Section 11.2: Regulation T & Margin Requirements

  • What is Regulation T (Reg T)

    • Issued by the Federal Reserve Board (FRB).

    • Defines:

      • What securities can be purchased on margin.

      • The initial deposit requirement when buying on margin.

    • Reg T sets the initial margin requirement at 50% of the purchase price.

Marginable vs. Non-Marginable Securities:

  • ✅ Can Be Purchased on Margin and Used as Collateral:

    • Exchange-listed stocks and bonds

    • NASDAQ stocks

    • OTC issues approved by the FRB

    • Warrants

  • ❌ Cannot Be Purchased on Margin or Used as Collateral:

    • Options (calls & puts)

    • Rights

    • Non-NMS OTC issues (not approved by FRB)

    • Insurance contracts

  • ⚠️ Cannot Be Purchased on Margin, But Can Be Used as Collateral After 30 Days:

    • Mutual funds

    • New issues (once held 30 days after IPO)

  • 🛡️ Exempt from Regulation T Requirements:

    • U.S. Treasury securities (bills, notes, bonds)

    • Government agency issues

    • Municipal securities

These can still be purchased on margin, but they are not subject to Reg T — they follow their own margin rules.

💰 Margin Definitions:

  • Margin: The amount of cash or securities deposited to meet the minimum equity requirement.

  • Marginable: A security that can be used as collateral for a margin loan.

⚖️ Initial Margin Requirements:

  • 📘 Regulation T (FRB)

    • Customer must deposit 50% of the purchase price.

  • 📘 FINRA Rule

    • Customer must deposit the greater of:

      • $2,000, or

      • 100% of the purchase price if it’s under $2,000.

The higher of the two rules (Reg T or FINRA) applies.

Margin & Cash

〰️

Margin & Cash 〰️

🧮 Examples

Purchase Price / Reg T (50%) / FINRA Minimum / Required Deposit / Rule Applies

  • $5,000 / $2,500 / $2,000 / $2,500 / Reg T

  • $3,000 / $1,500 / $2,000 / $2,000 / FINRA

  • $1,500 / $750 / $1,500 / $1,500 / FINRA

📉 Maintenance Margin Requirement:

  • After the initial purchase, a customer must maintain at least 25% equity in their margin account.

  • If equity falls below this level, the BD issues a maintenance call (also called a margin call).

⚠️ Maintenance Call Example:

  • Initial Purchase:

    • 500 shares @ $20 = $10,000 total value.

    • Customer deposits $5,000 (50%), borrows $5,000.

    • Initial equity = $5,000.

  • Stock drops to $16/share:

    • Market value = $8,000.

    • Equity = $8,000 – $5,000 borrowed = $3,000.

    • Equity % = $3,000 ÷ $8,000 = 37.5% → still above 25%.

  • Stock drops to $13/share:

    • Market value = $6,500.

    • Equity = $6,500 – $5,000 borrowed = $1,500.

    • Equity % = $1,500 ÷ $6,500 = 23% → below 25%.

✅ Result: The BD issues a maintenance call requiring the customer to deposit more funds or securities to bring equity back to at least 25%.

If the customer fails to deposit additional funds, the BD can liquidate securities to restore required equity.

✺ Review questions ✺

  • A. 25%
    B. 50%
    C. 75%
    D. 100%
    ✅ Answer: B. 50%

  • A. Options
    B. Mutual funds (newly purchased)
    C. Exchange-listed stocks
    D. Rights
    ✅ Answer: C. Exchange-listed stocks

  • A. 10 days
    B. 20 days
    C. 30 days
    D. 60 days
    ✅ Answer: C. 30 days

  • A. $1,000
    B. $1,500
    C. $2,000
    D. $3,000
    ✅ Answer: C. $2,000 (FINRA rule)

  • A. Mutual funds and new issues
    B. U.S. Treasury and municipal securities
    C. Options and rights
    D. OTC issues not approved by FRB
    ✅ Answer: B. U.S. Treasury and municipal securities

  • A. The account is frozen
    B. A maintenance call is issued
    C. The customer must close the account
    D. The FRB is notified
    ✅ Answer: B. A maintenance call is issued

  • A. 23%
    B. 25%
    C. 37.5%
    D. 50%
    ✅ Answer: A. 23%