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 Margin Borrowing

What is margin borrowing?

Margin borrowing is a type of loan using eligible securities in margin-enabled accounts as collateral. Your client can use margin borrowing to purchase additional securities or to withdraw funds.

What are some of the benefits of margin borrowing?

Borrowing on margin allows your client to take advantage of investment opportunities by leveraging his/her existing equity holdings to buy more securities without depositing more money. It can also be a cost-effective way to obtain cash without selling securities. By borrowing against securities rather than selling them, your client can keep his/her investment strategy intact and delay recognition of capital gains or losses resulting from the sale of investments. Clients should consult a tax advisor for more details.

What are some of the risks of margin borrowing?

A principal risk of margin borrowing is related to decreases in the market value of the securities in client’s accounts. While margin borrowing has the potential to amplify gains, it can also magnify losses. If the value of the securities falls significantly, your client will need to add additional funds or sell securities held in the account to correct the deficit. Even if you do so, we may still sell assets in your client account without notifying you or the client first.

Will clients be charged interest?

Margin interest is charged on the amount of money your clients borrow, for the time that they borrow it. Margin interest rates are available on our site and are subject to change at any time without notice. Interest accrues daily and is generally charged to the account monthly but may be charged sooner, such as when closing or transferring an account.

What accounts are eligible for margin borrowing?

Individual, Joint, Trust, and Business accounts are eligible for margin borrowing.

Note that if the client has multiple accounts of the same type and registration, he/she is limited to enabling margin borrowing in just one account for each registration.

  • Margin borrowing can only be enabled for one individual taxable account with us in the client?s name, if he/she has more than one such account with us.
  • If the client has a joint account with another person, in addition to an individual taxable account, then both of those accounts could be margin borrowing enabled.
  • However, if the client has a second joint account with this same person, then only one of those joint accounts could be margin borrowing enabled.

We encourage you and your clients to read the full FINRA margin disclosure statement, which is available here

Which types of securities may be considered as eligible securities for margin borrowing?

  • Publicly traded stocks and ETFs held by us in client brokerage accounts are generally considered eligible securities for margin borrowing.
  • Securities priced under $5 per share are not eligible for margin borrowing.
  • Securities issued in an Initial Public Offering (IPO) are not eligible for margin borrowing until 30 days after their listing date.
  • Mutual funds are not currently eligible for margin borrowing.
  • Leveraged ETFs provide less margin borrowing power than fully margin eligible securities.

Note that the amount of money we will lend to your clients will vary for different securities, may decrease based on the volatility of the securities and on other factors, and may change at any time as we determine. We do not publish or provide advanced notice of changes to our list of eligible securities or our credit extension policies.

How much must be in the account to start?

For an account to be eligible for margin borrowing, it must have a value of at least $2,000, either in cash and/or in eligible securities.

How much can clients borrow?

The amount of money that your client can borrow is determined by us, based upon our internal policies, the rules of the Board of Governors of the Federal Reserve System, the Securities and Exchange Commission (SEC), and the Financial Industry Regulatory Authority (FINRA). This is generally an amount up to 50% of the market value of eligible securities and/or the cash in the account.

Can clients use margin borrowing to withdraw cash?

After they have met the $2,000 minimum equity requirement, clients can borrow and withdraw from the account up to 50% of the market value of eligible securities.

Does a minimum account value have to be maintained?

Margin borrowing is based on the market value of eligible securities in the account. If the value of eligible securities in the account decreases and the account?s equity falls below certain minimum maintenance thresholds, clients will be required to either sell securities in the account or deposit cash. We can sell any securities in an account to satisfy a deficit, including selling more securities than the debit amount, and we may not notify you or the client before we sell their securities.

How do clients repay what they’ve borrowed on margin?

Clients may deposit funds or sell securities to pay off some or all of the margin debt. There is no set repayment schedule.

How does asset based fee billing work for clients with margin debt?

Automated billing of advisor, model manager and platform fees is processed based on total account value, which subtracts margin debt from the value of all holdings in the account to determine the total value of the account. For example, if a client is billed at the account level quarterly in advance, and the client has an account with holdings worth $2 million and margin debt of $1 million at the time billing is calculated, then the total billable value for that account will be $1 million.

How is margin borrowing enabled on an account?

Clients should go to the Settings page after they login to their Folio account and select the Margin Borrowing link, then follow the instructions.

How is margin borrowing disabled?

If clients wish to turn off margin borrowing, and they have paid off any margin debt, they can select the Margin Borrowing link on the Settings page and follow the onscreen instructions to disable this feature.

If a margin call is placed on an account, what happens?

While we are not required to place a margin call on an account (i.e., we can sell securities without prior notice), we normally will notify you and your clients by email if a margin call is placed on an account. A margin call may be satisfied by transferring funds into the account or selling securities in the account. If the margin call is not satisfied within the required time period, or if we otherwise decide based on market or other factors to act, we will sell securities in the account, without notifying you or the client first, to satisfy the margin call. If the sale proceeds did not satisfy the margin call, your clients will still be responsible for any margin debit in the account. We are not obligated to honor any time period specified in a margin call email.

Besides the ability to borrow against the securities and cash in a margin enabled account, are there any other differences between a margin enabled account and an account not enabled for margin?

Yes, we can for our benefit loan securities held in the margin enabled account and pledge those securities, for an amount up to 140% of your margin debit to us, as collateral for a loan at a bank. We may also loan these securities to ourselves or to others. As a result of these loans, clients may not be entitled to receive certain benefits, such as the ability to exercise voting rights and/or receive interest, dividends, and/or other distributions on the securities lent. They may only be allocated and receive substitute payments in lieu of interest, dividends, and/or other distributions. Substitute payments may not be afforded the same tax treatment as actual interest, dividends, and/or other distributions, and clients may incur additional tax liability for substitute payments that they receive. We may allocate substitute payments in any manner permitted by law, rule, or regulation, including, but not limited to, through a lottery allocation method. Clients are not entitled to any compensation in connection with securities lent or pledged from an account or for additional taxes they may be required to pay as a result of any tax treatment differential between substitute payments and actual interest, dividends, and/or other distributions.