Deposit requirements are the funds you must provide to carry out an investment strategy in a margin account. When you borrow money from a broker-dealer, you’re subject to both Regulation T and FINRA requirements.
Regulation T is a rule established in the Securities Exchange Act of 1934 and administered by the Federal Reserve. It requires investors to make a specified deposit when borrowing money for investment purposes. In general, investors must deposit 50% to establish stock positions in margin accounts.
For example, an investor purchasing $10,000 of stock must deposit at least $5,000 and may borrow the other $5,000.
FINRA requires a minimum margin equity (ownership) level of $2,000 to use margin loans. In practice, the required deposit is the greater of the Regulation T requirement and the FINRA requirement.
An investor opens a new margin account and subsequently executes a purchase of 100 shares of ABC stock at $30. What is their deposit requirement?
Can you figure it out?
Answer = $2,000
The investor purchases $3,000 of stock (100 shares x $30). The required deposit is the greater of:
Because $2,000 is greater than $1,500, the investor must deposit $2,000.
What if an investor purchases less than $2,000? For example, suppose an investor buys stock with a total value of $1,200. Requiring a $2,000 deposit wouldn’t make sense because the most they could lose on a long stock position is the amount invested (here, $1,200, assuming the stock becomes worthless). In this case, the investor deposits 100% of the transaction amount.
Essentially, the account is treated like a cash account for that purchase.
The rules above apply to long margin accounts, meaning accounts that involve purchases of securities (no short sales). Here’s a summary of the initial deposit rules:
| Purchase amount | Deposit amount |
|---|---|
| $2,000 or less | Entire amount |
| $2,000 - $4,000 | $2,000 |
| $4,000 or more | 50% (Regulation T) |
Investors who already own fully-paid securities (securities owned without borrowed funds) can sometimes avoid posting cash. These securities can be transferred into the margin account and used as collateral, allowing the investor to borrow funds from the broker-dealer.
In particular, investors can post twice the cash deposit requirement in fully-paid marginable* securities. For example, assume an investor wants to purchase $10,000 of stock in a new margin account. The standard Regulation T cash deposit requirement is 50%, or $5,000. Instead of depositing cash, the investor can transfer $10,000 of fully-paid securities (2 x $5,000) from another account into the new margin account to satisfy the Regulation T requirement.
*A marginable security can be purchased on margin or utilized as collateral in a margin account. A list of marginable securities is provided later in this chapter.
Deposit rules are different for short positions. When an investor sells short, losses can exceed the initial value of the position.
For example, assume an investor goes short 100 shares of stock at $15. The short sale proceeds are $1,500, but the investor’s potential loss is unlimited if the stock price rises. If the stock price rises to $50, the investor must repurchase the shares for $5,000 ($50 x 100 shares), resulting in a $3,500 loss ($1,500 short sale - $5,000 repurchase).
Because short positions carry higher risk, margin rules require a minimum deposit equal to the greater of 50% or $2,000. Most importantly, even a small short position well below $2,000 still requires at least a $2,000 deposit.
For example:
An investor opens a new margin account and executes a short sale of 10 shares of ABC stock at $40. What is their deposit requirement?
Although the position is only worth $400 (10 shares x $40), the investor must deposit $2,000. Unlike long purchases, short sales always require a deposit of at least $2,000.
If this same example were a long purchase of 10 shares at $40, the investor would only be required to deposit $400.
Many securities are marginable, meaning they can be purchased with borrowed funds or used as collateral. Marginable securities include:
*The Federal Reserve provides a list of OTC (unlisted) stocks they deem marginable. As a reminder, unlisted stocks are typically volatile and risky. The Fed generally only approves the “best of the worst,” typically the least volatile securities in this group. Here’s an old example of their marginable OTC stock list.
**Primary market offerings include both initial public offerings (IPOs) and mutual funds. These securities can’t be purchased on margin with borrowed funds, but they can act as collateral toward the purchase of another security. For example, assume an investor opens an account and buys mutual fund shares with their own money. After 30 days of holding the position, it is worth $10,000. They could purchase $10,000 of a marginable stock (a completely different security) and not deposit any extra funds.
These securities are not marginable:
In addition, only non-retirement margin accounts* can utilize margin. The following account types cannot utilize margin:
*In recent years, some broker-dealers have introduced “limited margin retirement accounts”. While most non-margin accounts require investors to wait before using unsettled proceeds (e.g., selling stock and using the proceeds immediately), limited margin accounts permit investors to bypass settlement requirements. Other forms of margin, like borrowing funds to purchase new securities, cannot be used. This concept is generally untested, and you should assume retirement accounts cannot use margin.
Regulation T also sets rules related to settlement for both margin and cash accounts. Securities can have different regular-way settlement times, but Regulation T settlement is always two business days after regular-way settlement. This is the last day the cash for a purchase or the securities for a sale can be delivered (investors pay cash when they buy securities and deliver securities when they sell).
If an investor doesn’t meet their Regulation T call (meaning they fail to deliver the required cash or securities by Regulation T settlement), the broker-dealer holding the account must take action. The firm can request an extension from the appropriate self-regulatory organization (usually FINRA), or it can close out the position and “freeze” the account.
If the firm obtains an extension from an SRO, the customer gets additional time to meet the obligation. For example, if a customer is subject to a $10,000 Regulation T call for a recent securities purchase, they may receive a few extra days to make the $10,000 deposit. Extension requests are infrequent and may be denied.
More commonly, the firm liquidates the customer’s position(s) and freezes the account. Using the same example, if the required deposit isn’t made by Regulation T settlement (two days after regular-way settlement), the firm can liquidate $10,000 of securities in the customer’s account. The firm uses the $10,000 proceeds to pay for the transaction and then freezes the account.
The term “frozen” can be misleading. A frozen account can still trade, but only when funds are immediately available. Before the investor places a new purchase, the required cash or collateral must already be in the account. Accounts remain frozen for 90 days, and then the restriction is removed.
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