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Question

Difficulty: MediumMargin Accounts and Borrowing Requirements

An investor opens a new margin account and executes an initial transaction by purchasing 250250 shares of XYZ stock at $12\$12 per share. Under Federal Reserve Board Regulation T and FINRA rules, what is the minimum initial dollar amount the investor must deposit?

Answer: 2000 USD

Answer

The minimum initial required deposit is $2,000.
The total market value of the purchase is 250 shares×$12=$3,000250 \text{ shares} \times \$12 = \$3,000. Under Federal Reserve Board Regulation T (50%), the calculated margin requirement is $1,500\$1,500. However, FINRA Rule 4210 requires a minimum initial equity deposit of $2,000\$2,000 for any margin transaction where the total value exceeds $2,000\$2,000. Since the FINRA minimum requirement ($2,000\$2,000) is greater than the Regulation T requirement ($1,500\$1,500), the investor must deposit $2,000\$2,000.

Step-by-Step Solution

1
Calculate the total market value of the initial transaction
250 shares×$12=$3,000250 \text{ shares} \times \$12 = \$3,000
Margin requirements are calculated based on the total purchase price.
2
Calculate the Regulation T initial requirement
50%×$3,000=$1,50050\% \times \$3,000 = \$1,500
Regulation T mandates that investors deposit at least 50% of the purchase value.
3
Compare Regulation T result against the FINRA Rule 4210 initial minimum equity requirement
FINRA minimum deposit is $2,000
FINRA rules require a minimum equity deposit of 2,000toopenandexecutemargintransactionswhentotalpurchasevalueexceeds2,000 to open and execute margin transactions when total purchase value exceeds 2,000.
4
Select the greater of the Regulation T requirement and the FINRA rule minimum requirement
Deposit required = $2,000
The investor must satisfy the stricter of the two regulatory requirements.

Key Concept

FINRA Initial Minimum Equity Rule ($2,000 Deposit)
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Topics

Margin Accounts and Borrowing Requirements