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Difficulty: HardMargin Accounts and Borrowing Requirements

An investor opens a new margin account with a FINRA member firm and executes an initial transaction by purchasing 80 shares of a marginable equity security at $30 per share. Assuming no prior balance or collateral in the account, what is the minimum cash deposit required from the customer to satisfy Federal Reserve Regulation T and FINRA initial margin requirements?

  1. A
    $1,200
  2. $2,000Answer
  3. C
    $2,400
  4. D
    $1,000

Answer

$2,000
The correct answer specifies 2,000.Totaltradevalueequals80shares×2,000. Total trade value equals 80 shares × 30 = 2,400.RegulationTrequires502,400. Regulation T requires 50% of the purchase price ( 1,200). However, FINRA Rule 4210 specifies that the initial margin equity deposit for opening a new margin account must be at least 2,000(or1002,000 (or 100% of the purchase price if the trade value is less than 2,000). Because 2,000exceedsthe2,000 exceeds the 1,200 Reg T calculation, the customer must deposit $2,000.

Step-by-Step Solution

1
Calculate the total purchase value of the transaction.
80 shares × 30pershare=30 per share = 2,400 total purchase value.
Establishing total trade value is required before evaluating Federal Reserve and SRO margin rules.
2
Determine the Federal Reserve Regulation T initial margin requirement.
50% of 2,400=2,400 = 1,200.
Reg T standard initial requirement for marginable equity long purchases is 50% of trade value.
3
Apply FINRA Rule 4210 minimum initial equity requirement.
FINRA requires a minimum initial equity deposit of 2,000(or1002,000 (or 100% of purchase value if total trade is less than 2,000).
Broker-dealers must enforce the stricter of Regulation T or SRO minimum equity rules.
4
Compare the Regulation T requirement and FINRA minimum requirement.
Since 2,000(FINRAminimum)isgreaterthan2,000 (FINRA minimum) is greater than 1,200 (Reg T 50%), the required cash deposit is $2,000.
The customer must deposit whichever requirement is higher to satisfy both industry regulations.

Key Concept

FINRA $2,000 Minimum Initial Equity Requirement vs. Regulation T 50% Margin
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Topics

Margin Accounts and Borrowing Requirements