Final answer:
The margin maintenance requirement for a client who is long a convertible security and short on the stock it can be converted into varies by brokerage firm, but regulatory minimums may be supplemented by brokerage risk assessments.
Step-by-step explanation:
When a client is long a convertible security and simultaneously short on the stock that the security can be converted into, this is referred to as a convertible hedge. The margin maintenance requirement for a position like this can vary depending on the brokerage firm's rules and the specific securities in question.
However, regulatory guidelines stipulate minimum requirements that brokerages usually follow or exceed to manage risk.In general, for a convertible bond, the Federal Reserve Board's Regulation T requires a 50% initial margin. However, the maintenance margin requirement could be lower.
The exact margin requirement for maintaining the position will depend on how the brokerage firm assesses the risk involved in the security and the short position, and it might require clients to maintain between 25% to 40% on the short position.
This requirement ensures that the account has enough equity to cover potential losses from the short position. For this specific scenario involving a convertible security, some firms may even offer a “netting out” option, where the long and short positions can offset each other, potentially lowering the margin requirement further. It's important to check with the specific brokerage firm for their rules as they can differ from the regulatory minimums.