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Difficulty: HardMargin Accounts and Borrowing Requirements

Match each margin trading transaction or account classification on the left with its corresponding regulatory margin requirement on the right under Federal Reserve Regulation T and FINRA rules.

  • Long purchase of $1,500 of marginable equity in a newly opened margin accountRequires a 100% cash deposit (1,500)undertheFINRAminimuminitialequityrulefortransactionsunder1,500) under the FINRA minimum initial equity rule for transactions under 2,000.
  • Short sale of 500 shares of stock at $30 per share in a new margin accountRequires a 50% Regulation T deposit (7,500)becauseitexceedstheFINRA7,500) because it exceeds the FINRA 2,000 minimum equity threshold.
  • Short sale of 400 shares of stock trading at $3 per share in a margin accountSubject to a minimum requirement of $2.50 per share (or 100% of market value) under FINRA rules for low-priced stocks.
  • Customer account designated as a Pattern Day TraderMandates a minimum equity requirement of $25,000 to be maintained in the account on any day that day-trading occurs.

Answer

The correct pairings align each transaction or classification with its governing Regulation T or FINRA Rule 4210 requirement: the 1,500longpurchaserequiresa1001,500 long purchase requires a 100% cash deposit ( 1,500); the short sale of 500 shares at 30requiresa5030 requires a 50% Regulation T deposit ( 7,500); the short sale of stock trading at 3pershareissubjecttothe3 per share is subject to the 2.50 per share minimum; and the Pattern Day Trader classification mandates a $25,000 minimum equity requirement.
Each scenario maps directly to its specific regulatory constraint: purchases under 2,000require1002,000 require 100% deposit; trades over 4,000 follow standard 50% Reg T; short sales under 5/sharefollowthe5/share follow the 2.50 per share rule; and Pattern Day Trading requires $25,000 minimum equity.

Step-by-Step Solution

1
Analyze the long purchase of $1,500 in a new margin account.
Regulation T mandates a 50% deposit (750),butFINRARule4210enforcesaminimuminitialequityruleof750), but FINRA Rule 4210 enforces a minimum initial equity rule of 2,000 or 100% of the purchase price if the purchase is under 2,000.Therefore,theclientmustdeposit1002,000. Therefore, the client must deposit 100% ( 1,500).
Prevents small accounts from taking on excessive leverage for low-value opening transactions.
2
Calculate the initial deposit for short selling 500 shares at 30pershare(30 per share ( 15,000 total).
Applying the 50% Regulation T requirement yields 7,500.Because7,500. Because 7,500 is greater than FINRA's 2,000minimuminitialequitythreshold,2,000 minimum initial equity threshold, 7,500 must be deposited.
For larger margin transactions, Regulation T's 50% requirement supersedes FINRA's flat $2,000 minimum requirement.
3
Determine the short sale rule for stocks selling under 5pershare(400sharesat5 per share (400 shares at 3).
FINRA Rule 4210 specifies that short sales of securities priced under 5persharerequireaminimummaintenancemarginof5 per share require a minimum maintenance margin of 2.50 per share or 100% of market value, whichever is greater.
Protects broker-dealers against heightened volatility and unlimited loss potential in low-priced equity short positions.
4
Identify the minimum equity threshold for Pattern Day Traders.
FINRA rules require that any margin account executing four or more day trades within five business days maintain at least $25,000 in equity.
Ensures adequate capitalization for intra-day leverage and high trading frequency.

Key Concept

Margin Accounts and Borrowing Requirements (Regulation T & FINRA Rule 4210 Equity Minimums)
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Margin Accounts and Borrowing Requirements