Nasd - Day - Trading Margin Requirements(PDF)
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NASD Notice to Members 01-26
Executive Summary a customer to deposit margin of at
INFORMATIONAL least $2,000, unless in excess of
On February 27, 2001, the Securi- the cost of the security.
ties and Exchange Commission Although the day trader may end
Day-Trading (SEC) approved amendments to
National Association of Securities
the day with no position, the day
trader’s clearing firm is at risk dur-
Margin Dealers, Inc. (NASD®) Rule 2520
relating to margin requirements for
ing the day if credit is extended.
To address this risk, the NASD
day traders (the “amendments”).1
SEC Approves Proposed The amendments become effec-
and NYSE require day traders to
demonstrate that they have the
Rule Change Relating To tive on September 28, 2001 and ability to meet the initial margin
are substantially similar to amend-
Day-Trading Margin ments by the New York Stock
requirements for at least their
largest open position during the
Requirements Exchange (NYSE) to its margin day. Specifically, under current
rules.2 margin requirements, a customer
SUGGESTED ROUTING The text of the amendments and who meets the definition of day
Federal Register version of the trader under the rule must deposit
The Suggested Routing function is meant to aid SEC Approval Order are attached in his or her account the margin
the reader of this document. Each NASD member (see Attachments A & B). For that would have been required
firm should consider the appropriate distribution in a detailed description of the under Regulation T (i.e., the 50
the context of its own organizational structure. amendments, as well as specific percent initial margin requirement)
examples of certain margin if the customer had not liquidated
q Executive Representatives calculations under the amend- the position during the trading day.
ments, members should review If the customer day trades, but is
q Legal & Compliance not considered a “day trader,” the
the attached SEC Approval Order
q Operations (see Attachment B). customer is still required to post 25
percent of the position held during
Questions concerning this the day.4 Currently, this payment is
Notice may be directed to Susan due after the risk has been incurred.
KEY TOPICS DeMando, Director, Financial Therefore, the funds are not avail-
Operations, Member Regulation, able during the trading day when
q Rule 2520 NASD Regulation, Inc. (NASD the clearing firm is at risk.
q Margin Regulation), at (202) 728-8411, or
Stephanie M. Dumont, Associate Currently, if a customer’s day trad-
q Day Trading General Counsel, Office of Gener- ing results in a day-trading margin
al Counsel, NASD Regulation, at call, the customer has seven days
(202) 728-8176. to meet the call by depositing cash
or securities in the account.
Because day traders typically end
Background the day flat and this day-trading
Because Regulation T initial “margin” deposit is not securing a
margin requirements and NASD/ margin loan, the customer is not
NYSE standard maintenance required to leave the margin
margin requirements3 are calculat- deposit in the account and may
ed only at the end of each day, a withdraw the deposit the day after
day trader who has no positions in the deposit is made. If the cus-
his or her account at the end of the tomer fails to meet a day-trading
day would not incur a Regulation margin call, no specific action to
T initial margin nor a standard the customer account is required
maintenance margin requirement, to be taken by the firm. There are
assuming no losses in the account no securities to liquidate, as there
from that day’s trading. Current would be for an existing position,
NASD/NYSE initial margin provi- because day traders typically end
sions, however, generally require the day flat.
NASD Notice to Members 01-26 April 2001
227
NASD Notice to Members 01-26
Description Of Amendments firms are not required under account must be further
The amendments address the the rule to monitor the mini- restricted to trading only on a
deficiencies that have been identi- mum equity requirements on cash-available basis for 90
fied with existing rules relating to an intra-day basis. The mini- days or until the call is met.
day-trading margin activities. mum equity requirement
addresses the additional (5) Two-day holding period
Specifically, the amendments pro- requirement. The amendments
vide for the following changes to risks inherent in leveraged day
trading activities and ensures require that funds used to
current margin requirements: meet the day-trading minimum
that customers cover losses
(1) Definition of “pattern day incurred in their accounts equity requirement or to meet
trader.” Under the amend- from the previous day before a day-trading margin call must
ments, “pattern day traders” continuing to day trade. remain in the customer’s
are defined as those cus- account for two business days
tomers who day trade four or (3) Day-trading buying power. following the close of business
more times in five business The amendments limit day- on any day when the deposit is
days. If day-trading activities trading buying power to four required.
