Section 4
Function 4: Transaction Processing and Compliance
Margin accounts and calculations
63 min read
· Lesson 3 of 4
About This Lesson
Margin is the most calculation-heavy chapter on the Series 7, and one of the most missed; the good news is that two equations carry nearly everything you will be asked. LMV − DR = EQ for long accounts, CR − SMV = EQ for short ones, and the skill the exam actually tests is knowing which term froze and which one moved.
What you'll cover
- the T-account framework, the three numbers (50% Reg T, 25% long maintenance, 30% short), and long and short account math with worked walkthroughs and a simulator
- excess equity, SMA creation and its one-way ratchet, restricted accounts, and the retention rule
- the $2,000 minimum and its waiver, marginable versus non-marginable securities, hypothecation, combined accounts, and the pattern day trader rules
This is the third chapter of the final module; one more after this and the course is behind you.
In this chapter
63 min · 16 concept checks
Section 1 of 4
~10 min · 3 concept checks
Margin Account Foundations
Margin Accounts: The T-Account Framework
A margin account lets the customer borrow from the firm to buy more securities, and every margin question you will see reduces to one bookkeeping picture: the T-account, tracking what the securities are worth against what is owed.
LONG MARGIN ACCOUNT
DR (Debit)
Market value of securities
(CMV)
(CMV)
CR (Credit)
Debit balance (loan)
Equity (CMV − Debit)
Equity (CMV − Debit)
SHORT MARGIN ACCOUNT
DR (Debit)
Short market value
(SMV)
Equity (CR − SMV)
(SMV)
Equity (CR − SMV)
CR (Credit)
Short sale proceeds
Reg T deposit
Reg T deposit
Margin Call Triggers: Three Numbers to Memorize
50%: the Reg T initial requirement, charged when a new margin position opens. Equity below this makes the account restricted (no new purchases without a deposit).
25%: the FINRA maintenance floor for long accounts. Fall below it and a maintenance call goes out, due promptly, not within the Reg T grace window.
30%: the FINRA maintenance floor for short accounts, set higher because a short's loss potential is theoretically unlimited.
Pattern Day Trader (PDT): $25,000 minimum equity at all times, with 4:1 intraday buying power against the 2:1 Reg T overnight standard.
Maintenance calls are met promptly; the firm may liquidate immediately rather than wait, unlike an initial Reg T call.
50%: the Reg T initial requirement, charged when a new margin position opens. Equity below this makes the account restricted (no new purchases without a deposit).
25%: the FINRA maintenance floor for long accounts. Fall below it and a maintenance call goes out, due promptly, not within the Reg T grace window.
30%: the FINRA maintenance floor for short accounts, set higher because a short's loss potential is theoretically unlimited.
Pattern Day Trader (PDT): $25,000 minimum equity at all times, with 4:1 intraday buying power against the 2:1 Reg T overnight standard.
Maintenance calls are met promptly; the firm may liquidate immediately rather than wait, unlike an initial Reg T call.
Concept Check
An investor purchases $30,000 of stock in a margin account. Under Regulation T, what is the minimum equity deposit required?
Regulation T, set by the Federal Reserve, requires a 50% initial margin deposit for new equity purchases in a margin account. On a $30,000 purchase, the required deposit is $15,000. The remaining $15,000 is borrowed from the broker-dealer (the debit balance / margin loan). FINRA's 25% maintenance requirement applies to ongoing monitoring, not the initial purchase. Cash accounts require full payment but are not margin accounts.
Concept Check
An investor short sells 100 shares of XYZ at $60 per share. Under Regulation T, what is the required deposit?
For a short sale, the Reg T requirement is 50% of the short sale proceeds. Short sale proceeds = 100 shares × $60 = $6,000. Reg T deposit = 50% × $6,000 = $3,000. The broker holds both the $6,000 short sale proceeds AND the $3,000 deposit, for total credit balance of $9,000. This is the starting CR (credit) side of the short account T-account. Short market value (SMV) goes on the DR side.
Concept Check
A customer opens a new margin account by purchasing $1,800 of marginable stock. What is the minimum required deposit?
The minimum equity rule requires the greater of $2,000 or the Reg T requirement — except when the entire purchase is less than $2,000. A customer cannot be required to deposit more than 100% of the purchase price. For a $1,800 purchase, the deposit is the full $1,800 (effectively a fully-paid trade). The 50% Reg T figure of $900 is the standard new-purchase rate but is overridden by the higher minimum equity rule. The $2,000 minimum cannot exceed 100% of the trade value, and there is no rule combining the two requirements additively.
Section 2 of 4
~22 min · 6 concept checks
Long & Short Account Mechanics
Regulation T, Maintenance Margin, and Margin Calls
Three separate margin requirements govern how much equity must be maintained:
Regulation T (initial)
Set by Federal Reserve
Long accounts
50% of purchase price
Short accounts
50% of short sale proceeds
FINRA maintenance
Set by FINRA (minimums)
Long accounts
25% of CMV
Short accounts
30% of SMV (or $5/share min)
Firm “house” requirements
Set by individual BD
Long accounts
Often 30%+ (stricter than FINRA)
Short accounts
Varies — often stricter than FINRA
Margin Call Calculations
Long account example:
Purchase $20,000 of stock on margin. Reg T deposit: $10,000. Debit balance: $10,000.
Stock falls to $14,000 (CMV). Equity = $14,000 − $10,000 = $4,000.
FINRA requirement: 25% × $14,000 = $3,500.
