Unit 6

Front 1

types of margin accounts

Back 1

- long - customers purchase securities and pay interest on the money borrowed until the loan is repaid - customers borrow money
- short - stock is borrowed and then sold short enabling the customer to profit if its value declines - basically customers borrow securities
- all short sales must be accounted for

Front 2

advantages of margin accounts

Back 2

- purchase more securities wiht a lower initial cash outlay
- leverage the investment by borrowing a portion of the purchase price
- advantages for broker dealers are that the loans generate interst income for the firm and it encourages customers to trade at larger positions

Front 3

margin agreement

Back 3

- consists of three parts:
1) credit agreement - discloses the terms of the credit extended by the BD including interest payments
2) hypothecation agreement - allows BD to hold securities in street name to pledge as collateral
3) loan consent form - gives permission to the firm to loan customer margin securities to other customers or BDs - this form is optional
- all customer securities must be held in Street name for margin accounts - customer is beneficial owner and BD is nominal or named owner

Front 4

risk disclosure

Back 4

- must be provided on an annual basis
- it states that customers are not entitled to choose which securities can be sold if a maintenance call is not met
- customers can lose money
- customers are not entitled to an extension of time to meet a call
- firms can increase their margin requirements w/o advance notice

Front 5

regulation T

Back 5

- states that customers must deposit a min of 50% of the market value of the transation w/in five business days
- applies to both cash and margin accounts
- firms however expect to be paid regular way within three business days of trade date
- those exempt from reg T are T-Bills and bonds, gov agency issues, and municipal securities

Front 6

margin and marginable

Back 6

- margin - amount of equity that must be deposited bo buy securities in a margin account
- marginable - securities that can be used as collateral in a margin account
- FRB determins if marginable
- Marginable if: Exchange listed, nasdaq issue, FRB approved, owned for more than 30 days
- options not marginable

Front 7

calculating reg T requirement

Back 7

- options cannot be purchased in margin accounts
- when writing a covered call there is no regulation T - you just have to make sure that there is 50%of purchase price of the stock minus whatever you received for the sale of the call or put
- in cash accounts 100% must be deposited minus any premium received
- leaps optiosn can be purchased on margin - initial requirement is 75%

Front 8

NASD initial requirements for Margin accounts

Back 8

- wants initial deposit to be no less than 2,000
- customer is required to deposit the greater of the Reg T or NASD minimum

Front 9

terms for long margin accounting

Back 9

- Long Market VAlue LMV - CMV of stock position the investor purchased
- Debit Register DR - amt of money borrowed by the customer
- EQ - the customers net worth in the margin account - represents the portion of the securities the customer fully owns - determined by LMV - DR = EQ

Front 10

restricted accounts

Back 10

- if the equity in the account is less than the regulation t amt but greater than or equal to the min. maintenance , the account is restricted - maintenance call only sent if below maintenance min.

Front 11

maintenance requirement for margin accounts

Back 11

- in a long margin account the minimum maintenance is 25% of the LMV - short accouts are 30%
- if below maintenance requirement a maintenance margin call will be sent
- they demand that the customer make a payment to bring act to minimum
- if payment not made the BD will liquidate enough of the securities in the account to bring to min.
- the firm can impose a maintenance level higher than the NASD - this is called the house minimum - many will impose a 30-35% min.

Front 12

SMA

Back 12

- special memorandum account - represents a line of credit that a customer can borrow from or use to purchase securities
- for every $1 increase in MV, %.50 of SMA is created
- the amount in the SMA is equal to the greater of the excess equitey or the amt already in SMA

Front 13

EE

Back 13

excess equity
- amt of equity exceedin the reg T requirement
- EE creates buying power in the account

Front 14

what can increase SMA

Back 14

- nonrequired cash deposits - credited to SMA and reduces debit
- dividends - added to SMA and can be withdrawn - must be withdrawn within 30 days before it is applied to equity
- loan values - nonrequired deposit of stock - stock loan value is credited to SMA - credit equal to have the value
- sale of stock - 50% of proceeds credited to SMA-
- sma has a buying power of 2 to 1 for purchasing stock - 20k in sma allows one to buy 40k of stock
- SMA can be borrowed as cash however dollar for dollar

Front 15

Regulation U

Back 15

- Regulation b/w bank and BD

Front 16

Combined Accounts

Back 16

- client who has margin account with both long and short positions in different securities