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Margin requirements, margin loans, and margin rates: practice and principles


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  • Peter Fortune
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    The Board of Governors of the Federal Reserve System establishes initial margin requirements under Regulations T, U, and X. Recent margin loan increases, both in aggregate value and relative to market capitalization, have rekindled the debate about using margin requirements as an instrument to affect the prices of common stocks. Proponents of a more active margin requirement policy see the regulations as instruments for affecting the level and volatility of stock prices by influencing investors' demand for common stocks. Others believe that the announcement effects of increased margin requirements would have a stabilizing effect on the stock market and on the economy. ; This article discusses the historical background, accounting mechanics, regulation, and economic principles of margin lending. The author analyzes the data on the volume of margin loans, and he describes the history and practice of margin requirements as well the accounting framework. He assesses the extent to which initial margin requirements restrict the amount of margin lending, and he reviews the economics of margin loans, focusing on margin loans to the customers of broker-dealers. The author also develops a model of the link between the value of the put option embedded in margin loans and the margin loan rate, which he applies to determine the characteristics that should explain the high margin loan rates that typically prevail.

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    Bibliographic Info

    Article provided by Federal Reserve Bank of Boston in its journal New England Economic Review.

    Volume (Year): (2000)
    Issue (Month): Sep ()
    Pages: 19-44

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    Handle: RePEc:fip:fedbne:y:2000:i:sep:p:19-44

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    Keywords: Margins (Security trading);


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    1. Peter Fortune, 1995. "Stocks, bonds, options, futures, and portfolio insurance: a rose by any other name," New England Economic Review, Federal Reserve Bank of Boston, Federal Reserve Bank of Boston, issue Jul, pages 25-46.
    2. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
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    Blog mentions

    As found by, the blog aggregator for Economics research:
    1. Why Margin Requirements Made Sense in 1934
      by Mike Guttentag in The conglomerate on 2008-10-30 22:06:19
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    Cited by:
    1. Chris Florackis & Alexandros Kontonikas & Alexandros Kostakis, 2010. "Transmission of macro-liquidity shocks to liquidity-sorted stock portfolios’ returns: The role of the financial crisis," Working Papers, Business School - Economics, University of Glasgow 2011_22, Business School - Economics, University of Glasgow, revised Apr 2011.
    2. Guanghui Huang & Wenting Xin & Weiqing Gu, 2012. "Active margin system for margin loans and its application in Chinese market: using cash and randomly selected stock as collateral," Papers 1202.4913,, revised Feb 2012.
    3. Jose Ramón Martínez Resano & Liliana Toledo Falcón, 2002. "Futuros sobre acciones: demanda e implicaciones sobre los mercados de renta variable," Banco de Espa�a Working Papers 0218, Banco de Espa�a.
    4. Poledna, Sebastian & Thurner, Stefan & Farmer, J. Doyne & Geanakoplos, John, 2014. "Leverage-induced systemic risk under Basle II and other credit risk policies," Journal of Banking & Finance, Elsevier, Elsevier, vol. 42(C), pages 199-212.
    5. D. Matsypura & V.G. Timkovsky, 2013. "Integer programs for margining option portfolios by option spreads with more than four legs," Computational Management Science, Springer, vol. 10(1), pages 51-76, February.
    6. Roche, Hervé & Tompaidis, Stathis & Yang, Chunyu, 2013. "Why does junior put all his eggs in one basket? A potential rational explanation for holding concentrated portfolios," Journal of Financial Economics, Elsevier, Elsevier, vol. 109(3), pages 775-796.
    7. Florackis, Chris & Kontonikas, Alexandros & Kostakis, Alexandros, 2013. "Stock Market Liquidity and Macro-Liquidity Shocks: Evidence from the 2007-2009 Financial Crisis," SIRE Discussion Papers, Scottish Institute for Research in Economics (SIRE) 2013-58, Scottish Institute for Research in Economics (SIRE).


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