A margin account lets a customer borrow from the firm to buy securities. Because the customer is taking on a loan, opening a margin account requires extra documentation before any margin trading begins. The Series 63 focus is on the agreement and disclosure, not on margin calculations.
The Margin Agreement
Before an account can trade on margin, the customer must sign a margin agreement. The agreement has up to three parts:
- Credit agreement: states the terms of the loan, including how interest is charged. Required.
- Hypothecation agreement: the customer pledges securities as collateral for the loan. Required.
- Loan consent agreement: lets the firm lend the customer's margin securities to others. This part is optional, and the customer can open a margin account without signing it.
The credit and hypothecation agreements are mandatory; the loan consent is the one piece a customer may decline.
Risk Disclosure
The firm must give the customer a margin risk disclosure statement at or before opening the account. In plain terms, it warns the customer that:
- They can lose more money than they deposited
- The firm can sell securities in the account to cover a shortfall, without contacting the customer first
- The customer cannot choose which securities are sold
- The firm can change its margin requirements at any time
Cash vs. Margin: What Gets Signed
- A cash account needs no customer signature to open.
- A margin account requires the customer to sign the margin agreement before trading on margin.
Exam Tip: Gotchas
- The loan consent agreement is optional; the credit and hypothecation agreements are not. A customer can have a fully functioning margin account without ever consenting to having their securities loaned out.
- Unlike a cash account, a margin account does require the customer's signature.