Hypothecation and Broker-Dealer Rehypothecation Limit (140% of DR)
A customer purchases stock on margin with a Long Market Value of $50,000 and a Debit Balance of $20,000. Under SEC Rule 15c2-1, what is the maximum dollar amount of customer securities the broker-dealer can rehypothecate (pledge to a bank) to secure the loan?
Under SEC Rule 15c2-1 and Rule 8c-1, a broker-dealer may rehypothecate up to 140% of the customer's net debit balance to a bank as collateral. 140% × $20,000 Debit = $28,000 maximum rehypothecation.
Complete Analysis & Legal Rationale
The customer pledges securities to the firm (hypothecation). The firm can re-pledge up to 140% of the borrowed amount ($20,000 × 1.40 = $28,000) to a bank. The remaining $22,000 in securities must be kept in segregated safekeeping.
Mathematical Step-by-Step Derivation
- Step 1: Debit Balance = $20,000.
- Step 2: SEC Maximum Rehypothecation Cap = 140% × Debit Balance.
- Step 3: Maximum Rehypothecated = 1.40 × $20,000 = $28,000.
Distractor Autopsy (Why Other Options Are Traps)
FINRA exam writers design incorrect distractors using specific calculation mistakes and regulatory misconceptions. Review why each option succeeds or fails:
140% of $20,000 debit equals $28,000 maximum permitted pledge.
The cap is 140%, not 100%, allowing the bank to maintain a haircut cushion.
Pledging the entire $50,000 market value is commingling and a severe SEC violation.
Applies arbitrary percentage to market value.
Official Standard: Limits rehypothecation to 140% of customer debit balance.