For most custodians, when a security transaction is imported into Morningstar Office, the system automatically generates an offsetting cash transaction. For example, a buy will generate an offsetting withdrawal from cash and a sell will generate a deposit into cash. These automatically generated transactions indicate cash flow within a client’s portfolio, i.e. from cash to a security or vice versa. Imported transactions without corresponding automatically generated offsetting cash transactions will be marked as out of pocket, indicating that cash movement into or out of the portfolio. Click here for more information on cash flow.
While most custodians only send down transactions of the original security, LPL sends down transactions of the original security AND its own offsetting LPL:Cash transactions.
The following table compares transaction codes taken from an LPL data file that has the additional cash flow versus a TD Ameritrade data file that has the typical cash flow. The transaction is a distribution from Verizon into the Money Market.
Transaction Type |
Transaction Type |
Distribution from Verizon Communications Inc. |
Distribution from Verizon Communications Inc. |
Deposit into LPL Cash |
|
Purchase of the money market FDIC INSURED DEPOSIT |
Purchase (deposit) of INSURED CASH ACCOUNT |
Withdrawal from LPL CASH |
Morningstar Office generates an offsetting CASH transaction for each of LPL’s transaction codes.
Typical Cash Flow for a Distribution that Moves to the Money Market
Transaction in Data File |
Auto-Generated Transaction |
Distribution in original holding |
Deposit into Cash holding |
Buy into Money Market |
Withdrawal out of Cash holding |
LPL Cash Flow for the Same Scenario
Transaction in Data File |
Auto-Generated Transaction |
Distribution from original holding |
Deposit into Morningstar Cash |
Deposit in LPL Cash |
Withdrawal out of Morningstar Cash |
Withdrawal out of LPL Cash |
Deposit into Morningstar Cash |
Buy into Money Market |
Withdrawal out of Morningstar Cash |
Therefore, a total of 8 transactions are created in the import blotter. The 4 highlighted transactions come directly from the LPL transaction file and the rest are automatically generated.
How does LPL Margin work in an account?
A margin account is a brokerage account in which the brokerage firm lends the customer cash with which to purchase securities. Unlike a cash account, a margin account allows an investor to buy securities with money that he/she does not have, by borrowing the money from the broker. The Federal Reserve limits margin borrowing to at most 50% of the amount invested. Some brokerages have even stricter requirements, especially for volatile stocks. People usually open margin accounts to take advantage of an opportunity to leverage their investment, rather than because they don't have the money to make the full purchase. Brokerage firms charge a relatively low interest rate on margin loans in order to entice investors into buying on margin.
The movement of a Distribution Paid in an Account with Margin Activity
Security Name |
Trade Date |
Number of Shares |
Transaction Type |
Amount |
Price |
Cash Security Name |
SPDR S&P 500 |
1/4/2016 |
|
Distribution |
12.49 |
|
CASH |
CASH |
1/4/2016 |
12.49 |
Deposit |
12.49 |
1.00 |
SPDR S&P 500 |
LPL: MARG |
1/4/2016 |
12.49 |
Deposit |
12.49 |
1.00 |
CASH |
CASH |
1/4/2016 |
12.49 |
Withdrawal |
12.49 |
1.00 |
LPL: MARG |
LPL: MARG |
1/5/2016 |
12.49 |
Withdrawal |
12.49 |
1.00 |
|
LPL: CASH |
1/5/2016 |
12.49 |
Deposit |
12.49 |
1.00 |
|
LPL: CASH |
1/5/2016 |
12.49 |
Withdrawal |
12.49 |
1.00 |
CASH |
CASH |
1/5/2016 |
12.49 |
Deposit |
12.49 |
1.00 |
LPL: CASH |
INSURED CASH ACCOUNT |
1/5/2016 |
12.49 |
Deposit |
12.49 |
1.00 |
CASH |
CASH |
1/5/2016 |
12.49 |
Withdrawal |
12.49 |
1.00 |
INSURED CASH ACCOUNT |
The example above demonstrates the cash flow necessary for a distribution in a margin account.
Money is moved from the Money Market:
Distribution in SPDR S&P 500 (Holding held in Margin)
Deposit into Cash (Morningstar Cash) Auto-generates
Deposit into LPL Margin
Withdrawal out of Cash (Morningstar Cash) Auto-generates
Movement between Margin Cash and LPL Cash:
Withdrawal out of LPL Margin - Out of Pocket
Deposit into LPL Cash - Out of Pocket
Note: These transactions are out of pocket because LPL codes the margin cash as leaving the account and new cash coming in.
Movement into Money Market:
Withdrawal out of LPL Cash
Deposit into Cash (Morningstar Cash) Auto-generated
Deposit into Insured Cash Account (Money Market)
Withdrawal out of Cash (Morningstar Cash) Auto-generated