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FEDER A L RESERVE BANK OF DALLAS
DALLAS. TEXAS 75222
Circular No. 71-29
February 3 > 1971

PROPOSED AMENDMENTS TO REGULATIONS T AND U

To All Banks, Broker/Dealers,
Nonbank Lenders and Others Concerned
in the Eleventh Federal Reserve District:
The Board of Governors of the Federal Reserve System
issued for comment on January 26, 1971? a proposed amendment to
exempt from margin requirements credit extended by banks, brokers,
and dealers to so-called "block positioners".
Block positioners are securities firms that stand ready
to hold substantial blocks of stock for their own account to facili­
tate the sale or purchase by their customers— primarily institutions—
of quantities of stock too large to be absorbed by ordinary trading
mechanisms.
The Board also reissued for further comment a proposal to
exempt purported "third market makers" from margin requirements for
credit they obtain from banks to carry on their market-making activ­
ity. Third market makers are firms that make a
market off the
exchanges in stocks that are listed for exchange trading.
Copies of the Board's press release and the proposed
amendments are attached. Interested persons are invited to submit
relevant data, views, or arguments. Such materials should be sub­
mitted in writing to the Secretary, Board of Governors of the
Federal Reserve System, Washington, D. C. 20551? to be received
not later than March 17? 1971.
Yours very truly,
P. E. Coldwell
President
Attachments

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)

k

f

F E D E R A L

press

R E S E R V E

release

January 26, 1971

For immediate release

The Board of Governors of the Federal Reserve System today
issued for comment a propoail to exempt from margin requirements credit
extended by banks, brokersJ and dealers to so-called "block positioners."
The Board fixed March 17 as the deadline for the receipt of comment.
Block positioner i are securities firms that stand ready to hold
f
I

1
substantial blocks of stocll for their own account to facilitate the sale
or purchase by their custoi lers— primarily institutions— of quantities of
stock too large to be abso •bed by ordinary trading mechanisms.
The minimum bloc

i

of stock that could qualify for the proposed

exemption would have a market value of $200,000.

A block would also have

to be sold by the block positioners within 15 business days, although
limited extensions of 5 days at a time could be allowed by the stock ex­
changes and the National Association of Securities Dealers.
The Board also re-issued for further comment a proposal to
exempt so-called "third market makers" from margin requirements for credit
they obtain from banks to carry on their market making activity.

Third

market makers are firms that make a market off the exchanges in stocks
that are listed for exchange trading.
The new proposals would subject credit for block positioning
activities by all market makers to the same restrictions as those on
block positioners*

The restrictions would apply to specialists, to over-

the-counter firms that make a market in OTC Margin Stocks, and to third

-2 -

market makers*

If any of these firms took a single position with a
,

market value of $200,000 or more, the block would have to be sold within
15 business days, or the credit would cease £o be eligible for exemption.
The same limited extensions of time could be^allowed, however.
Copies of the proposed amendments are attached.
-

0-

FEDERAL RESERVE SYSTEM
[12 CFR PART 220]
[Reg. T]
CREDIT BY BROKERS AND DEALERS
Limitations on Exempt Credit to Specialists

Pursuant to the authority contained in the Securities
Act of1934(15 IhS.C. 78g)„ the Board of Governors proposes
Part 220

Exchange

to amend

in the following respects:
Section 220.4 would be amended by revising paragraph (g) to

read as follows:
§ 220.4

Special Accounts
* * * * *
(g)

Specialist's account*

(I)

In a special account designated

as a specialist's account, a creditor may effect and finance, for any
member of a national securities exchange who is registered and acts as
a specialist in securities on the exchange, such member's transactions
as a specialist in such securities, or effect and finance, for any joint
venture in which the creditor participates, any transactions in any secu­
rities af an issue with respect to which all participants, or all partic­
ipants other than the creditor, are registered and act on a national secu­
rities exchange as specialists.
(2)

Such specialist's account shall be subject to the same

conditions to which it would be subject if it were a general account

-

2

-

except that if the specialist's exchange, in addition to the other
requirements applicable to specialists, is designated by the Board of
Governors of the Federal Reserve System as requiring reports suitable
for supplying current information regarding specialists' use of credit
pursuant to this paragraph (g), the requirements of § 220.6(b) regard­
ing joint ventures shall not apply to such accounts and the maximum loan
value of a registered security in such account (except a security that
has been identified as a security held for investment pursuant to a
rule of the Commissioner of Internal Revenue (Regs, section 1-1236-1(d))
shall be as determined by the creditor in good faith:

