View PDF

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

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 I E F E X E C U T IV E

DA LLA S, TEX AS
O F F IC E R

July 13, 1995

75265 -5 9 0 6

Notice 95-64

TO:

The Chief Executive Officer of each
member bank and others concerned in
the Eleventh Federal Reserve District

SUBJECT
Proposed Amendments to Regulation T
(Credit 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).
This action is part of the Board’s program to periodically review all regulations.
These amendments reflect consideration of the comments submitted in
response to the Board’s Advance Notice of Proposed Rulemaking. Many of the pro­
posed amendments feature increased reliance on rules of the Securities and Exchange
Commission and self-regulatory organizations. Other amendments would make Regu­
lation T consistent with Regulation G and Regulation U, the regulations covering
securities credit by lenders other than broker-dealers.
The Board must receive comments by August 28, 1995. Comments should be
addressed to William W. Wiles, Secretary, Board of Governors of the Federal Reserve
System, 20th Street and Constitution Avenue, N.W., Washington, D.C. 20551. All
comments should refer to Docket No. R-0772.
ATTACHMENT
A copy of the Board’s notice as it appears on pages 33763-79, Vol. 60, No.
125, of the Federal Register dated June 29, 1995, is attached.

F or 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; E l 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)

MORE INFORMATION
For more information, please contact Eugene Coy at (214) 922-6201. For
additional copies of this Bank’s notice, please contact the Public Affairs Department at
(214) 922-5254.
Sincerely yours,

Federal Register / Vol. 60, No. 125 / Thursday, June 29, 1995 / Proposed Rules

33763

SUMMARY: As part of a program to

FEDERAL RESERVE SYSTEM
12C FR Part 220
[Regulation T; Docket No. R-0772]
RIN 7100-AB28

Securities Credit Transactions; Review
of Regulation T, “ Credit by Brokers
and Dealers”
AGENCY: Board of Governors of the

Federal Reserve System.
ACTION: Proposed rule.

periodically review its regulations, the
Board is proposing am endm ents to
Regulation T, the regulation that covers
extensions of credit by and to broker
and dealers (also known as creditors).
These amendments reflect consideration
of the com m ents submitted in response
to the Board’s Advance Notice of
Proposed Rulemaking. Many o f the
proposed amendments feature increased
reliance on rules of the Securities and
Exchange Com m ission (SEC) and selfregulatory organizations (SROs) and
others would make Regulation T
consistent w ith Regulation G and
Regulation U, the regulations covering
securities credit by lenders other than
broker-dealers. Proposed changes in the
options area include permitting loan
value for long positions in exchangetraded options and increasing reliance
on the margin rules of the exchange that
trades the option for custom er and
specialist transactions. These changes
would also allow creditors to recognize
the offsetting nature of financial futures
in calculating margin for securities
options. Proposed am endm ents in the
international area w ill reduce
restrictions on transactions involving
foreign securities that are not publicly
traded in the United States and foreign
securities being sold on an installm ent
basis if the U .S. com ponent is a
relatively sm all percentage of the
offering. Broker-dealers would also be
given more flexibility in com puting
overall margin requirem ents for
customer accounts with securities
denominated in one or more foreign
currencies. In addition to these and
other amendments, technical changes
are being proposed to clarify areas that
have raised questions, update
references, or restore language
inadvertently deleted. The Board is also
soliciting com m ents on a number of
specific proposals. Finally, a num ber of
questions regarding the existing
regulation raised by com m enters are
being answered.
DATES: Comments should be received on
or before August 28, 1995.
ADDRESSES: Comments should refer to
Docket No. R -0 7 7 2 , and may be m ailed
to W illiam W. W iles, Secretary, Board o f
Governors of the Federal Reserve
System, 20th Street and Constitution
Avenue, N.W., W ashington, DC 20551.
Comments also may be delivered to
Room B -2 2 2 of the E ccles Building
between 8:45 a.m. and 5:15 p.m.
weekdays, or to the guard station in the
Eccles Building courtyard on 20th
Street, N.W. (between Constitution
Avenue and C Street, N.W.) at any time.
Comments received w ill be available for

33764

Federal Register / Vol. 60, No. 125 / Thursday, June 29, 1995 / Proposed Rules

inspection in Room M P -5 0 0 of the
Martin Building between 9:00 a.m. and
5:00 p.m. weekdays, except as provided
in 12 CFR 261.8 of the Board’s rules
regarding availability of information.
FOR FURTHER INFORMATION CONTACT:

Scott Holz, Senior Attorney, or Angela
Desmond, Senior Counsel, Division of
Banking Supervision and Regulation
(202) 4 5 2 -2 7 8 1 ; for the hearing
impaired only, Telecom m unications
Device for the Deaf (TDD), Dorothea
Thom pson (202) 4 5 2 -3 5 4 4 .
SUPPLEMENTARY INFORMATION: In 1992,
the Board issued an advance notice of
proposed rulem aking and request for
com m ent concerning a general review of
Regulation T .1 Comments were received
from 31 respondents, some of whom
com m ented more than once. The
com m ents have been analyzed to help
prepare proposed amendments to the
regulation. T hese proposed amendments
are consistent w ith the current tenor of
the regulation and statutory
requirem ents; however, the com ments
raised broad issues as to purposes that
Regulation T serves in light of the
current regulatory environm ent and
market practices. One comment
questioned the continuing need for the
Regulation T requirem ents, noting that
possible purposes for the regulation,
such as broker dealer financial integrity
and custom er protection, also are
addressed by SEC oversight of brokers
and dealers by means of net capital and
custom er protection rules. Comments
also suggested broad changes to
Regulation T that the commenters
believe are appropriate in the current
environm ent. These changes included,
but were not lim ited to: (1) Delegating
all responsibility for margins and
related requirem ents to the selfregulatory organizations under the
oversight of the SEC; (2) applying the
restrictions on arranging credit only to
credit that otherw ise violates margin
rules; (3) elim inating margin
requirem ents on loans to brokers and
dealers; (4) exem pting from the margin
rules transactions in all exempt
securities; (5) exempting transactions
with sophisticated customers; (6)
expansion of perm issible arrangements
for borrowing and lending securities;
and (7) exem pting transactions in
investm ent grade securities. W hile the
Board believes that it is important to
proceed w ith the proposed amendments
in order to address particular problems,
the Board also believes regulatory
structures should be reviewed
continually, not merely to update them,
but also to assess whether different
1 57 FR 37109, August 1 8 ,1992.

reliance on SRO options margin rules
for custom ers and specialists.
a. Margin account. T he margin
account currently specifies positions
w hich may serve in lieu of the margin
required for w riting an option on an
equity security, w hile incorporating the
rules of the SRO s for options written on
anything other than an equity security
(such as a secu rities index). The Board
proposes to allow SRO rules, w hich
must be approved by the SEC, to
prescribe appropriate cover for all short
options positions.
Many com m enters expressed support
I. Options
for a risk-based options margin system
and/or a recognition of the offsetting
A. E x c h a n g e -T r a d e d O ption s
nature o f financial futures based on
1. Loan Value for Long Options
sim ilar indexes, rates, or assets. Under
All secu rities listed on a national
the Board’s proposal, the SROs would
securities exchange have loan value
be able to further these goals in setting
under Regulation T except for options.
cover requirem ents for all types of
The Board proposes to elim inate this
securities options.
disparate treatm ent, w hich was adopted
b. Cash account. Although the writing
in the early 1970s, and allow exchangeof an option creates a short position
traded options the same 50 percent loan
w hich is norm ally carried in the margin
value currently afforded other margin
account, the cash account section was
equity securities. In light of the
amended in the early 1980s to allow
successful growth of standardized
certain covered options transactions to
options trading sin ce the 1970s, the
be effected in th is account. Board staff
positive perform ance of the Options
has sin ce indicated that the cash
Clearing Corporation, and the
account can be used for additional
developm ent of new types of options,
options transactions. These transactions
other securities and financial futures,
are not “ covered ” in the sense that the
the Board is proposing to treat long
account holds the underlying security.
positions in exchange-traded options
However, the transactions involve a
the same as other registered equity
quantifiably lim ited risk and the cash
securities for margin purposes.
account in w hich the transaction is
Granting 50 percent loan value to
effected contains specified assets of
exchange-traded options would also
sufficient value to'cover this amount or
address a disparity that has arisen in the an escrow receipt representing such
past few years w ith the listing of soassets.2 The Board proposes to adopt
called index warrants. Although index
generic language under w hich a
warrants resem ble long-term options,
“covered option transaction” would be
the use of the word “warrant” to
eligible for the cash account under
describe th is product has led many
specified cond itions. T he Board is also
broker-dealers to allow 50 percent loan
adding m oney market mutual funds to
value for these instrum ents while long­
the list of cash equivalents that may be
term options, such as LEAPs, are not
used to cover a put written in the cash
permitted any loan value under the
account.
current regulation. Treating exchangec. Market functions account.
traded options the same as other
Regulation T perm its the extension of
exchange-traded equity securities would credit on a good faith basis to a
elim inate this disparity.
specialist for transactions in its
specialty security. In addition, options
2. Increased R eliance on SRO Rules
specialists can obtain good faith
When Regulation T was adopted in
financing for the underlying security
1934, the am ount o f margin required for and other sp ecialists can obtain good
writing a put or call was the amount
faith credit for options overlying their
“custom arily required” by the creditor.
specialty securities. These positions are
In the 1970s the Board adopted specific
known as “ perm itted offsets.” The
requirem ents based on existing rules of
regulation specifies w hich positions
one of the self-regulatory organizations
must be held in the account to allow
(SROs). Starting in the 1980s, the Board
permitted offsets and does not provide
has on more than one occasion amended for offsets in the case of specialists in
Regulation T to incorporate by reference
SRO margin rules for options
2 See, e.g., Staff Opinion of July 1 2 ,1 9 9 1 , Federal
transactions. T he Board is proposing to
Reserve Regulatory Service {FRRS) 5-666.251 and
Staff Opinion of October 11, 1991, FRRS 5-666.26.
continue this process by increasing

structures w ould better meet regulatory
objectives and even whether regulation
is still necessary. Accordingly, the
Board requests com m ents including
particular proposals and supporting
legal and policy rationale, not only on
the sp ecific changes to Regulation T set
forth in this notice, but also on the
proposals enum erated above, the
continuing need for Regulation T, and
appropriate changes to its scope and
architecture. T h e supplementary
inform ation that follow s explains what
is being proposed and reasons therefor.

Federal Register / Vol. 60, No. 125 / Thursday, June 29, 1995 / Proposed Rules
index options. The Board proposes to
adopt generic language perm itting the
extension of good faith credit for
permitted offsets, provided the position
has been designated as a permitted
offset under SEC-approved rules of the
appropriate SRO.
B. OTC O ption s
In 1991, Board staff raised no
objection to a broker-dealer that sought
to “arrange” for its custom er to write an
OTC option on foreign secu rities.3 This
position would be codified by the
proposed amendments to the arranging
section concerning foreign securities.
The Board is not proposing to extend
this position to OTC options on
securities w hich are publicly traded in
the United States. Allowing brokerdealers to arrange for custom ers to write
OTC options without collecting margin
would not be consistent w ith the
requirements of the organized options
exchanges. Rules of the New York Stock
Exchange (NYSE) and the National
Association of Securities Dealers
(NASD) both provide that margin is
required for the “ issuance, guarantee or
sale (other than a ’long’ sale) for a
customer of a put or ca ll.” The Board is
proposing to add the word “ se ll” to the
language in the cash account to make
clear that the Board’s rules cover the
same situations covered by N YSE and
NASD rules.

participate in employee benefit plans
under SEC rules.
II. International Transactions
A. F oreign B rok er-D ealers
Any entity required to register as a
broker or dealer with the SEC under
section 15(a) of the Securities Exchange
Act of 1934 (the Act) is a creditor under
Regulation T. Although the d efinitions
of “broker” and “dealer” in the A ct do
not refer to nationality, the SEC ’s policy
is to require registration o f foreign
broker-dealers only when they are
physically operating in the United
States.4 The Board generally follow s the
SEC in this area and does not consider
foreign broker-dealers not required to
register with the SEC as creditors under
Regulation T.
Although the com m enters were m ixed
on whether the definition of creditor
should be amended to include or
exclude foreign broker-dealers, there
was general agreement that U .S. brokerdealers purchasing securities from or
selling securities to a foreign brokerdealer on a DVP basis should be able to
effect the trades on a broker-to-broker
basis. Proposed language is being added
to the Broker-Dealer Credit A ccount that
will make clear that foreign brokerdealers may use this account for DVP
transactions with U .S. broker-dealers.
B. F oreign C u rrency

