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FEDERA L RESERVE BANK OF DALLAS DALLAS, TEXAS 75222 C i r c u l a r No. 83-136 November 8, 1983 REGULATION X BORROW ERS OF SECURITIES CREDIT (Proposed Revision and S i m p l i f i c a t i o n ) TO ALL M BER BANKS EM AND OTHERS CONCERNED IN THE ELEVENTH FEDERAL RESERVE DISTRICT: The Board of Governors of the Federal Reserve System has published f o r comment a proposal to r e v i s e and s i m p l i f y i t s Regulation X. This proposal i s a r e s u l t of the Board's r e g u l a t o r y improvement p r o j e c t in which the Board is reviewing and r e v i s i n g i t s r e g u l a t i o n s in or d e r to update them, s i m p l i f y t h e i r language, e l i m i n a t e o b s o l e t e or unneeded language or p r o v i s i o n s , and l i g h t e n the burden of compliance. I n t e r e s t e d p a r t i e s ar e i n v i t e d to submit proposed r e v i s i o n to William W Wiles, S e c r e t a r y , . Federal Reserve System, 20th S t r e e t and C o n s t i t u t i o n D.C., 20551. Comments should r e f e r to Docket re c e iv e d by November 30, 1983. comments concerning the Board of Governors of the Avenue, N.W., Washington, Number R-0487 and must be Attached ar e co pies of the Board's pres s r e l e a s e and the m a t e r i a l as submitted f o r p u b l i c a t i o n in the Federal R e g i s t e r . Questions r e ga rd in g the m a t e r i a l co n ta in ed in the c i r c u l a r should be d i r e c t e d to the Legal Department, Extension 6171. Add itiona l co pies of t h i s c i r c u l a r w ill be f u r n i s h e d upon r e q u e s t to the Publi c A f f a i r s Department, Extension 6289. Sincerely yours, F i r s t Vice P r e s i d e n t This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) 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. FEDERAL RESERVE press release For immediate r e l e a s e October 20, 1983 The Federal Reserve Board today req u est ed comment on a proposal to completely r e v i s e Regulation X, which a p p l i e s t o borrowers who o b ta in c r e d i t f o r t h e purpose of purchasing or c a r r y i n g s e c u r i t i e s (margin c r e d i t ) . The Board req ue ste d comment by November 30, 1983. The proposed r e v i s i o n of Regulation X i s p a r t of t h e Board's Regulatory Improvement P r o j e c t in which t h e Board i s reviewing and r e v i s i n g a l l i t s r e g u l a t i o n s to update them, s im p li f y t h e i r language, e l i m i n a t e o b s o l e t e or unneeded language or p r o v i s i o n s and l i g h t e n th e burden of compliance. The Board has p r e v i o u s l y , under t h i s p r o j e c t , completely re v is e d Regul ati ons G, T and U, which apply t o le nd er s (as d i s t i n g u i s h e d from borrowers under Regul ation X) who give c r e d i t f o r purchasing or c a r r y i n g s e c u r i t i e s . The major s u b s t a n t i v e changes t o Regulation X would be t h e e x c l u si o n of pure ly domestic borrowings which a r e a lr e a d y r e g u l a t e d by margin r u l e s a p p l i c a b l e to l e n d e r s , and an i n c r e a s e in t h e exemption f o r margin c r e d i t ob ta in e d by U.S. persons r e s i d i n g abroad from $5,000 to $100,000. In a d d i t i o n , th e Board proposed a number of t e c h n i c a l r e v i s i o n s t o th e Regulation and t h e e l i m i n a t i o n of th e Board's requirement f o r borrowers t o f i l e form X-l. The Board's n o t i c e i s a t t a c h e d . - Attachment 0- Federal Reserve System Regulation X (12 CFR 224) [Docket No. R-0487] BORROW ERS OF SECURITIES CREDIT Complete Revision and S i m p l i f i c a t i o n of Regulation X AGENCY: Board of Governors of the Federal Reserve System. ACTION: Proposed Rule. SUM ARY: The Board proposes to r e v i s e , in i t s e n t i r e t y , Regulation X, which M governs borrowers who o b t a i n c r e d i t fo r the purpose of purchasing or c a r ry in g s e c u r i t i e s . The proposed Regulation X i s w r i t t e n in s i m p l i f i e d language, o rg a ni z ed in a l o g i c a l fas hio n and reduced in r e g u l a t o r y burden. DATE: Comments should be receiv ed on or b ef ore November 30, 1983. ADDRESS: Comments, which should r e f e r to Docket No. R-0487, may be mailed to Mr. William W Wiles, S e c r e t a r y , Board of Governors of the 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, O.C. 20551 or d e l i v e r e d to Room B-2223 between 8:45 a.m. and 5:15 p.m. Comments re cei ve 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. 