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federal R eserve Ba n k o f D allas DALLAS. TEXAS 75222 Circular No. 82-61 June 1, 1982 MARGIN REGULATIONS Amendments TO ALL MEMBER BANKS, OTHER CREDITORS AND OTHERS CONCERNED IN THE ELEVENTH FEDERAL RESERVE DISTRICT: The Board of Governors of the Federal Reserve System has amended its margin regulations to include the following: (1) To broaden the types of collateral in Regula tion T against which brokers and dealers may borrow and lend securities. This is effective May 17, 1982. (2) To change the criteria for inclusion on the Board's list of stocks traded over the counter. This is effective June 12, 1982. Enclosed are copies of the press releases and Federal Register material for each set of amendments. Questions concerning the amendments should be directed to Dean A. Pankonien of this Bank's Legal Department, Ext. 6171. Additional copies of this circular and enclosure may be obtained upon request to the Department of Communications, Financial and Community Affairs, Ext. 6289. Sincerely yours, William H. Wallace First Vice President Enclosure Banks and others are encouraged to use the following incoming W A T S numbers in contacting this Bank: 1-800-442-7140 (intrastate) and 1-800-527-9200 (interstate). For calls placed locally, please use 651 plus the extension referred to above. This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) FEDERAL RESERVE press release For immediate release May 13, 1982 The Federal Reserve Board has amended its Regulation T (extension of credit on securities by brokers and dealers) to broaden the types of collateral against which brokers and dealers may borrow and lend securitiesThe revision would permit brokers and dealers to use as collateral letters of credit issued by Federally insured banks. United States government securities, certain bank certificates of deposit and bankers acceptances and letters of credit from foreign banks that have filed a specified agreement with the Board. The Board acted after consideration of comment received on proposals published last November. The new authority becomes effective May 17, 1982. Until now, brokers and dealers have been able to borrow and lend securities only against cash collateral. The Board's notice in this matter is attached. -0 - Attachment FEDERAL RESERVE SYSTEM Regulation T (12 CFR Part 220) [Docket No. R - 0370] CREDIT B BROKERS A D DEALERS Y N Deposit Required for Borrowing and Lending S e c u r i t ie s AGENCY: Board of Governors of the Federal Reserve System. ACTION: Final Rule. SU M RY On November 10, 1981, t h e Board published f o r comment a proposal MA : to amend section 220.6(h) Regulation T to permit brokers and dealers to borrow and lend s e c u r i t i e s against l e t t e r s of c r e d i t issued by banks insured by the Federal Deposit Insurance Corporation and against U.S. government s e c u r i t i e s (46 Fed. Reg. 55533). The ex is tin g rule requires a deposit of cash. The Board has adopted a modified version of i t s November 10, 1981 proposal. The amendment will permit, in addition to cash, the use of s e c u r i t i e s issued or guaranteed by the United States government or i t s agencies, c e r t a i n l e t t e r s of c r e d i t , bank CD's and bankers acceptances, as permissible c o l l a t e r a l in stock lending and borrowing t r a n s a c t i o n s . The amendment w il l also permit foreign banks t o issue l e t t e r s of c r e d i t in such tr a n s a c t i o n s i f they have f i l e d with the Board agreements t o comply with the same ru les and regulations applicable t o member banks in s e c u r i t i e s c r e d i t t r a n s a c t i o n s . EFFECTIVE DATE: M 17, 1982. ay FOR FURTHER INFORM ATION CONTACT: Laura Homer, S e c u r i t i e s Credit Officer or Robert Lord, Attorney, Division of Banking Supervision and Regulation, Board of Governors of the Federal Reserve System, Washington, D.C. (202) 452-2781. SUPPLEM ENTAL INFORM ATION: The Board's November 10, 1981 proposal to amend section 220.6(h) of Regulation T would have expanded acceptable kinds of c o l l a t e r a l in stock lending t r a n s a c t i o n s to include l e t t e r s of c r e d i t and U.S. government s e c u r i t i e s . Many commenters believed the Board's proposed l i m i t a t i o n with respect to acceptable kinds of c o l l a t e r a l was too r e s t r i c t i v e . These commenters suggested t h a t CD's, bankers acceptances, commercial - 2 In order to give brokers and serv ice bureaus time to ad ju s t t h e i r programs to r e f l e c t changes in the OTC L i s