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Question

Difficulty: MediumMargin Accounts and Borrowing Requirements

Match each margin account operational term or regulatory requirement on the left with its correct description or functional definition on the right.

  • RehypothecationThe re-pledging of customer securities by a broker-dealer to a commercial bank as collateral to finance customer margin loans.
  • Regulation T CallA demand for the Federal Reserve mandated initial deposit (typically 50% of the trade value) required for margin transactions.
  • Maintenance CallA demand issued when customer account equity falls below FINRA minimum thresholds (25% for long positions, 30% for short positions).
  • Pattern Day Trader Minimum EquityThe regulatory mandate requiring accounts executing four or more day trades within five business days to maintain at least $25,000 in account equity.

Answer

Rehypothecation matches with the re-pledging of customer securities by a broker-dealer to a bank. Regulation T Call matches with the demand for the Federal Reserve mandated 50% initial deposit. Maintenance Call matches with the demand issued when account equity falls below FINRA minimum thresholds (25% long / 30% short). Pattern Day Trader Minimum Equity matches with the requirement to maintain at least $25,000 in equity for accounts executing four or more day trades in five business days.
Each operational term accurately corresponds to its regulatory definition: Rehypothecation involves broker-dealers re-pledging securities to banks; Regulation T calls relate to the Federal Reserve Board's initial 50% requirement; Maintenance calls enforce FINRA's 25%/30% minimum equity requirements; and Pattern Day Trader requirements dictate a minimum account equity of $25,000.

Step-by-Step Solution

1
Identify the function of borrowing and collateral pledging in margin accounts.
Connect Rehypothecation to the process where a broker-dealer re-pledges margin securities to a bank for financing.
Hypothecation is customer-to-broker pledging; rehypothecation is broker-to-bank re-pledging.
2
Differentiate between Federal Reserve initial requirements and FINRA ongoing requirements.
Link Regulation T Call to the Fed Reserve initial 50% requirement, and Maintenance Call to FINRA ongoing minimums (25% long / 30% short).
Regulation T governs initial leverage limits while FINRA Rule 4210 sets minimum ongoing equity levels to maintain open positions.
3
Recall specific equity thresholds for high-frequency day trading accounts.
Associate Pattern Day Trader Minimum Equity with the $25,000 account balance requirement.
FINRA requires pattern day traders (4+ day trades in 5 business days) to hold at least $25,000 in equity.

Key Concept

Margin Account Terminology and Regulatory Thresholds
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Topics

Margin Accounts and Borrowing Requirements