Terra Nova Online Notice: New Margin Rules, Part 1

D

David Lipsett

Terra Nova Online Notice: New Margin Rules
Due to the large number of questions we've received regarding the NASD
margin rule changes, we have compiled a list of frequently asked questions to help you better understand Terra Nova Trading's interpretation of the new rules and how they will affect you. If you have any additional questions or concerns regarding this please contact us or visit: http://www.terranovaonline.com/TNO2001/TNO_Main/Events.asp for an update on the much anticipated online chat regarding the new rules.

Regards,
Client Services
Terra Nova Online
(866)TN-ONLINE (866-866-6546)
www.terranovaonline.com

Q. What date will Terra Nova Trading and its Branches implement the new day trading rules?
A. The effective date is September 28, 2001.

Q. What is the difference between the August 27th, 2001 and the
September 28th, 2001 dates?
A. NYSE member firms were required to set the new rules into place
on August 27th and NASD member firms, such as Terra Nova Trading and its Branches, are
required to implement these rules on September 28th, 2001.

Q. What constitutes a day trade under the new margin rules?
A. A day trade is the purchase and sale or sale and purchase of the
same security on the same day in a single account.

Examples of day trades:
8/31/01 Buy 500 MSFT and Sell 500 MSFT
8/31/01 Buy 500 MSFT and Sell 200 MSFT
8/31/01 Sell Short 300 MSFT and Buy 300 MSFT

Please note that this definition revises the current interpretation
that requires the sale and repurchase of a position held from the
previous day to be treated as a day trade. Going forward, the sale
of an existing position that was held overnight will be treated as a
liquidation and the subsequent repurchase of that position as the
establishment of a new position not subject to the rules affecting
day trades.

Q. What is a Pattern Day Trader?
A. A client who day trades 4 or more times in 5 business days within
a single margin account. If the day trading activity in a single
margin account does not exceed 6% of the client's total trading
activity for the 5-day period, the client would not be considered a
"Pattern Day Trader". If a client qualifies as a Pattern Day Trader
in a single margin account, that account will be designated as a Day
Trade Margin Account.

For Example:
If a client does 4 day trades within 5 business days and also has a
total of 100 transactions during that 5 day period, they would not be
deemed a Pattern Day Trader since less than 6% of that customer's
total trades would have been day trades. In this instance only 4% of
the customers trades would be considered day trades.

Q. What are the Minimum Equity Requirements for Day Trade Margin
Accounts?
A. An account classified as a "Pattern Day Trader Account" requires
a minimum liquidating equity of $25,000. Your liquidating equity can
be found every morning on the bottom section of your comprehensive
report found in the client center on our website
www.terranovaonline.com. Liquidating equity may differ from margin
equity as liquidating equity includes positions with a market value
below $5.00, in addition to options positions.

Q. What types of securities can I deposit into my margin account at
Terra Nova Trading and its Branches?
A. Terra Nova Trading and its Branches will accept marginable equities, government bonds,
corporate bonds, municipal bonds, mutual funds and/or money markets.
Please call a Terra Nova Online’s Client Service Department if you
have questions in determining whether your equities are marginable,
and to assess the extent to which the other securities are
marginable.

Q. How do the new margin rule amendments change Day Trading Buying
Power (DTBP)?
A. DTBP for accounts deemed as Pattern Day Traders, is limited to
four times the day traders Maintenance Excess. This calculation is
based on the customer's account positions as of the close of business
the previous day. Maintenance Excess is calculated by subtracting
your Margin Maintenance Requirement from your Margin Equity. The
maintenance excess (DT Excess Equity) figure can be found every
morning on the bottom section of your comprehensive report found in
the client center on our website www.terranovaonline.com
Q.How do I calculate my Day Trading Buying Power?
A. Provided the account is not currently in a day trading call, and
the account is coded as a pattern day trader, DTBP is calculated by
multiplying your maintenance excess times four. If in a day trading
call and coded as a pattern day trader, the DTBP is calculated by
multiplying your maintenance excess times 2 on an aggregate basis.
Aggregating trades is defined as taking the total cost of all opening
positions in one trading day.

