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RSE practice questions: borrowing-to-invest and margin
Ten RSE practice questions on borrowing-to-invest, margin, and short selling. NI 31-103 §13.13 requires written pre-trade leverage disclosure. CIRO Rule 5300 series governs margin requirements. UMIR 3.3 requires a reasonable expectation of borrow before short-sale order entry. Retail clients typically need the highest level of disclosure on these products.
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FAQ
When does §13.13 leverage disclosure apply?
Whenever a client uses borrowed funds to purchase securities. Required in writing, before the trade. Must cover risk of margin call, magnified losses, and interest cost.
What's the initial margin requirement on long equities?
Standard initial margin is typically 30% on long equity positions (with security-specific exceptions for reduced-margin eligible securities under CIRO Rule 5300). Maintenance margin is typically 25%.
What's reduced-margin eligibility?
CIRO Rule 5300 requires the security to be on the CIRO Securities List and meet criteria including a $5/share minimum price. Reduced-margin lowers the initial requirement (often to 25% from 30%).
What's the short-sale locate rule?
UMIR 3.3 requires reasonable grounds to believe the security can be borrowed before order entry. Naked short selling without locate is prohibited.
Can a retail client open a margin account by default?
No. CIRO Rule 3401 requires account-appropriateness assessment before the account is activated for margin trading. The client must demonstrate sufficient knowledge and financial capacity.