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F ed e r a l R es er v e Ba n k o f D a lla s

DALLAS, TEXAS

75222
Circular No. 72-1^2
July 7, 1972

PROPOSED AMENDMENTS TO REGULATIONS G, T, AND U
(Concerning Same-Day Substitution Rule
and Short Sales of Stock)

To All Banks, Broker/Dealers, Regulation G Registrants and
Others Concerned in the Eleventh Federal Reserve District:
The Board of Governors of the Federal Reserve System proposed
to put into effect on August 1 4 a modified technical amendment to its
^
margin regulations designed to improve the quality of stock market credit.
The change will strengthen the equity position of low-margin accounts
when offsetting sales and purchases of stock collateral are made on the
same day.
The proposed amendment is basically the same as that forwarded
to you under Circular No. 72-88, dated May 11, 1972. However, because
of certain technical changes made since that time, the Board has indicated
it will receive additional comments on the modified proposal through
July 10. The modifications affect the manner of calculating the status
of margin accounts.
Under the modified amendment, use of the "same-day substitution"
rule would end in accounts where the debt--adjusted as defined in the
regulation--is more than 60 percent of the market value of the stock col­
lateral in the account.
Under the "same-day substitution" rule, customers are permitted
to substitute one security for another in their accounts through offsetting
purchases and sales made on the same day even if the account is below the
initial margin requirement. Presently, no margin customer is required to
put up additional equity unless he buys more securities than he sells on
that day. This practice makes it possible for customers with undermargined
accounts to continue trading for an extended period without putting up
additional equity.
In a second action, the Board stated that it intends to adopt,
effective August 1^, another technical amendment to Regulation T to permit
short sales of stock into which bonds are convertible on the same terms as
ordinary short sales of stock.
A copy of both proposed amendments is attached.
Yours very truly,
P. E. Coldwell,
President
Attachment

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

TITLE 12 -- BANKS A N D BANKING
CHAPTER II —

FEDERAL RESERVE SYSTEM

SUBCHAPTER A -- BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
[Regs. G, T, and Uj
PARTS 2C7, 220, and 221 -- SECURITIES CREDIT TRANSACTIONS
Same-Day Substitutions;

Convertible ''Hedge: Transactions
l

By notice of proposed rulemaking published in the Federal
Register on May 6, 1972 (37 F. R. 9243), the Board of Governors p ro­
posed to amend Regulations G, T, and U in order to require the deposit
of additional margin in connection with purchases and sales of securi­
ties executed on the same day, in margin accounts whose net equity
status is less than a percentage to be determined by the Board and
published in the Supplements to the regulations.
As one of a group of technical amendments, the Board also,
by notice of proposed rulemaking published in the Federal Register on
July 29, 1971 (36 F. R. 14033) proposed to amend §§ 220.3(a), 220.3(d)
and 220.4(j) of Regulation T to provide that short sales of stock into
which a security is convertible may be effected

in a special conver­

tible debt security account without deposit of additional margin, if the
convertible security is held in the special convertible debt security
acco unt.
Following consideration of all the comments received, the
Board has made final technical revisions in c e r t a i n of the proposals,
as follows.

- 2 1.

Paragraphs a, b, d and g of Section 220.3 would be amended

as set forth below:
§ 220.3 -- GENERAL ACCOUNT
(a)

Contents of general account.

All financial relations

between a creditor and a customer, whether recorded in one record
or in more than one record, shall be included in and be deemed to be
part of the customer's general account with the creditor, except that
the relations which § 220.4 permits to be included in any special
account provided for by that section may be included in the appro­
priate special account, and all transactions in commodities, and e x ­
cept to the extent provided in paragraph (b)(2) of § 220.3, all trans­
actions in non-equity securities, exempted securities, and in other
securities having no loan value in a general account under the pro­
visions of § 220.3(c) and § 220.8 (the Supplement to Regulation T)
(except unissued securities, short sales and securities positions
to offset short sales other than those permitted in § 220.4(j)(5)
of this part, purchases to cover short sales and contracts in­
volving an endorsement or guarantee of any put, call, or other
op t i o n ) , shall be included in the appropriate special account p r o ­
vided for by § 220.4.

During any period when such § 220.8 specifies

that margin equity securities shall have no loan value in a general
account or special convertible debt security account (sometimes
referred to herein as "special convertible security account")
subject to § 220.4(j), any transaction consisting of a purchase of a
security other than a purchase of a security to reduce or close out a
short position shall be

- 3 -

effected in the special cash account provided for by § 220.4(c) or in
some other appropriate special account provided for by § 220.4.
(b)

General r u l e .