Q. Where can I find my Maintenance Excess?
A. Your maintenance excess (DT Excess Equity) figure can be found
every morning on the bottom section of your comprehensive report
found in the client center on our website www.terranovaonline.com. In
addition, you can also find this figure in your account detail screen
within your RealTick software or the positions section within your
Investor platform. If you have any questions locating this figure
please do not hesitate to call a Client Service Department at
866-866-6546.

Q. What will happen if my pattern day trade margin account falls
below the $25,000 minimum equity balance?
A. If an account begins the day below the $25,000 minimum and is
coded as a pattern day trade account, the account will be restricted
to trading one times cash available on an aggregate basis. In
addition, when the account falls below the minimum equity
requirement, a minimum equity call is issued.

Please see part 2 for more Q & A
 
Q. What is an equity call?
A. An Equity Call is generated when your account equity falls below
the minimum requirement of $25,000 and you are trading on margin.

Q. If I do not meet an equity call will my account go on 90-day
restriction?
A. No. If an account fails to meet an equity call, the account will
continue to be restricted to one times cash available on an aggregate
basis.

Q. How do I meet an equity call?
A. You must deposit either cash or fully paid for, marginable
securities with sufficient loan value to bring your account above
$25,000.

Q. What if I day trade in an account that is below $25,000 that is
coded a Pattern Day Trade Account?
A. You may day trade in a pattern day trade account up to 1 times
cash available on an aggregate basis.

For example:
Account comes into the day with $20k = cash available
Buy 500 shares of DELL at 20 = $10,000
Sell 500 shares of DELL at 20 = $10,000
Buy 400 shares of AAPL at 25 = $10,000
Sell 400 shares of AAPL at 25 = $10,000

The aggregate sum of the buys is $20,000. No trading call was
created. However, if the account were to initiate another purchase
or short sale (open an additional position) a day trade call would be
created in the amount exceeding the cash available amount.

Q. If my account is below the $25,000 minimum and I am coded as a
Pattern Day Trader, what happens if I liquidate an overnight position
and repurchase the same security? How does that affect my buying
power?
A. Under the new rules, the liquidation of an overnight position
will not be counted towards a day trade.

For Example: An account with $20,000 equity...
Day 1: Buy $40,000 CSCO
Day 2: Sell $40,000 CSCO
Day 2: Buy $40,000 CSCO

Under this example no day trading call would be created because of
same day substitution. A sell of an overnight position and
subsequent buy of the same security on the same days (which does not
constitute a day trade) is treated as a same day substitution and the
customer can use the proceeds of the sale towards a new purchase.

Q. What if my pattern day trading margin account falls below the
$25,000 minimum equity balance intraday?
A. If the account is coded as a pattern day trade margin account and
drops below the $25,000 minimum intraday but has a liquidating equity
above $25,000 by the close of the day, the account will not generate
an equity call.

Q. What happens if I am a Pattern Day Trader and I exceed my Day
Trading Buying Power and my account is above $25,000?
A. If the day trading buying power is exceeded in a pattern day
trader account above $25,000, the account will be subject to a day
trading call.

Example:
A pattern day trader with $50,000 in equity, not currently in a call,
purchases $250,000 worth of stock. A trading call will be generated
in the amount of $12,500. Since not currently in a call, the
account would be able to purchase $200,000 worth of stock ($50,000
times 4). However, the account purchased an additional $50,000
generating a call of $12,5000 ($50,000 divided by 4).

Q. What is a Day Trading Call?
A. A Day Trading Call is generated when a pattern day trade account
above $25,000, exceeds their Buying Power when affecting an opening
position, provided the account is not currently in a call. The
amount of the call is equal to 25% of the amount exceeded (see
example above).

Q. How do I meet a Day Trading Call?
A. You can meet a Day Trading Call by depositing full cash in the
amount of the call or fully paid for marginable securities. Please
be aware you cannot liquidate positions to cover a day trading call.

Q. How many days do I have to meet a Day Trading Call?
A. Once the call has been generated the customer has to meet the
call by trade date plus five business days (T+5).

