FC Chapter 15 Flashcards
Jim has a $10,000 debit balance in his margin account. The BD may rehypothecate stock of $_______ and borrow $_______.
Jim has a $10,000 debit balance in his margin account. The BD may rehypothecate stock of $14,000 and borrow $10,000.
If a BD extends credit to a client, what must it disclose to the client?
The annual interest rate to be charged and the method of determining the debit balance on which interest is charged
If a client’s margin account has an equity balance greater than the Reg. T requirement, the account has ____.
If a client’s margin account has an equity balance greater than the Reg. T requirement, the account has SMA.
For clients to whom credit has been extended, what two disclosures must be made regarding the loan?
(1) The annual interest rate that may be charged, and (2) the method by which the debit balance is determined
Regulation T regulates the extension of credit by _____ for the purchase of securities.
Regulation T regulates the extension of credit by BDs for the purchase of securities.
The maintenance requirement on a short leveraged ETF position is computed by multiplying the leverage factor by ____%.
The maintenance requirement on a short leveraged ETF position is computed by multiplying the leverage factor by 30%.
Define Regulation T.
The percentage a customer must deposit when purchasing securities or selling short
True or False: Portfolio margin may be used for only one type of security.
False. Portfolio margin may be used for most securities.
The ______________ agreement must be signed before a firm may lend stock belonging to a client.
The loan consent agreement must be signed before a firm may lend stock belonging to a client.
When must a margin disclosure document be provided to a client?
At the time the account is opened
A client’s account has an LMV of $40,000, Debit of $25,000, and Equity of $15,000. Must the account’s equity be fixed?
No. The equity percentage is currently 37.5% (15 ÷ 40). Provided the equity is 25% or greater, no fix is required.
In order to utilize portfolio margin, a client must be approved for ___________ option writing.
In order to utilize portfolio margin, a client must be approved for uncovered option writing.
True or False: BDs are NOT required to provide advance notice if they change their in-house maintenance requirements.
True
Under Regulation T, does the payment date requirement apply to cash or margin accounts?
Payment is required within four business days for both (100% in a cash account, but 50% in a margin account).
Reg X regulates the ___________ who obtain credit for the purchase of securities.
Reg X regulates the borrowers who obtain credit for the purchase of securities.
Jim makes a $1 million purchase of a 3x long Gold Index ETF. What is his maintenance requirement?
His requirement is based on the leverage factor times the SRO maintenance requirement (3 x 25% = 75% or $750,000).
When may a member firm lend the stock that belongs to a client?
When the client signs the loan consent agreement
What must be obtained for a firm to commingle the securities of two or more customers?
Written permission from each customer
A margin account has Market Value of $20,000, Debit of $8,000, Equity of $12,000. What may the BD borrow from a bank?
$8,000, which is 100% of the debit balance.
True or False: Firms may establish their own in-house rules relating to payment dates and minimum requirements.
True. However, the requirements must be at least as stringent as those established by the regulators.
True or False: ETFs are marginable and may be sold short.
True
True or False: Restricted accounts must be remedied immediately by depositing the appropriate dollar amount.
False. Restricted accounts do not require immediate response.
For a client to use portfolio margin, when must he receive, and acknowledge receipt in writing, a disclosure document?
Prior to the initial transaction
A restricted account has equity below ____%, but above the minimum maintenance requirement of ____%.
A restricted account has equity below 50%, but above the minimum maintenance requirement of 25%.
Customers are given ____ business days after settlement date to pay for their portion of the trade.
Customers are given two business days after settlement date to pay for their portion of the trade. (S+2 or T+4)
Reg U regulates the extension of credit by ________ for the purchase of securities.
Reg U regulates the extension of credit by non-BDs for the purchase of securities.
True or False: National futures exchange members may use portfolio margin-eligible securities to hedge index futures.
True
How is SMA created?
Appreciation in the value of securities, cash or dividend deposits, or sales of securities from the account
The buying power of a day trading account is _____ times the maintenance requirement excess.
The buying power of a day trading account is four times the maintenance requirement excess.
Define a day trade.
The purchase and sale of the same security on the same day in a margin account
On a stock loan between two BDs, when may the lender call the stock back?
At any time
`Along with listed common stock, name some of the other securities that are deemed marginable by the FRB.
Closed-end funds, warrants, convertible bonds, REITs, and leveraged ETFs
Sue makes a $1 million purchase of a 2x short Gold Index ETF. What is her maintenance requirement?
Her requirement is based on the leverage factor times the SRO maintenance requirement (2 x 30% = 60% or $600,000).
If owned for ____ days, open-end investment company (mutual fund) shares may be used as collateral in a margin account.
If owned for 30 days, open-end investment company (mutual fund) shares may be used as collateral in a margin account.
The industry minimum maintenance requirement for a long account is ____%.
The industry minimum maintenance requirement for a long account is 25%. (Equity must be at least 25% of LMV.)
True or False: Day trading accounts do NOT require delivery of a special risk disclosure document prior to opening.
False. A special disclosure document is required.
What are the three typical components of a margin agreement?
The credit section, the hypothecation section, and the loan consent section
Due to lower margin requirements, portfolio margin affords investors with greater __________.
Due to lower margin requirements, portfolio margin affords investors with greater leverage.
True or False: Portfolio margin sets a margin requirement based on the greatest potential net loss in the portfolio.
True
The minimum equity in a day trading account with uncovered derivatives is $________.
The minimum equity in a day trading account with uncovered derivatives is $25,000.
Define pattern day trading.
