Examkin

Question

Difficulty: MediumSIPC vs. FDIC Protection and Coverage Limits

Arthur maintains two accounts in his name at Horizon Financial, a SIPC-member broker-dealer: an individual cash account holding 320,000incorporatestocksand320,000 in corporate stocks and 180,000 in uninvested cash, and an individual margin account holding 150,000instockswitha150,000 in stocks with a 50,000 margin debit balance. In addition, he holds a $40,000 commodity futures contract in a separate commodities account at the same firm. If Horizon Financial becomes insolvent and enters SIPC liquidation, what is the maximum total coverage amount SIPC will provide for Arthur's claims?

  1. $500,000Answer
  2. B
    $600,000
  3. C
    $640,000
  4. D
    $250,000

Answer

SIPC will cover a maximum of $500,000.
SIPC protects customer accounts against broker-dealer insolvency up to 500,000perseparatecustomer,whichincludesamaximumof500,000 per separate customer, which includes a maximum of 250,000 for cash claims. Because Arthur holds both an individual cash account and an individual margin account at the same broker-dealer, SIPC aggregates them into a single customer capacity. His combined claim totals 600,000(600,000 ( 180,000 cash + 420,000netsecuritiesequity).Whilehiscashclaim(420,000 net securities equity). While his cash claim ( 180,000) is within the 250,000cashsub−limit,histotalclaimiscappedattheoverallSIPCmaximumof250,000 cash sub-limit, his total claim is capped at the overall SIPC maximum of 500,000. Commodity futures contracts are explicitly excluded from SIPC coverage.

Step-by-Step Solution

1
Determine account capacity aggregation
The cash account and margin account are held under the same ownership capacity (individual) at the same broker-dealer, so they must be combined into one single customer claim for SIPC coverage calculation.
SIPC rules state that multiple accounts owned by the same individual at the same firm are treated as one separate customer.
2
Calculate net equity for securities and cash
Cash account equity: 320,000securities+320,000 securities + 180,000 cash = 500,000.Marginaccountequity:500,000. Margin account equity: 150,000 securities - 50,000debitbalance=50,000 debit balance = 100,000 net securities. Total combined claim = 180,000cash+180,000 cash + 420,000 securities = $600,000.
Net equity in a margin account equals market value of securities minus debit balance.
3
Identify excluded assets and apply coverage limits
Commodity futures (40,000)areexcludedfromSIPCcoverage.Thecashportion(40,000) are excluded from SIPC coverage. The cash portion ( 180,000) is fully under the 250,000cashcap.However,thetotalclaimof250,000 cash cap. However, the total claim of 600,000 exceeds the maximum overall SIPC protection limit of 500,000percustomercapacity,resultingin500,000 per customer capacity, resulting in 500,000 of coverage.
SIPC covers up to 500,000perseparatecustomer,ofwhichnomorethan500,000 per separate customer, of which no more than 250,000 can be for cash claims. Commodity contracts are not securities and are not protected by SIPC.

Key Concept

SIPC Coverage Limits and Account Aggregation Rules
Rate this question

Topics

SIPC vs. FDIC Protection and Coverage Limits

More questions from this topic