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Question

Difficulty: EasyMargin Accounts and Borrowing Requirements

Match each margin account disclosure agreement with its primary purpose or function.

  • Credit AgreementDiscloses the terms, interest rates, and method of computing interest on the margin loan extended by the broker-dealer.
  • Hypothecation AgreementPledges the customer's securities as collateral to the broker-dealer to secure the margin loan.
  • Loan Consent AgreementProvides optional permission for the broker-dealer to lend the customer's fully paid or margin securities to third parties.

Answer

Credit Agreement matches with terms/interest disclosure; Hypothecation Agreement matches with pledging securities as collateral; Loan Consent Agreement matches with optional authorization to lend customer securities.
Each agreement serves a distinct legal function in opening a margin account: the Credit Agreement discloses loan interest terms, the Hypothecation Agreement establishes collateral by pledging securities, and the Loan Consent Agreement gives optional permission to lend out customer securities.

Step-by-Step Solution

1
Identify the mandatory document that governs interest terms and loan conditions.
The Credit Agreement specifies how margin interest is charged and calculated.
Federal regulations require explicit disclosure of credit terms to the margin customer.
2
Identify the document required to establish collateral for the borrowed funds.
The Hypothecation Agreement legally pledges customer securities as collateral.
Broker-dealers require security collateral in order to extend margin credit under Regulation T.
3
Identify the non-mandatory agreement related to securities lending.
The Loan Consent Agreement allows the firm to lend out customer securities.
This agreement is optional when opening a margin account.

Key Concept

Margin Account Documentation Requirements
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Topics

Margin Accounts and Borrowing Requirements