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Difficulty: MediumMargin Accounts and Borrowing Requirements

A customer opens a new margin account with a broker-dealer and executes an initial transaction by selling short 400400 shares of a marginable equity security at $25\$25 per share. Assuming the Regulation T margin requirement is 50%50\%, what is the minimum dollar amount of equity the customer must deposit into the account?

Answer: 5000 USD

Answer

The customer must deposit a minimum of $5,000 in equity to satisfy initial margin requirements.
For an initial short transaction in a new margin account, the investor must satisfy Federal Reserve Board Regulation T (50%50\% of the trade value) as well as FINRA's minimum initial equity requirement ($2,000\$2,000). The short sale of 400400 shares at $25\$25 per share generates a total trade value of $10,000\$10,000. Regulation T requires 50%50\% of $10,000\$10,000, which equals $5,000\$5,000. Because the Regulation T requirement of $5,000\$5,000 exceeds the FINRA minimum requirement of $2,000\$2,000, the investor must deposit $5,000\$5,000.

Step-by-Step Solution

1
Calculate the total market value of the short position
400 shares×$25=$10,000400 \text{ shares} \times \$25 = \$10,000
Initial margin calculations are based on the aggregate value of the transaction.
2
Determine the Regulation T initial margin requirement
50%×$10,000=$5,00050\% \times \$10,000 = \$5,000
Regulation T mandates an initial deposit of 50% of the trade value for short equity positions.
3
Apply the FINRA initial minimum deposit rule
$5,000 equity required\$5,000 \text{ equity required}
FINRA rules require a minimum initial equity deposit of $2,000 or the Regulation T requirement, whichever is greater.

Key Concept

Short sale initial margin requirements under Federal Reserve Board Regulation T and FINRA rules
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Topics

Margin Accounts and Borrowing Requirements