What Is a Brokerage Margin Agreement and Risk Disclosure?

A brokerage margin agreement and risk disclosure are the two documents a broker-dealer requires before letting you borrow against your account to buy securities. The agreement is a lending contract: it lets the firm charge you interest on borrowed cash, places a lien on everything in your account as collateral, and authorizes the firm to sell your holdings if your equity falls too low. The risk disclosure, mandated by FINRA Rule 2264, delivers the warnings in writing — you can lose more than you deposited, the firm can liquidate without calling first, and you have no guaranteed right to extra time. Together they define a relationship in which most of the leverage, legally speaking, sits with the firm.

What the Margin Agreement Binds You To

A margin account is a brokerage account in which the broker-dealer lends you cash to purchase securities and uses those same securities as collateral for the loan.¹ The margin agreement is the contract that establishes this arrangement. It sets out how interest is calculated, how you repay what you borrow, and the conditions under which the firm can step in and sell your holdings.

The agreement grants the firm a legal lien on every asset in the account. That lien secures the borrowed amount, called the debit balance, against the market value of your holdings. If those holdings drop, the firm’s collateral shrinks, which is why the contract gives the broker broad authority to protect its position. A margin account looks like a routine account-opening form, but the moment you borrow a dollar, that form limits your control over your own assets.

How Your Broker Can Pledge Your Securities

Most margin agreements contain a hypothecation clause allowing the firm to pledge your securities as collateral for the money it lent you. Some agreements go further and permit rehypothecation, meaning the broker can lend your securities to other investors — for short selling, for example — or pledge them to its own creditors.¹ This can happen at any time, without notice and without compensation to you, so long as you have an outstanding margin loan.

Federal rules cap how far it can go. Under SEC Rule 15c3-3, a broker-dealer may only pledge customer securities with a market value up to 140 percent of your debit balance. Securities above that threshold are classified as “excess margin securities” and must be segregated — the firm cannot use them for its own purposes.² If you borrow $10,000, the firm can pledge up to $14,000 worth of your securities, and anything above that must sit untouched. That 140 percent ceiling is the main federal guardrail on rehypothecation. While a margin loan is outstanding, your securities are effectively working for the broker as well as for you.

Interest on Borrowed Funds

Margin interest accrues daily on your debit balance and is typically posted to the account monthly. The rate is set as a spread above a benchmark, often the federal funds rate or the broker’s own reference rate, with the spread shrinking as your loan size grows. At larger firms, a debit balance under $25,000 may carry an effective rate several percentage points higher than one above $250,000. The tiered structure rewards larger borrowers, so the proportional cost of a $5,000 margin loan is steeper than borrowing $100,000.

Interest compounds because each day’s accrual adds to the running balance from the day before. The agreement specifies the calculation method, but the practical reality is simple: the longer you hold a margin position, the more interest eats into your returns. In a flat or slowly rising market, margin interest alone can turn a profitable position into a losing one.

What the Risk Disclosure Warns You About

Before opening a margin account, the firm must deliver a specific risk disclosure as a standalone document. FINRA Rule 2264 dictates its contents, and the required warnings include:

You can lose more than you deposit. If the securities you bought on margin decline far enough, your losses can exceed 100 percent of your original investment, and you still owe the remaining debt plus interest.³
The firm can force-sell your securities. If your account equity falls below the maintenance requirement, the broker can liquidate positions to cover the deficiency.³
The firm does not have to call you first. Many investors assume a margin call must be communicated before any liquidation can happen. That assumption is wrong. Most firms attempt to notify you, but they are not legally required to do so.³
You have no right to extra time. Even if the firm contacts you with a margin call, you are not entitled to an extension to gather the funds. The firm can start selling immediately.³
House requirements can increase without warning. The firm’s internal maintenance requirements can become stricter at any moment, and the change often takes effect immediately, potentially triggering a margin call on an account that was fine the day before.³

The disclosure functions as a legal shield for the broker-dealer. Once you’ve received it, you’ve been warned, and that documented warning makes it harder to argue later that you didn’t understand the risks.

SIPC Does Not Cover Margin Losses

One common misconception is that the Securities Investor Protection Corporation somehow backstops margin losses. SIPC protects you if your brokerage firm fails and your assets go missing. It does not protect against market losses of any kind.⁴ If a leveraged position collapses and your account value drops below what you owe, no insurance program makes you whole.

Minimum Equity and Maintenance Requirements

Two regulatory layers set the floor for margin accounts. Regulation T, issued by the Federal Reserve Board, governs the initial margin you must post when buying securities. FINRA Rule 4210 sets the ongoing maintenance margin you must sustain for as long as you hold the position.⁵

Opening the Account

FINRA requires a minimum of $2,000 in equity before you can begin trading on margin, though you never need to deposit more than the full cost of what you’re buying.⁶ If you want to purchase $1,500 worth of stock, you deposit $1,500. The $2,000 minimum only applies for larger purchases.

