chapter 7 upload

Question 1

What is the initial margin requirement set by Regulation T for nonexempt securities?

Answer 1

50% of the market value

This requirement is also known as the ‘Fed call’.

Question 2

What must a customer do before opening a margin account?

Answer 2

Sign a margin agreement

The margin agreement includes the hypothecation agreement, credit agreement, and loan consent agreement.

Question 3

What does the hypothecation agreement allow the member to do?

Answer 3

Use the customer’s securities as collateral for a loan

This agreement is necessary for opening a margin account.

Question 4

True or false: A loan consent agreement is mandatory for opening a margin account.

Answer 4

FALSE

The loan consent agreement is optional and allows the member to loan out the customer’s margin securities.

Question 5

What is a restricted margin account?

Answer 5

An account where the percentage equity has fallen below 50%

This occurs if the market value of the securities falls.

Question 6

What is the minimum maintenance margin requirement for long margin accounts?

Answer 6

25% of the current market value

For short margin accounts, the requirement is stricter at 30%.

Question 7

What happens if the equity in a margin account falls below 25%?

Answer 7

The member sends a maintenance call

The call is for an amount sufficient to bring the account back to minimum.

Question 8

What is a Special Memorandum Account (SMA)?

Answer 8

An account that may be maintained in conjunction with a margin account

SMA is created when the market value of securities rises above initial cost.

Question 9

How is buying power calculated in relation to SMA?

Answer 9

SMA x 2

This means the customer can purchase double the SMA amount without additional funds.

Question 10

What must a member firm provide to noninstitutional customers before opening a margin account?

Answer 10

A margin risk disclosure document

This document addresses the risks associated with trading on margin.

Question 11

What is the consequence of failing to meet a maintenance call?

Answer 11

The firm will sell securities to eliminate the deficiency

This action is taken to bring the account back to minimum requirements.

Question 12

What does marginable mean?

Answer 12

It may be used as collateral for a loan

For example, IBM stock is marginable.

Question 13

What is the difference between margin and marginable?

Answer 13

Margin is the money required for a transaction; marginable means it can be used as collateral

Example: To buy $10,000 worth of stock, the margin is $5,000.

Question 14

What is the maximum time a customer has to pay for securities purchased under Regulation T?

Answer 14

Two additional business days

Payment is expected by the regular way settlement date, which is one business day after the trade date.

Question 15

What happens if payment is not received by the fourth business day?

Answer 15

The position must be sold out and the account frozen for 90 days

This applies to both cash and margin accounts.

Question 16

What is the Regulation T time frame for payment of securities purchased?

Answer 16

Two business days

Regulation T allows customers an additional two business days to pay for securities purchased.

Question 17

If payment is not received in time, what happens to the position on the fourth business day?

Answer 17

Must be sold out and account frozen for 90 days

This applies to both cash and margin accounts.

Question 18

Who makes extension requests for an introducing broker-dealer?

Answer 18

Its clearing firm

FINRA requires clearing firms to keep daily records of margin and extension requests.

Question 19

What happens if an introducing firm exceeds a 3% ratio of extension requests?

Answer 19

Prohibited from further extension requests for 90 days

This is if the ratio is not reduced by the next monthly reporting period.

Question 20

What is the prohibited practice of freeriding?

Answer 20

Buying stock without paying for it, then selling it

Member firms must enter the sell order and freeze the account.

Question 21

What is the minimum maintenance margin requirement established by FINRA?

Answer 21

• 25% for long positions
• 30% for short positions

Most member firms have requirements that exceed these levels.

Question 22

What is the mark-to-market process in margin accounts?

Answer 22

Daily comparison of purchase price with current market price

This determines any increase in equity or equity deficiency.

Question 23

What does Regulation X require for margin credit obtained outside the U.S.?

Answer 23

Compliance with Regulation T or Regulation U

This applies if the credit is obtained from a foreign branch or bank.

Question 24

What types of securities are generally marginable?

Answer 24

• National Market System securities
• Exempt securities like U.S. government bonds

Nonexempt securities must be on the Federal Reserve’s marginable securities list.

Question 25

What is the **140% Rule** regarding rehypothecation?

Answer 25

Customer securities can be pledged up to 140% of the debit balance ## Footnote Excess margin securities must be segregated and cannot be liened on.

Question 26

What is a **short sale**?

Answer 26

Sale of a security the customer does not own ## Footnote The customer must borrow the security to deliver it by the settlement date.

Question 27

What is the risk associated with **short selling**?

Answer 27

Potentially unlimited loss if the stock appreciates ## Footnote Short sellers profit if the stock declines in value.

Question 28

What is the **locate requirement** in short selling?

Answer 28

Determination that shares can be borrowed ## Footnote This must be noted on the order ticket.

Question 29

What does **SEC Rule 10b-21** address?

Answer 29

Fails-to-deliver transactions related to naked short selling ## Footnote It targets short sellers misleading broker-dealers about their ability to deliver securities.

Question 30

What privileges does the **stock lender** retain when lending securities?

Answer 30

* Right to cash dividends * Right to stock dividends or stock splits ## Footnote The short seller must compensate the lender for dividends not received.

Question 31

What must a member firm do when a customer effects a **short sale**?

Answer 31

Determine that the shares can be borrowed ## Footnote This is known as the locate requirement.

Question 32

What is the **short exempt** marking for a short sale order?

Answer 32

Marked if by an underwriting syndicate or for certain options ## Footnote This is to reduce risk in standby underwriting.

