The correct answer is that the firm should issue a margin call to the client, requiring them to deposit additional funds or liquidate part of their position to restore the required margin level. When a client’s account equity in a leveraged foreign exchange position falls below the maintenance margin, it triggers a margin call. This is a critical risk management procedure for the brokerage firm to protect both itself and the client from further losses. The margin call serves as a formal request for the client to bring their account back into compliance. The client typically has a specified period to meet this call. Failing to do so will result in the firm liquidating the client’s positions to cover the deficit. Immediately liquidating the client’s entire position without prior notification is an extreme measure, usually reserved for situations where a margin call is not met or if the account equity drops to a pre-defined liquidation level, which is typically even lower than the maintenance margin level. Advising the client to simply wait for a market rebound is irresponsible, as it ignores the immediate risk and could lead to greater losses. Suggesting the opening of a new hedging position is also inappropriate because it does not address the current margin shortfall and may even increase the total margin requirement.

In leveraged foreign exchange trading, the client agreement is a critical document that outlines the rights and obligations of both the client and the licensed corporation. Statement I is correct because these agreements invariably grant the firm the authority to liquidate a client’s positions without their explicit consent if they fail to meet a margin call. This is a fundamental risk management tool for the firm to prevent its own capital from being eroded by a client’s losses. Statement II is incorrect; while firms may provide a short window as a matter of practice, there is no legal or regulatory requirement for a fixed grace period like one business day. Market conditions can change rapidly, and firms retain the right to act immediately to mitigate risk. Statement III is correct. Leveraged trading exposes clients to the risk of losses exceeding their initial margin deposit. If liquidating the position results in a deficit (a negative balance), the client is contractually obligated to cover that shortfall. This is a key risk that must be disclosed to clients. Statement IV is incorrect. A licensed corporation has no obligation to extend credit to a client to meet a margin call. Doing so would increase the firm’s own credit risk exposure, which is contrary to prudent risk management principles. Therefore, statements I and III are correct.

The correct answer is that the firm should promptly issue a margin call to the client. When a client’s account equity in a leveraged foreign exchange trading account falls below the predetermined maintenance margin level, the licensed corporation is exposed to significant credit risk. The standard and required procedure is to issue a margin call, formally requesting the client to restore the account equity to the initial margin level. This can be done by depositing additional funds or by closing out some or all of the open positions to reduce the margin requirement. This action is a critical component of risk management to protect both the firm and the client from further losses. Liquidating the client’s positions without prior notification is an extreme measure, typically reserved for situations where the client fails to meet the margin call within the specified time or if the client agreement explicitly allows for it under severe market conditions. It is not the first and most appropriate step. Advising the client to hold the position and await a market recovery constitutes providing investment advice and irresponsibly ignores the firm’s duty to manage its credit exposure. Extending a credit line to cover the shortfall would increase the firm’s own risk, which is contrary to the principles of prudent risk management.

The correct answer is that the firm is entitled to liquidate a sufficient portion of Mr. Chan’s positions to restore the required margin level. This action is a standard and critical component of risk management in leveraged foreign exchange trading. When a client opens a margin account, they sign a client agreement that explicitly grants the licensed corporation the right to liquidate positions if the account equity falls below the maintenance margin level and the client fails to meet a margin call in a timely manner. This right, often referred to as a forced liquidation or close-out, protects the firm from incurring credit losses should the client’s account value become negative. The firm is not obligated to wait for a prescribed period like 24 hours, as rapid market movements could exacerbate losses. The decision on which positions to liquidate is at the firm’s discretion to best manage the risk, not necessarily limited to the most profitable or largest positions. Requiring the firm to extend further credit or absorb the loss is contrary to the fundamental principles of margin trading, where the client is responsible for maintaining adequate funds to cover potential losses.

This question assesses the understanding of procedures related to margin calls and the liquidation of positions in leveraged foreign exchange trading, which are critical aspects of credit and counterparty risk management for a licensed corporation.

Statement I is correct. While the client agreement grants the firm the right to liquidate, standard industry practice and the principle of treating clients fairly (as outlined in the SFC’s Code of Conduct) suggest that the firm should give the client a reasonable opportunity and timeframe to meet the margin call by depositing additional funds or closing some positions voluntarily.

