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Federal R eserve B ank OF DALLAS ROBERT D. M c T E E R , J R . PRESIDENT AND CH IE F E X EC U TIV E O F F I C E R November 16, 1994 DALLAS, TEXAS 75265-5906 Notice 94-111 TO: The Chief Executive Officer of each member bank and others concerned in the Eleventh Federal Reserve District SUBJECT Final Amendments to Regulation T (Credit By Brokers and Dealers) DETAILS The Board of Governors of the Federal Reserve System has published final amendments to Regulation T (Credit by Brokers and Dealers) regarding payment for securities purchases and the status of government securities transactions. One amendment specifies that customers must meet initial margin calls or make full cash payment for securities purchased at a broker-dealer within two business days of the standard settlement period. When a standard settlement period of three days adopted by the Securities and Exchange Commission goes into effect in June 1995, Regulation T will be in conformity. Related amendments raise the de minimis amount below which liquidation of unpaid transactions is not required from $500 to $1000, require brokers seeking exten sions of the payment periods to obtain them from their designated examining authority, and clarify that the time periods provided for certain securities with extended settlement periods are the time periods used to calculate when restrictions in the cash account are applied. The other amendments address transactions involving U.S. government securities. The amendments become effective November 25, 1994. ATTACHMENT A copy of the Board’s notice as it appears on pages 53565-68, Vol. 59, No. 205, of the Federal Register dated October 25, 1994, is attached. For additional copies, bankers and others are encouraged to use one of the following toll-free numbers in contacting the Federal Reserve Bank of Dallas: Dallas Office (800) 333 -4460; El Paso Branch Intrastate (800) 592-1631, Interstate (800) 351-1012; Houston Branch Intrastate (800) 392-4162, Interstate (800) 221-0363; San Antonio Branch Intrastate (800) 292-5810. This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) 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. 59, No. 205 / Tuesday, October 25, 1994 / Rules and Regulations ACTION: Final rule. SUMMARY: The Board is adopting amendments to Regulation T. The amendments are part of the Board’s review of Regulation T and respond to rulemaking by the Securities and Exchange Commission (SEC) concerning settlement of securities transactions and Congressional action concerning government securities. The proposed amendments were published for public comment in the Federal Register on July 1,1994. The amendments address two general areas: payment periods for securities purchases and transactions in government securities. The amendments concerning payment periods will reduce by two days the amount of time customers have to meet initial margin calls or make full cash payment for securities at the same time the SEC reduces the standard settlement period by two days, require broker-dealers seeking an extension of this time period to obtain the extension from their designated examining authority if the balance due is $1000 or more, and revise regulatory language in the cash account so that the time periods within which extensions must be obtained and when the “90-day freeze” may be lifted are consistent for certain transactions in which settlement exceeds the standard settlement period. The amendments concerning transactions in government securities will exempt from Regulation T those broker-dealers registered with the SEC'solely as government securities brokers or dealers and create a new account for customers of general brokerdealers that permits transactions in government securities to be effected without regard to other provisions of the regulation. EFFECTIVE DATE: November 25,1994. FEDERAL RESERVE SYSTEM 12 CFR Part 220 [R egulation T; D ocket No. 0840) Credit by Brokers and Dealers AGENCY: Board of Governors of the Federal Reserve System. 53565 commenters in favor, some opposed, and some requesting a delay in the amendments’ effectiveness. The related payment period issues were generally supported by the commenters, with the exception of the requirement that extensions be obtained solely from the broker-dealer’s examining authority and the use of language that will automatically reduce the payment periods if the standard settlement cycle is reduced. Comments on these issues were also mixed. The Board is adopting the proposed amendments substantially as proposed. Technical changes have been made in the regulatory language and structure to respond to comments and clarify the intent of the amendments. The two general areas are discussed below. I. Payment Periods A. T+3 and Shortening o f Payment Periods 1. Introduction. On October 6,1993, the SEC adopted Rule 15c6-l,* which establishes a standard three business day settlement cycle for most securities transactions in the United States, effective June 1,1995. Regular settlement