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Difficulty: MediumMargin Accounts and Borrowing Requirements

A client establishes a new margin account with a broker-dealer and executes an initial long purchase of 8080 shares of a marginable equity security priced at $45\$45 per share. Assuming Federal Reserve Regulation T is set at 50%50\%, how much cash must the client deposit 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 client must deposit $2,000.
The total trade value is 3,600(3,600 ( 80 \times \4545). While 50% Regulation T requires 1,800,FINRArulesmandateaminimuminitialequitydepositof1,800, FINRA rules mandate a minimum initial equity deposit of 2,000 for any margin purchase between 2,000and2,000 and 4,000. Therefore, the investor must deposit $2,000.

Step-by-Step Solution

1
Calculate the total market value of the purchase.
80 shares×$45=$3,60080 \text{ shares} \times \$45 = \$3,600
Determining total trade cost is necessary before applying initial margin percentages.
2
Calculate the Regulation T requirement at 50%.
50%×$3,600=$1,80050\% \times \$3,600 = \$1,800
Federal Reserve Regulation T requires 50% initial equity on long stock margin transactions.
3
Compare Regulation T requirement to FINRA initial minimum equity requirement.
FINRA requires a minimum initial deposit of 2,000foraccountsopenedwithtradesbetween2,000 for accounts opened with trades between 2,000 and $4,000.
Broker-dealer rules specify that the investor must deposit the greater of the Regulation T requirement (1,800)orFINRA′sminimumequityrequirement(1,800) or FINRA's minimum equity requirement ( 2,000).

Key Concept

FINRA Initial Minimum Margin Requirement vs. Regulation T
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Topics

Margin Accounts and Borrowing Requirements