SIE Exam: Margin Accounts

Section 3 — Understanding Trading, Customer Accounts and Prohibited Activities (31% of exam)

Margin accounts allow investors to borrow money from their broker-dealer to purchase securities, using those securities as collateral. The SIE exam tests this topic in detail. Regulation T, set by the Federal Reserve, establishes the initial margin requirement at 50% for equity purchases. FINRA requires a minimum initial deposit of $2,000, which supersedes Reg T when the 50% calculation yields a lower amount. You must understand how to calculate equity in a long margin account (long market value minus debit balance), the Special Memorandum Account (SMA), and buying power (SMA times two). FINRA's minimum maintenance margin is 25% for long positions and 30% for short positions. When equity falls below maintenance levels, a margin call is issued requiring the customer to deposit additional funds. The exam covers restricted accounts (equity between 25% and 50%), the three components of the margin agreement (credit agreement, hypothecation agreement, and loan consent), and pattern day trader rules requiring $25,000 minimum equity. Non-marginable securities (such as new issues during their first 30 days) and portfolio margin requiring $100,000 minimum equity are tested at harder difficulty levels.

Key Concepts

Regulation T (Initial Margin)

Requires an initial deposit of 50% of the purchase price for equity securities bought on margin. Set by the Federal Reserve Board.

Maintenance Margin

FINRA requires minimum equity of 25% of long market value for long positions and 30% of short market value for short positions.

Debit Balance

The amount borrowed from the broker-dealer in a long margin account. It does not change when the market value fluctuates.

SMA (Special Memorandum Account)

Represents excess equity above the Reg T requirement. Buying power equals SMA times two (at 50% Reg T).

Restricted Account

A margin account where equity has fallen below the Reg T initial requirement (50%) but remains above the FINRA maintenance minimum (25%).

Pattern Day Trader

An investor who executes four or more day trades within five business days. Must maintain minimum equity of $25,000 in their margin account.

Hypothecation Agreement

Part of the margin agreement where the customer pledges their securities as collateral for the margin loan. The firm may rehypothecate (repledge) these securities.

Practice Questions

Question 1 of 4

Under Regulation T, what is the initial margin requirement for purchasing equity securities on margin?

Question 2 of 4

A customer buys $20,000 of stock on margin with the Reg T deposit. If the stock rises to $28,000, what is the customer's equity?

Question 3 of 4

If a margin account has an SMA balance of $5,000, what is the customer's buying power?

Question 4 of 4

Under FINRA rules, a pattern day trader must maintain minimum equity of at least:

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Frequently Asked Questions

What margin calculations should I know for the SIE exam?

You should be able to calculate equity (LMV minus debit balance), SMA (excess equity above Reg T requirement), buying power (SMA times 2), and determine when maintenance calls occur. Know Reg T (50% initial), FINRA minimum ($2,000), and maintenance margins (25% long, 30% short).

What is the difference between initial margin and maintenance margin?

Initial margin (50% under Reg T) is the deposit required to open a new margin position. Maintenance margin (25% for longs, 30% for shorts under FINRA rules) is the minimum equity level that must be maintained. A margin call occurs when equity drops below maintenance.