The Same-Day SMA Withdrawal
On Monday morning a customer's margin account shows: long market value $120,000, debit balance $40,000, equity $80,000, and an SMA balance of $10,000 carried over from prior weeks. On Monday the customer sells $30,000 of securities, settling Wednesday, and simultaneously buys $30,000 of different securities, also settling Wednesday. On Tuesday the customer requests a $10,000 cash withdrawal, citing the SMA. The operations clerk processes the withdrawal Tuesday afternoon. On Wednesday the purchased securities drop 20% in value before settlement.
1. Was the Tuesday withdrawal permissible, and how does the sale affect SMA?
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The withdrawal was permissible only to the extent of the SMA balance, which was $10,000. SMA is a memorandum account, not cash; it records the customer's excess buying power available for withdrawal or new purchases. A sale of $30,000 with a $40,000 debit does not automatically create SMA - the proceeds first reduce the debit. Because the sale and purchase offset, the account's equity is unchanged at the moment of trade, and no new SMA is generated by the round trip. The $10,000 SMA existed before Tuesday and could be withdrawn, but doing so reduces SMA to zero and reduces equity to $70,000. The clerk should verify SMA before paying and record the reduction. Paying out more than the SMA balance would create an unauthorized extension of credit.
2. After the Wednesday price drop, does the account have a maintenance deficiency? Show the computation and the firm's options.
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Assume the $30,000 purchase is now worth $24,000 (20% decline) and the remaining long positions are unchanged at $90,000 (the $120,000 less the $30,000 sold). Long market value = $90,000 + $24,000 = $114,000. Debit: originally $40,000; the sale of $30,000 reduces it to $10,000, the purchase of $30,000 raises it back to $40,000, and the $10,000 withdrawal raises it to $50,000. Equity = $114,000 − $50,000 = $64,000. Under Regulation T initial margin of 50%, required equity on the $24,000 new position is $12,000; under FINRA maintenance of 25%, required equity = 25% × $114,000 = $28,500. Equity of $64,000 exceeds both, so no call. A call would arise only if equity fell below $28,500, i.e., if MV fell below roughly $76,000 given the $50,000 debit. The firm should still monitor because the withdrawal consumed the entire SMA cushion.