Statement II is incorrect. The client agreement for a leveraged FX account invariably includes a clause that explicitly grants the licensed corporation the right to liquidate the client’s positions without their specific consent at the time of liquidation if the client fails to meet a margin call. This is a fundamental mechanism to manage the firm’s credit risk.

Statement III is correct. This is the primary recourse for a licensed corporation when a client fails to meet a margin call. The firm has the contractual right to close out the client’s positions to restore the margin level and prevent further losses that could expose the firm to credit risk.

Statement IV is incorrect. The client is fully liable for all losses in their account. If the forced liquidation results in a negative balance (a deficit), the client owes this amount to the licensed corporation. The firm has the right to pursue the client for this debt. The risk of a negative balance is a key risk that must be disclosed to clients. Therefore, statements I and III are correct.

The correct answer is that the licensed corporation has the right to liquidate part or all of the client’s positions without their consent to restore the required margin level. In leveraged foreign exchange trading, the client agreement is a critical document that outlines the rights and obligations of both the client and the licensed corporation (LC). A standard and essential clause in these agreements grants the LC the authority to close out a client’s open positions if the client fails to meet a margin call. This is a fundamental risk management tool to protect the LC from credit and counterparty risk arising from the client’s potential default. The Leveraged Foreign Exchange Trading Ordinance and the SFC’s Code of Conduct require LCs to have robust risk management policies. Allowing a position with insufficient margin to remain open, especially when the client is unreachable, would be a breach of these principles. Requiring the firm to wait a fixed period, such as 24 hours, is impractical as market volatility could lead to catastrophic losses in a much shorter time. Forcing the firm to absorb losses until the client is contacted would expose the firm to unlimited liability, which is contrary to the entire purpose of margining. Seeking a court order is a lengthy legal process completely unsuitable for managing real-time market risk.

The correct answer is that the licensed corporation should promptly issue a margin call to the client. When a client’s account equity falls below the maintenance margin level, it triggers a margin call. This is a formal request for the client to deposit additional funds or close out some positions to bring the account equity back up to the required level. This procedure is a fundamental risk management tool for the licensed corporation to mitigate its credit and counterparty risk exposure. Failing to meet the margin call within a specified timeframe typically gives the corporation the right to liquidate the client’s positions to cover the deficit, as outlined in the client agreement. Immediately liquidating the client’s positions without first issuing a margin call and providing a reasonable time to respond is generally not the initial step, although the firm retains this right if the call is not met. Offering a temporary credit line would be contrary to prudent risk management, as it would increase the firm’s exposure to a client who is already in a precarious financial position. Simply advising the client to wait for a market rebound ignores the immediate contractual obligation to maintain the required margin and constitutes providing investment advice, which is not the primary responsibility in a margin call situation.

Statement I is correct. The client agreement for a leveraged foreign exchange account is a contract that explicitly grants the licensed corporation the right to liquidate a client’s positions if they fail to meet a margin call. This is a critical risk management tool for the firm to protect itself from credit and counterparty risk arising from the client’s potential default. Statement III is also correct. While the firm has the right to liquidate, it must still act in accordance with its regulatory obligations, including the duty to act with due skill, care, and diligence and in the best interests of its clients, as stipulated in the SFC’s Code of Conduct. This translates to executing the liquidation in a commercially reasonable and fair manner. Statement II is incorrect; client agreements typically allow for immediate liquidation upon a failed margin call, especially in fast-moving markets, and do not guarantee a fixed grace period. Statement IV is incorrect because the client bears the market risk. The potential for a market reversal is irrelevant to the firm’s contractual right to liquidate a position to cover a margin deficit. Therefore, statements I and III are correct.

The correct answer is that the licensed corporation should promptly issue a margin call to Mr. Chan. In leveraged foreign exchange trading, when a client’s account equity falls below the maintenance margin level due to adverse market movements, it triggers a margin call. This is a formal request for the client to deposit additional funds (or securities) to bring the account equity back up to the required level. This action is a critical component of the licensed corporation’s credit and counterparty risk management process, as it mitigates the risk of the client’s losses exceeding their deposited funds. The client agreement will specify the procedures and timeframe for meeting such a call. Failure to meet the margin call in a timely manner gives the firm the right to liquidate the client’s positions to cover the deficit. Immediately liquidating the position without first issuing a margin call is generally not the initial step, unless the client is uncontactable or the market is moving so rapidly that it’s necessary to prevent further losses as per the client agreement. Advising the client to increase their position is inappropriate and irresponsible, as it would amplify their risk exposure. Simply suspending the account from new trades does not address the immediate risk posed by the existing under-margined position.

