Cash Account Trading and Freeride Restrictions

• What is a Cash Account?
• What are the Cash Account trade settlement and rules?
• What are the restrictions on a Cash Account (Good Faith Violations & Freeride Restrictions)?
• For Cash Accounts, what does the Available to Purchase Securities balance value mean?

What is a Cash Account?

A Cash Account is a brokerage account, including retirement accounts and other non-retirement accounts that have not been approved for margin, that does not allow for any extension of credit on securities. In a Cash Account, all trades are accepted on the basis of receiving full payment in cash for purchases and good delivery of securities for sales by the trade settlement date.

In a Cash Account, the following transactions are allowed:

• The purchase and sale of securities
• Options purchases and covered call writing (if approved for options trading)

Short selling, option writing, and pattern day-trading strategies all require extension of credit under the terms of a Margin Account. To learn more about margin trading, on Fidelity.com, go to Investment Products > Trading > Commission and Margin Rates > Margin Borrowing.^*

What are the Cash Account trade settlement and rules?

Rules for payment of securities transactions executed in accounts are established under Federal Reserve Board Regulation T. These rules allow for the acceptance of purchases in Cash Accounts if sufficient funds are in the account to pay for the purchase fully, or if you make a "good faith agreement” to make full payment promptly prior to both selling the security and settlement due date. Though settlement date varies by security type and trade conditions, it is generally three business days for equities, and one business day for options and most mutual funds. Fixed income security settlement will vary based on security type and new issue versus secondary market trading.

Note that the definition of sufficient funds residing in the account does not include Cash Account sale proceeds that have not settled. It also does not include non-core account money market positions. If you do not have sufficient funds on hand to purchase a security, you must agree to pay for the security before buying it.

What are the restrictions on a Cash Account (Good Faith Violations & Freeride Restrictions)?

If a security purchased without sufficient funds on hand is sold prior to being fully paid for, a “good faith violation” has occurred, even if payment is received prior to settlement. The reason it is referred to as a “good faith violation” is that trade activity is giving the appearance that sales proceeds are being used to cover buy orders when there is insufficient settled cash to cover these purchases. Basically, trade activity indicates that a “good faith” effort to deposit additional cash into the account will not happen. If payment is not received at all,prior to settlement, then a “freeriding” violation has occurred. Accounts with three good faith violations or one freeriding violation in a 12-month period must be restricted to purchasing securities only with sufficient funds on hand in the form of core account balance, received deposit, or settled sale proceeds. This restriction expires in 90 days.

The following examples^** illustrate good faith violations and freeriding restrictions.

Good Faith Violation Example 1

A Cash Account with Available to Purchase Securities = $0.00

• On Monday morning, you sell XYZ and net $10,000 in proceeds
• On Monday afternoon, you buy ABC for $10,000
• If you sell ABC before XYZ's settlement date on Thursday, you will incur a good faith violation, as the ABC would not be considered fully paid for prior to the sale

Good Faith Violation Example 2

A Cash Account with Available to Purchase Securities = $10,000

• On Monday morning, you buy XYZ for $10,000
• On Monday mid-day, you sell $10,000 worth of XYZ
• Near market close on Monday, you purchase ABC for $10,000
  At this point, you have not incurred a good faith violation because you have sufficient funds for your XYZ purchase
• If you sell ABC before the settlement date of your purchase, you will incur a good faith violation

Good Faith Violation Example 3

A Cash Account with Available to Purchase Securities = $10,000, Cash Credit from Unsettled Activity = $5,000 (due to the proceeds from a sale of stock the prior Friday, and the trade settles on Wednesday)

• On Monday morning, you purchase ABC for $15,000
• If you sell ABC on Monday or Tuesday (i.e., prior to Wednesday's settlement date for your stock sale on Friday), you will incur a good faith violation, as your ABC purchase on Monday would not be considered fully paid for

Freeriding Example 1

A Cash Account with Available to Purchase Securities = $0.00

• On Monday morning, you place a buy order for $10,000 of ABC with a representative on a good faith agreement of prompt payment by settlement date
• You do not send your payment prior to settlement date
• On Friday, you sell ABC for $10,500
• A freeriding violation has occurred, as no payment was received for the ABC purchase

Freeriding Example 2

A Cash Account with Available to Purchase Securities = $5,000

• On Monday morning, you place a buy order for $10,000 of ABC, intending to send a $5,000 payment later by Electronic Fund Transfer (EFT)
• On Tuesday, ABC rises dramatically, and your purchase on Monday is now valued at $15,000
• On Wednesday morning, you sell ABC for $15,000, and cancel your transfer of $5,000
• A freeriding violation if a $5,000 payment is not received by settlement date to cover the initial purchase of ABC on Monday

For Cash Accounts, what does the Available to Purchase Securities balance value mean?

Available to Purchase Securities is defined as the cash dollar amount available for trading in the core account without adding money to the account. This balance includes intraday transaction activity.

For unrestricted cash accounts, all buy trades are debited and all sell trades are credited from the Available to Purchase Securities balance as soon as the trade executes, not when the trade settles. For example, if the core account balance is $10,000, a deposit of $10,000 is received today, and the account has a $10,000 credit balance from unsettled activity, the Available to Purchase Securities balance would be $30,000.

For cash accounts restricted for freeriding or good faith violations, the Available to Purchase Securities balance will not include unsettled cash account sale proceeds.