customer accounts outline

Cash account

·        Total equity=Market value + cash + money market funds

·        customer can hold Stocks/bond certificates

·        safekeeping, street name, Broker/dealer can hold customer stock/bond certificates

·        firm can NOT hypothecate, lend securities or danger the ownership of stocks/bonds

·        b/d MUST Keep securities separate and safe

A purchase of stock done regular way in a cash account shall be paid for on what day?

·        3 business days after trade

·        regular way-3 business days

·        cash transaction, same day

customer accounts outline

Seller’s/buyer’s options delivery a.k.a seller’s option delivery

·        Customer does not want to deliver or does not want to pay for securities regular way

·        Seller can delivery late 5-60 days

·        Sellers can deliver  early

New issues

·        Pay for completely when purchase

Mutual funds/variable annuities

·        Pay for completely when purchase

Uniform Gifts to Minors Act or Uniform Trust to Minors

·        Margin-NOT allowed

Trust document

·        Can decide NO margin purchases

Private placements and limited partnerships

·        No margin

Cash account

·        Total equity=Market value + cash + money market funds

customer accounts outline

Cash account

·        Pay for all of purchase

Margin account

·        Borrow $ for part of trade

Settlement date

·        Different date based on type of delivery

Same day delivery,cash trade,cash delivery

·        Transaction settles that day

·        Transaction complete by 2:30pm EST

Regular way delivery settlement date

T+3

·        FINRA sets dates

·        third day after trade date

·         transfer of securities-stock,bonds,municipal bond,exercising stock (equity) options

 

T+1

·        next business day

·         transfer of $, government securities

·        Trading options-stock,interest,interest rate, foreign currency

·        Exercise index options

·        Exercise interest rate options

·        Writer gives $ to buyer of option that is exercised

Options and margin outline

Options and margin

·        Can NOT buy option on margin if expires < 9 mo

·        Pay 100% of options premium-on margin, off margin

·        LEAPs, options >9mo, deposit 75% of option cost

·        LEAPs, loan value=25%

Selling options

·        Write covered calls

·        If covered, no margin

·        Naked, uncovered options-there is initial margin requirement

·        Margin call, a % of market value

Suppose an investor buys 10 70 calls for a premium of 8. How much must the investor deposit?

·        8x100x10=8000

Marking to the market

·        Securities valued at day’s closing price

·        Broker/dealers use it to make sure customer’s have enough equity in margin account

·        Minimum maintenance level, broker/dealer tells customer to deposit more $ or stock

·        Stock loan, broker/dealers borrow stock from other broker/dealers-have to keep some $ to pay for borrowed stock

·        Marking to market, all margin accounts, in long and short accounts, anytime there are borrowed securities

Under which of the following circumstances will the broker/dealer firm mark to the market for the customer’s account?

·        When the market changes and more margin is required

·        When market value changes

·        Customer must deposit more $

Margin account

·        $2000 minimum requirement

·        If purchase price under $2000, customer must deposit all of price

·        If purchase $2000-$3,999 deposit $2000 minimum

·        If $4,000, deposit $2000

Government bond

·        No Reg T requirement

·        Minimum maintenance requirement 5% of principal

Municipal bonds

·        Maintenance requirement:15% of par value or 25% of market value-pick lower one

Same day substitution

·        Can buy one stock, sell a stock same day and use sale proceeds to pay for purchase

·        Sell more than buy, keep all proceeds. If restricted-follow retention requirement-keep 50% of excess sales price

New issues

·        Can NOT buy on margin

Loan value

·        Amount of $ a broker/dealer can loan on a fully paid for margin-allowed security

·        To buy stock, deposit equity-money or stock

Buying power

·        Amount of securities a customer can buy

Buying power=Money or (SMA)/ Reg T

margin outline

Short account

·        For selling stock short

·        Opening sale, sell stock before buy shares

·        Closing purchase, buy stock back, cover short sale

·        Profit when price decreases

·        Credit balance, sale proceeds

·        When borrowed stock sold, customer must deposit Reg T to increase credit balance

·        SMV (Short market value)=Credit balance (Cr) – Equity (E)

·        SMA = Equity –(Market value x 50%)

Short account SMA increase

·        Market value decrease

Short account SMA neutral

·        Market value increase

·        Stock value decrease because of stock dividend/stock split

Long account SMA increase

·        Market value increase

An investor has a short margin account with 3 different stocks in it. If one of the stocks goes down in value, what happens to the equity of the short account?