(l)(i) A creditor shall not effect for

or with any customer in a general account, special bond account sub­
ject to § 220.4(i), or special convertible debt security account any
transaction which, in combination with the other transactions effected
in such account on the same day, creates an excess of the adjusted
debit balance of such account over the maximum loan value of the secu­
rities in such account, or increases any such excess, unless in con­
nection therewith the creditor obtains, as promptly as possible and
in any event before the expiration of 5 full business days following
the date of such transaction, the deposit into such account of cash
or securities in such amount that the cash deposited plus the loan
value of the securities deposited equals or exceeds the excess so
created or the increase so caused.
(ii)

If the adjusted debit balance in a general account or

special convertible debt security account, computed using the margin
requirement for short sales specified in § 220.8(g)(2) of the Supple­
ment to Regulation T, exceeds the maximum loan value of the securities
in such account specified in § 220.8(g)(1), the account is "subject to
section 8(g).1
'

If an account is subject to section 8(g) as of the

close of business on the preceding business day, it shall be subject,
in addition to all other requirements applying to the account, to the
requirement that the creditor shall not effect any transaction in the

- 4

-

account which creates an excess of the adjusted debit balance of such
account, computed using the margin requirements for short sales speci­
fied in § 220.8(d), over the maximum loan value of the securities in
such account specified in §§ 220.8(a) and (c), or increases any such
excess, unless in connection therewith the creditor obtains, as promptly
as possible and in any event before the expiration of 5 full business
days following the date of such transaction, the deposit into such
account of cash or securities in such amount that the cash deposited
plus the loan value of the securities deposited equals or exceeds the
excess so created or the increase so caused.

The required deposit may

be reduced by the amount of cash or securities which otherwise could
be withdrawn pursuant to the provisions of subparagraph (2) of this
paragraph in connection with any other transactions in the account on
the same day.
*

*

(d)

*

*

*

Adjusted debit balance.

the adjusted debit balance of a general account,
ial convertible debt

For the purpose of this part,
special bond account,

or spec­

security account shall be calculated by taking

the sum of the following items:
*
(3)

*

*

*

*

the current market value of any securities (other than

unissued securities) sold short in the general account plus, for each
security (other than an exempted security), such amount as the Board
shall prescribe from time to time in § 220.8 (the Supplement to

- 5 -

Regulation T) as the margin required for such short sales, except
that such amount so prescribed in such § 220.8(d) need not be included
when there are held in the general account or special convertible debt
security account the same securities or securities exchangeable or
convertible within 90 calendar days, without restriction other than
the payment of money, into such securities sold short;
*
(g)

*

*

*

Transactions on given d a y .

*
(1)

For the purpose of

subparagraph (b)(1) of this section, except in the case of an account
subject to section 8(g), the question of whether or not an excess of
the adjusted debit balance of a general account,

special bond account,

or special convertible security account over the maximum loan value of
the securities in such account is created or increased on a given day
shall be determined on the basis of all the transactions in the account
on such day exclusive of any deposit of cash, deposit of securities,
covering transactions, or other liquidation that has been effected on
such day, pursuant to the requirements of paragraphs (b) or (e) of
this section, in connection with a transaction on a previous day.
(2)

In the case of an account subject to section 8(g), the

required deposit, under subparagraph (b)(l)(ii) of this section in
connection with transactions on a given day, shall be equal to the
amount by which the retention requirement of any securities sold for
such account on such day exceeds the maximum loan value of any secu­
rities purchased in such account on such day.
made at the

Such comptiiaiiou may be

6

close of trading on such day and shall be made exclusive of any deposit

6i dash> deposit of securities, covering transactions or other liquida­
tion that hat been effected on such day, pursuant to the requirements
of paragraphs (b) or (e) of this seetion, in connection with a trans­
action on a previous day.
(3)

In any case in which an excess so created, or increase

so caused, by transactions on a given day does not exceed $100, the
creditor need not obtain the deposit specified therefor

in subpara­

graph (b)(1) of this section.
(4)

Any transaction which serves to meet the requirements

of paragraph (e) of this section or otherwise serves to permit any
offsetting transaction in an account shall, to that extent, be un­
available to permit any ether transaction in such account.
(5)

For the purposes of this part (Regulation T), if a

security has maximum loan value under subparagraph (c)(1) of this
section im a general account, or under § 220.4(j) in a special con­
vertible debt security account, a sale of the same security (even
though not the same certificate) in such account shall be deemed to
be a long aale and shall not be deemed to be or treated as a short
sale.
*

2.

*

*

*

*

Section 220.4 would be amended as follows:

$ 220.4 -• SPECIAL ACCOUNTS
*

*

*

*

*

- 7 -

(j)

Special convertible debt security account.

(4)

*

**

In the event any convertible debt security held in this

account is to be converted to a stock, such security shall upon con­
version be transferred to the customer's general account against a
deposit of cash or margin securities eligible for an extension of credit
in this account (counted at their maximum loan value) equal to at least
the maximum loan value of the security for which such substitution is
made, without regard to the retention requirement of § 220.3(b)(2).
(5)

In a special convertible debt security account t

amount of margin equity securities into which a margin debt security
held in the account is convertible may be sold short without regard
to the margin required for short sales in § 220.8(d) (Supplement to
Regulation T), and such short position may be carried in the special
convertible debt security account in conformity with the exception
provided in § 220.3(d)(3) of this part.
*

*

3.

