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F ederal Reserve b a n k o f Dallas

DALLAS, TEXAS

75222
Circular No. 72-113
June l k 9 1972

MODIFIED PROPOSED AMENDMENTS
REGULATIONS T AND U
("Block Positioners" and "Third-Market Makers")

To All Banks, Broker/Dealers and Others Concerned in the Eleventh Federal
Reserve District:

On May 30, 1972, the Board of Governors of the Federal Reserve
System re-issued for comment a modified proposal to exempt from margin re­
quirements certain credit extended to so-called "Block Positioners" and
"Third-Market Makers".
Block Positioners are securities firms that stand ready to hold
amounts of stock for their own account sufficient to facilitate the sale or
purchase by their customers— primarily institutions— of quantities too large
to be absorbed by normal exchange transactions.
The minimum block of stock that could qualify for the exemptions
from margin requirements would have a market value of $200,000. A block
would also have to be sold by the block positioner within 20 days (instead
of 15 days as originally proposed), although limited extensions of five days
at a time could be allowed by the stock exchanges and the National Association
of Securities Dealers.
The modified proposal also would: (l) Require a specialist to re­
port through a stock exchange to the Board of the blocks of stock that he
holds and the credit extended to carry those blocks. (This provision replaces
an original proposal that would have required a specialist to dispose of a
block within 15 days.); (2) Require Third-^Market Makers and Over-The-CounterMarket Makers to register and file reports with the Securities and Exchange
Commission about their market-making activities. (The original proposal would
also have required Third-Market Makers and OTC market makers to dispose of a
block within 15 days.); and (3) Change the net capital requirements for ThirdMarket Makers and Block Positioners to reflect the range deemed necessary for
carrying out these functions.
Third-Market Makers are firms that make a market off the exchanges
in stocks that are listed for exchange trading.
Printed on the following pages is the text of the modified amendments.
Comments thereon should be addressed to the Secretary, Board of Governors of the
Federal Reserve System, Washington, D. C. 20551? to be received not later than
June 30, 1972.
Very truly yours,
P. E. Coldwell,
President

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)

(Regs. T and U)
C R E D IT BY BROKERS A N D D E A L E R S
C R E D IT BY BANKS FOR T H E PURPOSE OF
PUR C H A S IN G OR C A R R Y IN G MARGIN STOCKS
Exempt Credit to S pecialists, O T C Market Makers,
Third-Market Makers and Block Positioners

By notice of proposed rulemaking published in the
Federal Register on February 4, 1971 (36 F. R.
2412-2414), the Board of Governors proposed to exempt
from margin requirements credit extended by banks
and brokers or dealers to block positioners, and credit
extended by banks to third-market makers to carry on
their market making activities. The proposals would
have subjected to certain conditions credit for block
positioning activities by all market makers, including
specialists, block positioners, over-the-counter firms
making a market in OTC margin stocks, and thirdmarket makers.
Following consideration of the comments received,
the Board has withdrawn certain parts of the proposed
revisions of paragraph (g) o f § 220.4 (Regulation T) and
paragraphs (o), (w) and (y) of § 221.3 (Regulation U)
pertaining to limitations on exempt credit to specialists,
OTC market makers, and third-market makers. The
Board is republishing, with certain modifications in the
proposed language, paragraph (g) of § 220.4, and
paragraphs (w), (y) and (z) of § 221.3, with simultaneous
publication o f proposed rules in this area by the
Securities and Exchange Commission appearing else­
where in this issue of the Federal Register.
The Board also proposes at this time an amend­
ment to § 221.3(a) to conform with the existing practice
under which banks need not obtain purpose statements
in connection with transactions arising out of the
ordinary course of broker/dealer business.
The text of the proposed amendments, as revised,
is as follows:
§ 220.4 — SPECIAL ACCOUNTS
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(g) Specialist's account. (1) In a special account
designated as a specialist’s account, a creditor may
effect and finance, for any member o f a national securi­
ties exchange who is registered and acts as a specialist
in securities on the exchange, such member’s transac­
tions as a specialist in such securities, or effect and
finance, for any joint venture in which the creditor
participates, any transactions in any securities o f an
issue with respect to which all participants, or all par­
ticipants other than the creditor, are registered and act
on a national securities exchange as specialists.
(2) Such specialist’s account shall be subject to the
same conditions to which it would be subject if it were a

