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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

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