Justia Lawyer Rating
Super Lawyers
Avvo Rating Top Attorney
AV Preeminent

Will We See a Spike in Margin Liquidations Due to SEC Guidance?

Herskovits, PLLC

We are all painfully aware of the recent volatility in the markets, which has not gone unnoticed by the SEC. On March 14, 2022, the Staff of the Division of Trading and Markets stated that “broker-dealers should collect margin from counterparties to the fullest extent possible in accordance with any applicable regulatory and contractual requirements.” We shall see whether Wall Street acts upon the SEC’s guidance, and whether investors are caught flat-footed by stepped-up maintenance margin requirements.

Regulatory and Contractual Requirements

The regulatory requirements for margin are set forth in FINRA Rule 4210. Although the rule is lengthy, and incorporates other rules including Federal Reserve Board Regulation T, the essence of the rule allows a broker-dealer to lend a customer up to 50% of the total purchase price of an eligible stock. A margin call may be issued if the margin account falls beneath the maintenance margin requirements (generally 25% of the current market value of the securities in the account) or if the margin account falls below the firm’s “house” maintenance margin requirements (which can be substantially higher than 25%). Brokerage firms can, and often do, upwardly adjust “house” maintenance margin requirements if the firm has risk concerns relating to outstanding margin loans. Most margin account agreements specifically permit broker-dealers to increase maintenance margin requirements at the sole discretion of the firm. In light of the SEC’s recent guidance, it seems likely that broker-dealers will act upon its contractual rights and demand enlarged collateral from customers to protect its margin loans.

More Volatility Expected

A primary gauge of stock market volatility is the CBOE Volatility Index (VIX). The VIX volatility index measures how much volatility professional investors think the S&P 500 will experience over the coming month. The VIX index tracks volatility by analyzing trading in S&P 500 options. As a general proposition, a VIX index of 12 or lower is a period of low volatility and a VIX index of 20 or higher is abnormally high volatility. Currently, the VIX index currently sits at 31.04, which is approximately double where it sat in early January 2022.

Increase in FINRA Arbitration Claims?

Undoubtedly, any sizable increase maintenance margin requirements will trigger margin calls. That, coupled with abnormal market volatility, is a recipe for increased FINRA arbitration claims. Investors will point fingers at brokerage firms over suitability and brokerage firms will point fingers at investors for any unsecured debit balances.

Herskovits PLLC has a nationwide practice defending and prosecuting claims in FINRA arbitration. Feel free to call us for a consultation at (212) 897-5410.

Client Reviews

I give Rob Herskovits and his law firm my strongest possible recommendation. He expertly guided me through a challenging and highly adversarial FINRA disciplinary hearing. Due largely to Rob's extraordinary efforts, each of FINRA's charges were ultimately dismissed by the hearing panel. It is...

Matt D.

Rob has handled customer matters (mediations and arbitrations) as well as regulatory matters for my firm. He is very knowledgeable about the process, and can explain the details in layman's terms. Rob presented our case very well and achieved successful results in every engagement.

Jay

I give Robert my highest recommendation. He and his firm helped me through what could have been an extended and financially troubling time. I am not sure that I could have cleared up a false accusation by a previous client had it not been for Robert and his firm, and for that I am very grateful.

Derrick

Rob was great he helped my partner and I last year get two cases removed from our record that had no merit. You know how the firms are they represent themselves and settle we suffer. Rob represents you and he’s great!!

Jeremy

Contact Us

  1. 1 Free Initial Consultation
  2. 2 Decades of Experience
  3. 3 Exceptional Track Record
Fill out the contact form or call us at (212) 897-5410 to schedule your free initial consultation.

Leave Us a Message