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SIE Chapter 9: Cash and Margin Account Basics
Terms in this set (38)
There are two basic types of accounts that customers can open at a brokerage firm:
1. Cash Account
2. Margin Account
An account that requires the customer to pay cash in full for all securities that they purchase in the account. Customer's signatures are not required when opening a cash account.
An account that allows customers to purchase securities worth twice the amount of money they have deposited by using money borrowed from the broker-dealer or borrow securities from the broker-dealer to sell the stock short. Borrowing money on your investments is often called leverage.
There are three types of margin accounts. These are:
1. Margin Account Long
2. Margin Account Short
3. Margin Account Mixed
Margin Account Long
for buying stock. The customer borrows money.
Margin Account Short
for selling stock short. The customer borrows stock.
Margin Account Mixed
Long and Short positions in the same account
The _____________ in a margin account is the amount that a customer must deposit in the account to do a margin or leveraged trade.
1. The Reg T Margin deposit required is generally _____ of the purchase price.
2. The other 50% which the broker-dealer lends to the customer is the "Loan Value" ofthe margin account.
SMA (Special Memorandum Account)
is a line of credit extended to the customer by the broker-dealer.
of the Federal Reserve Board regulates credit extension by broker-dealers. Cash and margin accounts are covered under this Regulation, but not commodity accounts.
Under Reg T, if a customer purchases a security in either a "Special" Cash Account or a Margin Account, payment must be received by the 4th business day (previously 5th business day) after trade date or the broker-dealer must either:
a. Obtain an extension of time for payment from the appropriate regulatory authority, normally FINRA, Stock Exchanges, or a Federal Reserve Bank (Broker-dealers cannot grant extensions),
b. Cancel or liquidate the unsettled portion of the transaction
This rule does not apply if:
a. a customer purchases $1,000 or less of a security or
b. the security is a government security. Government securities are exempt from Regulation T
____________ also states that if a customer is sold out in a Cash Account for failure to make prompt payment, then the account must be frozen for 90 days. If a customer wants to purchase a security during this "frozen period," cash sufficient to cover the total trade must be in the account before the purchase.
__________________ provide that in a cash account, a customer must pay for the purchase of a stock before the customer can be paid for the sale of the same security. If a customer was paid for a sale before paying for the purchase of the same security, it is called "free-riding" and is a violation of Federal Reserve rules.
are the rules and regulations mandated by the Federal Reserve Board that cover the initial margin requirements for the extension of credit (margin accounts) to customers by broker-dealers.
Classifications of securities under Regulation T:
a. Registered Securities
b. OTC Margin Securities
c. Exempt Securities
d. Unregistered Securities
are securities that are listed on a National Exchange
OTC Margin Securities
are securities that for margin trading by the Federal Reserve Board
are securities that are issued by governments and municipalities.
New issues, open-end Investment Companies, and any other securities accompanied by an offering circular or prospectus. (No Loan Value)
Put & Call options
Remember that ____________________ can be purchased "in" a margin account but, cannot be purchased "on" margin. 100% of the premium payment is required.
Firms do not have the capital to carry these margin loans to customers. Therefore, the same securities purchased by the customer are used by the broker-dealer to secure a loan from the bank. It is for this reason that securities purchased on margin must be registered in street name. Street name refers to securities that are held in the broker-dealer's name rather than the customer's name. It simplifies the custody and transfer of shares.
occurs when the broker-dealer makes a margin loan to a customer, using the securities purchased as collateral
is the pledging by a broker-dealer of customers' securities to the bank in exchange for a loan of cash to the broker-dealer to cover margin loans made to customers. A broker is permitted to hold fully paid securities at the customer's request when the securities are segregated. Fully paid securities cannot be rehypothecated.
the amount of money a customer has borrowed from the broker-dealer to purchase securities in a margin account.
When a ____________________ requests a loan from a bank to fund a customer's margin account, it can use up to 140% of the value of the customer's debit balance in the form of customer securities as collateral for the loan.
Although the broker-dealer can use up to _______ of the customer's debit balance to secure the loan, the broker-dealer may not borrow more than the amount of the customer's debit balance (amount loaned to customer).
The following forms must be completed in order for a customer to open a margin account with a broker-dealer:
1. New Account Report Form
2. Margin Agreement / Customer Agreement / Hypothecation Agreement
3. Customer Loan Consent Agreement
4. Credit Agreement
New Account Report Form
a form which details information about a new client's financial situation and investment objectives.
Margin Agreement / Customer Agreement I Hypothecation Agreement
Customers cannot purchase securities on margin without a signed Margin Agreement on file. The margin agreement details the regulations that govern margin accounts and gives notice to the customer that:
a. All trades are subject to the rules & regulations of the SROs (e.g., NYSE, FINRA).
b. Securities are subject to Rehypothecation. Rehypothecation is when broker/dealers use the customers' securities in margin accounts as collateral to make broker loans.
c. The firm may sell out any securities in the account, if necessary, with or without written notice.
d. Interest will be charged on all debit balances.
- Interest charged is based on the Broker Loan Rate or Call Loan Rate which is a fluctuating interest rate
- Interest charges increase the customer's debit balance
e. Many broker-dealers now use one form to cover both the New Account form and the Margin agreement. Also, if the RR has discretionary authority on an account and the customer wants to add margin capabilities to that account, the RR must obtain a margin agreement and supervisory approval before exercising discretion on the margin account.
Customer Loan Consent Agreement
Gives specific permission to the broker-dealer
to lend customers securities to itself or others. Although it is not mandatory that customers sign this agreement, most firms require it as a matter of firm policy.
* Note: Securities may not be borrowed from other customer's cash accounts. Borrowing can only be done from customer margin accounts where Loan Consent Agreement has been signed.
requires a broker-dealer extending credit to a customer to disclose the terms and conditions under which such financing will be maintained.
Regulation T is mandated and administered by the Federal Reserve.
When a customer establishes a new margin account, Regulation T requires that certain conditions be met for each type of margin account opened.
Reg T Initial Requirements for a Margin Account Long
Customers must deposit 50% of the purchase price or $2,000, whichever is greater.
*Exception: If the full purchase cost is less than $2,000, the customer has to deposit the full amount of the purchase.
When making a deposit to satisfy a _________ call the customer can deposit the cash required or deposit securities which have a market value that is 2 X the Reg T requirement.
Reg T Initial Requirements for a Margin Account Short
1. Minimum equity to open a short account is $2,000 - NO EXCEPTIONS.
2. Customers must deposit 50% of the proceeds of the short sale or $2,000, whichever is greater (unless it is a low priced stock).
3. Initial Margin Requirements for the Short Sale of low priced stock:
*Note: The minimum requirement of $2,000 would still have to be deposited (separate from the proceeds of the short sale) if any of the above requirements totaled less than $2,000.
Equity in a margin account
represents the part of the account that the customer actually owns. It is the customer's net financial ownership in the account. To compute equity in a margin account, you would use the follow formula: current market value - debit balance = equity
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