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Difficulty: MediumMargin Accounts and Borrowing Requirements

An investor opening a new margin account places an initial trade to purchase 150150 shares of XYZ stock at $24\$24 per share. Assuming Regulation T is set at 50%50\%, what is the minimum cash deposit required from the investor to satisfy the initial margin requirement?

  1. 2,0002,000Answer
  2. B
    1,8001,800
  3. C
    3,6003,600
  4. D
    900900

Answer

The minimum cash deposit required is 2,0002,000.
To determine the required initial deposit, calculate both the Regulation T requirement (50%50\% of total market value) and the FINRA minimum initial equity requirement. The total purchase is 150×$24=$3,600150 \times \$24 = \$3,600. Under Reg T (50%50\%), the required amount is $1,800\$1,800. However, FINRA Rule 4210 mandates a minimum initial equity deposit of $2,000\$2,000 for margin trades exceeding $2,000\$2,000. Because $2,000\$2,000 is greater than $1,800\$1,800, the investor must deposit $2,000\$2,000.

Step-by-Step Solution

1
Calculate the total market value of the purchase.
Total Market Value = 150 shares×$24=$3,600150 \text{ shares} \times \$24 = \$3,600.
Initial margin calculations are based on the aggregate dollar value of the trade.
2
Calculate the Federal Reserve Board Regulation T requirement.
Reg T Requirement = 50%×$3,600=$1,80050\% \times \$3,600 = \$1,800.
Regulation T mandates a standard initial margin requirement of 50%50\% of the purchase value.
3
Apply the FINRA Rule 4210 minimum initial equity threshold.
FINRA minimum deposit is $2,000\$2,000. Since $2,000>$1,800\$2,000 > \$1,800, the required deposit is $2,000\$2,000.
FINRA rules require an absolute minimum initial equity deposit of $2,000\$2,000 (or 100%100\% of the purchase price if the total value is under $2,000\$2,000) when opening or executing an initial trade in a margin account.

Key Concept

Initial Margin Requirements and FINRA Minimum Equity Rule
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Topics

Margin Accounts and Borrowing Requirements