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Federal R eserve Bank OF DALLAS ROBERT D. M c T E E R , J R . P R E S ID E N T AND C H IE F E X E C U T IV E July 15, 1994 DALLAS, TE X A S 7 5 2 6 5 -5 9 0 6 O F F IC E R Notice 94-73 TO: The Chief Executive Officer of each member bank and others concerned in the Eleventh Federal Reserve District SUBJECT Proposed Amendments to Regulation T (C redit By Brokers and Dealers) DETAILS The Board of Governors of the Federal Reserve System has requested public comment on proposed amendments to Regulation T (Credit by Brokers and Dealers) regarding settlement of securities purchases and the status of government securities transactions. One proposal specifies that customers must meet initial margin calls or make full cash payment for securities purchased at a broker-dealer within two business days of the standard settlement period. Related amendments would raise the de minimis amount below which liquidation of unpaid transactions is not required from $500 to $1000, require brokers seeking extensions of the payment periods to obtain them from their designated examining authority, and clarify that foreign settlement periods are used to calculate when restric tions in the cash account are applied to foreign securities. Other amendments would exempt certain brokers and transactions involving U.S. government securities from the regulation. The Board must receive comments by be addressed to William W. Wiles, Secretary, Reserve System, 20th Street and Constitution 20551. All comments should refer to Docket August 15, 1994. Comments should Board of Governors of the Federal Avenue, N.W., Washington, D.C. No. R-0840. ATTACHMENT A copy of the B o a r d ’s notice as it appears on pages 33923-25, Vol. 59, No. 126, of the Federal Register dated July 1, 1994, is attached. For additional copies, bankers and others are encouraged to use one of the following toll-free numbers in contacting the Federal Reserve Bank of Dallas: Dallas Office (800) 333-4460; El Paso Branch Intrastate (800) 592-1631, Interstate (800) 351-1012; Houston Branch Intrastate (800) 392-4162, Interstate (800) 221-0363; San Antonio Branch Intrastate (800) 292-5810. This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) - 2 - MORE INFORMATION For more information, please contact Eugene Coy at (214) 922-6201. For additional copies of this B a n k ’s notice, please contact the Public Affairs Department at (214) 922-5254. Sincerely yours, Federal Register / Vol. 5S, No. 126 / Friday, July 1, 1994 / Proposed Rules 33923 also received several comment letters stating that the implementation of T+3 settlement will require the Federal Reserve to address the possible shortening of its Regulation T payment periods. Those letters were forwarded to Board staff for consideration in the context of the ongoing Regulation T review. The Board proposes to reword Regulation T to specifically incorporate the standard settlement cycle and the I. Three Day Settlement (T+3). current two day cushion, instead of In light of the adoption by the requiring payment within “seven Securities and Exchange Commission business days,” the regulation would FEDERAL RESERVE SYSTEM (SEC) of a rule shortening the standard require payment within “One payment 12 CFR Part 220 settlement period for securities period,” with “payment period” being transactions from five to three business defined as the standard settlement [Regulation T; Docket No. R - 0840] days (T+3), the Board proposes to period in the United States plus two shorten the time periods specified in business days. This will not change the Credit by Brokers and Dealers Regulation T for customers to meet operation of the rule at this time, but AGENCY: Board of Governors of the margin calls or make full c^sh payment once the new language is put into place Federal Reserve System. by a corresponding two days. Related the conversion to T+3 next year will a c t i o n : Proposed rule, amendments would raise the de automatically result in a reduction in minimis amount below which the amount of time brokers can give SUMMARY: As part of its review of liquidation of unpaid transactions is not their customers to pay for securities or Regulation ,T, the Board is proposing meet initial margin calls. Future required from $500 to $1000, require three substantive amendments to two brokers seeking extensions of the changes in settlement periods by the areas of the regulation. One proposal SEC will similarly be automatically payment periods to obtain them from specifies that customers must meet reflected in the Board's rule without the their designated examining authority initial margin calls or make full cash necessity of further amendment. ("DEA”), and clarify that