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Question

Difficulty: HardMargin Accounts and Borrowing Requirements

An investor opens a new margin account with no prior position or cash balance and executes an initial transaction selling short 100 shares of ABC common stock at $28 per share. What is the minimum dollar amount of equity the investor must deposit to satisfy Federal Reserve Board Regulation T and FINRA initial margin requirements?

Answer: 2000 $

Answer

The investor must deposit $2,000.
To open a short position in a new margin account, the investor is subject to both Federal Reserve Board Regulation T (50% of the total transaction value) and FINRA initial minimum equity rules. The total short sale value is 2,800(100shares×2,800 (100 shares × 28). Regulation T requires 50% of 2,800,whichequals2,800, which equals 1,400. However, FINRA rule mandates an initial minimum equity deposit of 2,000formarginaccounttransactions.Becausetheinvestormustmeetthemorestringentrequirement,thecustomermustdeposit2,000 for margin account transactions. Because the investor must meet the more stringent requirement, the customer must deposit 2,000.

Step-by-Step Solution

1
Calculate the total market value of the short transaction
2,800(2,800 ( 100 \text{ shares} \times \2828 per share)
Determining total market value is the baseline for evaluating initial margin rules.
2
Compute the Regulation T requirement
1,400(1,400 ( 2,800 \times 50\%)$
Federal Reserve Board Regulation T imposes a standard 50% initial margin requirement on short sales of marginable equity securities.
3
Evaluate the FINRA initial minimum equity rule
$2,000 requirement
FINRA rules state that the minimum initial equity required to establish a margin position is 2,000,unlessthetotalvalueofalongpurchaseislessthan2,000, unless the total value of a long purchase is less than 2,000 (in which case 100% of the purchase price is required).
4
Compare Regulation T and FINRA minimum rules to determine the final deposit
$2,000
The customer must satisfy the stricter of the Regulation T requirement (1,400)ortheFINRAinitialequityrule(1,400) or the FINRA initial equity rule ( 2,000).

Key Concept

FINRA Initial Minimum Equity Deposit Requirement for Short Sales
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Topics

Margin Accounts and Borrowing Requirements