9.4 Margin Calculations & SMA
Calculating equity, maintenance call thresholds, and SMA buying power are critical mathematical competencies on the Series 7 examination.
Key FINRA Exam Takeaways
- Long Margin Formula: LMV - DR = EQ (Long Market Value - Debit Register = Equity).
- Short Margin Formula: CR - SMV = EQ (Credit Balance - Short Market Value = Equity).
- FINRA Minimum Maintenance: 25% for Long positions; 30% for Short positions.
- Long Maintenance Call Market Value = DR ÷ 0.75.
- Short Maintenance Call Market Value = CR ÷ 1.30.
- Special Memorandum Account (SMA): A line of credit created when equity exceeds 50% Reg T. Buying Power = 2 × SMA.
Long Maintenance Call Threshold
Equity must not drop below 25% of LMV. Maintenance call triggers when: LMV = Debit Balance ÷ 0.75. Example: If DR is $15,000, a maintenance call is issued if LMV falls below $15,000 ÷ 0.75 = $20,000.
Special Memorandum Account (SMA) Rules
For every $1 increase in LMV above reg T, $0.50 of SMA is generated. SMA NEVER decreases due to a market decline! SMA only decreases when the customer withdraws cash or uses it as buying power (Buying Power = 2 × SMA).
Long Maintenance Call Calculation
An investor buys $20,000 of stock on margin, depositing $10,000 cash (Debit Balance = $10,000). At what Long Market Value (LMV) will the customer receive a maintenance margin call?
- Step 1: Formula for Long Maintenance Level = Debit Balance (DR) ÷ 0.75.
- Step 2: LMV = $10,000 ÷ 0.75.
- Step 3: $10,000 ÷ 0.75 = $13,333.33.
A customer's margin account has a Long Market Value (LMV) of $50,000, a Debit Balance (DR) of $22,000, and an Equity (EQ) of $28,000. Reg T is 50%. How much Special Memorandum Account (SMA) does the customer have, and what is their additional stock buying power?