Enabling leverage

Phase 1 - Customer Onboarding

Account Trading Types

Customers have the option to open either a cash account or a margin account. The primary difference between the two trading types is whether a customer has to have cash to pay for their trades.

  1. Cash Account - This is the most basic of the 2 account types and is considered low risk because the customer is not borrowing cash from DriveWealth. All transactions must be made with available cash (known as free cash credits). When buying securities in a cash account, the customer must deposit cash to settle the trade or sell an existing position on the same trading day so that cash proceeds are available to settle the buy order.
    1. DriveWealth creates omnibus partners as cash accounts within our system. Due to the nature of an omnibus relationship and the net settlement (see pg ) aspect of paying for trades, the omnibus Partner must extend margin to customers on their own side.
  2. Margin Account - Is a complex account type that can be risky and affords your customer the ability to leverage their investments by borrowing cash from DriveWealth. US and Non US Customers can establish margin accounts. Regulators require a customer to execute a margin account agreement as well as answer specific margin eligibility questions during the on-boarding process.

Margin Accounts

In the U.S., Regulation T governs the manner in which margin accounts are established, how margin debit balances are calculated, and how trading activity within a margin account is monitored and managed. In order to provide proper controls over margin accounts, DriveWealth requires additional information to be passed through the API during onboarding to ensure the customer meets the minimum requirement to maintain a leveraged margin account.

There are two types of “margin” accounts in the DriveWealth system. Both account types are opened by indicating on the account create request the trading type will be “margin”. There are two flavors of margin accounts:.

  • Margin Account – the customer has the option to use securities held in the account as collateral to purchase securities up to two times the value of the cash and equity in the brokerage account. Margin accounts are considered “leveraged” accounts.
  • Limited Purpose Margin Account (“LPMA”) – in an LPMA all transactions are fully paid for (like a cash account). The customer is given the ability to purchase securities and deposit funds to fully pay for the securities prior to settlement date (trade date + 2 business day). This is not “margin”, but “buying power” or credit to purchase securities before funds to settle the trade are in the account. LPMA accounts function similarly to a margin account and margin rules apply (details below), though per rule it is not a margin account and it is not a leveraged account. LPMA enables partners to provide customers “instant trading” when they first open their brokerage account.
    • “Instant Trading” is currently available to Partners who can verify that a customer has cash in their account to cover a trade.
    • Partner must be able to place a hold on funds required to settle all executed purchase orders by end of day
    • Traditional margin leverage is not available for “Instant Trading” offerings

Margin Agreement

The customer must sign a margin agreement to establish either type of margin account. There are two different agreements for Margin and LPMA. The margin agreement provides the disclosure and other information specific to the Margin Account functionality, including the “Trust in Lending” section with covers the information regarding margin loans. The LPMA is a truncated version of the margin agreement, as no margin lending is provided in the account. However, the LPMA agreement covers other information for customers specific to the LPMA being established.

Margin Account Information Collection

The following information is required to open a margin account only (not LPMA). Partners that would like to offer margin capabilities can add the following information to the onboarding data collection process.

  • Total Net Worth of greater than or equal to $25,000.
  • Liquid Net Worth of greater than or equal to $5,000.
  • Annual Income greater than or equal to $25,000.
  • Customer must have some investment experience, value cannot be “None”

Margin Account Requirements (Not applicable to LPMA)

  1. A customer must have a minimum of $2,000 in total account equity (cash and securities) in their account to trade on margin, i.e. use margin to buy securities
    1. If the equity balance falls below the $2,000 minimum, the margin capability will automatically be blocked - the account will need to be fully funded (100% paid for, e.g. Cash Account)
  2. Initial Margin Requirement: the customer must have funds in their account equal to >50% of the notional value of the transaction to buy a security on margin (customer can deposit funds to reach 50% minimum)
  3. Margin Maintenance: the customer must generally maintain 30–35% of the equity value to loan ratio for any individual position purchased on margin. The 30–35% is called the “house margin” and can vary based on the characteristics of each security. Drivewealth retains the right to change the house margin requirement (rarely occurs) in its sole discretion.
  4. Margin Call: If the equity balance falls below the house margin (~30–35%), the position and account will be placed on “Margin Call''(see Margin Call Section).

Margin and LPMA Trading Violations

DriveWealth will monitor and advise the Partner of customer trading violations. The Partner has the obligation to put tools in place to identify trading or margin violations and remedy. A safeguard we offer to our Partners through our API is a flag that restricts a customer from trading if they do not have settled funds.

  • Pattern Day Trading (PDT) - For customers with less than $25,000 held directly with DriveWealth, to avoid PDT violations a customer cannot execute four or more day trades over five rolling business days

Cash Account Trading Violations

  • Good Faith Violation (GFV) - cash account activity where a position is opened by the Customer using unsettled funds and then the position is subsequently closed before the funds used to make the opening trade have settled. For more information please visit our help pages.
  • Freeride violation - cash account activity where the position is opened by the Customer without sufficient funds then subsequently closed before funds are deposited into the account.