Client Accounts and Relationships

Maintaining Client Accounts and Relationships

• This chapter explains how to manage cash and margin accounts.
• Gain insight into communicating account details to clients.
• Learn to address client complaints and handle account transfer requests efficiently.

Accounting Practices

• Registered Representatives(RRs) ensure clients settle securities transactions.
• RRs must assess client account status, including owing funds or withdrawal availability.
• Client accounts may reflect deposits, withdrawals, dividends, interest, purchases, sales, and fees.
• Deposits, interest, and security sales credit the account.
• Withdrawals, short security payments, borrowed money interest, and security purchases debit the account.
• Security deposits/withdrawals affect market and loan values, and should be factored into status assessments.
• Account cash functions similar to a bank statement.

Table 8.1 Transactions in a Client Account

• Tracks transaction impact on client account balance in credits and debits.
• An initial deposit will increase the overall balance
• Client purchases will decrease the overall balance
• Receiving dividends on securities increases the value

Margin Accounts

• Margin accounts allows clients to buy/sell on credit but only pay a portion of the price.
• Dealer members will lend the remainder amount and charge interest, holding purchased securities as collateral.
• Interest is calculated on the debit balance, and is charged to margin clients based on rates from chartered banks.
• Margin refers to funds the investor personally provides.
• Credit/loans granted based on market value and security quality.
• Long margin account: finances partial security purchases via dealer member borrowing.
• Short margin account: allows selling securities not owned by arranging to borrow from dealer member, also called a short sale.
• Canadian Investment Regulatory Organization (CIRO) regulates credit amounts dealer members can extend on listed/unlisted securities.
• CIRO rules specify minimum requirements for margin agreements and maximum financeable amounts/loan values per security type.
• CIRO permits dealer members to extend certain credit percentages, dealer members can also use more restrictive house margin rules.
• In Borrowing for Investment Purposes, dealers fully disclose risks of using borrowed money to invest.
• Disclosures include margin and investment loans from the dealer or external sources recommending leveraged loans.

Client Awareness of Borrowing Risks

• Investment using borrowed money is higher risk.
• Principal and interest must be paid, irrespective of the investment value
• Borrowing to invest is riskier than investing without borrowing

Potential Rewards to Clients for Using Margin

• Purchasing more securities than normal
• Increasing return on assets
• Loan repayment without any penalties
• Using Loans for purposes outside of security purchases
• Using margin accounts for other security transactions

Client Strategy

• Borrow-to-invest strategy recommendations need assessment for suitability and suitability assessments are needed if the borrow money is used by a client
• Recommendations must be supervised
• Dealer members should have sound policies detailing risk evaluations, supervisions, suitability, and supervision evidence maintenance.
• Supervisory framework includes margin account loans and third-party loans.
• Monitoring off-book loans does not require an expansive framework.

Margin Agreements

• Clients must sign a margin agreement when using margin, defining rights/obligations.
• Agreements must state: adequate margin maintenance, loaned amount repayment on demand, and debt interest payment.
• Clients authorize dealer members to act if margin is not maintained
• Firms may use client's securities as collateral including pledging, realizing assets, security use and liquidations

Undermargined Accounts

• Clients usually must fully margin before action.
• Brokers issue margin calls if the margined security drops where the account is becomes undermargined, so sufficient funds are available.
• Margin calls may be written, telephone, courier, or faxed.
• Clients are notified before selling securities in long margin accounts if there is a deficit.
• Prior notification is given before buying shotted securities in short margin account
• A margin agreement specifies right to sell without notice
• Clients are encouraged to avoid margining close to the price limits to avoid frequent margin calls.
• CIRO prohibits dealer members from any transferring undermargined account
• CIRO requires sufficient funds/collateral for the account's credit.

Customised Margin

• CIRO determines a customized margin rate for listed security that reflects its market risk and grants margin eligibility to a group of securities on foreign exchanges.
• Table 8.2 summarizes margin required and maximum loan values extended for long positions
• Excludes bonds, debentures plus includes rights, warrants other than Canadian bank warrants.
• Required margin equals 100% minus loan value
• Minimum dealer member inventory and client account margin rate for foreign securities is 50%
• Securities eligible for reduced margin include ones that are liquid and with low price volatility.
• Security price fluctuations can result in losses.
• Reduced margin securities get 70% in dealer loans and CIRO can alter margin rates.
• Dealer members can have more stringent margin rates.

Debt Securities

• Most debt securities can be purchased with margin rates
• Bonds/debentures are categorized for margining and minimum margin requirements vary per credit quality and maturity.

Factors Affecting Regulatory Margin Rates

• Creditworthiness : Higher issuer creditworthiness increases loan availability with lower margin rates.
• Term to maturity : Longer security lifespans increase price volatility, requiring a high margin.
• Default : High security default risk requires a high margin to purchase it.

Long Margin Account

• Loan value: financing amounts from dealer members
• Margin position : Account status with respect to margin requirements and deposits
• Equity position: Whether the dealer loan is fully secured by equity

Loan Value

• Loan Value is the concept of how much a dealer is willing to lend to finance the purchase of securities.
• In lending, the regulatory maximum loan value is the maximum financing that a dealer may give a client based on the security held.

Margin Position

• An account’s loan value is equal or greater than the borrow which is called fully margined.
• Excess margin* is when the loan value and debit balance is different.
• Shortage means that the account is undermargined, called margin deficiency
• Margin Deficiency* is when additional deposit is needed.

Equity Position

Equity Position: Total securities market value plus/minus debit/credit balance

• A positive is a fully secured position
• A negative is partly secured position
• No securities with debit is unsecured positions

Concentrated Positions

• Greater risk because of the possible loss in market events

Long Margin Account and MKT Price

• If price declines, net equity falls requiring a margin call

Short Margin Accounts

• Differ since there are differences in risk and their margins

Risks involved in taking Short Positions

• Securities may increase
• Unlimited risk

Credit Balances of Securities Sold Short

• Credit balances do not allow for withdrawals or credit interest
• Client has Obligations to securities at a future date, so there must be funds available

Margin Required

• The initial market value is equal to 150% or total credit value In a long margin account, the credit must be in excess margin
• Credit of account - the margin = short sale

Trading Disputes

• Resolved from dispute in trading history of the client.
• Check all account applications and trading history.

Margin Situations:

• Margin positions use a complex formula on convertibles/debentures
• Hedges are governed separately with similar accounts

Special Margin Situations and Client Types

• Concentration client list or high amount in another account

Free Credit Balances

• Money from any source from, or, for, the client is free cash balances

Cash Accounts: Accounts where no financing is being used

Cash Account Rule

The Cash Account Rule purposes are:

• Credit practice
• Equal basis

Cash Account Standards

• Limit buying and trading practices
• Avoid or delay statements

Settlement

Delivery: on sales Payment: on purchase, or after two methods.

• Cash Deposit Equity: Has equity has long as is Trades: On margin to be set to margin account
• Transfers Adequate transfer must occur

Overdue Accounts

• There are minimum capital requirements, and may affect what clients
• Pay on time
• Are able to do