Hypothecation Agreement: Customer Collateral and the 140% Rehypothecation Cap
A margin customer purchases $100,000 of securities on margin and carries a debit balance of $40,000 (the loan from the broker-dealer). Under SEC Rule 15c2-1, what is the maximum dollar amount of the customer's securities that the broker-dealer is legally permitted to pledge (rehypothecate) to a commercial bank as collateral for a bank broker loan?
Under SEC Rule 15c2-1, a broker-dealer may rehypothecate customer margin securities up to a maximum of 140% of the customer's DEBIT BALANCE ($40,000 × 1.40 = $56,000).
Complete Analysis & Legal Rationale
When a customer signs a margin agreement, the hypothecation clause allows the firm to pledge the customer's securities to a bank. Under SEC Rule 15c2-1, a broker-dealer may pledge customer securities up to 140% of the customer's net debit balance. Here: 140% of $40,000 debit balance = $56,000 of securities. The remaining $44,000 of securities ($100,000 - $56,000) must be segregated and placed in safe-keeping as fully paid/excess margin securities.
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:
Under SEC Rule 15c2-1, a broker-dealer may rehypothecate customer margin securities up to a maximum of 140% of the customer's DEBIT BALANCE ($40,000 × 1.40 = $56,000).
Fails to adhere to margin rules for B.
Fails to adhere to margin rules for C.
Fails to adhere to margin rules for D.
Official Standard: When a customer signs a margin agreement, the hypothecation clause allows the firm to pledge the customer's securities to a bank. Under SEC Rule 15c2-