Margin and Financial Compliance: Client and Counterparty Obligations
Margin as a risk control
Margin is collateral collected to protect the dealer against client default and market moves. CIRO rules set minimum margin requirements for cash accounts, margin accounts, and short positions. Candidates should understand initial margin (required at trade inception), maintenance margin (the ongoing floor), and variation or mark-to-market calls. Margin requirements differ for equities, options, bonds, and concentrated positions; concentration and low-priced securities attract higher requirements.
The compliance machinery
Financial compliance covers client money segregation, the handling of trust accounts, and timely reporting. Client free credit balances and securities must be segregated from firm assets. Dealer Members file monthly financial reports and must notify the regulator of material events, including capital deficiencies, significant losses, or control failures. Know the distinction between the firm's own proprietary accounts and client accounts, and the rules on commingling.
Know-your-client and suitability interface
Margin eligibility depends on account approval: a client must be approved for margin and options trading before those privileges are extended. Suitability and know-your-client obligations underpin margin approvals. A common exam theme is that margin cannot be extended to an unapproved account even if the client requests it.
Traps
Watch for questions that confuse maintenance margin with initial margin, or that assume margin requirements are static regardless of volatility. Another trap: treating a client's request as sufficient authority to commingle funds or to skip segregation. Also expect questions on when a margin call must be issued and the consequences of failing to meet it (liquidation rights).
Worked rule of thumb
Suppose a client buys $50,000 of margin-eligible stock with a 50% initial margin requirement. The client must deposit $25,000; the dealer finances the rest. If maintenance margin is 30%, the maintenance level is $15,000 of equity. If equity falls to $12,000, a margin call is triggered and the client must restore equity to the required level or the position may be liquidated.
Key points
- Initial margin applies at trade inception; maintenance margin is the ongoing floor.
- Concentration and low-priced securities attract higher margin requirements.
- Client assets must be segregated from firm assets.
- Margin privileges require prior account approval and suitability review.
- Material events such as capital deficiencies require regulator notification.
- Failure to meet a margin call can lead to liquidation of positions.