Margin Process

Stock Loans

DriveWealth will have the right to lend a customer’s securities to another broker-dealer.

Long Margin Positions 
A customer purchasing securities in a margin account establishes a long margin position. The three factors used for all computations in a long margin position include the long market value (LMV), the debit balance (DB), and the equity (EQ).

The long market value reflects the current market price of the securities in the account. This figure will fluctuate as the total value of the securities increases and decreases.

Real-Time Mark to Market
Marking to the market refers to adjusting the market value of the position purchased to the current market every 15 minutes during the trading day. This process will determine if the customer is required to deposit additional cash or has sufficient Buying Power/Cash Available for Trading (CAFT) to be able to buy additional securities.

The debit balance, the amount borrowed, represents the amount owed to the brokerage firm. Assuming that there are no further transactions and disregarding interest charges, the debit balance will remain constant. A change in the current market price will have no effect on a customer’s debit balance.

The equity in the account is determined by subtracting the amount owed from the current long market value of the securities.           


For example, a client purchases 1,000 shares of XYZ at $10 per share when the Reg. T requirement is 50%. The account will be established as follows.

Industry Requirements for Long Accounts 
In addition to those requirements set by the Federal Reserve Board under Regulation T, margin accounts are also subject to industry requirements. Whereas Reg. T covers only the initial requirement on each transaction in a margin account, industry rules cover both initial transactions and maintenance requirements. In addition, DriveWealth is permitted to establish their own requirement ( house rules – 35% or $3.00 per share, whichever is greater), as long as they are at least as stringent as those established by the regulators.

Initial Requirement 
Industry rules require a customer to establish a minimum equity for initial transactions in a margin account. For a long position, the customer’s minimum deposit is $2,000, or 100% of the purchase price, whichever is less. This requirement may override the 50% Reg. T requirement if the initial purchase is for less than $4,000.

Example 1. A customer’s initial purchase in a margin account is for stock worth $3,000. The FRB would require a deposit of $1,500 ($3,000 x 50%).  This amount does not meet the industry requirement of the lesser of $2,000 or the total purchase price. In this case, the customer would be required to deposit $2,000.

Example 2. 

A customer’s initial purchase in amargin account is for stock worth $1,800. Industry rules would require a deposit of $1,800 since $2,000 would be greater than 100% of the purchase price, and the Reg. T requirement of $900 ($1,800 x 50%) would be insufficient.

Example 3. A customer purchases 100 shares of stock at $50 in a new margin account. The customer would need to meet the Reg. T requirement of $2,500 since this amount is greater than the $2,000 required by the industry rules.

Maintenance Requirement
Industry rules require that customers maintain a minimum amount of equity in their margin accounts. Should the equity drop below the minimum, a customer would receive a maintenance call for the amount needed to bring the equity back up to the required amount.

The minimum  house maintenance requirement for a long position is 35% or $3.00 per share whichever is greater. Securities at a price $3.00 or below have a 100% requirement. This means that is equity falls below the total maintenance requirements of the securities in the account a  house maintenance call will occur. The minimum  exchange maintenance requirement for a long position is 25%. This means that the equity must not fall below a minimum of 25% of the current market value of the securities in the account or an  exchange maintenance call will occur.

For example, the long market value of the securities in a margin account declines to $50,000 when the debit balance is $40,000. The equity is $10,000. Since the required equity is $17,500 ($50,000 x 35%), the customer would receive a house maintenance call for $7,500.

Maintenance Call Due
When a maintenance call is made, the call must be met  promptly. It may be met by depositing cash equal to the amount of the call, liquidating securities, or depositing fully paid securities.

To determine the value that the market price could decline to and still be at the minimum exchange maintenance level, multiply the debit balance by 4/3.
For example, a customer’s margin account is as follows.

To what level could the market value fall and still be at the minimum maintenance level?

New Market Value= Debit Balance x 4/3
                           = $9,000 x 4/3
New Market Value= $12,000

If the market value declined from $20,000 to $12,000, the equity would be $3,000 or 25% of the market value.

Excess Equity
An investor who establishes a long margin position is projecting that the securities in the account will increase in value. If the long market value of the securities increases, the equity in the account will increase proportionately. This can create a situation whereby the equity in the account is above the initial Reg. T requirement; this means the account has excess equity.

To determine the excess equity of a long margin position, subtract the Reg. T requirement (based on the current market value of the securities) from the equity in the account.

For example, a long margin account is as follows. (The Reg. T margin requirement is 50 %.) 

The excess equity would be calculated as follows.

Excess Equity         = Account Equity - 50% of current market value.
                              = $14,000  - ($24,000 x 50%)
                               = $14,000  - $12,000
Excess Equity         = $2,000

Special Memorandum Account (SMA)/Cash vailable for Withdrawal (CAFW)
If a margin account generates excess equity, an amount equal to the excess equity will be notated in a  Special Memorandum Account (SMA), SMA or Cash Available for Withdrawal (CAFW) refers to the amount that may be withdrawn from a margin account. SMA, however, is not cash, nor is it equity. It is simply a line of credit established with DriveWealth. Once established, decreases in market value will not have an effect on day SMA.  However, DriveWealth calculates Excess Equity in real-time, and will determine a real-time effective SMA by using the lesser of either day SMA or Excess Equity thus effecting Cash Available for Withdrawal and Cash Available for Trading (Buying Power) in real-time.  This will protect customers from going into house or exchange maintenance calls should the market drop in significant value during the trading day.

In addition to an increased market value, the following items will also increase SMA:
  • Cash dividends on stock owned in the account.
  • Voluntary cash deposits made by the customer.
  • Proceeds from the sale of securities in the account.
SMA is increased because these items are used to pay down the debit balance and thus increase excess equity.

