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federal reserve bank of DALLAS, TEXAS D a lla s 75222 Circular No. 82-127 O ctober 7, 1982 REGULATION T CREDIT BY BROKERS AND DEALERS Proposed Am endm ent TO ALL MEMBER BANKS, OTHER CREDITORS, AND OTHERS CONCERNED IN THE ELEVENTH FEDERAL RESERVE DISTRICT: The Board o f Governors o f the Federal R e se r v e S ystem for public c om m en t an am endm ent to R egu lation T that would c h a r a c te r is tic s o f private m ortgage-b ack ed s e c u r itie s that may be used for margin cred it at s e c u r itie s brokers. C o m m en ts on the proposed should be r e c e iv e d on or before O ctober 29, 1982. is proposing sp e c ify the as c o lla ter a l am endm ent E nclosed are co p ies o f the Board's press r e le a s e and the m aterial su b m itted to the Federal R e g iste r d etailin g the proposed changes o f the R egulation. In ter e ste d persons are invited to subm it c o m m e n ts to the S ecretary, Board o f G overnors o f the Federal R e se r v e System , 20th S tr e e t and C on stitution Avenue, N.W., Washington, D.C. 20551. P le a se re fe r to D o c k e t No. R -0423 when subm itting co m m e n ts. Q uestions concern ing the proposed am en dm ent should be d ir ec te d to this Bank's L egal D epartm ent, Extension 6171. Additional c o p ies o f this circular may be obtain ed from the D epartm ent o f C om m unications, Financial and Com m unity A ffairs, Extension 6289. Sincerely yours, William H . W allace First Vice P resident Enclosures Banks and others are encouraged to use the following incoming W A T S 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 September 23, 1982 The Federal Reserve Board today proposed, for public comment, an amendment to Regulation T that would specify the characteristics of private mortgage-backed securities that may be used as collateral for margin credit at securities brokers. Comment should be received on or before October 29, 1982. The proposed rule would amend the definition of OTC margin bonds to specify that private mortgage pass-through certificates may be bought on margin at a "good faith" loan value under the same general criteria established for corporate bonds. However, unlike a corporate issue, the principal balance of a private mortgage-backed security declines each month as mortgages backing the security are amortized or prepaid. Consequently, the proposed amendment would require (1) an original minimum issue of $25,000,000 (rather than an outstanding principal amount at the time credit is extended) that may be sold in separate series, (2) current filings with the Securities and Exchange Commission, and (3) the passing through of mortgage interest and principal payments by the servicing agent according to the terms of the offering. The Board specifically requests comment as towhetherthe $25,000,000 minimum initial size is an appropriate criterion to establish adequate marketability of the security for margin account purposes. In addition, the Board requests views as to the likelihood that a broker would liquidate these securities to meet margin calls when there are other types of securities in the customer's account with that broker. The Board's notice is attached. A tta c h m e n t Federal R eserve System Reg ul ati on T (12 CFR 220) [Docket No. R - 0423] CREDIT BY BROKERS AND DEALERS P r i v a t e Mortgage Pa s s- t h ro u g h S e c u r i t i e s as OTC Margin Bonds AGENCY: Board of Governors of th e Federal Reserve System. ACTION: Proposed Rule. SUM ARY: The Board i s propo sin g f o r p u b li c comment an amendment to Regula M t i o n T t h a t w il l s p e c i f y the c h a r a c t e r i s t i c s o f " p r i v a t e " mortgage p a s s -t h r o u g h s e c u r i t i e s ( i . e . , not g ua ra nte ed by a g e n c ie s of th e United S t a t e s government) t h a t may be used as c o l l a t e r a l f o r margin c r e d i t a t s e c u r i t i e s brokerage f i r m s . The e x i s t i n g d e f i n i t i o n of "OTC margin bond" i n Regulation T w il l be expanded t o c o v e r th e s e i n s t r u m e n t s . At p r e s e n t , any "OTC margin bond" i s e l i g i b l e f o r c r e d i t on a "good f a i t h " b a s i s . The proposed c r i t e r i a f o r i n c l u s i o n of a p r i v a t e mortgage p a s s - th r o u g h s e c u r i t y i n the d e f i n i t i o n o f "OTC margin bond" d i f f e r from th e c r i t e r i a i n t h e e x i s t i n g d e f i n i t i o n because of th e n a tu re o f the mortgage p a s s - th r o u g h s e c u r i t y . Unlike a t y p i c a l c o r p o r a t e bond, the p r i n c i p a l ba la n ce of t h i s s e c u r i t y d e c l i n e s each month as mortgages backing th e s e c