The following rules apply for Reg T Margin and Portfolio Margin^[1] accounts. Bonds must be paid-in-full in a Cash account. FINRA and the NYSE have imposed rules to limit small investor day trading. Customers that these organizations classify as Pattern Day Traders are subject to special Day Trading Restrictions for US securities.

The margin for the following types of corporate bonds is determined using a proprietary Value At Risk (VAR) methodology^[1]:

■   Investment Grade

■   NYSE-listed Speculative Grade

■   NYSE-listed Junk Grade

The theoretical price of each bond is calculated over a range of interest rate offsets to the prevailing Treasury yield curve. The result of such a calculation is illustrated in the following figure. As the interest rate offset increases, the bond price decreases. The upward curvature of the line is indicative of the "convexity" of the bond.

The VAR is the loss (in the worst case) in the bond price over a specified range of underlying interest rate changes. The scanning ranges are listed in the table below.

Within the Value At Risk calculation, bonds that contain embedded options (calls or puts) are subjected to stress tests that separately increase and decrease the interest rate period volatilities used to calculate the theoretical price of the bond by 15% of their values. Under each volatility change scenario, another theoretical price curve is calculated over the same range of interest rate offsets to the prevailing Treasury yield curve. The VAR for bonds with embedded options is taken as the loss (in the worst case) on the appropriate interest rate scanning range across each of the unchanged, up and down volatility scenarios.

The regulatory minimum margin of 10% of market value applies to investment grade bonds. The regulatory minimum of the larger of 20% of market value and 7% of face value applies to non-investment grade, NYSE-listed bonds.

Non-NYSE-Listed Speculative and Junk Bonds are margined as follows:

Bonds that have defaulted or that are not rated are not eligible for margin treatment.

Place Trade may reduce the collateral value of securities (reduces marginability) for a variety of reasons, including:

■   small market capitalization or small issue size

■   low liquidity in the collective primary/secondary exchanges

■   involvement in tenders and other corporate action

Changes in marginability are generally considered for a specific security. However, in cases of concerns about the viability or liquidity of a company, marginability reductions will apply to all securities issued by, or related to, the affected company, including bonds, derivatives, depository receipts, etc.

In addition, please see discussions on special risk management algorithms, for example, large position and position concentration algorithms which may affect the margin rate applied to a given security within an account and may vary between accounts.

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