Regulation T Requirements
FINRA and exchange rules complement Regulation T requirements by setting “maintenance” margin requirements for accounts receivable. If you`re on a Reg T call, it`s because you didn`t meet the initial requirement for the shares you bought. Initial demand may vary depending on stock, but should never be less than 50%. Be sure to check the inventory detail page for each inventory to determine the initial requirement. Robinhood Gold clients who have activated margin investments are responsible for paying their initial needs each day. The Federal Reserve Board and many self-regulatory organizations (SROs), such as the NYSE and FINRA, have rules governing margin trading. Brokerage firms can set their own requirements, as long as they are at least as restrictive as the rules of the Federal Reserve Board and SROs. Here are some of the most important rules you should know: The 50% requirement is called the initial margin because it establishes a minimum credit level at the time of purchase. Some brokers may have stricter requirements with levels above 50%. Here`s an example of how maintenance requests work. Let`s say you buy $16,000 worth of securities by borrowing $8,000 from your business and paying $8,000 in cash or securities. If the market value of the securities drops to $12,000, the equity of your account drops to $4,000 ($12,000 – $8,000 = $4,000).
If your business has a 25% maintenance requirement, you must have $3,000 in equity in your account (25% of $12,000 = $3,000). In this case, you have enough equity because the $4,000 equity in your account is greater than the $3,000 maintenance requirement. FINRA Rule 4210 (Margin Requirements) outlines margin requirements that determine the amount of collateral clients must hold in their margin accounts, including strategy-based margin accounts and portfolio margin accounts. The rule explains margin requirements for equities and fixed income, as well as options, warrants and securities futures. The conditions under which companies can lend for securities transactions are governed by federal regulations and by FINRA and stock exchange rules. The New York Stock Exchange, the National Association of Securities Dealers, and individual brokerages also have their own rules. For example, a brokerage may limit investors to less than Reg T`s maximum credit of 50%. It may also force investors to meet higher maintenance requirements. After purchasing shares on margin, FINRA requires that you hold a minimum amount of shares in your margin account. The equity of your account is the value of your securities minus the amount you owe to your brokerage firm.
The rules require that you have at least 25% of the total market value of the securities in your margin account at all times. The 25% is referred to as “maintenance needs.” In fact, many brokerage firms have higher maintenance requirements, usually between 30 and 40% and sometimes more, depending on the type of shares purchased. Reg T allows the Federal Reserve Board of Governors to change margin requirements. Over the decades, the amount of cash needed for margin trading has ranged from 40% to 100%. Let`s say you buy a stock for $50 and the share price goes up to $75. If you purchased the shares in a cash account and paid for them in full, you will receive a 50% return on investment. But if you bought the stock on margin — paying $25 in cash and borrowing $25 from your broker — you get a 100% return on the money invested. Of course, you still owe your business $25 plus interest. The margin carries the risk of significant investment losses. Before using margin, clients should consider whether this type of strategy is right for them given their investment objectives and risk tolerance. For more information, please see our Margin Statement Statement.
The downside of using margin is that when the stock price falls, large losses can occur quickly. For example, let`s say the stock you bought for $50 falls to $25. If you pay for the stock in full, you lose 50% of your money. But if you bought on margin, you lose 100% and you still have to pay the interest you owe on the loan. FINRA`s rules for margin accounts are as follows: DOWNLOAD FINRA`S SAMPLE PORTFOLIO MARGIN STATEMENT Reg T also requires investors to open a margin account with their brokerage before investing on margin. Interest rates and terms on these margin accounts may vary by brokerage. In such cases, the investor`s broker must freeze the cash account for 90 days, so the investor must fund his purchases of securities with cash on the day of trading. For more information, see Regulatory Notice 10-08 (Customer Margin Accounts). Always keep in mind that your broker may not be required to make a margin call or notify you that your account has fallen below the Company`s maintenance requirements.
Your broker can sell your securities at any time without consulting you first. With most margin agreements, even if it gives you time to increase the equity in your account, your company can sell your securities without waiting for you to fill out the margin call. Buying on margin allows investors to increase their purchasing power. By borrowing to buy shares, they can own many more shares than if they could only buy what they could pay in cash. Author, educator and investment professional with nearly two decades of experience as an investment portfolio manager and CFO for a real estate holding company.
