Legal Definitions - margin deficiency

A margin deficiency occurs in a securitiesmargin account when the investor's actual equity (their ownership stake in the account) drops below the minimum amount required by their brokerage firm or regulatory bodies. This situation indicates that the investor's own funds in the account are no longer sufficient to meet the required percentage of the total value of the securities held, often triggering a "margin call" from the broker.

Here are a few examples to illustrate this concept:

• Significant Decline in Investment Value: An investor uses a margin account to purchase $20,000 worth of shares, borrowing $10,000 from their broker. This means their initial equity is $10,000. If the brokerage firm requires a minimum maintenance margin of 30% of the current market value, the investor's account is initially well above this threshold. However, if the stock market experiences a downturn and the value of those shares drops to $12,000, the investor's equity becomes $12,000 (current value) - $10,000 (loan) = $2,000. At this point, the required margin is 30% of $12,000, which is $3,600. Since the investor's actual equity ($2,000) is less than the required margin ($3,600), there is a margin deficiency of $1,600, prompting a margin call.

• Increased Margin Requirements: Imagine an investor holds a portfolio of volatile technology stocks valued at $50,000 in their margin account, having borrowed $20,000 from their broker. Their current equity is $30,000. Initially, the brokerage firm's maintenance margin requirement for these stocks was 40% of their value, meaning $20,000 was required, and the account was in good standing. However, due to increased market volatility or a change in the firm's risk policy, the brokerage decides to raise the maintenance margin requirement for these specific stocks to 65%. Now, the required margin becomes 65% of $50,000, which is $32,500. Since the investor's actual equity ($30,000) is now less than the new required margin ($32,500), a margin deficiency of $2,500 exists, necessitating additional funds.

• Withdrawal of Funds: An investor has $30,000 worth of securities in their margin account, with a $10,000 loan from the broker, resulting in $20,000 of equity. The brokerage firm's maintenance margin requirement is 35% of the securities' value, which means $10,500 is the minimum required. The investor decides to withdraw $12,000 in cash from their account for an unrelated expense. This withdrawal directly reduces their equity. After the withdrawal, their equity becomes $20,000 - $12,000 = $8,000. As the required margin remains $10,500, the investor's actual equity ($8,000) is now below the required amount, creating a margin deficiency of $2,500.