Section 220.3(e)(4) of Regulation T
was added in 1988 to allow creditors to
help custom ers with valuable em ployee
stock options exercise their options by
providing short-term financing o f the
exercise price. The short-term loan is
either paid off from the sale of the
securities received pursuant to the
employee stock option or replaced with
a conventional margin loan extended
against those securities. This practice
has come to be known in the industry
as “cashless exercise.” Over the last five
years, Board staff has not objected to the
expansion of the application of
§ 220.3(e)(4) to other types o f securities
customers receive under employee
benefit plans, such as certain em ployee
stock warrants. In addition, Board staff
has allowed brokers to temporarily
finance withholding taxes due on stock
received under employee benefit plans.
New language is being proposed to
reflect these staff opinions. The new
language would also allow the use of
§ 220.3(e)(4) for outside directors and
consultants who are eligible to

Since 1990, creditors have been able
to extend margin credit denom inated in
foreign currency if it is secured by
foreign margin securities denom inated
or traded in the same foreign currency.
If a customer has securities o f various
denominations, margin subaccounts
(and, if desired, SMA subaccounts) are
set up so that credit com puted in U .S.
dollars and each separate currency can
be isolated. Under the current rule, an
increase in the value of securities used
to support specific foreign currencydenominated debt cannot be used to
offset a deficiency in another margin
subaccount. At the request of
commenters, the Board is proposing to
delete this lim itation and permit margin
requirements denominated in any
currency to be offset by equity in any
marginable security or a foreign
currency deposit made in connection
with a security denominated in that
currency. Creditors would be free to
retain the current system of separate
SMAs for each foreign currency
denomination.
Another com ment concerning foreign
currency com es from the Securities
Industry Association (SIA), w hich

3 Staff Opinion of October 22, 1991, FRRS 5 666.27.

4 SEC Release No. 34-27017; 54 FR 30013 (July
18,1989).

C. E m p lo y ee S to ck O ption s a n d O ther
B en efit P lan s

33765

believes that any freely convertible
currency should be able to be treated at
its U.S. dollar equivalent for all
purposes of Regulation T. Under the
current version of Regulation T , foreign
currency received in connection w ith
the purchase, sale or loan of a security
denominated in that currency may be
accounted for in that currency or at its
U.S. dollar equivalent. If there is no
security denominated in that currency,
creditors should convert the currency
into its U .S. dollar equivalent upon
receipt. The conversion can be effected
in a custom er’s cash or margin account,
with the resulting balance m aintained in
U.S. dollars.
C. F oreig n S ecu rities
1. Arranging
In 1990, the Board added an
exception concerning foreign stocks to
the arranging section of Regulation T
w hich permits a creditor to arrange for
its customer to receive more credit than
the creditor could extend when its
customer is purchasing a foreign
security with credit from a foreign
lender. The exception, found in section
220.13(d), was based on the theory that
transactions involving foreign securities
do not require the same strictness of
regulation because they do not have a
substantial effect on the U .S. securities
market. Commenters have asked for the
Board to expand the foreign stock
exception to cover short sales as well.
The Board agrees that equal treatm ent in
the arranging area should be afforded to
both long and short sales.
In gaining experience with the 1990
amendment, however, it has been
noticed that there is an increasing trend
for corporations that have issued stock
abroad to list the securities for trading
in the United States. Therefore, the
Board is proposing a somewhat more
restricted definition o f what constitutes
a foreign security for purposes of this
section to assure equal treatm ent of
foreign and dom estic securities that are
publicly traded in the United States. For
example, the German conglom erate
Daim ler-Benz recently listed its shares
on the New York Stock Exchange,
thereby enabling U.S. broker-dealers to
extend 50 percent credit against the
stock. Under the current arranging
exception for foreign securities, a
creditor can arrange for its custom er to
borrow more than 50 percent on
Daimler-Benz stock if the credit is
extended by a foreign lender (often a
foreign affiliate of the creditor). In
contrast, a creditor may not arrange for
its customer to buy AT&T stock w ith
less than 50 percent margin, even if the
credit were extended by a foreign

33766

Federal Register / Vol. 60, No. 125 / Thursday, June 29, 1995 / Proposed Rules

lender. Proposed language would
address this situation and ensure equal
treatment for all stocks that are publicly
traded in the United States by
permitting a creditor to arrange for the
purchase or short sale of a “non-U.S.
traded foreign security,” defined as a
security issued abroad that does not
trade on a national securities exchange
or NASDAQ.
2. Lending Foreign Securities
Under Regulation T, a creditor may
borrow or lend securities for the
purpose of making delivery pursuant to
a short sale or “fa il” transaction. In
addition, the regulation lim its the type
of collateral that must be pledged to
secure a loan o f securities. Several
com m enters, such as the SIA and the
SIA -C redit D ivision, request an
amendment to permit U.S. brokerdealers to lend foreign securities to a
foreign person for any purpose that is
lawful in the foreign country. The NYSE
would like to ensure that foreign
securities loaned abroad do not come
back to the U .S. to cover short sales or
fails. The Board is therefore proposing
to allow loans of foreign securities for
any lawful purpose if the securities are
“non-U.S. traded foreign securities.”
This should prevent these securities
from being used for transactions in the
United States. In addition, the SIA notes
that many securities lending
transactions occurring outside the U.S.
would not meet the collateral
requirem ents of Regulation T. The
proposed am endm ent would allow a
creditor to accept any collateral that
may be pledged in the foreign country
for loans of securities, providing the
collateral’s value is at least equal to 100
percent of the market value of the
securities borrowed.
3. Installm ent Sales
The United Kingdom began a series of
privatizations of state-owned com panies
in the late 1970s. Investors in the shares
of these com panies paid for them on an
installm ent basis over a period of at
least six months. Installm ent sales are
not uncom m on in the U.K., but are
generally prohibited in this country
under section 11(d) of the A ct.5 The
practice is also prohibited under
Regulation T if the first installm ent is
less than the initial margin requirement.
Participation o f U.S. investors in the
U.K. privatizations was accommodated
by letters written by Board staff.6 The
Board proposes to amend the arranging
provision of Regulation T to state that a
5
15 U.S.C. 78k(d).
“ See, e.g., Staff Opinion of October 24 ,1 9 8 4 ,
FR/iS 5-615.92.

creditor is not deemed to have arranged
for credit subject to the margin
regulations if it sells a foreign security
that is being offered on an installm ent
basis, provided that less than 15 percent
of the issue is offered to U .S. persons.
This generic language would allow U.S.
investors to participate in installm ent
sales of foreign securities when the U.S.
com ponent of the offering is a relatively
small portion of the overall offering and
would cover offerings by foreign
governments and other foreign issuers.
4. Foreign Margin Stocks
In 1990, the Board amended
Regulation T to establish a List of
Foreign Margin Stocks (the “Foreign
L ist”). These stocks are treated in the
same m anner as dom estic margin equity
securities. The Board established
criteria for in itial inclusion on the
Foreign List and for continued listing.
U .S. broker-dealers certify to an SRO
that specific foreign securities meet the
criteria. The Board uses the information
submitted by the SRO in publishing the
Foreign List. T he Foreign List has grown
from approxim ately 40 stocks in August
1990 to over 700 stocks this year.
Many com m enters state that the
system is cum bersom e and results in all
broker-dealers benefitting from the
research done by a small number of
firms. Som e com m enters have suggested
that a stock included in a major foreign
stock index should be automatically
marginable if it meets two criteria: (1)
the SEC or CFTC has approved trading
in the United States of options,
warrants, or futures on a foreign
securities index that contains the
foreign equity security and (2) the SEC
has determ ined that the stock has a
“ready m arket” for purposes of its net
capital rule.7 T he Board is soliciting
com m ent w hether such a test should be
adopted, w hich securities would be
covered under the criteria, and
suggestions on how this information
could be integrated into the Board’s
Foreign List.
III.

Other Customer Transactions

A. M argin A ccou n t/S M A
Most custom er transactions involving
credit take place in a margin account,
w hich may be m aintained in
conjunction with a special
memorandum account (SMA). Several
com m enters recomm end that more than
one custom er, such as members of a
fam ily, be permitted to share a single
SMA. One broker-dealer notes that this
would allow the individual custom ers’
accounts to be cross-collateralized and
7 17 CFR 240.15C 3— )(ll).
l(c

cross-guaranteed. T he Board is not
proposing to change the SMA at this
time. In addition to operational
problem s raised by linked SMAs,
Regulation T and the Board’s other
margin regulations do not allow a
guarantee to have loan value for
securities credit transactions.
The SIA-Credit D ivision suggests
elim ination o f the provision in
§ 220.4(f)(2)(ii) concerning withdrawals
of securities received as part of a
distribution attributed to securities
already in the margin account. This
section is perm issive in that it permits
some withdraw als w hich create or
increase a margin deficiency.
Nevertheless, the Board is soliciting
com m ent on w hether such an exception
is still warranted.
1. Convertible Bonds
Under Regulations G and U (12 CFR
Parts 207 and 221), a debt security
convertible into a margin stock is
considered a margin stock. Although no
com parable rule exists in Regulation T,
in 1990 the Board defined foreign
margin stock to include a debt security
convertible into a margin security. The
SIA-Credit D ivision and several brokerdealers recom m end applying this
concept to all convertible debt securities
in Regulation T and the Board is
proposing language to accom plish this.
2. Mutual Funds
a. Exem pted securities mutual funds.
Sin ce 1968, the definition of margin
stock in Regulations G and U has
excluded mutual fund shares of
com panies whose assets are at least 95
percent invested in exempted securities.
The exclusion -of these funds (exempted
securities mutual funds) from the
definition of margin stock is equivalent
to giving them good faith loan value at
lenders other than broker-dealers. The
Investment Company Institute has asked
the Board to amend Regulation T so that
exem pted securities mutual funds will
be entitled to good faith loan value at
broker-dealers as w ell as other lenders.
The Board is proposing to use the
regulatory language found in
Regulations G and U in Regulation T.
b. M oney market mutual funds. In
addition to exem pted securities mutual
funds, the Board is proposing to give
good faith loan value to money market
mutual funds. M oney market mutual
funds are subject to additional SEC
regulation and are recognized as cash
equivalents by the industry and the
general public.
3. OTC Margin Bonds
Several com m enters suggest that the
Board adopt a rating requirement for all

Federal Register / Vol. 60, No. 125 / Thursday, June 29, 1995 / Proposed Rules
debt securities as an alternative to the
current requirem ent that domestic debt
securities be registered with the SEC.
The Board has adopted the rating
requirem ent for foreign securities
because the concept of com ity argues
against requiring SEC registration. The
fact that “mortgage-related securities”
require a rating but not SEC registration
was Congressionally mandated in the
Secondary Mortgage Market
Enhancem ent Act of 1984.
The Board is proposing to strike the
word “mortgage” from the second
section of the definition of “OTC margin
bond” .to clarify that all pass-through
securities can m eet this definition. The
Board also confirm s that the minimum
principal amount required for “OTC
margin bond s” applies to shelf
registrations of a single issue once the
m inim um amount has been issued, even
though some of the individual tranches
sold may be sm aller.
Although a 1984 staff opinion took
the position that privately-issued
Treasury receipts were not exempted
securities and not entitled to loan
value,8 the Board, SEC and Treasury
Department have becom e more
com fortable over tim e with viewing
these securities as equivalent to exempt
securities. For exam ple, a 1994 Board
staff opinion concerning the GlassSteagali Act concluded that the holder
of a privately-issued Treasury receipt is,
for virtually all purposes, a holder of an
interest in the underlying Treasury
security.9 The Board therefore does not
object to the treatm ent of privatelyissued Treasury receipts as exempted
securities for purposes of Regulation T.
The staff opinion to the contrary will be
deleted.
4. OTC Margin Stock
A com m ent was received from an
investor who believes stock which does
not trade on NASDAQ should be
marginable if the issuer has another
class of marginable stock whose price is
used to determ ine the saie price of the
nonmargin stock. This situation is not
being addressed by the proposed
amendments. In addition to the
com plexity of covering such a limited
group of stocks, this type of stock
cannot be purchased by the general
public and therefore no bid prices are
available.
5. Nonsecurities Instruments
The Public Securities Association
(PSA) and a broker-dealer comment that
* Staff Opinion of December 13, 1984, FEES 5 628.13.
9 Staff Opinion of January 10, 1994, FEES 4 655.5.

