Portfolio Margin Risk Disclosure Understanding

R

Ritaelyn

I'm applying for portfolio margin at a broker. I'm trying to understand their risk disclosure statement. I completely understand the margining rules behind PM.

What I don't understand is this:
Why there is greater risks of having a fully paid account in portfolio margin instead of another account type?

Why is there a possibility I won't get back 100% of my equity in a broker's insolvency?

Are the liens on my securities I'm agreeing to in my PM Risk Disclosure document means the broker could pull another MF Global situation? IE use my shares as collateral for their prop trading? Or are they just doing securities lending to short sellers on the entire PM account and just all the risks that go along with that?

I'm intending to keep my Portfolio Margin account fully paid 90-95% the time, same as a cash account. I'm only desiring to utilize Portfolio Margin's unique features only a few times a year. Is portfolio margin right for me?

I'd greatly appreciate it if someone walks me through these specific risk disclosures providing legal information. Googling them looks like it's been standardized across every broker.
 
The safety of your funds in a PMA from your broker is no different than a Reg-T margin account. You are protected by SIPC. Because a PMA provides more leverage and a lower margin on naked options, it has more risk in what you can do, not more from your broker. The PM disclosure is required to point out that risk.
 
Thanks Robert! I really appreciate the quick response. I'm above SPIC limits with my account.

I'm getting really hung up on these particular risk disclosure statements. Will you please walk me through those as well?

has a lien on all long positions in a portfolio margin account, including margin equity securities, even if fully paid. Accordingly, to the extent that a client does not borrow against long options and margin equity positions in a portfolio margin account or have margin requirements in the account against which the long options or margin equity securities can be credited, there is no advantage to carrying the long options and margin equity securities in a portfolio margin account and the client should consider carrying them in an account other than a portfolio margin account.

16. For the reasons noted above, a client who carries long eligible positions in a portfolio margin account could, under certain circumstances, be less likely to recover the full value of those positions in the event of the insolvency of Broker

Rule 15c3-3 under the Securities Exchange Act of 1934 requires...
The hypothecation rules under the Securities Exchange Act...

LONG POSITIONS IN A PORTFOLIO MARGINING ACCOUNT WILL BE EXEMPTED FROM CERTAIN CLIENT PROTECTION RULES OF THE SECURITIES AND EXCHANGE COMMISSION AS DESCRIBED ABOVE
​
For 16 - is it just noting the risks if I have PM positions on and they go bankrupt. Does it include the risks of them having a lien on all my shares and they go bankrupt? (IE their creditors possibly selling the shares due to the lien?)

I'm interpreting the disclosure statement as waving SEC rules 15c3-3, 8c-1 and 15c2-1 in full. Is it waiving them in full, or only to the extent necessary to grant the lien on the account?

Since I'm above SPIC limits I do place some value in the risk controls of the broker being required to promptly obtain and maintain physical possession or control of all fully paid securities and excess margin securities and maintain a special reserve account for the benefit of their clients.

To me, it looks like the risk disclosure statement is waiving the broker's requirements to do the risk control, allowing hypothecation, etc., even if I'll be "fully paid" in the PM account 90-95% the time. I'm just having a really hard time understanding this part even when the broker suggests I should carry these positions in another account.

So is the agreement just outlining their risk controls rules and hypothecation and I'm only allowing these assets to be exempt from SEC rules 15c3-3, 8c-1 and 15c2-1 in regards to the lien, or am I allowing these assets to be exempt from everything 15c303m 8c-1, 15c-2-1 outlines - risk controls, hypothecation, etc?

I know the safety of my funds in a Reg-T margin account are only up to my excess margin. 140% of the equity of my margin requirement is fair game. To me, it sounds like 100% of the equity in a PM account even with 0 excess margin - "paid in full", has less protections.

I'd appreciate any more legal information you're able to give on this subject!
 
I wish I could be of more help, but the Language that they’re using it’s above my pay grade. Every broker has disclosure documents. We have additional disclosure documents for PMA. I have never read more than a few lines of either one. I accept them as necessary to open an account anywhere.

Ritaelyn said:
Thanks Robert! I really appreciate the quick response. I'm above SPIC limits with my account.

I'm getting really hung up on these particular risk disclosure statements. Will you please walk me through those as well?

has a lien on all long positions in a portfolio margin account, including margin equity securities, even if fully paid. Accordingly, to the extent that a client does not borrow against long options and margin equity positions in a portfolio margin account or have margin requirements in the account against which the long options or margin equity securities can be credited, there is no advantage to carrying the long options and margin equity securities in a portfolio margin account and the client should consider carrying them in an account other than a portfolio margin account.

16. For the reasons noted above, a client who carries long eligible positions in a portfolio margin account could, under certain circumstances, be less likely to recover the full value of those positions in the event of the insolvency of Broker

Rule 15c3-3 under the Securities Exchange Act of 1934 requires...
The hypothecation rules under the Securities Exchange Act...

LONG POSITIONS IN A PORTFOLIO MARGINING ACCOUNT WILL BE EXEMPTED FROM CERTAIN CLIENT PROTECTION RULES OF THE SECURITIES AND EXCHANGE COMMISSION AS DESCRIBED ABOVE
​
For 16 - is it just noting the risks if I have PM positions on and they go bankrupt. Does it include the risks of them having a lien on all my shares and they go bankrupt? (IE their creditors possibly selling the shares due to the lien?)

I'm interpreting the disclosure statement as waving SEC rules 15c3-3, 8c-1 and 15c2-1 in full. Is it waiving them in full, or only to the extent necessary to grant the lien on the account?

Since I'm above SPIC limits I do place some value in the risk controls of the broker being required to promptly obtain and maintain physical possession or control of all fully paid securities and excess margin securities and maintain a special reserve account for the benefit of their clients.

To me, it looks like the risk disclosure statement is waiving the broker's requirements to do the risk control, allowing hypothecation, etc., even if I'll be "fully paid" in the PM account 90-95% the time. I'm just having a really hard time understanding this part even when the broker suggests I should carry these positions in another account.

So is the agreement just outlining their risk controls rules and hypothecation and I'm only allowing these assets to be exempt from SEC rules 15c3-3, 8c-1 and 15c2-1 in regards to the lien, or am I allowing these assets to be exempt from everything 15c303m 8c-1, 15c-2-1 outlines - risk controls, hypothecation, etc?

I know the safety of my funds in a Reg-T margin account are only up to my excess margin. 140% of the equity of my margin requirement is fair game. To me, it sounds like 100% of the equity in a PM account even with 0 excess margin - "paid in full", has less protections.

I'd appreciate any more legal information you're able to give on this subject!
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