Provided, That

in the case of credit extended on any block of stock or portion thereof
with a current market value of $200,000 or more, acquired from a single
source at approximately the same time, whether in a single transaction or
in several transactions, the requirements of subparagraph (3) of this
paragraph (g) shall also apply.
(3)(i)

In the case of credit extended on any block of stock

or portion thereof described in subparagraph (2) of this paragraph (g),
the creditor shall identify the credit extended pursuant to this para­
graph (g) and all the collateral used to support such credit.

(ii)

No

credit shall be extended pursuant to this paragraph (g) in respect of
any such block of stock or portion thereof which the specialist has
held continously for more than 15 business days, and any credit extended
pursuant to this paragraph (g) shall be extinguished before the expiration
of such 15 day period.

(iii)

In exceptional cases such 15 day period

may on application of the specialist and the creditor be extended for

one or more periods limited to 5 business days each commensurate with
the circumstances by any regularly constituted cortmittee of a national
securities exchange which has jurisdiction over the business conduct
of its members, of which the specialist is a member:

Provided, That

such committee is satisfied that the specialist and the creditor are
acting in good faith in making the application and that the circumstances
in fact warrant such treatment.

(iv)

For the purposes of this sub­

paragraph (3), a block of stock or portion thereof shall be treated as
not having been held continuously only to the extent that there has been
a net sale

(or

in the case of short positions, net purchase) of such

securities (whether or not represented by the same certificate) during
such 15 day period and/or such extension.
*

it

it

* V
?

The proposed change in § 220.4(g) would restrict the ability
of specialists to obtain exempted credit from other broker/dealers with­
out regard to the limitations of Part 220 (Regulation T) in connection
with substantial blocks of stock positioned in the course of their
specialist activity.

Such credit would be available for a limited

period of time only, and would be in conformity with restrictions
similar to those that would be imposed under Part 221 (Regulation U)
on credit by banks to finance block positioning by specialists, Third
market-makers, OTC market makers, and block-positioners.

Such period

could be extended in exceptional circumstances for one or more additional
limited periods, by a committee of the exchange of which the specialist
was a member.

The change would also clarify that securities held for

investment are not eligible for exempt credit under § 220.4(g).

The

provisions for bank credit to finance specialists and OTC market makers

- 4 -

are contained in Part 221 (Regulation U) in § 221.3(o) and § 221.3(w)
respectively and proposed amendments to these sections are being pub­
lished simultaneously with this proposal.
This notice is published pursuant to section 553(b) of Title 5,
United States Code, and § 262..2(a) of the Rules of Procedure of the Board
of Governors of the Federal Reserve System (12 CFR 262.2(a)).
To aid in the consideration of these matters by the Board,
interested persons are invited to submit relevant data, views, or
arguments.

Any such material should be submitted in writing to the

Secretary, the Board of Governors of the Federal Reserve System,
Washington, D. C. 20551, to be received not later than
.

Such material will be made available by inspection and copying

upon request, except as provided in 5 261.6(a) of the Board's Rules
Regarding Availability of Information.
By order of the Board of Governors, January 26, 1971.

(Signed) Kenneth A. Kenyon

Kenneth A. Kenyon,
Deputy Secretary.
(SEAL)

,

FEDERAL RESERVE SYSTEM
[12 CFR PART 221]
[Reg. U]
CREDIT BY BANKS FOR THE PURPOSE OF
PURCHASING OR CARRYING REGISTERED
STOCKS
Limitations on Exempt Credit to Specialists and OTC
market makers; Proposal for Exempt Credit to ThirdMarket Makers and Block-Positioners

Pursuant to the authority contained in the Securities Exchange
Act of 1934 (15 U uS*Co 78g) , the Board of Governors proposes to amend
Part 221 in the following respects:
Section 221.3 would be amended by revising paragraph (o) and
subparagraph (1) of paragraph (w) and by adding paragraph (y) and para­
graph (z), as set forth below;

§ 221.3 Miscellaneous Provisions
*
(o)

*
Specialist.