do not exceed six percent of times the day trader’s mainte-
nance margin excess. This (6) Prohibition of the use of cross-
the customer’s total trading guarantees. Under the amend-
activity for the five-day period, calculation is based on the
customer’s account position ments, pattern day traders
the clearing firm is not required are not permitted to meet day-
to designate such accounts as of the close of business of
the previous day. trading margin requirements
as pattern day traders. The six through the use of cross-
percent threshold is designed (4) Day-trading margin calls. guarantees. Each day-trading
to allow clearing firms to Under the amendments, in the account is required to meet
exclude from the definition of event a day-trading customer the applicable requirements
pattern day trader those cus- exceeds his or her day-trading independently, using only the
tomers whose day-trading buying power limitations, addi- financial resources available in
activities comprise a small tional restrictions are imposed the account. Accordingly, pat-
percentage of their overall on the pattern day trader that tern day traders are prohibited
trading activities. more adequately protect the from using cross-guarantees
In addition, if the firm knows firm from the additional risk to meet the minimum equity
or has a reasonable basis to and help prevent a recurrence requirements or to meet day-
believe that the customer is a of such prohibited conduct. trading margin calls.
pattern day trader (for exam- Members are required to
issue a day-trading margin call In addition, the amendments
ple, if the firm provided training revise the current interpreta-
to the customer on day trading to pattern day traders that
exceed their day-trading buy- tion that requires the sale and
in anticipation of the customer repurchase on the same day
opening an account), the ing power. Customers have
five business days to deposit of a position held from the
customer must be designated previous day to be treated as
as a pattern day trader imme- funds to meet this day-trading
margin call. The day-trading a day trade. The amendments
diately, instead of delaying treat the sale of an existing
such determination for five account is restricted to day-
trading buying power of two position as a liquidation and
business days. the subsequent repurchase
times maintenance margin
(2) Minimum equity requirement. excess based on the cus- as the establishment of a new
The amendments require tomer’s daily total trading position not subject to the
that a pattern day trader have commitment, beginning on rules affecting day trades.
deposited in his or her account the trading day after the Similarly, if a short position is
minimum equity of $25,000 on day-trading buying power is carried overnight, the purchase
any day in which the customer exceeded until the earlier of to close the short position and
day trades. The required when the call is met or five subsequent new sale would
minimum equity must be in business days. If the day- not be considered a day trade.
the account prior to any day- trading margin call is not met
trading activities; however, by the fifth business day, the
NASD Notice to Members 01-26 April 2001
228
NASD Notice to Members 01-26
For a more detailed description of
the amendments, as well as spe-
cific examples of certain margin
calculations under the amend-
ments, members should review
the attached SEC Approval Order.
Endnotes
1 See Securities Exchange Act Release
No. 44009 (February 27, 2001), 66 FR
13608 (March 6, 2001) (File No. SR-
NASD-00-03) (“SEC Approval Order”).
2 The SEC issued a joint approval order
for the NASD’s and NYSE’s proposed
rule changes relating to day-trading
margin requirements. The NYSE rule
filing number is SR-NYSE-99-47.
3 NASD Rule 2520 and NYSE Rule 431,
the margin provisions for the NASD
and the NYSE, respectively, are
substantially similar.
4 The firm has the option to calculate
day-trading margin requirements based
on either the largest open position at
any given time during the day, or on the
customer’s total trading commitment
during the day. If the firm chooses to
base day-trading margin requirements
on the customer’s largest open position
during the day, the firm must maintain
“time and tick” records documenting the
sequence in which each day trade is
completed.
© 2001, National Association of Securities
Dealers, Inc. (NASD). All rights reserved. Notices
to Members attempt to present information to
readers in a format that is easily understandable.
However, please be aware that, in case of any
misunderstanding, the rule language prevails.
NASD Notice to Members 01-26 April 2001
229
NASD Notice to Members 01-26
ATTACHMENT A
SR-NASD-00-03, Proposed Rule Language, as amended
Proposed new language is underlined; proposed deletions are in brackets.
2520. Margin Requirements
(a) Definitions No change.
(b) Initial Margin
For the purpose of effecting new securities transactions and commitments, the customer shall be
required to deposit margin in cash and/or securities in the account which shall be at least the greater of:
(1) through (3) No change.
(4) equity of at least $2,000 except that cash need not be deposited in excess of the cost of any
security purchased (this equity and cost of purchase provision shall not apply to “when
distributed” securities in a cash account). The minimum equity requirement for a “pattern day
trader” is $25,000 pursuant to paragraph (f)(8)(B)(iv)a. of this Rule.
Withdrawals of cash or securities may be made from any account which has a debit balance,
“short” position or commitments, provided it is in compliance with Regulation T of the Board of Governors
of the Federal Reserve System and after such withdrawal the equity in the account is at least the greater
of $2,000 ($25,000 in the case of a “pattern day trader”) or an amount sufficient to meet the maintenance
margin requirements of this [paragraph] Rule.
