What Is an Excess Margin Deposit?
An excess margin deposit is cash or equity in a margin trading account beyond what is required to open or maintain the account. Regulation T of the Federal Reserve Board governs initial margin, while the Financial Industry Regulatory Authority (FINRA) sets rules on margin maintenance requirements. The value in a margin trading account that exceeds regulatory requirements is known as an excess margin deposit.
Understanding Excess Margin Deposit
Regulation T allows investors to borrow up to 50% of the purchase price of a stock that is eligible to be purchased on margin. (Not all stocks are eligible.) The 50% is known as the initial margin, but it is at the discretion of the individual brokerage firm to decide the percentage amount; for instance, it may allow only an investor to borrow only 30% of the purchase price. After a stock is purchased on margin, FINRA imposes requirements on margin accounts that hold a minimum of 25% of the market value of securities. Again, a brokerage firm may set its own policy with respect to the minimum percentage as long as it is over FINRA's 25% threshold.
Illustration of Excess Margin Deposit
Suppose an investor buys $20,000 worth of securities by borrowing $10,000 from the brokerage and depositing $10,000 in cash or securities in the margin account. If the market value of the securities falls to $18,000, the equity in the margin account will decline to $8,000 ($18,000 minus $10,000). If the investor's brokerage firm has a maintenance requirement of 25%, the investor's account must have at least $4,500 of equity (25% of $18,000). Since $8,000 of equity is greater than the maintenance figure of $4,500, the investor's margin account meets requirements. The excess margin deposit, in this case, is $3,500.