creditors should be able to extend credit
on com m ercial paper, certificates of
deposit (CDs), and bankers acceptances
(BAs). All o f these instrum ents may be
used collateral for a nonpurpose loan
(i.e., a loan that is not made for the
purpose of purchasing, carrying, or
trading in securities). Section 7(c) of the
A c t 10 prohibits the Board from
permitting broker-dealers to accept
nonsecurities as collateral in a margin
account. Although com m ercial paper is
a security and can be held in a margin
account, Regulation T denies loan value
to dom estic debt securities that are not
SEC-registered. Therefore, com m ercial
paper is a nonm argin, nonexem pted
security and the Supplem ent to
Regulation T requires a margin of 100
percent if held in a margin account.
B. C ash A cco u n t
1. Perm issible T ransactions
Proposed changes to the cash account
concerning options are discussed in this
preamble in section I.B.2. In addition,
one com m enter would like confirmation
that custom ers may purchase CDs and
other nonsecurities products in the cash
account. A 1988 staff opinion confirmed
that industry practice is to use the cash
account to record the purchase of both
securities and n on secu rities,1 and the
1
Board is proposing to add language to
the cash account section o f the
regulation to codify this position.
2. Net settlem ent
In order to guard against free-riding,
net settlement of trades in a cash
account generally is not permitted,
Customers are required to pay for all
purchases in full without netting sale
proceeds from secu rities purchased and
sold on the same day in order to avoid
im position of the 90-day freeze
described in § 220.8(c) of Regulation T.
In 1988, Board staff confirm ed two
statutory exceptions to this general rule
for transactions in mortgage-related
securities 12 and exem pted secu rities.13
Some broker-dealers com m ent that
customers should be able to net settle all
transactions in a cash account as long as
the regulation states that day trading is
not permitted in that account. No
changes are being proposed in this area
as allow ing net settlem ent of all trades
in the cash account would com plicate a
creditor’s ability to prevent free-riding
in the cash account.
" ’ 15 U.S.C. 78g(c).
1 FRRS 5-615.955.
1
12FRRS 5-615.952.
' ’ F/ffiS 5-628.17.

33767

3. 90-Day Freeze
A custom er who sells a security
purchased in a cash account before
making full cash paym ent must have
sufficient funds in the account by trade
date for any purchases during the next
90 days. T his restriction is known as the
“90-day freeze.” One broker-dealer
suggested the freeze should not apply ii
the cash account holds marginable
securities with sufficient loan value to
pay for the securities that have been
sold before having been paid for. This
suggestion is contrary to the nature of
the cash account. A custom er who
contem plates the need for credit to
settle securities purchases should be
using a margin account and not a cash
account.
Another broker-dealer believes the
freeze should not apply if a customer
decides to liquidate a purchase made on
a DVP basis w hen the custom er is read}?
to make full payment but the selling
broker does not make tim ely delivery
and the security is otherw ise
unavailable. The Board agrees that a
custom er should not be subject to the
90-day restriction w hen it decides to
liquidate a transaction that the
counterparty cannot com plete.
C. O th er A c co u n ts
1. Arbitrage A ccount
Transactions effected in the arbitrage
account are not subject to Regulation T
margin requirem ents. The SIA and a
broker-dealer have requested that the
arbitrage account no longer require that
the transactions be entered into to take
advantage of a concurrent disparity in
prices. However, elim ination of the
requirem ent that the two transactions
yield an im m ediate gain would expand
this special provision beyond those
transactions w hich perform a market
function by bringing together the prices
of securities or markets w hich should be
the same. Therefore no changes are
being proposed to the arbitrage account.
2. Broker-Dealer Credit A ccount
The broker-dealer credit account is
norm ally available only for brokerd ealers.14 However, the brokerage
industry has developed a service known
as “ prime brokerage” in w hich a
custom er m aintains a cash and/or
margin account w ith a “ prime broker”
to record transactions executed at one or
more executing brokers. Industry
practice has been for th e executing
broker to use the broker-dealer credit
account to record the transactions sent
14 As noted in the section on foreign brokerdealers, the Board is proposing to allow foreign
broker-dealers to use the broker-dealer credit
account when purchasing securities on a DVP basis.

33768

Federal Register / Vol. 60, No. 125 / Thursday, June 29, 1995 / Proposed Rules

to the prime broker (who enforces
Regulation T vis-a-vis the customer).
After discussions with Board staff and
an SIA com m ittee, the SEC issued a no
action letter last year describing
requirem ents that must be followed in
connection with prime brokerage.15 The
Board is proposing to add language to
the broker-dealer credit account to
officially acknowledge its use in prime
brokerage transactions.
D. O ther T ran sactio n s
1. Repurchase Agreements
A repurchase agreement from a
broker-dealer’s point of view 'm ay be
viewed as a borrowing by the creditor
and should not generally be covered by
the Board’s margin regulations as long
as the security is not subject to the
restrictions imposed by section 8(a) of
the A ct. The repurchase agreements
addressed herein are reverse repurchase
agreements in w hich a custom er sells a
security to a creditor with an agreement
to repurchase from the creditor at a later
time. Repurchase agreements in
government securities are permitted in
the government securities account
created last year.16
In addition to repurchase agreements
on government securities the PSA, SIA
and several broker-dealers request an
amendment that would permit
repurchase agreements on all fixed
incom e securities w ith good faith loan
value, although the PSA acknowledges
that it may be appropriate to treat these
transactions as margin loans. However,
broker-dealers traditionally require 20
percent margin when financing
nonexem pted debt securities and do not
lend the 100 percent im plied in
structuring the transaction as a
repurchase agreement. Although the
PSA acknowledges the resem blance
betw een repurchase agreements and
margin loans, it states that practical
problems make the cash account or a
new account more appropriate.
Although the collection of margin from
a custom er by a broker-dealer would
seem to indicate that the transaction is
properly recorded in the margin
account, the Board is soliciting
com ment on the advisability of creating
a new account for repurchase
agreements on securities other than
government securities in w hich margin
would be collected as if the transaction
were a conventional margin loan. The
PSA , SIA, and a law firm also request
creation of a new account to allow
forward transactions, w hich are not
15 Letter of January 25. 1994, from Brandon
Becker, Esq. to Mr. Jeffrey C. Bernstein, reprinted
in CCH Federal Securities Law Reporter at 76,819.
16See 59 FR 53565 (October 25, 1994).

permitted under Regulation T unless the
security is trading on a w hen-issued
basis or is a government or mortgagerelated security. Comment is also
invited on the advisability of
accom modating forward transactions
accom panied by the deposit required for
a conventional margin loan in an
account other than a margin account.
The PSA and SIA would also like
creditors to be able to effect repurchase
agreements on money market
instrum ents that may not qualify as
securities. Such transactions are
perm issible in the non securities credit
account as long as the proceeds are not
used for purpose credit.
2. Two-Tiered Market
The SIA and several broker-dealers
believe the Board should establish an
account or subaccount where creditors
may effect and finance all securities
transactions on a good faith basis for
custom ers who meet som e level of
financial sophistication. In the past, the
Board has amended the arranging
section of Regulation T to permit
creditors to arrange for certain types of
credit for sophisticated cu stom ers.17 No
further relaxation of the regulation is
being proposed in this area at this time.
3. Use of Money M arket Funds
As noted above,18 the Board is
proposing to add money market mutual
funds to the list o f cash equivalents
available to cover a put w ritten in the
cash account and give the fund shares
good faith loan value in a margin
account. The SIA-Credit D ivision and
two other broker-dealers believe money
market mutual funds should be treated
as cash without having to be liquidated.
Although the Board recognizes that
money market shares are often viewed
as .cash equivalents, they are not cash.
A custom er who is required to deposit
cash pursuant to Regulation T must
liquidate the shares to realize cash.
IV.

Broker-Dealer Transactions

A. C red it E x ten d e d to O th er B rokerD ea lers
1. All Broker-Dealers
T he com m enters were split on the
question of whether broker-dealers
should continue to be treated as
custom ers under Regulation T. The
principal argument in favor of special
17 For example, the exemption in section
220.13(b) requires that the sale of securities be
effected pursuant to the SE C s private placement
exception from registration. Such sales must be
made to sophisticated investors.
""See section I.A.2.b. on the cash account under
options and section III.A.2.b. on mutual funds
above.

treatment for broker-dealers is that they
are subject to m inim um net capital
requirem ents that im pose a lim it on
leverage, albeit greater leverage than
that permitted public custom ers. The
Board continues to believe special credit
(i.e., lower margin) is appropriate when
broker-dealers perform a market
function, but is not proposing treatment
that differs from that for p u blic,
custom ers for reasons of equity.
2. Specialists and Market-M akers
Regulation T permits special credit for
broker-dealers performing a market
function. The Board is proposing
clarifying language to the provisions
describing OTC market makers and
third-market makers to respond to
questions that have arisen sin ce the
regulation was last revised.
The SIA would like the Board to
permit deficit financing of specialists,
elim inate restrictions on their permitted
offsets and elim inate the restriction in
§ 220.12(b)(4) of Regulation T
concerning free-riding by specialists. As
discussed in this pream ble in section
I.A.2.C., the Board is proposing to allow
any permitted offset that is perm issible
under SEC-approved rules of the
creditor’s exam ining authority.
Although the Board supports the
concept of good faith credit for
specialist transactions, d eficit financing
is a form of unsecured credit, w hich is
prohibited by section 7(c) o f the A ct.19
The restriction on free-riding by
specialists by its terms does not apply
to any specialist on an exchange that
has an SEC-approved rule on the same
subject.
One broker-dealer suggested
expanding the definition of OTC
market-maker to include m arket makers
of convertible bonds who post their
prices in the “yellow sh eets” or deal in
convertible bonds traded pursuant to
SEC Rule 144A .2HConvertible bonds are
equity securities under the A c t21 and
the Board has designated convertible
bonds as OTC margin stock when they
meet the criteria in section 220.17 of
Regulation T. OTC market-makers are
registered with NASDAQ as such and
are required to engage in a certain level
of market-making, as are specialists. The
Board does not permit good faith credit
for broker-dealers making a market in
equity securities via the “ pink sheets.”
Consistency argues against permitting
such credit for broker-dealers making a
market in convertible bonds via the
1915 U.S.C. 78g(c).
2017 CFR 230.144A.
21 Section 3 (a )(ll) of the Act (15 U.S.C. 78c(a)(ll))
defines equity security to include any security
convertible into an equity security.

Federal Register / Vol. 60, No. 125 / Thursday, June 29, 1995 / Proposed Rules
“yellow sheets” or those trading
pursuant to SEC Rule 144A.
3. Joint Back Office Arrangements
Section 220.11(a)(2) of Regulation T
allows broker-dealers to set up a joint
back office (JBO). The owners of the JBO
are not considered customers of the
clearing organization and therefore no
Regulation T margin is required,
although the clearing firm generally
obtains the appropriate securities
haircut from its participants. W hen the
JBO section was adopted, the Board
assumed there would be a reasonable
relationship between the creditors’
ownership interests and the amount of
business conducted and did not adopt
an explicit requirement for the amount
of ownership each broker-dealer should
have in the JBO. Since adoption of the
provision, several stock exchanges have
expressed concern that JBOs are
permitting credit far in excess of the
participant’s interest. Much of the
activity was attributed to index options
specialists seeking good faith financing
for stock baskets, w hich is not otherwise
permitted under Regulation T. As
discussed in the section on the market
functions account under options, the
Board is proposing to permit such
financing under SEC-approved rules of
the exchanges and this change should
reduce the pressure on JBOs to extend
credit greatly disproportionate to the
amount of equity ownership.
Nevertheless, the Board is also
proposing to state explicitly that the
participants’ ownership interest in the
JBO should be reasonably related to the
amount of business conducted through
it. Three stock exchanges and one other
commenter support changes along these
lines.
4. Credit to Other Types of BrokerDealers
Several commenting broker-dealers
suggest additional classes of creditors
that should be entitled to good faith
credit. One broker-dealer suggests
creating a new category of brokerdealers entitled to beneficial margin
treatment that would be under some
affirmative obligation to add liquidity to
the market but would not be required to
be present on the trading floor. The
Board has traditionally allowed good
faith credit for specialists engaged in
specialist transactions and deferred to
the SEC to determ ine who is a specialist
under the Act. It is unclear what the
effect would be on specialists if other
broker-dealers with lesser marketmaking obligations were permitted good
faith credit on certain transactions.
The SIA-Credit Division believes that
self-clearing broker-dealers who choose

