Other Margin Accounts

Beyond standard margin accounts, there are two specialized account types tested on the Series 7: pattern day trading accounts and portfolio margin accounts. Each has unique requirements and higher minimums.

Pattern Day Trading

A pattern day trader is defined by two conditions that both must be met:

1. Executes 4 or more day trades within 5 consecutive business days
2. Those day trades represent more than 6% of total trades in the account during that period

A day trade is opening and closing the same security position on the same day.

Pattern Day Trader Requirements

Key Rules

• If the account falls below $25,000, the customer cannot day trade until equity is restored
• The $25,000 minimum can be a combination of cash and eligible securities; it does not need to be all cash
• Day-trading buying power is calculated based on the prior day's closing equity minus maintenance requirements, multiplied by 4
• If day-trading buying power is exceeded, a day-trading margin call is issued

Exam Tip: Gotchas

• Pattern day trader requires BOTH conditions. 4+ day trades in 5 business days AND those trades must exceed 6% of total trades. The exam may present a scenario with exactly 4 day trades but a very high total trade count (making day trades less than 6%); in that case, the customer is NOT a pattern day trader.
• $25,000 minimum can include securities. It does not need to be all cash.
• Day-trading buying power is 4x (not 2x like standard margin).

Portfolio Margin

Portfolio margin uses risk-based modeling instead of the fixed percentage requirements of Regulation T (Reg T):

• Computer models calculate theoretical gains/losses across multiple pricing scenarios
• Margin is based on the greatest projected net loss across all positions in a group of related securities
• Typically results in lower margin requirements for well-hedged, diversified portfolios

Think of it this way: Standard margin applies the same flat percentage to every position. Portfolio margin looks at the big picture and asks, "If the market moves against you, how much could you actually lose across all your positions?" A hedged portfolio (long stock plus protective put, for example) has less real risk, so it requires less margin.

Minimum Equity Requirements

• The generally taught customer minimum equity for portfolio margin is $100,000, though a firm may impose a higher house requirement
• A $5,000,000 minimum applies only to an eligible participant who establishes or maintains unlisted derivatives in the portfolio margin account; it is not a general day-trading minimum
• Individual retirement accounts (IRAs) are not eligible for portfolio margin at all

Additional Rules

• Customers must be approved for uncovered options and must receive and acknowledge the required portfolio-margin disclosure statement before the first transaction
• Eligible products include margin equity securities, listed equity and index options, security futures, qualifying unlisted derivatives, warrants, and related instruments
• The firm must maintain robust controls to monitor credit exposure and concentration risk

Exam Tip: Gotchas

• Portfolio margin minimum starts at $100,000, not $5,000,000. The $5,000,000 figure only applies to a customer holding unlisted derivatives in the account; do not attach it to day trading in general.
• Portfolio margin lowers requirements for hedged portfolios. If a question describes a well-diversified, hedged portfolio, portfolio margin will produce a lower requirement than Reg T.
• IRAs cannot use portfolio margin, no matter how large the account.

Margin Disclosure Requirements

The firm must deliver a margin disclosure statement to each non-institutional customer, individually and in a separate document (or a separate page within another document), at or before opening a margin account; a firm that permits non-institutional customers to open accounts or trade online must also post the statement on its website. The disclosure must explain:

• The firm can force the sale of securities or other assets in any of the customer's accounts held at the firm, and the firm chooses which assets to sell, without notice
• The firm can increase its house maintenance margin requirements at any time without advance notice
• The customer is not entitled to an extension of time to meet a margin call
• The customer can lose more money than originally deposited
• The customer is not entitled to choose which securities or other assets in the account are liquidated to meet a call

This disclosure must be delivered again at least once per calendar year to all non-institutional margin customers; the annual delivery does not need to be a separate document.

Exam Tip: Gotchas

• The firm can liquidate margin positions without giving the customer notice or time. Students often assume the customer gets a chance to respond first; the disclosure explicitly states otherwise.
• The customer is not entitled to a time extension on a margin call. The firm decides whether to grant extra time, not the customer.
• A forced sale is not limited to the deficient account. The firm can sell assets in any of the customer's accounts at the firm and picks which ones to sell.

What Should You Check on Exam Day?

• Pattern day trader status requires BOTH the 4-trades-in-5-days test and the more-than-6% test
• Day-trading buying power is 4x, not the standard 2x
• Portfolio margin's $100,000 minimum and its $5,000,000 unlisted-derivatives minimum are two different thresholds; IRAs cannot use portfolio margin at all
• The initial margin disclosure must be its own document or page; the annual one does not have to be