Initial Margin

For equity securities, Regulation T requires you to put up at least 50 percent of the purchase price.⁵ To buy $20,000 of stock, you need at least $10,000 in cash or eligible securities. The broker lends the rest. For short sales, the initial margin requirement is 150 percent of the current market value of the securities being shorted; the extra cushion reflects the theoretically unlimited loss potential of a short position.⁷

Maintenance Margin

Once you own the position, FINRA requires a minimum equity level of 25 percent of the current market value for long stock positions.⁶ Your equity is the market value of your holdings minus your outstanding loan. If you hold $10,000 worth of stock with a $4,000 loan, your equity is $6,000, or 60 percent, comfortably above the minimum. If the stock drops to $5,000, your equity falls to $1,000, which is 20 percent and below the 25 percent floor.

Most firms set house requirements above the FINRA minimum, commonly in the 30 to 40 percent range. Volatile securities, thinly traded stocks, and concentrated positions often carry higher requirements still. Because the firm can raise these internal thresholds without advance notice, an account can shift from compliant to deficient overnight with no change in the market at all.

Margin Calls and Forced Liquidation

When your account equity drops below the maintenance requirement, the firm issues a margin call asking you to deposit cash or fully paid securities to bring the account back into compliance.⁸ You can also meet the call by selling existing positions to reduce the loan balance. Those are the only options, and the clock starts when the deficiency appears, not when you receive a notification.

If you don’t act quickly enough, the firm begins liquidating. The broker selects which securities to sell, and you have no say in the choice.⁹ The firm can sell enough to pay off your margin loan in full, not merely enough to satisfy the call. In a fast-moving downturn, the process is often automated: risk management systems trigger sales before a human reviews the account. The firm’s priority is protecting its own capital, and the agreement you signed explicitly authorizes that.

Three things catch investors off guard. First, the firm may not contact you before it starts selling.³ Second, even if the firm reaches out, you have no guaranteed right to additional time. Third, the firm decides what gets sold, and it frequently isn’t what you would choose. Long-term holdings with embedded capital gains are fair game. Tax consequences are your problem, not the broker’s.

Your Liability After a Forced Sale

Forced liquidation does not necessarily end your financial obligation. If proceeds from selling your securities don’t fully cover your outstanding loan plus accrued interest, you owe the difference. This is the scenario the risk disclosure warns about when it says you can lose more than you deposited.¹ A sharp enough decline can leave you with zero holdings, a closed account, and a bill from the brokerage for the remaining deficit.

The firm can pursue that deficit. Most margin agreements include a pre-dispute arbitration clause requiring disputes to be resolved through FINRA arbitration rather than in court.¹⁰ That clause cuts both ways: it limits your ability to sue the firm in court, and it typically governs how the firm pursues outstanding deficits against you.

Securities That Cannot Be Bought on Margin

Not everything is eligible for margin lending. Regulation T defines “margin securities” as stocks listed on a national exchange or Nasdaq, registered investment company shares such as mutual funds and ETFs, non-equity securities, and certain foreign stocks.¹¹ Anything outside those categories requires 100 percent of the purchase price, meaning you cannot borrow against it at all.

In practice, the most commonly excluded securities include:

Over-the-counter stocks not on Nasdaq. These are fully non-marginable under Regulation T, and FINRA Rule 4210 requires 100 percent of market value for any non-margin-eligible equity held long.⁶
Newly issued IPO shares. Regulations generally prohibit extending credit on new-issue securities for at least 30 days following pricing, so recently purchased IPO shares cannot serve as margin collateral during that window.
Low-priced stocks. Firms typically impose 100 percent margin on stocks trading below $5, and FINRA Rule 4210 sets steep requirements for short positions in low-priced securities.

The margin agreement itself may add exclusions based on the firm’s internal policies. Checking eligibility before you buy avoids the surprise of finding that a position you expected to leverage is locked at full cash value.

1
Investor.gov. Investor Bulletin: Understanding Margin Accounts
2
eCFR. 17 CFR 240.15c3-3 – Customer Protection – Reserves and Custody of Securities
3
Financial Industry Regulatory Authority. FINRA Rule 2264 – Margin Disclosure Statement
4
Securities Investor Protection Corporation. How SIPC Protects You
5
Financial Industry Regulatory Authority. Margin Accounts
6
Financial Industry Regulatory Authority. FINRA Rule 4210 – Margin Requirements
7
Federal Reserve Board. Federal Reserve Board Legal Interpretations – Margin Requirements
8
U.S. Securities and Exchange Commission. Investor Bulletin: Understanding Margin Accounts
9
Financial Industry Regulatory Authority. Know What Triggers a Margin Call
10
Financial Industry Regulatory Authority. FINRA Rule 12200 – Arbitration Under an Arbitration Agreement or the Rules of FINRA
11
eCFR. 12 CFR Part 220 – Credit by Brokers and Dealers (Regulation T)