The correct answer is that the licensed corporation has the right to liquidate Mr. Wong’s positions if he fails to meet the margin call in a timely manner. This right is a fundamental risk management tool for the firm, designed to mitigate credit and counterparty risk. It is stipulated in the client agreement signed when the account is opened. The purpose of a margin call is to restore the account’s equity to the required maintenance level. Failure by the client to provide the necessary funds constitutes a breach of the agreement, empowering the firm to close out positions to cover the deficit and prevent further losses for both the client and the firm. Waiting for a potential market recovery would expose the firm to unacceptable levels of risk, as the losses could continue to grow. Offering an automatic credit extension would similarly increase the firm’s risk exposure and is not standard practice; it would be contrary to prudent risk management. While a firm must attempt to contact the client, the client agreement typically grants the firm the authority to liquidate positions without explicit, real-time consent if a margin call is not met, as waiting for such consent could lead to significant further losses in a volatile market.

The correct answer is that the primary objective of a margin call is to mitigate the credit risk exposure of the licensed corporation by ensuring the client’s account has sufficient funds to cover potential further losses. When a client’s account equity falls below the maintenance margin, it signifies that their initial deposit is no longer sufficient to cover potential losses on their leveraged position. The licensed corporation (LC) is the counterparty and is exposed to credit risk; if the client’s losses exceed their account balance and they default, the LC must bear the loss. The margin call is a demand for the client to restore their account equity, thereby re-establishing the necessary buffer to protect the LC from this risk. The other options are incorrect. While a client might choose to use additional funds to average down their cost, this is a trading strategy decision made by the client, not the primary risk management objective of the LC. The purpose is not to generate additional commission revenue; margin calls are a defensive risk-control measure, not a tool for increasing business. Although issuing margin calls is governed by client agreements and regulatory principles, the underlying purpose is active risk management, not simply to fulfill a procedural communication requirement.

The core purpose of a margin call in leveraged foreign exchange trading is to manage the credit and counterparty risk faced by the licensed corporation. When a client’s account equity falls below the maintenance margin level, it signals that their losses are approaching the value of their deposited collateral. To prevent the account from falling into a negative balance, which would mean the client owes money to the firm, the firm issues a margin call. Client agreements, which are legally binding contracts, almost universally grant the firm the right to liquidate any or all of the client’s open positions if the margin call is not met promptly. This action is a protective measure for the firm and does not require further consent from the client at the time of liquidation, as this right was pre-authorized when the client signed the agreement. The correct answer is that the firm is entitled to liquidate positions to bring the account back into compliance. It is incorrect to state that a firm must wait a fixed period like 24 hours, as fast-moving markets could lead to substantial losses during that time. Requiring explicit approval from the client at the time of the call would render the risk management process ineffective, especially if the client is unreachable or uncooperative. While closing only a portion of the position is a possibility, the firm’s rights typically extend to liquidating all positions if necessary to adequately protect itself from further risk.

Statement I is correct. When a client’s account equity falls below the maintenance margin level, the standard procedure for a licensed corporation is to issue a margin call. This call formally notifies the client of the shortfall and specifies the amount of additional funds required to bring the account back into compliance with the margin requirements.

Statement II is correct. The client agreement for leveraged foreign exchange trading invariably includes a clause that grants the licensed corporation the right to liquidate a client’s open positions if they fail to meet a margin call within the specified time. This is a critical risk management tool for the corporation to protect itself from incurring losses due to the client’s position.

Statement III is incorrect. While a licensed corporation must act in the best interests of its clients, this does not extend to taking on undue credit risk on the client’s behalf. Delaying liquidation in the hope of a market reversal would expose the corporation to potentially larger losses if the market continues to move against the client’s position. The primary responsibility of the firm in this scenario is to manage its risk exposure.

