Full text of District Notices (Federal Reserve Bank of Dallas) : Regulation G, T, and U, Circular No. 81-149

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F ederal R eser ve Ba n k

DALLAS. TEXAS

of

Dallas

75222
Circular No. 81-149
July 21, 1981

REGULATIONS G, T, AND U
Proposed Amendments

TO ALL MEMBER BANKS, OTHER CREDITORS,
AND OTHERS CONCERNED IN THE
ELEVENTH FEDERAL RESERVE DISTRICT:
The Board of Governors of the Federal Reserve System is inviting
comment on a second set of proposals to simplify and reduce the regulatory
burden of its margin regulations G , T, and U. The first group of proposals was
published for comment in the Federal Register on June 24, 1981.
Enclosed are copies of the Board's press release dated July 10, 1981,
and the material submitted for publication in the Federal Register. Interested
persons are invited to submit comments to the Secretary, Board of Governors of
the Federal Reserve System, Washington, D.C. 20551, to be received no later
than September 15, 1981. When submitting comments, please refer to Docket
No. R-0362.
Any questions concerning the proposed amendments
directed to this Bank’s Legal Department, Ext. 6171.

should be

Sincerely yours,

William H. Wallace
First Vice President
Enclosure

B a n k s a n d o t h e r s a r e e n c o u r a g e d to u s e th e fo llo w in g in c o m in g W A T S n u m b e r s in c o n t a c t in g th is Bank:
1-800-442-7 140 ( in tr a s t a te ) a n d 1-800-527 -9 20 0 ( in te r s t a te ) . F o r c a lls p la c e d lo cally , p l e a s e us e 651 plus th e
e x t e n s io n refe rred to ab o ve .

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

FEDERALRESERVEpressrelease
For immediate release

July 10, 1981

The Federal Reserve Board today requested comment on proposed revisions
of its margin regulations.

The Board asked for comment by September 15, 1981.

The proposals made today complete proposals being made by the Board
to simplify, and to reduce the regulatory burden of compliance with, its margin
regulations G, T and U.

The Board proposed other amendments, in regulations

T and U, in June, also for comment by September 15.

Following consideration of

comment received the Board will propose rewritten margin regulations.
Revision of the Board's margin regulations is part of the Board's
Regulatory Improvement Project, established in 1978, in which the Board is
examining all of its regulations, with the objectives of simplifying them and of
reducing the burden of compliance wherever possible.
The Board proposed, in addition to the amendments suggested in June,
the following further principal changes in its margin rules:
1.

Regulation T would be amended to reduce the number of types of
securities and other accounts subject to Regulation T from eleven
to seven and to restructure the accounts along functional lines.
Four of the accounts would be used for public customer transactions
and three for transactions between industry members.

2.

The terminology of Regulation T would be revised to prescribe the
amount of margin required rather than the maximum loan value of
securities used as collateral.

This would conform to the

terminology generally used by the securities industry.
3.

The definition of "indirectly secured" margin loans in regulations
U and G would be amended to achieve more objective standards.

This

action would affect principally lending arrangements, by banks
and insurance companies with corporate borrowers, that contain
restrictions on disposition of the borrower's assets.
4.

Regulation G would be amended to broaden the types of credit which
may be extended by lenders subject to that regulation, chiefly
insurance companies and credit unions.

The Board's proposal is attached.

32592

Federal Register / Vol. 46, No. 121 / Wednesday, June 24,-1981 / Proposed Rules
amendments to the regulations. In the
first group of amendments the following
changes are proposed for Regulation T:
1. Eliminate the “equity building”
devices; consolidate the bond accounts
with the General Account; and require
an offsetting adjustment to any highly
leveraged General Account from the
Special Miscellaneous Account.
2. Relax the restriction on the
arranging of credit by investment
bankers.
In Regulation U the Board proposes to
change the collateral test so as to
exempt from quantitative limitation all
bank credit not secured by margin
equity securities.
DATE: Comments should be received on
or before September 15,1981.
a d d r e s s : Comments, which should refer
to Docket No. R-0362, may be mailed to
the Secretary, Board of Governors of the
Federal Reserve System, 20th Street and
Constitution Avenue, N.W., Washington,
D.C. 205S1 or delivered to Room B-2223
between 8:45 a'.m. and 5:15 p.m.
Comments received may also be
inspected at Room B-1122 between 8:45
a.m. and 5:15 p.m., except as provided in
I 261.6(a) of the Board’s Rule Regarding
Availability of Information (12 CFR
261.6(a)).
FOR FURTHER INFORMATION CONTACT:

FEDERAL RESERVE SYSTEM
12 CFR Parts 220 and 221
[D o cket No. R -0362]

Credit by Brokers and Dealers and
Credit by Banks for the Purpose of
Purchasing or Carrying Margin Stocks
AGENCY: Board of Governors of the
Federal Reserve System.
ACTION: Proposed amendments.

After a comprehensive
review of the margin regulations, the
Board has decided to proceed with a
major simplification through a series of
su m m a ry :

Laura Homer, Securities Credit Officer.
Division of Banking Supervision and
Regulation, Board of Governors of the
Federal Reserve System, Washington,
D.C. 20551 (202) 452-2786, or Mindy R.
Silverman or James N. McNeil, Federal
Reserve Bank of New York (212) 791­
5000.
SUPPLEMENTARY INFORMATION: The
Board proposes to amend certain parts
of Regulations T and U (12 CFR Parts
220 and 221) in the first phase of the
regulatory simplification of the margin
rules. The changes in Regulation T will
eliminate the so-called “equity building”
devices by (a) deleting the retention
requirement and permitting withdrawals
from transactions equal to the current
maximum loan value of securities in the
account and (b) eliminating the
suspension of the same-day substitution
privilege in "super-restricted” accounts.
It is the Board's intention to effect the
same results in Regulations U and G if
these "equity building” devices are
eliminated from Regulation T. The
consolidation of Accounts will simplify
Regulation T and permit customers
greater flexibility in changing the
makeup of their portfolios.
The Board has long been concerned
with the existence of large credit
balances in Special Miscellaneous
Accounts of customers with highlyleveraged General Accounts. The

proposed changes to eliminate “equity
building” devices and the consolidation
of the Special Bond Account and the
Special Convertible Debt Security
Account into the General Account could
result in an even greater increase in
credit balances in the Special
Miscellaneous Account. Accordingly, a
provision is also being added to require
transfers from the Special Miscellaneous
Account whenever the customer's equity
in the General Account falls below 25
percent. This proposed change would
not require that the customer be called
to deposit additional cash or securities
with the broker; it would require only
the draining of Special Miscellaneous
Account balances into the General
Account when the General Account
equity fell below 25 percent.
In publishing the SMA adjustment
proposal for comment, the Board
expressed concern that it might have
little or no effect since there may be
alternate ways to preserve buying
power for customers’ accounts without
the use of the Special Miscellaneous
Account. In particular, it has been
suggested that the goal of the Board’s
proposal could be circumvented by daily
payment to the customer or the
customer's cash account of an amount
representing the excess loan value in the
customer's General Account.
Commenters are specifically invited to
comment as to whether this is likely to
occur and, if so, what the effects would
be. Commenters are also asked to
address the question as to whether there
are alternative ways of addressing the
Board's concern with respect to large
credit balances in Special Miscellaneous
Accounts of highly leveraged customers.
If so, could these alternative methods be
effected with less cost than the method
proposed by the Board? Estimated cost
projections associated with
implementing the SMA adjustment
feature of the Board’s proposal are also
requested.
Section 220.7(a) which restricts a
broker or dealer in arranging credit will
be relaxed to permit investment banking
services which involve arranging credit.
Arranging credit which the broker or
dealer cannot itself extend would
continue to be prohibited in other
circumstances.
The collateral test in Regulation U
will be changed so that only purpose
loans secured by any margin stock will
be subject to the margin restrictions and
only loans secured by margin stock will
require the execution of a Form U-l.
Accordingly, pursuant to § § 7 and 23
of the Securities Exchange Act of 1934,
as amended (15 U.S.C. 78g, 78w], the
Board proposes to amend Regulations T

