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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]