foreign payment for securities purchased at a The ‘ ayment periods in Regulation T p settlement periods are used to calculate broker-dealer within two business days can be extended for exceptional when restrictions in the cash account of the standard settlement period and circumstances if the broker applies to a foreign securities. includes related technical amendments. ere applied toT has always required cash self-regulatory organization (SRO) for an Regulation The other amendments would exempt payment for securities purchases within extension. In 1988, the New York Stock certain brokers and transactions Exchange (NYSE) sought SEC approval seven business days of trade date. The involving U.S. government securities of a rule that would require a broker seven day period was initially chosen from the regulation. seeking a Regulation T extension to for the cash account because it was felt DATES: Comments should be received on obtain the extension from the NYSE if that a customer should have no or before August 15,1994. the NYSE is the broker’s DEA. The . obligation to pay for securities before ADDRESSES: Comments, which should proposal was noted by the Board in the they were delivered. The two days refer to Docket R-0840, may be mailed Advance Notice, as was a suggestion by permitted beyond settlement date to Mr. William Wiles, Secretary, Board the Credit Division of the Securities provide a short period of time for of Governors of the Federal Reserve resolution of problems before the broker Industry Association that brokers be System, 20th Street and Constitution permitted to grant customer extensions is required to act under Regulation T, Avenue, NW., Washington, DC 20551. without approval of an SRO. The SEC i.e. either obtain an extension on the Comments addressed to Mr. Wiles may approved the NYSE rule filing in May customer’s behalf (if it is determined also be delivered to the Board’s mail that a valid reason exists) or sell out the 1994.2 In its approval order, the SEC room between 8:45 a.m. and 5:15 p.m., stated that it does nbt agree with customer’s position. and to the security control room outside assertions that the objectives of the The Board's Advance Notice was of those hours. Both the mail room and Securities Exchange Act of 1934 (the issued before the SEC proposed its rule the security control room are accessible adopting a T+3 settlement period. The “Act”) could be better met by from the courtyard entrance on 20th Advance Notice mentioned the Group of implementing a uniform system of Street between Constitution Avenue and Thirty’s recommendation of a world sharing extension information. As to the C Street, NW. Comments may be other abjections raised by eommenters wide settlement standard of T+3 and inspected in Room B-1122 between 9 (and also raised with the Board said the Board “may consider a.m. and 5 p.m., except as provided in pursuant to the Advance Notice), the shortening the time for customer § 261.8 of the Board’s Rules Regarding SEC found that “the regulatory benefits payment once the settlement period is the Availability of Information, 12 CFR from the NYSE rule outweigh any shortened from the current five days.” 261.8. competitive concerns raised by the The Board supported the SEC when it fo r FURTHER INFORMATION CONTACT: eommenters.” Finally, the SEC said it proposed requiring T+3 settlement, Scott Holz, Senior Attorney or Angela does not agree with those eommenters calling the proposal “an important and Desmond, Senior Attorney, Division of who argue that broker-dealers should achievable step” to reduce potential Banking Supervision and Regulation not be required to submit requests for systemic disturbances to financial (202) 452-2781; for the hearing extensions of time to either their DEA or markets and to the economy. The SEC impaired only, Telecommunications Device for the Deed (TDD), Dorothea 2 59 FR 26826, May 24,1-994; Securities Exchange 1 Docket No. R-0772, 57 FR 37109, A ugust 18 , Act Release 34873, May 17, *994. Thompson (202 ) 452-3544. 