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F ederal reserve Bank o f Dallas


Circular No. 71-3^
February 15, 1971

(Delayed Issue Contracts on Certain Securities)
To All Broker/Dealers and Others Concerned
in the Eleventh Federal Reserve District:
The Board of Governors approved on February b , 1971? an
interpretation of Regulation T, "Credit by Brokers and Dealers",
regarding the applicability of margin requirements to partial
delayed issue contracts covering non-convertible bonds and pre­
ferred stocks. The Board has concluded that contracts of the type
described in the interpretation should not be regarded as having
been issued until delivered, pursuant to the agreement, to the
institutional purchaser.
A copy of the interpretation is attached for your infor­
Yours very truly,
P. E. Coldwell

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (

[Reg. T]

Partial Delayed Issue Contracts

§ 220.123

Partial Delayed Issue Contracts Covering Non-Convertible

of newissues

During recent years, it has

become customary for portions

of non-convertible bonds and

preferred stocks to be sold

subject to partial delayed issue contracts, which have customarily been
referred to in the industry as "delayed delivery" contracts, and the
Board of Governors has been asked for its views as to whether such trans­
actions involve any violations of the Board's margin regulations.
security issue

The practice of issuing a portion of a debt (or equivalent)
at a date subsequent to the

main underwriting has arisen

where market conditions made it difficult or impossible, in a number of
instances, to place an entire issue simultaneously.

In instances of this

kind, institutional investors (e.g., insurance companies or pension
funds) whose cash flow is such that they expect to have funds available
some months in the future, have been willing to subscribe to a
portion, to be issued to them at a future date.

The issuer has

been willing to agree to issue the securities in two or more
stages because it did not immediately need the proceeds to be
realized from the deferred portion, because it could not raise funds

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on better terms, or because it preferred to have a certain portion of
the issue taken down by an investor of this type.

In the case of such a delayed issue contract, the

underwriter is authorized to solicit from institutional customers
offers to purchase from the Issuer, pursuant to contracts of the
kind described above, and the agreement becomes binding at the under­
writers' closing, subject to specified conditions.

When securities

are issued pursuant to the agreement, the purchase price includes
accrued interest or dividends, and until they are issued to it,
the purchaser does not, in the case of bonds, have rights under the
trust indenture, or, in the case of preferred stocks, voting rights.

Securities sold pursuant to such arrangements are high

quality debt issues (or their equivalent).

The purchasers buy with

a view to investment and do not resell or otherwise dispose of the
contract prior to its completion.

Delayed issue arrangements are

not acceptable to issuers unless a substantial portion of an issue,
not less than ten per cent, is involved.

Sections 3(a)(13) and (14) of the Securities Exchange Act

of 1934 provide that an agreement to purchase is equivalent to a pur­
chase, and an agreement to sell to a sale.

The Board has hitherto

expressed the view that credit is extended at the time when there is
a firm agreement to extend such credit (1968 Federal Reserve Bulletin
328; 1? CFR 207.101; 9 6800 Published Interpretations of the Board
of Governors).

Accordingly, in instances of the kind described

above, the issuer may be regarded as extending credit to

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the institutional purchaser at the time of the underwriters' closing,
when the obligations of both become fixed.

Section 220.7(a) of the Board's Regulation T (12 CFR

§ 220.7(a)), with an exception not applicable here, forbids a creditor
subject to that regulation to arrange for credit on terms on which
the creditor could not itself extend the credit.

Sections 220.4(c)(1)

and (2) (12 CFR §§ 220.4(c)(1) and (2)) provide that a creditor may
not sell securities to a customer except in good faith reliance upon
an agreement that the customer

will promptly, and in no event in


seven full business days, make full cash payment for the secu­


Since the underwriters in question are creditors subject to

the regulation, unless some specific exception applies, they are for­
bidden to arrange for the credit described above.

This result follows

because payment is not made until more than seven full business days
have passed from the time the credit is extended.

However, section 220.4(c)(3) (12 CFR § 220.4(c)(3))

provides that:
"If the security when so purchased is an unissued
security, the period applicable to the transaction
under subparagraph (2) of this paragraph shall be
seven days after the date on which the security is
made available by the issuer for delivery to pur­

In interpreting section 220.4(c)(3), the Board has

stated that the purpose of the provision:
". . . is to recognize the fact that, when an issue
of securities is to be issued at some future fixed

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date, a security that is part of such issue can be
purchased on a 'when-issued' basis and that payment
may reasonably be delayed until after such date of
issue, subject to other basic conditions for
transactions in a special cash account."
(1962 Federal Reserve Bulletin 1427; 12 CFR 220.118;
5996, Published Interpretations of the Board of
In that situation, the Board distinguished the case of mutual fund
shares, which technically are not issued until the certificate can
be delivered by the transfer agent.

The Board held that mutual fund

shares must be regarded as issued at the time of purchase because
they are:
". . . essentially available upon purchase to the
same extent as outstanding securities. The mech­
anics of their issuance and of the delivery of
certificates are not significantly different from
the mechanics of transfer and delivery of certificates
for shares of outstanding securities, and the issuance
of mutual fund shares is not a future event in the
sense that would warrant the extension of the time
for payment beyond that afforded in the case of out­
standing securities." (ibid.)
The issuance of debt securities subject to delayed issue contracts,
by contrast with that of mutual fund shares, which are in a status
of continual underwriting, is a specific single event taking place
at a future date fixed by the issuer with a view to its need for
funds and the availability of those funds under current market con­

For the reasons stated above the Board concluded that

the non-convertible debt and preferred stock subject to delayed issue

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contracts of the kind described above should not be regarded as having
been issued until delivered, pursuant to the agreement, to the
institutional purchaser.

This interpretation does not apply, of

course, to fact situations different from that described above.
(Interprets and applies 15 U.S.C. 78g.)
By Order of the Board of Governors, February 4, 1971.


Kenneth A. Ke ny on

Kenneth A. Kenyon
Deputy Secretary

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