21 Apr 2020

What is a Blocked Period?

A blocked period refers to a length of time in which an investor’s securities are prevented from being accessed. A blocked period may be put in place if an investor has used a security as collateral, as it prevents the investor from using the same security as collateral or from selling the security. It may also refer to a period of time in which an investor cannot access account funds.

  • Blocked periods denote periods of time where an investor cannot access their assets. Brokerages and financial institutions may place a hold on the securities in an investor’s account for several reasons.
  • Brokerages may be required to block an account for a period if the account holder buys or shares securities without having sufficient capital to complete the trade, referred to as freeriding. The specific regulation governing this is called Regulation T and specifically relates to cash accounts.
  • For novice traders, familiarizing oneself with these rules beforehand will make life a lot easier because a blocked period can come as a surprise to those unaware of the rules/laws. A lot of these rules are in place to protect both the investor and the broker dealer.

How a Blocked Period Works

Blocked periods denote periods of time where an investor cannot access their assets. Brokerages and financial institutions may place a hold on the securities in an investor’s account for several reasons. Reasons include the investor being labeled a day trader using a margin account, or the investor using a security as collateral in a trade.

Investors who trade frequently may be considered to be day traders by the Securities and Exchange Commission (SEC). This label may bring with it requirements for how much money must be available in the investor’s account at a particular point in time. A pattern day trader label is given if an investor buys or sells stocks using a margin account more than a defined number of times during a week.

Brokerages may be required to block an account for a period if the account holder buys or shares securities without having sufficient capital to complete the trade, referred to as freeriding. The specific regulation governing this is called Regulation T and specifically relates to cash accounts.

For novice traders, familiarizing oneself with these rules beforehand will make life a lot easier because a blocked period can come as a surprise to those unaware of the rules/laws. A lot of these rules are in place to protect both the investor and the broker dealer.

An Example of a Blocked Period

If an investor with a cash account tries to purchase shares with funds that have not yet been settled from a previous trade, the brokerage firm’s compliance and trade monitoring department may issue a blocked period. The blocked period lasts ninety days. During this time, the investor may make purchases, but only with completely settled funds. Investors can avoid this type of blocked period by trading on margin, though margin accounts are subject to other rules regarding minimum balances.

Let’s say this investor has $5000 in her cash account and she decides to buy 100 shares of ABC at a price of $50 per share. She transacts the trade and a month later she decides to sell the shares for $52 per share. If she tries to purchase another stock with those funds on the same day as the sale, she will be blocked because the funds have not had the chance to settle. Generally speaking, U.S. equities clear T + 2. So, if the sell of ABC happened on a Monday, the investor would not be able to buy another security with those funds until the settlement date of Wednesday at the earliest.

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