Margin Call

A customer at Stapleford Clearing has received a margin call and offers to meet it by delivering shares of a security that carries no loan value in a margin account. How should the margin department treat the deposit?

1. A.It does not reduce the deficiency, because the call may be met only with cash, margin securities or exempted securities.Correct. It applies the closed list of acceptable deposits and draws the right conclusion about a security outside it.
2. B.It satisfies the call at full market value, since anything deposited into the account serves as collateral.Wrong. Market value and loan value are different measures, and only the second one pays down a requirement.
3. C.It satisfies the call once the firm's credit committee has approved the security as acceptable collateral.Wrong. It invents an internal approval route that cannot confer loan value the security does not have.
4. D.It satisfies the call, but only after the shares have been placed in the firm's possession or control.Wrong. It borrows a custody condition from the customer protection rules, which is not what determines whether a deposit counts.

Why: A margin call may be satisfied by a transfer from the special memorandum account or by a deposit of cash, margin securities, exempted securities, or a combination of those. A security that is not a margin security has no loan value, so depositing it adds an asset to the account without reducing the deficiency by anything. The department must therefore treat the call as still outstanding and tell the customer so before the period runs, rather than marking it satisfied and discovering the shortfall later. Had the customer offered an exempted security instead, the deposit would have counted.

At the close of trading, a margin account's equity dips slightly below the maintenance requirement due to a small price move. The firm's system flags the account but does not issue a formal call that day. Has the firm violated the maintenance rule by not issuing an immediate call?

1. A.Yes -- any computed deficiency, however small, must result in an immediate formal call the same day it is identified.Wrong. A computed deficiency does not automatically require an immediate formal call the same day; firms exercise discretion.
2. B.Yes, unless the deficiency is caused by a security the firm itself designated as non-marginable, in which case no call is ever required.Wrong. The cause of the deficiency does not create a blanket exemption from ever issuing a call.
3. C.No, because maintenance requirements do not apply until the deficiency has persisted for several consecutive trading days.Wrong. The maintenance requirement applies from the moment equity falls below the level; there is no multi-day grace period before it applies.
4. D.Not necessarily -- a computed deficiency and a formally issued call are not the same thing, and firms exercise discretion in the timing and threshold for issuing a call, particularly for small or transient dips.Correct. A computed deficiency and a formally issued call are distinct, and firms have discretion in how and when to issue calls.

Why: A computed margin deficiency is a mechanical output of comparing account equity to the requirement; a formally issued margin call is a demand for action. The two are not automatically the same event. Firms retain discretion in how and when to issue calls, particularly for small or transient shortfalls that may correct themselves, and not every dip below the maintenance level results in an immediate formal call the same day it appears on a report.

A margin call at Merrivale Brokerage is not going to be met by the end of the payment period, and the customer asks the firm to arrange more time. What has to happen for the period to be extended?

1. A.The customer submits a written application for additional time to the firm's examining authority.Wrong. The customer has no standing before the firm's examining authority; the creditor makes the application.
2. B.The firm may grant the extension itself once it is satisfied the customer intends to pay.Wrong. It hands the firm a discretion it does not have and removes the outside check entirely.
3. C.The firm applies to its examining authority, and the application must be filed and acted on before the period expires.Correct. It names both the correct applicant and the deadline that makes the application effective.
4. D.An extension may be sought after the period has run, so long as the request accounts for the delay.Wrong. A request made after expiry comes too late; by then the obligation to liquidate has already arisen.

Why: An extension of the payment period is not something the firm grants and not something the customer requests. The creditor applies to its own examining authority, and the application has to be filed and acted upon before the payment period, or any extension already running, expires. That sequencing is the operational point: once the period has run without an extension in hand, the firm is in the position of having to liquidate rather than of having a request pending. If the examining authority thought the firm was not acting in good faith or had not established exceptional circumstances, it could decline the application.