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Which of the following agreements allows the broker-dealer to use the customer’s securities as collateral on a loan?
A. loan consent agreement
B. hypothecation agreement
C. credit agreement
D. prime broker agreement
Correct Answer: B. hypothecation agreement
Rationale: The hypothecation agreement allows the broker-dealer to use the customer’s securities as collateral on a loan. The credit agreement details the terms and conditions for the credit that the broker-dealer is extending to the customer. This agreement will include how the firm will calculate the interest charged on the credit and what interest rate the loan rate it will be tied to (e.g., broker call rate). The loan consent agreement permits the broker-dealer to lend the customer’s securities to other customers wishing to execute short sales. This agreement is not required of customers opening a margin account, but strongly encouraged by the broker-dealer.
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