t , the Board will h e r e a f te r publish t he O List two weeks in advance of i t s e f f e c t i v e date. This change was TC suggested by many commenters. The Board wishes to make c l e a r t h a t no ex is tin g O margin stock TC which ceases to meet new O List c r i t e r i a will .be immediately removed from the TC OTC L ist as a r e s u l t of these amendments; the Board intends to "grandfather" such stocks for two ye ar s. In te res ted persons should also be aware t h a t special consideration for inclusion on the List will be given to companies which v o l u n t a r i ly f i l e an appplication to d e l i s t t h e i r s e c u r i t i e s from a national exchange and are trading in NASDAQ. Such a procedure wi ll prevent any i n t e r ruption in the m argin ability of c e r t a i n s e c u r i t i e s . EFFECTIVE DATE: June 12, 1982. FOR FURTHER INFORM ATION CONTACT: Jamie Lenoci, Financial Analyst, or Robert Lord, Attorney, Division of Banking Supervision and Regulation (202) 452-2781. SUPPLEM ENTARY INFORM ATION: In July 1969, pursuant to the Over the Counter Market Act of 1968, (Pub. L. 90-437), the Board adopted c r i t e r i a which, i f met by i ss u e r s of over-the-counter stocks, would r e s u l t in the stocks being placed on the O List and hence afforded the same treatment as exchange TC l i s t e d stocks for purposes of the Board's margin ru les . This meant t h a t once on the OTC L i s t , over-the-counter stocks were e l i g i b l e for margin t r a d i n g . In addition to c r i t e r i a for i n i t i a l e l i g i b i l i t y for the O L is t , TC c r i t e r i a for continued e l i g i b i l i t y for inclusion on the OTC List were also e s ta bl i sh ed by the Board in 1972. Changes in the O List c r i t e r i a made today are the r e s u l t of a TC review of recent developments in the s e c u r i t i e s markets, p a r t i c u l a r l y the O TC market, s t a f f experience with the administration of the O List and the pub TC l i c commentary. Each change i s discussed below. Foreign Issuers Now E lig ib le for O List Inclusion TC Issuers e l i g i b l e for inclusion on the O List will no longer have TC t o be organized under the laws of the United States or a S t at e. Foreign iss ue r s were precluded from O List e l i g i b i l i t y in the past because of the TC r e l a t i v e lack of access to such i s s u e r s ' financial information. The st re ng thened di sc losure rules of the S ecu ri ti es and Exchange Commission now make i t possible to obtain comprehensive and up to date financial information on many foreign i s s u e r s . Because of these improvements, i t is no longer necessary to r e s t r i c t O L ist candidates to domestic i s s u e r s . Foreign as well as TC domestic iss uer s must, however, be r e g i s t e r e d or f i l e comparable reports with the S ec u ri ti es and Exchange Commission in order to be e l i g i b l e for inclusion on the O L ist . TC Eliminating Alternate C r i t e r i a and Making Price and Capital C r i t e r i a Mandatory Another change in O List c r i t e r i a involves the a l t e r n a t i v e TC requirements with respect to the size and character of the issue and i s s u e r . Prior to these amendments, a stock could f a i l one of the three c r i t e r i a of a $5.00 minimum p r i c e , $5 million c a p i t a l , or $5 million in market value and s t i l l be placed on the O L ist . The c r i t e r i o n requiring an aggregate market TC - 3 - value of $5 million is of limited value in since i t only a f f e c t s stocks worth between past two yea rs, for example, only seven per O List fa il ed the aggregate market value TC of t h i s t e s t i s no longer j u s t i f i e d . determining OTC List e l i g i b i l i t y $5 and $10 per share. During the cent of the stocks added to the t e s t . Accordingly, th e retention The remaining a l t e r n a t e c r i t e r i a for both i n i t i a l and continued inclusion on the O List -- r e l a t i n g to price per share and minimum ca p i t al — TC are now made mandatory. Doing so will lessen the e f f e c t of systemic f l u c tu a tions which have i n d i r e c t l y been a f fe c tin g the size and composition of the O L ist . TC The Board o r i g i n a l l y proposed to lower the price and capi tal c r i t e r i a for continued l i s t i n g from $3 and $2.5 million to $1 and $1 m il li on , re sp ec ti ve ly . Some public comment, however, r e f l e c t e d the view t h a t the pro posed c r i t e r i a may encourage the use of speculative c r e d i t . The Board has decided, t h e r e f