Five Hundred Dollar Rule

An old rule that prevents a bank or firm from liquidating a client's account to cover a margin call if the amount of the margin call is equal to or less than $500, this was changed to $1,000. The five hundred dollar rule is mandated by the Federal Reserve, and is used to keep relatively small financial deficiencies, that could be readily solved, from resulting in the automatic sale of an investment position.




Taobiz explains Five Hundred Dollar Rule

For example, a broker places an order to purchase shares on behalf of an investor using a margin account. To cover the margin the investor places shares of another security as collateral, with the total value of the collateral securities being a certain percentage of the amount on margin. If the value of the securities of the collateral dips below the required percentage - even if by a fraction of a percent - the broker could liquidate shares purchased on margin to cover the difference. The five hundred dollar rule prevented this from happening if this dip is under $500 but later changed to $1,000.

The actual Regulation T § 220.4 Margin account, 4 (d).states: "If any margin call is not met in full within the required time, the creditor shall liquidate securities sufficient to meet the margin call or to eliminate any margin deficiency existing on the day such liquidation is required, whichever is less. If the margin deficiency created or increased is $1,000 or less, no action need be taken by the creditor."