What Is a Special Memorandum Account (SMA)?

A special memorandum account (SMA) is a dedicated investment account where excess margin generated from a client's margin account is deposited, thereby increasing the buying power for the client. The SMA essentially represents a line of credit and may also be known as a "special miscellaneous account."

Special memorandum accounts should not be confused with separately managed accounts, also abbreviated by SMA.

Key Takeaways

  • A special memorandum account (SMA) is a dedicated investment account where excess margin generated from a client's margin account is held.
  • An SMA equates to the buying power balance or excess equity in a margin account, which is money an investor has to buy securities.
  • Brokerage firms calculate the SMA balances of margin accounts at the end of each trading day.

Understanding a Special Memorandum Account (SMA)

SMA generally equates to the buying power balance in a margin account. Buying power, also referred to as excess equity, is the money an investor has available to buy securities and equals the total cash held in the brokerage account plus all available margin.

The purpose of an SMA is to provide additional buying power in a client's margin account. SMA exists when the margin equity in an account exceeds the Federal Reg T requirement of 50%. A Fed call will be issued against the account if the Reg T initial requirement is not met.

Brokerage firms calculate the SMA balances of margin accounts at the end of each trading day to make sure they are greater than or equal to zero. SMA is calculated simply as the previous day's SMA +/- the change in current day cash, and +/- the current day trades' initial margin requirements.

An SMA will lock in any gains realized in a client's margin account. However, the SMA balance fluctuates.

Special Considerations

Consider the situation where stock within a client's margin account realizes a capital gain and creates excess margin. If this excess amount is held in the account, and the stock position produces a capital loss at a later date, the client could then lose their gain entirely.

The SMA balance increases in value with cash deposits into the brokerage account. The SMA also holds interest and dividend payments from long positions and proceeds from closing out a securities position.

Clients can use funds in their SMA to purchase additional securities for their margin account. The SMA balance decreases with cash withdrawals from the brokerage account and when buy orders for securities are executed.