*

*

*

In the case of credit extended to a member of

a national securities exchange who is registered and acts as a specialist
in securities on the exchange for the purpose of financing such member’s
transactions as a specialist in such securities, the maximum loan value
of any stock (except stock that has been identified as a security held for
investment pursuant to a rule of the Commissioner of Internal Revenue
(Regs, section 1-1236-1(d)) and except a block of stock or portion thereof
with a current market value of $200,000 or more, acquired from a single
source at approximately the same time, whether in a single transaction or
several transactions) shall be as determined by the bank in good faith:

- 2 -

Provided. That the specialist's exchange, in addition to other requirements
applicable to specialists, is designated by the Board of Governors of the
Federal Reserve System as requiring reports suitable for supplying current
information regarding specialists' use of credit pursuant to this section.
*
(w)

*

*

OTC market maker exemption,

*
(1)

*
In the case of credit

extended to an OTC market maker, as defined in subparagraph (2) of this
paragraph (w), for

the purpose of purchasing or carrying an OTC margin

stock

in order to conduct the market-making activity of such a market maker,

the

maximum loan value of any OTC margin stock (except stock that has been
identified as a security held for investment pursuant to a rule of the
Commissioner of Internal Revenue (Regs, section 1-1236-1(d)) and except a
block of stock or portion thereof with a current market value of $200,000
or more, acquired from a single source at approximately the'same time,
whether in a single transaction or in several transactions) shall be deter­
mined by the bank in good faith:

Provided. That in respect of each such

stock the OTC market maker shall have filed with the Securities and
Exchange Commission a notice of his intent to begin or continue such
market-making activity (Securities and Exchange Commission Form X-17A12(a)) and all other reports required to be filed by market makers in OTC
margin stocks pursuant to a rule of the Commission (Rule 17a-12 (17 CFR
240.17a-12)) and shall not have ceased to engage in such market-making
activity:

And provided further. That the bank shall obtain and retain in

its records for at least three years after such credit is extinguished a
a statement in conformity with the requirements of Federal Reserve Form U-2,

- 3 -

executed by the OTC market maker who is the recipient of such credit and
executed and accepted in good faith* by a duly authorized officer of the
bank prior to such extension.

In determining whether or not an extension

of credit is for the purpose of conducting such market-making activity, a
bank may rely on such a statement if executed and accepted in accordance
with the requirements of this paragraph (w) and section 221.3(a).
*
(y)

*

*

Third-market maker exemption.

*

*
(1) in the case of credit

extended to a Third-market maker, as defined in subparagraph (2) of this
paragraph (y), for the purpose of purchasing or carrying a stock that is
registered on a national securities exchange (other than a convertible
security described in section 221.3(t)(l) of this part) in order to conduct
the market-making activity of such a market maker, the maximum loan value
of any such stock (except (i) a convertible security described in
section 221.3(t)(l) of this part, (ii) stock that has been identified as a
security held for investment pursuant to a rule of the Commissioner of the
Internal Revenue (Regs, section l-1236-l(d) and (iii) a block of stock or
portion thereof with a current market value of $200,000 or more, acquired
from a single source at approximately the same time, whether in a single
transaction or in several transactions), shall be determined by the bank
in good faith:

Provided, That in respect of each such stock he shall,

at least ten full business days prior to such extension of credit, have
filed with the Securities and Exchange Commission a notice of his intent to
begin or continue such market-making activity, and all other reports
required to be filed by Third-market makers pursuant to a rule of the

* As described in section 221.3(a).

- 4 -

Securities and Exchange Commission and, except when such activity is unlaw­
ful, shall not have ceased to engage in such market-making activity:

And

provided further, That the bank shall obtain and retain in its records for
at least three years after such credit is extinguished a statement in
conformity with the requirements of Federal Reserve Form U-3, executed by
the Third-market maker who is the recipient of such credit and executed and
accepted in good faith* by a duly authorized officer of the bank prior to
such extension.

In determining whether or not an extension of credit is

for the purpose of conducting such market-making activity, a bank may rely
on such a statement, if executed and accepted in accordance with the
requirements of this paragraph (y) and section 221.3(a).
(2)

A Third-matket maker with respect to a stock that is

registered on a national securities exchange is a dealer who has and
maintains net capital, as defined in a rule of the Securities and Exchange
Commission (Rule 15c3-l (17 CFR 240.15c3-l)), of $250,000 for each such
stock in respect of which he has filed and not withdrawn a notice with the
Securities and Exchange Commission (but in no cane does this subparagraph
(2) require net capital of more than $1,000,000) who is in compliance
with such rule of the Commission and who, except when such activity is
unlawful, meets all the following conditions with respect to such stock:
(i) he furnishes bona fide, competitive bid and offer quotations &t fill
times to other broker/dealers on request, (ii) he is ready, willing, and
able to effect transactions for his own account in reasonable amounts, and
at his quoted prices, with other brokers and dealers, (iii) he does no more

* As described in section 221.3(a).