o r e , to adopt a higher continued l i s t i n g price c r i t e r i o n than th a t proposed. The new c r i t e r i o n will s t i l l be lower than the c r i t e r i o n ex is tin g before these amendments. The capital c r i t e r i o n for i n i t i a l and continued l i s t i n g has been reduced to $4 million and $1 m il l i o n , respec ti vel y. The i n i t i a l l i s t i n g p r ic e per share c r i t e r i o n will remain at $5. The continued l i s t i n g price per share c r i t e r i o n has been reduced to $2. The i n i t i a l l i s t i n g publicly held share c r i t e r i o n has been reduced to 400,000 shares. These changes will make the Board's O List c r i t e r i a more comparable to the l i s t i n g TC c r i t e r i a of the American Stock Exchange. (NOTE: The remainder of t h i s notice may be obtained from the Federal Reserve Board or the Federal Reserve Banks.) For immediate release May 13, 1982 The Federal Reserve Board today adopted amendments to its margin regulations that change the criteria for inclusion on the Board's list of stocks traded over the counter (OTC list). Inclusion of a stock on this list makes it possible for brokers and dealers to lend on the stock in conformance to the Board's margin requirements. About 1,500 stocks are on the Board's OTC list. Further, the Board decided that in the future changes in the OTC list, which is updated three times yearly, will become effective two weeks after publication rather than immediately. The changes adopted by the Board, after consideration of comment received on proposals published last November, are: 1. Inclusion on this list of eligible foreign securities. 2. Setting of mandatory price and capital criteria for determining OTC list eligibility (formerly, stocks, to be eligible, could satisfy any two out of three criteria: price, capital or market value). 3. Reduction of requirements for initial listing as follows: — Capital requirement of $4 million (rather than $5 million), and — Requirement for the number of shares held publicly lowered to 400,000 (rather than 500,000). 4. Reduction of requirements for continued listing as follows: — Capital, $1 million (rather than $2.5 million). — Listed price, $2 (rather than $5). Stocks that no longer meet eligibility requirements under the new criteria for listing on the Board's OTC list will be retained on the list for two years. The Board believes the revised criteria reflect changes, since the last major revision of the criteria in 1976, in stock market conditions and exchange practices. The introduction to the Board's notice in this matter is attached. The text of the notice may be obtained from the Board or the Federal Reserve Banks. FEDERAL RESERVE SYSTEM Regulations G, T and U [12 CFR 207, 220 and 221] [Docket No. R-0372] SECURITIES CREDIT TRANSACTIONS Revision of C r i t e r i a for I n i t i a l and Continued Inclusion on the List of O Margin Stocks TC AGENCY: Board of Governors of the Federal Reserve System. ACTION: Final Rule. SU M RY On November 24, 1981, t h e Board published f or comment (46 Fed. Reg. MA : 57532) a proposal to amend i t s c r i t e r i a for i n i t i a l and continued inclusion on the List of O Margin Stocks ("OTC L i s t " ) . TC Brokers and dealers may not extend c r e d i t on stocks which are traded over-the-counter unless such stocks appear on the O L i s t . Loans by banks and other lenders t h a t are used to TC purchase stocks appearing on the OTC List are subject to the Board's margin requirements i f the loans are secured by margin stock. In i t s announcement, the Board proposed to revise OTC List c r i t e r i a in t h r ee important r esp ect s. F i r s t , equity s e c u r i t i e s of foreign issuers and American Depository Receipts would, for the f i r s t time, be e l i g i b l e for O L ist i nc lus io n. Second, c e r t a i n a l t e r n a t i v e c r i t e r i a with respect to TC price and c a p i t a l were to be made mandatory. Third, a proposal was made to relax capital and p r i ce c r i t e r i a to more closely resemble the l i s t i n g re qu ire ments of major stock exchanges. In i t s action today, the Board adopts revisions to O List TC c r i t e r i a in s u b s t a n t i a l l y the same form as proposed. S p e c i f i c a l l y , the O TC L ist c r i t e r i a are amended to (1) permit the inclusion of s e c u r i t i e s of foreign i ss u e r s r e g i s t e r e d with the S ec u r i t i es and Exchange Commission, (2) eliminate the a l t e r n a t i v e market value c r i t e r i o n and make the pr ice and ca p i t al c r i t e r