33769

was supported by the SIA, SIA-Credit
Division, NYSE and several brokerdealers.
b. SEC cu sto m er p ro tec tio n rule.
W hile § 220.16 of Regulation T covers
all borrowing and lending of securities
by creditors, the SEC’s customer
protection ru le 27 also applies if the
creditor is borrowing securities from its
customer. Both rules specify perm issible
types of collateral. In 1989 the SEC
proposed expanding the types of
acceptable collateral specified in its
ru le 28 and its staff issued a no action
letter in the interim. Regulation T
B. B orrow in g a n d L en d in g S ecu rities
currently expressly provides for all of
Section 220.16 of Regulation T covers
these types of collateral, with the
the borrowing and lending of securities.
exception of foreign sovereign debt,
Securities may be borrowed or lent in
w hich is being proposed as part of this
connection with the need to make
package. To ensure that acceptable
delivery in short sales and fails to
collateral under § 220.16 of Regulation T
receive. The section covers the
is always at least as broad as that
borrowing and lending of all types of
required by the SEC when creditors
securities,24 including those w ith good
borrow securities from their custom ers,
faith loan value, and requires
the Board is proposing to refer to the
enumerated types of collateral worth at
SEC’s custom er protection rule in
least 100 percent of the market value of
§ 220.16 of Regulation T.
the securities on a daily basis. Although
c. O ther co lla te ra l. The SIA and a
stock loans are econom ically equivalent
broker-dealer seek confirm ation that any
to repurchase agreements, the former are freely convertible currency may be
based on the need to make delivery and
treated as cash collateral for borrowings
are not meant to be financing
o f securities. Although this may present
arrangements for the owner of the
a currency risk not originally
securities being lent.25
anticipated, the Board believes that this
is perm issible, given that such loans are
1. Collateral
marked-to-market daily with collateral
a.
F oreign sov ereig n d ebt. In 1988, the equal to at least 100 percent of the
Board amended Regulation T to give
market value of the securities being
good faith loan value to highly rated
borrowed.
foreign sovereign bonds. Shortly
Several com m enters support
thereafter, Board staff indicated that
expanding acceptable collateral to
these securities should be acceptable as
include options or some or all types of
collateral for stock loans if the currency
marginable securities, while the NYSE
of the lent security is the same as the
is opposed to this concept. Although the
sovereign bond.26 The Board is
Board has gradually expanded the types
proposing explicitly to add foreign
o f acceptable collateral over the years, it
sovereign bonds to the list of collateral
has always required collateral with high
in § 220.16 of Regulation T without
liquidity and low volatility.
restriction as to currency. This change
2. Permitted Purposes

to go through another broker-dealer
should not be required to post custom er
margin. Board staff has addressed this
issue several tim e s22 and reiterated that
the treatment of a broker-dealer depends
on whether it clears the transaction
itself and not whether it c o u ld clear the
transaction. In addition, a broker-dealer
suggested that affiliated broker-dealers
should not be treated as customers.
Board staff has indicated that affiliated
(sister) firms are treated as custom ers 23
and no policy reasons for changing this
have been presented.

22 See, e.g., Staff Opinion of August 18, 1986,
FRRS 5-621.16.
23 Staff Opinion of December 16, 1988, FRRS 5 621.18.
24 The government securities account can be used
to conduct all types of permissible transactions
involving government securities, including
borrowing and lending.
25 The Financial Accounting Standards Board
(FASB) is currently debating the differing treatment
of repurchase agreements and stock loans and has
tentatively concluded that repurchase agreements
should be accounted for as collateralized
borrowings if the repurchase agreement entitles the
party receiving financial assets subject to
repurchase to repledge them but not sell them. Most
securities lending transactions that entitle the party
receiving the financial assets to sell them would be
accounted for as sales. Staff plans to review the
Regulation T treatment in this area once FASB
reaches a decision on the matter.
26 Staff Opinion of September 23, 1988, FRRS 5 615.15.

a. P re-borrow in g. Although Regulation
T currently permits borrowing of
securities for short sales that have been
effected or are in immediate prospect,
several com m enters support the concept
of “ pre-borrowing,” the borrowing of
securities in anticipation of a short sale
that may or may not take place in the
near future. Pre-borrowing can lead to
an attempt to “squeeze” the market for
a security by locking up all available
shares and hindering the ability of
others to sell that security short.29
27 SEC Rule 15c3— ,1 7 CFR 240.15c3-3.
3
2BSEC Release No. 34-26608, 54 FR 10680 (March
15,1989).
29
Board staff has indicated that a permissible
alternative to pre-borrowing is the payment of a
C o n tin u e d

33770

Federal Register / Vol. 60, No. 125 / Thursday, June 29, 1995 / Proposed Rules

b. D iv id en d rein v estm en t a n d s t o c k
p u r c h a s e p la n s . In addition to pre­
borrowing, com m enters such as the
NYSE and several broker-dealers suggest
that broker-dealers be permitted to
borrow securities in order to participate
in an issu er’s dividend reinvestm ent
and stock purchase plan. These plans
allow dividends, and often additional
funds, to be used to purchase additional
shares of the issuer, usually at a
discount from the current stock price.
Board staff opinions and SEC
enforcem ent actions have made clear
that Regulation T as currently written
does not perm it the borrowing of
securities for this purpose.30
The Board is not proposing to include
dividend reinvestm ent and stock
purchase plans as a permitted purpose
for borrowing securities. Perm itting
such borrowing would not be consistent
with existing Board policy concerning
borrowing and lending securities. The
Board has perm itted securities lending
where it is needed for the smooth
operation of the securities m arkets, i.e.
short sales and fails to receive
securities. T his view was echoed by the
Group of Thirty when they
recom m ended removing im pedim ents to
securities lending to allow delivery of
securities. Participation in dividend
reinvestm ent and stock purchase plans
does not help the securities markets
com plete transactions as broker-dealers
do not actually want or need possession
o f the securities. Nevertheless, in light
of com m ents received indicating that
many issuers view these programs as a
less costly m eans of raising capital, the
Board is soliciting com ment on whether
section 220.16 of Regulation T should
be amended to accom m odate these
plains.
c. O ther p u r p o s e s . The PSA, SIA and
a broker-dealer recomm end adding
repurchase agreements to the list of
permitted purposes. Since a repurchase
agreement represents the sale o f a
security w ith a promise to repurchase it
at a later date, a creditor who does not
own the security subject to the
repurchase agreement is engaging in a
short sale and therefore may borrow the
security pursuant to section 220.16 of
Regulation T .31
One broker-dealer believes
institutions such as banks and insurance
commitment fee to a stock lender. See staff opinion
of October 22, 1990, FRRS 5-615.18.
30 Staff Opinions of March 2, 1984, FRRS 5-615.1
and July 6 ,1 9 8 4 , FRRS 5-615.01; see also In re RFG
Options, SEC Administrative Proceeding File No.
3-63 7 0 , September 26, 1988.
31 As noted in footnote 29, all transactions
involving government securities may be effected in
the government securities account without regard to
other provisions of Regulation T.

com panies should be able to borrow
securities from a creditor if they say it
is for a permitted purpose. However,
Regulation T and the U.S. securities
markets in general presume that the
borrowing of securities w ill be effected
by the broker-dealer that executes the
trade. Perm itting an entity other than a
broker-dealer to borrow securities for a
transaction effected by a broker-dealer
would permit circum vention of the
Board’s margin requirem ents.
C. B orrow in g b y C reditors
All of the com m enters addressing
section 8(a) of the Act, w hich lim its the
source of certain loans to broker-dealers
to member banks and some nonm em ber
banks, support expansion of the types of
lenders described in section 8(a) or a
reduction in the types of transactions
subject to the restriction. T he SEC has
recently exem pted all listed debt
securities from the scope of section 8(a)
of the A ct,32 w ith the result that only
loans secured by exchange-traded equity
securities are still subject to the
restriction.
A wide variety o f com m enters
recomm end legislation be introduced to
loosen the restrictions of section 8(a).
Such legislation is currently pending in
Congress.33
V. Section-by-Section Explanation of
Proposed Changes
S ectio n 2 2 0 .2

D efin ition s

The following new definitions are
being proposed: c a s h eq u iv a len t,
c o v e r e d o p tio n tra n sa ctio n , e x e m p te d
sec u rities m u tu a l fu n d , fo r eig n p er so n ,
m o n e y m a r k e t m u tu a l fu n d , non-U .S.
tr a d e d fo reig n secu rity , a n d p e r m itte d
o ffs e t p o sitio n . T he following
definitions would be m odified: e s c r o w
ag reem en t, in th e m o n ey , m argin
secu rity, O TC m arg in b o n d , OTC m arg in
sto ck , sh o rt c a ll o r sh o rt p u t, a n d
u n d erlyin g secu rity . The definition of in
or at the m oney would be deleted and
SEC-approved rules of the appropriate
SRO would govern permitted offsets for
specialists.
S ectio n 2 2 0 .3

G en era l P rov ision s

Section 220.3(e)(4), “Receipt of funds
or secu rities,” is used by creditors to
temporarily finance the exercise of a
custom er’s em ployee stock option. The
section would be reworded to permit
such short-term financing for anyone
entitled to receive or acquire any
securities pursuant to an SEC-registered
employee benefit plan.
32SEC Rule 3 a l 2 - l l , 17 CFR 2 4 0 .3 a l2 - ll,
published at 59 FR 55342, November 7, 1994.
33H.R. 1062, 104th Cong., 1st Sess.

Section 2 2 0 .3(i), “Variable annuity
contracts issued by insurance
com panies,” would be deleted, although
no substantive change is intended.
S ectio n 2 2 0 .4

M argin A cco u n t

Section 220.4(b) would contain all
provisions o f section 220.5, except for
those covering specific options
transactions. T he options provisions
would be deleted and SEC-approved
rules of the SROs would apply to these
transactions.
Section 220.4(c) would no longer
prohibit a margin excess in a foreign
currency subaccount from offsetting a
margin d eficiency in another foreign
currency subaccount.
S ectio n 2 2 0 .5
A ccou n t

S p e c ia l M em oran d u m

This account would be moved from
section 220.6. No substantive changes
are proposed.
S ectio n 2 2 0 .6
A cco u n t

G ov ern m en t S ecu rities

This account would be moved from
section 220.18. No substantive changes
are proposed.
S ectio n 2 2 0 .8

C ash A ccou n t

Section 220.8(a), Perm issible
tran sactions,” would be amended in two
ways. First, the cash account would
recognize industry practice and
specifically perm it the sale to a
custom er o f any asset on a cash basis.
Second, the covered options
transactions perm itted under section
220.8(a)(3) would be broadened to
include any eligible transaction
designated by the SEC-approved rules of
the SROs.
Section 220.8(b), “Tim e periods for
payment; cancellation or liquidation,”
would perm it creditors to accept full
cash payment from custom ers for the
purchase of foreign securities up to one
day after the regular way settlement
date.
S ectio n 220.11
A cc o u n t

B rok er-D ea ler C redit

Three substantive changes are being
proposed to section 220.11(a),
“Perm issible transactions.” First,
foreign broker-dealers would be
permitted to use the account for
delivery-versus-payment transactions
with U.S. broker-dealers. Second, joint
back office arrangements would require
a reasonable relationship betw een the
ow ners’ equity interest and the amount
of business effected or financed by the
joint back office. Third, “ prime broker”
arrangements set up under SEC
guidelines would be able to use this

Federal Register / Vol. 60, No. 125 / Thursday, June 29, 1995 / Proposed Rules
account for transactions effected at
executing broker-dealers.
S ection 220.12
A ccou n t

M arket F u n ctio n s

Section 220.12(b), “ Sp ecialists,”
would be amended to allow SECapproved rules of the SROs to determ ine
which permitted offsets can be effected
on a good faith basis.
S ection 220.13
O thers

A rranging f o r L o a n s by

Changes are proposed for this section
in two areas. First, the provision
allowing U.S. broker-dealers to arrange
for customers to obtain credit from a
foreign lender to purchase foreign
securities would be expanded to cover
short sales w hile the overall coverage of
this provision would be lim ited to
foreign securities that are not publicly
traded in the United States. Second, the
regulation would explicitly permit U.S.
broker-dealers to sell its custom ers
foreign securities with installm ent
features if the offering has only a small
U.S. com ponent.
Section 2 2 0 .1 6
S ecu rities

B orrow in g a n d L en d in g

Two changes are proposed for this
section. First, the required collateral
would be expanded to include
marginable foreign sovereign debt
securities and any collateral that is
acceptable to the SEC when a brokerdealer borrows securities from its
customer. Second, U.S. broker-dealers
would be able to lend foreign securities
to a foreign person for any legal purpose
and against any legal collateral.
S ection 220.18
R equ irem en ts

S u p p le m en t: M argin

Several changes are being proposed.
Options would be given fifty percent
loan value if listed on a national
securities exchange. Mutual funds
whose portfolio is limited to exempted
securities would be given good faith
loan value, as would money market
mutual funds.
VI. Regulatory Flexibility Act
The Board believes there w ill be no
significant econom ic impact on a
substantial number of small entities if
this proposal is adopted. Comments are
invited on this statement.
VII. Paperwork Reduction Act
No additional reporting requirem ents
or m odification to existing reporting
requirements are proposed.
List of Subjects in 12 CFR P art 220
Banks, banking, Bonds, Brokers,
Credit, Federal Reserve System , Margin,

33771

Margin requirem ents, Investm ent
com panies, Investm ents, Reporting and
recordkeeping requirem ents, Securities.
For the reasons set out in the
preamble, the Board proposes to amend
12 CFR Part 220 as follows:

association, or creditor from im posing
additional requirem ents or taking action
for its own protection.
(3) This part does not apply to
transactions betw een a custom er and a
broker or dealer registered only under
section 15C of the Act.