- 5 -

than 25 per cent of his business in the stock with other market makers and
national securities exchanges and (iv) he has a reasonable average rate of
inventory turnover on the stock.
(3)

If all or a portion of the credit extended pursuant to this

paragraph (y) ceases to be for the purpose specified in subparagraph (1)
or the dealer to whom the credit is extended ceases to be a Third-market
maker as defined in subparagraph (2), the credit or such portion thereof
shall there upon be treated as "a credit subject to § 221.1''.

(z)

Block positioner exemption.

(1)

In the case of credit

extended to a block positioner, as defined in subparagraph (2) of this
paragraph (z), for the purpose of financing the activity of block position­
ing, the maximum loan value of any stock obtained in the ordinary course
of the activity of block-positioning as described in subparagraph (2)
of this paragraph (z) •(except (i) a convertible security described
in section 221.3(t)(l) of this part and (ii) S’
tock that has been iden­
tified as a security held for investment pursuant to a rule of the
Commissioner of Internal Revenue (Regs, section 1-1236-(d)) shall be
determined by the bank in good faith:

Provided. That in respect of

such activity he shall have filed with the Securities and Exchange
Commission a notice of undertaking such activity on a form prescribed
by the Commission, and all other reports required to be filed by blockpositioners:

And provided further. That the bank shall obtain and

retain in its records for at least three years after such credit is

- 6 -

extinguished a statement in conformity with the requirements of Federal
Reserve Form U-5 and section 221.3(a), executed by the block positioner
who is the recipient of such credit and executed and accepted in good
faith* by a duly authorized officer of the bank prior to such extension.
In determining whether or not an extension of credit is for the purpose
of conducting such block positioning activity, a bank may rely on such
a statement if executed and accepted in accordance with the requirements
of this paragraph (z) and section 221.3(a).

In determining whether

or not an extension of time has been granted pursuant to subparagraph
(3) of this paragraph (z) and whether or not such extension of time is
commensurate with the circumstances the bank may rely on a statement
executed by an officer of the exchange or association on behalf of
the committee in conformity with the requirements of Federal Reserve
Form U-?6 and section 221.3(a).
(2)

A block positioner is a dealer who (i) is registered

with the Securities and Exchange Commission under section 15 of
the Securities Exchange Act of 1934 (15 U.S.C. 78o) and has
a minimum net capital, as defined in a rule of the Securities and
Exchange Commission (Rule 15c3-l (17 CFR 240„15c3-l)) or in the
capital rules of an exchange of which he is a member if the members
thereof are exempt therefrom by Rule 15c3-l(b)(2) of the Commission
(17 CFR 240#15c3-l(b)(2), of $250,000, or who is a registered
specialist on a national securities exchange, (ii) engages in the
activity of purchasing long or selling short as principal, from time
to time, from or to a customer

* As described in section 221.3(a).

- 7 -

(other than a partner or a joint venture or other entity in which as
partner of the dealer, or the dealer itself, participates or a person
"associated with1 such dealer as defined in section 3(a)(18) of the
1
Securities Exchange Act of 1934) a block of stock (other than a
convertible security as described in section 221.3(t)(l) of this part)
with a current market value of $200,000 or more, in a single trans­
action to facilitate a sale or purchase by such customer, (iii) certifies
to the lending bank that he has determined in the exercise of reasonable
diligence that the block could not be sold to or purchased from others
on equivalent or better terms, and (iv) sells the shares comprising such
block as rapidly as possible commensurate with the circumstances.
(3)

No credit shall be extended or maintained pursuant to

this paragraph (z) in respect of any such block of stock or portion
thereof which the block-positioner has held continously for more
than 15 business days, and any credit extended pursuant to this para­
graph (z) shall be extinguished or brought into conformity with the
initial margin requirements of sections 221.1 and 221,4 before the
expiration of such 15 day period.