·        Equity increases

·        Market value go down, equity go up

Short account minimum maintenance requirement

·         Minimum maintenance = Short market value (SMV) x 30%

Short account Maintenance Margin call

·        Maintenance Margin call= Credit (Cr)/130%

·        Market value increase, equity decrease

·        Minimum maintenance is 30%

·        Credit balance can not < 130% of market value

·        Investor shorted stock, don’t want stock increase because investor pays > for stock

Minimum Maintenance vs. Maintenance Margin call

·        Minimum Maintenance, market value neutral, credit balance go(es) down

·        Maintenance Margin call, credit balance neutral, market value go(es) up

·        SMA=Equity – (SMVx50%)

·        MM= SMV x 30%

·        Maintenance Margin call = Credit balance/130%

An investor has a short margin account with a market value of $80,000 and a credit balance of $130,000. At what point would there be a FINRA maintenance call for the account?

·        130/130%=$100,000

 

maintenance call chart, maintenance requirement long account, minimum maintenance chart, Reg T chart

FINRA maintenance requirement long account

·        Customers must keep 25% of market value in account

·        FINRA sets minimum maintenance requirements

·        Reg T only sets amount needed for initial purchase not balance that must be in account later

·        Broker/dealer firms require 5-10% above FINRA to protect themselves

·        Maintenance margin call (MMC) =Dr/75%

·        Minimum maintenance=MVx25%

·        SMA=Equity – (LMV x 50%)

·        Minimum Maintenance= LMV x 25%

Equity can decrease

·        Debit balance increases

·        Customer borrows $-use all/part SMA

·        Market value decreases, stock price decreases

An investor has a long margin account with a market value of $88,000 and a debit balance of $40,000. What is the FINRA minimum maintenance for the account at its present position?

·        $22,000

·        25% present market value

·        88,000x25%=22k

	Reg T Call	Minimum Maintenance	Maintenance Call
When maintenance call applies	when investors buy short/sell short	withdraw$ from long or short account,equity drop	long: bear, short:bull
Calculate long account	MVx50%	MVx25%	Dr/75%
Calculate short account	MVx50%	MVx30%	Cr/130%
minimum amount allowed in account	$2000-FINRA. Not The Fed's Reg T	Long: $2000 short:$2000 or $5 per share	N/A. need to deposit $

margin outline

Long Margin account

·        Customer buys stock and bonds on margin

·        Opening purchase, buy stock first

·        Closing purchase, sell held stock

·        Long market value=debit + eqity

·        Equity-theoretical value

·        Market value goes up, equity goes up

·        Minimum maintenance requirement, 25% in long account

A customer has a long margin account with a market value of $86,000 and a debit balance of $23,000. What is the equity in the account?

·        $63,000

·        MV-debit balance=equity

·        86-23=63

Restricted account

·        Equity dips below 50% of market value

·        Retention requirement, firm keeps 50% of customer sale proceeds to cover debit balance

·        If customer leave proceeds from sale in account, debit balance decreases, SMA increases

Releasing money

·        NO LONGER tested

Special Memorandum account, SMA

·        Sell stock, leave proceeds in account create SMA

·        Decrease debit balance, increase SMA

·        If market value in long account increases, SMA increases

·        SMA=equity-(Reg T x MV)

·        Line of credit

·        Don’t lose until used

SMA uses

·        Buy more stock

·        Short sale

·        Buy calls and puts

·        Personal use

·        Cannot let equity <$2,000

·        Equity can’t <minimum

Initial margin call

·        Meet Reg T requirements

Maintenance call

·        Equity must get to maintenance level

Increase SMA

·        Market value increases

·        Sell stock

·        Receive cash dividends

Decrease SMA

·        Buy more stock

No SMA effect

·        Receive stock dividends because more shares at lower price

·        Market value decrease

An investor has a long margin account with a market value of $65,000 and a debit balance of $40,000. If the investor sells $20,000 all of the following are true except:

·        Equity increases

·        Equity does not increase when stock sold

·        Sell stock, equity decrease unless proceeds used to pay debit balance

·        With sale-equity same, SMA increase

margin outline

Which of the following is NOT needed to open a margin account with a broker/dealer firm?

·        Discretionary authorization

·        Only for discretionary account

·        Not for margin account

·        Hypothecation agreement,customer agreement,lending authorization: all needed to open a margin account

margin outline

·        MV: market value

 

·        Dr: debit balance,debit receipt in long account

 

·        Cr: credit balance,credit receipt in short account

 

·        E:equity

 

·        SMA: special memorandum account or excess equity

 

·        B/D: broker/dealer