Equity ($4,000) > requirement ($3,500) → no margin call yet.
Stock falls further to $12,000. Equity = $12,000 − $10,000 = $2,000.
FINRA requirement: 25% × $12,000 = $3,000.
Equity ($2,000) < requirement ($3,000) → margin call of $1,000.
Maintenance call formula: CMV must be ≥ Debit ÷ (1 − maintenance %)
Minimum CMV = $10,000 ÷ 0.75 = $13,333 (at 25% maintenance)
Purchase $20,000 of stock on margin. Reg T deposit: $10,000. Debit balance: $10,000.
Stock falls to $14,000 (CMV). Equity = $14,000 − $10,000 = $4,000.
FINRA requirement: 25% × $14,000 = $3,500.
Equity ($4,000) > requirement ($3,500) → no margin call yet.
Stock falls further to $12,000. Equity = $12,000 − $10,000 = $2,000.
FINRA requirement: 25% × $12,000 = $3,000.
Equity ($2,000) < requirement ($3,000) → margin call of $1,000.
Maintenance call formula: CMV must be ≥ Debit ÷ (1 − maintenance %)
Minimum CMV = $10,000 ÷ 0.75 = $13,333 (at 25% maintenance)
Worked Examples: Margin Account T-Account Walkthroughs
Problem 1 — Long margin account (full scenario): An investor purchases $50,000 of stock on margin (Reg T = 50%). The stock subsequently falls to $32,000. Calculate: (a) initial equity and debit balance, (b) equity and account status at $32,000, (c) maintenance call amount (FINRA 25% minimum), (d) the minimum CMV before a call is triggered.
1
(a) At purchase — initial T-account:
Reg T deposit = 50% × $50,000 =
| DR | CR |
|---|---|
| CMV = $50,000 | Debit balance = $25,000 (Reg T loan) Equity = $25,000 (50% of CMV) |
$25,000. Debit balance = $50,000 − $25,000 = $25,000.2
(b) After price decline to $32,000:
Debit balance does not change (it's the loan amount).
Equity = CMV − Debit = $32,000 − $25,000 =
Equity % = $7,000 ÷ $32,000 =
Status: equity is below 50% (restricted) AND below 25% → maintenance call triggered
Debit balance does not change (it's the loan amount).
Equity = CMV − Debit = $32,000 − $25,000 =
$7,000Equity % = $7,000 ÷ $32,000 =
21.9%Status: equity is below 50% (restricted) AND below 25% → maintenance call triggered
3
(c) Maintenance call amount:
Required equity = 25% × CMV = 25% × $32,000 =
Current equity = $7,000
Call amount = $8,000 − $7,000 =
Required equity = 25% × CMV = 25% × $32,000 =
$8,000Current equity = $7,000
Call amount = $8,000 − $7,000 =
$1,0004
(d) Minimum CMV before call triggers:
Formula: Minimum CMV = Debit balance ÷ (1 − maintenance %)
The stock must fall below $33,333 for a maintenance call to trigger. At exactly $33,333: equity = $8,333 = exactly 25%. Any price below $33,333 triggers a call.
Formula: Minimum CMV = Debit balance ÷ (1 − maintenance %)
$25,000 ÷ 0.75 = $33,333The stock must fall below $33,333 for a maintenance call to trigger. At exactly $33,333: equity = $8,333 = exactly 25%. Any price below $33,333 triggers a call.
(a) Equity = $25,000, Debit = $25,000 | (b) Equity = $7,000 (21.9%) — maintenance call triggered | (c) Call amount = $1,000 | (d) Minimum CMV = $33,333.
Problem 2 — Short margin account: An investor short sells 100 shares of XYZ at $70. Reg T = 50%. The stock rises to $84. Calculate: (a) the initial T-account, (b) equity at $84, (c) whether a maintenance call is triggered (FINRA 30% short minimum).
1
(a) Initial T-account at $70:
Reg T deposit = 50% × $7,000 =
Total CR = $7,000 + $3,500 =
| DR (debit side) | CR (credit side) |
|---|---|
| SMV = $7,000 Equity = $3,500 | Short sale proceeds = $7,000 Reg T deposit = $3,500 |
$3,500Total CR = $7,000 + $3,500 =
$10,5002
(b) After stock rises to $84:
New SMV = 100 × $84 =
CR stays at $10,500 (does not change)
Equity = CR − SMV = $10,500 − $8,400 =
Equity % = $2,100 ÷ $8,400 =
New SMV = 100 × $84 =
$8,400 (goes on DR side)CR stays at $10,500 (does not change)
Equity = CR − SMV = $10,500 − $8,400 =
$2,100Equity % = $2,100 ÷ $8,400 =
25.0%3
(c) Maintenance call check:
Required equity = 30% × SMV = 30% × $8,400 =
Current equity = $2,100 < $2,520 → maintenance call triggered
Call amount = $2,520 − $2,100 =
Required equity = 30% × SMV = 30% × $8,400 =
$2,520Current equity = $2,100 < $2,520 → maintenance call triggered
Call amount = $2,520 − $2,100 =
$4204
Key short account rule: When stock rises, SMV increases, equity decreases. The short seller is hurt by rising prices. Minimum CMV for short account before call = CR ÷ (1 + maintenance %) =
$10,500 ÷ 1.30 = $8,077 → call triggers above $80.77/share.(a) Initial equity = $3,500, CR = $10,500 | (b) Equity at $84 = $2,100 (25%) | (c) Maintenance call triggered — call amount = $420. Short account maintenance threshold: CMV must not exceed CR ÷ 1.30.