For the purposes of this subpara­

graph, a block or portion thereof shall be treated as not having been
held continously only to the extent that there has been a net sale
(or in the case of short positions, net purchase) of such securities
(whether or not represented by the same certificate) during such 15
day period.

V

-

(4)

8

-

In exceptional cases the 15 day period specified in

subparagraph (3) of this paragraph (2 ) may on the application of the
block-positioner, be extended for one or more periods limited to 5 b u s i ­
ness days each commensurate with the circumstances by any regularly con­
stituted committee of a national securities exchange having jurisdiction
over the business conduct of its members, of which the block-positioner
is a member or through which his transactions are effected, or by a
committee of a national securities association:

Provided, That such

committee is satisfied that the block-positioner is acting in good faith
in making the application and that the circumstances in fact warrant such
treatment.

The proposed change in section 221.3(o) would restrict the
ability of specialists to obtain credit from banks without regard to
the limitations of Part 221 (Regulation U) in connection with substantial
blocks of stock positioned in the course of their specialist activity.
Such credit would be available only in conformity with the requirements
of proposed section 221.3(z), and not otherwise.

This restriction is

similar to that which would be imposed under Part 220 (Regulation T) on
credit by broker/dealers to finance block-positioning by specialists.

The

change would also clarify that securities held by specialists for investment
are not eligible for exempt credit under section 221.3(o).
The proposed change in section 221.3(w) would restrict the
ability of OTC market makers to obtain exempted credit from banks without

- 9 regard to the limitations of Part 221 (Regulation U) in connection with
substantial blocks of stock positioned in the course of their marketmaking activity.

Such credit would be available only in conformity with

the requirements of proposed section 221.3(e), and not otherwise.
Section 221.3(x), proposed for comment by the Board of
Governors on May 5, 1969 (34 Federal Register 7823, May 16, 1969),
would be revised as section 221.3(y*), and would restrict the ability of
Third-market makers to obtain credit from banks without regard to the
limitations of Part 221 (Regulation U) in connection with substantial
blocks of stock positioned in the course of their market-making activity.
Such credit would be available only in conformity with the requirements
of proposed section 221.3( e ), and not otherwise.

The revision would

also provide that if the credit ceased to be for the purpose of making
such a market, or the customer ceased to be a Third-market maker, the
remaining credit would become restricted in accordance with the provisions
of sections 221.1 and 221.4 of this Part.

A similar provision applies to

OTC market makers under section 221.3(w).
The proposed paragraph (z) of section 221.3 would permit certain
broker/dealers (including qualifying specialists, Third-market makers, and
OTC market makers) to obtain credit from banks ’
without regard to the
restrictions of Part 221 (Regulation If in connection with their activities
)
as block-positioners.

However, the credit would have to be brought into

conformity with the initial margin requirements imposed by Part 221 if
(1) the credit ceased to be for the purpose of tarrying on such an
activity, or (2) the dealer ceased to be a block-positioner.

In any

- 10 event, credit extended pursuant to paragraph (z) would have to be
paid back or brought into conformity with ordinary margin requirements
within 15 business days, unless extended in exceptional cases, for one
or more additional periods limited to 5 business days each by appropriate
procedures.
For credit to be in connection with block-positioning, the
broker/dealer must certify that the credit is used to buy a substantial
amount of securities in order to faciliate a securities transaction too
large to be handled through normal channels.

The credit would enable the

broker/dealer to acquire for his own account that part of the transaction
that the market could not otherwise absorb; he must thereafter close his
position as quickly as circumstances permit.

Any credit extended in con­

nection with the transaction thereafter becomes subject to the ordinary
initial margin requirements imposed by Part

This notice is published pursuant

221.

to section553(b)

of

Title 5,

United States Code, and section 262.2(a) of the Rules of Procedure of
the Board of Governors of the Federal Reserve System (12 CFR 262.2(a)).
To aid in the consideration of these matters by the Board,
interested persons are invited to submit relevant data, views, or
arguments.

Any such material should be submitted in writing to the

Secretary, the Board of Governors of the Federal Reserve System,
Washington, D. C. 20551, to be received not
Such material will be made available

later than
by inspection and copying

upon request, except as provided in § 261.6(a) of the Board's Rules
Regarding Availability of Information.
By order of the Board of Governors , January 26, 1971.

(Signed) Kenneth A. Kenyon

Kenneth A. Kenyon,
Deputy Secretary.


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102