In less than 3 months - - on 7/1/2011 - new customer maintenance margin requirements go into effect .  The changes deal with equity securities that don't meet the definition of a margin equity security under Regulation T.

        Background.   Under Regulation T, initial margin requirement for an equity security is 50% of current market value ("CMV") - so long as it meets the definition of a margin equity security.  Once the trade has been executed, daily maintenance margin requirements kick in:

• long equity securities:  25% of CMV.
• short equity security:  greater of: (i) $2.50 per share or 100% of CMV of each short equity security priced <$5 a share;  or, (ii) $5 a share or 30% of CMV of each short equity security priced at $5 a share or greater. 

        FINRA Staff Contacts.    Rudolph Verra, MD - Risk Oversight and Operational Regulation  (646) 315-8811;  Glen Garofalo, Director - Credit Regulation  (646) 315-8464; or  Steve Yannolo, Project Manager - Credit Regulation  (646) 315-8621.

        Long Positions.   Reg T permits a long position of a non-margin eligible equity security to be held in a margin account, provided an initial requirement of 100% of CMV is deposited.  Pursuant to FINRA Rule 4210(f)(8)(A)(ii), FINRA is clarifying that the maintenance margin requirement for a non-margin eligible equity security held long in a Reg. T margin account shall be 100% of CMV.  This is consistent with maintenance margin requirement for a non-margin eligible equity security held in a portfolio margin account.

FINRA further is clarifying that firms may apply a maintenance loan value based on current maintenance margin requirements - e.g., 25% for long equity securities or higher for leveraged ETFs to a long non-margin eligible equity security held in a Reg. T or portfolio margin account only when there is the presence of a maintenance margin deficiency in such account, provided the amount of maintenance loan value does not exceed the amount of the maintenance margin deficiency. The maintenance loan value permitted above cannot be extended for the purpose of financing additional transactions or for withdrawals.  See examples illustrating how maintenance loan may be applied.

• Example 1:   
  • Maintenance Margin Deficiency $5,000 
  • Non-Margin Eligible Equity Securities Market Value $4,000
  • Usable Maintenance Loan Value ($4,000 x .75) $3,000
  • Adjusted Maintenance Margin Deficiency ($5,000 - $3,000) $2,000
  • Here, 100% of maintenance loan value may be used.

• Example 2:   
  
  • Maintenance Margin Deficiency $5,000
  • Non-Margin Eligible Equity Securities Market Value $10,000
  • Maintenance Loan Value ($10,000 x .75) $7,500
  • Usable Maintenance Loan Value - cannot exceed maintenance margin deficiency;  $5,000
  • Here, only $5,000 of maintenance loan value may be extended.

        Short Positions.   For short positions, initial margin requirement pursuant to Reg. T is 150% of CMV of a non-margin eligible equity security.  In a Reg. T margin account, current maintenance margin requirements for all short equity securities and leveraged ETFs set forth in FINRA Rule 4210(c)(2) and (3) and in Regulatory Notice 09-53, respectively, continue to apply. Pursuant to FINRA Rule 4210(f)(8)(A)(ii), FINRA is clarifying that in a portfolio margin account, the maintenance margin requirement for a short non-margin eligible equity security shall be the greater of: (i) $2.50 per share or 100% of CMV of each short equity security priced < $5 a share;  or, (ii) $5 a share or 50% of CMV of each short equity security priced at $5 a share or greater.

        Non-Purpose Loans in Good Faith Accounts.   Pursuant to Regulation T 220.6(e), non-purpose loans must be executed in the good faith account. FINRA is clarifying that firms may extend maintenance loan value on non-margin eligible equity securities when used to collateralize non-purpose loans. Firms are reminded that non-purpose loans are to be extended in accordance with the requirements promulgated under Regulation T,9 and that any debit balances are not to be included in the Reserve Formula computation.

    Day Trading.   Pursuant to FINRA Rule 4210(f)(8)(A)(ii), FINRA is clarifying that for customers who day trade in a Reg. T margin account or portfolio margin account, the special maintenance margin requirement for non-margin eligible equity securities is 100%.  In addition, firms cannot extend maintenance loan value for the purpose of calculating day-trading buying power. Customers will be permitted to day trade a non-margin eligible equity security in such accounts, provided the special maintenance margin requirement of 100% doesn't > 1x regulatory maintenance excess - i.e., equity in account after maintenance margin requirement is met.  In the event a customer does day-trade in excess of this limit, the firms are required to issue a day-trade call.  If customer doesn't meet the day-trade call within the required number of business days pursuant to Rule 4210(f)(8)(B)(iii) or 4210(g)(13), firm will be required to cancel the day-trade transactions.

For further details, go to:   [FINRA RegNote 11-16, "Treatment of Non-Margin .."]