Client Transactions Accounting

• As a Registered Representative, it is the responsibility to ensure clients settle security purchase and sale transactions.
• This includes evaluating client accounts to inform clients of funds or securities owed or available for withdrawal.
• Even with meticulous account maintenance, client complaints and account transfer requests are inevitable.
• Thus preparation to handle any situation effectively is crucial.

Accounting for Client Transactions

• Knowledge of basic accounting practices for cash and margin accounts is necessary for analyzing account operation and status.

• Transactions appearing in client accounts include deposits, withdrawals, dividend crediting/charging, interest charging (on borrowed funds), security purchases/sales, and miscellaneous fees.

• The cash part of a client account functions like a bank statement:

  • Credits are made for deposits, dividends, interest, and sale proceeds.
  • Debits are made for withdrawals, short security dividends/interest, borrowed money interest, and security purchases.

• Security deposits or withdrawals do not directly impact cash balance, but affect market and loan value of securities.

• Table 8.1 shows a series of transactions and their effect on the account balance.

• E.g., an initial deposit of $10,000 results in a $10,000 credit balance.

• E.g., a purchase of equity securities for $4,200 results in a $4,200 debit, reducing the credit balance.

• E.g., receiving dividends increases the credit balance.

• E.g., withdrawing funds results in a debit.

• E.g., a security sale results in a credit.

• E.g., receiving interest increases the credit balance.

Margin Accounts

• Clients can buy/sell securities on credit through margin accounts.
• This requires initially paying only a portion of the transaction price.
• The dealer member loans the remaining amount and charges interest, holding purchased securities as collateral.
• Interest is calculated on the debit balance, typically based on chartered bank rates.
• Margin is the amount of funds investors put up themselves.
• Credit/loans granted by dealer members are linked to market value/quality of holdings.
• Long Accounts: partially finance security purchases by borrowing from dealer member.
• Short Accounts: sell securities not owned, borrowing them through dealer member, which is known as a short sale.
• CIRO regulates credit that dealer members can extend for security purchases (listed and unlisted).
• CIRO sets rules for margin agreements and maximum finance (or the maximum loan value of each type of security).
• Some dealer members avoid margin accounts altogether, while others have stricter margin requirements than regulations mandate.
• Dealer members may choose to have more restrictive house margin rules even though CIRO allows a certain percentage of credit extension to clients.
• Investors must understand margin account risks/rewards
• Borrowing for Investment Purposes – Suitability and Supervision, reminds dealers they must fully disclose all risks of using borrowed money to invest.
• Disclosure requirements include credit in the form of margin, as well as other types of investment loans provided or recommended by the dealer.
• Firms may recommend leveraged loans where clients get more credit from an outside source as investment strategy.
• Information about the risks of borrowing money to invest must be provided to clients.
• Borrowed money involves greater risk than using their own money.
• Principal and interest payments are still required even if the investment value decreases.
• Borrowing to invest could lead to much greater losses than investing without borrowing.
• Clients may see benefits to using margin or more leverage if prices of purchased securities do not decline.
• Clients can typically buy more securities than they could if they did not get the loan.
• Clients can increase their rates of return on their invested assets.
• Loans can be repaid at any time without penalty.
• Loans can be used for purposes other than buying more securities.
• Margin accounts can be used for other security transactions.
• Must determine the strategy is suitable for the client for any borrow-to-invest strategy,
• The dealer member is responsible for making a suitability assessment any time it becomes aware that borrowed money is to be used or is being used by a client.
• Dealer members require policies/procedures detailing how risks related to recommendations are evaluated, supervised, suitability assessed, and how supervision evidence is maintained.
• Proper supervision capture margin account loans and loans advanced by third parties.
• Expansive framework not expected to identify/monitor off-book loans. But cannot ignore.
• A margin agreement must be signed between clients and dealer members to define each party's responsibilities/rights.
• Agreement stipulations: clients must maintain adequate margin, repay the amount loaned when demanded, and pay interest on debt.
• The client gives the dealer member power to take action if the client breaches the Agreement.
• Securities used as collateral against the amount loaned may lead to a broker taking certain actions, including:
  • Pledging the client’s securities to raise money to fund the amount loaned to the client.
  • Realizing the client’s securities and other assets to cover the purchase of short securities.
  • Using a security in the client’s account to make a delivery on a short sale.
  • Liquidating the client’s securities and other assets to cover any amount they owe.
• Clients are normally given opportunity to fully margin accounts before any action.
• Brokers issues a margin call and it is sent to the client in writing
• Where there are time restrictions, clients may be contacted by telephone, courier, or fax.
• Prior to selling securities to cover margin deficit, attempt is made to notify long margin account clients.
• Buyers in same condition for buying Shorted Securities into short margin accounts.
• A copy of the notice is kept on file which specifies the right to sell out or buy part or all of the client's margined securities, without notice, in the event of dramatic and adverse price fluctuations.
• Even with all the conditions in place, consider notify the client of retain documentation.
• It is useful to encourage Client to avoid margining close to prevailing price limits - keeping the minimum margin amount on deposit in the account.
• Additional funds, or securities with excess loan value, provides a cushion of protection.
• Clients may have to respond to margin calls after minor adverse price fluctuations.
• Dealers cannot accept transfers from any undermargined account unless the member holds sufficient funds or collateral to margin it when taken over.
• Customized rate determines reflection of risk
• Margin eligibility applied to larger of securities listed on other exchanges, such as U.S.. *Restriction of bonds and debentures but includes rights and warrants (excludes bank warrants).
• Minimum margin required of clients *complement of maximum loan value (100% of purchase price - maximum loan value).
• Minimum dealer member inventory margin and client account margin rate for foreign is 50% Securities
• Security for margin can be reduced on high liquid/low price volatility
• Regulators study historical price volatility of securities.
• Reduced margin qualifies up to 70% in dealer loans, may choose for more stringent rates themselves, but cannot reduce below.
• Debt securities are usually lower than listed equities, Bonds and debentures into categories for margining purposes..
• Minimum margin requirements vary based on credit and date.
• Other criteria is listed for consideration relating from margin eligibility
• Issuer: amount of loan available to purchaser increases, Goverment bonds are lower than Mining stocks Term - Increase in price of security= higher volatility
• Default ; the risk of security also increases the amount of margin that clients put in.

