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Difficulty: Very hardMargin Accounts and Borrowing Requirements

An investor opening a new margin account with no existing positions executes an initial trade to purchase $3,200 of marginable common stock. Rather than depositing cash, the client wishes to satisfy the initial margin requirement by depositing fully paid marginable stock already held in another account. What is the minimum market value of marginable securities the client must deposit to satisfy the initial margin requirement?

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

Answer

The minimum market value of fully paid marginable stock required to satisfy the margin deposit is $4,000.
For an initial purchase of 3,200inanewmarginaccount,RegulationTcallsfor503,200 in a new margin account, Regulation T calls for 50% ( 1,600), but FINRA rules enforce a minimum initial equity requirement of 2,000forpurchasesbetween2,000 for purchases between 2,000 and 4,000.Therefore,therequiredcashmargincallis4,000. Therefore, the required cash margin call is 2,000. When an investor deposits fully paid marginable stock instead of cash, Regulation T requires the market value of the deposited securities to be equal to 200% (twice) the dollar amount of the cash margin call (2,000×2=2,000 × 2 = 4,000).

Step-by-Step Solution

1
Calculate the Regulation T cash requirement
50% of 3,200=3,200 = 1,600
Federal Reserve Board Regulation T mandates a 50% initial margin requirement on equity purchases.
2
Determine the governing cash margin call using FINRA minimum initial equity rules
The cash margin requirement is $2,000
FINRA rules mandate a minimum initial equity deposit of 2,000(or1002,000 (or 100% of the purchase price if less than 2,000). Because 2,000isgreaterthanthe2,000 is greater than the 1,600 Regulation T calculation, $2,000 is the required cash margin call.
3
Apply the 200% rule for depositing fully paid marginable securities in lieu of cash
200% × 2,000=2,000 = 4,000
When satisfying an initial margin call with fully paid marginable stock instead of cash, the client must deposit securities with a market value equal to twice (200%) the cash requirement because marginable securities have a 50% loan value.

Key Concept

Initial Margin Requirements and Fully Paid Securities Deposit Rules
Estimated Time:2m 0s
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Topics

Margin Accounts and Borrowing Requirements