Margin Call Definition: Reg T, Maintenance, and Formulas
A margin call is a demand from a broker-dealer that a customer deposit cash or securities because the account has fallen below a required equity level. Reg T requires 50% initial margin on equities; FINRA Rule 4210 sets minimum maintenance of 25% on long and 30% on short positions.
Types of margin calls
A Regulation T call arises when a purchase or short sale is made and the required initial margin has not been deposited. A maintenance call arises when equity falls below the maintenance requirement. A minimum equity call arises if the account falls below $2,000.
Maintenance formulas tested on the Series 7
For a long margin account, the market value at which a maintenance call occurs equals the debit balance divided by 0.75 (LMV = DR ÷ 0.75). For a short account, the market value at which a call occurs equals the credit balance divided by 1.30 (SMV = CR ÷ 1.30).
Example
A customer buys $20,000 of stock on margin and deposits $10,000, leaving a $10,000 debit. The account hits the 25% maintenance level when the long market value falls to $10,000 ÷ 0.75 = $13,333.
Frequently asked questions
What is Margin Call?
A margin call is a demand from a broker-dealer that a customer deposit cash or securities because the account has fallen below a required equity level. Reg T requires 50% initial margin on equities; FINRA Rule 4210 sets minimum maintenance of 25% on long and 30% on short positions.
How does Margin Call show up on the exam?
Initial margin comes from Regulation T (Federal Reserve); maintenance comes from FINRA and the firm. Do not mix up which body sets which requirement.
Practice this concept
Sources
- Federal Reserve Regulation T (12 CFR Part 220)
- FINRA Rule 4210
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