Apply Margin Requirements - Series 7

1. Calculate short equity percentage: credit $C = \$30{,}000$ and $MV = \$24{,}000$. What is equity $\%$?

   $25\%$. Short equity percentage is equity divided by market value, measuring the buffer against price rises in the short position.

2. Which requirement is met by depositing cash or marginable securities: a Reg T call or a maintenance call?

   Reg T call (initial margin) must be met with cash or marginable securities. Reg T initial margin deficiencies require deposits of cash or marginable securities to meet the 50% requirement without reducing positions.

3. What is the market value formula for a long margin position if a customer buys $N$ shares at price $P$?

   Market value $= N \times P$. The market value of a long position is calculated by multiplying the number of shares by the current price per share.

4. Identify the time limit to meet a Reg T initial margin call for equities (standard timeframe).

   Reg T call must be met within $4$ business days. Reg T provides a standard four-business-day period to deposit the required initial margin, allowing time for compliance before restrictions apply.

5. What is the loan value of marginable securities under Reg T at purchase?

   $50\%$ loan value (customer must deposit $50\%$). Reg T permits broker-dealers to lend up to 50% of the securities' value, requiring the customer to fund the remaining 50% at purchase.

6. What is the FINRA maintenance margin requirement for short equity positions in a margin account?

   Minimum equity is $30\%$ of current market value. FINRA Rule 4210 requires 30% equity for short positions to provide a buffer against adverse price movements increasing the market value.

7. Identify if a long account meets maintenance: $MV = \$16{,}000$ and debit $D = \$13{,}000$.

   No; equity $= \$3{,}000$ and required is $25\% \times \$16{,}000 = \$4{,}000$. FINRA maintenance requires equity at least 25% of market value; here, actual equity falls short, triggering a maintenance call.

8. Calculate short equity: credit $C = \$15{,}000$ and current market value $MV = \$11{,}000$. What is equity?

   $\$4{,}000$. Short equity is credit minus market value, capturing the value above the amount needed to repurchase the shorted securities.

9. Find the maximum loan (debit) allowed under Reg T for a $\$18{,}000$ margin stock purchase.

   $\$9{,}000$. Under Reg T's 50% loan value, the maximum debit for an $18,000 purchase is $9,000, ensuring the customer provides half the funds.

10. What is the SMA (Special Memorandum Account) used to represent in a margin account?

    Excess equity available for future margin purchases. The SMA tracks surplus equity above Reg T requirements, allowing withdrawals or additional margin transactions without new deposits.

11. State the formula for equity in a short margin account position at market value $MV$ with credit balance $C$.

    Equity $= C - MV$. Equity in a short position is the difference between the credit balance and market value, reflecting the profit or loss potential.

12. What is the Reg T initial margin requirement for shorting equity securities in a margin account?

    $50\%$ of the short sale proceeds (plus proceeds held). Reg T mandates depositing 50% of the short sale proceeds, with the full proceeds retained in the account to cover potential price increases.

13. What is the typical restriction period after a Reg T call is not met and the account is liquidated?

    Account is restricted for $90$ days (must pay in full for purchases). FINRA imposes a 90-day restriction period post-liquidation for Reg T violations to deter repeated non-compliance and ensure full payment for trades.

14. Find the Reg T initial deposit for a $\$10{,}000$ margin purchase of stock.

    $\$5{,}000$. Reg T requires a 50% initial deposit, so for a $10,000 purchase, the customer must deposit $5,000 with the broker lending the rest.

15. Calculate long equity: $MV = \$12{,}000$ and debit $D = \$7{,}000$. What is equity?

    $\$5{,}000$. Equity is the difference between market value and debit, representing the customer's net investment in the long position.

16. What is the minimum equity requirement to open and maintain a margin account (FINRA minimum)?

    $\$2{,}000$ minimum equity (or $100\%$ for purchases under $\$2{,}000$). FINRA establishes a $2,000 minimum equity threshold to open a margin account, or full payment for smaller transactions to ensure account viability.

17. What is the required action if a Reg T margin call is not met by the due date?

    Broker-dealer must liquidate sufficient securities to satisfy the call. To comply with Reg T and protect the firm, broker-dealers are required to sell securities if the initial margin deficiency persists beyond the deadline.

18. What is the formula for long margin equity percentage using market value $MV$ and debit balance $D$?

    Equity $\% = \frac{MV - D}{MV}$. The equity percentage for long positions measures the proportion of market value owned outright, derived from equity divided by market value.

19. Which requirement can be met by depositing cash or securities, or by liquidating positions: a maintenance call?

    Maintenance call can be met by deposit or liquidation (firm policy applies). FINRA maintenance calls allow flexibility, permitting resolution through deposits, securities, or position liquidation based on firm discretion.

20. What is the FINRA maintenance margin requirement for long equity positions in a margin account?

    Minimum equity is $25\%$ of current market value. FINRA Rule 4210 sets the maintenance margin at 25% of the long position's market value to prevent excessive borrowing as prices fluctuate.

21. What is the formula for short margin equity percentage using market value $MV$ and credit balance $C$?

    Equity $\% = \frac{C - MV}{MV}$. The short equity percentage indicates the margin cushion, calculated as the equity divided by the current market value of the shorted securities.

22. State the formula for equity in a long margin account position at market value $MV$ with debit balance $D$.

    Equity $= MV - D$. Equity in a long margin position represents the customer's ownership value, computed as the difference between market value and the debit balance.

23. What is the Reg T initial margin requirement for buying equity securities in a margin account?

    $50\%$ of the purchase price (minimum equity deposit). Reg T requires a 50% deposit of the purchase price to ensure sufficient equity and control leverage in margin purchases of equity securities.

24. Calculate long equity percentage: $MV = \$20{,}000$ and debit $D = \$12{,}000$. What is equity $\%$?

    $40\%$. The equity percentage is equity divided by market value, indicating the portion of the position financed by the customer's funds.

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