Ch 3: Margin

Question 1

Margin

Answer 1

Investing with credit from b/d. Regulated by Federal Reserve Board (FRB). SEC enforces the rules established by FRB.

Question 2

Regulation T

Answer 2

Governs the extension of credit by B/D.

Regulates:

1. which securities may be purchased thru a b/d,
2. when payment must be made, and
3. amount of credit that may be extended.

Question 3

Regulation U

Answer 3

Governs the extension of credit by lenders other than B/D.

Loans to investors who use securities as collateral for loan.

Question 4

Regulation X

Answer 4

Governs those who borrow to buy securities.

Question 5

Marginable Securities

Answer 5

Exchange listed
Nasdaq
LEAPS - Long-term Equity Anticipation Securities (option with maturities > 9months.

Question 6

When are new issues of IPO Shares & investment company securities (mutual funds) eligible for margin?

Answer 6

After held for 30 days.

Question 7

Margin Payment Deadline

Answer 7

Must be made promptly as a % of purchase price.

If not paid w/in T+4 (Reg T payment date), B/d is required to cancel the transaction by selling out securities and freeze account for 90 days.

Question 8

Freeriding

Answer 8

The prohibited act of purchasing securities w/o paying for them in hopes of being able to profit without any outlay of funds. (Paying the purchase price from the sale of the securities purchased on margin)

Question 9

Reg T Payment Deadline

Answer 9

Within two business days following the settlement date. (T+4)

Question 10

What is the payment rule for COD transactions?

Answer 10

B/d has 35 calendar days to deliver and receive payment.

Question 11

B/d requirements when margin account is opened?

Answer 11

Must send the customer a statement of the amount of interest that will be charged and the method by which interest will be computed.

Customer required to sign a margin agreement.

Question 12

Margin Account Disclosures

Answer 12

1. Conditions under which interest charges will be imposed
2. Interest rate charged to customer
3. Method of computing interest
4. Method of determining the debit balances on which interest will be charged.

Question 13

Hypothecation

Answer 13

Pledging of customers’ securities to back a loan.

Question 14

Rule 15c2-1 Hypothecation Prohibited Acts

Answer 14

1. Commingling customers’ securities w/ those of another customer w/o consent.
2. Commingling customers’ securities w/ any person who is not a customer of the b/d, including securities owned by the b/d.
3. Hypothecating securities for a sum exceeding the total indebtedness of all customers.