is presently effected in five business days. This new standard is often referred to as "T+3,” meaning regular settlement will occur three business days after trade date. Regulation T contains a seven day time period within which brokers must obtain cash or margin deposits from their customers. The seven day payment period in Regulation T is based on the current five day settlement period. The Board proposed shortening the payment period in Regulation T by the same amount of time that SEC Rule 15c6-l shortens the standard settlement cycle. Instead of changing the phrase "seven business days” to "five business FOR FURTHER INFORMATION CONTACT: days,” the proposal defined a new term, Scott Holz, Senior Attorney or Angela "payment period,” to represent the Desmond, Senior Attorney, Division of number of days in the standard Banking Supervision and Regulation settlement cycle plus two business days. (202) 452-2781; for the hearing This formulation allows the regulation impaired only, Telecommunications to be amended immediately without Device for the Deaf (TDD), Dorothea changing the current payment period. Thompson (202) 452-3544. Once SEC Rule 15c6-l becomes * SUPPLEMENTARY INFORMATION: The effective next June, the regulation will proposed amendments are part of the automatically require payment within Board’s general review of Regulation T five business days. Although the (Docket R-0772) and were published for definition of payment period refers to public comment on July 1,1994 (59 FR settlement date, Regulation T remains a 33923). Twenty-two comments have trade date based regulation. The use of been received. The comments on the the phrase "payment period” is meant proposed amendments concerning to be an alternate way of requiring transactions in government securities payment within seven business days were supported by all commenters, until June 1995 and five business days although some asked for additional thereafter, unless the SEC acts to further amendments. The comments concerning the proposed reduction in payment »17 CFR 240.15c6-l; 58 FR 52891 (October 13, 1993). periods were mixed, with some 53566 Federal Register / Vol. 59, No. 205 / Tuesday, October 25, 1994 / Roles and; Regulations change the standard settlement cycle. Future changes by the SEC would be automatically incorporated in the Board’s rule without the necessity of further amendment. 2. Issues raised by commenters. Comments on the proposal to shorten the payment periods in conjunction with the SEC’s shortening of the standard settlement cycle were focused on three issues: whether the payment periods should be shortened, whether the proposed language clearly accomplishes this goal, and whether future reductions in the standard settlement period should be automatically accommodated or reviewed by the Board. a. Shortening the payment period by two days. The Board is adopting the proposed amendments, subject to the clarification discussed in section b below. Many of the commenters who oppose shortening the payment periods had written to the SEC last year to oppose its T+3 proposal. The Board and the SEC both have responsibilities in the area of settlement and clearance. Shortening the Regulation T payment periods is consistent with (if not required by) the SEC’s adoption of a three day settlement cycle. A failure to adjust the payment periods would lessen the overall benefits to be realized from the transition to T+3 and increase risk to the broker-dealer community since they will have to settle trades amongst themselves in the shortened time frame while allowing their customers’ behavior and payment patterns to remain unchanged. Increased risk to broker-dealers also affects customers with cash and securities at those firms. Adoption of the proposed amendments by the Board does not reduce the two-day period currently provided to resolve payment problems, but merely clarifies that two days beyond the usual settlement date should be sufficient to resolve any mistakes in the payment process. Some of the commenters opposed to shortening the payment periods in conjunction with the shortening of the standard settlement cycle believe that the mail system does not permit funds to be delivered within this time frame. However, the increased use of fax machines and money market mutual funds provide alternate ways for customers to make prompt payment for their securities purchases. Although fbe Board shares the concerns expressed about investors who rely on the mail to pay for securities, it believes that most investors will be able to adjust to the shortened periods. Indeed, the Bachmann Task Force on Clearance and Settlement Reform in U.S. Securities Markets, which recommended to the SEC that the standard settlement cycle be reduced to T+3, stated that it “believes that current customer behavior practices should not be an obstacle to shortened settlement provided there is strong leadership from within the industry and educational efforts to address customer and account executive concerns.” 