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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 purchasing 100 shares of a marginable stock at $32 per share. Under Federal Reserve Regulation T and FINRA margin rules, what is the minimum cash deposit required from the customer?

  1. $2,000Answer
  2. B
    $1,600
  3. C
    $3,200
  4. D
    $800

Answer

The minimum cash deposit required is $2,000.
For an initial long purchase in a new margin account, the investor must satisfy both Federal Reserve Regulation T (50% of trade value) and FINRA minimum initial equity rules (2,000minimumdepositfortransactionsbetween2,000 minimum deposit for transactions between 2,000 and 4,000).Withapurchasevalueof4,000). With a purchase value of 3,200, Reg T calls for 1,600,butFINRA′s1,600, but FINRA's 2,000 rule takes precedence because it is higher.

Step-by-Step Solution

1
Calculate the total purchase value of the transaction.
100 shares×$32=$3,200100 \text{ shares} \times \$32 = \$3,200
Initial margin calculations are based on the total market value of the purchase.
2
Determine the Regulation T initial requirement.
$3,200×50%=$1,600\$3,200 \times 50\% = \$1,600
Federal Reserve Regulation T requires a 50% deposit on margin purchases.
3
Apply the FINRA minimum initial equity rule and compare.
max⁡($1,600,$2,000)=$2,000\max(\$1,600, \$2,000) = \$2,000
FINRA rules mandate a minimum initial equity deposit of 2,000(unlessthepurchasetotalisunder2,000 (unless the purchase total is under 2,000, in which case 100% of the purchase price is required). The customer must deposit the greater of the Reg T amount (1,600)orFINRAminimumequity(1,600) or FINRA minimum equity ( 2,000).

Key Concept

Initial Margin Deposit Requirements (Reg T 50% vs. FINRA $2,000 Minimum Equity Rule)
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Topics

Margin Accounts and Borrowing Requirements