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Difficulty: MediumMargin Accounts and Borrowing Requirements

An investor opening a margin account signs the required documentation to begin trading on credit. Which specific document authorizes the broker-dealer to pledge the customer's margin securities to a bank as collateral to secure a loan?

  1. Hypothecation AgreementAnswer
  2. B
    Credit Agreement
  3. C
    Loan Consent Agreement
  4. D
    Risk Disclosure Document

Answer

The Hypothecation Agreement is the contract that authorizes the broker-dealer to pledge the customer's margin securities as collateral.
The correct answer is the Hypothecation Agreement. When opening a margin account, the customer must sign the hypothecation agreement, which grants the broker-dealer the right to pledge (hypothecate) the customer's securities to a bank (rehypothecation) as collateral for a loan used to finance customer purchases.

Step-by-Step Solution

1
Identify the primary purpose of each mandatory and optional margin document.
The Credit Agreement defines credit terms; the Hypothecation Agreement governs collateral pledging/rehypothecation; the Loan Consent Agreement governs lending stock to third parties.
Margin documentation requires distinct disclosures and authorization agreements under FINRA rules and SEC regulations.
2
Match the specific authorization requested (pledging securities to a bank for collateral).
Pledging securities as collateral for a loan is the legal definition of hypothecation.
Rehypothecation allows broker-dealers to use customer margin securities to obtain bank loans to finance customer borrowing.

Key Concept

Margin Account Documentation and Hypothecation Rights
Estimated Time:1m 0s
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Topics

Margin Accounts and Borrowing Requirements