Problem 3 — SMA and buying power: An investor's long margin account has CMV = $80,000 and debit = $28,000. Calculate: (a) current equity %, (b) excess equity, (c) SMA balance, (d) additional securities that can be purchased, (e) maximum cash withdrawable.
1
Equity = $80,000 − $28,000 =
Equity % = $52,000 ÷ $80,000 =
$52,000Equity % = $52,000 ÷ $80,000 =
65% (well above 50%)2
Excess equity = Actual equity − Required equity
Required equity (Reg T 50%) = 50% × $80,000 = $40,000
Excess equity = $52,000 − $40,000 =
Required equity (Reg T 50%) = 50% × $80,000 = $40,000
Excess equity = $52,000 − $40,000 =
$12,0003
SMA = Excess equity =
(SMA is credited when excess equity accumulates; it persists even if CMV falls below 50% later, as long as maintenance is met.)
$12,000(SMA is credited when excess equity accumulates; it persists even if CMV falls below 50% later, as long as maintenance is met.)
4
Buying power = SMA × 2 (under Reg T 50%)
The $12,000 SMA covers the 50% Reg T requirement on a $24,000 purchase.
$12,000 × 2 = $24,000 in new securities can be purchasedThe $12,000 SMA covers the 50% Reg T requirement on a $24,000 purchase.
5
Maximum cash withdrawal = SMA balance =
(Withdrawing $12,000 would bring equity to exactly 50% of CMV.)
$12,000(Withdrawing $12,000 would bring equity to exactly 50% of CMV.)
(a) Equity = 65% | (b) Excess equity = $12,000 | (c) SMA = $12,000 | (d) Can purchase $24,000 in new securities | (e) Can withdraw up to $12,000 cash.
Long Margin Account Mechanics
One equation runs the long margin account, and the exam serves it to you in half a dozen flavors:
LMV − DR = EQ | Long Market Value − Debit Balance = Equity
When the market moves, LMV changes. The debit balance is fixed (it’s the loan) until the customer pays interest, deposits cash, or makes new trades. Recompute equity by subtracting the unchanged DR from the new LMV.
When the market moves, LMV changes. The debit balance is fixed (it’s the loan) until the customer pays interest, deposits cash, or makes new trades. Recompute equity by subtracting the unchanged DR from the new LMV.
Worked Example: A New Long Margin Purchase
Step 1 — Initial purchase. Customer buys $50,000 of marginable stock. Reg T requires 50%.
• LMV = $50,000
• DR = $25,000 (firm lends 50%)
• EQ = $50,000 − $25,000 = $25,000
Step 2 — Stock rises to $60,000.
• LMV = $60,000
• DR = $25,000 (unchanged)
• EQ = $60,000 − $25,000 = $35,000
• Reg T level = 50% of $60,000 = $30,000. Equity exceeds Reg T by $5,000 — this is excess equity and creates SMA.
Step 3 — Stock falls to $36,000.
• LMV = $36,000
• EQ = $36,000 − $25,000 = $11,000
• Reg T level = 50% of $36,000 = $18,000. Equity is below Reg T — the account is restricted, but no maintenance call yet.
• Maintenance minimum = 25% of $36,000 = $9,000. Equity ($11,000) still exceeds maintenance.
• LMV = $50,000
• DR = $25,000 (firm lends 50%)
• EQ = $50,000 − $25,000 = $25,000
Step 2 — Stock rises to $60,000.
• LMV = $60,000
• DR = $25,000 (unchanged)
• EQ = $60,000 − $25,000 = $35,000
• Reg T level = 50% of $60,000 = $30,000. Equity exceeds Reg T by $5,000 — this is excess equity and creates SMA.
Step 3 — Stock falls to $36,000.
• LMV = $36,000
• EQ = $36,000 − $25,000 = $11,000
• Reg T level = 50% of $36,000 = $18,000. Equity is below Reg T — the account is restricted, but no maintenance call yet.
• Maintenance minimum = 25% of $36,000 = $9,000. Equity ($11,000) still exceeds maintenance.
Maintenance Margin Call: Long Accounts
Long maintenance minimum = 25% of LMV. Equity below that line draws a maintenance call: deposit funds or securities until equity is back at the minimum.
Maintenance call worked example: Customer’s long account has DR $25,000 and current LMV $30,000.
• EQ = $30,000 − $25,000 = $5,000
• Maintenance minimum = 25% of $30,000 = $7,500
• Maintenance call = $7,500 − $5,000 = $2,500
Customer must deposit $2,500 in cash or fully-paid marginable securities to satisfy the call.
• EQ = $30,000 − $25,000 = $5,000
• Maintenance minimum = 25% of $30,000 = $7,500
• Maintenance call = $7,500 − $5,000 = $2,500
Customer must deposit $2,500 in cash or fully-paid marginable securities to satisfy the call.
House call vs. Reg T call: A
house call is issued when equity falls below the firm’s house margin
requirement (typically 30-35% on long accounts — stricter than the FINRA 25%
minimum). A Reg T call arises only on a new purchase that creates a
Reg T deficit. The two calls have different deadlines and use different reference
points; firms can also liquidate positions to cover unmet calls.
Short Margin Account Mechanics: The Mirror Image
Short accounts run the same logic with the signs flipped, and the most-tested mistake is forgetting which number froze: the credit balance is the constant, not the short market value.