2 Many of the commenters stressed the fact that the brokerage industry is already educating customers about the approach of T+3 settlement and the changes this will entail. The Board is of the view that the successful implementation of T+3 includes a reduction in the Regulation T payment periods. It is expected that broker-dealers w ill be working with customers who may have difficulty making prompt payment. A delay in the effectiveness of shortening the payment periods would not necessarily improve the educational process, which is already well underway at most firms, and might serve as an excuse for others to delay their educational efforts. b. Uniform payment period. The proposed term “payment period” was defined as the two business days beyond “the standard securities settlement cycle in the United States.” This phrase was meant to refer to the current five day settlement cycle for most securities transactions until SEC Rule 15c6-l becomes effective next June, at which time the Board’s regulation would be referring t 9 the three day period established in the SEC rule. Additional language has been added to the definition of payment period to clarify this point. Some commenters believed the reference to a “standard settlement cycle” dependson the type of security being purchased, so that trades involving standardized options or government securities, both of which settle the day after trade date, would have to be paid for by the third business day after trade date. Although broker-dealers can require payment for transactions'by settlement date of the particular trade, Regulation T establishes a standard period within which customers must make payment even though certain securities settle in less than die Current five day period. It was not the intent of the Board to change this general policy. c. Impact of further reductions in settlement periods. As noted in the request for public comment, one of the reasons for using the phrase “payment period” instead of a fixed number of days was to ensure that future reductions in the settlement cycle would be automatically reflected in 2 57 FR 27819 (June 22,1992). Regulation T, without the need for further amendments. Commenters were evenly split on whether thte Board should be forced to review the Regulation T payment periods whenever the standard settlement cycle is altered. The proposed language has been retained. In light of the fact that investors are expected to pay for securities on settlement date, tying the payment period to the standard settlement, cycle merely codifies the Board’s current position that two business days should be sufficient to insure that a failure to receive the customer’s payment is not due to an error or other exceptional circumstance. B. Granting o f Extensions of Time by a Broker-dealer’s Examining Authority If a customer has not made full cash payment or met an initial margin call within the payment period, the brokerdealer must liquidate the customer’s position. However, if exceptional circumstances exist, the broker-dealer can obtain an extension for its customer. Regulation T currently permits any selfregulatory organization (SRO) to grant these extensions. A New York Stock Exchange (NYSE) rule recently approved by the SEC requires brokerdealers for whom the NYSE is the designated examining authority (DEA) to obtain these extensions only from the NYSE.3 Although the Board could leave Regulation T unchanged and most broker-dealers would still be required to go to their DEA instead of any SRO, the Board proposed amending Regulation T to require that extensions be granted only by a broker-dealer’s DEA. This decision was based on analysis of the comments received by the Board in response to its advance notice of proposed rulemaking concerning the current review of Regulation T and the SEC’s consideration of the NYSE rule filing. No new information was presented in this area. The Board is therefore adopting the requirement that extensions be granted by a brokerdealer’s DEA. C. Technical Amendments Concerning Foreign Securities The Board proposed technical amendments to the cash account to clear up confusion resulting from its 1990 amendment allowing payment for foreign securities to be tied to the appropriate foreign settlement period. The amendments would clarify that this longer period is also used to determine when extensions of time must be 3 NYSE Rule 434; SEC approval: 59 FR 26826 (May 24,1994); Securities Exchange Act Release 34073 (May 17.1994). Federal Register / Vol. 59, No. 205 / Tuesday, October 25, 1994 / Rules and Regulations obtained and when the “90-day freeze” may be lifted for foreign securities. Two securities trade associations point out that the cash account establishes three other situations in which settlement regularly exceeds the standard settlement cycle: unissued securities, “when-issued” securities, and refunded securities.4 These commenters suggest the proposed language be revised to consistently refer to the various time periods in determining when extensions are required and when the "90-day freeze” may