Unsettled Funds - Trading in Cash Accounts

This week I thought I would point out our rules and some basic examples regarding Unsettled Funds and Trading in your cash accounts.

Interpretations of Regulation T, which govern how trades are paid for, state that funds from liquidations in cash accounts will not be available to pay for purchases until the settlement date of the sell.  

 Credit balances in a cash account may be used for purchases:

·         If the account has settled funds, there are no restrictions as to what may be purchased.

·         If the credit balance is a result of an unsettled sale of securities, certain restrictions may apply.

·         Unsettled proceeds from existing long positions can be used to purchase additional securities as long as the new purchase is not sold prior to the settlement date of the original sale that generated the proceeds used to finance the purchase.

·         If it is sold prior to the settlement date of the funding sale without additional funds being deposited, it will be considered a free ride under Federal Reserve Regulation T.

 For example, if you sell a security on Monday the 1st, you can use the proceeds to make a purchase prior to the settlement date of Thursday the 4th.  However, if you make a purchase before Thursday the 4th then sell that new position before the settlement of Monday's sale, you will then be required to deposit funds to pay for the purchase. If you purchase on Thursday the 4th, you may place a sell at anytime you wish, since the purchase was made with settled funds.

 Mutual Funds and Fixed Income Securities can only be purchased with existing or settled funds.

 Examples:

1.      Monday 5/1/XX: sell 1000 (ABC) stock for $10,000.00 � Sell has a settlement date of 5/4/XX. You make a purchase of 1000 (XYZ) for $10,000.00 on 5/4/XX, using the settled proceeds from the sale of 1000 (ABC) shares from 5/1/XX.  Since the 5/1/XX funds have settled, you are free to use those funds to make purchases of stocks on 5/4/XX, and sell those stocks at anytime without having to bring in any additional cash to pay for the purchases.
 

2.       You sell 1000 (ABC) stock on Monday 5/1/XX for $10,000.00 � sell has a settlement date of 5/4/XX.  You then buy 1000 (XYZ) for $10,000.00 on Tuesday 5/2/XX.  Since you have used the proceeds from a sale that has not settled yet, to make a purchase, you cannot sell the 1000 (XYZ) stock until 5/4/XX.  If you sell the securities that were purchased with unsettled proceeds, on 5/2/XX, before the proceeds settled, then you must bring in additional funds to cover the $10,000.00 purchase.  If you do not bring in additional funds, then you will be charged with a free ride.
 

3.      You have 10 (ABC) call options long in your account.  You sell the options on Monday 5/1/XX, generating $300.00 in proceeds.  You then use the proceeds to buy $300.00 worth of (XYZ) stock, also on 5/1/XX.  If you hold those shares of (XYZ) stock until the options sale proceeds settle, on 5/2/XX, then you may sell those shares at any time you want without bringing in any additional money to pay for the purchase.  If you sell the (XYZ) stock the same day that you bought the stock, the option sale would not have settled yet, and you would have to bring in an additional $300.00 to pay for the purchase of the (XYZ) stock.
 

4.      You begin the day with a cash position of $10,000 on Monday 05/01/XX.  The first thing you do is a buy of 1000 (ABC) stocks for $10,000 Then you sell those securities on the same day generating $10,100.00, which settles on 05/04/XX, and use the money to buy 1100 (XYZ) shares for $10,100.00, again on 05/01/XX.  If you hold the 1100 (XYZ) shares until Thursday 05/04/XX, you can then sell those 1100 (XYZ) shares whenever you want without having to bring in any additional funds.  If you sell those 1100 (XYZ) shares before Thursday 05/04/XX, then the 05/01/XX sell of 1000 (ABC) would not have settled yet and you could not use those proceeds to pay for the 05/01/XX purchase of 1100 (XYZ) shares.  In this case you would need to bring in additional money to pay for that purchase.   
 

5.      You begin the day selling $5,000 of a Mutual Fund (ABCDX) on 05/01/XX. This Fund has a settlement date of 05/04/XX.    You wish to purchase $5,000 of DEFGX on 05/01/XX using the ABCDX proceeds.  This Mutual Fund could not be purchased until 05/04/XX because the ABCDX has not settled.

 There are other scenarios that may apply to your trading.  Regardless of the security and your trading patterns, please keep in mind to avoid any restrictions on your account, you can only purchase with settled funds.

 Non-retirement accounts have two basic choices.  Your first option is to provide sufficient cash in the account to support the desired level of trading.  Your second option is to sign a margin agreement, which will allow you to trade without the 3 business day hold on sales proceeds.  

 A consideration with the option of signing a margin agreement would be the requirement by industry regulations, that if you do 4 roundtrips (A buy and a sell on the same day) in a five-day period, you will be considered a pattern day trader and will be required to maintain $25,000 minimum equity in the account.  There could also be interest charges that would apply on any debit balances past settlement date.

Remeber, when in doubt never hesitate to call your local representative regarding this or any other questions you may have.  I hope this is helpful and have a great weekend.

Trader Z