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F edera l R ese r v e Bank




Circular No. 68-30
February 2, 1968


To All Banks and Others Concerned
in the Eleventh Federal Reserve D istrict:

There is enclosed for your information a copy of a press
release concerning the adoption by the Board of Governors of
the Federal Reserve System of amendments to Regulations T
and U and the new Regulation G.


Copies o f the revised Regulations T and U will be forwarded
as soon as available.
Yours very truly,
P. E. Coldwell

Enclosure (1)

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (


f^ A L




Rt^ •

For immediate release.

February 1, 1968.

The Board of Governors of the Federal Reserve System announced
today that it has adopted a number of changes to broaden the coverage of,
and, in most respects, to tighten its regulations governing the use of
credit in stock market transactions.

These changes are^basp.d on.prQPQfi.l f .

which were published for comment on October 20, 1967.

Interested persons

were asked to submit their comments in writing by November 20, 1967.


proposals have been revised extensively in the light of numerous comments
received in response to the Board’s invitation.

As adopted, the changes

w il l:

Extend the period in which a broker or dealer must obtain

the customer's margin deposit on a margin transaction by one day, to
five full business days after the transaction*
effective on February 5, 1968.

This change will become

The purpose of this liberalizing proposal

is to reduce the current pressures on bookkeeping departments of brokerage
firms by insuring that a weekend will always be included in the period
of time within which the deposit must be obtained.
The margin required on stock transactions remains unchanged at
70 per cent.

This means in effect that anyone buying a $100 stock on

credit must deposit in his margin account at least $70 in cash, or
securities with an equivalent loan value *

-2 ­

Impose a new margin requirement on loans made by banks for

the purpose of purchasing or carrying securities convertible into regis­
tered stock.

This requirement will be set independently of the margin

requirement for loans to purchase or carry registered stock, and is fixed
initially at 50 per cent in recognition of the fact that convertible
securities combine characteristics of both stocks and bonds.

The same

requirement applies to loans by brokers and dealers on registered con­
vertible securities, instead of the present 70 per cent, but margin require­
ments are removed from loans they make on non-convertible bonds.

In conse­

quence, banks, brokers and dealers will be on substantially the same
footing in these respects.
The 50 per cent initial margin requirement applies to all new
loans made after February 1, 1968, by banks, brokers and dealers, and other

On loans made b^r banks between October 20, 1967, and February 1,

1968, a fully margined (50 per cent) status must be achieved by April 10,
1968; bank loans made before October 20, 1967, are not affected unless
there have been subsequent substitutions of collateral or conversions into
For all lenders--banks, brokers and others--loans on convertibles
that have a margin status below the prescribed 50 per cent will be subject
to a 70 per cent "retention requirement":

that is, 70 per cent of the pro­

ceeds from a sale of these securities will have to be retained to improve
the status of the loan until it is margined at the full 50 per cent.

Require that non-convertible bonds and exempted securities

(e.g., Government securities) on the one hand, and convertible securities
on the other, be segregated in two new accounts, separate from the ordinary
margin account in which only stock may be held.

The purpose of requiring


separate accounts is to foreclose use of the "same-day-substitutiori"
privilege to circumvent the retention requirement for accounts that ar 6
below the prescribed margin.

Placing convertible securities in a separate

account will also, it is believed, avoid some bookkeeping and other
mechanical problems which would result from having in the same margin
account securities with different loan values.

Require that collateral in special subscription accounts--

that is, securities acquired by the exercise of subscription rights on
the preferential 25 per cent Initial margin presently allowed for such
acquisitions--be brought into "fully margined" status by payments in four
equal quarterly instalments.

This.provision, as adopted, requires that

when a payment is not made, the bank, broker or dealer sell enough collateral
so that the remaining credit will be roughly in the same proportion to the
collateral remaining in the account as if the payment had been made.


originally proposed, the changes would have required all the collateral in
the account to be sold, and the loan paid off, if a payment were missed.

Introduce a new regulation (designated "Regulation G") to

extend to other lenders margin requirements corresponding to those long
applicable to brokers, dealers, and banks on credit extended for the purpose
of purchasing or carrying registered equity securities.
The "other lenders" whose security loans are thus put on a
corresponding footing with those of banks and brokers include the follow­

"factors," "collateral lenders," and others whose stock loans usually

rise during periods when both margin requirements and stock market activity
are high; insurance companies; tax-exempt organizations; credit unions;
finance companies; those State-chartered savings and l»an associations


authorized to make such loans; and anyone acting as agent for a lender-­
foreign or domestic--in handling securities loans.
The new Regulation G does not apply to any credit extended before
February 1, 1968, and persons extending credit in relatively small amounts
will not be subject to its requirements.

Only credit on registered equity

securities (stocks and securities convertible into stock) will be subject
to the regulation (as contrasted with the proposals, which applied to
credit on all registered securities).

Lenders extending more than $50,000

in credit in any calendar quarter against registered equity securities, or
whose loans against such securities amount to $ 100,000 at any time during
the quarter, must register with the Board by the end of the month following
the close of the quarter.

Margin requirements will apply to any loan made

for the purpose of purchasing or carrying registered equity securities by
a person subject to the registration requirement, and all registered
lenders must file quarterly reports.
An exception from initial margin requirements is provided for
credit extended by corporations to finance the exercise of stock purchase
rights granted officers and employees under corporate plans that contain
certain safeguards designed to make it less likely that the credit will be
repaid with proceeds of the sale of the securities.

Exceptions are also

made for borrowing to finance plans of this kind, and for rights that were
granted prior to Februar


1, 1968.
Require that banks and other persons performing certain

services "as agent" for foreign and other stock market lenders obtain a
signed statement from their principals to the effect that the activities of
the principal conform to the applicable margin regulations.

The agent may

act in reliance on such a statement.

A similar requirement has been

inserted into Regulation T, as to services by brokers and dealers.


banks and other lenders will be forbidden to arrange for credit on lower
margin than they can extend themselves; brokers and dealers have long
been subject to this rule.

Require that banks and other lenders obtain from the

borrower a signed statement of the purpose of any stock-secured loan, on
a form prescribed by the Board, determine in good faith that the statement
is correct, and sign it as so accepted.
be punishable by fine or imprisonment.

A false statement on the form may
The forms will have to be kept in

the records of the bank or lender for at least six years after the credit
is extinguished.

Loans by brokers and dealers are generally for the pur­

pose of purchasing or carrying securities, and no statement of purpose is
ordinarily required in connection with such loans.
In adopting the new provisions relating to convertible securities,
the Board also published for comment a proposal to exempt from margin
requirements loans made by banks to dealers to finance their market-making
activities in convertible securities.

If adopted, this exemption would

become effective not later than March 11, 1968.

Dealers who wish to be

eligible for the exemption should begin to file reports promptly on
Federal Reserve Form U-3, copies of which will be available from any
Federal Reserve Bank.

Information supplied on such reports will be

accorded confidential treatment, in conformity with the Board's rules.
Margin requirements were established initially in October, 1934,
under authority Congress granted the Federal Reserve Board in the Securities
Exchange Act of 1934 "for the purpose of preventing the excessive use of
credit for the purchase or carrying of securities."




Under present law, margin requirements can be applied only to
loans for the purpose of purchasing or carrying securities registered on
a national securities exchange*

The Reserve Board has, however, submitted

to Congress a legislative proposal that would provide authority to apply
margin regulations also to securities that are actively traded in the overthe-counter market.

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