Maintenance Call

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.

A margin maintenance call has been issued. Instead of depositing cash or securities, the customer instructs the firm to sell enough of the existing position to cure the deficiency. Is this an acceptable way to satisfy the call?

1. A.Yes -- reducing the position through liquidation lowers the requirement along with the debit balance, and satisfying a call does not require adding new money or securities.Correct. Liquidating enough of the position reduces both the requirement and the debit balance, curing the deficiency without new funds.
2. B.No -- a margin call can only be satisfied by a deposit of new cash or marginable securities; liquidation is a separate remedy the firm uses only after a call is missed.Wrong. Liquidation is an acceptable, proactive way to satisfy a call, not only a remedy for a missed one.
3. C.No -- liquidating part of the position converts the call into a Reg T call, which then requires a cash deposit regardless of the sale.Wrong. Liquidating to cure a maintenance deficiency does not convert it into a Reg T call requiring a separate cash deposit.
4. D.Yes, but only if the securities sold were not the ones originally purchased on margin.Wrong. There is no requirement that the securities sold be different from those originally purchased on margin.

Why: A margin maintenance call exists because equity has fallen below the required level relative to the debit balance. Selling part of the position reduces both the market value requirement and, since sale proceeds are applied to the loan, the debit balance itself -- curing the deficiency without any new money coming into the account. Satisfying a call through liquidation is a standard, acceptable response, not one limited to situations where the call has already gone unmet.

A customer facing a maintenance call tells her representative that she has sufficient securities in an account at a different firm and asks that the call be considered satisfied on that basis, without actually transferring anything into her account at this firm. The representative marks the call as satisfied. What is the problem?

1. A.A maintenance call is not satisfied by the existence of assets the firm doesn't actually hold or control; until those securities or equivalent value are actually transferred into and become part of the account at this firm, the account remains under-margined regardless of what the customer holds elsewhere.Correct. A call is only satisfied by assets actually held at the firm carrying the account, not by assets that exist somewhere else.
2. B.There is no problem, since the customer's overall net worth across all her accounts, wherever held, is what ultimately matters for margin purposes.Wrong. Overall net worth elsewhere does not satisfy a maintenance call at the firm actually carrying the under-margined account.
3. C.The problem is limited to whether the other firm should have been contacted directly to confirm the customer's account balance there.Wrong. Even confirming the other account's balance would not satisfy the call without an actual transfer of assets into this account.
4. D.The problem is that the representative should have required the customer to close her account at the other firm entirely before considering the call addressed.Wrong. Closing the other account is not required; what's needed is an actual transfer of sufficient value into this account.

Why: A maintenance call is not satisfied by the existence of assets the firm doesn't actually hold or control; until those securities or equivalent value are actually transferred into and become part of the account at this firm, the account remains under-margined regardless of what the customer holds elsewhere.

Ottoline Bramfield holds a long margin account at Kelverstone Reach Securities. A sharp decline leaves her equity below the firm's maintenance requirement, and the firm issues a MAINTENANCE CALL. Ottoline telephones to say that she has no intention of adding money, that the positions are excellent long-term holdings, and that she expects the firm to wait for the market to recover rather than selling at the bottom. What is the firm entitled to do?

1. A.It must wait until the customer consents to a specific sale, since the securities are the customer's property.The margin agreement pledges those securities as collateral and permits the firm to sell them to meet an unmet call.
2. B.It may sell securities in the account to restore the required equity, without needing her further consent.Correct. An unmet maintenance call entitles the firm to liquidate collateral under the margin agreement.
3. C.It must close the account entirely and liquidate every position, since the customer has refused to meet the call.The firm sells enough to restore compliance. Wholesale liquidation of the account is not required.
4. D.It may only charge additional interest on the debit balance until the equity recovers on its own.The firm is not confined to charging interest while its collateral shortfall persists; it may sell to cure the deficiency.

Why: A maintenance call requires the customer to restore the account's equity to the required level, either by depositing additional cash or by depositing marginable securities. If the customer does not meet the call, the firm may SELL SECURITIES IN THE ACCOUNT to bring the equity back into compliance, and it may do so without the customer's further consent. That authority comes from the margin agreement the customer signed when the account was opened, under which the account's securities are pledged as collateral for the loan. The firm's exposure is to the loan, not to Ottoline's investment thesis, so her conviction that the positions will recover does not oblige it to remain exposed. In practice a firm may allow a short period to meet a call, but it is not required to wait and may act to protect itself.