CR − SMV = EQ | Credit Balance − Short Market Value = Equity
CR is established at sale and is fixed thereafter. CR = original short sale proceeds + Reg T deposit. When the market moves, only SMV changes. Recompute equity by subtracting the new SMV from the unchanged CR.
CR is established at sale and is fixed thereafter. CR = original short sale proceeds + Reg T deposit. When the market moves, only SMV changes. Recompute equity by subtracting the new SMV from the unchanged CR.
Worked Example: A New Short Sale
Step 1 — Open short sale. Customer sells short $60,000 of stock. Reg T requires 50% deposit ($30,000).
• SMV = $60,000
• CR = $60,000 sale proceeds + $30,000 Reg T deposit = $90,000 (this stays fixed)
• EQ = CR $90,000 − SMV $60,000 = $30,000
Step 2 — Stock falls to $55,000.
• SMV = $55,000
• CR = $90,000 (UNCHANGED — this is the most-tested point)
• EQ = $90,000 − $55,000 = $35,000
• The customer’s short is up $5,000 — equity rose by exactly the same amount.
• SMV = $60,000
• CR = $60,000 sale proceeds + $30,000 Reg T deposit = $90,000 (this stays fixed)
• EQ = CR $90,000 − SMV $60,000 = $30,000
Step 2 — Stock falls to $55,000.
• SMV = $55,000
• CR = $90,000 (UNCHANGED — this is the most-tested point)
• EQ = $90,000 − $55,000 = $35,000
• The customer’s short is up $5,000 — equity rose by exactly the same amount.
Short Maintenance Minimum = 30% of SMV
The short side carries a higher floor than the long side's 25%, because the loss on a short has no ceiling. Equity must hold at least 30% of current short market value.
Short maintenance worked example: Customer sold short 500 shares of XYZ at $80 ($40,000 SMV at sale). The stock falls to $60 per share before regular-way settlement — SMV is now 500 × $60 = $30,000.
• Minimum maintenance = 30% of SMV = 30% × $30,000 = $9,000
• Minimum maintenance = 30% of SMV = 30% × $30,000 = $9,000
Special minimum equity rule for low-priced stocks:
For shorts of stock priced below $5 per share, FINRA requires the greater of
$2.50 per share or 100% of the market value. This protects against the asymmetric
loss potential when shorting penny stocks.
Tool Card: Margin Simulator
Work through long and short margin account scenarios interactively — enter purchase prices, see the Reg T deposit, watch equity change as the stock moves, and trigger maintenance calls. Covers the DR/CR ledger structure, the maintenance formula, and what happens when a margin call is not met.
Open Margin Simulator
Work through long and short margin account scenarios interactively — enter purchase prices, see the Reg T deposit, watch equity change as the stock moves, and trigger maintenance calls. Covers the DR/CR ledger structure, the maintenance formula, and what happens when a margin call is not met.
Open Margin Simulator
📈
You Are The Trader
Four margin account scenarios — work through each T-account and decide what action is required.
Progress:
Scenario 1 of 4 — Long Margin Account
A customer opens a long margin account and purchases $60,000 worth of stock, depositing the Reg T requirement. Over the following weeks the stock falls to $35,000.
CMV
$35,000
Debit balance
$30,000
Equity
$5,000
Equity %
14.3%
What is the maintenance call amount?
✓ Correct. Required equity = 25% × $35,000 = $8,750. Actual equity = $5,000. Maintenance call = $8,750 − $5,000 = $3,750. Verify with the minimum CMV formula: debit ÷ 0.75 = $30,000 ÷ 0.75 = $40,000. Since $35,000 < $40,000, a maintenance call is triggered. Responding to the call restores the account to 25% equity — not back to Reg T (50%).
✗ Not quite. Required equity at FINRA maintenance minimum = 25% × CMV = 25% × $35,000 = $8,750. Actual equity = CMV − Debit = $35,000 − $30,000 = $5,000. Call amount = $8,750 − $5,000 = $3,750. Key distinction: the maintenance call brings equity back to 25%, not back to Reg T (50%).
Scenario 2 of 4 — SMA and Buying Power
A customer's long margin account has a current market value of $90,000 and a debit balance of $35,000.
CMV
$90,000
Debit balance
$35,000
Equity
$55,000
Reg T req (50%)
$45,000
What is the customer's SMA balance and buying power?
✓ Correct. SMA = Excess equity above the 50% Reg T requirement = $55,000 − $45,000 = $10,000. Buying power = SMA × 2 = $20,000. The customer can also withdraw the full SMA amount ($10,000) as cash. SMA persists even if the account later becomes restricted — it does not disappear when equity falls below 50%.
✗ SMA = equity above the Reg T (50%) requirement, not total equity. Required equity = 50% × $90,000 = $45,000. Actual equity = $55,000. SMA = $55,000 − $45,000 = $10,000. Buying power = SMA × 2 = $20,000.
Scenario 3 of 4 — Short Margin Account
A customer shorts 200 shares at $60. The required Reg T deposit is made. The stock subsequently rises to $72.
Short Mkt Value (SMV)
$14,400
Credit balance (CR)
$18,000
Equity
$3,600
Equity %
25.0%
Is there a maintenance call, and if so how much?
✓ Correct. Short accounts have a 30% maintenance minimum (not 25% like long accounts). Required equity = 30% × $14,400 = $4,320. Actual equity = CR − SMV = $18,000 − $14,400 = $3,600. Call = $4,320 − $3,600 = $720. Rising stock price is bad for the short seller — SMV increases, equity decreases. The 30% vs. 25% distinction is a critical exam trap.
✗ Key distinction: short accounts require 30% maintenance equity, not 25%. Required equity = 30% × SMV = 30% × $14,400 = $4,320. Actual equity = CR − SMV = $18,000 − $14,400 = $3,600. Maintenance call = $4,320 − $3,600 = $720.
Scenario 4 of 4 — Pattern Day Trader
A customer at a retail broker has been making frequent in-and-out trades. Over the past 5 business days, 5 of their 6 total trades were day trades. Their account equity is $18,000.
What must happen before this customer can continue day trading?
✓ Correct. FINRA Rule 4210 defines a Pattern Day Trader (PDT) as any customer who executes 4 or more day trades in 5 rolling business days, where day trades represent more than 6% of total trading activity. Once designated as a PDT, the account must maintain minimum equity of $25,000. With $18,000, the customer cannot day trade until the account is brought to $25,000. There is no 30-day waiting period — it is an equity requirement, not a time penalty. PDT accounts also receive 4:1 intraday buying power (vs. standard 2:1 Reg T).
✗ A Pattern Day Trader requires a minimum $25,000 equity — not $10,000. The customer here has $18,000, which is below the threshold. Day trading must be suspended until the account equity reaches $25,000. There is no time-based waiting period — only the equity requirement applies. This $25,000 floor is set by FINRA Rule 4210 and cannot be met with cross-guarantees from other accounts.
Concept Check
A long margin account has a CMV of $18,000 and a debit balance of $12,000. The FINRA maintenance requirement is 25%. Is a maintenance call required, and if so, for how much?
Equity equals CMV minus debit balance: $18,000 − $12,000 = $6,000. The FINRA maintenance requirement is 25% of CMV, or $4,500. Because the account has $6,000 of equity, it exceeds the maintenance requirement by $1,500, so no maintenance call is required. The minimum CMV can also be checked by dividing the debit balance by 75%: $12,000 ÷ 0.75 = $16,000. Since the account’s CMV is $18,000, it is above the maintenance threshold.
Concept Check
A long margin account has a CMV of $40,000 and a debit balance of $28,000. The FINRA maintenance requirement is 25%. Is a maintenance call required?
Equity = CMV - Debit = $40,000 - $28,000 = $12,000. Maintenance requirement = 25% x $40,000 = $10,000. Equity ($12,000) > requirement ($10,000) — no maintenance call. The account IS restricted (equity below 50% Reg T: 50% x $40,000 = $20,000), so no new purchases can be made without depositing additional funds. But restricted does not mean a maintenance call is required — that only triggers when equity falls below 25% of CMV.
Concept Check
A long margin account has CMV of $18,000 and a debit balance of $14,000. The FINRA maintenance minimum is 25%. A maintenance call is triggered. How much must the customer deposit to bring the account back into compliance?
Equity = $18,000 - $14,000 = $4,000. Maintenance requirement = 25% x $18,000 = $4,500. Deficiency = $4,500 - $4,000 = $500 — this is the call amount. The customer must deposit $500 to restore equity to the $4,500 maintenance minimum. A maintenance call does not require restoration to the Reg T 50% level — only to the maintenance minimum. However, the firm can always require a higher amount.
Concept Check
A customer’s long margin account holds securities with current LMV of $30,000 and a debit balance of $25,000. What is the amount of the maintenance call, if any?
Equity = LMV − DR = $30,000 − $25,000 = $5,000. Long maintenance minimum = 25% of LMV = 25% × $30,000 = $7,500. Equity is below the minimum by $7,500 − $5,000 = $2,500. The customer must deposit $2,500 in cash or fully-paid marginable securities to bring equity back to the maintenance minimum. The $5,000 figure is the current equity (not the shortfall), and $7,500 is the minimum maintenance level itself, not the amount of the call.
Concept Check
A customer short sells 100 shares of ABC at $80 per share. The stock subsequently rises to $95. What is the equity in the short account, and has a maintenance call been triggered (FINRA minimum 30%)?
Short sale proceeds are $8,000, and the Reg T deposit is $4,000, so total credit is $12,000. When the stock rises to $95, the short market value is $9,500. Equity in a short account equals credit balance minus short market value: $12,000 − $9,500 = $2,500. The maintenance requirement is 30% of $9,500, or $2,850. Because equity is $350 below the requirement, a $350 maintenance call is triggered.
Concept Check
A customer sells short 500 shares of XYZ at $80 per share in a margin account. Before regular-way settlement, the stock falls to $60 per share. The minimum maintenance margin requirement at this point is
Short maintenance is 30% of current short market value. After the price drop, SMV = 500 × $60 = $30,000. Required maintenance = 30% × $30,000 = $9,000. The original sale price of $80 is not used for maintenance calculations — only the current market value matters. The $7,500 figure (25% of $30,000) is the long maintenance rate; long and short positions carry different requirements. The $10,000 figure (one-third of SMV) and $12,000 (40%) do not match any standard maintenance threshold.
Section 3 of 4
~10 min · 3 concept checks
SMA, Restricted & Buying Power
Excess Equity, SMA, and Restricted Accounts
SMA (Special Memorandum Account) is the line of credit that builds when equity runs above the Reg T requirement, and its defining habit is stickiness: once created, it survives market drops as long as maintenance holds.
