What Is a Federal Call?
A federal call is a legally mandated margin call pursuant to Regulation T. Investors will receive a federal call when their margin account lacks sufficient equity to meet the initial margin requirement for new, or initial, purchases.
Key Takeaways
- A federal call is a legal requirement to fund a purchase of securities in a margin account with at least 50% cash.
- This is known as the initial margin requirement, and is defined by SEC Regulation T.
- Failure to meet initial margin can result in the prevention of trading, or the forced liquidation of other securities by one's broker in order to meet the margin requirement.
Understanding Federal Calls
A federal call, (i.e., a Regulation T - Reg T call) is an initial margin call that is only issued as a result of an opening transaction. Under Federal Reserve Board Regulation T, brokers can lend an investor up to 50% of the total purchase price of a stock for new, or initial, purchases. This is called initial margin. For example, if you want to purchase 1,000 shares of a stock valued at $10 per share, the total price would be $10,000. However, a margin account with a brokerage firm would allow you to acquire the 1,000 shares for as little as $5,000, with the brokerage firm covering the remaining $5,000 through a margin loan. The shares of the stock serve as collateral for the loan, and you pay interest on the amount borrowed.
Regulation T requirements are only a minimum, and many brokerage firms require more cash from investors up front. In this example, a firm requiring 65 percent of the purchase price from the investor up front would cover no more than $3,500 with a loan, meaning the investor would need to pay $6,500.
If an investor does not already have cash or other equity in the account to cover their share of the purchase price, they will receive a federal (initial) margin call from their broker requiring them to deposit the other 50% of the purchase price.
How to Satisfy a Federal Call
Investors can satisfy a federal call by depositing cash in the amount of the call or depositing marginable securities valued at two times the amount of the call by trade date plus four business days. When an investor does not meet a margin call by its due date, brokers can force the sale of securities in the account to cover the margin deficiency.
Although most brokers will attempt to notify their customers of margin calls, they are not required to do so and can choose what securities are sold to satisfy a call without an investor's consent. When shares are liquidated to meet a federal call, whether by an investor or their broker, the account may be restricted from margin borrowing for a period of time or revoked from margin privileges altogether. Ideally, investors should cover a federal call as soon as possible to retain control over which securities are sold to satisfy the call and avoid repeated violations that can result in removal of their margin privileges.
Brokerage firms have the right to set their own margin requirements, referred to as house requirements, so long as they are higher than Regulation T margin requirements. Investors should carefully examine their broker’s margin account agreement to review important risk disclosure information, house requirements, and margin interest rates.
Purpose of a Federal Call
The purpose of Regulation T and federal calls is to moderate the amount of financial risk present in the securities markets. Since borrowing money from a broker to buy securities on margin amplifies both gains and losses relative to initial investment, a broad overuse of margin has the potential to cause instability in financial markets as a whole.
As disruptions in the financial markets can interfere with the broader economy, regulators seek to have the controls necessary to promote orderly market functioning.