u r i t y a r e a mo rti ze d o r p r e p a i d . The proposed c r i t e r i a , t h e r e f o r e , w i l l r e q u i r e (1) an o r i g i n a l i s s u e o f $25,000,000 ( r a t h e r than an o u t s t a n d i n g p r i n c i p a l amount a t th e time c r e d i t i s ex te nded) t h a t may be sold i n s e p a r a t e s e r i e s , (2) c u r r e n t f i l i n g s with the S e c u r i t i e s and Exchange Commission, and (3) the p a ssi ng through of mortgage i n t e r e s t and p r i n c i p a l payments by the s e r v i c i n g a g e n t a c c or di ng t o the terms of th e o f f e r i n g . The Board s p e c i f i c a l l y r e q u e s t s comment as t o whether the $25,000,000 minimum i n i t i a l s i z e i s an a p p ro p r i a t e c r i t e r i o n t o e s t a b l i s h adequate m a r k e t a b i l i t y of th e s e c u r i t y f o r margin a cc o u n t pu rp o s e s. In a d d i t i o n , th e Board r e q u e s t s views as t o the l i k e l i h o o d t h a t a broker would l i q u i d a t e t h e s e s e c u r i t i e s to meet margin c a l l s when t h e r e a r e o t h e r types o f s e c u r i t i e s i n the c u s t o m e r ' s accou nt w ith t h a t br o k e r. DATE: Comments should be rec ei v e d on or b e f o r e October 29, 1982. ADDRESS: Comments, which should r e f e r t o Docket No. R-0423, may be mailed t o the S e c r e t a r y , Board of Governors of th 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 or 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 iv 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. - 2FOR FURTHER INFORMATION CONTACT: Laura Homer or Robert Lord, D i v i s i o n of Banking Su p e rv is io n and Reg ul ati on (202) 452-2781 o r David S e i d e r s , D iv is io n o f Research and S t a t i s t i c s , (202) 452-2694, a t th e Board o f Governors of th e Federal Reserve System, Washington, D.C. 20551. INITIAL REGULATORY FLEXIBILITY ANALYSIS: The Board b e l i e v e s t h e r e w i l l be no 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 i f t h i s proposed r u l e i s adopted. LIST OF SUBJECTS IN 12 CFR 220 Banks, Banking; Brokers; C r e d i t ; Federal Reserve System; Margin; Margin Requirements;, Reporting Requirements; S e c u r i t i e s . Pur suant t o s e c t i o n s 7 and 23 of th e S e c u r i t i e s Exchange Act of 1934, as amended (15 U.S.C. 78g and w), th e Board proposes t o amend Regulation T (12 CFR 220) as s e t f o r t h below: § 220.2 — Defi n i t i o n s * * * * * (i) The term "OTC margin bond" means (1) a d e b t s e c u r i t y not t r a d e d on a n a ti o n a l s e c u r i t i e s exchange which meets a l l o f th e following requi re m e n ts : (1) At the time of th e e x t e n s i o n of c r e d i t , a p r i n c i p a l amount of not l e s s than $25,000,000 of the i s s u e i s o u t s t a n d i n g . ( i i ) The i s s u e was r e g i s t e r e d under s e c t i o n 5 of th e S e c u r i t i e s Act of 1933 and the i s s u e r e i t h e r f i l e s p e r i o d i c r e p o r t s p u rs u a nt to s e c t i o n 13(a) o r 15(d) o f th e S e c u r i t i e s Exchange Act of 1934 o r i s an i n s u r a n c e company which meets a l l of the c o n d i t i o n s s p e c i f i e d i n s e c t i o n 12 ( g ) ( 2 ) ( G) of th e Act. ( i i i ) At the time of th e e x t e n s i o n of c r e d i t , the c r e d i t o r has a re aso na ble b a s i s f o r b e l i e v i n g t h a t the i s s u e r is not i n d e f a u l t on i n t e r e s t or p r i n c i p a l payments; or (2) a p r i v a t e mortgage p a s s - th r o u g h s e c u r i t y (no t guaranteed by an agency of th e U.S. government) meeting a l l o f th e following re qu ire me nts : ( i ) an a g g re g a te p r i n c i p a l amount of not l e s s than $25,000,000 (which may be is sue d i n s e r i e s ) was is sue d p u rs u a nt t o a r e g i s t r a t i o n s ta t e m e n t f i l e d w ith the S e c u r i t i e s and Exchange Commission under s e c t i o n 5 of the S e c u r i t i e s Act of 1933. (ii) Curr en t r e p o r t s r e l a t i n g t o th e i s s u e have been f i l e d w ith th e S e c u r i t i e s and Exchange Commission. - 3 (iii) At the time of th e c r e d i t e x t e n s i o n , the c r e d i t o r has a re aso na ble b a s i s f o r b e l i e v i n g t h a t mortgage i n t e r e s t and p r i n c i p a l payments a r e being passed through and t h a t the s e r v i c i n g a g e n t 1s meeting a l l th e o b l i g a t i o n s re q u ir e d under th e terms o f th e o f f e r i n g . By o r d e r of th e Board of Governors of t h e Federal Reserve System, September 22, 1982. ( s ig n e d ) ________________________ James McAfee A s s o c ia te S e c r e t a r y of t h e Board [SEAL]
