FINRA Series 7Processes and Confirms TransactionsMedium
A customer owns 300 shares of XYZ stock long in a cash account and instructs the representative to sell short 300 shares of the same stock in a margin account ('short against the box') to lock in a gain before year-end. XYZ is trading at $40 per share. What is the Reg T margin requirement for this short sale?
- A$3,000
- B$6,000
- C$12,000
- D$0, because the position is fully hedged by the long shares
Show answer & explanationAnswer & explanation
Correct answer: B. $6,000
Reg T requires 50% initial margin on short sales regardless of an offsetting long position held elsewhere; there is no special exemption for shorting against the box. Requirement = 50% × (300 × $40) = 50% × $12,000 = $6,000.
Why the other options are wrong
- A. Understates the requirement; 25% is the maintenance margin rate for long positions, not the initial short margin.
- C. This equals 100% of the position value, overstating the Reg T requirement.
- D. There is no full margin exemption for short-against-the-box positions under current Reg T rules.
Short Sale Against the Box
Selling short shares of a security the investor already owns long, typically to lock in a gain; Reg T margin is still required as with any short sale.
- No reduced margin for holding an offsetting long position
- Reg T requirement is 50% of the short sale market value
- Often used for tax/timing purposes, but margin rules apply fully
Memory trick: Locked in the box doesn't unlock the margin requirement.