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Difficulty: MediumMargin Accounts and Borrowing Requirements

An investor opens a new margin account with a FINRA member broker-dealer and executes a initial long purchase of 250 shares of a marginable equity security at $14 per share. Under Federal Reserve Regulation T and FINRA margin rules, what is the minimum required initial equity deposit the investor must make?

  1. A
    $1,750
  2. $2,000Answer
  3. C
    $3,500
  4. D
    $875

Answer

$2,000
The total purchase value is 3,500(250shares×3,500 (250 shares × 14). Under Regulation T (50%), the initial margin requirement is 1,750.However,FINRArulesestablishaminimuminitialequityrequirementof1,750. However, FINRA rules establish a minimum initial equity requirement of 2,000 for transactions valued between 2,000and2,000 and 4,000. Because the broker-dealer must enforce whichever requirement is greater, the customer must deposit $2,000.

Step-by-Step Solution

1
Calculate the total market value of the purchase.
250 shares × 14=14 = 3,500 total market value.
Determining total trade value is required to calculate margin requirements.
2
Calculate the Federal Reserve Regulation T initial margin requirement.
50% of 3,500=3,500 = 1,750.
Regulation T mandates a 50% initial margin deposit on marginable equity securities.
3
Compare Regulation T requirement with FINRA minimum equity requirements.
FINRA requires a minimum equity deposit of 2,000forinitialtradesexceeding2,000 for initial trades exceeding 2,000 up to $4,000.
The investor must deposit the greater of the Regulation T requirement (1,750)ortheFINRAminimumequityrule(1,750) or the FINRA minimum equity rule ( 2,000).

Key Concept

Regulation T and FINRA Initial Margin Deposit Requirements
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Topics

Margin Accounts and Borrowing Requirements