PART 220— CREDIT BY BROKERS
AND DEALERS (REGULATION T)

§ 220.2

1. The authority citation for Part 220
continues to read as follow s:
Authority: 15 U.S.C. 78c, 78g, 78h, 78q,
and 78w.

2. The table of contents for part 220
is amended by revising the entries for
§§ 2 2 0 .1 -2 2 0 .1 8 and renaming the entry
for § 220.19 to read as follow s:
Sec.
220.1 Authority, purpose, and scope.
220.2 D efinitions.
220.3 General provisions.
220.4 Margin account.
220.5 Special m em orandum account.
220.6 Governm ent securities account.
220.7 Arbitrage account.
220.8 Cash account.
220.9 N onsecurities credit and em ployee
stock ow nership account.
220.10 Om nibus account.
220.11 Broker-dealer credit account.
220.12 Market functions account.
220.13 Arranging for loans by others.
220.14 Clearance o f securities, options, and
futures.
220.15 Borrow ing by creditors.
220.16 Borrow ing and lending securities.
220.17 Requirem ents for the list of
m arginable OTC stocks and the list of
foreign margin stocks.
220.18 Supplem ent: Margin requirem ents.
*

*

*

*

*

3. Sections 220.1 through 2 2 0 .1 8 are
revised to read as follows:
§ 220.1

Authority, purpose, and scope.

(a) A u th ority a n d p u r p o s e . Regulation
T (this part) is issued by the Board of
Governors of the Federal Reserve
System (the Board) pursuant to the
Securities Exchange Act of 1934 (the
Act) (15 U.S.C. 78a et seq.). Its principal
purpose is to regulate extensions of
credit by and to brokers and dealers; it
also covers related transactions w ithin
the Board’s authority under the Act. It
imposes, among other obligations,
initial margin requirem ents and
payment rules on securities
transactions.
(b) S co p e. (1) This part provides a
margin account and eight special
purpose accounts in w hich to record all
financial relations betw een a custom er
and a creditor. Any transaction not
specifically permitted in a special
account shall be recorded in a margin
account.
(2) This part does not preclude any
exchange, national securities

Definitions.

The terms used in this part have the
meanings given them in section 3(a) of
the Act or as defined in this section.
C ash eq u iv a le n t m eans securities
issued or guaranteed by the United
States or its agencies, negotiable bank
certificates of deposit, bankers
acceptances issued by banking
institutions in the United States and
payable in the United States, or money
market mutual funds.
C o v ered o p tio n tra n sactio n means:
(1) In the case of a short call, the
underlying security (or a security
im m ediately convertible into the
underlying security, without the
payment of money) is held in or
purchased for the account on the same
day, and the option premium is held in
the account until cash payment for the
underlying or convertible security is
received; or
(2) In the case of a short put, the
creditor obtains cash in an amount
equal to the exercise price or holds in
the account cash equivalents w ith a
current market value at least equal to
the exercise price and with one year or
less to maturity; or
(3) Any other transaction involving
options or warrants in w hich the
custom er’s risk is lim ited to a fixed
amount and is not subject to early
exercise if:
(i) The amount at risk is held in the
account in cash, cash equivalents, or via
an escrow receipt; and
(ii) The transaction has been defined
as eligible for the cash account by the
rules of the registered national securities
exchange authorized to trade the option
or warrant, provided that all such rules
have been approved or amended by the
SEC.
C redit b a la n c e means the cash
amount due the custom er in a margin
account after debiting amounts
transferred to the special memorandum
account.
C red itor means any broker or dealer
(as defined in sections 3(a)(4) and
3(a)(5) of the Act), any member of a
national securities exchange, or any
person associated with a broker or
dealer (as defined in section 3(a)(18) of
the Act), except for business entities
controlling or under com mon control
with the creditor.
C u stom er includes:
(1) Any person or persons acting
jointly:

33772

Federal Register / Vol. 60, No. 125 / Thursday, June 29, 1995 / Proposed Rules

(1) To or for whom a creditor extends,
arranges, or m aintains any credit; or
(ii) Who would be considered a
custom er of the creditor according to the
ordinary usage of the trade;
(2) Any partner in a firm who would
be considered a custom er o f the firm
absent the partnership relationship; and
(3) Any joint venture in w hich a
creditor participates and w hich would
be considered a custom er of the creditor
if the creditor were not a participant.
D ebit b a la n c e means the cash amount
owed to the creditor in a margin account
after debiting am ounts transferred to the
special memorandum account.
D elivery ag a in st p a y m e n t, P aym en t
a g ain st d eliv ery , o r a C.O.D. tran saction
refers to an arrangement under which a
creditor and a custom er agree that the
creditor w ill deliver to, or accept from,
the customer, or the custom er’s agent, a
security against full payment of the
purchase price.
E qu ity m eans the total current market
value o f security positions held in the
margin account plus any credit balance
less the debit balance in the margin
account.
E scrow a g re em e n t means any
agreement issued in connection with a
call or put option under which a bank
or any person designated as a control
location under paragraph (c) of SEC
Rule 15c3— (17 CFR 2 4 0 .1 5 c 3 -3 ),
3
holding the underlying security, foreign
currency, certificate of deposit, or
required cash, is obligated to deliver to
the creditor (in the case of a call option)
or accept from the creditor (in the case
o f a put option) the underlying security,
foreign currency, or certificate of
deposit against payment of the exercise
price upon exercise of the call or put.
E x am in in g a u th o rity means:
(1) The national securities exchange
or national securities association of
w hich 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.
E x e m p te d se c u rities m u tu a l fu n d
m e a n s any security issued by an
investm ent com pany registered under
section 8 of the Investment Company
Act of 1940 (15 U.S.C. 80a-8), provided
the com pany has at least 95 percent of
its assets continuously invested in
exempted securities (as defined in
section 3(a)(12) of the Act).
F oreign m argin s t o c k means: (1) A
foreign security that is an equity
security and that appears on the Board’s
periodically published List of Foreign
Margin Stocks based on information
submitted by a self-regulatory
organization under procedures
approved by the Board. F oreig n p er so n

means a person other than a United
States person as defined in section 7(f)
of the Act.
F oreign secu rity m eans a security
issued in a ju risd iction other than the
United States.
G o o d fa ith m arg in means the amount
of margin w hich a creditor, exercising
sound credit judgment, would
customarily require for a specified
security position and w hich is
established without regard to the
custom er’s other assets or securities
positions held in connection with
unrelated transactions.
In th e m o n e y m eans the current
market price of the underlying security
or index is not below (with respect to
a call option) or above (with respect to
a put option) the exercise price of the
option.
M argin c a ll m eans a demand by a
creditor to a custom er for a deposit of
additional cash or securities to
elim inate or reduce a margin deficiency
as required under this part.
M argin d e fic ie n c y means the amount
by w hich the required margin exceeds
the equity in the margin account.
M argin e x c e s s m eans the amount by
which the equity in the margin account
exceeds the required margin. W hen the
margin excess is represented by
securities, the current value of the
securities is subject to the percentages
set forth in § 220.18 (Supplem ent:
Margin requirem ents).
M argin secu rity means:
(1) Any registered security;
(2) Any OTC margin stock;
(3) Any OTC margin bond;
(4) Any OTC security designated as
qualified for trading in the National
Market System under a designation plan
approved by the Securities and
Exchange Com m ission (NMS security);
(5) Any security issued by either an
open-end investm ent com pany or unit
investment trust w hich is registered
under section 8 of the Investment
Company Act of 1940 (15 U.S.C. 8 0 a -8 );
(6) Any foreign margin stock; or
(7) Any debt security convertible into
a margin security.
M on ey m a r k e t m u tu a l fu n d means
any security issued by an investment
company registered under section 8 of
the Investment Company Act of 1940
(15 U.S.C. 8 0 a -8 ) that is considered a
money market fund under SEC Rule 2 a 7 (17 CFR 270.2a—
7).
N o n e x em p ted se cu rity means any
security other than an exempted
security (as defined in section 3(a)(12)
of the Act).
N o n m em b er b a n k means a bank that
is not a member of the Federal Reserve
System.
Non-U .S. tr a d e d fo r eig n secu rity
means a foreign security that is neither

a registered security nor one listed on
NASDAQ.
OTC m arg in b o n d means:
(1)
A debt security not traded on a
national securities exchange which
meets all o f the follow ing requirements:
(1) At the tim e of the original issue, a
principal am ount o f not less than
$ 2 5 ,0 0 0 ,0 0 0 of the issue was
outstanding;
(ii) The issue was registered under
section 5 of the Securities Act of
1933(15 U.S.C. 77e) and the issuer
either files periodic reports pursuant to
section 13(a) or 15(d) of the Act o r is an
insurance com pany w hich meets all of
the conditions specified in section
12(g)(2)(G) o f the A ct; and
(iii) At the tim e of the extension of
credit, the creditor has a reasonable
basis for believing that the issuer is not
in default on interest or principal
payments; or
(2) A private pass-through security
(not guaranteed by an agency of the U .S.
government) m eeting all of the
following requirem ents:
(i) An aggregate principal amount of
not less than $ 2 5 ,0 0 0 ,0 0 0 (w hich maybe
issued in series) was issued pursuant to
a registration statem ent filed with the
SEC under section 5 of the Securities
A ct of 1933 (15 U.S.C. 77e);
(ii) Current reports relating to the
issue have been filed w ith the SEC; and
(iii) At the tim e of the credit
extension, the creditor has a reasonable
basis for believing that mortgage
interest, principal payments and other
distributions are being passed through
as required and that the servicing agent
is meeting its material obligations under
the terms o f the offering; or
(3) A mortgage related security as
defined in section 3(a)(41) of the Act; or
(4) A debt security issued or
guaranteed as a general obligation by the
government of a foreign country, its
provinces, states, or cities, or a
supranational entity, if at the time of the
extension o f credit one of the following
is rated in one o f the two highest rating
categories by a nationally recognized
statistical rating organization:
(i) The issue;
(ii) The issuer or guarantor
(im plicitly); or
(iii) Other outstanding unsecured
long-term debt securities issued or
guaranteed by the government or entity;
or
(5) A foreign security that is a
nonconvertible debt security that meets
all o f the follow ing requirements:
(i) At the tim e of original issue, a
principal amount o f at least
$ 1 0 0 ,0 0 0 ,0 0 0 was outstanding;
(ii) At the tim e of the extension of
credit, the creditor has a reasonable

Federal Register / Vol. 60, No. 125 / Thursday, June 29, 1995 / Proposed Rules
basis for believing that the issuer is not
in default on interest or principal
payments; and
(iii) At the tim e of the extension of
credit, the issue is rated in one of the
two highest rating categories by a
nationally recognized statistical rating
organization, except that an issue that
has not been rated as o f the effective
date of this provision shall be
considered an OTC margin bond if a
subsequent unsecured issue o f at least
$1 0 0 ,000,000 of the same issuer is rated
in one of the two highest rating
categories by a nationally recognized
statistical rating organization.
OTC m argin s to c k m eans any equity
security traded over-the-counter that the
Board has determ ined has the degree of
national investor interest, the depth and
breadth of market, the availability of
inform ation respecting the security and
its issuer, and the character and
perm anence o f the issuer to warrant
being treated like an equity security
traded on a national securities
exchange. An OTC stock is not
considered to be an OTC margin stock
unless it appears on the Board’s
periodically published list of OTC
margin stocks.
O verlying o p tio n means:
(1) A put option purchased or a call
option written against a long position in
an underlying security in the specialist
record in § 220.12(b); or
(2) A call option purchased or a put
option written against a short position
in an underlying security in the
specialist record in § 220.12(b).
P ay m en t p e r io d m eans the number of
business days in the standard securities
settlem ent cycle in the United States, as
defined in paragraph (a) of SEC Rule
1 5 c 6 - l (17 CFR 2 4 0 .1 5 c 6 -l), plus two
business days.
P erm itted o ffs e t p o s itio n means a
position in securities or other'assets
underlying options in w hich a specialist
makes a market or a position in options
overlying the securities in w hich a
specialist makes a market, provided the
positions qualify as permitted offsets
under the rules of the national securities
exchange w ith w hich the specialist is
registered, provided that all such rules
have been approved or amended by the
SEC.
P u rp o se c re d it m eans credit for the
purpose of:
(1) Buying, carrying, or trading in
securities; or
(2) Buying or carrying any part of an
investm ent contract security which
shall be deemed credit for the purpose
o f buying or carrying the entire security.
R eg istered secu rity means any
security that:

(1) Is registered on a national
securities exchange; or
(2) Has unlisted trading privileges on
a national securities exchange.
S h ort c a ll o r sh o r t p u t m eans a call
option or a put option that is issued,
endorsed, guaranteed or sold in or for an
account.
(1) A short call that is not cash-settled
obligates the custom er to sell the
underlying asset at the exercise price
upon receipt of a valid exercise notice.
(2) A short put that is not cash-settled
obligates the custom er to purchase the
underlying asset at the exercise price
upon receipt of a valid exercise notice.
(3) A short call or a short put that is
cash-settled obligates the custom er to
pay the holder of an in the money long
put or call who has exercised the option
the cash difference betw een the exercise
price and the current assigned value of
the option as established by the option
contract.
S p e c ia lis t jo in t a c c o u n t means an
account w hich, by written agreement,
provides for the com m ingling of the
security positions of the participants
and a sharing o f profits and losses from
the account on some predeterm ined
ratio.
U nderlying sec u rity means:
(1) the security that w ill be delivered
upon exercise of an option; or
(2) In the case of a cash-settled option,
the securities w hich com prise the index
in the same proportion or any other
asset from w hich the op tion’s value is
derived.
§ 220.3

General provisions.

(a) R eco rd s. The creditor shall
maintain a record for each account
showing the full details of all
transactions.
(b) S ep a r a tio n o f a c c o u n ts. Except as
provided for in the margin account and
the special memorandum account, the
requirem ents of an account may not be
met by considering item s in any other
account. If withdraw als o f cash or
securities are perm itted under the
regulation, written entries shall be made
when cash or secu rities are used for
purposes o f m eeting requirem ents in
another account.
(c) M a in ten a n ce o f cred it. Except as
prohibited by this part, any credit
initially extended in com pliance with
this part may be m aintained regardless
of:
(1) Reductions in the custom er’s
equity resulting from changes in market
prices;
(2) Any security in an account ceasing
to be margin or exem pted; or
(3) Any change in the margin
requirem ents prescribed under this part.
(d) G u ara n tee o f a c c o u n ts. No
guarantee of a custom er’s account shall

33773

be given any effect for purposes of this
part.
(e) R e c eip t o f fu n d s o r secu rities. (1)
A creditor, acting in good faith, may
accept as im m ediate payment:
(1) Cash or any check, draft, or order
payable on presentation; or
(ii) Any security w ith sight draft
attached.
(2) A creditor may treat a security,
check or draft as received upon written
notification from another creditor that
the specified security, check , or draft
has been sent.
(3) Upon notification that a check,
draft, or order has been dishonored or
when securities have not been received
w ithin a reasonable tim e, the creditor
shall take the action required by this
part when payment or secu rities are not
received on time.
(4) To tem porarily finance a
custom er’s receipt o f stock pursuant to
an em ployee benefit plan registered on
SEC Form S -8 , a creditor may accept, in
lieu of the securities, a properly
executed exercise notice and
instructions to the issuer to deliver the
stock to the creditor. Prior to
acceptance, the creditor must verify that
the issuer w ill deliver the securities
promptly and the custom er must
designate the account into w hich the
securities are to be deposited.
(f) E x c h a n g e o f se cu rities . (1) To
enable a custom er to participate in an
offer to exchange secu rities w hich is
made to all holders of an issue of
securities, a creditor may submit for
exchange any securities held in a
margin account, w ithout regard to the
other provisions of this part, provided
the consideration received is deposited
into the account.
(2) If a nonmargin, nonexem pted
security is acquired in exchange for a
margin security, its retention,
withdrawal, or sale w ithin 60 days
follow ing its acquisition shall be treated
as if the security is a margin security.
(g) V aluing secu rities. T he current
market value o f a security shall be
determ ined as follows:
.(1) Throughout the day o f the
purchase or sale o f a security, the
creditor shall use the secu rity’s total
cost o f purchase or the net proceeds of
its sale including any com m issions
charged.
(2) At any other tim e, the creditor
shall use the closing sale price of the
security on the preceding business day,
as shown by any regularly published
reporting or quotation service. If there is
no closing price, the creditor may use
any reasonable estim ate of the market
value of the security as o f the close of
business on the preceding business day.

33774

Federal Register / Vol. 60, No. 125 / Thursday, June 29, 1995 / Proposed Rules

(h) In n o c e n i m ista k e s. If any failure to
com ply w ith this part results from a
m istake made in good faith in executing
a transaction or calculating the amount
of margin, the creditor shall not be
deemed in violation of this part if,
promptly after the discovery of the
m istake, the creditor takes appropriate
corrective action.
§ 220.4

Margin account.

(a) M argin tran saction s. (1) All
transactions not specifically authorized
for inclu sion in another account shall be
recorded in the margin account.
(2)
A creditor may establish separate
margin accounts for the same person to:
(i) Clear transactions for other
creditors where the transactions are
introduced to the clearing creditor by
separate creditors; or
(ii) Clear transactions through other
creditors if the transactions are cleared
by separate creditors; or
(iii) Provide one or more accounts
over w hich the creditor or a third party
investm ent adviser has investment
discretion.
(b) R eq u ir ed m argin — (1)
A p p lic a b ility . The required margin for
each long or short position in securities
is set forth in § 220.18 (Supplement:
Margin requirem ents) and is subject to
the follow ing exceptions and special
provisions.
(2) S h ort s a le ag ain st th e b o x . A short
sale “against the b ox” shall be treated as
a long sale for the purpose of computing
the equity and the required margin.
(3) W hen is s u e d secu rities. The
required margin on a net long or net
short com m itm ent in a when issued
security is the margin that would be
required if the security were an issued
margin security, plus any unrealized
loss on the com m itm ent or less any
unrealized gain.
(4) S to c k u s e d a s cov er, '(i) W hen a
short position held in the account serves
in lieu of the required margin for a short
put, the amount prescribed by
paragraph (b)(1) of this section as the
amount to be added to the required
margin in respect of short sales shall be
increased by any unrealized loss on the
position.
(ii) W hen a security held in the
account serves in lieu of the required
margin for a short call, the security shall
be valued at no greater than the exercise
price of the short call.
(5) A cco u n ts o f p artn ers. If a partner
of the creditor has a margin account
with the creditor, the creditor shall
disregard the partner’s financial
relations w ith the firm (as shown in the
partner’s capital and ordinary drawing
accounts) in calculating the margin or
equity of the partner’s margin account.

(6) C on trib u tion to jo in t ven tu re. If a
margin account is the account o f a joint
venture in w hich the creditor
participates, any interest of the creditor
in the joint account in excess of the
interest w hich the creditor would have
on the basis o f its right to share in the
profits shall be treated as an extension
o f credit to the joint account and shall
be margined as such.
(7) T ra n sfer o f a cco u n ts, (i) A margin
account that is transferred from one
creditor to another may be treated as if
it had been m aintained by the transferee
from the date o f its origin, if the
transferee accepts, in good faith, a
signed statem ent o f the transferor (or, if
that is not practicable, o f the customer),
that any margin call issued under this
part has been satisfied.
(ii) A margin account that is
transferred from one custom er to
another as part o f a transaction, not
undertaken to avoid the requirem ents of
this part, may be treated as if it had been
m aintained for the transferee from the
date o f its origin, if the creditor accepts
in good faith and keeps w ith the
transferee account a signed statement of
the transferor describing the
circum stances for the transfer.
(8) C red it d e n o m in a te d in fo reig n
cu rren cy . A creditor may extend credit
denom inated in a foreign currency
secured by foreign margin securities
denom inated or traded in the same
foreign currency and specifically
identified on the creditor’s books and
records as securing the foreign currency
debit.
(c)
W hen a d d it io n a l m argin is
re q u ire d — (1) C om p u tin g d efic ien c y . All
transactions on the same day shall be
com bined to determ ine whether
additional margin is required by the
creditor. For the purpose of computing
equity in an account, security positions
are established or elim inated and a
credit or debit created on the trade date
of a security transaction. Additional
margin is required on any day when the
day’s transactions create or increase a
margin deficiency in the account and
shall be for the amount of the margin
d eficien cy so created or increased.
(2) S a tisfa c tio n o f d eficien cy . The
additional required margin may be
satisfied by a transfer from the special
memorandum account or by a deposit of
cash, margin securities, exempted
securities, or any com bination thereof.
(3) T im e lim its, (i) A margin call shall
be satisfied w ithin one payment period
after the margin deficiency was created
or increased.
(ii) The payment period may be
extended for one or more limited
periods upon application by the creditor
to its exam ining authority unless the

exam ining authority believes that the
creditor is not acting in good faith or
that the creditor has not sufficiently
determ ined that exceptional
circum stances warrant such action.
A pplications shall be filed and acted
upon prior to the end of the payment
period or the expiration of any
subsequent extension.
(4)
S a tis fa c tio n restriction . Any
transaction, position, or deposit that is
used to satisfy one requirement under
this part shall be unavailable to satisfy
any other requirem ent.
(a) L iq u id a tio n in lieu o f d ep o s it. If
any margin call is not met in full within
the required tim e, the creditor shall
liquidate secu rities sufficient to meet
the margin ca ll or to elim inate any
margin d eficien cy existing on the day
such liquidation is required, whichever
is less. If the margin deficiency created
or increased is $ 1 0 0 0 or less, no action
need be taken by the creditor.
(e) W ith d ra w a ls o f c a s h o r secu rities.
(1) Cash or securities may be withdrawn
from an accou nt, except if:
(1) A dditional cash or securities are
required to be deposited into the
account for a transaction on the same or
a previous day; or
(ii) T he withdraw al, together with
other transactions, deposits, and
withdraw als on the same day, would
create or increase a margin deficiency.
(2) Margin excess may be withdrawn
or may be transferred to the special
memorandum account (§ 220.5) by
making a single entry to that account
w hich w ill represent a debit to the
margin account and a credit to the
special m em orandum account.
(3) If a creditor does not receive a
distribution of cash or securities w hich
is payable w ith respect to any security
in a margin account on the day it is
payable and withdraw al would not be
permitted under paragraph, (e) of this
section, a withdraw al transaction shall
be deemed to have occurred on the day
the distribution is payable.
(f) In terest, se r v ic e ch a rg es, etc. (1)
W ithout regard to the other provisions
of this section, the creditor, in its usual
practice, may debit the following items
to a margin account if they are
considered in calculating the balance of
such account:
(i) Interest charged on credit
m aintained in the margin account;
(ii) Prem ium s on securities borrowed
in'con n ection w ith short sales or to
effect delivery;
(iii) D ividends, interest, or other
distributions due on borrowed
securities;
(iv) Com m unication or shipping
charges w ith respect to transactions in
the margin account; and

Federal Register / Vol. 60, No. 125 / Thursday, June 29, 1995 / Proposed Rules
tv) Any other service charges which
the creditor may impose.
(2) A creditor may permit interest,
dividends, or other distributions
credited to a margin account to be
withdraw n from the account if:
(i) The withdrawal does not create or
increase a margin deficiency in the
account; or
(ii) The current market value of any
securities withdrawn does not exceed
10 percent of the current market value
of the security with respect to w hich
they were distributed.

