9.3 Margin Accounts & Agreements
Margin accounts leverage customer capital. To open a margin account, clients must execute binding legal agreements and meet both Federal Reserve Reg T (50%) and FINRA initial equity minimums.
Key FINRA Exam Takeaways
- Margin account allows borrowing funds from the broker-dealer to buy securities (leverage).
- Reg T Initial Margin: 50% of the purchase price.
- FINRA Initial Minimum Equity Rule: Must deposit at least $2,000 or 100% of the purchase price (whichever is LESS).
- Margin Agreement Documents: 1. Credit Agreement (mandatory - discloses interest calculation); 2. Hypothecation Agreement (mandatory - pledges stock as collateral); 3. Loan Consent Agreement (OPTIONAL - allows lending shares for short sales).
- Rehypothecation: Broker-dealer can repledge customer securities to a bank for up to 140% of the debit balance.
The FINRA $2,000 Rule
Purchase > $4,000: Deposit 50% (Reg T). Purchase between $2,000 and $4,000: Deposit $2,000 (FINRA minimum). Purchase < $2,000: Deposit 100% of purchase price (cash equivalent).
The 3 Margin Documents
Credit Agreement: Establishes the debtor-creditor relationship and interest charges. Hypothecation Agreement: Pledges securities to the BD as loan collateral. Loan Consent Form: Permits BD to loan shares to short sellers (the ONLY optional document).
A customer opens a new margin account and places an initial order to buy 100 shares of stock at $30 per share ($3,000 total). How much cash must the customer deposit to satisfy margin requirements?