The new amendments to rule 2520 only effects those who daytrade on a margin acct. It does not force a daytrader to change from a cash acct to a margin acct. as some have posted on RB. I find nothing that indicates that. If I am missing something, please inform me and others. I only trade on a cash basis, so I will not be effected.
NASD Notice to Members 01-26
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:
(1) 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.
(2) 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.
(3) 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.
(4) 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.
(5) 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.
(6) 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.
Notices to Members attempt to present information to readers in a format that is easily
understandable. However, please be aware that, in case of any misunderstanding, the
rule language prevails.
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.
