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F ederal Reserve Ba n k
DALLAS, TEXAS
of
Dallas
75222
C i r c u la r No. 78-63
May 19, 1978
PROPOSED AMENDMENT TO REGULATION T —
CREDIT BY BROKERS AND DEALERS
C r e d it by B r o k e r s a n d D ealers on N on c o n v ertib le
C o rp o ra te Debt S e c u r itie s Not Listed on a National
S e c u ritie s Exch an g e; Uniform Loan Value For All Eligible
N o n co n v ertib le C o r p o ra te Debt S e c u ritie s
TO ALL BANKS, BROKERS/DEALERS,
REGULATION C REGISTRANTS, AND
OTHERS CONCERNED IN THE
ELEVENTH FEDERAL RESERVE DISTRICT:
Following is th e te x t of a s tatem ent is s u e d b y the Board of G o v e rn o rs of
th e Fed eral R e s e r v e System :
T h e Board of G o v e rn o rs of th e Fed eral R e s e rv e System today
(May 4) p r o p o s e d to am end its R egulation T (C re d it b y B r o k e r s and
D ealers) to p e rm it a b r o k e r o r d e a l e r to e x te n d a n d maintain c r e d i t on
c e r ta in n o n c o n v e r tib le c o r p o r a te b o n d s , with a 30 p e r c e n t m arg in
req u irem en t.
T h e Board a s k e d fo r comment by J u n e 15, 1978.
T h e p ro p o s a l would affect c e r ta i n c o r p o r a t e b o n d s sold on the O v e rth e - C o u n te r (OTC) m a rk e t, r a t h e r than on a national s e c u r it ie s e x c h a n g e .
T h e e x is tin g Regulation T allows c r e d i t to be e x te n d e d a n d maintained on
only th ose b o n d s w hich a r e listed on national s e c u r it ie s e x c h a n g e s .
T h e Board m ain tain s a list of some 1,100 s to ck s sold o v e r - t h e c o u n te r on w hich b r o k e r s a n d d e a l e r s may e x te n d c r e d i t u p to a limit,
c u r r e n t l y 50 p e r c e n t , e s ta b lis h e d b y th e B o a rd . T h e e x is tin g OTC
M argin List in c lu d e s five c o n v e r tib le c o r p o r a t e b o n d s (debt is su e s
th a t may b e c o n v e r te d to e q u ity is su e s ) on w h ich m a rg in c r e d i t may
be g iv e n .
T h e Board p r o p o s e d t h a t m a rg in c r e d i t be e x te n d e d a n d maintained
b y b r o k e r s a n d d e a l e r s on n o n c o n v e r tib le c o r p o r a te d e b t is s u e s sold on
th e OTC m a rk e t w h ic h h a v e the following c h a r a c t e r i s t i c s :
This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)
- 2 —
At th e time c r e d i t is e x t e n d e d , th e o u ts ta n d in g p rin c ip a l
amount of th e i s s u e is not less than $25 million.
—
All p a y m e n ts of p rin c ip a l a n d in te r e s t on the is s u e s a r e
c u r r e n t a t th e time c r e d i t is e x t e n d e d .
—
T h e i s s u e w as r e g i s t e r e d with the S e c u ritie s a n d E x
c h a n g e Commission a n d the i s s u e r is p r o v id i n g c u r r e n t
r e p o r t s u n d e r SEC re g u la tio n s .
T h e Board p r o p o s e d t h a t the m a rg in (down payment) r e q u i r e d for
n o n c o n v e rtib le c o r p o r a te b o n d s , sold e it h e r on the OTC m a rk e t o r on
national e x c h a n g e s , sh o uld be 30 p e r c e n t . T h e m arg in re q u ir e m e n t
for c o n v e r t i b l e c o r p o r a t e b o n d s on the B o a r d 's OTC lis t, or r e g i s t e r e d
on a national e x c h a n g e , re m a in s 50 p e r c e n t .
P r in te d on the following p a g e s is a copy of the B o a r d 's o r d e r as subm itted
for p u b lic a tio n in the FEDERAL REGISTER. Comments on th e p ro p o s e d am en d m ent
sh o u ld be s ub m itted in w ritin g to th e S e c r e t a r y , Board of G o v e rn o rs of the Federal
R e s e r v e S y ste m , W ashington, D .C . 20551. All comments m ust be re c e iv e d by
J u n e 15, 1978, a n d sh o u ld r e f e r to Docket No. R-0080.
