Client Accounts and Relationships

Maintaining Client Accounts and Relationships

• This chapter explains how to operate and maintain cash and margin accounts
• Also covered are communication of account information to clients
• How to deal with client complaints and account transfer requests

Key Terms

• Arbitration, Cash Account Rule, Complaints and Settlement Reporting System, confirmation, excess margin, fully margined, fully secured, hedge, loan value, margin agreement, margin call, margin deficiency, margin rate and undermargined are key terms

Introduction

• As a Registered Representative (RR), ensure clients settle securities purchases and sales
• Evaluate client accounts to inform clients about owed funds or potential withdrawals
• Be prepared to handle client complaints and transfer requests effectively

Accounting for Client Transactions

• Understand accounting practices for cash and margin accounts
• Transactions that might appear in client accounts
  • Client deposits or withdrawals of funds or securities
  • Dividends and interest credited for long securities and charged for short securities
  • Charging of interest on borrowed funds
  • Purchase or sale of securities
  • Miscellaneous fees
• Cash accounts function like bank statements; credits for deposits and sales, debits for withdrawals and purchases
• Securities deposits/withdrawals affect market and loan values which impact overall account status, consider loan concepts

Margin Accounts

• Margin accounts enable buying and selling securities on credit, paying a portion of the transaction price initially
• The dealer member loans the remaining amount and charges interest of loans based on debit balance, holding purchased securities as collateral
• Margin refers to the amount of funds the investor must personally provide and is based on security market value/quality
• Long and short margin accounts defined
  • Long margin accounts finance securities purchases through dealer member loans
  • Short margin accounts allow selling securities that are not owned by borrowing through dealer members, otherwise known as a short sale
• CIRO regulates credit amounts dealer members can extend on securities purchases
• CIRO rules specify margin agreements with maximum financeable amounts
• Dealer members can have more restrictive house margin rules
• Investors must know the potential risks and rewards of margin accounts
• Borrows must know that:
  • Using borrowed money involves greater risk than using their own money
  • There must be a principal and interest payment, even if the value of the investment decreases
  • Borrowing to invest could result in far greater losses than investing without borrowing
• There are potential rewards to clients for using margin or leveraging when the price of the securities purchased does not decline
• Investors can buy more securities than they could with a loan,
• They can increase their rates of return on assets and
• Can repay the loans at any time without penalty
• Borrow-to-invest strategies require assessing suitability and dealer members must make suitability assessments if they become aware of borrowed money usage
• Dealer members require policies detailing risk evaluation, supervision, suitability and evidence of supervision, including loans advanced by third parties

Margin Agreements

• Clients using margin must sign a margin agreement
• The agreement must state clients must maintain adequate margin, repay loaned amount on demand, and pay interest on debt
• Clients give dealer members power under margin agreements, including pledging securities for funding, realizing assets for short sales, using securities for short delivery, and liquidating assets for debt
• Clients normally have opportunity to fully margin accounts with brokers issuing margin calls when an account is undermargined and request an immediate increase of margin in the account
• Prior to selling securities in long margin accounts or buying securities in short margin accounts, every effort must be made to notify the client
• The margin agreement specifies the right to sell out or buy in securities without notice in case of dramatic price fluctuations
• In good client relations, notifying the client and retaining documentation is necessary
• Encourage clients to avoid margining close to price limits/frequent minor fluctuations
• It is prohibited for CIRO dealer members to accept transfers of undermargined accounts
• There must sufficient funds or collateral to the account's credit to reach margin requirements

Long Margin Accounts

• CIRO determines customized margin rates reflecting market risk and grants eligibility to foreign exchange listed securities
• Minimum margin required is the complement of the maximum loan value for Canadian/U.S. listed securities, excluding bonds/debentures but including rights/warrants without Canadian bank warrants
• Loan values subject to change; exchanges may prescribe higher margin requirements
• The minimum dealer member inventory margin and client account margin rate for foreign equity is 50%

Securities Eligible for Reduced Margin

• CIRO produces a reduced margin eligible securities list for high liquidity/low price volatility based on specific price risk/liquidity measures
• Regulators study historical price volatility to set margin rates
• Securities eligible for reduced margin qualify for up to 70% of value in dealer loans, CIRO can alter rates, and dealer members can impose more but not less stringent rates

Debt Securities

• Most debt securities can be purchased on margin at rates significantly lower than those for listed equities
• Minimums vary by credit quality/maturity length according to CIRO rules

Issuer Creditworthiness

• As creditworthiness of the issuer increases, so does the loan available to the purchaser/lower margin rate

Term to Maturity

• As the life span of a security increases, so does the volatility of its price - GOC Treasury Bills (T-bills) need less margin if shorter than GOC bond with long terms to maturity