Question 33

What is the process called when bankers buy up rights and sell shares represented by these rights?

Answer 33

Laying off ## Footnote This process involves selling short an amount of shares equivalent to the rights expected to go unexercised.

Question 34

What is a **syndicate short position**?

Answer 34

An agreement among underwriters authorizing the lead manager to sell securities beyond the firm commitment underwriting ## Footnote It may include a covered short position equal to the securities registered to cover the underwriters' option to purchase additional securities.

Question 35

What is the **overallotment option** also known as?

Answer 35

Green shoe ## Footnote This option allows underwriters to sell more shares than initially planned.

Question 36

What is the minimum margin required to short stocks trading at less than $5 per share?

Answer 36

100% of market value or $2.50 per share, whichever is greater ## Footnote This rule is known as the Cheap Stock Rule.

Question 37

If a customer wants to short 1,000 shares of WXYZ at $4 per share, how much must they deposit?

Answer 37

$4,000 ## Footnote This amount is 100% of the short market value.

Question 38

Open short positions must be reported to FINRA how often?

Answer 38

Twice monthly ## Footnote Reports are due as of the 15th and the last business day of the month.

Question 39

What are **Exchange-Traded Funds (ETFs)** typically registered as?

Answer 39

* Unit investment trusts (UITs) * Open-end investment companies ## Footnote ETFs represent an interest in a portfolio of securities that track an underlying index.

Question 40

What is a **leveraged ETF** designed to do?

Answer 40

Generate 200% or 300% of the underlying index it tracks ## Footnote Leveraged ETFs use futures and swaps to amplify daily returns.

Question 41

What is the maintenance margin requirement for leveraged ETFs?

Answer 41

Higher than non-leveraged ETFs ## Footnote This is due to the higher volatility experienced by leveraged ETFs.

Question 42

What is the **minimum maintenance margin** required for short accounts?

Answer 42

30% ## Footnote A rise in stock price can quickly put a short account close to minimum maintenance.

Question 43

What is an **arbitrage account**?

Answer 43

An account that has both long and short positions in equal amounts ## Footnote The margin requirement is 5% of the value of the long position.

Question 44

What happens if payment is not received by the fourth business day from the trade date?

Answer 44

The position must be sold out and the account is frozen for 90 days ## Footnote This rule applies to both cash and margin accounts.

Question 45

What is the minimum equity requirement for **pattern day traders**?

Answer 45

$25,000 ## Footnote This amount must be on deposit in the account on any day trading occurs.

Question 46

What is the **Customer Protection Rule**?

Answer 46

A rule adopted to safeguard customer funds and securities ## Footnote It was created in response to broker-dealer liquidations in the late 1960s and early 1970s.

Question 47

What must member firms do with customer cash according to the Customer Protection Rule?

Answer 47

Keep it separate from their own cash ## Footnote Customer cash can only be used to finance customer securities purchases.

Question 48

What are the **two broad components** of the Customer Protection Rule?

Answer 48

* Custody (control requirements) * Reserve requirement ## Footnote These components ensure the safeguarding of customer funds and securities.

Question 49

Member firms must keep customers' cash separate from their own and cannot use it as _______.

Answer 49

working capital ## Footnote Customer cash can only be used to finance customer securities purchases.

Question 50

True or false: The Customer Protection Rule allows firms to use customer cash for their operations.

Answer 50

FALSE ## Footnote Firms must keep customer cash separate and cannot use it as working capital.

Question 51

What must carrying firms do daily regarding fully paid-for customer securities?

Answer 51

* Bring under possession (in-house) * Control (in an account controlled by the firm) ## Footnote This ensures that all customer securities are accounted for and secured.

Question 52

What is the role of a **special reserve account**?

Answer 52

To hold excess customer funds for the exclusive benefit of customers ## Footnote The account must not have cross liens and is subject to specific deposit requirements.

Question 53

What types of securities are acceptable for deposits into the special reserve account?

Answer 53

* Cash * Qualified securities (e.g., Treasury bills, notes, bonds) ## Footnote These securities are backed by the full faith and credit of the U.S. government.

Question 54

Firms with customer credits of not more than $1 million can compute reserves on a _______ basis.

Answer 54

monthly ## Footnote These firms must deposit 105% of the required amount due to less frequent updates.

Question 55

What is the **k(1) exemption**?

Answer 55

Applies to firms whose transactions are limited to the sale and redemptions of redeemable securities ## Footnote These firms must promptly transmit all funds and deliver all securities received.

Question 56

The **k(2)(i) exemption** applies to firms that carry no margin accounts and must promptly forward all customer funds and securities. What does this mean?

Answer 56

They do not hold funds or securities for customers ## Footnote Transactions are conducted through a special account for the exclusive benefit of customers.

Question 57

What must a broker-dealer do if it does not claim an exemption from Rule 15c3-3?

Answer 57

Enter a memo stating it has no possession or control obligations ## Footnote This memo should list the activities that limit its obligations under the rule.

Question 58

How often must carrying broker-dealers send written statements to customers with a free credit balance?

Answer 58

At least once every three months ## Footnote The statement must indicate the amount is payable upon the customer's demand.

Question 59

What is required for carrying firms regarding **proprietary accounts of other brokers**?

Answer 59

* Perform a separate reserve computation * Establish a separate reserve bank account for PAB accounts ## Footnote This is in addition to the customer reserve computation required by Rule 15c3-3.