Jim, I've never used margin either. Following are the SEC rules on margin and proposed changes:
<Under Regulation T, a broker-dealer must ensure that a customer deposit, or have on deposit in a margin account, 50% of the cost of a transaction; the broker-dealer may lend the customer the other 50% using the securities as collateral. This calculation is performed at the end of the day and includes transactions that occur that day.If the customer's funds are insufficient to meet the 50% requirement, the broker-dealer issues a Regulation T margin call and the customer must deposit the additional capital within five business days.
In addition to Regulation T initial margin requirements, broker-dealers must comply with SRO requirements commonly referred to as "maintenance margin." Under these rules, broker-dealers must ensure that customers maintain a specified minimum amount of equity in their accounts at all times. Currently, a customer is required to maintain capital in his/her account equal to 25% of all long positions. Similar to Regulation T, this calculation is performed by brokerage firms at the end of the day and, in the event of a deficiency, the firm issues a margin call which must be met as promptly as possible and in any event within 15 business days, or seven business days for day trading accounts.Thus, every day-trading firm must make two separate margin calculations for each customer every day, one for Regulation T and the other for SRO maintenance margin.
Regulation T and SRO margin requirements are designed to work in tandem. For example, because Regulation T is calculated on the position in the account at the end of the day, which for most day traders' accounts would be flat, a Regulation T margin call would not be issued unless the account activity resulted in a loss. During the course of the day, however, the broker-dealer has extended credit to the customer for intra-day positions and was therefore at risk. Accordingly, the SROs amended the maintenance rules to capture these day-trading transactions. In effect, the rules require an individual to demonstrate that he/she could meet a margin call if he/she did not unwind the largest open positions by the end of each day. In addition to these amendments, the SROs have disseminated interpretive releases specifically addressing day trading margin issues.
1. Proposed Margin Rules for Day Trading
The NYSE and NASD have proposed rules that would require day-trading firms to restrict the use of margin by active day traders. Both the NYSE's and NASD's rule proposals are similar. On January 14, 2000, the SEC issued the NYSE's rule proposal for public comment. On February 11, 2000, the SEC issued the NASD rule proposal for public comment.
The proposed amendments would adopt a new term, "pattern day trader," which would include any customer that executes four or more day trades within five business days, provided the number of trades is more than six percent in the account for the five day period. Under the proposed amendments, a pattern day trader would be required to maintain a minimum equity of $25,000 at all times. If the account falls below the $25,000 requirement, the pattern day trader would not be permitted to day trade until the account is restored.
The proposed amendments would require special maintenance margin for pattern day traders equal to 25% of the cost of all day trades made during the day. In effect, this would permit a pattern day trader to have buying power of four-times the equity in the pattern day trader's account. In addition, the pattern day trader would be permitted to maintain margin based on the largest aggregate open position during that day.
Under the proposed amendments, if the pattern day trader exceeds his/her buying power during the day, the pattern day trader would receive a margin call, which is required to be met within five business days. If the margin call is not met, the pattern day trader's buying power would be reduced to two-times the equity in the account and the pattern day trader's margin requirement would be based on the pattern day trader's cumulative positions during the day, not the largest aggregate open position during the day. This would have the effect of substantially limiting the day-trading activity. In addition, if the margin call is not met within the required five business days, no trades on margin would be allowed for 90 days or until the margin call is met.
In addition to these new margin requirements for pattern day traders, the proposed rules would also require a pattern day trader that makes a deposit to satisfy a margin deficiency, to keep the deposit in the account for at least two business days. Further, a pattern day trader would be prohibited from using cross guarantees to satisfy a margin requirement. Together, these requirements are designed to provide greater financial stability to pattern day trader accounts and effectively require pattern day traders to utilize funds actually on deposit in their accounts.
2. Lending in Excess of Margin Requirements
A broker-dealer violates Regulation T and SRO maintenance rules when the broker-dealer, directly or indirectly, extends credit in excess of the requirements set forth in the rules. Broker-dealers that extend credit beyond the 50% Regulation T or 25% SRO margin obligations are, in effect, meeting the margin obligations of the customer. For example, in a typical transaction, a customer who purchases securities in his/her margin account at a cost of $10,000 would be required to deposit 50%, or $5,000, of the transaction cost. The broker-dealer lends the customer the remaining 50%, or $5,000, using the securities as collateral. If the customer is unable to meet his/her 50% obligation, the broker-dealer is required to issue a Regulation T margin call. Contrary to the rule, examinations revealed that several day-trading broker-dealers loaned funds to customers to meet their margin obligations -- in addition to and separate from credit extended for initial margin. As a result, the customer was left with a highly leveraged security transaction in excess of the amount contemplated by the rules. >
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