An investor opens a margin account with a registered broker-dealer and places an order to purchase $20,000 of common stock in an initial public offering (IPO) underwritten by the firm. The investor requests to borrow 50% of the purchase price from the broker-dealer using the newly purchased shares as collateral under Federal Reserve Board rules. Under FRB margin regulations (Regulation T, Regulation U, and Regulation X), how must this transaction be handled?
- The transaction must be paid for fully in cash because newly issued securities are non-marginable and cannot be used as collateral for credit until 30 days after the public offering date.Cevap
- BThe transaction may be executed on margin immediately provided the investor deposits the 50% Regulation T initial margin requirement of $10,000 within two business days of the trade.
- CThe transaction is marginable immediately if the broker-dealer finances the customer loan by re-hypothecating the IPO securities to a commercial bank under Regulation U.
- DThe Federal Reserve Board will freeze margin access on the purchase only if the transaction violates monetary policy targets set by the Federal Open Market Committee.
Cevap
The transaction must be paid for fully in cash because newly issued securities are non-marginable and cannot be used as collateral for credit until 30 days after the public offering date.
Under Federal Reserve Board rules and federal securities laws, new issue distributions (such as IPOs) cannot be purchased on credit or used as collateral in a margin account until at least 30 calendar days have elapsed from the effective date of the offering. Therefore, the investor must deposit 100% of the purchase price ($20,000) in cash.
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30-Day Margin Restriction on New Issues (IPOs)