Margin Accounts and Margin Requirements

A margin transaction has two separate equity tests: one at purchase and one after the position is open.

What Does a Margin Account Permit?

• Margin account: A brokerage account in which a customer may borrow funds from the broker-dealer, using account securities as collateral.
• Initial margin: Customer equity required when purchasing securities on margin. Regulation T generally requires 50% initial margin for a long margin equity purchase.
• Maintenance margin: Minimum equity that must remain after purchase under Financial Industry Regulatory Authority (FINRA) margin rules.
• Margin call: A demand for additional funds or eligible securities when account equity falls below an applicable requirement.

Initial margin → establishes the position. Maintenance margin → measures whether the open position still has enough equity.

Which Initial or Maintenance Requirement Applies?

• Requirements vary by security and by whether the position is long or short.
• The customer's initial deposit must satisfy the greatest applicable amount: the federal amount, the maintenance amount, a higher FINRA amount for the security, or $2,000 in equity.
• The $2,000 minimum-equity floor does not require a cash deposit above the cost of the security purchased.
• A firm may impose a requirement more stringent than the applicable federal or FINRA minimum.

Think of it this way: Initial margin is the down payment for opening the position. Maintenance margin is the equity floor that applies while the position remains open.

Exam Tip: Gotchas

• Initial margin and maintenance margin answer different questions. Initial margin governs opening the position. Maintenance margin governs ongoing equity.
• A short nonexempted equity security generally has 150% total Regulation T margin. The retained short-sale proceeds supply 100%, and the customer deposits another 50%.
• The $2,000 minimum-equity floor has a purchase-cost exception. The controlling initial requirement is the greatest applicable amount, but the floor does not require cash above the purchase cost.
• Exempted and non-equity securities use good-faith initial treatment. A long position uses the greater of the good-faith requirement or the regulatory percentage. A short position uses 100% of current market value plus the good-faith requirement.
• Other exempted securities have a 7% maintenance requirement. This percentage applies to current market value for long and short positions.
• Short-stock maintenance uses two price-based tests. Below $5, use the greater of $2.50 per share or 100% of current market value. At $5 or more, use the greater of $5 per share or 30% of current market value.
• Non-equity maintenance depends on credit quality. Unless another provision imposes a lesser requirement, investment-grade debt uses 10% of current market value. Unless another provision imposes a lesser requirement, other listed or margin-eligible debt uses the greater of 20% of current market value or 7% of principal.
• Short bonds and security futures use separate schedules. A short bond uses the greater of 5% of principal or 30% of current market value unless a lower exception applies. A security futures contract uses 20% of current market value for both initial and maintenance margin.

What Should You Check on Exam Day?

• For a long margin equity security, generally use 50% initial margin, or the percentage set by the regulatory authority where the trade occurs if greater. Use 25% of current market value for maintenance.
• For a long non-margin-eligible, nonexempted equity security, require 100% at purchase and 100% of current market value for maintenance.
• For a short nonexempted equity security, generally distinguish 150% total margin from the additional 50% customer deposit.
• For short stock, use the greater of $5 per share or 30% of current market value at $5 or more, and the greater of $2.50 per share or 100% of current market value below $5.
• Remember that a firm may impose a stricter house requirement.