Statement IV is correct. Mark-to-market is the accounting practice of revaluing an asset or a portfolio to reflect its current market value. In leveraged FX trading, positions are marked-to-market at least daily to calculate unrealized profits or losses, which in turn determines the account equity and whether margin requirements are being met. This process is what would identify the margin shortfall in Mr. Chan’s account. Therefore, statements I, II and IV are correct.

The correct answer is that the currency is likely to appreciate due to increased demand from foreign investors. A central bank’s decision to raise interest rates makes holding assets denominated in that currency more attractive because they offer a higher return. This phenomenon, often explained by the International Fisher Effect and capital flow theories, leads to an inflow of foreign capital as investors seek to buy the country’s bonds and other interest-bearing assets. To do so, they must first purchase the local currency, which increases its demand and, consequently, its value relative to other currencies. The option suggesting the currency will depreciate due to economic slowdown concerns is incorrect because, while aggressive tightening can slow an economy, the immediate impact on the FX market is typically dominated by the allure of higher yields attracting capital inflows. The assertion that the exchange rate would remain stable because the hike was priced in is contradicted by the scenario’s detail that the move was ‘more aggressive-than-anticipated,’ indicating a market surprise that would necessitate a price adjustment. Finally, the idea that the currency would become volatile with no clear direction is unlikely; such a significant and unexpected policy signal usually provides a strong, clear directional impetus for the currency in the short term, even if volatility increases.

The correct answer is that the licensed corporation should promptly issue a margin call to the client. When a client’s account equity falls below the maintenance margin level, standard industry practice and risk management procedures, as expected under the SFC’s regulatory framework, require the firm to notify the client of the shortfall and demand the deposit of additional funds or collateral to bring the account back to the required level. This process is known as a margin call. Liquidating the client’s position without first issuing a margin call and providing a reasonable time to respond is typically a measure taken only if the client fails to meet the margin call or if the market is moving so rapidly that the position’s value is approaching zero or negative equity. Offering to increase the leverage on the account would exacerbate the risk, not mitigate it, and is contrary to prudent risk management. Waiting for the client’s next scheduled account review is inappropriate as it ignores the immediate and significant increase in counterparty risk to the firm.

The correct answer is that the licensed corporation can liquidate a sufficient portion, or all, of the client’s open positions without further notice to restore the required margin level. When a client fails to meet a margin call by the specified deadline, the client agreement almost universally grants the licensed corporation the right to close out any or all of the client’s open positions at its discretion. This action is a critical risk management tool to prevent the client’s losses from exceeding their deposited funds, which would create a debt for the client and a credit loss for the firm. The firm is not obligated to provide an additional grace period, as this would expose it to further market risk. The firm’s right to liquidate is not restricted to only the position that triggered the call; it can close any positions necessary to cover the margin shortfall. Seeking approval from a regulatory body like the Securities and Futures Commission is not required for such standard, contractually-agreed operational procedures.

This question assesses the understanding of procedures related to credit and counterparty risk management in leveraged foreign exchange trading, specifically margin calls and the liquidation of positions. Statement I is correct because the client agreement, which governs the relationship between the licensed corporation (LC) and the client, will specify the terms for a margin call, including the timeframe the client has to deposit additional funds or close positions. This ensures a clear and contractually agreed-upon process. Statement II is also correct. The fundamental purpose of margin is to protect the LC from client default. If a client fails to meet a margin call, the client agreement grants the LC the right to unilaterally liquidate the client’s open positions to cover the deficit and mitigate further risk. Statement III is incorrect because obtaining specific consent for each liquidation trade after a margin call is missed would be impractical and would defeat the purpose of having a pre-agreed right to liquidate. The client provides this authority upfront in the client agreement. Statement IV is incorrect as the client is fully liable for any debit balance remaining in their account after liquidation. The risk of loss in leveraged trading rests entirely with the client, not the LC. Therefore, statements I and II are correct.

