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F ederal r eser ve Ban k o f Dallas

DALLAS, TEXAS

75222

Circular No. 71-251
October 22, 1971

REGULATION X
"RULES GOVERNING BORROWERS WHO OBTAIN SECURITIES CREDIT"
(Effective November 1, 1971)
To All Banks, Brokers/Dealers, Regulation G Registrants
and Others Concerned in the Eleventh Federal Reserve District:
Enclosed is a pamphlet containing new Federal Reserve
Regulation X, "Rules Governing Borrowers Who Obtain Securities Credit",
effective November 1, 1971? and an explanatory press release prepared
by the Board of Governors of the Federal Reserve System.
The regulation, issued pursuant to Title III of P.L. 91-508?
imposes responsibility for compliance with the Board's margin regulations
(Regulations G? T and U) on borrowers of securities credit as well as
lenders.
The cooperation of banks and firms engaged in extending
securities credit is requested in advising borrowers, particularly
those outside the United States, of the requirements of Regulation X.
Because of the increased difficulty of informing borrowers outside the
United States, banks and firms in this Federal Reserve District with
foreign branches and subsidiaries are particularly encouraged to inform
their U. S. borrowers residing abroad.
A pamphlet containing the present margin regulations G, T
and U as well as new Regulation X, will soon be available for distri­
bution. You may request copies of this pamphlet for internal use and
for distribution to customers here and overseas from the Regulations
Department, Federal Reserve Bank of Dallas, Station K, Dallas, Texas
75222. Requests will be filled as soon as the pamphlets are available.
Yours very truly,

P. E. Coldwell
President

Enclosures

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

;oL£2vv :

..

FEDERAL RESERVE

l
^

press

The Board
i ss u e d

release

of G o v e r n o r s

a new regulation

to c o m p l y w i t h m a r g i n
lation

to

regulations

out

provisions

91-508

enacted

ments.

Credit"

of T i t l e

That Act

for

1970)
first

comply w i t h m a r g i n regulations
l a t io n s

previously applied
Establishment

the

proposal

is su e d

ing m a r g i n regulations
Margin
of

credit

to all

securities

applies
margin
other

to c r e d i t
stoc ks ,

while

t ha n b an ks ,
As

persons

by

t i me

Borrowers Who

R e g u l a t i o n X.
Bank Secrecy

that r e l a t e

to

It w i l l

A c t (P ub l ic

m a r g i n credit

to

transactions.

Law

require­

The

to

regu­

lenders.

26 w h i c h w o u l d h a v e a m e n d e d

are d e s i g n e d

extended

b a nk s

for

brokers,

to

p re v e n t

transactions.
by brokers

the p u r p o s e

Regulation G applies

in the J u l y

carry

specifically requires borrowers

in s e c u r i t i e s

securities

c re di t

Th e r e g u ­

in f o r m

f ro m

t he t h r e e

exist­

c ov er b o r r o w e r s .

regulations

in f i n a n c i n g

the F o r e i g n

primarily

July
to

borrowers

transactions.

of a separate regulation differs

on

t o d ay

that r e q u i r e s

"Rules Governing

is d e s i g n a t e d

II I of

the

in s e c u r i t i e s

is e n t i t l e d

a nd

O c t o b e r 26,

legislation

System

1.

The new regula t i o n
Securities

the F e d e r a l R e s e r v e

implement

is e f f e c t i v e N o v e m b e r

Obtain

of

the

excessive

Regulation

and d e a l e r s ;

of

T applies

Regulation U

p u r c h a s i n g or

to suc h

c re d i t

use

carrying

by p e r s o n s

or d e a l e r s .

proposal,

the n e w r e g u l a t i o n w i l l

borrowing

in

the U n i t e d S ta t e s

lation applicable

to

the

to c o m p l y w i t h

l en de r e x t e n d i n g

h i m credit

require

the m a r g i n r e g u ­
on s e c u r i t i e s .

