Customer Accounts - Margin/Short Sale Rules

Question 1

SEC rule that governs short sales

Answer 1

Reg SHO

Question 2

Information on an order ticket

Answer 2

buy or sell (long or short), order size, duration (ex. day order)

Question 3

AON

Answer 3

All or none. entire order is filled or nothing. Keep trying until order is filled.

Question 4

FOK

Answer 4

Fill or kill. entire order is filled on the first try or it’s cancelled

Question 5

IOC

Answer 5

Immediate or cancel. part or all of order is filled on the first try and the balance is cancelled.

Question 6

Day orders

Answer 6

are cancelled at the end of the day if they aren’t filled

Question 7

not held orders

Answer 7

trader determines the best time and price

Question 8

limit order

Answer 8

executes at a set price or better

Question 9

stop order

Answer 9

used to stop a loss on an existing position. When the price goes through the stop it becomes a market order.

Question 10

alteration of order ticket

Answer 10

must be approved in writing by branch manager or principal.

Question 11

Securities and Exchange Act of 1934 (Reg T)

Answer 11

Federal Reserve controls the margin requirements of non-exempt securities. Minimum maintenance requirements are applied by FINRA. Exempt securities = US Govt, agency, Muni and Commercial Paper

Question 12

Margin agreement

Answer 12

client “hypothecates” (pledges) the securities in return for the loan. Bank loans the funds to the broker dealer, “call loan” or “broker loan”, on the basis of the hypothecated securities. Then broker loans the funds to the client.

Question 13

Broker loan rate

Answer 13

the rate at which the firm borrows from the bank. Client pays broker loan rate plus a percent.

Question 14

Reg U

Answer 14

governs relationship from bank to broker. Firms can’t borrow more money than they loan. Limit is 140% of customer debit balance. $5000 debit balance x 140% = $7000 collateral. Bank lends firm 70% of that ($7000 x 70% = $4900).

Question 15

Reg T

Answer 15

applied under Securities Exch Act of 1934. Only non-exempt securities. Sets the initial margin requirements. Corporate bonds are non-exempt, but Federal Reserve chooses not to set margin for them.

Question 16

Marginable securities

Answer 16

must be actively traded, listed on a stock exchange or NASDAQ. Non-marginable - LP DPPs, OTC issues, new issues for 30 days.

Question 17

Cash account

Answer 17

payment in full by S+2. “Reg T extension” - ask for more time. If customer doesn’t pay, firm sells out position and freezes account for 90 days. While account is frozen client can’t buy unless firm has cash in hand.

Question 18

Margin account

Answer 18

must meet Reg T requirements. If Reg T doesn’t apply then exchanges minimum maintenance must be met. If it’s not marginable must be paid in full.

Question 19

Arbitrage account

Answer 19

no initial margin for arbitrage transactions, only minimum maintenance applies.

Question 20

Initial margin

Answer 20

stocks 50%, options 100% of premium

Question 21

minimum margin to open long account

Answer 21

$2000 unless fully paid

Question 22

minimum margin to open short account

Answer 22

$2000 no matter what

Question 23

FINRA minimum maintenance requirement

Answer 23

long stock 50%, short stock 30%, options 100% of premium

Question 24

Long account SMA calculation

Answer 24

SMA = 50% of MV - debit. For every $1 in market value increase, $0.50 of SMA is created.

Question 25

Restricted account

Answer 25

below 50% margin, but above 25%. If purchase is made, regular Reg T initial margin rules apply. “Retention requirement” - if sale is made 50% of proceeds must be retained in the account.

Question 26

Long account equity calculation

Answer 26

Equity = long MV - Debit

Question 27

maintenance call

Answer 27

must be met “promptly”. $1000 or less then maintenance call doesn’t need to be sent. To calculate market value where account is at 25% = debit balance / .75.

Question 28

short margin account

Answer 28

usually shares are borrowed from other margin customers, but can also be borrowed from other firms or a mutual fund. Borrower has to pay divs to lender. All short sales have to be in margin accounts. Initial margin in 50%

Question 29

Short account equity calculation

Answer 29

Equity = credit - short market value. The credit is the proceeds from the short sale + 50% margin deposit.

Question 30

Short account SMA calculation

Answer 30

SMA = equity - 50% of market value. For every $1 decline in market value produces $1.50 in SMA.

Question 31

short account restricted rules

Answer 31

if another short sale is made normal Reg T initial margin rules apply. If covering purchase is made, 50% of proceed

Question 32

short account MV calculation where acct is at 30% maintenance

Answer 32

30% maintenance MV = credit balance / 1.3

Question 33

DVP account

Answer 33

aka COD

Question 34

Day trading account minimum equity

Answer 34

$25,000. Minimum margin = 25% which is applied to the highest intra day market value, but no less than $25,000. Buying power is 4 X excess margin above the minimum requirement

Question 35

Portfolio margin

Answer 35

risk is assessed to establish the margin requirement. Reduces the margin for stock positions hedged by option positions. Margin becomes the max potential loss. Can’t be used for bond positions. To open Portfolio margin acct client must receive and sign Risk Disclosure statement.

Question 36

Stress test securities

Answer 36

loss probability is based on volatility. For most equities the max portfolio margin in 15%. If deemed concentrated then 30%.

Question 37

Portfolio margin account minimums

Answer 37

Ind acct - min equity $100,000. Prime brokerage accounts - $500,000. Accounts with unlisted derivatives or day trading - $5,000,000.

Question 38

Portfolio margin account margin call

Answer 38

must be met within 3 business days (as opposed to Reg T = “promptly”, but not later than 5 business days).

Question 39

Reg SHO short sale definition

Answer 39

Reg SHO intended to curb naked short selling. Defines a short sale as: sale of security not owned (Rule 200), sale settled by delivery of security not owned, sale settled by delivery of borrowed security.

Question 40

Rule 201 of Reg SHO

Answer 40

if stock drops 10% from previous days close short sale is only permitted at a price above the national best bid.

Question 41

Rule 203 of Reg SHO

Answer 41

short sellers in all equities must “locate” source from which securities can be borrowed before effecting short sale. Security has been borrowed or an arrangement has been entered into to borrow. Or reasonable grounds to believe security could be borrowed.

Question 42

Reasonable grounds for Rule 203

Answer 42

firm creates “easy to borrow” list. Also creates a daily “hard to borrow” or “threshold” list. Threshold security - has a clearing short position at NSCC of 10,000 shares or more and clearing short position is at least 1/2% of total shares outstanding.

Question 43

buy in

Answer 43

old rule - buy in of undelivered shares if on the threshold list for 13 consecutive settlement days. New rule 204 - all fails (long or short sales) buy in no later than T+3 for short sale and T+5 for long sale.