Federal Register / Vol. 46, No. 121 / Wednesday, June 24. 1981 / Proposed Rules
and U (Parts 220 and 221, respectively)
as follows:

exhaust the credit balance of the Special
Miscellaneous Account, whichever
occurs first.
PART 220—CREDIT BY BROKERS
(e) Modifications and exceptions.
AND DEALERS
Modifications of and exceptions to the
provisions stated in this section are
A. Section 220.3 of Regulation T is
provided in the subsequent paragraphs
revised in the following manner:
of this section and in § 220.6.
§220.3 [Amended!
2. Existing paragraphs (c) through (i)
1.
Existing paragraphs (a) and (b) are are redesignated as new paragraphs [f)
removed and replaced with the
through (1).
following paragraphs (a) through (e):
3. References throughout § 220.3 to the
(a) Contents o f general account. All
special convertible security account and
financial relations between a customer
the special bond account are removed.
and a creditor, whether recorded in one
4. Subparagraph (2) of redesignated
record or more than one record shall be
paragraph (f) is revised to read as
included in and be deemed part of the
follows:
customer’s general account with the
(f) * * *
creditor except that:
(2) The maximum loan value of a
(1) Relations which § 220.4 permits to
security in a general account shall be
be included in any special account
such maximum loan value as the Board
provided for by the section may be
Bhall prescribe from time to time in
included in the appropriate special
§ 220.8 (the supplement to Regulation T).
account; and
No collateral other than an exempted
(2) All transactions in commodities
security or a margin security shall have
shall be included in the special account
any loan value in a general account.
provided by 5 220.4(e).
5. Redesignated paragraph (h) is
(b) Initial margin. Whenever a
revised to read as follows:
creditor effects in a general account any
(h) Liquidation in lieu o f deposit.3 la
transaction which, combined with other
any case in which the deposit required
transactions effected in the account on
by this section, or any portion thereof, is
the same day, creates or increases an
not obtained by the creditor within the
excess of the adjusted debit balance of
seven-day period specified therein, the
the account over the maximum loan
creditor shall promptly sell securities or
value of the securities in the account,
effect other liquidating transactions in
the creditor shall obtain, as promptly as
the account in such amount that the
possible, but no later than the end of
resulting decrease in the adjusted debit
seven full business days following the
balance of such account equals or
date of such transaction, the deposit into exceeds the required deposit or the
the account of cash or securities in such
undeposited portion thereof: Provided,
amount that the cash deposited plus the
That a creditor is not required to sell
loan value of the securities deposited at
securities or to effect other liquidating
least equals the excess so created or the
transactions specified by this paragraph
increase so caused.
in an amount greater than necessary to
(c) Withdrawals. A creditor may
eliminate the excess of the adjusted
permit the withdrawal of cash or
debit balance of such account over the
securities from a general account unless: maximum loan value of the securities
(1) Cash or securities are required to
remaining in such account after such
be deposited in connection with a
liquidation.
transaction on the current or a previous
6. Redesignated paragraph (g) is
day, or
revised to read as follows:
(2) Such withdrawal would, combined
(g) Transactions on given day. (1) For
with other transactions, deposits and
the purpose of this section, the question
withdrawals on the same day, create or
of whether or hot an excess of the
increase an excess of the adjusted debit
adjusted debit balance of a general
balance over the maximum loan value of account over the maximum loan value of
the account.
the securities in the account is created
(d) Minimum Level Adjustm ent
or increased on a given day shall be
Whenever the adjusted debit balance of
determined on the basis of all the
the account exceeds 150% of the
transactions in the account on such day
maximum loan value of the account,
exclusive of any deposit of cash, deposit
after treating all calls for margin issued
under 5 220.3(b) as if they had been
3This requirem ent relates to the action to be
satisfied, the creditor shall transfer from taken w hen a custom er fails to m ake th e deposit
the Special Miscellaneous Account to
required by S 220.3(b). an d It is not inten d ed to
countenance on the part of custom ers the practice
the General Account credit balances
commonly know n as "free-riding,” to prevent w hich
sufficient to decrease the adjusted debit
the principal national securities exchanges hav e
balance of the account to 150% of the
adopted certain rules. See the rules o f such
maximum loan value of the account or
exchanges an d S220.7(e).

