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Difficulty: HardMargin Accounts and Borrowing Requirements

An investor opening a new margin account executes a short sale of 300300 shares of ABC common stock at a price of $6\$6 per share. According to Federal Reserve Regulation T and FINRA margin rules, what is the required initial equity deposit the investor must make?

  1. A
    900900
  2. B
    1,8001,800
  3. 2,0002,000Answer
  4. D
    2,7002,700

Answer

The required initial equity deposit is $2,000.
Under Federal Reserve Regulation T, the initial margin requirement is 50% of the trade value (900).However,FINRARule4210requiresanabsoluteminimuminitialequitydepositof900). However, FINRA Rule 4210 requires an absolute minimum initial equity deposit of 2,000 to open a short margin position. Because the 2,000minimumequityruleisgreaterthanthe2,000 minimum equity rule is greater than the 900 Reg T requirement, the investor must deposit $2,000.

Step-by-Step Solution

1
Calculate the total market value of the short sale
300 shares×$6=$1,800300 \text{ shares} \times \$6 = \$1,800
Determining the total transaction size is necessary to calculate the Regulation T initial requirement.
2
Calculate the Regulation T initial requirement
50% of $1,800=$90050\% \text{ of } \$1,800 = \$900
Regulation T mandates a 50% deposit of the total trade value.
3
Apply the FINRA Rule 4210 minimum initial equity rule for short sales
\text{Required deposit} = \max(\$900, \$2,000) = \$2,000
FINRA rules state that the minimum initial deposit to establish a margin position is 2,000.Forshortsales,evenifthetotalshortsaleamountislessthan2,000. For short sales, even if the total short sale amount is less than 2,000, the investor must deposit at least $2,000.

Key Concept

FINRA Rule 4210 Minimum Initial Equity Requirement for Short Sales
Estimated Time:1m 45s
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Topics

Margin Accounts and Borrowing Requirements