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Difficulty: HardMargin Accounts and Borrowing Requirements

A client establishes a long position by purchasing 6060 shares of a marginable security at $40\$40 per share in a newly opened margin account with no prior cash or collateral balances. What is the minimum cash deposit required from the client to satisfy initial margin rules?

  1. A
    $1,200\$1,200
  2. $2,000\$2,000Answer
  3. C
    $2,400\$2,400
  4. D
    $600\$600

Answer

The client must deposit $2,000\$2,000 in cash.
The total trade value is 60×$40=$2,40060 \times \$40 = \$2,400. Under Federal Reserve Regulation T, the initial margin requirement is 50%, which equals $1,200\$1,200. However, FINRA Rule 4210 establishes an initial minimum equity requirement of $2,000\$2,000 for a margin account (or 100% of the purchase price if the trade is under $2,000\$2,000). Because $2,000\$2,000 is greater than the $1,200\$1,200 Reg T requirement, the customer is required to deposit $2,000\$2,000.

Step-by-Step Solution

1
Calculate total purchase value
Total purchase value = 60 shares×$40=$2,40060 \text{ shares} \times \$40 = \$2,400
Initial margin calculations are based on the total market value of the trade.
2
Calculate Federal Reserve Regulation T requirement
Regulation T requirement = 50%×$2,400=$1,20050\% \times \$2,400 = \$1,200
Regulation T mandates a standard 50% initial margin deposit on marginable equity securities.
3
Apply FINRA minimum initial equity rule
FINRA initial minimum equity requirement = $2,000\$2,000
FINRA Rule 4210 requires a minimum deposit of $2,000\$2,000 (or 100% of the trade value if less than $2,000\$2,000). Since the calculated Reg T amount ($1,200\$1,200) is less than $2,000\$2,000, the $2,000\$2,000 FINRA rule dictates the deposit.

Key Concept

FINRA Initial Margin Minimum vs. Regulation T 50% Requirement
Estimated Time:1m 30s
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Topics

Margin Accounts and Borrowing Requirements