Credit Extension in the Securities Industry – Series 7 Exam
- April 1, 2025
- Posted by: 'FINRA Exam Mastery'
- Category: Finance
💳 Credit Extension in the Securities Industry – Series 7 Exam
Understanding credit extension is essential for passing the Series 7 Exam, particularly in the areas of customer accounts and margin trading. This concept plays a central role in how broker-dealers allow investors to buy securities using borrowed funds. Here’s what you need to know about credit extension to ace your Series 7.
🏦 What Is Credit Extension?
Credit extension refers to the practice of a broker-dealer lending funds to a customer so they can buy securities on margin. It’s regulated under Regulation T of the Securities Exchange Act of 1934, which sets the terms and conditions under which credit may be extended.
📜 Regulation T Overview
- Administered by: The Federal Reserve Board
- Applies to: Broker-dealers and margin accounts
- Initial Margin Requirement: Typically 50% of the purchase price for listed securities
- Payment Deadline: T+4 (trade date plus 4 business days) for full payment or margin deposit
- Applies to: Corporate stocks and bonds traded on national exchanges
🔍 If a customer does not pay within the T+4 deadline, the broker must cancel or liquidate the trade.
🧾 Margin Account Components
| Component | Description |
|---|---|
| Initial Margin | The customer must deposit a percentage (e.g., 50%) of the trade value. |
| Maintenance Margin | Ongoing equity requirement (usually 25% for long positions). |
| Call for Margin | If account equity drops, the firm issues a margin call requiring more funds. |
| Hypothecation | Customer pledges securities as collateral for the loan. |
| Rehypothecation | The firm uses customer securities as collateral to borrow from a bank. |
🚫 Restrictions and Rules
- Cannot extend credit on:
- Mutual funds (at the time of purchase)
- New issues (within 30 days of offering)
- Day trading margin: Requires minimum equity of $25,000 for pattern day traders
- Credit cannot be extended in cash accounts
📈 Credit Extension Example
A client wants to purchase $20,000 worth of stock in a margin account. Under Regulation T:
- Customer must deposit $10,000
- The firm may extend credit for the remaining $10,000
- The securities are pledged as collateral
- If the account value falls, a margin call may be issued
🧠 Series 7 Test Tip
Expect questions that test your ability to:
- Apply Regulation T timelines
- Identify what securities are margin-eligible
- Calculate initial and maintenance margin requirements
- Understand the difference between cash and margin accounts
✅ Prepare Confidently
Master credit extension and all Series 7 margin rules with practice questions, visual breakdowns, and scenario-based drills at: