Debit Balance

Nolan Reyes holds 800 shares of Ashgrove Metals in his long margin account. The position is worth 28,000 dollars against a 19,600 dollar debit balance. Ashgrove declines steadily. At what total market value does the account first reach FINRA's 25 percent minimum maintenance level?

1. A.78,400 dollarsThis divides the debit by 0.25, inverting the formula. That would imply equity of 75 percent, far above the requirement.
2. B.24,500 dollarsThis divides the debit by 0.80, which is the formula for a 20 percent maintenance requirement. FINRA's long account minimum is 25 percent.
3. C.26,133.33 dollarsCorrect. 19,600 / 0.75 = 26,133.33, the market value at which equity is exactly 25 percent.
4. D.39,200 dollarsDoubling the debit gives the market value at which equity equals 50 percent, which is the Regulation T initial level, not the maintenance level.

Why: At the maintenance point, equity equals 25 percent of market value, so the debit balance is the other 75 percent. Dividing the debit by 0.75 gives the market value where the account is exactly at the line: 19,600 / 0.75 = 26,133.33 dollars. Below that value the firm issues a maintenance call. The debit balance itself does not change as the stock falls, which is why it anchors the calculation.

Sanjay Bhatt buys 40,000 dollars of marginable stock and meets the 50 percent Regulation T call with a 20,000 dollar cash deposit. Over the next twelve months the firm charges 1,900 dollars of margin interest, which Sanjay never pays in cash, and the stock's market value is unchanged. What is his equity at the end of the year?

1. A.18,100 dollarsCorrect. The debit rises to 21,900 with the unpaid interest, leaving 40,000 - 21,900 = 18,100 of equity.
2. B.20,000 dollarsThis assumes the interest charge never touched the account. Unpaid margin interest is added to the debit balance.
3. C.16,200 dollarsThis subtracts the interest twice, once from equity and once through the debit. The charge is counted only once.
4. D.21,900 dollars21,900 dollars is the year end debit balance, which is what Sanjay owes, not what he owns.

Why: Sanjay borrowed 20,000 dollars, so his opening debit balance was 20,000. Margin interest that is not paid in cash is simply charged to the account, raising the debit to 20,000 + 1,900 = 21,900. With market value still 40,000, equity is 40,000 - 21,900 = 18,100 dollars. This is why a flat market still erodes a margin customer's equity: the interest meter runs regardless of performance.

The customer protection rule requires a carrying broker-dealer to promptly obtain and maintain physical possession or control of certain customer securities. Which securities does that obligation reach?

1. A.Every security carried for a customer, whether or not the customer has paid for it.Wrong. Unpaid positions still secure money the firm has lent, and the rule does not force that collateral to be set aside.
2. B.Fully paid securities and excess margin securities carried for customers.Correct. Those two categories together cover the customer property against which the firm holds no financing claim.
3. C.Only positions held in cash accounts; margin accounts fall outside the requirement.Wrong. Once collateral value runs past what the debit needs, the surplus is captured even though it sits in a margin account.
4. D.Only positions a customer has separately instructed the firm to hold in safekeeping.Wrong. The duty attaches by operation of the rule, so a customer who gives no instruction is protected identically.

Why: The possession-or-control requirement of SEC Rule 15c3-3 is drawn around customer property the firm has no claim against. That is fully paid securities, meaning positions in a cash account or margin-account positions with no loan value, plus excess margin securities, meaning collateral whose market value runs past what is needed to secure the debit balance of the customer. Everything else in a margin account is financing the borrowing of the customer and stays available to the firm. A cash-account customer who buys and pays generates a possession-or-control obligation the moment the position settles, with no instruction from her at all.

Priya holds 400 shares of Denholm Utilities in her margin account, and Denholm pays a 1.25 dollar per share cash dividend directly into that account. How does the 500 dollar dividend affect her SMA?

1. A.SMA rises by 250 dollars, the loan value of the dividendThe 50 percent haircut applies to securities deposited into the account. Cash entering the account is credited at its full amount.
2. B.SMA is unaffected until Priya withdraws the cashSMA records the credit when the dividend posts. Withdrawing the cash later draws the SMA back down rather than creating it.
3. C.SMA rises by 1,000 dollars, twice the dividend, reflecting buying powerThis confuses SMA with the buying power it produces. The 500 dollar credit supports 1,000 dollars of purchases, but SMA itself increases only by 500.
4. D.SMA rises by the full 500 dollarsCash credited to a margin account, including dividends and interest, increases SMA dollar for dollar.

Why: Cash dividends and interest credited to a margin account increase SMA dollar for dollar, because the cash either reduces the debit balance or sits as a credit and either way represents equity the customer may draw on. Priya's SMA rises by the full 500 dollars. SMA is a line of credit, so it does not shrink later merely because market value falls.