Special Memorandum Account

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.

A customer's margin account shows SMA of $8,000. With Reg T at 50%, her buying power for additional marginable stock is:

1. A.$4,000Wrong. Halving SMA reverses the leverage arithmetic.
2. B.$24,000Wrong. Tripling would require 33% margin, not Reg T's 50%.
3. C.$16,000Correct. SMA doubles into buying power at 50% margin.
4. D.$8,000Wrong. That is the SMA balance itself, not the purchases it can finance.

Why: Each SMA dollar supports two dollars of new marginable purchases at 50% initial margin: $8,000 x 2 = $16,000 of buying power. Citation: Regulation T; margin account mechanics. Takeaway: buying power = 2 x SMA at Reg T 50%.

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.

A margin account's Special Memorandum Account shows a balance built up from stock appreciation. The customer has not withdrawn it or used it to purchase anything. What does this SMA balance represent?

1. A.A line of credit reflecting equity in excess of the requirement, which the customer may withdraw as cash or use to purchase additional securities without a new deposit.Correct. SMA is a credit line built from excess equity that the customer can withdraw or use for further purchases without depositing new funds.
2. B.A segregated cash balance the firm is already holding for the customer, separate from the securities in the account.Wrong. SMA is a bookkeeping credit line, not a segregated cash balance held apart from the account.
3. C.An amount that must be withdrawn within a fixed number of days or it is forfeited back to reduce the debit balance automatically.Wrong. SMA does not expire or get forfeited; it remains available until the customer chooses to use or withdraw it.
4. D.A reserve the firm holds against its own net capital charge that has no relationship to the customer's buying power.Wrong. SMA is directly about the customer's available buying power, not a firm net capital reserve.

Why: A Special Memorandum Account is a running record of a margin account's equity in excess of what current positions require -- it is not a separate pool of cash the firm is holding aside. When market appreciation (or a cash deposit) creates equity beyond the requirement, that excess is credited to SMA, which then functions like an available line of credit: the customer can withdraw it as cash or use it as buying power to purchase additional securities, without having to make a fresh deposit. It sits on the books as a credit balance until the customer actually exercises it.