1992. On August 18,1992, the Board published an advance notice of proposed rulemaking (Advance Notice) requesting public comment in connection with a general review of Regulation T.1 The review is not yet complete, but the Board believes that certain developments since the publication of the Advance Notice warrant the publication of three proposed amendments in two areas. SUPPLEMENTARY INFORMATION: 33924 Federal Register / Vol. 59, No. 126 / Friday, July 1, 1994 / Proposed Rules any SRO. The Board believes, along with the SEC, that a good case has been made to restore to the broker’s DEA sole responsibility for granting and monitoring extensions of time and the language proposed by the Board today reflects this conclusion. II. Government Securities In light of the recent enactment of the Government Securities Act Amendments of 1993, the Board proposes to exempt most transactions involving government securities from the restrictions of Regulation T. This would be accomplished with two separate but related actions. First, Regulation T would exclude government securities brokers and dealers who register with the SEC under section 15C of the Securities Exchange Act of 1934 (the “Act”) from the definition of “creditor” in Regulation T. Second, general broker-dealers effecting customer transactions that could be effected by a section 15C broker-dealer would be able to record the transactions in a new government securities account in which the other restrictions in Regulation T would not apply. Before the enactment of the Government Securities Act of 1986, brokers-dealers who limited themselves to transactions in government securities were not subject to a comprehensive regulatory scheme and were not required to be registered with the SEC. Although such brokers were within the definition of “creditor,” there was no practical way to enforce Regulation T for them. The Government Securities Act of 1986 required SEC registration of all nonbank government securities brokers and dealers under a new section 15C of the Act. The Government Securities Act of 1986 also added the term “government securities” to the Act. The Advance Notice invited comment on two areas involving government securities: repurchase agreements (“Repos”) and the borrowing and lending of securities. The Advance Notice explained that the Board has not specified the exact treatment of repurchase agreements while noting that repos of government securities do not raise credit issues under Regulation T because the good faith loan value of such securities is often close to 100 percent of their current market value. Many of the eommenters suggested that the Board create a new account for exempted securities that could be used for transactions such as Repos and forward transactions. Most of the eommenters supported exempting government securities from § 220.16 of Regulation T. This wouM allow loans of government securities without the current requirement that a broker document that the reason for the borrowing stems from a short sale or failure to receive securities required for delivery. Under today’s proposal, whenever a general broker-dealer effects a transaction for a customer that could be effected by a section 15C broker, the transaction could be recorded in a new government securities account. The account would allow these transactions to be effected without regard to other restrictions in Regulation T. The account would be permissive; brokers could continue to let customers who wish to use the cash or margin account for transactions involving government securities do so. It would allow institutional customers who cannot or will not use a margin account to engage in government securities transactions not specifically authorized in the cash account. For example, the government securities account could be used to effect purchases of government securities on credit or for cash as well as repurchase and reverse repurchase agreements. Borrowing and lending of government securities could also be effected in the proposed account without being subject to the “permitted purpose” requirement in § 220.16 of Regulation T that requires brokers to limit and document the reasons for their securities borrowings. The account would also permit net settlement of offsetting purchases and sales of government securities. Government securities purchased or deposited in a margin account would still be subject to the current Regulation T rules and would therefore still be available to finance the purchase of other securities in a margin account. The Board is not proposing to include additional types of exempted securities, such as municipal securities, in the proposed government securities account. Government securities constitute an unusually deep and liquid market and are subject to a unique scheme of regulation, as evidenced by the Government Securities A d of 1986. Regulatory Flexibility Act The Board believes there will be no significant economic impact on a substantial number of small entities if this proposal is adopted. Comments are invited on this statement. Paperwork Reduction Act No additional reporting requirements or modification to existing reporting requirements are proposed. List of Subjects in 12 CFR Part 220 Banks, banking, Bonds, Brokers, Commodity futures, Credit, Federal Reserve System, Investment companies. Investments, Margin, Margin requirements, National Market System (NMS Security), Reporting and recordkeeping requirements, Securities. For the reasons set out in the preamble, the Board proposes to amend 12 CFR Part 220 as follows: PART 220—CREDIT BY BROKERS AND DEALERS (REGULATION T) 1. The authority citation for Part 220 is revised to read as follows: Authority: 15 U.S.C. 78c, 78g, 78h, 78q. and 78w. § 220.1 [Amended] 2. In § 220.1 the word “seven" in the first sentence of paragraph (b)(1) is revised to read “eight”. 