In order to make it easier to track and monitor short sales and positions, most brokerage firms execute and hold short sales in the "short account." This is really just a sub-account of a margin account since Regulation T requires all short sales to be done in a margin account.

The Reg. T initial margin requirement on a short sale calls for "150% of the short sale proceeds." This means that the entire amount received from the proceeds of the sale plus an additional 50% of the proceeds is the initial margin requirement on a short position.

Transaction Description	Share Price	Sale Proceeds	Reg. T 50% Requirement	Credit Bal. Retained
Short 100 shs. ABC	$50	$5000	$2500	$7500
Short 100 shs. DEF	$20	$20,000	$10,000	$30,000
Short 100 shs. KYZ	$90	$90,000	$45,000	$135,000

Since the final column amounts above are retention requirements which providie collateral for the shares sold short, they cannot be removed from the account. Thus, they are not free credit balances and typically will not earn interest for the investor since interest is usually paid only on free credit balances. This cash is held in customer accounts, but any interest earned is kept by the brokerage firm. This is why the stock loan department of brokerage firms are very profitable.

The Reg. T initial margin requirement on a short sale is charged against the Special Memorandum Account (SMA). In the event that the SMA balance is insufficient to cover the charge, a margin call is issued against the account. This Fed call must then be met no later than the seventh business day, either by depositing cash or marginable securities with a loan value at least equal to the amount of the call.

The NYSE and NASD maintenance margin requirements are greater on short positions than on long positions. Usually though, the house requirements of various brokerage firms are more stringent than the NYSE and NASD requirements. An investor should always get a copy of the house margin requirements wherever he maintains a margin account.

Let's look at what happens to the margin requirements on a short position when the market price increases on the security sold short. Suppose an investor sells 100 shares of ABC at $100 per share. We'll use the following table to figure the initial margin requirement.

Transaction Description	Share Price	Sale Proceeds	Reg. T 50% Requirement	Credit Bal. Retained
Short 100 shs. ABC	$100	$10,000	$5000	$15,000

Now, suppose that the price of ABC increases 20% to $120 per share. We'll use the NYSE/NASD maintenance requirement of 30% to calculate the maintenance margin requirement. In order to meet the minimum maintenance requirement, there must be enough credit in the special memorandum account to meet 100% of the current market value plus another 30% of the current market value. This procedure is known as marking to the market and is used to ensure that the lender of the security will always have 100% of the current market value of the security.

Current Share Price	100% of Current Market Value Requirement	30% of Current Market Value Requirement	Total Requirement
$120	$12,000	$3600	$15,600

In this example, the investor would have to meet a margin call for an additional $600 based on only a 20% adverse move in the stock price. This extra money is given to the lender to increase his collateral. Let's continue the example and assume another 20% rise in the price of ABC.

Current Share Price	100% of Current Market Value Requirement	30% of Current Market Value Requirement	Total Requirement
$140	$14,000	$4200	$18,200

Thus, on the second 20% adverse move, the investor would have to post $2,600, more than four times the amount required to meet the first margin call.

When an investor buys a security, his theoretical losses are limited to 100% because the stock cannot decline below $0.

When an investor sells a security short, his theoretical losses can be infinite because the value of the underlying security can keep on increasing.

Now let's use this same example to see what happens if the investor is right and the stock price declines from the sale price of $100 down to $90. A reverse mark to the market reveals the following:

Current Share Price	100% of Current Market Value Requirement	30% of Current Market Value Requirement	Total Requirement
$90	$9000	#4500	#13,500

In this example, the lender, who was originally holding $10,000 as collateral, would have to return $1,000 to the borrower, so that the lender's collateral is maintained at 100% of the current short market value (SMV) of $9,000. In addition, Reg. T requires the short seller to maintain an additional 50% of the SMV, or $4,500 in this instance. Thus, on a $1,000 decline in SMV, $1,500 or 150% is released to SMA.

The formula used to find the dollar amount of equity in a short position is:

Credit Balance

Minus

Short Market Value

Equals

Equity

After meeting the margin call in the last example above, the investor has put up a total of $8,200 and his current equity is:

$18,000

Minus

$14,000

Equals

$4200

The formula to determine the maximum value that the underlying security can appreciate to before a margin call will be generated is:

Total Credit Balance

Divided By

130%

Equals

Maximum Market Value Before Call

Using our previous example when the sort sale was first made, the highest ABC stock could have gone before a call was generated would be:

$15,000

Divided By

$130%

Equals

$11,538.46

If ABC closed the trading day at $11 1/2 per share, no call would be issued. If ABC closes the day at 11 5/8, a maintenance margin call would be issued.