be lifted. These amendments have been redrafted to accommodate this suggestion. “creditors” when they are not dealing with “customers.” For example, the commenters point out that the term “creditor” is used in the broker-dealer credit account to describe permissible transactions between broker-dealers. In light of these comments, the exclusion has been moved to the scope section of Regulation T. B. Government Securities Account The second amendment proposed in the area of government securities was the creation of a new government securities account. This account would allow general broker-dealers to effect customer transactions that could be D. De Minimis Amount effected by Section 15C Brokers without The required liquidation of customer regard to other restrictions in Regulation purchases for which payment has not T. In addition to general support of the been received within the required time proposal, commenters focused on two currently does not apply to amounts of areas: the regulatory language used to $500 or less. The Board proposed describe the account and whether doubling this amount to $1000 in light additional securities and other financial of the ten years that had passed since instruments should be included in its the amount was last increased. This scope. increase was supported by a wide 1. Description. The government variety of commenters. The increase to securities account was proposed for $1000 will still reduce the regulatory “transactions involving government burden on broker-dealers and their securities, provided the transaction examining authorities by reducing the would be permissible for a broker or number of extensions that must be dealer registered under section 15C of requested and processed. the act.” The PSA and the SIA both II. Government Securities suggest deletion of the reference to Section 15C Brokers because they Two amendments were proposed to believe it is confusing and unnecessary. exempt most transactions in * * * They argue that section 15C does not government securities from Regulation establish permissible and impermissible T. The first exempts those brokers and dealers who effect customer transactions classes of transactions in government securities. However, section 15C(b)(7) of only in government securities (Section the Act prohibits government securities 15C Brokers). The second amendment brokers and dealers from effecting “any effectively exempts transactions transaction * * * in any government involving government securities for security in contravention of any rule customers of general securities brokerunder this section.” The regulatory dealers by allowing the transactions to language for the government securities be effected in a new government account has been redrafted to clarify securities account. All of the that it is available for transactions commenters supported these two involving government securities as long proposed amendments. as the transaction is not prohibited A. Exemption from Regulation T for under section 15C or any of the rules Brokers and Dealers Whose Activities thereunder. are Limited to Government Securities 2. Scope. The PSA, SIA, SIA-Credit The scope of Regulation T, as stated Division and one broker-dealer suggest in section 220.1(b)(1), is “all financial that all exempted securities, including relations between a customer and a municipal securities, be included in the creditor.” In order to exempt Section new account. A second broker-dealer 15C brokers'from Regulation T, the would include foreign sovereign debt Board proposed excluding them from that meets the margin requirements of the definition of creditor in section Regulation T. In addition, three of these 220.2(b) of the regulation. The Public commenters believe that all Securities Association (PSA) and the nonconvertible debt securities that meet Securities Industry Association (SLA) the margin requirements of Regulation T suggest that the exclusion be moved to should be eligible for the account and the scope section, so that Section 15C one of these commenters would like brokers would still be defined as “money market instruments” such as certificates of deposit, bankers « See § 220.8(b)(l)(i)(BHD) of Regulation T acceptances and commercial paper to be 53567 covered by the new account. All of these suggestions will be considered in the course of Board’s review of Regulation T, with an opportunity for public comment. As explained in the request for public comment on the proposed government securities account, the rationale for the new account stems from the unique regulatory scheme established for U.S. government securities and brokers and dealers in that market. Regulatory Flexibility Act The Board certifies that this final rule will not have a significant economic impact on a substantial number of small entities. Paperwork Reduction Act This regulation imposes no additional reporting requirements or modification to existing reporting requirements. List of Subjects in 12 CFR Part 220 Banks, Banking, Bonds, Brokers, Commodity futures, Credit, Federal