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Apply Margin Requirements - Series 7

  1. After the stock dividend, which of the following best describes the customer's position?
    Answer: 500 shares at $40.00 per share A stock dividend increases the number of shares and decreases the price per share, while the total market value of the position remains unchanged at the time of the dividend. The customer started with 400 shares. A 25% stock dividend means they receive 100 additional shares (400 0.25), for a total of 500 shares. The initial total market value was 400 $50 = $20,000. To keep the total value at $20,000, the new price per share will be $20,000 / 500 shares = $40.00 per share. The debit balance remains unchanged.
  2. What is the maximum amount of additional marginable stock the client can purchase using their SMA without depositing additional funds?
    Answer: $30,000 SMA can be used to meet the 50% Regulation T requirement for new purchases. The buying power for purchasing stock is twice the amount of SMA. Therefore, with $15,000 in SMA, the client can purchase $30,000 worth of marginable stock ($15,000 SMA * 2 = $30,000 Buying Power).
  3. What is the total initial margin requirement for these transactions?
    Answer: $55,000 Regulation T requires a 50% deposit for both long purchases and short sales. The requirements are calculated separately and then added together. For the long purchase: 50% of (500 shares $80) = 50% of $40,000 = $20,000. For the short sale: 50% of (1,000 shares $70) = 50% of $70,000 = $35,000. The total initial requirement is $20,000 + $35,000 = $55,000.
  4. A client has a portfolio margin account. Which of the following statements is TRUE regarding this type of account?
    Answer: Margin requirements are calculated based on the net risk of the entire portfolio rather than individual positions. Portfolio margining is a risk-based methodology that calculates margin requirements based on the net risk of a portfolio of securities, rather than the standard Regulation T rules which are applied on a position-by-position basis. This can result in lower margin requirements for well-hedged portfolios. It is generally available only to sophisticated investors, and the minimum equity requirement is typically $100,000 or more.
  5. Which of the following securities can be purchased on margin but are exempt from Regulation T?
    Answer: U.S. Treasury bonds U.S. Treasury securities and municipal bonds are exempt from Regulation T's 50% requirement. However, they are marginable, with margin requirements set by the broker-dealer subject to FINRA rules, which are typically lower than 50%. Options, new issues for the first 30 days, and open-end mutual fund shares cannot be purchased on margin.
  6. A customer purchases $30,000 of a 2x leveraged inverse ETF in their margin account. What is the FINRA minimum maintenance requirement for this position?
    Answer: 60% of the market value FINRA has special maintenance requirements for leveraged ETFs. The requirement is the standard SRO minimum (25% for long, 30% for short) multiplied by the leverage factor. An inverse ETF is treated as a short position. Therefore, the maintenance requirement is 30% * 2 = 60% of the market value.
  7. Which of the following statements is correct regarding this account?
    Answer: The account is restricted. First, calculate the account's equity and Reg T requirement. Equity = $200,000 (LMV) - $110,000 (DR) = $90,000. The Regulation T requirement is 50% of the LMV, which is 0.50 * $200,000 = $100,000. Since the equity ($90,000) is below the Regulation T requirement ($100,000), the account is restricted. There is no SMA because there is no excess equity. A Reg T call is for initial purchases, not for a decline in value. A maintenance call would not be issued as the equity is well above the 25% FINRA minimum ($50,000).
  8. What is the immediate effect of this dividend payment on the customer's account?
    Answer: The debit balance is reduced by $200. When a cash dividend is paid on a stock held in a long margin account, the cash is credited to the account. This cash is used to pay down the margin loan, thereby reducing the debit balance. The stock's price will have already been reduced by the dividend amount on the ex-dividend date, but the payment itself directly reduces the debit balance.
  9. How much Special Memorandum Account (SMA) is generated by this market appreciation?
    Answer: $10,000 SMA represents the excess equity in a margin account above the Regulation T 50% requirement. Initially, the equity is $120,000 (LMV) - $60,000 (DR) = $60,000. The Reg T requirement is 50% of $120,000 = $60,000. There is no excess equity, so SMA is $0. After appreciation, LMV is $140,000. The new equity is $140,000 - $60,000 = $80,000. The new Reg T requirement is 50% of $140,000 = $70,000. The excess equity is $80,000 - $70,000 = $10,000. This $10,000 becomes SMA.
