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Margin Account
Series 7
| Question | Answer |
|---|---|
| If regulation T is Denied, Broker dealer Must? | Cancel or Liquidate transaction |
| IF a customer cannot pay their balance on the 5th Business day in their Margin or Cash account? | Account will be sold out and frozen for 90 days |
| When is payment REQUIRED for Margin accounts? | 5th business day after trade date |
| Cash Accounts | All Purchases must be paid in Full |
| Margin Account | Allows customers to sell stock short, customer can buy twice the amount of stock. |
| Margin | Amount the customer Must deposit to make purchase typically 50% |
| Loan Value | 50 % of loan made to customer, typically Reg T amount |
| SMA | Line of credit extended by Broker Dealer (works like a credit card), can withdraw cash from it or buy stocks. |
| Using SMA increases? | Debit Balance |
| Who determines what LISTED securities can be trade on margin? | The Exchanges on which the Security trades |
| Who determines what OTC securities can be purchased on Margin? | The Fed (FRB) |
| Exempt Securities | Don't register with SEC and Exempt from some form of taxation |
| Unregistered Securities Sold with Prospectus | Not Margin-able (Mutual funds, IPOs, anything with an offering circular, prospectus) |
| Non Marginable Securities have?- | No Loan Value |
| Securities that can be traded on Margin | Government & Muni Bonds, listed Securities and OTC (NASDAQ) |
| Margin Securities Must Be Held in? | Street Name (Under Broker) |
| To calculate amount of securities that can be used as collateral for Margin loan | Debit Balance x 1.40 |
| Broker dealer is limited to using _____% debit balance as collateral for Re- Hypothication | |
| Broker dealer can never? | Borrow more from the bank than the Customers debit balance (amount the BD lent the customer) |
| Test Question: How much can the Broker dealer USE as collateral for loan when dealing with a bank (Re-Hypotheicaton) | Can use up to 140% of the debit balance |
| Test Question: How much can the Broker dealer "Borrow" from a bank when making loans to customers? | Can only borrow "UP TO" the customers debit balance in the account |
| Hypothecation Agreement | Authorizes Brokers to pledge customer margin securities as collateral for a loan form a bank |
| New Account Report Form | Needed in opening either cash or margin account, includes basic information Name, addresses, DOB. Financial situation, investment objectives |
| Margin Agreement States? | |
| Interest Charges increase? | A customers debit balance |
| Margin on a descretionary account | RR must obtain margin agreement from customer and needs supervisory approval before entering a trade or exercising discretion on margin account |
| Customer Loan Consent Agreement | States that customer securities can be loaned to other customers for short sales |
| Credit Agreement | Requires Broker to disclose terms and conditions" under which such financing will be maintained. |
| "Initial" Reg T requirement | $2,000 |
| Margin account Long Initial Funding | Deposit 50% of purchase or $2,000 which ever is greater |
| Margin account Long Total Purchase is less than $2,000 | Deposit the Full Purchase amount |
| Margin function kicks in when? | Purchase is over $2,000 |
| How can deposits to Satisfy a Margin call be made? | Cash equal to call amount or Securities worth 2 x the Reg T requirement |
| Margin Account Short Initial Requirements ( to open) | $2,000 no exceptions |
| Initial requirement for low priced stock ( $0-$5) | Proceeds of SS + $.2.50 per share or 100% of Market Value ( which ever is greater) |
| Initial requirement for stock ( $0-$5) | Proceeds of SS + $5 per share or 50% of the Mrtk Value Short wich ever is greater |
| If initial Requirements for Short Margin AccOunt total less than $2,000 | $2,000 would still need to be deposited 'NO EXCEPTIONS' |
| Maintenance requirement for Margin Account Short ($0-$5) | Proceeds of SS or 100% of MVL (Which ever is greater) Same as initial reg-T |
| Maintenance requirement for Margin Account Short ($0-$5) | Proceeds of SS + $5 per share or 30% of MVL of short |
| Margin Account Equity = | Current Market Value - Debit Balance |
| IF a customer has Excess Equity what can he do? | Withdraw it for cash, Buy 2x the amount of securities (buying power), leave it to be credited to SMA |
| Buying power | Equals 2 x Excess Equity |
| SMA | Special Memorandum Account |
| SMA increases when? | Market Value of Stock increases but does not decrease if MRkt value of stock falls, |
| When Equity in Margin Account is Below 50% | Account is labeled as restricted but the client will not be notified |
