Special Memorandum Account (SMA): The Reg T Line Few Read

A market drop never lowers SMA. That property trips people up. The figure sits on a margin statement or the balances screen next to buying power and equity, and it is easy to skip because it is labeled with an acronym and a word, memorandum, that sounds like paperwork. It is paperwork. It also records borrowing power you already have.

What the line records

Regulation T, from the Federal Reserve Board, fixes how much equity a margin purchase needs up front, and when your equity climbs past that level because a holding gained or you added money, the surplus is written into a side ledger that keeps its balance until you draw on it. That ledger is the special memorandum account. You can spend the credit on more stock or pull it out as cash, and the broker keeps the running total whether you use it or not.

A position that gains

All $10,000 of it would be borrowed. The loan goes to $30,000. Total position $60,000, equity still $30,000. That is 2.0x leverage again, where you started.

What moves it up and down

SMA rises when the account’s equity grows past the 50% line through gains, when you deposit cash or securities, and when you sell a position, since a sale frees up part of the requirement it was carrying. Using it lowers it. Margin purchases draw it down, and so do withdrawals.

Sales work on a half-and-half basis under the usual Reg T accounting. Sell $8,000 of stock from a margin account and half the proceeds, $4,000, is released to SMA, because the sale removed a position that had needed 50% equity behind it. The other $4,000 pays down the loan.

Prices falling do nothing to it. Suppose the stock slides back to $32,000 after the credit was booked. Equity is $12,000 against the $20,000 loan. The SMA line still reads $5,000, as if the rally were intact.

The logic looks backward. Regulation T treats the credit as something the account earned when it had the equity, and it does not claw it back when prices retreat. Maintenance rules exist for the retreat.

Where maintenance takes over

An SMA balance gives you permission under Regulation T. Your broker still runs the maintenance test before it lets you spend a dollar of it.

The broker will refuse it, or allow part. SMA is a ceiling set by one rule, and once the market has turned, the ceiling that binds is the maintenance margin requirement along with whatever higher house figure the firm applies to the stocks you hold.

How it relates to buying power

Buying power on most platforms starts from SMA and doubles it for marginable stock, since each dollar of excess supports two dollars of purchases at 50% initial margin. House rules trim it from there. How much you can borrow on margin goes through the full chain of deductions.

Using all of it is a separate decision. Every dollar of SMA you spend is new debt, and new debt raises your leverage ratio and moves the price at which a call arrives closer to where the stock trades now.

What people get wrong

The favorite misreading treats SMA as money. It is a credit line. Drawing on it creates a loan, with interest. Another treats a high SMA after a sell-off as a sign the account is healthy, when equity may be much closer to the maintenance floor than the credit suggests. A third assumes SMA disappears when prices drop. It stays until you use it.

Related terms

Initial margin is the Reg T requirement that SMA is measured against. Excess equity is the looser term for equity above any requirement. Buying power is the platform’s own figure, built from SMA after house rules.