This question assesses the understanding of standard risk management procedures for credit and counterparty risk in leveraged foreign exchange trading. Statement (II) is a fundamental practice; licensed corporations must perform mark-to-market valuations on client positions, typically at least daily, to accurately assess current profit/loss and equity levels. This process is what identifies a margin shortfall. When a client’s account equity falls below the maintenance margin level, the first direct action is to issue a margin call, as described in statement (I). This call formally notifies the client of the deficit and provides a deadline to deposit additional funds. If the client fails to meet this margin call within the stipulated time, the licensed corporation has the right, as per the client agreement, to liquidate positions to bring the account back into compliance, as stated in statement (IV). This is a critical mechanism to prevent further losses and protect the firm from the client’s default. Statement (III) is incorrect because a licensed corporation cannot unilaterally execute trades, such as a hedge, in a client’s account without their explicit instruction or prior discretionary authority. Doing so would be considered unauthorized trading. The firm manages its overall book risk, but this is separate from taking unauthorized action on a specific client’s position. Therefore, statements I, II and IV are correct.

A core aspect of risk management in leveraged foreign exchange trading is the margin mechanism. When a client’s account equity falls below the maintenance margin level due to adverse market movements, the licensed corporation faces increased counterparty risk. Statement I is correct because the standard procedure is to issue a margin call demanding the client to deposit additional funds (or close positions) to restore the account equity, typically back to the initial margin level, not just the maintenance level. This re-establishes the necessary buffer. Statement III is also correct; the client agreement invariably grants the licensed corporation the right to liquidate (close out) some or all of the client’s open positions if the margin call is not met promptly. This is a critical tool for the firm to mitigate its credit risk and prevent further losses. Statement II is incorrect as there is no specific mandatory grace period (e.g., one business day) stipulated by the SFC. The timeframe for meeting a margin call is governed by the terms of the client agreement, which may allow for immediate liquidation. Statement IV is incorrect because the firm’s right to liquidate is generally not restricted to the single position causing the deficit. The client agreement typically allows the firm to close any or all open positions in the account as necessary to cover the overall margin shortfall. Therefore, statements I and III are correct.

This question assesses the understanding of standard procedures for managing credit and counterparty risk in leveraged foreign exchange trading, specifically during a margin call event.

Statement I is incorrect. In leveraged FX trading, a client’s potential losses are not capped at the initial margin. If the market moves significantly against their position, they can lose more than their initial deposit and will be liable for the entire deficit. This is a fundamental risk that must be disclosed to clients.

Statement II is correct. When a client’s account equity falls below the maintenance margin level, the standard first step for the licensed corporation is to issue a margin call. This is a formal request for the client to deposit additional funds (or close positions) to restore the account equity to the required level.

Statement III is correct. The client agreement for a leveraged FX account will invariably grant the licensed corporation the right to liquidate the client’s open positions if they fail to meet a margin call within the specified timeframe. This is a critical mechanism for the firm to protect itself from credit losses.

Statement IV is incorrect. The client provides pre-authorization for such liquidation in the client agreement upon opening the account. Seeking explicit consent at the moment of liquidation would be impractical, especially in a fast-moving market, and would undermine the firm’s ability to manage its risk effectively. Therefore, statements II and III are correct.

The correct answer is that the firm can liquidate a sufficient portion of the client’s positions to restore the account’s margin level. In leveraged foreign exchange trading, when a client’s account equity falls below the maintenance margin level, the licensed corporation faces significant credit risk. The client agreement, which is a legally binding contract, almost invariably grants the firm the right to liquidate open positions without the client’s consent to cover the margin shortfall and protect the firm from further losses. This is a fundamental risk management practice. Waiting for a mandatory grace period is not a standard industry practice as it would expose the firm to potentially unlimited losses in a fast-moving market. The firm’s right to liquidate is not typically restricted to only the specific position that caused the margin call; they can close any positions necessary to bring the account back into compliance. Finally, seeking approval from a regulator like the Securities and Futures Commission for a routine liquidation due to a margin call is not required; this is an operational risk management function governed by the client agreement and the firm’s internal policies, which are expected to be in line with the principles of the Code of Conduct.