- Excess equity: Account equity above the Reg T 50% initial requirement
- SMA credit: Equal to excess equity. Can be used to buy additional securities (using Reg T leverage: $1 of SMA = $2 of buying power) or withdrawn as cash
- Restricted account: An account where equity has fallen below the 50% Reg T initial requirement but still meets FINRA maintenance (25%). No new purchases can be made in a restricted account unless the customer deposits additional funds. The customer can still sell securities.
The retention rule: In a restricted
account, if the customer sells a security, 50% of the proceeds must be retained
in the account to reduce the debit balance. The other 50% may be withdrawn (SMA credit).
Special Memorandum Account (SMA): The Borrowing Account
SMA deserves the deep pass because it is the chapter's strangest object: not dollars in the account, but a running record of what the customer could borrow without depositing another cent.
How SMA Is Created
Long account
$1 stock rise = $1 of SMA
When LMV rises above the Reg T level, the excess (LMV × 50%) is recorded in SMA. Because of the 50% Reg T rate, SMA can fund a new purchase of 2x its dollar amount.
Short account
$1 stock decline = $1.50 of SMA
For every $1 decrease in SMV, $1.50 of SMA is created. The 1.5x ratio reflects the combined effect of the gain on the short and the freed Reg T margin.
Short SMA Worked Example
In a new margin account, customer sells short $60,000 ABC and deposits $30,000 to meet Reg T. The stock falls to $55,000.
• SMV decline = $60,000 − $55,000 = $5,000
• SMA created = $5,000 × 1.5 = $7,500
This $7,500 of SMA can be withdrawn as cash or used to support new purchases worth up to $15,000 (2x leverage).
• SMV decline = $60,000 − $55,000 = $5,000
• SMA created = $5,000 × 1.5 = $7,500
This $7,500 of SMA can be withdrawn as cash or used to support new purchases worth up to $15,000 (2x leverage).
What Affects SMA
Increases SMA
Cash dividend received (long); cash deposit; long stock appreciation above Reg T; short stock decline; sale of stock at a profit.
No effect on SMA
Stock dividend or stock split (the equity is the same, just split across more shares); long stock decline; short stock rise.
SMA is a one-way ratchet.
Once created, SMA does not decrease automatically when the stock price
falls back. SMA decreases only when the customer uses it (withdrawal or new
purchase). This asymmetry is why SMA can build up substantially over time even
when the account itself is volatile.
Concept Check
An investor has $10,000 of excess equity in a margin account (above the Reg T 50% requirement). This $10,000 is credited to the SMA. If the investor wants to use the SMA to purchase additional securities, how much in new securities can she buy?
SMA acts as a line of credit. Under Reg T (50% initial requirement), $1 of SMA provides $2 of buying power — the investor can use the $10,000 SMA to purchase $20,000 of new securities ($10,000 SMA covers the 50% Reg T requirement on a $20,000 purchase). SMA can also be withdrawn as cash. The 4x intraday buying power applies to Pattern Day Traders only.
Concept Check
A margin account is classified as "restricted." The customer wants to sell a security for $10,000. Under the retention requirement, how much of the proceeds must remain in the account?
In a restricted margin account (equity below 50% Reg T initial requirement but above 25% FINRA maintenance), the retention rule requires 50% of any sale proceeds to be retained in the account to reduce the debit balance. The other 50% may be withdrawn as cash or credited to the SMA. On a $10,000 sale, $5,000 must stay and $5,000 may be withdrawn. The 50% retention parallels the original Reg T 50% deposit requirement.
Concept Check
In a new margin account, a customer sells short $60,000 of ABC stock and deposits $30,000 to meet the Regulation T requirement. The stock then falls to $55,000 in current market value. The special memorandum account (SMA) balance is now
In a short account, every $1 decline in market value creates $1.50 of SMA. The $5,000 SMV decline ($60,000 to $55,000) creates SMA of $5,000 × 1.5 = $7,500. The 1.5x ratio reflects the combined effect of the gain on the short position and the freed Reg T margin from the lower required equity. A 1-to-1 ratio of $5,000 would understate the SMA created. The $2,500 figure ignores the leverage entirely, and $10,000 doubles the SMV change without applying the correct ratio.
Section 4 of 4
~12 min · 4 concept checks
Combined Accounts, PDT & Hypothecation
Minimum Equity, Marginable Securities, and Hypothecation
The $2,000 Minimum Equity Rule
The first trade in a new margin account deposits the greater of $2,000 or the Reg T 50%, with one exception the exam adores:
The $2,000 minimum is waived if the entire purchase costs less than $2,000.
Customer cannot be required to deposit more than 100% of the transaction.
Example A: Buying $4,000 of marginable stock → deposit = max($2,000, $2,000 Reg T) = $2,000.
Example B: Buying $1,500 of marginable stock → deposit = $1,500 (the full purchase price). The $2,000 minimum does not require depositing more than the trade is worth.
Example C: Buying $10,000 of marginable stock → deposit = max($2,000, $5,000 Reg T) = $5,000 (Reg T binds).
Customer cannot be required to deposit more than 100% of the transaction.
Example A: Buying $4,000 of marginable stock → deposit = max($2,000, $2,000 Reg T) = $2,000.
Example B: Buying $1,500 of marginable stock → deposit = $1,500 (the full purchase price). The $2,000 minimum does not require depositing more than the trade is worth.
Example C: Buying $10,000 of marginable stock → deposit = max($2,000, $5,000 Reg T) = $5,000 (Reg T binds).