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 Robert Lord, A tt or ne y , D ivi si on of Banking Supervision and Regulation (202) 452-2781. SUPPLEMENTAL INFORMATION: Regulation X, governing borrowers who o b ta in c r e d i t to purchase s e c u r i t i e s , i s being r e v i s e d in i t s e n t i r e t y . The proposed r e v i s i o n follows the format of the r e c e n t l y r e v i s e d Regul ation s G, T, and U in t h a t i t has been re o r g a n iz e d in a l o g i c a l f a s h i o n , i t s language has been s i m p l i f i e d and o b s o l e t e p r o v i s i o n s have been removed. D e f i n i t i o n s which a r e in the a p p l i c a b l e le nd e r r e g u l a t i o n have been e li m in a te d as su p e r fl u o u s because the borrower must look t o the a p p l i c a b l e l e n d e r r e g u l a t i o n in any e v e n t . The major s u b s t a n t i v e change proposed fo r Regul ation X i s the e x c l u s i o n from r e g u l a t i o n of purely domestic borrowings. C r e d i t involved in such t r a n s a c t i o n s i s a l r e a d y r e g u l a t e d by margin r u l e s a p p l i c a b l e to l e n d e r s . In a d d i t i o n , the proposed r e v i s i o n would i n c r e a s e the exemption f o r purpose c r e d i t o b ta in e d by U.S. persons r e s i d i n g abroad from $5,000 t o $100,000. - 2 - The se c tio n providing f o r an exemption f o r borrowings made in con ne ct ion with c l e a r i n g , market-making, or a r b i t r a g e t r a n s a c t i o n s in c e r t a i n o f f s h o r e debt s e c u r i t i e s , the purchase of which gave r i s e to fe d e ra l tax l i a b i l i t y , has been removed in i t s e n t i r e t y . I t i s be lie ve d t h a t t h i s exemption i s no longer necessary in l i g h t of i t s very l i m i t e d a p p l i c a t i o n and the repeal of the I n t e r e s t E q ua liz a tio n Tax (see P.L. 94-455) which c r e a t e d the aforementioned tax l i a b i l i t y . Although c r e d i t extended to a U.S. person by a fo r e ig n branch of a U.S. b r o k e r / d e a l e r w il l s t i l l be s u b j e c t to Regulation T, th e p r o v i s i o n t h a t ap pli ed the same tre a tm e n t to c r e d i t extended by a s u b s i d i a r y of a b r o k e r / d e a l e r (even when t h a t s u b s id ia ry i s a merchant bank) has been removed. This w il l p a r a l l e l the s t r u c t u r e in Regulation U concerning bank lending abroad where a U.S. borrower i s s u b je c t to Regulation U only i f th e person borrows from a branch of a U.S. bank. I f t h i s change i s adopted, purpose c r e d i t extended to United S t a t e s persons by a fo r e ig n s u b s i d i a r y of a b r o k e r / d e a l e r would be s u b j e c t to the c r e d i t l i m i t a t i o n s of Regulation G. The "ai ding and a b e t t i n g " c la us e of Regulation X (12 CFR 2 24 .6 (b )) i s proposed to be d e le te d because such l i a b i l i t y i s a lr e ad y implied in the general body of s e c u r i t i e s law. F i n a l l y , under the proposed r e v i s i o n , th e Form X-l would no lo nge r be r e q u ir e d . Experience has not demonstrated t h a t a requirement to use the form i s necessary to e f f e c t compliance with th e Regul ati on . In any e v e n t , the information re q u ir e d to be maintained on the form could be o b ta in e d through legal pr oc ess . INITIAL REGULATORY FLEXIBILITY ANALYSIS: The changes proposed pursuant to t h i s a c t i o n a re p a r t of a program to s im pl ify all of the Board's r e g u l a t i o n s and to reduce s p e c i f i c a d m i n i s t r a t i v e and re g u la to ry burdens. The Board c e r t i f i e s f o r purposes of 5 U.S.C. 6 0 5 ( b ) ) , t h e r e f o r e , t h a t the proposed s i m p l i f i c a t i o n of Regulation X i s not expected to have any adverse impact on a s u b s t a n t i a l number of small b u s in e s s e s . L i s t of Subjects in 12 CFR P a r t 224 Banks, Banking, Borrowers, Brokers, C r e d i t , Federal Reserve System, Margin, Margin Requirements. Accordingly, pur suant to se c ti o n s 3, 7, 8, 17 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. §§ 78c, 78g, 78h, 78q, and 78w) the Board proposes to re p la c e Regulation X in i t s e n t i r e t y with a completely r e v i s e d Regulation X which will read as foll ows: 12 CFR P a r t 224 - - BORROW ERS OF SECURITIES CREDIT Se ction 224.1 — AUTHORITY, PURPOSE, A D SCOPE M (a) Authority and pu rp o s e . Regulation X ( t h i s p a r t ) i s is su ed by the Board of Governors of the Federal Reserve