The correct answer is that the licensed corporation has the right to liquidate sufficient positions to cover the margin shortfall without the client’s further consent. The client agreement, which is a legally binding contract signed when opening a leveraged foreign exchange trading account, explicitly grants the firm this authority. This clause is a critical risk management tool for the licensed corporation to protect itself from credit risk and to prevent the client’s account from incurring a negative balance. The firm is obligated to act in a commercially reasonable manner, but it is not required to seek additional permission at the moment of liquidation, as this was pre-authorized in the agreement. The purpose of a margin call is to demand that the client restores the account equity to the required level; failure to do so triggers the firm’s right to take protective action. Requiring explicit consent at the time of the margin call would be impractical in fast-moving markets and would defeat the purpose of the margin system. While firms may have internal policies on which positions to close first, they generally have the discretion to liquidate any or all positions as necessary to rectify the margin deficiency. Similarly, waiting for a fixed, extended period like the end of the trading day could expose the firm to unacceptable levels of risk if the market continues to move adversely.

In leveraged foreign exchange trading, the client agreement is a critical document that outlines the rights and obligations of both the client and the licensed corporation. When a client’s account equity falls below the maintenance margin level, the firm faces significant counterparty risk. Statement II is correct because standard client agreements grant the licensed corporation the right to liquidate a client’s positions without prior notice or consent if a margin call is not met promptly. This is a crucial mechanism to prevent further losses and protect the firm from the client’s potential default. Statement III is also correct; leveraged trading carries the risk of losses exceeding the initial margin deposit. If a forced liquidation results in a negative account balance, the deficit represents a debt that the client is legally obligated to repay to the corporation. Statement I is incorrect because market conditions can change rapidly, and waiting a fixed period like 24 hours could lead to catastrophic losses. Client agreements typically allow for immediate action. Statement IV is incorrect as the firm’s action should be to close the client’s under-margined position directly, not to open a new, separate hedging position in its own proprietary account, which would be an inappropriate commingling of client and firm risk management. Therefore, statements II and III are correct.

Statement I is correct. Client agreements for leveraged foreign exchange trading typically grant the licensed corporation the right to liquidate a client’s open positions without prior notice if the account equity falls to or below a pre-determined forced liquidation level. This is a critical risk management tool for the firm to limit its exposure to credit risk. Statement II is incorrect. Due to the high leverage and volatility in the FX market, positions are ‘marked to market’ on a real-time or continuous intra-day basis, not just at the end of the day. This allows for constant monitoring of margin adequacy. Statement III is incorrect. The client agreement usually gives the licensed corporation sole discretion to decide which positions to close to satisfy a margin requirement. The firm is not bound to liquidate positions in any specific order, such as chronological. It will act in a way it deems best to protect its interests and restore the margin level. Statement IV is correct. A core risk of leveraged trading is that losses can exceed the client’s deposited funds. If a forced liquidation in a volatile market results in a negative account balance (a deficit), the client is legally obligated to pay this amount to the licensed corporation. Therefore, statements I and IV are correct.

The correct answer is that the licensed corporation is entitled to liquidate part or all of the client’s open positions without further notice to cover the margin shortfall. This action is a fundamental component of credit and counterparty risk management for a firm offering leveraged products. The client agreement, signed when the account is opened, pre-authorizes the firm to take such protective measures. When a client’s account equity falls below the maintenance margin level, it signifies that their losses are eroding the required collateral, exposing the firm to potential deficits if the market continues to move adversely. The margin call is a request for the client to restore the equity, but if they fail to do so promptly, the firm must act to mitigate its own risk. Waiting to maintain losing positions until the client gives instructions would expose the firm to potentially unlimited losses, which is unacceptable from a risk management perspective. While a firm might offer a grace period as a courtesy, it is not an obligation; the client agreement typically allows for immediate liquidation to protect the firm’s capital. Converting the shortfall into a loan is not a standard practice in leveraged FX trading; the margin system is designed to prevent such a credit situation from arising in the first place.

This question assesses the understanding of procedures related to margin calls and forced liquidation in leveraged foreign exchange trading, a critical aspect of credit and counterparty risk management. Statement I is correct because client agreements for leveraged FX trading invariably grant the licensed corporation the right to liquidate a client’s positions without further notice if a margin call is not met. This is a fundamental mechanism to protect the firm from credit losses. Statement III is also correct; leveraged trading means a client can lose more than their initial deposit. If liquidating positions results in a negative account balance (a deficit), the client is contractually obligated to cover that shortfall. Statement II is incorrect. While a firm might have internal policies, there is no regulatory or universal requirement to liquidate positions in a specific order (e.g., least profitable first). The firm’s primary objective during a forced liquidation is to mitigate its own credit risk as quickly and effectively as possible, which may involve liquidating the most liquid or largest positions first, irrespective of profitability. Statement IV is incorrect. Forced liquidation is a contractual right exercised by the licensed corporation based on its client agreement and risk management policies. It does not require prior approval from the Securities and Futures Commission (SFC) for each individual case. Therefore, statements I and III are correct.

