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Margin Rules

The following information is for general illustrative purposes only. SEC and Federal Reserve rules may change at any time. For more information go to the SEC and Federal Reserve websites, and also check with your brokerage firm for any additional specifics that they may have in place.

Margin Violation Warning (Excess Liquidity)

The "Current Excess Liquidity" of an account must be positive. If this number falls below 5% of the "Maintenance Margin" (see definition and comments below) a warning from the brokerage firm is issued.

Maintenance Margin definition: The minimum amount of equity that must be maintained in a margin account. Typically most brokerages set this at 30% of the market value of the marginable securities (the securities that have a short position).

In the context of the NYSE, after an investor has bought on margin (which Active Trading Investments doesn't do), or has sold short option contracts (which we do), a margin requirement is calculated by the broker per Regulation T of the Federal Reserve, and these funds are reserved to cover the short positions.

MARGIN RULES

The Federal Reserve Board and self-regulatory organizations (SROs), such as the New York Stock Exchange and FINRA, have clear rules regarding margin trading.

In the United States, the Federal Reserve Regulation T rule allows investors to borrow up to 50 percent of the price of the securities to be purchased on margin for the “INITIAL MARGIN.”

Once investors have started buying a stock on margin, the NYSE and FINRA require them to keep a minimum amount of equity in the margin account. These rules require investors to have at least 25 percent of the total market value of the securities they own in their margin account—meaning that their leveraging power is four times the balance in the account. This is the “MAINTENANCE REQUIREMENT.” For market participants identified as day traders, the maintenance requirement is $25,000.

When the balance in the margin account falls below the maintenance requirement, the broker can issue a margin call requiring the investor to send more cash or can liquidate the position. Most brokerages will issue a warning before this happens.

In the United States and Canada, the margin requirements are “rule-based,” meaning regulators set specific limits.

 

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