If

- 2 -

a U.S.

person borrows

the m a r g i n

regulation

the U n i t e d

a br oad ,

he m u s t

that w o u l d

comply with

provisions

maintained

after

the e f f e c t i v e
margin

October

date,

the

apply

c re d i t

to

credit were

extended,

Commencing May

restrictions

a c c o u n t s wi l l

the da t e

31.

apply

if the

of

Sta te s.
The regulation w ill

apply

the

1972,

on substitutions

to c r e d i t

legislation became

1,

extended

obtained

arranged

or

six m o n t h s

af ter

an d w i t h d r a w a l s

a f t er

October

26,

in

from

1970,

law.

The new Regulation X w ill

exempt

the

following

f r o m its

provisions:
1.
S ta t e s w h o
purpose

d e bt

c re d i t

Credit

c le a r i n g ,

3.
of U.

is w a r r a n t e d
Securities

ment

S.

by

market-making

tha t

are

a br o a d

outside

no m o r e

the U n i t e d

than $ 5 , 0 0 0

f o r e i g n a f f i l i a t e s o f U. S.
or arbitrage

convertible

p e r s o ns ,

provided

by e x c e p t i o n a l
of

in

the

Th e B o a r d

into m a r g i n
are

1934

retain

and

to

securities.

controlled

circumstances

f ir ms

t r a n s a c t i o n s in o f f s h o r e

by or

the B o a r d d e t e r m i n e s

acting on

th at

an e x e m p t i o n

is c o n s i s t e n t w i t h

the

an d R e g u l a t i o n X.

the n e w r e g u l a t i o n ,

abroad must

describing

proposals

outstanding

obtained

Exchange Act

credit

permanently residing

Foreign borrowers who

Under
rities

citizens

per year.

securities

behalf

S.

o b t a i n or h a v e

2.
finance

U.

certain borrowers who obtain

in t h e i r r e c o r d s

for

si x y e a r s

secu­
a state­

transaction.
s t i ll h a s

is s ue d o n J u l y

26,

c a t i o n of m a r g i n

regulations

broker-dealers.

A

under

consideration

particularly
to

t h os e

foreign branches

certain aspects

relating
of U.

c o py of R e g u l a t i o n X is a tt a ch ed .
- 0 -

to

of

the

the a p p l i ­

S. b a n k s

and U.

S.