Executing four or more day trades over a five-day period
On Monday, Sam buys ABC stock on margin. If he sells it on Tuesday, will he still be required to pay for the purchase?
Yes. The margin requirement must still be met on the purchase. Failure to pay is a violation called free-riding.
Where must a security trade for it to be considered marginable?
On the NYSE, Nasdaq, or another exchange
For margin accounts, the maximum amount that a firm may borrow from the bank is _____% of the debit balance.
For margin accounts, the maximum amount that a firm may borrow from the bank is 100% of the debit balance.
How is the account affected if SMA is withdrawn?
Debit balance increases and equity decreases.
True or False: On a stock loan between two BDs, the lender retains voting rights.
False. The borrower receives voting rights.
When is a client required to provide a signature when opening a margin account?
Prior to the time the account is opened
What section of the margin agreement is not mandatory?
The loan consent section
True or False: Market declines will reduce SMA.
False. The only way to lose SMA is to use SMA.
If a client’s equity falls below 25%, the maintenance call must be met __________.
If a client’s equity falls below 25%, the maintenance call must be met promptly.
The maintenance requirement on a long leveraged ETF position is computed by multiplying the leverage factor by ____%.
The maintenance requirement on a long leveraged ETF position is computed by multiplying the leverage factor by 25%.
How many days advance notice is provided to clients if a BD changes loan terms (e.g., interest rate)?
30 days
The minimum equity in a portfolio margin account with uncovered derivatives is $___________.
The minimum equity in a portfolio margin account with uncovered derivatives is $5,000,000.
True or False: Investment company shares may be purchased on margin.
False. While mutual fund shares may not be purchased on margin, the shares have loan value if owned for 30 days.
The _____________________ has the authority to regulate margin requirements.
The Federal Reserve Board (FRB) has the authority to regulate margin requirements.
How long must new issues be held before they may be used as collateral?
30 days
The lender of stock retains all ownership rights, with the exception of the right to _____.
The lender of stock retains all ownership rights, with the exception of the right to vote.
To collateralize a loan, the maximum amount of stock that a broker may send to the bank is _____% of the customer debit.
To collateralize a loan, the maximum amount of stock that a broker may send to the bank is 140% of the customer debit.
True or False: A BD must disclose to its margin clients the amount of interest that will be charged.
False. Since the rate changes, BDs cannot determine the amount of interest. Instead, the rate of interest is disclosed.
May credit be extended to purchase OTC equities?
No. Pink Sheets and OTCBB equities are not marginable.
What documents are mandatory when opening a margin account?
A new account form, the margin (customer) agreement, and the hypothecation agreement
True or False: FINRA approval is required before a BD may offer portfolio margin.
True
What are the two uses of SMA?
1) To buy additional securities, and 2) for a loan advance
BDs are not required to take action if a margin deficiency is less than $______.
BDs are not required to take action if a margin deficiency is less than $1,000.
May new issues (e.g., IPOs or mutual fund shares) be purchased on margin?
No
Clients must be notified of any changes in the terms of a margin account ____ days before they become effective.
Clients must be notified of any changes in the terms of a margin account 30 days before they become effective.
For a BD carrying a client’s margin account, what amount of stock may be rehypothecated?
140% of the debit balance
True or False: If a client’s margin account has been frozen, she may NOT continue to trade.
False. Trading is allowed; however, all trades must be paid for in advance.
How long are customers given to correct margin deficiencies that may occur?
One payment period (four business days), unless an extension of time has been granted by the SRO.
Upon what is portfolio margin based?
The greatest risk in a position
For a leveraged ETF, how is the maintenance requirement determined?
The 25% (long) or 30% (short) maintenance requirement multiplied by a given portfolio leverage factor
True or False: Regulation T is a transactional requirement, not a maintenance requirement.
True. The Reg. T requirement (50%) must be met on each trade, but the account need NOT be maintained at that level.
Under portfolio margin rules, margin requests must be satisfied within ______ business days of request.
Under portfolio margin rules, margin requests must be satisfied within three business days of request.
Is an SEC-registered BD an eligible client for portfolio margin?
Yes, as are members of a national futures exchange and clients who are approved for uncovered option writing.
According to Reg T, what happens to a client’s account if she fails to pay in a timely manner?
Her account will be frozen for 90 days.
An account with equity below the Reg T requirement is called ____________.
An account with equity below the Reg. T requirement is called restricted.
Mutual fund shares have loan value after they have been owned for ____ days.
Mutual fund shares have loan value after they have been owned for 30 days.
When buying securities in a restricted margin account, clients must deposit ___% of the trade within ____ business days.
When buying securities in a restricted margin account, clients must deposit 50% of the trade within four business days.
Are mutual funds considered marginable securities?
No. Investors must pay 100% of the purchase price.
To meet the minimum maintenance for day trading, ______ guarantees between accounts and/or clients are not allowed.
To meet the minimum maintenance for day trading, cross guarantees between accounts and/or clients are not allowed.
On margin, Dan buys $12,000 of stock, deposits $7,000, and borrows $5,000. What amount may the BD borrow from a bank?
$5,000, which is 100% of the debit balance
True or False: Hedge funds are the typical investors that take advantage of the benefits of portfolio margin.
True
The _________________________ regulates margin requirements.
The Federal Reserve Board (FRB) regulates margin requirements.
To meet a maintenance (in-house) call by selling securities, clients must sell ______ times the amount of the call.
To meet a maintenance (in-house) call by selling securities, clients must sell four times the amount of the call.
In a margin account, customers pay interest on the ________ balance.
In a margin account, customers pay interest on the debit balance.
