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Difficulty: EasyMargin Accounts and Borrowing Requirements

When opening a margin account, which mandatory agreement must a customer sign to pledge their purchased securities as collateral for the margin loan extended by the broker-dealer?

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

Answer

The Hypothecation Agreement is the mandatory margin account document in which the customer pledges securities as collateral for the margin loan.
The correct answer identifies the Hypothecation Agreement. In a margin account, the customer borrows funds from the broker-dealer to buy securities. By signing the Hypothecation Agreement, the customer gives the broker-dealer a pledge (hypothecation) of the purchased securities as collateral for the loan.

Step-by-Step Solution

1
Identify the purpose of each margin account agreement document.
The Credit Agreement details interest rates and loan terms; the Hypothecation Agreement pledges securities as loan collateral; the Loan Consent Agreement allows security lending; the Risk Disclosure Document outlines account risks.
Margin documentation has distinct regulatory purposes required by FINRA and the SEC.
2
Match the specific function requested in the question (pledging securities as collateral) to the correct agreement.
The Hypothecation Agreement creates the legal pledge of securities to secure the broker-dealer's loan.
Without a signed Hypothecation Agreement, the broker-dealer cannot legally extend credit secured by the customer's securities.

Key Concept

Margin Account Documentation - Hypothecation Agreement
Estimated Time:45s
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Topics

Margin Accounts and Borrowing Requirements