15.1. Opening a Margin Account

Prior to opening a margin account, the customer must sign a margin agreement. The margin agreement sets the terms and conditions for enabling the customer to borrow from the brokerage to buy securities. It identifies how much collateral will be placed in the margin account and the interest rate on the margin loan, and it permits (or does not permit) the customer’s broker to pledge the securities on margin as collateral for its own borrowing. Margin agreements typically contain three parts, the hypothecation agreement, the credit agreement, and the loan consent agreement.

Hypothecation agreement. Securitizing a debt by pledging securities as collateral for a loan is called hypothecation. This is because the pledged securities are “hypothetically” controlled by the credi