Default risk

• As risk of a security increases so does the amount of client margin - Corporate bonds not meeting interest payments need more margin than issuers not in default

Operating a Long Margin Account

• To assess margin account status, understand loan value, margin position, and equity positions

Loan Value

• Loan value: the financing amount that the dealer is willing to supply to the client
• In fixed income margin rate of 2% implies a loan value of 98% of market value
• Dealer members sometimes impose more conservative loan values for certain securities than regulations, which is the same concept - Members are willing to lend a smaller amount than regulations would allow
• The regulatory maximum loan value is the overall financing that the dealer can provide based on market value in the client’s account; the total amount the member is willing to stake

Margin Position

• When the loan value is equal to or greater to the amount borrowed, accound is said to be fully margined
• The difference between the loan value and the debt balance is the excess margin, an extra allowance available
• When the loan value is less than the amount borrowed, the accound is said to be undermargined
• The shortage is called margin deficiency, the amount require to deposit to fully meet margin requirments

Equity Position

• Equit position (account stake) is determined through combines the assets and cash balances to determine its condition
• Calculated as total market value of the securities plus a credit balance or subtracted by a debit balance
• 3 equity positions exists
  • Fully secured - positive position, liquidated market will cover debit balance owing
  • Partly secured - Negative equity, liquidation would still owe money
  • Unsecured - Debit balance without securities present (similar to partly, though unsecured stays stagnant, unlike partly which can fluctuate)

Combination of short/long positions in margin account

• Net margin position determined when loan value/credit required are combined

Special Margin Situations

• Special circumstances may dictate specialized margin rules
  • convertible bonds/debentures use specific formulas
  • hedge positions/options accounts are subject to different policies
  • regulations must be determined about account concentration
  • excess margin on other accounts
  • unlisted short securities
• always consult with compliance and credit departments before margin positions

Free Credit Balances

• includes funds from client accounts deposited to fund securities, proceed from secuirty sales or income not reinvested
• aside from registered accounts of RSPs and RIFS, the member may use the funds to finance their business, though clients must statements must reflect use on account statements

Cash accounts

• accounts where credit is not extended from the dealer, sales are not made at delivery of funds
• two purposes for the Cash Account Rule
  • eliminiate poor credit practices and normalize business with clients
  • guarantee equal credit to all dealers

Poor Practices

• poor practices in accounts may exist when dealers:
  • accept payments they do not fully tend to make or have ressources for
  • accept sales from those who will not deliver and may be making an undisclosed sale
  • carrying undermargined accounts beneath them

If a Dealer is at risk

• if settlement is not mad on time, the RR member may be at financial risk
• two failures exist to ensure cash standards:
  • failing to adapt practices that ensure compliance
  • trading done to avoid or artificially delay settlement

What practices ensure compliance with cash standard

• cash accounts with debit balances longer than 20 business days are restricted
• accounts other than based on outstanding balances are restricted
• failing to transfer the accounts to margin accounts at settltment
• RR liable for bad debt in clients account
• settling securities in purchase accounts through sales in the accounts

What tactics avoid or delay settlement?

• shares are sold and bought similarly or the some day on same or similar positions to re-age outstanding accounts, with no benefit

Purchase of Securities

• purchases must be paid on or before setllement, or member can sell
• increase results in recover from member, if decreased with sales the rest will be perused
• improper may terminate relations

Sales of Securities

• securities must be delivered by settlement date
• members buy to fulfill obligations
• sale decline reduces losses from client

Settlement Rules

• for each transaction in cash accounts payments must be by delivery of prescription sale,
• payments occur through methods
• can transfer money
• may trade proceeds of securiteis

Cash Account Minimums

• the account requirements listed in this chpater are minimum requirements; members should check with credits department to ensure their firms policys

Overdue Cash Accounts

• due to large business and capital that may be tied, members have capital requirements that provide more financial pressure
• should seek immediate settlement or close accounts

Read Account Screens

• its important to udnerstand account screens (even if in accounting) with client obligations to address capital; those who do not pay on time are the less best
• clients need the full implications of trnasactions such as paying in delivery
• know capital charges regarding delinquent actions

Purpose of Charges

• these capital charges exist to secure account with that not settle and measured by certain factors:
  • the length of time transaction has occured
  • the quality of security

Account Types

• for both types of cash accounts look at the timing, such as how long an amount goes missing

Cashing 1-5

• for accounts up to five days, the securities in the accounts must measure up with value
• weighting ensure colatteral is considered; market value alone is not sufficient

Securties of Weighted and Delinquent

• securities over 60%margin is weighting at 100
• security margin over60% is 33.3
• Nasdaq weighted 33.3
• Others are 0