An investor opens a new margin account with a FINRA member broker-dealer and executes a sh… — FINRA SIE (Securities Industry Essentials)

An investor opens a new margin account with a FINRA member broker-dealer and executes a short sale of $300$ shares of XYZ stock at $\$12$ per share as the initial transaction in the account. Assuming Federal Reserve Regulation T is $50\%$ , what is the minimum dollar equity deposit required from the investor to satisfy the initial margin requirement?

$\$2,000$ Answer
B
$\$1,800$
C
$\$3,600$
D
$\$5,400$

Answer

$2,000

Under Federal Reserve Regulation T, the initial margin requirement for short sales is 50% of the total transaction value (

50\% \times \$3,600 = \$1,800

). However, FINRA Rule 4210 imposes an absolute minimum initial equity deposit of

2,000 to open a margin position. Since the calculated Regulation T amount of

1,800 is below FINRA's

2,000 floor, the customer must deposit

2,000.

Step-by-Step Solution

Calculate the total market value of the short position.

300 \text{ shares} \times \$12/\text{share} = \$3,600

Initial margin calculations are based on the gross value of the transaction.

Calculate the Regulation T requirement (50%).

50\% \times \

3,600 = \$1,800

Federal Reserve Regulation T specifies an initial requirement of 50% of the short sale proceeds.

Compare the Regulation T requirement against the FINRA Rule 4210 minimum initial equity requirement.

\text{Reg T requirement} = \

1,800 < \text{FINRA minimum} = \$2,000 \rightarrow \text{Deposit required} = \$2,000

FINRA rules mandate a minimum initial equity deposit of

2,000 (or 100% of market value for transactions under

2,000). Because

1,800 is less than

2,000, the investor must deposit the full $2,000.

Key Concept

Initial margin requirements under Regulation T and FINRA minimum equity rules for short transactions

Estimated Time:1m 30s

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