Reserve System, Investment companies, Investments, Margin, Margin requirements, National Market System (NMS Security), Reporting and recordkeeping requirements, Securities. For the reasons set out in the preamble, 12 CFR part 220 is amended as follows: PART 220—CREDIT BY BROKERS AND DEALERS (REGULATION T) 1. The authority citation for Part 220 is revised to read as follows: Authority: 15 U.S.C. 78c, 78g, 78h, 78q, and 78w. 2. Section 220.1 is amended as follows: a. The word “seven” in the first sentence of paragraph (b)(1) is revised to read “eight”. b. A new paragraph (b)(3) is added to read as follows: § 220.1 Authority, purpose, and scope. * * . * * * (b) * * * (3) This part does not apply to transactions between a customer and a broker or dealer registered only under section 15C of the Act. 3. Section 220.2 is amended as follows: a. Paragraph (h) is revised. b. Paragraphs (w) through (aa) are redesignated as paragraphs (x) through (bb) and new paragraph (w) is added. The revisions and additions read as follows: § 220.2 Definitions. * * * * * 53568 Federal Register / Vol. 59, No. 205 / Tuesday, October 25, 1994 / Rules and Regulations (h) Examining authority means: (1) The national securities exchange or national securities association of which a creditor is a member; or (2) If a member of more than one selfregulatory organization, the organization designated by the SEC as the examining authority for the creditor. * * * * (3) Shipment o f securities, extension. If any shipment of securities is incidental to consummation of a transaction, a creditor may extend the payment period by the number of days required for shipment, but by not more than one additional payment period. * * * * * * (c) * * * (w) Payment period means the number of business days in the standard (2) * * * securities settlement cycle in the United (i) Within the period specified in States, as defined in SEC Rule 15c6-l paragraph (b)(1) of this section, full (17 CFR 240.15c6— under the Act, plus 1) payment is received or any check or two business days. Until June 1,1995, draft in payment has cleared and the payment period means seven business proceeds from the sale are not days. • withdrawn prior to such payment or * * * * ■ » r check clearance; or 4. In § 220.4, the figure “$500” in * * * * * paragraph (d) is revised to read “$1000” and paragraph (c)(3) is revised to read (d) Extension o f time periods; as follows: transfers. (1) Unless the creditor’s examining authority believes that the §220.4 Margin account. creditor is not acting in good faith or * * * * * that the creditor has not sufficiently (c) * * * (3) Time limits, (i) A margin call shall determined that exceptional circumstances warrant such action, it be satisfied within one payment period may upon application by the creditor: after the margin deficiency was created (1) Extend any period specified in or increased. (ii) The payment period may be paragraph (b) of this section; extended for one or more limited (ii) Authorize transfer to another periods upon application by the creditor account of any transaction involving the to its examining authority unless the purchase of a margin or exempted examining authority believes that the security; or creditor is not acting in good faith or (iii) Grant a waiver from the 90 day that the creditor has not sufficiently freeze. determined that exceptional circumstances warrant such action. (2) Applications shall be filed and Applications shall be filed and acted acted upon prior to the end of the upon prior to the end of the payment payment period, or in the case of the period or the expiration of any purchase of a foreign security within the subsequent extension. period specified in paragraph (b)(l)(ii) * * * * * of this section, or the expiration of any 5. In § 220.8, the figure “$500” in subsequent extension. paragraph (b)(4) is revised to read §220.18 [Redesignatedas§220.19] “$1000” and paragraphs (b)(l)(i) (introductory text, (b)(l)(ii), (b)(3), 6. Section 220.18 is redesignated as ’ (c)(2)(i), and (d) are revised to read as § 220.19 and new § 220.18 is added to follows: read as follows: §220.8 Cash account * * * * § 220.18 Government securities account. * (b) . * * (1) * * * (i) Within one payment period of the date: * * * * * (ii) In the case of the purchase of a foreign security, within one payment period of the trade date or the date on which settlement is required to occur by the rules of the foreign securities market, provided this period does not exceed the maximum time permitted by this part for delivery against payment transactions. In a government securities account, a creditor may effect and finance transactions involving government securities, provided the transaction is not prohibited by section 15C of the Act or any rule thereunder. By order of the Board of Governors of the Federal Reserve System, October 18,1994. Jennifer J. Johnson, Depu ty Secretary of the Board. (FR Doc. 94-26357 Filed 10-24-94; 8:45 am) BILLING CODE 6210-01-P
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