Examkin

Question

Difficulty: MediumMargin Accounts and Borrowing Requirements

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

  • Special Memorandum Account (SMA)A line of credit generated in a margin account when excess equity is created by market value appreciation.
  • RehypothecationThe broker-dealer's action of re-pledging customer margin securities to a bank as collateral for a bank loan.
  • FINRA Long Maintenance RequirementThe mandatory minimum ongoing equity threshold of 25%25\% of current market value required for long margin positions.
  • Margin Risk Disclosure DocumentA required notice informing retail investors that broker-dealers may liquidate securities without prior notice and increase house margin requirements.

Answer

Special Memorandum Account (SMA) matches with line of credit generated from excess equity; Rehypothecation matches with broker-dealer re-pledging securities to a bank; FINRA Long Maintenance Requirement matches with 25%25\% minimum ongoing equity threshold; Margin Risk Disclosure Document matches with notice informing investors of firm liquidation rights.
Each margin concept accurately pairs with its regulatory function: SMA represents a line of credit from excess equity; Rehypothecation describes the broker-dealer pledging collateral to a bank; FINRA maintenance requirement enforces 25%25\% minimum equity on long positions; and the Margin Risk Disclosure Document outlines account risks including forced position liquidations.

Step-by-Step Solution

1
Identify the function of the Special Memorandum Account (SMA).
SMA represents buying power or a line of credit created by market value appreciation in a long margin account.
Regulation T creates SMA whenever equity exceeds 50%50\% of the current market value.
2
Identify the regulatory definition of Rehypothecation.
Rehypothecation is the broker-dealer's secondary pledging of customer margin securities to a bank.
Under the hypothecation agreement, the broker-dealer may repledge securities up to 140%140\% of the customer's debit balance to secure bank funding.
3
Recall the FINRA requirement for maintaining long margin accounts.
FINRA Rule 4210 specifies a minimum maintenance requirement of 25%25\% of current market value for long margin positions.
If equity drops below 25%25\%, the firm issues a maintenance call.
4
Determine the legal purpose of the Margin Risk Disclosure Document.
It discloses key margin risks, including forced position liquidations and house requirement increases.
FINRA requires firms to deliver this document at account opening and annually to retail margin customers.

Key Concept

Margin Account Operations and Regulatory Disclosure Requirements
Rate this question

Topics

Margin Accounts and Borrowing Requirements