Margin Requirements

What is Reg T margin requirement?

Regulation T by the Federal Reserve governs the use of margin in investor accounts. Reg T outlines the requirements for minimum initial margin and maintenance margin for positions in a margin account.

The minimum initial margin set by the Federal Reserve is 50%, and the minimum maintenance margin is 25%, although individual brokerage firms may require higher levels. To open a margin account, an investor must deposit a minimum of $2,000 or more, depending on the broker. 

How do you calculate Reg T margin?

The minimum initial margin set by the Federal Reserve is 50%, and the minimum maintenance margin is 25%, although individual brokerage firms may require higher levels.

For example, an investor wants to buy 100 shares of XYZ stock currently trading at $100 per share. If the broker’s initial margin requirement for shares of XYZ stock is the same as the Federal Reserve minimum Reg T margin of 50%, then the initial margin required for the $10,000 purchase of XYZ stock would be $5,000.

What is the difference between margin and portfolio margin?

Margin accounts provide increased buying power beyond the initial amount deposited. Margin accounts essentially provide a line of credit from the brokerage for additional purchases of securities. The additional buying power is commonly referred to as leverage, and leverage magnifies the returns in an account.

Margin accounts also provide the ability to short sell securities. Margin may be utilized in defined or undefined risk options trades and provide immediate access to reinvest funds when a position is closed.

Margin trading has a greater potential risk of loss due to the use of leverage, interest expense from margin interest charges, and the possibility for margin calls in the event of a marked portfolio decline. Margin accounts typically refer to accounts governed by Reg T margin requirements. 

Portfolio margin utilizes margin requirements that incorporate the portfolio’s net risk, not just the risk of a specific position. Portfolio margin allows for significantly increased buying power in portfolios with robust hedging. Margin requirements for portfolio margin are set based on a range of outcomes, such as a one standard deviation move up or down or unrealized gains and losses of 10-15%. 

How do you qualify for portfolio margin?

Portfolio margin may be available for accounts with more than $100,000 of account equity and a minimum level of trading experience, such as three years. Investors utilizing portfolio margin typically must have the highest level of options authorization.