For Example:
If a call is created on Monday, the call must be met by the following
Monday (assuming no market holidays.)

Q. What happens to the account during those 5 days that I have to
meet the call?
A. In a Pattern Day Trading Account, the day following the day the
call was created, the buying power will be restricted to two times
maintenance excess.
For example:
The call is created on Monday; the account will be limited to two
times maintenance excess on Tuesday.
The account will be margined based on the aggregate sum of all
opening trades beginning on the trading day after the day trading
buying power is exceeded until the earlier of when the call is met or
5 business days.

For example:
Account begins day with $15,000 maintenance excess (Buying Power of
$30,000) and proceeds to do the following trades:
Buy 300 MSFT @ 50 total cost $15,000
Sell 300 MSFT @ 51 total cost $15,300
Buy 200 AAPL @ 20 total cost $4,000
Buy 300 CSCO @ 15 total cost $4,500
Sell 200 CSCO @ 14 total cost $2,800

The aggregate sum of the above trading activity would be $24,500.
The account will be required to have at least $12,250 in maintenance
excess to execute the above trades ($24,500 divided by 2)

Q. What happens if I do not meet the day trading call within 5
business days?
A. If a day trading call is not met by T+5, the account is
restricted to trading one times cash on hand for 90 days or until the
call is met.

Q. Once I deposit funds into my account to meet a day trade or
equity call, how long before I may withdraw those funds?
A. Funds deposited to meet a day trade or equity call must remain in
the account for an additional 2 business days before they may be
withdrawn. Please remember there is a ten-business day hold on all
checks deposited into the account.

For example:
Funds wired into the account on Monday are available to be withdrawn
on Thursday, assuming no market holidays.

Q. Are Regulation T calls affected by this change?
A. No, rules for covering and calculating Regulation T calls will
remain the same. The reason for this is that the Federal Reserve
regulates Regulation T and the Pattern Day Trade rules are changes
imposed by the NASD.

Q. Has there been a change to Cross Guarantee accounts?
A. 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 their
account.
 
Originally posted by David Lipsett
Q. How do I calculate my Day Trading Buying Power?
A. Provided the account is not currently in a day trading call, and
the account is coded as a pattern day trader, DTBP is calculated by
multiplying your maintenance excess times four. If in a day trading
call and coded as a pattern day trader, the DTBP is calculated by
multiplying your maintenance excess times 2 on an aggregate basis.
Aggregating trades is defined as taking the total cost of all opening
positions in one trading day.

More...

I apologize if this has already been covered in another thread and I just missed it. But for some reason, I can never get a straight answer on this.

Am I reading this correctly that daytrading buying power will be the SUM of all opening positions during the day, regardless of the current real-time equity? In otherwords, if you start the day with $50,000, can you only open $200,000 worth of positions "in aggregate" for that day, even if you close out the position before opening another, similar to the way most cash accounts are handled now? The wording in the Terranova notice with the statement that a daytrading call could not be met by selling an existing position would seem to back this up. This would kill most active traders who go through their "aggregate" margin several times per day. The old 2-1 margin with unlimited updating would be way better compared to this. I wish whoever writes the rules, would spare us the legalese and just lay it out in clear language. I suppose we will know more after the 28th, when everyone finds out one way or the other. All this confusion makes me glad I stuck with futures.

Thanks for any clarification, and again, I apologize if I am rehashing old ground.

Kirk
 
Kirk,

DTBP will still be calculated the same: The only difference is you will multiply your maintenance excess times four instead of two.

In a Pattern Day Trading Account, the day following the day the
call was created, the buying power will be restricted to two times
maintenance excess aggregate.


Account in good standing:
50k will give you 200k in DTBP
You may buy and sell repeatedly just as before.

Account in daytrade call:
50k will give you 100k in DTBP
This is where the term aggregate applies.

You can meet a Day Trading Call by depositing full cash in the
amount of the call or fully paid for marginable securities. Please
be aware you cannot liquidate positions to cover a day trading call.

If a day trading call is not met by T+5, the account is
restricted to trading one times cash on hand for 90 days or until the call is met.

Hope this helps,
David
 
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