Other margin rules

Beyond opening margin requirements and understanding minimum deposit requirements, the following margin-related concepts must be known for the exam:

• Minimum maintenance
• Specialized memorandum account (SMA)
• Pattern day trading
• Portfolio margin

Minimum maintenance

Margin accounts increase the typical risks of investing. If an investor purchases shares in a margin account and those shares lose 100% of their value, the investor loses both:

• The value of the securities purchased, and
• The borrowed funds that must still be repaid

That’s leverage in a nutshell: it increases both gain and loss potential.

Minimum maintenance helps keep customer margin accounts from becoming undercollateralized when the market moves against the customer. It also helps protect the broker-dealer from being left with unpaid debts or an unwanted short position.

Minimum maintenance is generally only a concern with short (naked) options. When this type of position is established, a customer must maintain equity equal to the greater of:

• The initial deposit requirements (covered in the last chapter), or
• 10% of the total exercise value plus the current premium

Most of the time, the initial deposit requirements are the greater amount. When that’s the case, the investor must maintain a minimum equity* level equal to the initial deposit requirements.

*Equity refers to the liquidation value of the account. For example, an investor with a $10,000 stock position and a $6,000 debit (loan) balance maintains a $4,000 equity value. If the $10,000 position were liquidated, the investor would repay the $6,000 loan and walk away with $4,000.

Specialized memorandum account

When margin accounts increase in value, they also gain additional buying power (for long accounts) or selling power (for short accounts). In practical terms, the investor may be able to enter new transactions without making additional cash deposits.

When a margin account gains value, it also gains something called a special memorandum account (SMA).

A helpful way to think about SMA is as a credit line. As the account’s value increases, the firm may extend additional credit that can be used to support new purchases (or short sales) without an immediate deposit.

An account’s buying or selling power equals twice the amount of the account’s SMA. Let’s apply that in an example:

A margin account currently maintains an SMA of $2,000. The account holder plans to establish four long ABC Jan 50 calls at $12. What minimum amount must the account holder deposit to establish the position?

Can you figure it out?

Pattern day trading

A day trade occurs when an investor buys and sells the same security on the same day*. For example, an investor purchases Nike stock at $125 in the morning and sells it at $130 in the afternoon. While short-term trading is unpredictable and risky, some investors make a living off this type of trading.

*More than two trades may be classified as a single ‘day trade.’ For example, assume an investor purchases 100 ABC shares in the morning. Two hours later, they sell 40 ABC shares. An hour after that, they sell 50 more ABC shares. Right before the close of the market, they sell the last 10 ABC shares. Although a typical day trade only involves two trades (buy shares, then sell same those shares later), this example involving four trades would still be considered one day trade.

Under FINRA’s intraday margin standard (effective June 4, 2026), a customer who day trades in a margin account must maintain equity commensurate with their market exposure at any point during the trading day - not just at the close. If an intraday margin deficit arises, the customer must satisfy it promptly (for example, by depositing additional funds); a persistent failure to do so can lead to account restrictions.

Broker-dealers that promote day trading strategies must provide a risk disclosure statement to customers who day trade in a margin account. A substantial risk day traders face is timing risk. “Timing the market,” or consistently making the right trades at the right time, is difficult. If the market moves in a different direction than the investor expects, losses can accumulate quickly.

To ensure retail customers* understand the risks they face when they day trade, the following statements are provided in the risk disclosure statement (and are also available on FINRA’s website):

• Day trading can be extremely risky
• Be cautious of claims of large profits from day trading
• Day trading requires knowledge of securities markets
• Day trading requires knowledge of a firm’s operations
• Day trading will generate substantial commissions, even if the per trade cost is low
• Day trading on margin or short selling may result in losses beyond your initial investment

*Member firms are not required to provide the same disclosures to institutional customers.

Some investors utilize cross guarantees when trading securities. A cross guarantee exists when one account covers another account’s liabilities or margin requirements. While a cross guarantee can exist with typical margin accounts, it is prohibited for day trading accounts.

Portfolio margin

The margin rules we’ve discussed so far are standard rules that apply broadly to investors. Investors with substantial knowledge and financial resources may qualify for less stringent rules by using portfolio margin.

A portfolio margin account allows customers to trade and hold securities at lower margin requirements based on overall risk.

For example, assume a customer establishes the following positions:

Long 100 ABC shares at $52
Long 1 ABC Jan 50 put at $5

Standard margin rules would require the customer to deposit:

• 50% of the stock position ($2,600), and
• 100% of the put premium ($500)

That’s a total of $3,100.

However, in the worst-case scenario, the customer can exercise the put and sell the ABC stock at $50. This results in a maximum loss potential of $700 ($2 stock loss + $5 option premium x 100 shares). A portfolio margin account would require a customer to deposit $700 instead of the $3,100 standard requirement.

These accounts allow investors to take on greater leverage than a typical margin account, so securities regulators want to ensure only “sophisticated” investors utilize them. Customers must maintain a minimum net equity (usually $100,000) to qualify for portfolio margin accounts. Additionally, customers must be approved for naked options writing during the account opening process, which requires additional risk disclosures.

While standard margin rules are relaxed with portfolio margin accounts, minimum deposit and maintenance requirements still apply. If a deficiency exists (e.g., the account falls below minimum maintenance), the customer must satisfy the deficiency within three business days. Satisfying the deficiency may involve liquidating a position or depositing more funds or securities.

FINRA member firms must receive appropriate SRO approval (typically from FINRA) to offer portfolio margin accounts. Additionally, firms must establish a comprehensive written risk methodology (a system for determining the risks an investor faces) based on a specified range of possible market movements and continually monitor these accounts.