The Inherited Concentrated Position
A customer holds 4,000 shares of XYZ Corp in a margin account, currently trading at $50 (market value $200,000), with a debit balance of $60,000. Equity is $140,000. The customer wants to transfer in 12,000 more XYZ shares from an outside account, which would make XYZ 80% of total account value. The registered rep notes the firm's concentration guideline caps any single position at 25% of account equity, but the customer argues the shares are fully paid and 'not borrowed against.' The compliance officer must decide whether to accept the transfer, and if so, how to margin the position.
1. Does accepting the transfer create a margin problem, and what is the firm's obligation under concentration rules?
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Yes. Even though the incoming shares are fully paid, once deposited they become collateral supporting the existing $60,000 debit. Concentration guidelines exist because a single security's price drop can wipe out equity and leave the firm undersecured. At $50, 12,000 additional shares = $600,000, making total account value $800,000 with XYZ at $800,000/$800,000 = 100% of holdings (and roughly 93% of equity). This far exceeds the 25% guideline. The firm should either reject the transfer, require the customer to deposit cash or diversify to reduce concentration below the limit, or (if policy permits) accept the shares with a special concentration maintenance requirement and a documented exception approved by a supervisor. The rep cannot simply accept because the shares are unencumbered.
2. If the firm accepts the transfer subject to a 50% concentration maintenance requirement on XYZ, compute the maintenance excess and explain when a call would occur.
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Total market value = $200,000 + $600,000 = $800,000. Debit = $60,000. Equity = $740,000. Under the special 50% requirement, required equity = 50% × $800,000 = $400,000. Excess = $740,000 − $400,000 = $340,000, so no call today. A maintenance call arises if equity falls below $400,000. With debit fixed at $60,000, equity = MV − $60,000, so the call triggers when MV − $60,000 < 0.50 × MV, i.e., 0.50 × MV < $60,000, or MV < $120,000 - a 85% decline from $800,000. The special requirement therefore protects the firm but is far looser than the 25% guideline; if the firm instead required 100% maintenance on the concentrated position, the call would trigger at any MV below $60,000 of equity cushion. The firm should document which requirement it applied and why.