SIAA Margin Lending cheat sheet

Regulation T governs initial extension of credit by broker-dealers; FINRA Rule 4210 governs maintenance requirements for the life of the position.

Reg T initial margin for long stock purchases is 50% of the purchase price; the FRB may change this between 40% and 100%.

FINRA minimum maintenance for long margin stock is 25% of market value; many firms impose higher house requirements of 30-40%.

Maintenance for long bonds is generally 20% of face value (7% for exempt securities under FINRA 4210) - confirm against the current rule text.

Reg T payment period: the customer must deposit the required margin by settlement date (T+1 for most equities), with FINRA permitting a limited extension process.

Under Reg T, an initial margin call that is not met can lead to cancellation of the trade and a 90-day freeze on new margin purchases.

Reg T applies to the initial extension of credit; FINRA 4210 applies to ongoing maintenance and to special situations such as concentrated or restricted accounts.

Cash-account settlement violations and free-riding are separate from margin violations but are often paired with margin account supervision.

Pattern day trader designation applies to margin accounts with 4 or more day trades in 5 business days where day trades exceed 6% of activity; minimum equity is $25,000.

A margin account requires a signed margin agreement, a credit application, and delivery of the margin disclosure statement before or at account opening.

The margin disclosure statement must be delivered to the customer at or before opening and annually thereafter, describing risks of borrowing and forced liquidation.

The hypothecation clause in the margin agreement authorizes the firm to pledge customer securities up to 140% of the customer's debit balance.

A loan consent provision permits the firm to lend customer margin securities; without it, the firm may still pledge but not lend the securities.

The customer agreement typically grants the firm a lien on securities in the account and the right to liquidate without prior notice.

Under FINRA Rule 2264, firms must provide the margin disclosure statement; the customer's signature acknowledging receipt is retained in the account records.

Margin accounts must be approved by a designated principal before the first transaction; the approval and the basis for it are documented.

SIPC coverage does not protect against market losses; it covers custody failures up to $500,000, with a $250,000 limit on cash claims.

Long market value (LMV) minus debit balance equals equity; equity divided by LMV is the equity percentage used for maintenance tests.

At Reg T initial margin of 50%, buying power equals equity divided by 0.50, or twice the customer's equity.

Excess equity equals equity minus the Reg T requirement; SMA is increased by the Reg T excess at the time of a sale or deposit, not by maintenance excess.

SMA is a memorandum account, not cash; it represents the maximum amount the customer may borrow without a new deposit.

SMA increases by the Reg T excess on a sale and by cash deposits above the Reg T requirement; it does not decrease when market values fall.

Special rule: SMA is credited with the greater of the Reg T excess or the maintenance excess when a position is sold, subject to FINRA 4210 interpretation.

Debit balance equals the amount owed to the firm; interest is charged on the debit balance at the broker's margin rate, typically tied to a benchmark.

Buying power for new purchases equals SMA plus any maintenance excess, subject to the firm's house requirements.

A debit balance can also arise from interest charges, commissions, and fees, which increase the debit and reduce equity.

Reg T eligible margin stock includes exchange-listed securities, Nasdaq securities, and many OTC securities approved for margin; non-listed and unregistered securities are generally ineligible.

Ineligible securities cannot be used as collateral for a margin loan and must be held in a cash account or fully paid.

Concentration rules under FINRA 4210 impose higher maintenance requirements when a customer's position in a single security exceeds specified percentages of the outstanding shares or the account's equity.

FINRA 4210(f)(8) permits higher maintenance for concentrated positions; typical house requirements rise to 40-100% of market value for concentrated stock.

Substitution of collateral must maintain the account's margin equity; withdrawing eligible securities while leaving a debit balance requires sufficient excess equity.

Non-marginable securities purchased in a margin account must be fully paid and are not counted toward buying power.

Options and certain mutual funds have their own margin treatment; money market funds may be marginable at 5-10% depending on the fund and firm policy.

Foreign securities, restricted stock, and private placements are generally treated as ineligible or non-marginable unless specifically approved.

Short sales require margin of 50% of the short sale proceeds under Reg T; the proceeds are held as collateral for the borrowed shares.

Maintenance on a short position is 30% of the current market value under FINRA 4210, computed as equity divided by market value at 30% or more.

Short account equity equals the credit balance minus the current market value of the shorted security; a rising price reduces equity.

The credit balance in a short account includes the short sale proceeds plus the Reg T deposit; the customer earns no interest on short proceeds unless the firm has a rebate arrangement.

Short sales must be marked as long or short; a short sale must be executed at a price above the preceding trade (plus tick) or at the last price if higher than the prior different price (zero-plus tick).

The locate requirement under Reg SHO requires the firm to borrow or locate shares before executing a short sale.

Hard-to-borrow securities may carry higher margin requirements and borrow fees; the firm may force a buy-in if shares cannot be borrowed.

A short position has unlimited loss potential; the firm may liquidate without notice if maintenance is not met.

A maintenance call arises when equity falls below the FINRA or house maintenance requirement; the customer must deposit funds or securities to restore the requirement.

A Reg T initial call arises when a new purchase exceeds buying power; it must be met by settlement date.

Firms may issue house calls with shorter deadlines than FINRA rules require; failure to meet a house call can lead to liquidation.

Liquidation may occur without prior notice when the account falls below maintenance; the firm may sell securities to restore compliance.

The firm should document the call, the notice given, and the liquidation decision; records are retained per FINRA and SEC rules.

Risk controls include real-time monitoring of equity, concentration limits, and automated alerts when accounts approach maintenance thresholds.

A customer cannot satisfy a maintenance call with SMA alone; SMA represents borrowing capacity, not cash, and using it increases the debit.

Restricted accounts (those with repeated calls) may face higher requirements or be limited to cash-only transactions.

Long options with more than 9 months to expiration may be marginable at 75% of market value; shorter-dated listed options are generally non-marginable.

Short options require margin equal to the premium plus a percentage of the underlying: typically 20% of the underlying value minus out-of-the-money amount, with a minimum.

Covered calls require no additional margin beyond the underlying stock; the stock serves as collateral for the short call.

Spreads have defined risk; margin is typically the maximum loss between strikes, and long options offset short options in the same class.

Short straddles and strangles have higher margin requirements because both legs are short and risk is undefined on the upside.

Portfolio margin under FINRA 4210(g) uses a risk-based calculation (TIMs) and requires approval; it is not available to all customers.

Options positions must be marked to market daily; the firm monitors assignment risk and expiration exposure.

Combination margin treatment requires positions to be in the same underlying and properly identified in the account records.

FINRA Rule 4511 requires firms to preserve books and records for at least 6 years, with the most recent 2 years readily accessible.

Margin agreements, disclosure acknowledgments, and approval records must be retained as part of the customer account record.

SEC Rule 17a-3 and 17a-4 prescribe the content and retention of broker-dealer records, including margin account documentation.

Firms must supervise margin activity through written supervisory procedures (WSPs) and designated principals who review calls and liquidations.

FINRA Rule 3110 requires supervision, including review of margin accounts, concentration, and exceptions.

The firm must maintain records of margin calls, extensions, and liquidations, and make them available to regulators on request.

Annual compliance reviews should test margin calculations, SMA accuracy, and timely delivery of margin disclosures.

Compliance must ensure that margin interest charges and fee disclosures are accurate and consistent with the customer agreement.