System (th e Board) under the S e c u r i t i e s Exchange Act of 1934, as amended (t h e A c t ) (15 U.S.C. 78a e t s e q . ) . This p a r t implements s e c t i o n 7 ( f ) of the Act (15 U.S.C. 7 8 g ( f ) ) , the purpose of which i s to r e q u i r e t h a t c r e d i t ob ta in e d w ith in or o u t s i d e the United S t a t e s complies with the l i m i t a t i o n s of the Board's Margin Regu lation s G, T, and U (12 CFR 207, 220, and 221, r e s p e c t i v e l y ) . (b) Scope and exemptions. The Act and t h i s p a r t apply the Bo ard 's margin r e g u l a t i o n s to United S t a t e s persons and fo r e ig n persons c o n t r o l l e d by or ac t in g on be h a l f of or in co n ju n c ti o n with United S t a t e s persons (borrowers), who o b ta in c r e d i t o u ts id e the United S t a t e s to purchase or car ry United S t a t e s s e c u r i t i e s , or w ithin the United S t a t e s to purchase or c a r ry any s e c u r i t i e s (both types of c r e d i t are h e r e i n a f t e r r e f e r r e d to as purpose c r e d i t ) . The following borrowers ar e exempt from the Act and t h i s part: (1) any borrower who o b ta in s c r e d i t w i t h i n the United S t a t e s t h a t i s s u b j e c t to Regulation G, T, o r U; 4 (2) any borrower whose permanent re s id e n c e i s o u t s i d e th e United S t a t e s and who does not o b ta in or have o u t s t a n d i n g , during any c a l e n d a r y e a r , a t o t a l of more than $100,000 in purpose c r e d i t ob ta in e d o u ts id e the United S t a t e s ; and (3) any borrower who i s exempt by Order upon terms and c o n d it io n s s e t by the Board. Section 224.2 — DEFINITIONS The terms used in t h i s p a r t have th e meanings given t o them in s e c t i o n s 3(a) and 7 ( f ) of the Act, and in P a r t s 207, 220, and 221 of t h i s Chapter (Regulations G, T, and U). Se ction 7 ( f ) of the Act c o n ta in s the following d e f i n i t i o n s : (a) "United S t a t e s person" in c lu d e s a person which i s organized or e x i s t s under the laws of any S t a t e o r , in the case of a n a tu r a l person, a c i t i z e n or r e s i d e n t of the United S t a t e s ; a domestic e s t a t e ; or a t r u s t in which one or more of the foregoing persons has a cumulative d i r e c t or i n d i r e c t b e n e f i c i a l i n t e r e s t in excess of 50 pe r centum of the value of th e trust. (b) "United S t a t e s s e c u r i t y " means a s e c u r i t y ( o t h e r than an exempted s e c u r i t y ) is su ed by a person i n c o r p o r a t e d under the laws of any S t a t e , or whose p r in c ip a l pla ce of bu si n ess i s w i t h i n a S t a t e . - 2 - (c) "Foreign person c o n t r o l l e d by a United S t a t e s person" i n c l u d e s any no n c orp ora te e n t i t y in which United S t a t e s persons d i r e c t l y o r i n d i r e c t l y have more than a 50 p e r centum b e n e f i c i a l i n t e r e s t , and any c o r p o r a t i o n i n which one o r more United S t a t e s pe rs on s, d i r e c t l y or i n d i r e c t l y , own stock p o s s e s s in g more than 50 p e r centum of the t o t a l com bined v o tin g power of a l l c l a s s e s of stock e n t i t l e d t o v o te , or more than 50 p e r centum of t h e t o t a l value of shar es of a l l c l a s s e s of s to c k . S e c ti o n 224.3 — MARGIN REGULATIONS TO BE APPLIED BY NON-EXEMPTED BORROW ERS (a) Types of c r e d i t t r a n s a c t i o n s . No borrower s h a l l o b ta in purpose c r e d i t from o u t s i d e t h e United S t a t e s u n le ss i t conforms to the following margin r e g u l a t i o n s : (1) R egul ation T (12 CFR 220) i f the c r e d i t i s o b ta ine d from a for eig n branch of a b r o k e r - d e a l e r ; (2) R egul ation U (12 CFR 221) i f the c r e d i t i s obt ained from a for ei gn branch of a bank, ex cep t f o r the requirement of a purpose stat eme nt (12 CFR 2 2 1 . 3 ( a ) ) ; and (3) R egul ation G (12 CFR 207) i f the c r e d i t i s ob ta ine d from any o t h e r l e n d e r , ex cep t f o r the re quirement of a purpose s tat em en t (12 CFR 2 0 7 . 3 ( a ) ) . (b) I n a d v e r t e n t noncompliance. No borrower who i n a d v e r t e n t l y v i o l a t e s t h i s p a r t and who a c t s to remedy th e v i o l a t i o n as soon as p r a c t i c a b l e s h a l l be deemed in v i o l a t i o n of t h i s p a r t . By o r d e r of t h e Board of Governors of the Federal Reserve System, October 19, 1983. (signed) William W. Wiles William W Wiles . S e c re ta r y of the Board