Operating a Long Margin Account

• loan value is the maximum amount of financing that the dealer member supplies.

• Margin position is account status with respect to margin requirements and actual margin

• If a dealer loan is fully secured by equity in the client's account

• Loan is willing to lend to the client. -If the margin rate of a fixed-income security is 2%, then the loan value market is 98%

• The concept always stays the same ; for Ex. a 30% margin gives 70% in loan value The regulatory maximum states the maximum the dealer is able to provide for any Market value of security that a client holds in their account.

• Equity position shows how much assets account holder has.

• Accounts equal/greater than Amount borrowed = fully margined. Difference is called excess margin.

  • ex. $4,500 indicated account Is ready for the client. Shortage to account that must be deposited A margin contains stock and debit balance, amount greater than the securities.

• Types are Positive, negative when securities are in hold for the account

Cash Accounts

• Cash accounts must eliminate any credit practices in place, without harming business,

• Ensurion all deal members provide on credit for all clients The failure to maintain accounts properly can have the following activities

• accepting purchase orders from clients who do not intend to settle payments.

• Failure can come in two types:

  • Failure comply to cash account standards

• Trading delay settlement.

• Examples are; Cash with debt is outstanding for 20+ Days are not restricted Arrangements cannot delay in settlements. Purchase of Securities: Client makes purchase; the dealer can sell them, but if the securities rise, the client Settlemetn rules state to make transaction with 2 methods, aside any deposit/cash transfer can transfer funds. Adequate requirements must be obtained on margin and proper transfer may only occur after confirmation Members must follow the credit guidelines in this section. CIRO: uniform minimum requirements to determine size, type, and business with dealer members. The capital requirements for dealer members that carry overdue cash accounts have the effect of tying up portions of the dealer member's capital. In turn, the dealer member may fail certain routine solvency tests required by regulations. As a result, the firm's capital cannot be used