading, detailing which options transactions are permitted.
If the signed agreement is not returned, you are prohibited from accepting new orders - only closing transactions are allowed.
A customer places an order to sell 100 shares of XYZ at the market. The initial execution report shows the trade occurring at $38.50 and this is reported to the client. The firm later discovers that the trade occurred at $38.25. Which statement is TRUE?
A The customer must be given the reported sale price of $38.50
B The trade will be cancelled
C The customer must accept the actual sale price of $38.25
D The customer will receive the average of the 2 prices
A customer places an order to sell 100 shares of XYZ at the market. The initial execution report shows the trade occurring at $38.50 and this is reported to the client. The firm later discovers that the trade occurred at $38.25. Which statement is TRUE?
A The customer must be given the reported sale price of $38.50
B The trade will be cancelled
C The customer must accept the actual sale price of $38.25
D The customer will receive the average of the 2 prices
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The best answer is C.
The customer placed a market order to sell which was executed at $38.25. The firm erroneously reported the trade as occurring at $38.50. If there is an error in confirmation or reporting (as happened in this case), the customer gets the actual trade price. Note, in contrast that if the firm made an error in execution, any loss due to the firm’s error must be absorbed by the firm.
An institutional hedge fund investor will open a prime brokerage account for all of the following reasons EXCEPT to:
A consolidate account positions with one broker to ease recordkeeping
B use a variety of executing brokers who, in return for receiving commissions on trade executions, give research to the investor
C get lower financing rates on borrowed funds because all positions are aggregated
D be able to charge lower management fees to its investors
An institutional hedge fund investor will open a prime brokerage account for all of the following reasons EXCEPT to:
A consolidate account positions with one broker to ease recordkeeping
B use a variety of executing brokers who, in return for receiving commissions on trade executions, give research to the investor
C get lower financing rates on borrowed funds because all positions are aggregated
D be able to charge lower management fees to its investors
—
The best answer is D.
Hedge fund investors typically use a “prime broker” to consolidate all of their positions with one brokerage firm. In a prime brokerage agreement, the institutional investor can use different executing brokers for its trades, but all of these trades are settled by the “prime broker” who maintains custody of the positions, and most importantly, provides margin financing on these positions and arranges for stock loans on short stock positions. By using a single prime broker, trade reports and position reports come from a single source, making account recordkeeping easier.
The hedge fund, in return for sending trades to different executing brokers at full commission rates, gets valuable research and recommendations in return. By using a prime broker to consolidate all positions, the hedge fund gets lower financing costs on borrowed funds and “front of the line” status when it wishes to borrow securities to effect short sales.
The fees charged by the hedge fund manager have nothing to do with the structure of the underlying brokerage account.
Under the rules of the Options Exchanges, if a customer's financial condition changes materially, then which of the following will be amended? I Customer New Account Form II Options Agreement III Options Disclosure Document IV Margin Agreement A I and II only B III and IV only C I, II, III D I, II, III, IV
Under the rules of the Options Exchanges, if a customer's financial condition changes materially, then which of the following will be amended? I Customer New Account Form II Options Agreement III Options Disclosure Document IV Margin Agreement A I and II only B III and IV only C I, II, III D I, II, III, IV --- The best answer is A. The rules of the options exchanges require that if a customer's financial condition changes materially, the options agreement signed by that customer must be amended to reflect the change. A revised options agreement must be sent to the customer, and must be signed and returned within 15 days. At the same time, customer account information would also be updated (which just makes sense).
A new Options Disclosure Document is sent to customers only if the Options Clearing Corporation changes its rules.
There is no requirement to amend the margin agreement, unless the brokerage firm changes the terms of the agreement.
A social security number or tax identification number is needed to open a securities account for a: I U.S. resident II Foreign resident III U.S. corporation IV Foreign corporation A I only B I and III C II and IV D I, II, III, IV
A social security number or tax identification number is needed to open a securities account for a: I U.S. resident II Foreign resident III U.S. corporation IV Foreign corporation A I only B I and III C II and IV D I, II, III, IV --- The best answer is D. To open an account for a U.S. resident, a social security number is needed; to open an account for a U.S. corporation, the tax identification number is needed. If a foreign resident or foreign corporation wishes to open an account, then that person must have a U.S. tax identification number.
Under FINRA rules, when opening a new account for the customer, the:
A name of the representative servicing the account must be recorded in the account file
B CRD number of the representative servicing the account must be recorded in the account file
C name of the branch manager supervising the account must be recorded in the account file
D CRD number of the branch manager supervising the account must be recorded in the account file
Under FINRA rules, when opening a new account for the customer, the:
A name of the representative servicing the account must be recorded in the account file
B CRD number of the representative servicing the account must be recorded in the account file
C name of the branch manager supervising the account must be recorded in the account file
D CRD number of the branch manager supervising the account must be recorded in the account file
—
The best answer is A.
As part of the customer account information required by FINRA, the name of the representative assigned to the account must be recorded. This way, FINRA knows who is responsible if there is an “issue” with the account.
Note that this rule (FINRA Rule 4512) only requires the recording of the names of the representative(s) assigned to the account. It does not require the CRD number of the representative as part of the record, though this information is readily available.
