Who Determines Margin Requirements

A “margin account” is a type of brokerage account where the broker-dealer lends money to the investor and uses the account as collateral to buy securities. Margin increases investors` purchasing power, but also exposes investors to the possibility of larger losses. Here`s what you need to know about margin. There are also more potential drawbacks to using margins. When the share price drops, the investor pays interest to the brokerage company and makes larger losses on the investment. In times of high market volatility, futures exchanges can increase initial margin requirements to any level they deem appropriate, which is consistent with the power of securities brokerage firms to increase the initial margin beyond what is required by Fed regulations. The recent increase in margin lending has drawn attention to the Federal Reserve`s margin requirements for the purchase of debt-bearing stocks, which have been 50% since 1974. In November and December 1999, margin lending increased very rapidly, outpacing the considerable appreciation of the stock market as a whole. And in January 2000, it continued to grow as the stock market valuation declined, leaving the ratio of margin-based loans to market capitalization at its highest level in the last 29 years. This business note discusses the recent trend of margin lending and the benefits of using margin requirements as a policy tool. Settlement T requirements are only a minimum, and many brokerage firms require more liquidity from investors in advance.

Imagine a company that charges 65% of the investor`s purchase price in advance. This would not cover more than $3,500 with a loan, which means the investor would have to pay $6,500. The Securities Exchange Act of 1934 imposed federal regulation for the purchase of margin securities. The margin requirement was driven by concerns that speculation on credit-financed securities had helped fuel the rise in stock prices before the stock market crash of 1929. The law considered the Federal Reserve to be responsible for managing the availability of credit in the economy, so the Fed was tasked with setting margin requirements for asset purchases. The Securities Exchange Commission was tasked with enforcing these regulations. Margin buying refers to the purchase of securities with money borrowed from a broker, using the purchased securities as collateral. As a result, the profit or loss of securities is increased. The securities serve as collateral for the loan. Net worth – the difference between the value of the securities and the value of the loan – is initially the amount of cash used by the company. This difference must remain higher than a minimum margin requirement, the purpose of which is to protect the broker from a loss in value of the securities to the point where the investor can no longer cover the loan. The U.S.

Securities and Exchange Commission (SEC) is an independent agency of the U.S. federal government responsible for enforcing federal securities laws and proposing securities rules. He is also responsible for maintaining the securities industry and stock and option exchanges regulate minimum margin requirements for leveraged trading accounts. In addition, each brokerage or trading company sets its own margin requirements in accordance with these regulations. A brokerage firm`s minimum margin requirements often exceed the minimum margins required by the government. It provides additional financial security to the brokerage firm and its clients. The rapid increase in margin lending raises the question of whether it could fuel rising stock prices. After all, this is Congress` main concern when it comes to passing margin requirements in the first place.

One way to address this is to perform a statistical test—called the Granger causality test—to examine the dynamics of time series between margin loan growth and market capitalization growth using monthly data from 1971 to 1999. The results show that market capitalization growth precedes margin loan growth and not the other way around. In particular, the one- and two-month delayed growth rates in market value are important in explaining the growth in margin loans. The stunted growth rates of margin lending have no power to explain the growth in market value. Although the Granger causality test does not identify economic causality and is only a statistical association, the data does not suggest that the growth of margin loans generally leads to stock market gains. The data is rather consistent with the fact that investors react to a rise in stock prices by taking out more loans against shares and also reacting to a fall in stock prices by taking out fewer loans. If the value of the securities had remained at approximately $60,000, the broker would likely have given the client the specified number of days to complete the margin call. Just because the market continued to decline, the broker exercised his right to take further action and sell the account. .