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Difficulty: MediumMargin Accounts and Borrowing Requirements

An investor opening a new margin account executes an initial transaction to sell short 200200 shares of XYZ common stock at $14\$14 per share. What is the minimum initial margin deposit required from the investor, in dollars, to satisfy Federal Reserve Regulation T and FINRA rules?

Answer: 2000 $

Answer

The minimum initial deposit required from the investor is $2,000.
Under Federal Reserve Regulation T, the initial margin requirement is 50% of the total transaction value (200×$14=$2,800200 \times \$14 = \$2,800), which equals $1,400\$1,400. However, FINRA Rule 4210 mandates a minimum initial equity requirement of $2,000\$2,000 to establish a new margin position. Because $2,000\$2,000 is greater than the Regulation T requirement of $1,400\$1,400, the investor must deposit $2,000\$2,000.

Step-by-Step Solution

1
Calculate total proceeds from the short sale
200 shares * 14/share=14/share = 2,800
Margin requirements are evaluated based on total market value of the transaction.
2
Calculate the Federal Reserve Regulation T requirement
50% of 2,800=2,800 = 1,400
Regulation T mandates a 50% deposit on margin transactions.
3
Compare against FINRA initial minimum equity rules
FINRA requires a minimum initial equity deposit of $2,000 for new margin accounts
FINRA Rule 4210 establishes an absolute minimum initial equity of 2,000unlessthetotalvalueisunder2,000 unless the total value is under 2,000 for a long transaction.
4
Select the governing deposit amount
The investor must deposit $2,000
The investor must deposit the greater of the Regulation T requirement (1,400)ortheFINRAminimumrequirement(1,400) or the FINRA minimum requirement ( 2,000).

Key Concept

Initial Margin Requirements and FINRA $2,000 Minimum Equity Rule
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Topics

Margin Accounts and Borrowing Requirements