The minimum maintenance margin requirement for long stock positions is:
A 25% of the price of the transaction
B 50% of the price of the transaction
C 25% of the closing price of the security that day
D 50% of the closing price of the security that day
The minimum maintenance margin requirement for long stock positions is:
A 25% of the price of the transaction
B 50% of the price of the transaction
C 25% of the closing price of the security that day
D 50% of the closing price of the security that day
—
The best answer is C.
The minimum maintenance margin requirement is set by FINRA at 25% of the long market value. The original transaction price is of no relevance. If the account falls below this level, then a “maintenance call” is sent to bring the account back up to the 25% minimum. Note that Regulation T sets initial margin at 50%. Thus, if the account loses value after the Reg. T amount is deposited, nothing happens unless the account falls below the 25% minimum.
A customer’s margin account shows:
Long 200 XYZ @ $60
Debit: $5,500
The “Buying Power” in the account is:
A 0
B $500
C $1,000
D $2,000
A customer’s margin account shows:
Long 200 XYZ @ $60
Debit: $5,500
The “Buying Power” in the account is:
A 0 B $500 C $1,000 D $2,000 --- The best answer is C. The market value of securities in the account is $12,000, against which $6,000 can be borrowed. The current loan amount is $5,500 and so there is $500 of SMA. With $500 of SMA, $1,000 of marginable securities can be purchased (with Reg. T. initial margin at 50%).
Which statements are TRUE about meeting a Regulation T call for initial margin?
I 50% of the call amount must be deposited in cash
II 100% of the call amount must be deposited in cash
III 100% of the call amount must be deposited in fully paid securities
IV 200% of the call amount must be deposited in fully paid securities
A I and III
B I and IV
C II and III
D II and IV
Which statements are TRUE about meeting a Regulation T call for initial margin?
I 50% of the call amount must be deposited in cash
II 100% of the call amount must be deposited in cash
III 100% of the call amount must be deposited in fully paid securities
IV 200% of the call amount must be deposited in fully paid securities
A I and III
B I and IV
C II and III
D II and IV
—
The best answer is D.
To meet a Regulation T call, either the entire call amount must be deposited in cash; or twice the call amount must be deposited in fully paid securities (which have a loan value of 50% of the market value that is used to meet the call).
A customer establishes a combined margin account by purchasing $30,000 of ABC stock and selling short $40,000 of XYZ stock, depositing the Regulation T requirement. Subsequently, the market value of the ABC position increases to $45,000, while the market value of the XYZ position decreases to $25,000. If no other activity occurs in the account, the account will have buying/selling power of: A $7,500 B $15,000 C $30,000 D $60,000
A customer establishes a combined margin account by purchasing $30,000 of ABC stock and selling short $40,000 of XYZ stock, depositing the Regulation T requirement. Subsequently, the market value of the ABC position increases to $45,000, while the market value of the XYZ position decreases to $25,000. If no other activity occurs in the account, the account will have buying/selling power of: A $7,500 B $15,000 C $30,000 D $60,000 ---
The best answer is D.
The customer established the following long position:
Long Market Value Debit Equity SMA
$30,000 $15,000 $15,000 0
If the market value rises to $45,000, the account will now show:
Long Market Value Debit Equity SMA
$45,000 $15,000 $30,000 $7,500
For every $1 increase in market value in a long account, the SMA increases by $.50. If the market value increases by $15,000, SMA goes up by 1/2 that or $7,500.
The customer established the following short position:
Credits Short Market Value Equity SMA
$60,000 $40,000 $20,000 0
If the market value falls to $25,000, the account will now show:
Credits Short Market Value Equity SMA
$60,000 $25,000 $35,000 $22,500
For every $1 decrease in market value in a short account, the SMA increases by $1.50. If the market value declines by $15,000, SMA goes up by 1.5 times that amount, or $22,500.
The total SMA balance is: $7,500 + $22,500 = $30,000. The buying/selling power in the account is 2 x SMA = $60,000.
Use the following information to answer the next question:
B A XYZ Jan 40 Call 5 5.25 XYZ Jan 40 Put 2 2.25 XYZ Jan 50 Call 1 1.25 XYZ Jan 50 Put 7 7.25 A customer who wishes to create a debit call spread must pay: (disregarding commissions)
A 3.75
B 4.00
C 4.25
D 5.00
Use the following information to answer the next question:
B A XYZ Jan 40 Call 5 5.25 XYZ Jan 40 Put 2 2.25 XYZ Jan 50 Call 1 1.25 XYZ Jan 50 Put 7 7.25 A customer who wishes to create a debit call spread must pay: (disregarding commissions)
A 3.75 B 4.00 C 4.25 D 5.00 --- The best answer is C. A Debit Call spread is created by purchasing the call with the lower strike price and selling the call with the higher strike price.
Buy 1 XYZ Jan 40 Call
Sell 1 XYZ Jan 50 Call
The XYZ Jan 40 Call is bought at the ask price of 5.25; the XYZ Jan 50 Call is sold at the bid price of 1, creating a net debit of 4.25 or $425 to be paid for the spread position. In a debit spread, the debit is the maximum potential loss and is the deposit amount.
