On February 27th, 2001, the Securities and Exchange Commission (SEC)
approved amendments to NASD Rule 2520. These amendments modify margin
requirements for individuals who actively daytrade stocks and become effective on September 28th, 2001.
While the recent amendments largely focus on "Pattern Day Traders" (i.e.
active intra-day traders), we feel it is still very important for anyone
who trades the markets to review these changes.
Following are key points to keep in mind regarding this rule
change:
- Your broker and/or the NASD will consider you a "pattern daytrader" if
you buy and sell (or short and cover) any security on the same day in a
margin account AND you execute four (4) or more such trades during any
rolling five business day period (Saturday, Sunday and market holidays do
not impact the five day rolling period).
- If, at any time, you execute four (4) or more such trades in a rolling
five day period, you'll then be required to maintain a minimum equity
of $25,000 in your margin account prior to any further day-trading
activities. This may also impact other investing in the account as well
(check with your broker).
- At some brokerage firms, if you meet the "pattern daytrader" requirements
and maintain a margin account of at least $25,000 as required, you will be
extended buying power of up to four times your maintenance margin excess.
Keep in mind, however, that this buying power is limited to intra-day
trades only and you must be flat by the end of the trading day or your
account will close trading at 25% equity (resulting in a house/margin
call).
In addition to the points outlined above, we suggest you review the
information below. This information was recently released by the National
Association of Securities Dealers, Inc. (NASD) in order to address the
upcoming changes to NASD Rule 2520. It has been reprinted here for your
convenience.
SEC Approves Proposed Rule Change
Relating To Day-Trading
Margin Requirements
Executive Summary
On February 27, 2001, the Securities and Exchange Commission (SEC)
approved amendments to National Association of Securities Dealers, Inc.
(NASD®) Rule 2520 relating to margin requirements for day traders (the
“amendments”).1 The amendments become effective on September 28, 2001 and
are substantially similar to amendments by the New York Stock Exchange
(NYSE) to its margin rules.2
The text of the amendments and Federal Register version of the SEC
Approval Order are attached (see Attachments A & B). For a detailed
description of the amendments, as well as specific examples of certain
margin calculations under the amendments, members should review the
attached SEC Approval Order (see Attachment B).
Questions concerning this Notice may be directed to Susan DeMando,
Director, Financial Operations, Member Regulation, NASD Regulation, Inc.
(NASD Regulation), at (202) 728-8411, or Stephanie M. Dumont, Associate
General Counsel, Office of General Counsel, NASD Regulation, at (202)
728-8176.
Background
Because Regulation T initial margin requirements and NASD/NYSE standard
maintenance margin requirements3 are calculated only at the end of each
day, a day trader who has no positions in his or her account at the end of
the day would not incur a Regulation T initial margin nor a standard
maintenance margin requirement, assuming no losses in the account from
that day’s trading. Current NASD/NYSE initial margin provisions, however,
generally require a customer to deposit margin of at least $2,000, unless
in excess of the cost of the security.
Although the day trader may end the day with no position, the day trader’s
clearing firm is at risk during the day if credit is extended. To address
this risk, the NASD and NYSE require day traders to demonstrate that they
have the ability to meet the initial margin requirements for at least
their largest open position during the day. Specifically, under current
margin requirements, a customer who meets the definition of day trader
under the rule must deposit in his or her account the margin that would
have been required under Regulation T (i.e., the 50 percent initial margin
requirement) if the customer had not liquidated the position during the
trading day. If the customer day trades, but is not considered a “day
trader,” the customer is still required to post 25 percent of the position
held during the day.4 Currently, this payment is due after the risk has
been incurred. Therefore, the funds are not available during the trading
day when the clearing firm is at risk.
Currently, if a customer’s day trading results in a day-trading margin
call, the customer has seven days to meet the call by depositing cash or
securities in the account. Because day traders typically end the day flat
and this day-trading “margin” deposit is not securing a margin loan, the
customer is not required to leave the margin deposit in the account and
may withdraw the deposit the day after the deposit is made. If the
customer fails to meet a day-trading margin call, no specific action to
the customer account is required to be taken by the firm. There are no
securities to liquidate, as there would be for an existing position,
because day traders typically end the day flat.