general account except that if the specialist’s exchange
is a national securities exchange which requires and
submits to the Board of Governors o f the Federal
Reserve System reports suitable for supplying current
information regarding specialist’s use o f credit pursuant
to this paragraph (g), the requirements o f § 220.6(b)
regarding joint ventures shall not apply to such accounts
and the maximum loan value of a registered security in
such account (except a security that has been identified
as a security held for investment pursuant to a rule of
the Commissioner of Internal Revenue (Regs, section
1-1236-1 (d») shall be as determined by the creditor in
good faith.

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§ 221.3 — MISCELLANEOUS PROVISIONS
(a)
Required statement as to stock-secured credit.
In connection with an extension of credit secured
directly or indirectly by any stock, the bank shall obtain
and retain in its records for at least 3 years after such
credit is extinguished a statement in conformity with the
requirements of Federal Reserve Form U -l executed by
the recipient of such extension o f credit (sometimes
referred to as the “customer” ) and executed and
accepted in good faith by a duly authorized officer of
the bank prior to such extension: Provided, That this
requirement shall not apply to any credit described in
paragraphs (o), (w), (x), (y), or (z) of this section or §
221.2 of this part except for credit described in
paragraphs 221.2(0, (g), and (h) extended to persons
who are not brokers or dealers subject to Part 220 of
this Chapter (Regulation T). In determining whether or
not an extension of credit is for the purpose specified in
§ 221.1 or for any o f the purposes specified in § 221.2
the bank may rely on the statement executed by the
customer if accepted in good faith. To accept the
customer’s statement in good faith, the officer must (1)
be alert to the circumstances surrounding the credit and
(2) if he has any information which would cause a
prudent man not to accept the statement without
inquiry, have investigated and be satisfied that the
customer’s statement is truthful.
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(o)
Specialist. In the case of credit extended to a
member of a national securities exchange who is
registered and acts as a specialist in securities on the
exchange for the purpose of financing such member’s
transactions as a specialist in such securities, the
maximum loan value of any stock (except stock that has
been identified as a security held for investment
pursuant to a rule of the Commissioner o f Internal
Revenue (Regs, section 1-1236-l(d))) shall be as de­
termined by the bank in good faith: Provided, That the
specialist’s exchange is a national securities exchange
which requires and submits to the Board of Governors
o f the Federal Reserve System reports suitable for

supplying current information regarding specialists’ use
of credit pursuant to this section.

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(w) OTC market maker exemption. (1) In the case
of credit extended to an OTC market maker, as defined
in subparagraph (2) of this paragraph (w), for the
purpose of purchasing or carrying an OTC margin stock
in order to conduct the market-making activity of such
a market maker, the maximum loan value o f any OTC
margin stock (except stock that has been identified as a
security held for investment pursuant to a rule o f the
Commissioner of Internal Revenue
(Regs.
section
1-1236- 1(d))) shall be determined by the bank in good
faith: Provided, That in respect of each such stock the
OTC market maker shall have filed with the Securities
and Exchange Commission a notice of his intent to
begin or continue such market-making activity (Securi­
ties and Exchange Commission Form X-17A-12 (1)) and
all other reports required to be filed by market makers
in OTC margin stock pursuant to a rule of the
Commission (Rule 17a-12 (17 CFR 240.17a-12)), shall
not have ceased to engage in such market-making
activity, and shall have a reasonable average rate of
inventory turnover in such stock: And provided further.
That the bank shall obtain and retain in its records for
at least 3 years after such credit is extinguished a
statement in conformity with the requirements of
Federal Reserve Form U-2, executed by the OTC
market maker who is the recipient of such credit and
executed and accepted in good faith9 by a duly
authorized officer of the bank prior to such extension.
In determining whether or not an extension of credit is
for the purpose of conducting such market-making
activity, a bank may rely on such a statement if
executed and accepted in accordance with the require­
ments of this paragraph (w) and paragraph (a) of this
section.

