FINRA Series 7Opens Accounts and Evaluates Customer ProfileMedium
A customer signs a margin account agreement authorizing the broker-dealer to pledge the customer's margin securities as collateral for a bank loan used to finance the firm's margin lending. This provision of the margin agreement is known as the:
- ACredit agreement
- BHypothecation agreement
- CDiscretionary trading agreement
- DLoan consent agreement
Show answer & explanationAnswer & explanation
Correct answer: B. Hypothecation agreement
The hypothecation agreement permits the broker-dealer to re-pledge (hypothecate) the customer's margin securities to a bank as collateral for the loan the firm uses to carry the customer's margin debit balance. This is distinct from the loan consent agreement, which permits the firm to lend the customer's fully-paid or excess margin securities to others (e.g., for short sales).
Why the other options are wrong
- A. A credit agreement discloses interest rates and terms on the debit balance, not pledging rights.
- C. A discretionary trading agreement grants trading authority, unrelated to pledging securities.
- D. A loan consent agreement covers lending the customer's securities to third parties, a separate optional provision.
Hypothecation Agreement
A provision within the margin agreement allowing a broker-dealer to pledge a customer's margin securities as collateral for the firm's bank loan.
- Part of the margin account agreement package
- Distinct from the loan consent agreement (lending securities to third parties)
- Enables the firm to re-hypothecate (pledge again) customer collateral, subject to limits
Memory trick: HYPO = firm 'hangs' your stock at the bank as collateral.