Margin Account Rules

Question 1

What are federal reserve margin rules set under?

Answer 1

Regulation T. Applies only to NON-exempt securities (anything besides US Govt., Agency, or Municipal)

Question 2

What is hypothecation?

Answer 2

A pledge of securities that are purchased by the customer to brokerage firm; the loan to the customer is the debit balance

Question 3

What is rehypothecation?

Answer 3

Brokerage firm re-pledges customer securities to a bank; the bank loans funds to the broker (a broker loan) and then the broker re-loans these funds to the customer

Question 4

What is Regulation U?

Answer 4

Credit relationship between bank and broker; brokerage firms can’t borrow ore money from banks using customer securities as collateral than actual amount loaned to customers

Question 5

What is the rehypothecation limit for the broker?

Answer 5

The broker can only rehypothecate customer securities equal to 140% of the DEBIT BALANCE

Question 6

What is regulation T?

Answer 6

• Controls credit from broker to customer

- Corp. bonds are non-exempt but Reg. T does not set margins here

Question 7

What types of securities are marginable?

Answer 7

Only Actively traded securities

• Listed (NYSE, AMEX, NASDAQ)
• Specific OTC issues that have sufficient trading volume (on OTC margin List)

Question 8

What types of securities are non-marginable?

Answer 8

• Non-marketable securities
• OTC issues NOT on OTC margin list
• NEW issues for first 30 days

Question 9

What are the 3 types of accounts?

Answer 9

1. Cash
2. Margin
3. Arbitrage

Question 10

When are cash account payments made?

Answer 10

PROMPTLY (but no later than FIVE (5) business days after TRADE date

Question 11

What happens if payment is not collected in time?

Answer 11

Firm requests Reg. T extension (usually 3 more business days). If not granted/still not received, the firm must sell out the POSITION and freeze the ACCOUNT for 90 days

Question 12

What is a margin account?

Answer 12

Customer can buy a security or sell short as long as Reg. T is met. (if not marginable, security must be paid in full)

Question 13

What is an arbitrage account?

Answer 13

Simultaneously buying and selling short the same security. The net position is always 0 (no risk). Customer shorts against the box

Question 14

What is the minimum margin (FINRA) for an arbitrage account?

Answer 14

5%

Question 15

What are the initial margins set by Reg. T for LONG positions?

Answer 15

Long stock - 50%
Long Stock options - 100% of PREMIUM
Long Stock LEAPS/Index LEAPS - 75% of PREMIUM or 100% if there is 9 months or less to expiration

Question 16

What are the initial margins set by Reg. T for SHORT positions?

Answer 16

Short stock - 50%
Short stock options - 20% of MARKET VALUE
Short leaps - N/A

Question 17

What is the minimum maintenance for a long/short account?

Answer 17

$2,000

Question 18

What are the minimum margins for sales of “cheap” stocks?

Answer 18

For stocks that are $5 and under (cheap), the minimum margin is the GREATER of:

1. 100% of the sale OR
2. $2.50 per share

Question 19

What are the minimum margins by FINRA for LONG positions?

Answer 19

Stock - 25%
Options - 100% of premium
LEAPS - 75% of PREMIUM or 100% if there is 9 months or less to expiration

Question 20

What are the minimum margins by FINRA for SHORT positions?

Answer 20

Stock - 30%

Options - N/A

Question 21

What is the minimum amount required for Day trading margins?

Answer 21

The greater of:

1. $25,000 OR
2. 25% of the intra-day HIGH market value

Question 22

What is portfolio margin?

Answer 22

Margining securities in a way that is tied to overall risk of the positions, rather than a fixed percentage for each position. This is ONLY available to institutions and WEALTHY individuals (they require a min. of $100K equity)