i a mandatory, (3) reduce the i n i t i a l l i s t i n g ca pi ta l and pu bl icl y -h eld share c r i t e r i a to $4 million and 400,000 shares, r es p ec ti v el y , and (4) reduce the continued l i s t i n g price and ca p i ta l c r i t e r i a to $2 and $1 m i l l i o n , respec ti vel y. In response to public commentary, th e price requirement for continued l i s t i n g adopted by the Board today is higher than th a t o r i g i n a l ly proposed f o r comment but lower than t h a t in the exi sti ng ru l e . The Board wishes t o make c l e a r t h a t i t s action today with respect to the inclusion of foreign iss uer s on the O List i s limited to those iss uers who have ac tu al ly TC r e g i s te r e d with the S ec u ri ti es and Exchange Commission or f i l e repo rts comparable to those f i l e d by domestic companies. - 2 - paper and equity s e c u r i t i e s be included as permissible c o l l a t e r a l in t r a n s a c t i o n s governed by section 220.6(h). The Board has determined t h a t c e r ta i n negotiable CD's and bankers acceptances along with l e t t e r s of c r e d i t and U.S. government s e c u r i t i e s , will be pennitted as acceptable c o l l a t e r a l when s e c u r i t i e s are lent or borrowed by brokers and dea lers. The Board's proposal to limit use of l e t t e r s of c r e d i t in stock lend ing and borrowing tr a n s a c t i o n s to l e t t e r s issued by‘ FDIC-insured banks was opposed by many foreign banks doing business in the United S t a te s. These banks regarded the Board proposal as discriminatory and unnecessary. The Board believes t h a t t h e i r p o sit io n i s not without m er it , and will permit use of foreign bank l e t t e r s of c r e d i t for purposes of section 22 0 .6 (h ) -i f such bank has f i l e d a Form F.R. T-2 with the Board agreeing, to comply with a l l laws r e l a t i n g to se c u ri t i e s c r e d i t t h a t are applic abl e to t h e i r U.S. coun ter par ts . Only foreign banks with branches or agencies t h a t are supervised and examined by S tat e or Federal banking a u t h o r i t i e s are e l i g i b l e to f i l e such agreements. In i t s orig ina l proposal, the Board c e r t i f i e d f or the purpose of 5 U.S.C. § 605(b) t h a t i t s action would not have a s i g n i f i c a n t impact on a su b s t an t i al number of small e n t i t i e s . N comments were received which would o lead the Board to conclude t h a t the adoption of t h i s amendment would have a s i g n i f i c a n t impact on a su bs tan ti al number of small e n t i t i e s . List of Subject Headings in 12 CFR Part 220 Banks, banking; Brokers; Credit; Federal Reserve System; Margin; Margin Requirements; Reporting Requirements; Se cur ities Accordingly, pursuant to §§ 7 and 23 of the S ec ur i t i es Exchange Act of 1934 (15 U.S.C. §§ 78g, 78w), the Board amends § 220.6(h) of Regulation T (12 CFR Part 220) to read as follows: "(h) Borrowing and lending s e c u r i t i e s . Without regard to th e other provisions of t h i s p a r t , a c r e d i t o r may borrow or lend s e c u r i t i e s for the pur pose of making delivery of the s e c u r i t i e s in the case of short s a l e s , f a i l u r e to receive s e c u r i t i e s required to be del ivered, or other si m il ar s i t u a t i o n s . Each borrowing sh a ll be secured by a deposit of one or more of the following: cash, s e c u r i t i e s issued or guaranteed by the United States government or i t s agencies, negotiable bank c e r t i f i c a t e s of deposit and bankers acceptances issued by banking i n s t i t u t i o n s in the United States and payable in the United S t a t e s , or irrevocable l e t t e r s of c r e d i t issued by a bank insured by the Federal Deposit Insurance Corporation or a foreign bank th at has f i l e d an agreement with the Board on Form F.R. T-2. Such deposit made with the lender of the s e c u r i t i e s shall have at a l l times a value a t l e a s t equal to 100 percent of the market value of the s e c u r i t i e s borrowed, computed as of the close of the preceding business day." O B Control Number: M Approval by O B i s pending. M Paperwork Reduction Act In accordance with the Paperwork Reduction Act of 1980 (P.L. 96-511), the reporting or recordkeeping provisions t h a t are included in t h i s regulation have been or will be submitted for approval to the Office of Management and Budget (OMB). - 3 - By order of the Board of Governors of the Federal Reserve System, M 12, 1982. ay (signed) William W Wiles , William W Wiles . Secretary of the Board [SEAL]