Quick Answer
A margin account lets a customer borrow from the broker-dealer to buy securities or sell short, with the securities pledged as collateral. Three regulatory layers apply: Reg T (federal, sets initial margin), FINRA (SRO, sets maintenance margin), and firm house rules (can only be stricter). Opening one requires signing a margin agreement and depositing at least $2,000.
Before diving into margin calculations, you need to understand what a margin account is, how it's opened, and what securities can be traded on margin.
What Is a Margin Account?
- A margin account allows a customer to borrow money from the broker-dealer to purchase securities (buying on margin) or borrow securities to sell short
- The broker-dealer charges interest on the margin loan; the customer's securities act as collateral
- Margin accounts are governed by three levels of regulation, each progressively stricter:
| Level | Regulator | What It Sets |
|---|---|---|
| Federal | Federal Reserve Board (Regulation T, or "Reg T") | Initial margin requirements (currently 50% for nonexempt margin equity securities; other nonexempt securities, like straight corporate bonds, use good-faith margin instead, covered in Product-Specific Margin Requirements) |
| Self-Regulatory Organization (SRO) | FINRA | Maintenance margin requirements (25% long, 30% short) |
| Firm | Broker-dealer ("house" requirements) | May impose requirements stricter than Reg T or FINRA minimums |
- A firm can always require more margin than the regulatory minimum, but never less
How Do You Open a Margin Account?
The customer must sign a margin agreement with three components:
| Component | Purpose | Required? |
|---|---|---|
| Credit agreement | Discloses loan terms, interest rate calculation, and repayment schedule | Yes |
| Hypothecation agreement | Pledges the customer's securities as collateral for the margin loan | Yes |
| Loan consent form | Authorizes the firm to lend the customer's securities to others (e.g., for short sales) | No - optional |
- The loan consent form is the only optional component
- The firm must also deliver a margin disclosure statement, as its own document or a separate page, to each non-institutional customer at or before opening the margin account
- This disclosure must be provided again at least once per calendar year to all non-institutional margin customers
Exam Tip: Gotchas
- The loan consent form is the ONLY optional part of the margin agreement. If the exam asks which document a customer does NOT have to sign, this is the answer. The credit agreement and hypothecation agreement are both mandatory.
What Are Hypothecation and Rehypothecation?
- Hypothecation: The customer pledges securities as collateral for the margin loan from the broker-dealer
- Rehypothecation: The broker-dealer re-pledges the customer's securities to a bank as collateral for its own loan (to finance customer margin lending)
- Under SEC rules, the broker-dealer may rehypothecate customer securities up to 140% of the customer's debit balance (not 140% of market value)
Example: If a customer's debit balance is $10,000, the firm can pledge up to $14,000 of the customer's securities to the bank. Any securities above that threshold are excess margin securities and must be segregated.
Exam Tip: Gotchas
- The 140% rehypothecation limit is based on the DEBIT BALANCE, not the market value. The exam may present a scenario with both figures and ask which securities can be pledged. Always multiply the debit balance by 1.4.
What Is the Minimum Equity Requirement?
- FINRA requires a minimum deposit of $2,000 to open a margin account
- If the purchase is less than $2,000, the customer must deposit the full purchase price (no borrowing allowed)
- For short sales, the minimum equity is also $2,000
- Any withdrawal of cash or securities from the account is limited so that equity afterward is at least the greater of $2,000 or the maintenance margin requirement, whichever is higher
Think of it this way: The $2,000 minimum acts as a safety deposit. If your purchase costs less than $2,000, you pay the full amount (no borrowing at all). The firm only lets you borrow when there is enough equity to absorb potential losses.
Which Securities Are Eligible for Margin?
Not all securities can be purchased on margin:
| Marginable (Eligible) | Non-Marginable (Ineligible) |
|---|---|
| Listed stocks on exchanges (NYSE, Nasdaq) | OTC (non-Nasdaq) stocks priced under $5/share (penny stocks) |
| Most Nasdaq stocks | New issues for the first 30 days after issuance, when the broker-dealer distributed the issue as a selling-group member |
| Corporate bonds | Mutual fund shares for the first 30 days after purchase |
| Government and municipal bonds | Options (premium must be paid in full) |
| ETFs |
Key rules on timing and options:
- After the 30-day holding period, mutual fund shares and a new issue subject to the selling-group restriction become marginable if they meet other eligibility criteria
- Options cannot be purchased on margin; the premium must be paid in full by the next business day (T+1)
- Options can act as collateral in a margin account (e.g., covered call writing uses the underlying stock as margin)
Exam Tip: Gotchas
- Mutual funds are NOT marginable for the first 30 days. This timing rule is frequently tested. The same 30-day restriction applies to a new issue only when the broker-dealer participated in the offering as a selling-group member; it is not a blanket rule for every IPO.
- Options cannot be bought on margin but CAN be used as collateral. These are two different concepts that are often confused.
What Should You Check on Exam Day?
- Confirm you know the three regulatory layers (Reg T federal, FINRA SRO, firm house) and that a firm can only require more, never less
- Remember the loan consent form is the only optional margin agreement component
- Multiply the debit balance (not market value) by 1.4 for the rehypothecation ceiling
- Remember $2,000 is the minimum to open, in cash or eligible securities, for both long and short accounts
- Watch for the selling-group qualifier on the 30-day new-issue restriction; it does not apply to every IPO