Marginable vs. Non-Marginable Securities
Marginable (Subject to Reg T 50%)
- Listed equity securities (NYSE, Nasdaq, regional exchanges)
- OTC stocks on the Federal Reserve’s OTC margin list
- Listed corporate bonds
- Warrants on listed securities
Reg T Exempt (Special Rules Apply)
- U.S. Treasury securities (FINRA sets house margin)
- Government agency and GSE securities
- Municipal securities
- Reg T does not impose 50% on these — firms set lower haircuts
Non-Marginable (Must Be Paid in Full)
- Mutual fund shares (cannot be margined for purchase, but can be margined after 30 days of ownership)
- New issues during the cooling-off period and for the first 30 days after offering
- Options (premiums must be paid in full; only the underlying stock or short sale generates margin)
- Securities listed on the Pink Sheets (other than those on the OTC margin list)
The Hypothecation and Rehypothecation Agreements
To open a margin account, the customer signs a hypothecation agreement pledging the purchased securities as collateral for the loan. The firm in turn re-pledges those securities to its bank as collateral for the firm’s broker call loan — a process called rehypothecation. The firm may rehypothecate up to 140% of the customer’s debit balance.
Two more documents at account opening:
Customers also typically sign a credit agreement (terms of the loan) and a
loan consent agreement (optional, allows the firm to lend the securities to
short-sellers in exchange for the borrow rate). The hypothecation and credit
agreements are required; loan consent is optional.
Combined Margin Accounts and Pattern Day Trader Rules
Combined (Mixed) Margin Account
Long and short positions can live in one account, and the analysis simply runs each side on its own equation and adds: combined equity = long equity + short equity.
Worked example:
Long side: LMV $40,000, DR $20,000 → long EQ = $20,000
Short side: CR $45,000, SMV $30,000 → short EQ = $15,000
Combined equity = $20,000 + $15,000 = $35,000
Combined Reg T level = 50% of LMV ($20,000) + 50% of SMV ($15,000) = $35,000. Equity equals Reg T, so the account is at exactly the line — no excess, no restriction.
Long side: LMV $40,000, DR $20,000 → long EQ = $20,000
Short side: CR $45,000, SMV $30,000 → short EQ = $15,000
Combined equity = $20,000 + $15,000 = $35,000
Combined Reg T level = 50% of LMV ($20,000) + 50% of SMV ($15,000) = $35,000. Equity equals Reg T, so the account is at exactly the line — no excess, no restriction.
Pattern Day Trader Rule
Trade in and out four or more times within five business days, with day trades above 6% of total activity, and the account is a pattern day trader's, which rewires the margin rules:
$25,000
Minimum equity
Must be maintained on any day day-trading occurs. Higher than the standard $2,000 margin minimum.
4x
Day trading buying power
Up to 4x the maintenance excess for intraday positions — vs. the 2x leverage available to non-PDTs through Reg T.
5 BD
Cash deposit deadline
If a day-trading buying power call is issued, the customer has 5 business days to deposit cash. Until met, the account is restricted to cash-available trading.
Day trade defined: Buying and
selling (or shorting and covering) the same security on the same trading day.
Holding overnight is not a day trade. Position trading and swing trading do not
trigger PDT status.
Concept Check
What minimum equity balance must a Pattern Day Trader (PDT) maintain, and what is the intraday buying power available to a PDT?
FINRA's Pattern Day Trader rule requires a minimum equity of $25,000 in the margin account at all times. If equity falls below $25,000, the PDT cannot execute day trades until the balance is restored. In exchange for meeting this requirement, PDTs receive 4:1 intraday buying power (vs. the standard 2:1 overnight Reg T requirement). A trader becomes a PDT when they execute 4 or more day trades within 5 rolling business days, where those trades represent more than 6% of total trades in the period.
Concept Check
A customer is classified as a pattern day trader. To continue day trading, the customer must maintain at all times a minimum equity of
Pattern day traders — customers executing four or more day trades within five business days when day trading exceeds 6% of total trading — must maintain at least $25,000 in equity at all times. Below that level, the account is restricted from day trading until the equity is restored. The $2,000 figure is the standard margin account minimum equity, which is overridden by the higher PDT requirement. There is no $5,000 PDT threshold and no $50,000 requirement — the rule sets $25,000 as the bright line.
Concept Check
A margin customer has a debit balance of $40,000. Under Federal Reserve rules, what is the maximum value of the customer’s securities the firm may rehypothecate to its bank as collateral for a broker call loan?
The rehypothecation rule caps the firm’s pledge of customer securities at 140% of the debit balance. For a $40,000 debit, the firm can rehypothecate up to $40,000 × 1.40 = $56,000 of customer securities to its bank. The 50% and 100% figures are below the actual rule. The 200% figure overstates the cap. The 140% threshold balances the firm’s funding need against customer protection — customers retain ownership but the firm uses the pledged shares as bank loan collateral.
Concept Check
A customer’s combined margin account holds long stocks with LMV of $40,000 and a debit balance of $20,000, plus short positions with SMV of $30,000 and a credit balance of $45,000. What is the customer’s combined equity?
In a combined margin account, long and short equity are computed separately and then summed. Long equity = LMV − DR = $40,000 − $20,000 = $20,000. Short equity = CR − SMV = $45,000 − $30,000 = $15,000. Combined equity = $20,000 + $15,000 = $35,000. The $30,000 figure mistakenly subtracts SMV from LMV directly. $50,000 conflates long and short balances incorrectly. $70,000 is the simple sum of all four numbers without applying the equity formulas — the customer does not own all $70,000 because the debit and SMV represent obligations.
