What is Free Credit Balance
Free credit balance refers to the cash held in a customer's margin account at a broker-dealer that s/he can withdraw on demand at any time. Free cash balance is calculated as the total uninvested remaining money in a margin account after margin requirements, short sale proceeds, purchase transactions awaiting settlement and special miscellaneous accounts are taken into consideration. It includes interest paid on securities and dividend payments.
BREAKING DOWN Free Credit Balance
In a cash account, the credit balance is the amount of money that remains after all purchases, and it is free from withdrawal restrictions. However, within a margin account, the credit balance of the account includes not only the cash remaining in the account, but also proceeds from short sales along with money used to meet margin requirements, and excess margin and buying power. Because the credit balance of a margin account includes both unrestricted amounts and restricted amounts, the free credit balance is created to determine the total amount that can be withdrawn by the account holder.
While not required to by law, some brokers pay interest on funds customers hold in free credit balance accounts. Some brokers offer account holders the option of periodic sweeps of funds held in their free credit balance accounts into short-term and highly liquid accounts such as FDIC-insured bank accounts or money market funds. Brokers who offer this option must have a policy in place, and follow it, to receive customers’ authorization, whether oral or written, to make the transfers or otherwise invest the funds held in these accounts.
Regulations Covering Free Credit Balances
Since amounts held in credit balance accounts are customer funds, though held by brokers, they are highly regulated. Regulations are designed to prevent broker-dealer misuse of customer funds as well as loss of funds in the event a broker becomes insolvent or faces liquidity issues. The Securities and Exchange Commission (SEC) requires brokers to perform a weekly calculation to determine the amounts of funds payable to or receivable from a customer’s free credit balance account. Financial Industry Regulatory Authority (FINRA), the brokerage industry's self-regulatory organization, requires brokers to inform customers of their account balances by providing written statements once a quarter unless customers opt out of receiving such statements. FINRA also requires brokers to provide it with details of the total amounts they hold as of month end in free credit balances in both margin and cash accounts on a monthly basis.