Question

A new client is opening a margin account and notices the following wording in the documentation: "You are authorized to lend to yourself or others any securities held by you in my margin account and to carry all securities lent as general loans, and you shall have no obligation to retain under your possession and control a like amount of such securities". When the client asks you what this is about, you would respond that

1) if the client does not sign the document, the account cannot be opened
2) this is the credit agreement
3) this is the hypothecation agreement
4) this is the loan consent agreement

Answer 1

The language described pertains to a hypothecation agreement in which a client pledges securities as collateral for a loan, allowing the brokerage to lend these securities. The correct answer is 3).

Step-by-step explanation:

The language you are referring to in the documentation for opening a margin account represents a hypothecation agreement. This means that you agree to pledge your securities as collateral for a margin loan. In such an agreement, the brokerage firm has the right to lend the securities in your margin account to itself or others.

It's important to understand that when you sign a hypothecation agreement, you authorize the firm to use the securities as they see fit, including for their own purposes or for other clients, and they are not required to keep a similar amount of the securities at hand.

Not signing this document may prevent you from opening a margin account, as it is often a mandatory part of the process.