Summary
Exam Essentials — high-yield review
Chapter Summary
Ch 29 Exam Essentials — Margin Accounts and Calculations
- Three margin thresholds: 50% = Reg T initial (Federal Reserve); below 50% = restricted (no new purchases). 25% = FINRA long maintenance minimum; below = maintenance call. 30% = FINRA short maintenance minimum.
- Long account equity: CMV − Debit balance. Minimum CMV before maintenance call = Debit ÷ (1 − maintenance %). At 25%: Minimum CMV = Debit ÷ 0.75.
- Short account equity: Credit balance (short proceeds + Reg T deposit) − Short market value (SMV). Maintenance call when equity < 30% of SMV. Rising stock price HURTS the short seller (SMV increases, equity decreases).
- SMA and buying power: SMA = excess equity above 50% Reg T requirement. $1 SMA = $2 buying power (under 2:1 Reg T leverage). SMA persists even if account becomes restricted — does not disappear until a maintenance call.
- Pattern Day Trader: $25,000 minimum equity at all times. 4:1 intraday buying power. Defined as 4+ day trades in 5 rolling business days where those trades are >6% of total account activity.
Margin Account Exam Traps — Consolidated
The Series 7 returns to a small set of distinctions in the margin chapter. If a question feels familiar, it is probably testing one of these:
1. $2,000 minimum is waived for sub-$2,000 trades. The minimum equity for a new margin account is the greater of $2,000 or Reg T — BUT a customer cannot be required to deposit more than 100% of the trade. A $1,500 purchase requires only $1,500 deposit.
2. CR is fixed; SMV moves. In a short account, the credit balance is established at the sale and stays constant. Only SMV changes with the market. EQ = CR − SMV. Treat CR as the anchor.
3. Long maintenance = 25%, short maintenance = 30%. Different percentages for different sides because short positions have unlimited upside risk.
4. Long $1 up = $1 SMA; short $1 down = $1.50 SMA. The asymmetry matters — short market declines create more SMA per dollar than long market gains.
5. SMA is a one-way ratchet. Once created, SMA does not automatically decrease when the market falls back. It decreases only when the customer withdraws or buys on it.
6. Stock dividends and splits don’t affect SMA. Equity is unchanged — just spread over more shares. Cash dividends do increase SMA.
7. Reg T governs new purchases; FINRA governs maintenance. Reg T is 50% on new purchases, with no role in ongoing maintenance. FINRA’s 25% (long) / 30% (short) thresholds govern maintenance calls.
8. Pattern day trader = 4 day trades in 5 business days. Plus the day trading must exceed 6% of total trading activity. PDT requires $25,000 minimum equity at all times.
9. Treasuries and munis are Reg T exempt. Margin can be extended on these but not at the 50% Reg T rate — firms set their own house margins, typically much lower (often single digits for Treasuries).
10. Mutual funds, options, new issues, and Pink Sheets are non-marginable. Mutual funds become marginable after 30 days of ownership. Options premiums must be paid in full at purchase.
11. House call > Reg T call. Firms can set house margin requirements above the FINRA minimums. House calls can be triggered before any Reg T or FINRA threshold is breached.
12. Hypothecation is mandatory; loan consent is optional. The hypothecation agreement (pledging securities as collateral) and the credit agreement (loan terms) are required to open a margin account. Loan consent (letting the firm lend the securities to short-sellers) is optional.
The Series 7 returns to a small set of distinctions in the margin chapter. If a question feels familiar, it is probably testing one of these:
1. $2,000 minimum is waived for sub-$2,000 trades. The minimum equity for a new margin account is the greater of $2,000 or Reg T — BUT a customer cannot be required to deposit more than 100% of the trade. A $1,500 purchase requires only $1,500 deposit.
2. CR is fixed; SMV moves. In a short account, the credit balance is established at the sale and stays constant. Only SMV changes with the market. EQ = CR − SMV. Treat CR as the anchor.
3. Long maintenance = 25%, short maintenance = 30%. Different percentages for different sides because short positions have unlimited upside risk.
4. Long $1 up = $1 SMA; short $1 down = $1.50 SMA. The asymmetry matters — short market declines create more SMA per dollar than long market gains.
5. SMA is a one-way ratchet. Once created, SMA does not automatically decrease when the market falls back. It decreases only when the customer withdraws or buys on it.
6. Stock dividends and splits don’t affect SMA. Equity is unchanged — just spread over more shares. Cash dividends do increase SMA.
7. Reg T governs new purchases; FINRA governs maintenance. Reg T is 50% on new purchases, with no role in ongoing maintenance. FINRA’s 25% (long) / 30% (short) thresholds govern maintenance calls.
8. Pattern day trader = 4 day trades in 5 business days. Plus the day trading must exceed 6% of total trading activity. PDT requires $25,000 minimum equity at all times.
9. Treasuries and munis are Reg T exempt. Margin can be extended on these but not at the 50% Reg T rate — firms set their own house margins, typically much lower (often single digits for Treasuries).
10. Mutual funds, options, new issues, and Pink Sheets are non-marginable. Mutual funds become marginable after 30 days of ownership. Options premiums must be paid in full at purchase.
11. House call > Reg T call. Firms can set house margin requirements above the FINRA minimums. House calls can be triggered before any Reg T or FINRA threshold is breached.
12. Hypothecation is mandatory; loan consent is optional. The hypothecation agreement (pledging securities as collateral) and the credit agreement (loan terms) are required to open a margin account. Loan consent (letting the firm lend the securities to short-sellers) is optional.
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