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Difficulty: HardMargin Accounts and Borrowing Requirements

An investor establishing a new margin account executes a short sale of 300300 shares of XYZ common stock at $12\$12 per share as the account's initial transaction. Assuming no prior cash or security balance in the account, what is the minimum dollar amount of cash equity the investor must deposit to satisfy all Federal Reserve Regulation T and FINRA initial margin requirements?

Answer: 2000 USD

Answer

The investor must deposit $2,000 in cash equity to satisfy the FINRA minimum initial margin requirement.
The total market value of the short sale is 300×$12=$3,600300 \times \$12 = \$3,600. Regulation T requires 50% of the trade value (0.50×$3,600=$1,8000.50 \times \$3,600 = \$1,800). However, FINRA Rule 4210 requires a minimum initial equity deposit of $2,000\$2,000 to initiate a short sale in a margin account. Because the investor must satisfy the stricter of the two rules, the required deposit is $2,000\$2,000.

Step-by-Step Solution

1
Calculate the gross proceeds / market value of the short sale position
300 shares×$12=$3,600300 \text{ shares} \times \$12 = \$3,600
The transaction value serves as the base for calculating Regulation T requirements.
2
Calculate the Regulation T initial deposit requirement (50%)
50%×$3,600=$1,80050\% \times \$3,600 = \$1,800
Federal Reserve Regulation T requires 50% initial margin on equity short sales.
3
Evaluate against FINRA Rule 4210 minimum initial equity requirement
\text{FINRA Minimum Equity} = \$2,000
FINRA rules mandate a minimum initial equity deposit of $2,000 for opening a short margin position.
4
Determine the governing requirement
\max(\$1,800, \$2,000) = \$2,000
The investor must deposit the higher of the Regulation T requirement or FINRA's minimum initial equity requirement.

Key Concept

Interaction between Regulation T 50% initial requirement and the FINRA $2,000 minimum initial equity rule for short sales
Estimated Time:2m 0s
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Topics

Margin Accounts and Borrowing Requirements