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(y) Third-market maker exemption. (1) In the
case of credit extended to a third-market maker, as
defined in subparagraph (2) of this paragraph (y), for
the purpose of purchasing or carrying a stock that is
registered on a national securities exchange (other than
a convertible security described in paragraph (t) (1) of
this section) in order to conduct the market-making
activity of such a market maker, the maximum loan
value of any stock (except (i) a convertible security
described in paragraph (t) (1) of this section, and (ii)
stock that has been identified as a security held for
investment pursuant to a rule of the Commissioner of
Internal Revenue (Regs, section 1-1236-l(d))) shall be
determined by the bank in good faith: Provided, That in
respect of each such stock he shall, at least five full
business days prior to such extension o f credit, have
filed with the Securities and Exchange Commission a

9 A s d e s c r ib e d in p a ra g ra p h (a ) of t h i s s e c tio n .

notice of his intent to begin or continue such marketmaking activity, and all other reports required to be
filed by third-market makers pursuant to a rule o f the
Securities and Exchange Commission and, except when
such activity is unlawful, shall not have ceased to
engage in such market-making activity: And provided
further. That the bank shall obtain and retain in its
records for at least 3 years after such credit is
extinguished a statement in conformity with the require­
ments of Federal Reserve Form U -3. executed by the
third-market maker who is the recipient o f such credit
and executed and accepted in good faith10 by a duly
authorized officer of the bank prior to such extension.
In determining whether or not an extension o f credit is
for the purpose of conducting such market-making
activity, a bank may rely on such a statement, if
executed and accepted in accordance with the require­
ments of this paragraph (y) and paragraph (a) o f this
section.
(2) A third-market maker with respect to a stock
that is registered on a national securities exchange is a
dealer who has and maintains net capital, as defined in
a rule of the Securities and Exchange Commission (Rule
15c3-l (17 CFR 240.15c3-D), or in the capital rules of
an exchange of which he is a member if the members
thereof are exempt therefrom by Rule 15c3-l(bX2) of the
Commission (17 CFR 240.15c3-l(bX2)), of $100,000 plus
$20,000 for each stock in excess of five in respect of
which he has filed and not withdrawn a notice with the
Securities and Exchange Commission (but in no case
does this subparagraph (2) require net capital of more
than $ 1,000,000) who is in compliance with such rule of
the Commission and who, except when such activity is
unlawful, meets all the following conditions with respect
to such stock: (i) He furnishes bona fide, competitive
bid and offer quotations in the stocks for which he
makes a market at all times on request, (ii) he is ready,
willing, and able to effect transactions for his own
account in reasonable amounts, and at his quoted
prices, with other brokers and dealers, (iii) he does no
more than 25 per cent of his business in the stock with
other market makers and/or on national securities
exchanges except as odd-lot dealer, alternate specialist,
or alternateodd-lot dealer specialist, and (iv) he has a
reasonable average rate of inventory turnover on the
stock.
(3) If all or portion of the credit extended pursuant
to this paragraph (y) ceases to be for the purpose
specified in subparagraph (1) of this paragraph or the
dealer to whom the credit is extended ceases to be a
third-market maker as defined in subparagraph (2) of
this paragraph, the credit or such portion thereof shall
thereupon be treated as “ a credit subject to § 221.1.”
(z) Block positioner exemption. (1) In the case of
credit extended to a block positioner, as defined in sub-

10

A s d e s c r ib e d in p a ra g ra p h (a ) o f t h i s s e c tio n .

paragraph (2) of this paragraph (z), for the purpose of
financing the activity of block positioning, the max­
imum loan value of any margin stock obtained in the
ordinary course of the activity o f block-positioning as
described in subparagraph (2) o f this paragraph (z)
(except (i) a convertible security described in paragraph
(t)(l) o f this section and (ii) stock that has been identi­
fied as a security held for investment pursuant to a rule
of the Commissioner of Internal Revenue (Regs, section
1-1236-1 (d))) shall be determined by the bank in good
faith: Provided, That in respect of such activity he shall
have filed with the Securities and Exchange Commis­
sion a notice of undertaking such activity as prescribed
by the Commission, and all reports required to be filed
by block-positioners: And provided further. That the
bank shall obtain and retain in its records for at least 3
years after such credit is extinguished a statement in
conformity with the requirements o f Federal Reserve
Form U -5 and paragraph (a) of this section, executed by
the block positioner who is the recipient o f such credit
and executed and accepted in good faith 11 by a duly
authorized officer of the bank prior to such extension.
In determining whether or not an extension of credit is
for the purpose of conducting such block positioning
activity, a bank may rely on such a statement if ex­
ecuted and accepted in accordance with the require­
ments of this paragraph (z) and paragraph (a) o f this
section. In determining whether or not an extension of
time has been granted pursuant to subparagraph (3) of
this paragraph (z) and whether or not such extension of
time is commensurate with the circumstances the bank
may rely on a statement executed by an officer of the
exchange or association on behalf of the committee in
conformity with the requirements o f Federal Reserve
Form U-6 and paragraph (a) of this section.

