Both margin and cash accounts are governed by Regulation T (Reg T), governed by the Federal Reserve. In brief, Reg T stipulates the following:
- The loan amount in a margin account can be no more than 50%* of the account's value on the day of its first trade. Put another way, for every $1 an investor has in a margin account, she can borrow another $1 from the broker-dealer, but no more than that.
- Reg T applies to borrowing either cash or securities; we'll discuss borrowing securities very soon.
- If, due to losses or withdrawals, the debt owed to the broker-dealer exceeds the equity in the account, the broker-dealer will issue a margin call requiring the client to deposit more funds or liquidate positions until the debt level is back in line.
- Cash trades settle on the same day as the transaction and must be paid in full.
The 50% margin requirement noted in the first point is not carved in stone. It can be changed whenever the Fed decides to do so. However, it has been stable at 50% for quite some time, and there is no indication that it will change soon.
Maintenance margin is the threshold for keeping an active margin account once it has been established, is set according to NYSE Rule 431 and consists of these criteria:
- 25% of the current market value of most long securities in the account; plus
- $2.50 per share or 100% of the current market value, whichever is greater, of each short stock in the account selling at less than $5.00 per share; plus
- $5.00 per share or 30% of the current market value, whichever is greater, of each stock short in the account selling at or above $5.00 per share; plus
- 5% of the principal amount or 30% of the current market value, whichever is greater, of each short bond in the account.
Individual firms can use their discretion to raise the bar on maintenance margin even higher if they want. Reg T exempts municipal bonds, meaning the Fed makes no margin requirements, but the NYSE generally requires a 15% margin. Reg T does require a margin on government bonds of 4% to 6%, on a sliding scale - the higher the years to maturity, the higher the percentage of market value that must be in cash.
The CBOE has its own maintenance margin rules:
- Long equity and equity index options with expirations of more than nine (9) months require cash payment of 75% of the option's market value.
- Long equity and equity index options with expirations of less than nine (9) months are not marginable and require 100% cash.
- Short equity and narrow-based equity index options require 20% cash.
- Short broad-based index options require 15% cash.
- Short interest-rate options require 10% cash.
- Spreads and other strategic combinations have distinct margin requirements based on their characteristics.
- A spread or other combination can be accounted for as separate positions if that will result in a less burdensome margin requirement.
Margin Account Calculations
TradingRegulation T governs customer cash accounts and the amount of credit that brokerage firms and dealers may extend to customers to buy securities.
InvestingWhen an investor buys on margin, he or she pays a portion of the stock price – called the margin -- and borrows the rest from a stockbroker. The purchased stocks then serve as collateral for ...
Financial AdvisorA maintenance margin is the minimum amount of equity that must be kept in a margin account.
InvestingInitial margin is the percentage of a stock’s price an investor must have in his account to buy that stock on margin.
Financial AdvisorInvesting on margin can be profitable but it's a risky play that needs care.
TradingBuying on margin is a good option if you don't have the cash to day trade.
InvestingAn underused opportunity provided in an SEC rule can enhance returns and lower risk for spread traders.
InvestingFind out how it provides futures and commodity option strategists with more bang for their margin buck!
InvestingMargin loans, futures and ETF options can all mean better returns, but which one should you pick?