If the customer does withdraw cash, the debit balance will increase by the amount withdrawn. This withdrawal would also cause the equity in the account to decrease proportionately.

If income is received from margined investments, such as dividends, the amount deposited in the account will be used to reduce the outstanding debit. SMA will also be credited with an amount equal to 100% of the dividend. An individual is always permitted to withdraw 100% of any cash dividends credited to the account.

Assume, in the previous example, the client withdraws the $2,000 SMA in their account. The debit balance will increase, reflecting the additional loan. 

Buying Power (BP)/Cash Available for Trading(CAFT)
A customer’s account is said to have buying power because SMA may also be used to purchase securities. With the Reg. T requirement at 50% buying power is equal to 2 x SMA. Using the previous example, the client could use their SMA to purchase $4,000 in securities ($2,000 x 2).  The debit balance would increase by $4,000 since DriveWealth is actually lending the client the entire amount of money for the purchase. The long market value would increase by $4,000, by the equity in the account would remain the same.


Investors may purchase securities in excess of their buying by depositing 50% of the purchase amount less their buying power.

For example, a customer has $6,000 of SMA, and wishes to purchase $20,000 worth of marginable securities. How much cash would need to be deposited?  

 The customer would need to deposit $4,000.

Restricted Account

While an increase in market value may result in excess equity, a decline may case a margin account to become restricted. An account becomes restricted when the equity falls below the 50% Reg. T requirement for the securities in the account, but is still greater than the 25% minimum maintenance requirement. 

For example, securities that were originally worth $20,000 decline in value to $16,000. This will have no effect on the debit balance of $10,000 but will cause a decline in the equity. 

Since the equity ($6,000) is below the initial Reg. T requirement for the securities in the account ($8,000), the account is restricted. Notice that the equity is still above the minimum maintenance requirement of $4,000 ($16,000 x 25%)。

Purchases in a Restricted Account
When an account is restricted, the customer may still make additional purchases in the account by meeting the initial Reg. T requirement for the new purchase. It is not necessary to deposit enough cash to bring the entire account up to the Reg. T requirement.

Sales in a Restricted Account
Upon the sale of securities in a restricted account, the entire sale proceeds are used to reduce the debit balance. However, an amount equal to only 50% of the sale is credited to SMA and may be withdrawn by the customer. If $5,000 of securities are sold in a restricted account, the entire proceeds would be used to reduce the debit balance. In addition, $2,500 would be credited to the SMA, which could then be withdrawn. If the $2,500 were withdrawn, the debit balance would increase by this amount.

If the withdrawal of SMA would cause the account equity to fall below the minimum maintenance requirements, the customer would be unable to withdraw the funds. In this case, the SMA is referred to as phantom SMA. It may be withdrawn only when the equity returns to an accepted level.

Same-Day Substitution
(Assumes no pattern day trading)
A purchase and sale of securities on the same day in a restricted account is called a same day substitution. If the amount of the purchase and sale is the same, there would be no additional deposit required. For example, if a customer sold $10, 000 worth of securities and purchased $10,000, there would be no margin deposit required.

If the purchase is greater than the sale, the customer would need to deposit the Reg T. requirement on the difference. If a customer sold $10,000 of securities and purchased $15,000, the customer would need to deposit $2,500 (the 50% Reg T. margin requirement on the net difference of $5,000). 

If the sale is for a greater amount than the purchase, SMA will be credited for an amount equal to 50% of the net sale proceeds. If a customer purchased $10,000 of securities and sold $15,000, SMA would increase by $2,500 ($5,000 x 50%).

House Maintenance Margin Requirements
DriveWealth’s  house maintenance margin requirement for a long position is 35% or $5.00 per share whichever is greater. Securities at a price $5.00 or below have a 100% requirement.  These maintenance requirements may be increased, at any time, without advance written notice.

Day-Trading Margin
Special rules apply to accounts of pattern day traders. A  pattern day trader is any customer who day-trades four or more times in a five-business-day period.  Day trading is defined as the purchasing and selling-or the selling and purchasing-of the same security on the same day in a margin account, except for (a) a long position held overnight and sold the next day prior to any new purchase of the same security, or (b) a short position held overnight and purchased the next day prior to any new sale of the same security. Day-Trading Margin is currently set to two times excess equity, subject to a $25,000 equity requirement.

If a customer meets the definition of a pattern day trader, but the number of day trades is 6% or less of total trades for the five-business-day period, the customers will not be considered a pattern day trader. However, if DriveWealth has a reasonable basis to believe that a customer opening an account or resuming day trading will engage in a pattern of day trading, the firm may impose the special day-trading margin requirements immediately.

Minimum Equity Requirement
Pattern day traders have a minimum equity requirement of $25,000 rather than the normal minimum requirement of $2,000. This required minimum must be deposited in the account before any day-trading activity begins.

Cross-Guarantees Prohibited
Pattern day traders are not permitted to meet day-trading margin requirements through the use of cross-guarantees. Each day-trading account must meet the requirements independently, based only on the resources in that account. This prohibits cross-guarantees not only between accounts of different customers, but also between different accounts of the same customer.
Day Trading Risk Disclosure Document  
Day trading strategies entail additional risks. Disclosures:
  • Day trading can be extremely risky.
  • Be cautious of claims of large profits from day trading.
  • Day trading requires knowledge of security markets.
  • Day trading requires knowledge of a firm’s operations.
  • Day trading will generate substantial commissions, even if the per-trade cost is low.
  • Day trading on margin or short selling may result in losses beyond your initial investment.

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