Description Of Amendments
The amendments address the deficiencies that have been identified with
existing rules relating to day-trading margin activities. Specifically,
the amendments provide for the following changes to current margin
requirements:
- Definition of “pattern day trader.” Under the amendments, “pattern day
traders” are defined as those customers who day trade four or more times
in five business days. If day-trading activities do not exceed six percent
of the customer’s total trading activity for the five-day period, the
clearing firm is not required to designate such accounts as pattern day
traders. The six percent threshold is designed to allow clearing firms to
exclude from the definition of pattern day trader those customers whose
day-trading activities comprise a small percentage of their overall
trading activities.
In addition, if the firm knows or has a reasonable basis to believe that
the customer is a pattern day trader (for example, if the firm provided
training to the customer on day trading in anticipation of the customer
opening an account), the customer must be designated as a pattern day
trader immediately, instead of delaying such determination for five
business days.
- Minimum equity requirement. The amendments require that a pattern day
trader have deposited in his or her account minimum equity of $25,000 on
any day in which the customer day trades. The required minimum equity must
be in the account prior to any day-trading activities; however, firms are
not required under the rule to monitor the minimum equity requirements on
an intra-day basis. The minimum equity requirement addresses the
additional risks inherent in leveraged day trading activities and ensures
that customers cover losses incurred in their accounts from the previous
day before continuing to day trade.
- Day-trading buying power. The amendments limit day-trading buying
power to four times the day trader’s maintenance margin excess. This
calculation is based on the customer’s account position as of the close of
business of the previous day.
- Day-trading margin calls. Under the amendments, in the event a
day-trading customer exceeds his or her day-trading buying power
limitations, additional restrictions are imposed on the pattern day trader
that more adequately protect the firm from the additional risk and help
prevent a recurrence of such prohibited conduct. Members are required to
issue a day-trading margin call to pattern day traders that exceed their
day-trading buying power. Customers have five business days to deposit
funds to meet this day-trading margin call. The day-trading account is
restricted to day-trading buying power of two times maintenance margin
excess based on the customer’s daily total trading commitment, beginning
on the trading day after the day-trading buying power is exceeded until
the earlier of when the call is met or five business days. If the
day-trading margin call is not met by the fifth business day, the account
must be further restricted to trading only on a cash-available basis for
90 days or until the call is met.
- Two-day holding period requirement. The amendments require that funds
used to meet the day-trading minimum equity requirement or to meet a
day-trading margin call must remain in the customer’s account for two
business days following the close of business on any day when the deposit
is required.
- Prohibition of the use of cross-guarantees. Under the amendments,
pattern day traders are not permitted to meet day-trading margin
requirements through the use of cross-guarantees. Each day-trading account
is required to meet the applicable requirements independently, using only
the financial resources available in the account. Accordingly, pattern day
traders are prohibited from using cross-guarantees to meet the minimum
equity requirements or to meet day-trading margin calls.
In addition, the amendments revise the current interpretation that
requires the sale and repurchase on the same day of a position held from
the previous day to be treated as a day trade. The amendments treat the
sale of an existing position as a liquidation and the subsequent
repurchase as the establishment of a new position not subject to the rules
affecting day trades. Similarly, if a short position is carried overnight,
the purchase to close the short position and subsequent new sale would not
be considered a day trade.
For a more detailed description of the amendments, as well as specific
examples of certain margin calculations under the amendments, 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.
ATTACHMENT A
SR-NASD-00-03, Proposed Rule Language, as amended
Proposed new language is in {brackets}; 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 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.}
{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.
Please note: a printable
PDF version of this information is also available from the NASD
website. In order to view/print this PDF file, you'll need to download
and install Adobe Acrobat if you do not already have it on your
system.
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