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Question

Difficulty: EasyMargin Accounts and Borrowing Requirements

Which required margin account document authorizes a broker-dealer to pledge a customer's purchased securities as collateral to a bank to secure a margin loan?

  1. Hypothecation AgreementAnswer
  2. B
    Credit Agreement
  3. C
    Loan Consent Agreement
  4. D
    Regulation S-P Privacy Notice

Answer

The Hypothecation Agreement is the mandatory margin account document that authorizes the broker-dealer to pledge customer securities as collateral to a bank.
The Hypothecation Agreement is a mandatory component of opening a margin account. It establishes that the securities purchased on margin are pledged as collateral for the margin loan. Furthermore, it allows the broker-dealer to re-hypothecate those securities to a bank to secure funds for the margin client.

Step-by-Step Solution

1
Identify the key function described in the scenario
The action required is pledging customer securities to a financing institution (bank) as collateral for borrowing.
Broker-dealers require a legal framework to use customer securities as collateral when obtaining margin loan funds.
2
Compare account documentation definitions
The Hypothecation Agreement specifically governs hypothecation (customer pledging to broker-dealer) and re-hypothecation (broker-dealer pledging to bank).
Credit agreements cover interest terms, while loan consent agreements cover lending securities to third parties.

Key Concept

Margin Account Documentation (Hypothecation Agreement)
Estimated Time:45s
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Topics

Margin Accounts and Borrowing Requirements