*

*

*

A new paragraph 3(g) of § 220.8 (the Supplement to

Regulation T) Wouid be added as follows and the present paragraphs (g)
and (h) would be relettered accordingly:
§ 220.8 -- SUPPLEMENT
*

(g)
computation
(1)

*

*

*

Account subject to section 8(g).

*

For purposes of the

described in sections 220.3(b)(l)(ii) of the regulation,
the maximum loan value of a registered non-equity secu­

rity held in the account on March 11, 1968, and continuously thereafter,

- 8 and of a margin equity security shall be 60 per cent of the current
market value of such security, and the maximum loan value of an
exempted security held in the account on March 11, 1968, and
continuously thereafter shall be the maximum loan value of the
security as determined by the creditor in good faith.
(2)

The amount to be included in the adjusted debit

balance of the account pursuant to § 220.3(d)(3) as margin required
for short sales of securities

(other than exempted securities) shall

be 40 per cent of the current market value of each security.

-

9 -

Proposed § 207.1( 0 ( 2 ) eliminates, for all accounts with
an equity ratio less than a figure deemed appropriate by the Board,
the same day substitution rule under which securities of equal value
could be substituted for existing collateral without the requirement
that additional margin be provided.
Proposed § 207.2(k) would define the term “equity ratio".
Proposed § 207.5(f)
a new paragraph

( f )

(Supplement to Regulation G) provides a

to the Supplement and establish an initial equity

ratio of 40 per cent.
The proposed amendment published in the Federal Register
of May 6, 1972 which would add paragraph (i) to § 220.2 would be
withdrawn.
Proposed § 220.3(a) would provide that short sales of
securities into which debt securities are convertible may be effected
in the special convertible debt security account described in § 220.4(j)
for certain "hedging" transactions.
Proposed § 220.3(b) revises the substance of the amendment
as initially published to provide that certain accounts with an equity
status lower than that deemed appropriate by the Board may no longer
use the same day substitution rule under which securities of equal
value could be substituted for existing collateral without the require­
ment that additional margin be provided.

The method for determining

which accounts described as accounts "subject to section 8(g)"
be ineligible for use of the rule is provided.

will

This revision simplifies

the computation required by the proposed amendment.

-

Proposed §

10

-

220.3(d) makes conforming changes

in regard

to short

sales to be effected in the special convertible debt

security

account described in § 220.4(j).
Proposed §

220.3(g) revises the amendment as

initially

published to conform it to the method used in revised § 220.3(b)
for determining which accounts may not use the same day substitution
rule.

Section 220.3(g) prohibits the use of this rule by any account

whose equity status places it in a category described as an account
"subject to section 8(g)
The proposed amendment published in the Federal Register
of Hay 6, 1972 which would amend paragraph (f) of § 220.4 would be
withdrawn.
Proposed § 220.4(j) provides that short sales of margin
equity securities may be effected in the special convertible debt
security account when the convertible debt securities which are
convertible into such equity securities are held in that account.
Proposed § 220.8(g) provides a new paragraph (g) to
Section 220.8 (Supplement to Regulation T ) .

The present paragraphs

and (h) are relettered (h) and (i) respectively.
(g)

(g)

The new paragraph

establishes the loan value and short sale margin requirements for

use in computing which accounts will no longer be permitted to substitute
collateral of equal value on the same day without providing additional
margin.

This new paragraph revises the substance of proposed § 220.8(i)

which would be withdrawn.

The loan value and short sale margin requirements

are set initially at 60 per cent and 40 per cent respectively.

- 11 Proposed § 221.1(c) eliminates use of the same day substitution
rule for certain accounts whose equity status is lower than a figure
deemed appropriate by the Board.
Proposed § 221.4(f) adds a paragraph to the Supplement to
Regulation U which provides for f minimum equJLty ratio to be set initially
i
at

40

per cent.
To aid in the consideration of the technical revisions set

forth above, interested persons are invited to submit relevant data,
views, and comments.

Any such material should be submitted in writing

to the Secretary, Board of Governors of the Federal Reserve System,
Washington, D. C . , 20551, to be received not later than July 10, 1972.
Any such material will be made available for inspection and copying
upon request, except as provided in $ 261.6(a) of the Board*s
rules regarding availability of information.

Subject to consideration

of such data, views, and comments, the Board proposes to adopt the
amendments described above, as so revised, to be effective August 14, 1972.
By order of the Board of Governors, June 16, 1972.

Michael A. Greenspan,
Assistant Secretary.
[SEAL]

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