Quick Answer
A customer may borrow for eligible securities transactions only through a broker-dealer approved margin account. In a cash account, the customer pays in full and does not borrow. A marginable security or collateral alone does not authorize credit: the customer must agree to the margin-account terms before the firm extends credit.
Before applying margin requirements, determine whether the account itself permits borrowing.
Cash Account or Margin Account
- 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.
Customer Authorization
- 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: The customer must agree to the margin-account terms before the firm extends margin credit.
- The margin agreement documents the credit relationship between the firm and customer.
Exam Tip: Gotchas
A marginable security does not itself permit borrowing. The customer must also have a broker-dealer approved margin account and must agree to the margin-account terms.