(c) through (f)(8)(A)(iii) No change.
(f)(8)(B) Day[-] Trading
(i) The term “day[-] trading” means the purchasing and selling or the selling and purchasing of
the same security on the same day in a margin account except for:
a. a long security position held overnight and sold the next day prior to any new
purchase of the same security, or
b. a short security position held overnight and purchased the next day prior to any new
sale of the same security.
(ii) [A “day- trader” is any customer whose trading shows a pattern of day- trading.] The term
“pattern day trader” means any customer who executes four or more day trades within five
business days. However, if the number of day trades is 6% or less of total trades for the five
business day period, the customer will not be considered a pattern day trader and the special
requirements under paragraph (f)(8)(B)(iv) of this Rule will not apply. In the event that the
NASD Notice to Members 01-26 April 2001
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NASD Notice to Members 01-26
organization at which a customer seeks to open an account or to resume day trading knows or
has a reasonable basis to believe that the customer will engage in pattern day trading, then the
special requirements under paragraph (f)(8)(B)(iv) of this Rule will apply.
(iii) The term “day-trading buying power” means the equity in a customer’s account at the close
of business of the previous day, less any maintenance margin requirement as prescribed in
paragraph (c) of this Rule, multiplied by four for equity securities.
Whenever day[-] trading occurs in a customer’s margin account the special maintenance margin
required for the day trades in equity securities [to be maintained] shall be [the margin on the “long” or
“short” transaction, whichever occurred first, as required pursuant to the other provisions of this Rule.
When day-trading occurs in the account of a “day-trader” the margin to be maintained shall be the margin
on the “long” or “short” transaction, whichever occurred first, as required by Regulation T of the Board of
Governors of the Federal Reserve System or as required pursuant to the other provisions of this Rule,
whichever amount is greater.] 25% of the cost of all the day trades made during the day. For non-equity
securities, the special maintenance margin shall be as required pursuant to the other provisions of this
Rule. Alternatively, when two or more day trades occur on the same day in the same customer’s
account, the margin required may be computed utilizing the highest (dollar amount) open position during
that day. To utilize the highest open position computation method, a record showing the “time and tick”
of each trade must be maintained to document the sequence in which each day trade was completed.
(iv) Special Requirements for Pattern Day Traders
a. Minimum Equity Requirement for Pattern Day Traders - The minimum equity required
for the accounts of customers deemed to be pattern day traders shall be $25,000. This
minimum equity must be deposited in the account before such customer may continue
day trading and must be maintained in the customer’s account at all times.
b. Pattern day traders cannot trade in excess of their day-trading buying power as
defined in paragraph (f)(8)(B)(iii) above. In the event a pattern day trader exceeds its
day-trading buying power, which creates a special maintenance margin deficiency, the
following actions will be taken by the member:
1. The account will be margined based on the cost of all the day trades made
during the day,
2. The customer’s day-trading buying power will be limited to the equity in the
customer’s account at the close of business of the previous day, less the
maintenance margin required in paragraph (c) of this Rule, multiplied by two for
equity securities, and
3. “time and tick” (i.e., calculating margin using each trade in the sequence that
it is executed, using the highest open position during the day) may not be used.
NASD Notice to Members 01-26 April 2001
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NASD Notice to Members 01-26
c. Pattern day traders who fail to meet their special maintenance margin calls as
required within five business days from the date the margin deficiency occurs will be
permitted to execute transactions only on a cash available basis for 90 days or until the
special maintenance margin call is met.
d. Pattern day traders are restricted from using the guaranteed account provision
pursuant to paragraph (f)(4) of this Rule for meeting the requirements of paragraph
(f)(8)(B).
e. Funds deposited into a pattern day trader’s account to meet the minimum equity or
maintenance margin requirements of paragraph (f)(8)(B) of this Rule cannot be
withdrawn for a minimum of two business days following the close of business on the
day of deposit.
(C) When the equity in a customer’s account, after giving consideration to the other provisions of
this [paragraph (c)] Rule, is not sufficient to meet the requirements of [subparagraph (i) or (ii)
hereof] paragraph (f)(8)(A) or (B), additional cash or securities must be received into the account
to meet any deficiency within [seven] five business days of the trade date.
In addition, on the sixth business day only, members are required to deduct from Net
Capital the amount of unmet maintenance margin calls pursuant to SEC Rule 15c3-1.
(f)(9) and (f)(10) No change.
NASD Notice to Members 01-26 April 2001
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