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Reg.~~ 480
INTERPRETATION OF LAW OR REGULATION
{Copies to be sent to all Federal Reserve b&lks)
October 29, 1957.
Mr. _
, Vice President,
Federal Reserve Bank of ;..·_ _ _ _ ,
Dear Mr.
-----·.
Reference is made to your letter of October 18, 1957, regarding
Regulation U.
~
It is understood that a bank made a loan to a brokerage firm
pursuant to Regulatio~ U and that subsequently, when the market value of
the collateral declined below that which the bank customarily requires to
be maintained for its own protection, the bank issued a demand for tnargin,
although such margin was not required b,y the regulation. Since the brokerage firm received the margin call on Saturday and it was customary with
the firm to eliminate the routine operatlons incident to entering vaults
to obtain securities on Saturdays when deliveries and clearances of securiti.;)S are not usually effected, the firm proposed thlit it ba permitted to
deposit a certified check on Saturday in temporary sutisfa.ct.ion of the demand for margin, and that on Mondny it be permitted to replace the certified check with stocks.
The certified check would be made for an amount equal to the·
current market value of the securities to be deposited rather than the
maximum loan value of such semtritias, since a certified check limited
to the maximum loan value of the :securities might not afford the bank as
much protection as the securities. The question presented is whether
this PI'OCedure may be followed.
As indicated in the Board's letters S-26 and S-52 of August 5
a.nd September 5, 1937, tha withdrawal of a certified check against the
deposit of an equal market value of stocks ordinarily would not be permissible when the amount of the loan exceeds the maximum loan value of
the coll~teral, since the substitution would reduce the maximum loan
value bf the collateral and thus increa.se the deficiency. It appears
in the present case, however, that margin would be deposited to satisfy
the bank's maintenance requirements rather than ~y requirement of Regulation u, that the entire tr~nsaction would be completed within what
amounts to only a comparatively few business hours, that the procedure
would be followed in entire good faith and not for the purpoje of evading the regulation, and ~~t the not effect of the procedure, which would
S-42
481
Reg. U-25
facilitate the usual operations of the brokerage firm, would be the same
as if the securities had originally been deposited on Saturday or the margin cull had not been met until Monday.
In the circumstances, the Board is of the opinion that the substitution of the securities for the certified check need not be separated
from the other portions of the transaction and that the entire transaction
may be considered according to its net results and be treated for the purposes of the regulation as if the securities had been deposited on Saturday
or the margin call had not been met until Monday. The Board believes the
transaction would be permissible on this basis although, of course, an entirely different situation might be presented if any of the circumstances
were altered.
In view of the discussion above, it is believed that it is not
necessary at thi.$ time to express an~r opinion as to the other considerations referred to in your letter.
Very truly yours,
(Signed) L. P. Bethea
L. P. Bethea,
Assistant Secretary.
@FedFRASER