| Fedreral Retetion Rules | Apply to all sales that occur in a restricted margin account, 50 % of proceeds is retained to reduce debit balance and 50% will be released to cutomer |
| IF market value of stock continues to decline in a Long Margin account? | A margin call may be made at 30% (house Call) or 25% (NYSE) if not met upon demand client will be sold out. |
| House Maintenance is? | 30% |
| 4 Conditions of Margin Accounts | Excess Equity, Reg -T, Restricted, Maintenance call |
| Firm will always be willing to loan clients | 50% of the Mrkt value of a security. |
| Debit balance is the stable Number | Amount borrowed wont change if the MRKt value of the stock fluctuates, the only number that constantly changes. |
| Calculating Excess Equity | Current MV /2 - DB |
| Selling and then Buying Stock in a Margin that is restricted | 50 % of proceeds is retained to reduce debit balance and 50% will be released to customer for purchase of other securities. Can use two times the amount of to purchase on margin |
| Net official ownership in the account is? | Equity |
| SMA Increase with? | Invrease in Stock MVL Cash Deposits (Not Required) Cash Dividends Long Sale of Stock in the Account (Brings money in) Increased by 50% of Sales proceed |
| Stock Dividends Effect on SMA | None, it has no effect on SMA |
| SMA Depletes When? | New Margin Purchase Cash Withdrwn |
| Decline in MVL Affects SMA in? | No way SMA remains the same if stock value goes down. |
| SMA can be used in restricted accounts if? | The purchase does not place customer in Minimum Maintenance |
| Buying Power for a Reg. T Account | When an account is at Reg T and securities appreciates, the amount of appreciation is equal to the Buying Power |
| Buying Power if Account Has Excess Equity but, No SMA | Buying Power = 2 x the accounts excess equity. |
| Buying Power When an Account has SMA | 2 x the SMA of the account, but investor cant use SMA to use SMA if it creates a Minimum Maintenance Situation |
| Once an account is determined to be restricted: | Work only from the trades that occur that day, do not recalculate the entire account. |
| If a customer buys securities in a restricted account | Customer is required to deposit Reg T of the purchase price. |
| If a customer Buys More than they Sell in a restricted account | Customer is required to deposit the Reg T difference of the buy and sell |
| Same Day substitution (Stock) in a restricted account | replacing a security in a margin account for another, the value is $ for $ not Share for share. |
| Cash Same Day Substitution in a restricted account | Customer must deposit 50% of the securities withdrawn |
| NYSE Min Maintenance | Current MV x .25 (Exam will not let you know this) |
| Maintenance calls can be satisfied by | Depositing Cash equal to call or securities with ''Loan Value" equal to the call |
| If a customers is liquidated to satisfy a Minimum Maintenance call | Firm must liquidate securities that are 4x the amount of the call |
| When and account hits minimum Maintenance it is | Already below 25% equity |
| Stable # in Short Margin Account | Credit Balance |
| Minimum Maintenance for a Short Margin Account | 30% |
| Customers do not earn... | Interest in a Short Margin Account. |
| Formula to Determine Equity in A Short Margin Account | 1)Proceeds of the Short Sale + Reg T Deposit = Credit Balance 2)Credit Balance - Current Market Value of the Short |
| Determine how high the Market Value would have to rise for a short account margin call | Credit Balance / 1.30 |
| Equity in Mixed Margin Account (test Q) | MVL -DB +CB- SMV |
| SMA in a mixed margin account | does not get calculated in equity for the account |
| "WI" Order in a Cash or Margin | Deposit Cash Equal to 25% of issued cost or $2,000 (Which ever is greater) |
| If a ''WI'' order is a bond Issue | The initial confirmation must contain the par value of the bonds purchased. |
| Margin Accounts for Fiduciaries, Trust Accounts, Discretionary require? | Require written authorization |
| Margin accounts are prohibited for | Minors |
| Long Sales Affect in Margin Account and funds are not withdrawn (MDSE) | Market Value Declines, Debit Balance Declines, SMA increases, Equity is unchanged |
| Debit Balance Increase | Withdraw cash, Interest charges, New Purchase |
| Stock Dividends Effect | Debit balance in unchanged, Market value decreases |
| Cash Dividends paid in a margin account | Reduce Debit balance |
| Interest on Municipal Bonds in a Margin Account | Are not tax deductible |
| Min Maintenance for a Municipal Bond | 15% of MV or 7% of principal, which ever is greater |
| If a customer withdraws securities from a long margin account |
Created by:
Ekitheman99