^®: CRE Regulatory Action of the Week

Proposed NASD/SEC Regulation to Raise the Day Trading Margin Requirement From $2,000 to $25,000

The National Association of Securities Dealers ("NASD"), a "self-regulating" entity, has filed with the Securities and Exchange Commission ("SEC") a proposed rule that would impose more stringent requirements on day trading customers. The proposed changes include:

1. "Incidental" or "occasional" would be excluded from the new requirements. Only true "pattern" day traders would be covered. A pattern day trader would be covered if he or she: (a) day trades four or more times in five business days, and (b) his or her day-trading activities exceed 6% of his or her total trading activity for a given period.
2. If a securities firm has reason to know or believe that one of its customers is a day trader, the firm would have to designate that person as a day trader immediately (instead of the present practice of waiting five business days). After a 90 day period without day trading, the firm could un-designate the individual.
3. The present equity requirement for day traders is $2,000. NASD has determined that this amount does not sufficiently prevent day traders from continuing to generate losses prior to depositing additional amounts into their accounts. Consequently, NASD is now proposing to require that a pattern day trader have $25,000 in his or her account on any day in which the person day trades.
4. Under the proposed rule, the day trader's buying power would be four times the day trader's maintenance margin excess. The day trader's buying power would not be allowed to exceed that amount.
5. If the day trader were to exceed his or her buying power, a day-trading margin call would be imposed. This would protect the firm from additional risk and prevent further prohibited conduct on the part of the day trader.
6. Under the proposed rule, sale and repurchase on the same day of a position held from the previous day would be treated as a day trade. The sale of an existing position would be treated as a liquidation and a subsequent repurchase viewed as the establishment of a new position and therefore not subject to day-trading rules. Moreover, if a short position were carried overnight, the purchase to close the short position and subsequent new sale would not be deemed a day trade.

For more information on how to comment to the SEC on this proposed rule, and for the complete text and background to the proposal, see: Federal Register, Vol. 65, No. 34, at pages 8461-8465.

Please click below to submit comments to the CRE on the Proposed NASD/SEC Regulation.
Proposed NASD/SEC Regulation: CRE Interactive Public Docket

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