Accounts Permitted to Trade on Margin

Before applying margin requirements, determine whether the account itself permits borrowing.

Does the Account Permit Borrowing?

• Cash account: The customer pays in full for purchases and does not borrow from the broker-dealer for securities transactions.
• Margin account: An approved account in which the customer may borrow from the broker-dealer for eligible securities transactions.
• Margin eligibility: A cash account does not become a margin account merely because securities are held as collateral.

Account approval → authority to extend credit. Holding collateral without approval → no authority to extend margin credit.

What Authorizes the Firm to Extend Margin Credit?

• Margin agreement: The customer agreement that authorizes the broker-dealer to extend credit and identifies the customer's obligations in a margin account.
• Customer authorization: Firm approval of the account and the customer's signed margin agreement are both required before the firm may lend. Approval alone does not authorize credit.
• The margin agreement documents the credit relationship between the firm and customer.

Exam Tip: Gotchas

A marginable security does not itself permit borrowing. Ordinary customer borrowing requires a broker-dealer-approved margin account and agreement to its terms, unless the transaction is specifically permitted in a special-purpose account.

What Should You Check on Exam Day?

• Determine whether the customer must pay in full or may borrow.
• Confirm that ordinary customer borrowing uses a broker-dealer-approved margin account, unless the transaction is specifically permitted in a special-purpose account.
• For a margin account, look for the customer's agreement to the margin-account terms.
• Do not treat marginable collateral by itself as authority to extend credit.