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Difficulty: MediumMargin Accounts and Borrowing Requirements

In a newly established margin account, a customer executes a short sale of 150150 shares of a marginable equity security priced at $22\$22 per share. According to Federal Reserve Board Regulation T and FINRA initial equity requirements, what minimum dollar amount must the customer deposit?

Answer: 2000 $

Answer

$2,000
The total value of the short sale is 150×$22=$3,300150 \times \$22 = \$3,300. Under Federal Reserve Board Regulation T, the initial margin requirement is 50% of the trade value (50%×$3,300=$1,65050\% \times \$3,300 = \$1,650). However, FINRA rules require a minimum initial equity deposit of $2,000\$2,000 to open a short position in a margin account. Because the calculated Regulation T deposit ($1,650\$1,650) is less than FINRA's minimum requirement, the customer must deposit the higher amount of $2,000\$2,000.

Step-by-Step Solution

1
Calculate total short sale value.
3,300(150shares×3,300 (150 shares × 22/share)
Initial margin requirement calculations are based on total transaction value.
2
Calculate the Regulation T requirement.
1,650(1,650 ( 3,300 × 50%)
Federal Reserve Board Regulation T mandates a standard 50% initial margin requirement.
3
Apply FINRA minimum initial equity rule.
$2,000 required deposit
FINRA rules require a minimum initial equity deposit of 2,000(or1002,000 (or 100% of purchase price if less than 2,000 for long positions, but 2,000minimumforshortsales).Because2,000 minimum for short sales). Because 1,650 is below 2,000,theinvestormustdeposit2,000, the investor must deposit 2,000.

Key Concept

Initial Margin Requirements under Regulation T and FINRA Rules
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Topics

Margin Accounts and Borrowing Requirements