determined in the exercise o f reasonable diligence that
the block could not be sold to or purchased from others
on equivalent or better terms, and (iv) sells the shares
comprising such block as rapidly as possible commen­
surate with the circumstances.

(2)
A block positioner is a dealer who (i) is reg­
istered with the Securities and Exchange Commission
under section 15 of the Securities Exchange Act of 1934
(15 U.S.C. 78o) and has a minimum net capital, as de­
fined in a rule of the Securities and Exchange Commis­
sion (Rule 15c3-1 (17 CFR 240.15c3-l)) or in the capital
rules of an exchange of which he is a member if the
members thereof are exempt therefrom by Rule 15c31(b)(2) of the Commission (17 CFR 240.15c3-1(b)(2)), of
$1,000,000, (ii) engages in the activity of purchasing
long or selling short as principal, from time to time,
from or to a customer (other than a partner or a joint
venture or other entity in which a partner of the dealer,
or the dealer itself, participates or a person “ associated
with" such dealer as defined in section 3(a)(18) of the
Securities Exchange Act of 1934) a block o f stock (other
than a convertible security as described in paragraph
(t)(l) o f this section) with a current market value of
$200,000 or more in a single transaction or in several
transactions at approximately the same time from a
single source to facilitate a sale or purchase by such
customer, (iii) certifies to the lending bank that he has

This notice is published pursuant to section 553(b)
of Title 5, United States Code, and § 262.2(a) o f the
rules o f procedure of the Board of Governors of the
Federal Reserve System (12 CFR 262.2(a)).

11 A s d e s c r ib e d in p a ra g ra p h (a) of t h i s s e c tio n .

(3) No credit shall be extended or maintained pur­
suant to this paragraph (z) in respect o f any such block
of stock or portion thereof which the block-positioner
has held continuously for more than 20 business days,
and any credit extended pursuant to this paragraph (z)
shall be extinguished or brought into conformity with
the initial margin requirements of §§ 221.1 and 221.4
before the expiration of such 20-day period. For the
purposes of this subparagraph, a block or portion
thereof shall be treated as not having been held con­
tinuously only to the extent that there has been a net
sale (or in the case of short positions, net purchase) of
such securities (whether or not represented by the same
certificate) during such 20-day period.
(4) In exceptional cases the 20-day period specified
in subparagraph (3) of this paragraph (z) may on the
application o f the block-positioner, be extended for one
or more periods limited to 5 business days each com­
mensurate with the circumstances by any regularly con­
stituted committee of a national securities exchange
having jurisdiction over the business conduct o f its
members, of which the block-positioner is a member or
through which his block transaction was effected, or by
a committee of a national securities association, if
effected in the over-the-counter market .Provided, That
such committee is satisfied that the block-positioner is
acting in good faith in making the application and that
the circumstances in fact warrant such treatment.

The proposed amendments, as revised, are re­
published primarily for the purpose of enabling inter­
ested persons to study them concurrently with the pro­
posed rules in this area by the Securities and Exchange
Commission appearing elsewhere in this issue of the
Federal Register.
Additional data, views or comments on the Board’s
proposed amendments, as revised, may be submitted in
writing to the Secretary, Board of Governors o f the
Federal Reserve System, Washington, D. C. 20551, to
be received not later than June 30, 1972. Such materials
will be made available for inspection and copying upon
request, except as provided in § 261.6(a) o f the Board’s
Rules Regarding Availability o f Information.
By order o f the Board o f Governors, May 22, 1972.

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