33775

(b)
A purchase of a security w hich is,
(D) A security owned by the customer
without restriction other than the
has matured or has been redeemed and
payment of money, exchangeable or
a new refunding security of the same
convertible w ithin 90 calendar days of
issuer has been purchased by the
the purchase into a second security
custom er, provided:
together with an offsetting sale o f the
(2)
T h e custom er purchased the new
second security at or about the same
security no more than 35 calendar days
tim e, for the purpose of taking
prior to the date of maturity or
advantage of a concurrent disparity in
redem ption of the old security;
the prices of the two securities.
(2) T h e custom er is entitled to the
proceeds o f the redemption; and
§2 2 0.8 Cash account.
(3) T h e delayed payment does not
(a) P erm iss ib le tran saction s. In a cash
exceed 103 percent of the proceeds of
accou nt, a creditor, may:
the old security.
(1)
Buy for or sell to any custom er any
(ii) In the case o f the purchase of a
security or other asset if:
§220.5 Special memorandum account.
foreign security, w ithin one payment
(1) There are sufficient funds in the
(a) A special memorandum account
period o f the trade date or w ithin one
account; or
(SMA) may be maintained in
(ii) The creditor accepts in good faith day after the date on w hich settlement
conjunction with a margin account. A
is required to occur by the rules of the
the cu stom er’s agreement that the
single entry amount may be used to
foreign secu rities market, provided this
custom er w ill promptly make full cash
represent both a credit to the SMA and
period does not exceed the maximum
payment for the security or asset before
a debit to the margin account. A transfer
tim e perm itted by this part for delivery
selling it and does not contem plate,
betw een the two accounts may be
against payment transactions.
selling it prior to making such payment;
effected by an increase or reduction in
(2) D eliv ery ag ain st p a y m en t. If a
(2) Buy from or sell for any customer
the entry. When computing the equity
creditor purchases for or sells to a
any security or other asset if:
in a margin account, the single entry
(i) T h e security is held in the account; custom er a security in a delivery against
amount shall be considered as a debit in
payment transaction, the creditor shall
or
the margin account. A payment to the
(ii) T he creditor accepts in good faith
have up to 35 calendar days to obtain
custom er or on the custom er’s behalf or
the custom er’s statement that the
payment if delivery o f the security is
a transfer to any of the custom er’s other
security is owned by the custom er or the delayed due to the m echanics of the
accounts from the SMA reduces the
cu stom er’s principal, and that it will be
transaction and is not related to the
single entry amount.
prom ptly deposited in the account;
custom er’s w illingness or ability to pay.
(b) The SMA may contain the
(3 ) Issue, endorse, guarantee, or sell
(3) S h ip m e n t o f sec u rities, ex ten sion .
follow ing entries:
an option for any custom er as part of a
If any shipm ent of securities is
(1) Dividend and interest payments;
covered option transaction; and
incid ental to consum m ation of a
(2) Cash not required by this part,
(4) Use an escrow agreement in lieu
transaction, a creditor may extend the
including cash deposited to meet a
o f the cash or underlying security
payment period by the number of days
m aintenance margin call or to meet any
position if:
required for shipm ent, but not by more
requirem ent of a self-regulatory
(i) In the case of a short call or a short
than one additional payment period.
organization that is not imposed by this
put, the creditor is advised by the
(4) C a n c ella tio n ; liq u id a tio n ;
part;
custom er that the required securities or
m in im u m am ou n t. A creditor shall
(3) Proceeds of a sale of securities or
cash are held by a person authorized to
prom ptly can cel or otherwise liquidate
cash no longer required on any expired
issue an escrow agreement and the
a transaction or any part of a transaction
or liquidated security position that may
creditor independently verifies that the
for w hich the custom er has not made
be withdrawn under § 220.4(e); and
appropriate escrow agreement will be
full cash payment within the required
(4) Margin excess transferred from the delivered by the person promptly; or
time. A creditor may, at its option,
margin account under § 220.4(e)(2).
(ii) In the case of a call issued,
disregard any sum due from the
endorsed, guaranteed, or sold on the
custom er not exceeding $1000.
§ 220.6 Government securities account.
same day the underlying security is
(c)
9 0 d a y fr e e z e . (1) If a nonexempted
In a government securities account, a
purchased in the account and the
security in the account is sold or
creditor may effect and finance
underlying security is to be delivered to
delivered to another broker or dealer
transactions involving government
a person authorized to issue an escrow
w ithout having been previously paid for
securities, provided the transaction is
agreem ent, the creditor verifies that the
in full by the custom er, the privilege of
not prohibited by section 15C of the Act
appropriate escrow agreement will be
delaying payment beyond the trade date
or any rule thereunder.
delivered by the person promptly.
shall be withdraw n for 90 calendar days
(b) T im e p e r io d s f o r p a y m en t;
§ 220.7 Arbitrage account.
follow ing the date of sale of the security.
c a n c e lla tio n o r liq u id a tio n — (1) F u ll
In an arbitrage account a creditor may
Cancellation of the transaction other
c a s h p a y m en t. A creditor shall obtain
effect and finance for any customer
than to correct an error shall constitute
full cash payment for customer
b o n a fi d e arbitrage transactions. For the
a sale.
purchases—
purpose of this section, the term “ b o n a
(2) The 90 day freeze shall not apply
(i)
W ithin one payment period of the
f i d e arbitrage” means:
if:
date:
(a)
A purchase or sale of a security in
(i)
W ithin the period specified in
(A) Any nonexem pted security was
one market together with an offsetting
paragraph (b)(1) of this section, full
purchased;
sale or purchase of the same security in
payment is received or any check or
(B) Any when issued security was
a different market at as nearly the same
made available by the issuer for delivery draft in payment has cleared and the
tim e as practicable for the purpose of
proceeds from the sale are not
to purchasers;
taking advantage of a difference in
(C) Any ‘‘when distributed” security
withdrawn prior to such payment or
prices in the two markets; or
was distributed under a published plan;
check clearance; or

33776

Federal Register / Vol. 60, No. 125 / Thursday, June 29, 1995 / Proposed Rules

(ii) The purchased security was
delivered to another broker or dealer for
deposit in a cash account w hich holds
sufficient funds to pay for the security.
The creditor may rely on a written
statement accepted in good faith from
the other broker or dealer that sufficient
funds are held in the other cash
account.
(d) E x ten sion o f tim e p e r io d s ;
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
circum stances warrant such action, it
.may upon application by the creditor:
(1) 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) A pplications 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.

the SEC under section 15 o f the A ct and
who gives the creditor w ritten notice
that:
(1) All securities w'ill be for the
account of custom ers of the broker or
dealer; and
(2) Any short sales effected w ill be
short sales made on beh alf of the
customers of the broker or dealer other
than partners.
(b)
The written notice required by
paragraph (a) shall conform to any SEC
rule on the hypothecation o f custom ers’
securities by brokers or dealers.
§ 220.11

Broker-dealer credit account.

(a) P erm issib le tr a n sa ctio n s. In a
broker-dealer credit account, a creditor
may:
(1) Purchase any security from or sell
any security to another creditor or
person regulated by a foreign securities
authority under a good faith agreement
to promptly deliver the security against
full payment of the purchase price.
(2) Effect or finance transactions of
any of its owners if the creditor is a
clearing and servicing broker or dealer
owned jointly or individually by other
creditors, provided that the ow ners’
interest is reasonably related to the
amount of business they transact
through the joint back office.
§ 220.9 Nonsecurities credit and employee
(3) Extend and m aintain credit to any
stock ownership account.
partner or stockholder of the creditor for
the purpose of making a capital
(a) In a nonsecurities credit account a
contribution to, or purchasing stock of,
creditor may:
the creditor, affiliated corporation or
(1) Effect and carry transactions in
com m odities;
another creditor.
(4) Extend and m aintain, with the
(2) Effect and carry transactions in
approval of the appropriate examining
foreign exchange;
authority:
(3) Extend and m aintain secured or
(i) Credit to meet the emergency needs
unsecured nonpurpose credit, subject to
the requirements of paragraph (b) of this of any creditor; or
(ii) Subordinated credit to another
section; and
creditor for capital purposes, if the other
(4) Extend and m aintain credit to
creditor:
employee stock ow nership plans
(A) Is an affiliated corporation or
without regard to the other sections of
would not be considered a custom er of
this part.
the lender apart from the subordinated
(b) Every extension of credit, except
loan; or
as provided in paragraphs (a)(1) and
(B) W ill not use the proceeds of the
(a)(2) of this section, shall be deemed to
loan to increase the amount o f dealing
be purpose credit unless, prior to
in securities for the account o f the
extending the credit, the creditor
creditor, its firm or corporation or an
accepts in good faith from the customer
a written statement that it is not purpose affiliated corporation.
(5) Effect transactions for a customer
credit. The statement shall conform to
as part of a “prime broker” arrangement
the requirements established by the
in conform ity w ith SEC guidelines.
Board. To accept the custom er’s
(b) A ffilia ted c o rp o r a tio n s . For
statement in good faith, the creditor
purposes of paragraphs (a)(3) and (a)(4)
shall be aware o f the circum stances
o f this section “ affiliated corporation”
surrounding the extension of credit and
means a corporation all the common
shall be satisfied that the statement is
stock of w hich is owned directly or
truthful.
indirectly by the firm or general
§220.10 Omnibus account.
partners and em ployees of the firm, or
(a)
In an om nibus account, a creditor by the corporation or holders of the
may effect and finance transactions for
controlling stock and em ployees of the
a broker or dealer who is registered with corporation and the affiliation has been

approved by the cred itor’s examining
authority.
§ 220.12

Market functions account.

(a) R eq u irem en ts. In a market
functions account, a creditor may effect
or finance the transactions o f market
participants in accordance w ith the
following provisions. A separate record
shall be kept for the transactions
specified for each category described in
paragraphs (b) through (e) of this
section. Any position in a separate
record shall not be used to meet the
requirem ents of any other category.
(b) S p ecia lists— (1) A p p lic a b ility . A
creditor may clear or finance specialist
transactions and perm itted offset
positions for any specialist, or any
specialist joint account, in w hich all
participants, or all participants other
than the creditor, are registered as
specialists on a national securities
exchange that requires regular reports
on the use of specialist credit from the
registered specialists.
(2) R eq u ir ed m argin . The required
margin for a sp ecialist’s transactions
shall be:
(i) Good faith margin for:
(A) Any long or short position in a
security in w hich the specialist makes a
market;
(B) Any w holly-ow ned margin
security or exem pted security; or
(C) Any permitted offset position.
(ii) The margin prescribed by § 2 2 0 .1 8
(Supplem ent: Margin requirements)
when a security purchased or sold short
in the account does not qualify as a
specialist or permitted offset position.
(3) A d d itio n a l m a rg in ; restriction on
“fr e e -r id in g ”, (i) Except as required by
paragraph (b)(4) of this section, the
creditor shall issue a margin call on any
day when additional margin is required
as a result of specialist transactions. The
creditor may allow the specialist a
maximum of one payment period to
satisfy a margin call.
(ii) If a specialist fails to satisfy a
margin call within the period specified
in paragraph (b)(3) of this section (and
the creditor is required to liquidate
securities to satisfy the call), the creditor
shall be prohibited for a 1 5 calendar day
period from extending any further credit
to the specialist to finance transactions
in nonspecialty securities.
(iii) The restriction on “ free-riding”
shall not apply to:
(A) Any specialist on a national
securities exchange that has an SECapproved rule on “ free-riding” by
specialists; or
(B) T he acquisition or liquidation of a
permitted offset position.
(4) D eficit statu s. On any day when a
sp ecialist’s separate record would

Federal Register / Vol. 60, No. 125 / Thursday, June 29, 1995 / Proposed Rules
liquidate to a deficit, the creditor shall
not extend any further specialist credit
in the account and shall issue a margin
call at least as large as the deficit. If the
call is not met by noon of the following
business day, the creditor shall liquidate
positions in the sp ecialist’s account.
(5)
W ithdraw als. W ithdrawals may be
perm itted to the extent that the equity
exceed s the margin requirem ents
sp ecified in paragraph (b)(2) of this
section.
(c) U nderw riters a n d d istribu tors. A
creditor may effect or finance for any
dealer or group o f dealers transactions
for the purpose of facilitating the
underwriting or distribution of all or a
part of an issue of securities w ith a good
faith margin.
(d) OTC m a r k e tm a k e r s a n d th ird
m a r k etm a k ers . (1) A creditor may clear
or finance with a good faith margin,
marketmaking transactions for a creditor
who is a registered NASDAQ
marketmaker or a qualified third
marketmaker as defined in SEC Rule
3 b -8 (17 CFR 240.3b—
8).
(2)
If the credit extended to a
marketmaker ceases to be for the
purpose of marketmaking, or the dealer
ceases to be a marketmaker for an issue
of securities for w hich credit was
extended, the credit shall be subject to
the margin specified in § 220.18
(Supplement: Margin requirements).
(e) O dd-lot d ea lers . A creditor may
clear and finance odd-lot transactions
for any creditor who is registered as an
odd-lot dealer on a national securities
exchange with a good faith margin.

