What is a ‘Special Memorandum Account – SMA’
A special memorandum account (SMA) is a special account where excess margin generated from a client’s margin account is deposited, thereby increasing the buying power for the client. The SMA essentially represents a line of credit. Also known as “special miscellaneous account.” SMA x 2 generally equates to the buying power balance in a margin account.
The formula for SMA:
SMA = previous day SMA
+/- change in current day cash
+/- current day trades’ initial margin requirements
BREAKING DOWN ‘Special Memorandum Account – SMA’
The purpose of a special memorandum account (SMA) is to provide additional buying power in a client’s margin account. SMA exists when the margin equity in an account exceeds the Federal Reg T requirement of 50%. A Fed Call will be issued against the account if the Reg T initial requirement is not met. (Initial margin requirements are typically 50% for stocks and 100% for non-marginable securities.) Brokerage firms calculate the SMA balances of margin accounts at the end of each trading day to make sure they are greater than or equal to zero.
An SMA will lock in any gains realized in a client’s margin account. However, the SMA balance fluctuates. Consider the situation where stock within a client’s margin account realizes a capital gain and creates excess margin. If this excess amount is held in the account and the stock position produces a capital loss at a later date, the client could then lose his or her gain entirely.
The SMA balance increases in value with cash deposits into the brokerage account. The SMA also holds interest and dividend payments from long positions and proceeds from closing out a securities position. Clients can use funds in their SMA to purchase additional securities for their margin account. The SMA balance decreases with cash withdrawals from the brokerage account and when buy orders for securities are executed.