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431 S-20 Reg. T-58 INTEP.Pl:tE_±}.TI\'N Q.L1£Yv OH HEGUL}TION (Copies to be sent to all Federal reserve banks) July 28, 1937. Mr. ' .. , Assistant Vice President, Federal Reserve Bank of -------' Dear Mr. ___ Reference is made to your correspondence regarding the inquiry presented by------ Stock Exchange as to whether certain transactions constitute bona fide arbitrage transactions within the meaning of section 5(d) of Regulation T. As you know, a reply to your letter has been delayed while certain practical aspects of this problem were being investigated. It is understood that the inquiryrelates to transactions in two securities of which the first is an issued warrant of a particular corporation which evidences a right to subscribe, by the payment of a specified sum of money, to a security which is definitely to be issued by the corporation. The .second security is the security that may be obtained by exercising the warrant, and it may conveniently be referred to as the subject security. In order to take advantage of the disparity in the relative market prices of the warrant and the subject security, a customer of a member of a national securities exche.nge purchases the warrant through the member and simultaneously, or nearly simultaneously, sells short through the member that quantity of the subject secllrity called for by the warrant. In one case the subject security is part of an additional issue of outstanding securities of the corporation and is sold short as an issued security. In another case the subject security is part of an issue of which no portion is outstanding, and it is sold short on a "when issued" basis. In both cases the customer instructs the member to exercise the warrants and to cover tha sales with the securities thus acquired, and the member advances the subscription funds for this purpose. It is the opinion of the Board that if transactions of the type described are effected etS outlined above in good faith and not for the purpos~ of evading or circumventing the provisions of the regulation, such transactions would constitute bona fide arbitrage 432 S--20 n -1':.-- Reg. 'I'---.-8 transactions in securities vvithin the weaning of section 3( d) of Regulation T and, ther';fore, might bo effected in a s9ecis1 account pursuant to thE: provisions of that section. Very tru.iy yours, (Signed) L. P. Bethea L. P~ Bethea, Assistant Secretary.
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