/margin-operations

name: margin-operations
description: "Guide margin lending, margin requirements, and margin call operations for brokerage and advisory accounts. Use when calculating Reg T initial margin or buying power, determining maintenance margin or house requirements, evaluating portfolio margin eligibility under OCC TIMS, generating or resolving margin calls (fed call, house call, exchange call, day-trade call), designing forced liquidation waterfall logic, structuring securities-backed lines of credit (SBLOC), computing margin interest impact on returns, assessing concentrated position margin, understanding pattern day trader rules, or reviewing FINRA 4210 and Reg U requirements. Also covers SMA calculations and short margin mechanics. For OTC derivatives margin (variation/initial margin, CSAs, SIMM) see counterparty-risk."

Margin Operations

Core Concepts

Regulation T Initial Margin

The Federal Reserve's Regulation T establishes the initial margin requirement for purchasing securities on credit. Key provisions:

• **50% initial margin requirement:** An investor must deposit at least 50% of the purchase price of marginable securities. For a $100,000 purchase, the investor must deposit $50,000 (cash or marginable securities); the broker-dealer may lend the remaining $50,000.
• **Reg T buying power:** The maximum dollar amount a client can purchase given their available equity. Buying power = SMA x 2 (for equity securities under Reg T). If a client deposits $100,000 cash in a new margin account, buying power is $200,000.
• **Special Memorandum Account (SMA):** A bookkeeping entry that tracks the client's excess Reg T equity. SMA increases when: the account has excess equity above 50%, securities are sold, dividends or cash are deposited. SMA decreases when used to purchase securities or withdraw cash. SMA is a high-water mark — it does not decrease when market values decline (unless used).
• **Reg T extension procedures:** When a client fails to meet the initial margin requirement by settlement date, the broker-dealer must request an extension from a self-regulatory organization (SRO). Extensions are typically granted for 1-5 business days. Failure to meet the call results in forced liquidation and a 90-day freeze (restricted account).
• **Exempt securities:** U.S. government bonds, municipal bonds, and certain agency securities are exempt from Reg T margin requirements — they can be purchased with lower or no initial margin.
• **Day-trade margin:** FINRA Rule 4210 provides pattern day traders (4+ day trades in 5 business days) with 4:1 intraday buying power (25% margin) but requires a minimum equity of $25,000 — day-trade buying power = (equity - $25,000 minimum) × 4. Overnight positions revert to standard 2:1 Reg T buying power.

Maintenance Margin

After the initial purchase, ongoing maintenance margin requirements determine the minimum equity the account must maintain:

• **FINRA Rule 4210 minimum:** 25% equity for long positions. Account equity = market value of securities minus debit balance. If equity falls below 25% of market value, a maintenance margin call is triggered.
• **House maintenance requirements:** Most broker-dealers impose requirements above the FINRA minimum, typically 30-40% for diversified accounts. House requirements vary by firm and may change based on market conditions.
• **Concentrated position margin:** Single-stock positions exceeding a threshold (e.g., 40-60% of account value) face elevated margin requirements, often 50-75% or higher. This discourages excessive concentration in margin accounts.
• **Long margin formula:** Maintenance call triggered when equity / market value < maintenance requirement, where account equity = market value - debit balance. Equivalently, a call is triggered when market value falls to: debit balance / (1 - maintenance requirement). The call amount due is (maintenance requirement × market value) - equity.
• **Short margin requirements:** Short positions require initial margin of 50% (Reg T) and maintenance of 30% of market value (FINRA minimum). Short account equity = credit balance - market value of short securities. A short squeeze (rising prices) increases the maintenance requirement.
• **Options margin:** Options strategies have specific margin requirements under FINRA Rule 4210 and exchange rules. Covered calls require no additional margin (shares serve as collateral). Naked short options require substantial margin — typically the greater of: (a) option premium + 20% of underlying value - out-of-the-money amount, or (b) option premium + 10% of underlying value. Spreads have defined-risk margin equal to the maximum loss.

Portfolio Margin

A risk-based margining methodology that can significantly reduce margin requirements for hedged or diversified portfolios:

• **Methodology:** Uses the Options Clearing Corporation's Theoretical Intermarket Margin System (OCC TIMS) to compute margin based on the theoretical maximum loss of the portfolio under a range of stress scenarios, rather than applying fixed percentage requirements to each position independently.
• **Eligibility requirements:** Minimum account equity of $100,000 (FINRA Rule 4210(g)), options trading approval (typically Level 3 or 4), and the firm may impose additional requirements such as minimum net worth, trading experience, or completion of a portfolio margin agreement.
• **Stress test scenarios:** The OCC TIMS model evaluates portfolio profit and loss under standardized moves:
• Large-cap equities: +/- 15% (with intermediate points at +/- 5%, +/- 10%)
• Small-cap equities: +/- 10% higher stress (effectively +/- 25%)
• Broad market indices: +/- 8% to +/- 15%
• High-volatility securities: firm-specific add-ons
• The largest theoretical loss across all scenarios becomes the margin requirement
• **Portfolio margin vs Reg T comparison:** A hedged equity portfolio with offsetting options positions might require 50% margin under Reg T (applied posi