Memorandum account

Memorandum account
See also


Memorandum account, also called special memorandum account (SMA) or special miscellaneous account, is an account that contains official customer's records. Even though an SMA is a separate account, it works in conjunction with the customer's margin account. The reason for creating the memorandum account is the fluctuation of securities values on a margin account. As a result, any equity excess can disappear rapidly. To avoid this situation, the broker, after disclosing that the excess equity exists, usually transfers excess equity amount from the margin account to the memorandum account. This activity prevents unwanted security values changings. In other words, the SMA is used to maintain security in its original or existing state and preserve customer's buying power [1] [2].

Memorandum account characteristics

Since the memorandum account is related to the customer, it will usually contain the name of relevant customer, date, amount and explanation of any entry. The memorandum account may have zero balance or credit balance which represents funds available related to the relevant customer and the amount held on this account may be used for purchasing new commitments or can be withdrawn [3]. The Memorandum account may contain the entries such a [4]:

  • dividend and interest payments,
  • precedes of a sell of securities, cash related to liquidation or expired security which is no more required and can be withdrawn,
  • transfers from margin account,
  • other cash no longer required.

Memorandum account example

Weiss D. explained the memorandum account by the following example [5]: "Amy Strate bought 1,000 shares of PUP at $30. The stock rose to $40, giving Amy $5,000 excess. Amy could have used the excess to acquire $10,000 worth ZIP, but if she didn't? The $5,000 would be stored in the SMA. The $5,000 would remain in Amy's SMA until she used it. The account's condition at any given time would be the determining factor. As Amy used the SMA, the debit balance in her account would increase. Therefore, if her SMA grew toa huge balance, or if the market value fell, she could only use that portion of the SMA that would not trigger a margin call for more collateral."

Footnotes

  1. Curley M. (2008) p.31
  2. Boston Institute of Finance (2005) p.185
  3. Boston Institute of Finance (2005) p.185
  4. Curley M. (2008) p.31
  5. Weiss D. (2009) chapter 15

References

Author: Weronika Kaca

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