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Question

Difficulty: MediumMargin Accounts and Borrowing Requirements

Match each margin account regulatory requirement or document with its corresponding definition or core function.

  • Regulation T Initial RequirementMandates that customers deposit at least 50% of the purchase price for marginable equity transactions.
  • FINRA Initial Minimum Equity RuleRequires an absolute minimum deposit of $2,000 in equity (or 100% of the purchase price if less) upon opening a margin position.
  • Hypothecation AgreementPledges customer securities as collateral to the broker-dealer to secure the margin loan.
  • Loan Consent AgreementProvides optional permission for the broker-dealer to lend customer securities to third parties for short sales.

Answer

Regulation T Initial Requirement matches with the 50% deposit requirement; FINRA Initial Minimum Equity Rule matches with the $2,000 (or 100% of purchase) equity threshold; Hypothecation Agreement matches with pledging customer securities as loan collateral; and Loan Consent Agreement matches with optional authorization to lend customer securities.
Each term accurately reflects its regulatory rule or contractual function. Regulation T sets the standard initial margin rate at 50%, FINRA enforces a minimum initial equity requirement of 2,000(or1002,000 (or 100% for transactions under 2,000), the hypothecation agreement authorizes borrowing against customer collateral, and the loan consent agreement gives optional permission to lend customer shares.

Step-by-Step Solution

1
Identify the governing body and deposit percentage for Regulation T.
Regulation T is established by the Federal Reserve Board and requires a 50% initial deposit.
Reg T regulates the extension of credit by broker-dealers for marginable securities.
2
Identify FINRA's baseline minimum dollar equity requirement.
FINRA requires a minimum initial customer equity of $2,000 or 100% of the trade value if less.
This prevents undercapitalized accounts from opening small margin positions without adequate equity.
3
Distinguish between mandatory account agreements (Credit and Hypothecation) and optional agreements (Loan Consent).
Hypothecation pledges customer securities to secure the debt, while Loan Consent permits lending customer securities for short selling.
Understanding account documentation is essential for regulatory compliance on the SIE exam.

Key Concept

Margin Account Regulations and Documentation Requirements
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Topics

Margin Accounts and Borrowing Requirements