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federal reserve Ba n k DALLAS. TEXAS of Dallas 75222 Circular No. 81-222 November 23, 1981 REGULATION T Proposed Amendment TO ALL MEMBER BANKS OTHER CREDITORS AND OTHERS CONCERNED IN THE ELEVENTH FEDERAL RESERVE DISTRICT: The Board of Governors of the Federal Reserve System has proposed for public comment an amendment to its Regulation T, Credit by Brokers and Dealers. Printed on the following pages are copies of the Board's press release dated November 5, 1981, and the material submitted for publication in the Federal Register. Interested persons are invited to submit comments to William W. Wiles, Secretary, Board of Governors of the Federal Reserve System, Washington, D.C. 20551, to be received no later than January 5, 1982. Please refer to Docket No. R-0370 when submitting comments. Questions concerning the proposed amendment should be directed to this Bank's Legal Department, Extension 6171. Additional copies of this circular will be furnished upon request to the Department of Communications, Financial and Community Affairs of this Bank, Ext. 6289. Sincerely yours, William H. Wallace First Vice President Banks and others are encouraged to use the following incoming W ATS numbers in contacting this Bank: 1-800-442-7140 (intrastate) and 1-800-527-9200 (interstate). For calls placed locally, please use 651 plus the extension referred to above. This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) FEDERAL RESERVE press release For immediate release November 5, 1981 The Federal Reserve Board today proposed for public comment an amendment to its Regulation T (Credit by Brokers and Dealers) that would permit brokers or dealers to make use of U.S. Government securities or irrevocable letters of credit as collateral when they borrow or lend securities. The regulation now requires a deposit of cash as collateral in such circumstances. The Board requested comment by January 5, 1982. The Board's notice is attached. T i t l e 12 - Banks and Banking CHAPTER II - FEDERAL RESERVE SYSTEM SUBCHAPTER A — BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM P a r t 220 — C r e d i t by Brokers and Dealers [Docket No. R-0370] No tice of Proposal t o Permi t Use of L e t t e r s o f C r e d i t a s t h e Required De po si t when S e c u r i t i e s a r e Borrowed AGENCY: Board o f Governors o f t h e Federal Reserve System. ACTION: Proposed Amendment. SUMMARY: The Board pro pos es t o amend § 2 2 0 . 6 ( h ) o f R e g u l a t i o n T, which r e g u l a t e s b r o k e r s and d e a l e r s when t h e y borrow or lend s e c u r i t i e s . The p r e s e n t r e g u l a t i o n r e q u i r e s a d e p o s i t o f cash as c o l l a t e r a l . The proposed amendment p e r m i t s i r r e v o c a b l e l e t t e r s o f c r e d i t and United S t a t e s government s e c u r i t i e s t o be u se d, and s p e c i f i e s t h a t t h e d e p o s i t must a t a l l t i m e s be equal in v a l u e t o t h e c u r r e n t market v a l u e o f t h e borrowed s e c u r i t i e s . The e x i s t i n g l i m i t a t i o n s in t h e r u l e on t h e o c c a s i o n s when s e c u r i t i e s may be borrowed a r e t o be r e t a i n e d . This a c t i o n i s be ing ta ke n in r es p o n s e t o r e q u e s t s and i s i nt e nd ed t o pr ov id e a l t e r n a t i v e t y p e s o f d e p o s i t s which l e n d e r s and borr owers o f s e c u r i t i e s may a gr e e t o us e. DATE: Comments s hould be r e c e i v e d on o r b e f o r e J a n u a r y 5, 1982. ADDRESS: Comments, which should r e f e r t o Docket No. R-0370, may be mailed t o William W. W i l es , S e c r e t a r y , Board of Governors of t h e Federal Reserve System, 20th S t r e e t and C o n s t i t u t i o n Avenue, N.W., Washington, D.C. 20551, o r d e l i v e r e d t o Room B-2223 between 8:45 a.m. and 5:15 p.m. Comments r e c e i v e d may a l s o be i n s p e c t e d a t Room B-1122 between 8:45 a.m. and 5:15 p . m . , e xcept as provided in s e c t i o n 2 6 1 . 