32593

of securities, covering transactions, or
other liquidation that has been effected
on such day in connection with a
transaction on a previous day.
(2) In any case in which an excess so
created, or increase so caused, by
transactions on a given day does not
exceed $500, the creditor need not
obtain the deposit specified therefor in
this section.
(3) Any transaction which serves to
meet the requirements of this section or
otherwise serves to permit any offsetting
transaction in an account shall, to that
extent, be unavailable to permit any
other transaction in such account.
(4) For the purposes of this part
(Regulation T), if a security has
maximum loan value under this section
in a general account a sale of the same
security (even though not the same
certificate) in such account shall be
deemed to be a long sale and shall not
be deemed to be or treated as a short
sale.
7. References to existing specific
paragraph numbers throughout this Part
will be changed to conform to these
revisions
b. Section 220.7(a) of Regulation T is
revised to read as follows:
§ 220.7 [Amended]

(a)—Arranging for loans by others. A
creditor may not arrange for the
extension or maintenance of credit to or
for any customer by any person upon
terms and conditions other than those
upon which the creditor may himself
extend or maintain under the provisions
of this Part, except that this limitation
shall not apply to credit arranged for a
customer which does not violate Parts
207 and 221 of this Chapter and results
solely from:
(1) Such investment banking services,
provided by the creditor to the customer,
as underwritings, private placement,
and advice and other services in
connection with exchange offers,
mergers and acquisitions, except for
underwritings that involve the public
distribution of an equity security with
installment or other deferred payment
provisions; or
(2) The sale of non-margin securities
with installment or other deferred
payment provisions if the sale is
exempted from the registration
requirements of the Securities Act of
1933 under section 4(2) or section 4(6) of
the Act (15 U.S.C. 77(d)(2) and (6)).
PART 221—CREDIT BY BANKS FOR
THE PURPOSE OF PURCHASING OR
CARRYING MARGIN STOCKS

C. Part 221, Credit by Banks for the
Purpose of Purchasing or Carrying

32594

Federal Register / Vol. 46, No. 121 / Wednesday, June 24, 1981 / Proposed Rules

Margin Stocks, would be amended as
follows:
1. All references to “stock” throughout
Regulation U (when the term refers to
collateral and is not part of a definition)
will be changed to “margin stock.”
Initial Regulatory Flexibility Analysis
The Board of Governors of the Federal
Reserve System is requesting comment
on changes to its margin regulations.
These changes are the first part of a
planned series of amendments intended
to simplify margin regulations, generally,
and to reduce specific administrative
and recordkeeping requirements
imposed upon lenders by Regulation T
(broker lending), Regulation U (bank
lending), and Regulation G (lending by
other than brokers or banks).
In addition to the widespread benefits
associated with the simplification, the
proposed changes would relax
regulatory treatment of individual and
business borrowers in a number of
instances. For example, most of the
changes to Regulation T will reduce
restrictions applied to portfolio
realignment for all margin customers—
benefiting customers with small as well
as large margin account holdings to the
same degree. Also, the modification of
the credit arranging provision in
Regulation T will permit brokers to
provide additional investment banking
services— including the arranging of
unsecured loans—for business
customers. Competition between
brokers will be dependent upon
investment banking expertise and not
upon financial lending capacity—
thereby, providing an opportunity for
small brokers to compete effectively
with large brokers for this business.
Furthermore, when seeking capital,
business firms of all sizes should derive
some benefit from the effects of
augmented competition that will result
from increased direct broker
participation in investment banking
activities. Finally, the amendment to the
collateral test in Regulation U will allow
nonmargin stock (typically, Stock issued
by small or privately-held corporations)
to be used as collateral for bank loans
without, any longer, a regulatory
requirement that the borrower state the
purpose for which the loan proceeds are
to be used. The effect thereby, would be
to exempt nonmargin equity security
loans from the margin limitations and to
reduce the overall reporting burden
imposed by the current regulatory
provisions.

By order of the Board of Governors of the
Federal Reserve System, June 17,1981.
James McAfee,
Assistant Secretary of the Board.
[FR Doc. 81-18872 Filed 6-23-81; 8:45 am]
BILLING CODE 6210-01 -M