In leveraged foreign exchange trading, client agreements are designed to protect the licensed corporation from credit and counterparty risk. When a client’s margin level falls below the maintenance margin, the firm has several contractual rights. (II) Issuing a margin call is the standard procedure to notify the client of the deficit and request additional funds. (IV) Concurrently, it is a prudent risk management practice to prevent the client from increasing their exposure by suspending their ability to open new positions. If the client fails to meet the margin call, or if the market moves rapidly, the firm has the right to take action to mitigate its risk. This includes (III) liquidating a portion of the client’s positions to bring the margin level back to an acceptable level, or, in severe cases, (I) liquidating all open positions. Critically, client agreements for leveraged products almost always grant the firm the right to liquidate positions without prior notice to protect itself from catastrophic losses, especially in volatile market conditions. Therefore, all of the above statements are correct.

The correct answer is that the firm has the right to liquidate Mr. Chan’s open positions to restore the margin level. In leveraged foreign exchange trading, when a client’s account equity falls below the maintenance margin requirement, a margin call is triggered. The client is required to deposit additional funds to bring the equity back to the required level. If the client fails to meet this margin call within the specified timeframe, the client agreement typically grants the licensed corporation the authority to close out some or all of the client’s open positions without further notice. This is a crucial risk management measure to prevent the client’s losses from escalating and to protect the firm from credit risk. Extending the deadline for the margin call would increase the firm’s exposure to risk, as the market could continue to move unfavorably. Converting the deficit into a loan is not a standard procedure for managing margin shortfalls in this context. Simply freezing the account while maintaining the losing positions does not resolve the immediate risk of the under-margined position and allows potential losses to grow.

In leveraged foreign exchange trading, the client agreement is a critical document that outlines the rights and obligations of both the client and the licensed corporation (LC). Statement I is correct because these agreements invariably grant the LC the authority to liquidate a client’s positions without seeking further consent if the margin level falls below a pre-determined liquidation level. This is a fundamental risk management tool to prevent the client’s losses from exceeding their account equity and to protect the LC from credit risk. Statement II is also correct. While the LC has the right to liquidate, the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission (specifically Schedule 5) requires firms to establish and follow procedures for making margin calls, which includes making reasonable attempts to notify the client. This demonstrates fair treatment of clients. Statement III is incorrect; delaying liquidation while waiting for funds could expose the LC to catastrophic losses in a fast-moving market, which contradicts the purpose of margin. The right to liquidate is triggered by the margin shortfall itself. Statement IV is incorrect as clients are fully liable for all losses incurred. If the liquidation of positions results in a negative account balance, the client is legally obligated to pay the deficit to the LC. The risk of loss exceeding the deposited margin is a key characteristic of leveraged trading. Therefore, statements I and II are correct.

The correct answer is that the licensed corporation must issue a margin call to Mr. Chan, demanding the deposit of additional funds to restore the account equity to at least the maintenance margin level. According to the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission, licensed corporations must have robust internal control and risk management systems. When a client’s account equity falls below the pre-agreed maintenance margin level, the firm is exposed to significant credit risk. The standard and required procedure is to promptly issue a margin call, giving the client a specified period to deposit additional funds or close out positions to bring the account back into compliance. This action protects both the firm and the client from further potential losses. Immediately liquidating the position without first issuing a margin call and providing the client an opportunity to respond is generally not the first step, unless the client agreement explicitly allows for it or the client cannot be contacted. Waiting for a market reversal constitutes a failure in risk management and exposes the firm to unacceptable levels of risk. Contacting the client to ask for their preferred course of action is also incorrect; while communication is important, the firm must enforce its margin policy by issuing a formal demand (the margin call), not by seeking advice on how to proceed.