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Difficulty: Very hardMargin Accounts and Borrowing Requirements

An investor opens a new margin account and executes a first-time transaction by short selling 1,000 shares of XYZ common stock at $3.00 per share. What is the minimum required cash equity deposit that the investor must make to satisfy Federal Reserve Regulation T and FINRA margin requirements?

  1. A
    $1,500
  2. B
    $2,000
  3. $2,500Answer
  4. D
    $3,000

Answer

The minimum required cash equity deposit is $2,500.
Under FINRA Rule 4210, short sales of stock trading below 5.00persharerequireaminimuminitialdepositof5.00 per share require a minimum initial deposit of 2.50 per share or 2,000,whicheverisgreater.Fora1,000shareshortpositionat2,000, whichever is greater. For a 1,000 share short position at 3.00 per share, 1,000 × 2.50=2.50 = 2,500. Because 2,500ishigherthanboththe502,500 is higher than both the 50% Regulation T requirement ( 1,500) and the baseline FINRA 2,000equityminimum,theinvestormustdeposit2,000 equity minimum, the investor must deposit 2,500.

Step-by-Step Solution

1
Calculate the total market value of the short sale position
3,000(1,000shares×3,000 (1,000 shares × 3.00)
Establishing the total position size is required to evaluate Regulation T and FINRA rules.
2
Calculate the Regulation T initial margin requirement
1,500(1,500 ( 3,000 × 50%)
Federal Reserve Regulation T specifies a 50% initial margin requirement for short sales.
3
Determine the applicable FINRA initial margin and cheap stock rules
FINRA baseline minimum is 2,000;FINRAlow−pricedshortrule(<2,000; FINRA low-priced short rule (< 5 per share) requires 2.50pershare,totaling2.50 per share, totaling 2,500 (1,000 shares × $2.50)
FINRA Rule 4210 mandates a minimum 2,000initialequity,butforstockpricedunder2,000 initial equity, but for stock priced under 5.00 per share, the rule requires $2.50 per share or 100% of market value, whichever is greater.
4
Determine the governing initial deposit requirement
$2,500
The investor must deposit the greatest of Regulation T (1,500),FINRAinitialminimum(1,500), FINRA initial minimum ( 2,000), and the low-priced short stock requirement ($2,500).

Key Concept

FINRA Initial Margin Requirements for Short Sales under $5 per Share
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Topics

Margin Accounts and Borrowing Requirements