  10. A new client's first transaction in their margin account is a short sale of 200 shares of JKL at $18 per share. What is the minimum amount the client must deposit?
    Answer: $2,000 For an initial transaction in a margin account, FINRA requires a minimum equity deposit of $2,000. Regulation T requires 50% of the transaction value, which is 50% of (200 * $18) = $1,800. Since the FINRA minimum equity requirement of $2,000 is greater than the Regulation T requirement of $1,800, the client must deposit $2,000.
  11. In a customer's long margin account, how is interest on the debit balance treated?
    Answer: It is added to the debit balance. Interest is charged on the debit balance (the amount borrowed from the broker-dealer). This interest charge is added to the debit balance, typically on a monthly basis. This increases the amount the customer owes the firm and reduces the equity in the account.
  12. What is the resulting Special Memorandum Account (SMA) balance after this transaction?
    Answer: $10,000 The total purchase amount is 400 shares * $200/share = $80,000. Under Regulation T, the initial margin requirement is 50% of the purchase amount, which is $40,000. The client deposited $50,000 in cash. The amount deposited in excess of the Regulation T requirement creates SMA. Therefore, the SMA balance is $50,000 (deposit) - $40,000 (requirement) = $10,000.
  13. At what long market value will this account receive a FINRA minimum maintenance call?
    Answer: $40,000 FINRA's minimum maintenance requirement for a long margin account is 25% of the long market value. A maintenance call is triggered when the account equity drops below this level. The formula to find the market value at which a call occurs is Debit Balance / (1 - Maintenance %). In this case, it is $30,000 / (1 - 0.25), which is $30,000 / 0.75 = $40,000. If the LMV drops below $40,000, a maintenance call will be issued.
  14. How much of the proceeds can the client withdraw after this sale?
    Answer: $5,000 The account is restricted because its equity of $40,000 ($90,000 LMV - $50,000 DR) is less than the 50% Regulation T requirement of $45,000 (50% of $90,000). When securities are sold in a restricted account, 50% of the proceeds must be used to reduce the debit balance, and the other 50% is credited to SMA and can be withdrawn. Therefore, the client can withdraw 50% of the $10,000 proceeds, which is $5,000.
  15. To what level must the short market value rise to trigger a FINRA minimum maintenance call?
    Answer: $30,000 For short accounts, FINRA requires minimum maintenance of 30% of the short market value. Current equity is $39,000 (CR) - $30,000 (SMV) = $9,000. Required maintenance is 30% × $30,000 = $9,000. The account is exactly at the maintenance requirement. Any increase in the short market value above $30,000 will cause the equity to fall below 30% of the new market value, triggering a maintenance call.
  16. A client has been designated as a pattern day trader (PDT). To engage in day trading, what is the minimum equity that must be maintained in the account at all times?
    Answer: $25,000 Under FINRA rules, a pattern day trader is a client who executes four or more day trades in a five-business-day period, provided the number of day trades represents more than 6% of the customer's total trades in the margin account for that same five-business-day period. To continue day trading, the client must maintain a minimum equity of $25,000.
  17. What is the total equity in this account?
    Answer: $65,000 The formula for calculating equity in a combined margin account is (Long Market Value - Debit Balance) + (Credit Balance - Short Market Value). In this case, the calculation is ($100,000 - $60,000) + ($65,000 - $40,000) = $40,000 + $25,000 = $65,000.
  18. A new client opens a margin account and their first transaction is the purchase of 1,000 shares of XYZ Corporation at $60 per share. What is the client's initial deposit requirement under Regulation T?
    Answer: $30,000 Regulation T requires an initial deposit of 50% of the market value of the securities purchased. The total market value of the purchase is 1,000 shares * $60/share = $60,000. The Regulation T requirement is 50% of $60,000, which is $30,000.

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