Margin is borrowed money from your brokerage firm to purchase securities. The portion of the purchase price that you must deposit is called Margin and is your initial equity or value in the account.
The Securities Exchange Act of 1934 granted the power to regulate credit in the purchase of securities to the Federal Reserve Board (also called the FRB or the Fed). The SEC is charged with the responsibility of enforcing rules that the Federal Reserve Board establishes.
FRB rules govern the extension or use of credit for securities transactions with Regulation T governing the extension of credit by broker-dealers.
Regulation T (also called Reg. T) governs the extension of credit by broker-dealers (DriveWealth). The rules under Reg. T determine which securities may be purchased on credit (margin) through a broker dealer, when payment must be made, and the amount of credit that may be extended.
Note that there is a difference between Reg. T requirements and settlement requirements. Reg. T applies to timing of payments by customers. Settlement, which is governed by the Uniform Practice Code (UPC), refers to payment and delivery by broker-dealers. For example, the regular-way settlement on a stock trade is 3 business (T + 3), while customer funds are due in 5 business days (T+5) under Reg. T requirements. DriveWealth requires funds to be on deposit prior to trading. Regulation T Applies to both Cash and Margin Accounts. A trade executed in a cash account must be paid for full within 5 business days under Reg. T. The Regulation would likewise require that a purchase executes in a margin account must be partially paid for (generally 50%) within 5 business days.
Prohibited Margin Accounts
Not all types of client accounts are permitted to engage in margin trading. The owners/custodians of IRAs, custodial accounts, and qualified retirement accounts such as 401 (k) s and 403 (b) s are examples of customers who are prohibited to trade on margin.
Reg. T allows the purchase of several types of securities on margin. Marginable equity securities include:
- Exchange-listed securities on the DriveWealth platform where the security price is greater than $5.00. If a security is priced below $5.00, you are required to put up 100% of the equity. (Example: If you buy 1,000 shares of stock ABC at $2.00, you are required to put up $2,000).
The initial margin requirement for these equities is typically 50% of the purchase price. In other words, the customer puts up half of the required amount and DriveWealth lends the other half. Other equities, such as stocks traded on the OTC Bulletin Board (OTCBB) or in the Pink Sheets, are not marginable, nor are they offered by DriveWealth.