6 ( a ) of t h e B o a r d ' s Rules Regarding A v a i l a b i l i t y o f I n f o r ma t io n (12 CFR § 2 6 1 . 6 ( a ) ) . FOR FURTHER INFORMATION CONTACT: Laura Homer, S e c u r i t i e s C r e d i t O f f i c e r , or Bruce B r e t t , S e c u r i t i e s R e g ul a t i o n A n a l y s t , S e c u r i t i e s R eg ul a ti o n S e c t i o n , D i v i s i o n of Banking S u p e r v i s i o n and R e g u l a t i o n , Board of Governors of t h e Federal Reserve System, Washington, D.C. 20551 (202-452-2781). SUPPLEMENTARY INFORMATION: The Board has been r e q u e s t e d by a major broke ra ge house and o t h e r s t o amend § 2 2 0. 6( h) in o r d e r t o pe rmi t t h e use o f l e t t e r s o f c r e d i t as t h e d e p o s i t r e q u i r e d when s e c u r i t i e s a r e borrowed e i t h e r to complete s h o r t s a l e s o r t o s e t t l e t r a n s a c t i o n s where t h e r e has been a f a i l u r e t o r e c e i v e t h e s e c u r i t i e s r e q u i r e d t o be d e l i v e r e d . I t has been s u gges t ed t h a t t h e use o f l e t t e r s o f c r e d i t (1) p r o v i d e s a l e s s cumbersome system t han t h e use of c as h d ur in g t i me s of high i n t e r e s t r a t e s (when t h e e a r n i n g s o f t h e cash a r e o f t e n d i v i d e d between t h e borrower and t h e l e n d e r ) and (2) i s regarded by f i d u c i a r i e s who lend s e c u r i t i e s as a s a f e r system - 2 - in t h e event o f f a i l u r e o f t h e borrowing b r o k e r o r d e a l e r . The proposed language a l s o adds as an a l t e r n a t i v e d e p o s i t "United S t a t e s government s e c u r i t i e s . " This would c o d i f y an e x i s t i n g i n d u s t r y p r a c t i c e . The language has a l s o been changed t o c l a r i f y t h a t d e p o s i t s should be “marked t o t h e m a r k e t . " The Board b e l i e v e s t h e r e w i l l be no a dv er s e economic consequences from t h e proposed amendment; a nd, f o r t h e purpose of 5 U.S.C. § 6 0 5 ( b ) , t h e Board c e r t i f i e s t h a t t h e r u l e would not have s i g n i f i c a n t economic impact on a s u b s t a n t i a l number of small e n t i t i e s . A c c o r d i n g l y , p u r s u a n t t o §§ 7 and 23 o f t h e S e c u r i t i e s Exchange Act of 1934, a s amended (15 U.S.C. §§ 78g, 78w), t h e Board p ro po se s t o amend § 2 2 0 . 6 ( h ) of R e g u l a t i o n T, t o read as f o l l o w s : (h) Borrowing and l e n d i n g s e c u r i t i e s . Without r e g a rd t o t h e o t h e r p r o v i s i o n s o f t h i s p a r t , a c r e d i t o r may borrow or lend s e c u r i t i e s f o r t h e purpose of making d e l i v e r y o f t h e s e c u r i t i e s in t h e c a s e of s h o r t s a l e s , f a i l u r e t o r e c e i v e s e c u r i t i e s r e q u i r e d t o be d e l i v e r e d , o r o t h e r s i m i l a r s i t u a t i o n s . Each borrowing s h a l l be s ec u re d by a d e p o s i t o f c a s h , United S t a t e s government s e c u r i t i e s o r an i r r e v o c a b l e l e t t e r of c r e d i t i s su e d by a bank i n s u r e d by t h e Federal Deposit I n s u ra n ce C o r p o r a t i o n . Such d e p o s i t made w i th t h e l e n d e r of t h e s e c u r i t i e s s h a l l have a t a l l t ime s a va lu e a t l e a s t equal t o 100 p e r c e n t o f t h e market value o f t h e s e c u r i t i e s borrowed. By o r d e r o f t h e Board of Governors o f t h e Federal Reserve System, November 4, 1981. ( s i g n e d ) William W. Wiles William W. Wiles S e c r e t a r y o f t h e Board [SEAL]
@FedFRASER