Margin Department Flashcards
What happens when a customer does not pay for a trade in a cash account?
The firm must sell the customer’s securities.
What is free-riding in a cash account?
Free-riding occurs when a customer buys and sells securities in a cash account before depositing enough funds to pay in full for the purchase. (Defined in Reg. T)
What is margin?
Margin is the practice of lending customers money to buy securities.
What is trading on unsettled funds in a cash account?
Trading on unsettled funds occurs in a cash account when a customer 1) buys and sells securities before depositing enough funds to pay in full for the purchase, and 2) uses the proceeds from the sale to buy other securities.
What are the consequences of trading on unsettled funds in a cash account?
The firm must place a 90-day freeze on the customer’s account per Reg. T Part 220. The privilege of delaying payment beyond the trade date is withdrawn during the freeze, and the customer may trade only with settled cash on hand.
A customer purchases 1,000 shares at $10 per share in a margin account. How much equity must the customer have in the account per Reg. T?
The Reg. T requirement is 50% of the purchase amount (i.e. $5,000). The account must contain enough cash or securities to ensure that the equity in the account after the purchase equals at least 50% of the value of the securities purchased.
A customer purchases shares valued at $10,000 with 50% equity in a margin account. The value of the shares increases to $15,000. What is the new equity percentage?
The customer started with equity of $5,000 in the account. The shares gained $5,000 in value. Therefore, equity increased to $10,000, and equity percentage increased from 50% to 67% ($10,000 / $15,000 = 67%).
When must a firm issue a margin call?
Per FINRA Rule 4210, a firm must issue a margin call when the equity percentage in a margin account falls below 25%.
A customer purchases shares valued at $10,000 with 50% equity in a margin account. The value of the shares decreases to $6,000. What is the new equity percentage?
The customer started with equity of $5,000 in the account. The shares lost $4,000 in value. Therefore, equity decreased to $1,000, and equity percentage decreased from 50% to 16.67% ($1,000 / $6,000 = 16.67%).
In a margin account, what do debits represent?
In a margin account, debits represent money the customer owes to the firm.
How is equity defined in Reg. T Part 220?
Equity = long market value − short market value + credit − debit
Equity is the net liquidating value of an account. That is, if a customer paid off all margin loans, covered all short positions, and sold all long positions, the remainder would be equity.
What is equity percentage?
Equity percentage (EP) is the total equity (E) of an account divided by the total market value (TMV) of the positions in the account.
EP = E / TMV
How is special memorandum account defined in Reg. T Part 220?
A special memorandum account (SMA) records the amount of money a customer may withdraw from his margin account. It represents the total equity (E) of an account minus 50% of the total market value (TMV) of positions in the account.
SMA = E − (TMV * 50%)
For net capital purposes, is a receivable for unsecured margin debt an allowable or non-allowable asset?
A receivable for unsecured margin debt is a non-allowable asset for net capital purposes.
For net capital purposes, is a receivable for fully secured margin debt an allowable or non-allowable asset?
A receivable for fully secured margin debt is an allowable asset for net capital purposes.