3. Section 220.2 is amended as follows: a. A new sentence is added to the end of paragraph (b). b. Paragraph (h) is revised. c. Paragraphs (w) through (aa) are redesignated as paragraphs (x) through (bb) and new paragraph (w) is added. The additions and revisions read as follows: § 220.2 * * Definitions. * * * (b) * * * Creditor does not include a broker or dealer registered only under section 15C of the act. * * * * * (h) Examining authority means: (1) The national securities exchange or national securities association of which a creditor is a member; or (2) If a member of more than one selfregulatory organization, the organization designated by the SEC as the examining authority for the creditor, * * * * * (w) Payment period means the number of business days in the standard securities settlement cycle in the United States plus two business days. * * * * * 4. In § 220.4, the figure “$500” in paragraph (d) is'revised to read “$1000” and paragraph (c)(3) is revised to read as follows: § 220.4 * * Margin account * * * (c) * * * (3) Time limits, (i) A margin call shall be satisfied within one payment period after the margin deficiency was created or increased. (ii) The payment period may be extended for one or more limited Federal Register / Vol. 59, No. 126 / Friday, July 1, 1994 / Proposed Rules periods upon application by the creditor to its examining authority unless the examining authority believes that the creditor is not acting in good faith or that the creditor has not sufficiently determined that exceptional circumstances warrant such action. Applications shall be filed and acted upon prior to the end of the payment period or the expiration of any subsequent extension. * * * * * 5. In § 220.8, the figure “$500” in paragraph (b)(4) is revised to read “$1000” and paragraphs (b)(l)(i) introductory text, (b)(l)(ii), (b)(3), (c)(2)(i), and (d) are revised to read as follows: § 2 2 0 .8 * Cash account * * * * (b) * * * (1 ) * * * (1) W ithin one paym ent period of the date: , * * * * * (ii) In the case of the purchase of a foreign security, within one payment period of the trade date or the date on which settlement is required to occur by the rules of the foreign securities market, provided this period does not excee'd the maximum time permitted by this part for delivery against payment transactions. * ' * * * * (3) Shipment o f securities, extension. If any shipment of securities is incidental to consummation of a transaction, a creditor may extend the payment period by the number of days required for shipment, but by not more than one additional payment period. * * * * * (c) * * * (2 ) * * * (i) Within one payment period of the trade date, or in the case of the purchase of a foreign security, within the period specified in paragraph (b)(l)(ii) of this section, full payment is received or any check or draft in payment has cleared and the proceeds from the sale are not withdrawn prior to such payment or check clearance; or * * * * * (d) Extension o f time periods; transfers. (1) Unless the creditor’s examining authority believes that the creditor is not acting in good faith or that the creditor has not sufficiently determined that exceptional circumstances warrant such action, it may upon application by the creditor: (i) Extend any period specified in paragraph, (b) of this section ; (ii) Authorize transfer to another account of any transaction involving the purchase of a margin or exempted security; or (iii) Grant a waiver from the 90 day freeze. (2) Applications shall be filed and acted upon prior to the end of the payment period, or in the case of the purchase of a foreign security within the period specified in paragraph (b)(l)(ii) of this section, or the expiration of any subsequent extension. 6. Section 220.18 is redesignated as § 220.19 and new § 220.18 is added to read as follows: Government securities account In a government securities account, a creditor may effect and finance transactions involving government securities, provided the transaction would be permissible for a broker or dealer registered under section 15C of the act. § 220.18 By order of the Board of Governors of the Federal Reserve System, June 27, 1994. W illia m W . Wiles, Secretary of the Board. IFR Doc. 94-16033 Filed 6 -3 0 -9 4 ; 8:45 am] BILUNG CODE 6 2 1 0 - 0 1 -P 33925