S in c e re ly y o u r s ,
Robert H . Boykin
F ir s t Vice P r e s id e n t
Proposed Rulem aking
FEDERAL RESERVE
SYSTEM
[12 CFR 220]
[Reg.
T; Docket Wo.
R-0080]
Credit by brokers and dealers on no nconvcrtible corporate
debt securities not listed on a national securities exchange; uniform
loan value for all eligible nonco nverti ble corporate debt securities.
AGENCY:
Board
of Governors
ACTION:
Proposed
of the Federal Reserve System.
rule.
SUMMARY:
The Board proposes
or dealer
to extend
debt
securities
to amend Reg ulatio n T to permit
and maintain credit
not
listed on a national
satisfy certain criteria as to size
tion and current
proposal
debt
securities,
and
a uniform loan value
whether
securities
of issue,
payments of principal
provides
on nonconver tible
corporate
exchange which
availability
interest.
a broker
of informa
In addition,
for all noncon vertib le
listed or unlisted,
that are eligible
the
corporate
for
loan value.
DATE:
Comments must
ADDRESS:
Secretary,
Washington,
D. C.
writing and should
be received on or before June 15,
Board
of Governors
20551.
All materials
include
the docket
F O R FURTHER INFORMATION CONTACT:
or Laura M.
Homer,
Banking S u pervis ion and Regulation,
R e s e r v e System,
Washington,
D. C.
of the Federal R e s e r v e System,
submitted shall
be in
nu mber R-0080.
Robert
Chief Attorney,
1973.
S. Plotkin,
Assistant Director,
Securities Regulation,
Div ision of
Board of Governors of the Federal
20551,
(202) 452-2782.
-
SUPPLEMENTARY
INFORMATION:
In July
of the Securities Exchange Act
authorize the Board
brokers,
dealers
1968,
Congress
1934 (15
U.S.C.
to control credit
and others
listed on a national
authority was
with
securities
limited,
respect
78g)
("the Act")
to securities
exchange
with
amended Section
extended or maintained
(" O r e " ) market.
the "over-the-counter"
Board's
of
2 -
but rather
Prior
respect
7
to
by banks
that are not
are traded
in
to this amendment,
to brokers
the
and dealers,
to credit extended for the purpose of purchasing or carrying securities
listed on a national
securities
an absolute prohibition against
or
exchange,
and municipal
Board's
authority
e xer cised
"Exempt
obligations) have
contained
securities"
by a broker
(generally
always been excluded
to set margin requirements.
Since
1968,
from the
the Board has
its new authority by adopting criteria and selecting
equity securities traded
m a r g i n credit.
is revised
the Act
the extension of credit
dealer on all other securities.
Federal
and
in the OTC market
The Board publishes
periodically;
some 1,100
that
are eligible
of OTC Margin Stocks,
issues
are presently on the List.
a debt
equity security is considered
to be an equity security
debt
for
a List
For purposes of Regul ation T,
are pre sently five convertible
those
security
securities
convertible
and
which
into an
there
on the Board's List
of OTC M a r g i n Stocks.
The National A s s o c i a t i o n of Securities Dealers,
has requested
dealers
the Board
to amend R e g u l a t i o n T to permit
to extend and maintain credit
on any unlisted
Inc.
brokers
("NASD")
and
nonconvertible
- 3 -
corporate
respect
debt securities
which meet
to size of issue and rating by at least one nationally
recognized
statistical
rating service.
The Board believes
merit.
that
Extending marginability
promote competitive
markets.
the NASD's
to unlisted
equality and
improve
Such action may, moreover,
issues of debt
securities
Act Amendments of 1975.
to prevent
an orderly manner.
self-executing
securities
the need
the efficiency of capital
companies
in marketing n e w
the trading of debt
the Board has responsibility
from being extended,
be established,
that debt collateral
To this end,
securities
system contemplated by the Securities
that certain criteria should
likelihood
request has considerable
corporate bonds would
On the other hand,
destabilizing credit
a reasonable
aid
and facilitate
more easily in the national market
agreed
certain m i n i m u m standards with
the Board
can
and it is
generally
so that there
be
liquidated
is seeking to adopt
is
in
a
rule with criteria readily ascertainable by the
industry and the investing public - thereby eliminating
for a published List.