33777

as prescribed in paragraph (b) o f this
Securities Act of 1933 under section
section, w hich agreement is still in
4(2) of section 4(6) of the Act;
(3) A subsequent loan or advance on
effect; or
(3)
From another creditor if the loan
a face-amount certificate as permitted
is perm issible under this part.
under 15 U.S.C. 8 0 a -2 8 (d ); or
(b) A g reem en ts o f n o n m e m b e r b a n k s.
(4) Credit extended by a foreign
(1) A nonmem ber bank shall file an
person in connection with the purchase
agreement that conform s to the
or short sale of non-U.S. traded foreign
requirem ents of section 8(a) of the Act
securities.
(b) A creditor shall not be deemed to (See Form FR T — T -2 ).
1,
(2)
Any nonmem ber bank may
have arranged credit by effecting the
term inate its agreement if it obtains the
sale of a foreign security offered on an
written consent of the Board.
installm ent basis if no more than 15
percent of the issue is offered to United
§ 220.16 Borrowing and lending securities.
States persons as defined in section 7(f)
(a) W ithout regard to the other
o f the Act.
provisions of this part, a creditor may
§ 220.14 Clearance of securities, options,
borrow or lend securities for the
and futures.
purpose of making delivery of the
(a) C redit f o r c le a r a n c e o f secu rities.
securities in the case of short sales,
The provisions of this part shall not
failure to receive securities required to
apply to the extension or m aintenance
be delivered, or other sim ilar situations.
of any credit that is not for more than
Each borrowing shall be secured by a
one day if it is incidental to the
deposit of one or more of the following:
clearance of transactions in securities
cash, cash equivalents, foreign sovereign
directly between members of a national
nonconvertible debt securities that are
securities exchange or association or
margin securities, collateral acceptable
through any clearing agency registered
for borrowings of securities pursuant to
with the SEC.
SEC Rule 15c3— (17 CFR 2 4 0 .1 5 c3 -3 ),
3
(b) D ep osit o f se cu rities with a
or irrevocable letters of credit issued by
clea rin g ag en cy . The provisions o f this
a bank insured by the Federal Deposit
part shall not apply to the deposit of
Insurance Corporation or a foreign bank
securities with an options or futures
that has filed an agreement with the
clearing agency for the purpose of
Board on Form FR T — T -2 . Such
1,
meeting the deposit requirem ents o f the
deposit made with the lender of the
agency if:
securities shall have at all tim es a value
,(1) The clearing agency:
at least equal to 100 percent o f the
(1) Issues, guarantees perform ance on,
market value o f the securities borrowed,
or clears transactions in, any security
com puted as of the close of the
(including options on any security,
preceding business day.
certificate of deposit, securities index or
(b) A creditor may lend non-U.S.
foreign currency); or
traded foreign securities to a foreign
§ 220.13 Arranging for loans by others.
(ii) Guarantees performance of
person for any purpose lawful in the
country in w hich they are to be used.
(a)
A creditor may not arrange for the contracts for the purchase or sale of a
commodity for future delivery or
Each borrowing shall be secured with
extension or m aintenance o f credit to or
options on such contracts;
collateral having at all tim es a value at
for any custom er by any person upon
(2) The clearing agency is registered
least equal to 100 percent of the market
terms and conditions other than those
with the Securities and Exchange
value of the securities borrowed,
upon which the creditor may itself
Commission or is the clearing agency for computed as of the close of the
extend or m aintain credit under the
a contract market regulated by the
preceding business day.
provisions of this part, except that this
Commodity Futures Trading
lim itation shall not apply to credit
§220.17 Requirements for the list of
Commission; and
arranged for a custom er w hich does not
(3) The deposit consists of any margin marginable OTC stocks and the list of
violate parts 207 and 221 of this chapter
foreign margin stocks.
security and com plies w ith the rules of
and results solely from:
(a)
R eq u irem en ts f o r in c lu sio n on th e
the clearing agency that have been
(1) Investment banking services,
list o f m a r g in a b le OTC sto ck s. Except as
approved by the Securities and
provided by the creditor to the
provided in paragraph (f) of this section,
Exchange Commission or the
customer, including, but not lim ited to,
OTC margin stock shall meet the
Commodity Futures Trading
underwritings, private placem ents, and
following requirements:
Commission.
advice and other services in connection
(1) Four or more dealers stand w illing
with exchange offers, mergers, or
§ 220.15 Borrowing by creditors.
to, and do in fact, make a market in such
acquisitions, except for underwritings
stock and regularly submit bona fide
(a)
R estriction s on borrow in g. A
that involve the public distribution of
creditor may not borrow in the ordinary
bids and offers to an automated
an equity security w ith installm ent or
quotations system for their own
course of business as a broker or dealer
other deferred payment provisions;
accounts;
using as collateral any registered
(2) The sale o f nonmargin securities
(2) The minimum average bid price of
nonexempted security, except:
(including securities with installm ent or
(1) From or through a mem ber bank of such stock, as determined by the Board,
other deferred payment provisions) if
is at least $5 per share;
the Federal Reserve System ; or
the sale is exempted from the
(3) The stock is registered under
(2) From any nonmem ber bank that
registration requirem ents of the
has filed with the Board an agreement
section 12 of the Act, is issued by an

33778

Federal Register / Vol. 60, No. 125 / Thursday, June 29, 1995 / Proposed Rules

insurance com pany subject to section
12(g)(2)(G) o f the Act, is issued by a
closed-end investm ent management
company subject to registration
pursuant to section 8 of the Investm ent
Company Act of 1940 (15 U.S.C. 8 0 a -8 ),
is an Am erican Depository Receipt
(ADR) of a foreign issuer whose
securities are registered under section
12 of the A ct, or is a stock of an issuer
required to file reports under section
15(d) of the Act;
(4) Daily quotations for both bid and
asked prices for the stock are
continuously available to the general
public;
(5) The stock has been publicly traded
for at least six months;
(6) The issuer has at least $4 m illion
of capital, surplus, and undivided
profits;
(7) There are 400,000 or more shares
of such stock outstanding in addition to
shares held beneficially by officers,
directors or beneficial owners o f more
than 10 percent of the stock;
(8) There are 1,200 or m ore holders of
record, as defined in SEC Rule 12g5—
1(17 CFR 2 4 0 .1 2 g 5 -l), of the stock who
are not officers, directors or beneficial
owners of 10 percent or more o f the
stock, or the average daily trading
volume of such stock as determ ined by
the Board, is at least 500 shares; and
(9) The issuer or a predecessor in
interest has been in existence for at least
three years.
(b) R eq u irem en ts f o r c o n tin u ed
in clu sion on th e list o f m a r g in a b le OTC
stocks. Except as provided in paragraph
(f) of this section, OTC margin stock
shall meet the following requirem ents;
(1) Three or more dealers stand
w illing to, and do in fact, make a market
in such stock and regularly subm it bona
fide bids and offers to an automated
quotations system for their own
accounts;
(2) The m inimum average bid price of
such stocks, as determ ined by the
Board, is at least $2 per share;
(3) The stock is registered as specified
in paragraph (a)(3) o f this section;
(4) Daily quotations for both bid and
asked prices for the stock are
continuously available to the general
public;
(5) The issuer has at least $1 m illion
of capital, surplus, and undivided
profits;
(6) There are 300,000 or m ore shares
of such stock outstanding in addition to
shares held beneficially by officers,
directors, or beneficial owners o f more
than 10 percent of the stock; and
(7) There continue to be 8 0 0 or more
holders of record, as defined in SEC
Rule 12g5— (17 CFR 2 4 0 .1 2 g 5 -l), o f the
1
stock who are not officers, directors, or

beneficial owners o f 10 percent or more
of the stock, or the average daily trading
volume of such stock, as determ ined by
the Board, is at least 300 shares.
(c) R eq u irem en ts f o r in c lu sio n o n th e
list o f fo r eig n m arg in s to c k s. E xcept as
provided in paragraph (f) o f this section,
foreign margin stock shall m eet the
following requirem ents:
(1) The security is listed for trading on
or through the facilities of a foreign
securities exchange or a recognized
foreign securities market and has been
trading on such exchange or market for
at least six m onths;
(2) Daily quotations for both bid and
asked or last sale prices for the security
provided by the foreign securities
exchange or foreign securities market on
w hich the security is traded are
continuously available to creditors in
the United States pursuant to an
electronic quotation system;
(3) The aggregate market value of
shares, the ownership o f w hich is
unrestricted, is not less than $1 b illion ;
(4) The average weekly trading
volume of such security during the
preceding six months is either at least
200.000 shares or $1 m illion; and
(5) T he issuer or a predecessor in
interest has been in existence for at least
five years.
(d) R eq u irem en ts f o r c o n tin u e d
in clu sio n o n th e list o f fo r e ig n m argin
sto cks. Except as provided in paragraph
(f) of this section, foreign margin stock
shall meet the follow ing requirem ents:
(1) The security continues to meet the
requirem ents specified in paragraphs (c)
(1) and (2) of this section;
(2) The aggregate m arket value of
shares, the ow nership o f w h ich is
unrestricted, is not less than $500
m illion; and
(3) The average weekly trading
volume of such security during the
preceding six months is either at least
100.000 shares or $500,000.
(e) R em o v a l fr o m th e lists. T he Board
shall periodically remove from the lists
any stock that:
(1) Ceases to exist or of w hich the
issuer ceases to exist; or
(2) No longer substantially m eets the
provisions of paragraphs (b) or (d) of
this section or the definition o f OTC
margin stock.
(f) D iscretio n a ry au th o r ity o f B o ard .
W ithout regard to other paragraphs of
this section, the Board may add to, or
omit or remove from the list of
marginable OTC stocks and the list of
foreign margin stocks and equity
security, if in the judgment of the Board,
such action is necessary or appropriate
in the public interest.
(g) U nlaw ful re p rese n ta tio n s. It shall
be unlawful for any creditor to make, or

cause to be made, any representation to
the effect that the inclusion o f a security
on the list of marginable OTC stocks or
the list of foreign margin stocks is
evidence that the Board or the SEC has
in any way passed upon the m erits of,
or given approval to, such security or
any transactions therein. Any statement
in an advertisem ent or other sim ilar
com m unication containing a reference
to the Board in connection w ith the lists
or stocks on those lists shall be an
unlawful representation.
§220.18 Supplement: Margin
requirements.

The required margin for each security
position held in a margin account shall
be as follows:
(a) Margin equity security, except for
an exempted security, m oney market
mutual fund or exempted securities
mutual fund: 50 percent o f the current
market value of the security or the
percentage set by the regulatory
authority where the trade occurs,
w hichever is greater.
(b) Exempted security, registered
nonconvertible debt security, OTC
margin bond, money market mutual
fund or exempted securities mutual
fund: The margin required by the
creditor in good faith or the percentage
set by the regulatory authority where the
trade occurs, w hichever is greater.
(c) Short sale of nonexem pted
security, except for a registered
nonconvertible debt security or OTC
margin bond: 150 percent of the current
market value o f the security, or 100
percent o f the current market value if a
security exchangeable or convertible
within 90 calendar days without
restriction other than the payment of
money into the security sold short is
held in the account.
(d) Short sale of an exem pted security,
registered nonconvertible debt security
or OTC margin bond: 100 percent o f the
current market value of the security plus
the margin required by the creditor in
good faith.
(e) Nonmargin, nonexem pted security:
100 percent of the current market value.
(f) Short put or short call on a
security, certificate of deposit, securities
index or foreign currency:
(1) In the case of puts and calls issued
by a registered clearing corporation and
listed or traded on a registered national
securities exchange or a registered
securities association, the amount, or
other position, specified by the rules of
the registered national securities
exchange or the registered securities
association authorized to trade the
option, provided that all such rules have
been approved or amended by the SEC;
or

Federal Register / Vol. 60, No. 125 / Thursday, June 29, 1995 / Proposed Rules
(2)
In the case of all other puts and
calls, the amount, or other position,
specified by the m aintenance rules of
the cred itor’s exam ining authority.
§220.19

[Removed]

4. Section 229.19 is removed.
By order of the Board of Governors of
the Federal Reserve System, June 21,
1995.
W illiam W . W iles,

Secretary o f the Board.
[FR Doc. 9 5 -1 5 6 8 0 Filed 6 - 2 8 -9 5 ; 8:45 am]
BILLING C O D E 6 2 1 0 - 0 1 - P

33779

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