The Board
unlisted nonconvertible corporate debt
margin credit by brokers
(1)
and dealers
A principal
amount
(2)
(3)
that
for
if:
less than $25 m i l l i o n of
of the extension
All payments of principal
not in default at
therefore
securities be eligible
of not
the issue is outstanding at the time
proposes
or interest
the time of the exte nsion
of credit;
are current
of credit;
and
and,
The issue is registered under the Securities Act of
and current reports
are provided
Securities Exchange Act of
1934.
by
the
issuer
inaccordance with
1933
the
Comments are requested on the advisability of using this
criteria,
bonds
particularly the requirement
o utstanding of not
The Board
required,
whereas
100%
further
A l t ho ugh
exchanges
price and volume
be "thin".
to set a specific
information is
the Board noted
is minimal,
Accordingly,
level
be extended on unlisted
for bonds
the Board
of equity
similarity
setting
corporate bonds.
the
level
corporate bonds
on the appropriateness
of that
for
information
believes
for
that
to credit
at
it is necessary
that will
speculative
in margin accounts.
the listed and unlisted
regulatory
time,
for botn
amount.
and many
for some issues may,
should
and the public
the major
(generally 30%).
level of margin
At the present
of margin required
at 30%,
such
cushions
to promote
that
conceivably permit
in order to prevent
of both
corporate bonds
to be
It noted
requirement
respect
corporate bonds
and in order
for unlisted
of
generally available
and markets
is of the opinion that the same
required
could
that
of margin with
and possible erosion
In view of the economic
markets
of margin
require a somewhat high er margin
cor porat e OTC bonds
excesses
level
impose a 25% maintenance
e x c h a n ge -trade d bonds,
listed
the
to be extended on listed corporate bonds,
brokerage houses
Board
considered
present Regul a t i o n T r equirements
securities
amount
less than $25,000,000.
should the proposed regu latio n be adopted.
loan value
times,
of a principal
equality,
that may be
also be required
the Board
listed
is invited
the
for
is considering
and unlisted
to submit comments
- 5 -
The proposed requirements will affect only extensions of
credit by brokers
and dealers subject
affect banks subject
prohibits
the Board
to Reg ul a t i o n U since
Act
of 1934,
to Sections
as amended
7 and
(15 U.S.C.
*
(i )
23 of the Securities Exchange
78g and w ) , the Boa rd proposes
*
*
forth below:
credit on exempted securities
creditor in good faith.
to Re gulati on T).
from time
Call
options
For the purpo se of this paragraph,
means a debt security which is
amount of not
to time
in § 220.8 (the
may be issued,
it is an exempted
endorsed
security
security.
the term "margin non-e quity
listed on a national
security which meets all of the
At
The
of a margin non-equit y
in this account on any underly ing equity
which is held in this account because
(1)
securities.
security shall be determined by the
The m a ximum loan value
shall be as prescribed
or guaranteed
a creditor may extend and maintain
and margin non-equity
m a x i m u m loan value of an exempted
Supplement
*
Special bond a c c o u n t .
In a special bond account
or a debt
to credit
SPECIAL AC COUNTS
*
security
sp ecifically
securities.
to amend R e g u l a t i o n T (12 C F R 220) as set
§ 220.4 —
the Act
from applying margin requirements
extended by banks on non-equity
Pursuant
to R e g u l a t i o n T and will not
securities
security"
exchange
following requirements:
the time of the exte nsion of credit,
less than $25,000,000 of the
issue is outstanding.
a principal
-
(2)
Securities Act
pursuant
The issue was
6 -
registere d under
of 1933 and the issuer
in section 12(g)(2)(G)
(3)
has
At
on interest or
meets all
periodic
reports
for believing that
principal
k
of the conditions
of the Act.
the time of the e x t e nsion
a reasonable basis
§220.8 --
files
to section 13(a) or 15(d) of tne Securities Exchange Act of
1934 or is an insurance company which
specified
either
section 5 of the
of credit,
the creditor
the issuer is not
in default
payments.
k
k
k
k
k
k
k
k
SUPPLEMENT
k
(b)
M a x i m u m Loan Value
for a Special
The m a x i m u m loan value of
shall be 70 per cent
of its current
Bond A c c o u n t .
a margin non-equity security
market
value as determined by
any reasonable method.
To aid in considerat ion of this matter by the Board,
interested persons
comments,
are
invited
or arguments.
number R-0080.
Such
to submit
All material
relevant
should
material will be made
and copying upon request,
except
include
available
as provided
Board's Rules R egar d i n g Availabi lity
data,
the docket
for inspection
in § 261.6(a) of
of Information
By order of the Board of Governors,
views,
May
(signed)
1,
the
(12 C F R 261.6(a)).
1978.
Theodo re E. A l lis on
T h e od ore E. Allison
Secretary of the Board
[SEAL]
@FedFRASER