(Regulation X ) . W hen th e term “G- len der” is used in this p a r t (Regulation
lender” is used in this p a r t (Regulation X) it m eans any person, other th a n a
X ) , it m eans a person who is n o t a U.S. person, who in th e ordinary course
broker/dealer or bank, who in th e ordi­ of his business extends, m aintains, or
n ary course of his business extends, arranges purpose credit outside th e
m aintains, or arran ges credit th a t is se­ United States and who is no t a foreign
cured, directly or indirectly, in whole or b ran ch or subsidiary of a broker/dealer,
A u t h o r i t y : T he provisions of th is P a rt
in part, by collateral th a t includes any a foreign bran ch of a bank, or a foreign
224 (Regulation X ) , issued u n d e r sec. 7(f) of m argin securities, an d who is subject to b ra n c h of a G-lender.
the Securities Exchange Act of 1934, as th e registration requirem ent of § 207.1
(2) The provisions of sub paragraph
amended (15 U.S.C. 78a-jj, particularly
(a) of this ch ap ter (Regulation G ) .
(1) of this para g ra p h shall no t apply to
78g(f)).
(2) Credit obtained from a b ro ker/ credit extended before November 1, 1971,
§ 2 2 4 .1 Scope of p a rt.
dealer shall conform to th e provisions of except th a t as to credit extended a fte r
This P a r t 224 (Regulation X) contains P a r t 220 of this ch ap ter (Regulation T ) , October 26, 1970, th e requirem ents as to
rules a nd regulations prom ulgated by the which is hereby incorporated in this p a rt w ithdraw als an d substitutions of col­
Board of Governors of th e Federal R e ­ (Regulation X ) . W hen the term “brok er/ lateral shall apply a fte r May 1, 1972, as
serve System (the Board) u nd er th e S e­ dealer” is used in this p a rt (Regulation follows: The requirem ents in § 207.1 (j )
curities Exchange Act of 1934 as X ) , it m eans a person who is a broker of this chapter (Regulation G) shall a p ­
amended (the Act) and applies to all or dealer, including every member of a ply to credit obtained from a foreign
Persons described below who obtain, re ­ n atio n al securities exchange, and i n ­ b ran ch of a G -lender or from a foreign
ceive, or enjoy th e beneficial use of cludes a foreign branch or subsidiary of lender; the requirem ents in § 220.3(b) of
this ch ap ter (Regulation T) shall apply
credit for th e purpose of purchasing or a broker/dealer.
(3) Credit obtained from a bank shall to credit obtained from a foreign branch
carrying securities.1 F or definitions of
technical term s see § 224.5, P a rts 207, 220, conform to th e provisions of P a r t 221 of or subsidiary of a broker/dealer: and the
and 221 of this c h a p te r (Margin* Regu­ this c h a p te r (Regulation U ) , except for requirem ents in § 221.1(b) of this ch ap ­
lations G, T, an d U) and th e S tatu to ry § 221.2(i). Except for such section, P a r t te r (Regulation U) shall apply to credit
Appendix. The purpose of this p a rt (Reg­ 221 of this ch ap ter (Regulation U) is obtained from a foreign bran ch of a
ulation X) is to prevent th e infusion of hereby incorporated in this p a r t (Regu­ bank.
(3) Record of credit. Every borrower
un egulated credit obtained both outside lation X ) . W hen th e term “b an k ” is used
and within th e United S tates into U.S. in this p a r t (Regulation X ) , it m eans subject to this P a r t 224 (Regulation X)
securities m arkets in circum vention of a bank th a t is subject to P a r t 221 of this who obtains any credit from a lender
described in subdivision ( i) , (iii), or (iv)
the provisions of th e B oard ’s m argin c h a p te r (Regulation U)
(b)
Credit obtained from outside theof subp arag raph (1) of this p arag rap h
regulations or by borrowers falsely cer­
tifying the purpose of a loan or otherwise United States. (1) A U.S. person or fo r­ if such credit is secured directly or in ­
wilfully and intentionally evading the eign person controlled by a U.S. person directly, in whole or in p art, by col­
Provisions of those regulations. W hen the or acting on behalf of or in conjunction lateral th a t includes any security, shall
term “obtain cred it” is used in this p a rt w ith such a person shall n o t obtain any prepare an d retain in his records, for a t
Regulation X) it m eans “obtain, receive. purpose c r e d it” from outside th e United least 6 years a fte r such credit is e x tin ­
°r enjoy the beneficial use of cred it” and S tates except in compliance w ith the fol­ guished, a record substantially in con­
form ity w ith th e requirem ents of Federal
when the term “purpose cred it” is used, lowing conditions:
(i) C redit obtained from a foreign Reserve F orm X -l.
it means “credit for the purpose of p u r­
chasing or carrying securities”. W hen b ran ch of a G -lender shall conform to § 224,3 E xem ptions.
the term “borrow er” is used, it m eans a th e provisions of P a r t 207 of this chap ter
T he following classes of persons shall
Person who obtains credit. T his p a rt (Regulation G ), except th a t th e require­
'Regulation X) im plem ents section 7(f) m e n t of § 207.1(e) of this ch ap ter as to be exempted from the provisions of sec­
°t the Act, and generally applies to bor­ obtaining a sta te m en t of th e purpose of tion 7(f) of th e Act and this p a rt (Regu­
lation X) to th e extent described below:
th e credit shall n o t apply.
rowers who are:
(a) A U.S. person whose perm anent
(ii) Credit obtained from a foreign
<a) Persons who obtain credit from
b ran ch or subsidiary of a broker/dealer residence is outside th e United States,
within th e U nited States, or
an d who does n o t during any calendar
fb> Those persons who obtain credit shall conform to th e provisions of P a r t year obtain a total of more th a n $5,000
220 of this ch a p te r (Regulation T ) .
,rom outside th e U nited S tates who are:
(iii) Credit obtained from a foreign or have outstanding a t any tim e during
•1) U.S. persons,2
any calendar year a total of more th a n
(2)
Foreign persons who are con­ b ran c h of a b ank shall conform to the $5,000 in credit obtained outside th e
provisions of P a r t 221 of this ch ap ter
trolled by U.S. persons,'1or
(Regulation U) which would apply if U nited S tates to purchase or carry m a r­
<3) Foreign persons acting on behalf th e credit were obtained from the head gin securities.
°f or in conjunction w ith 1 U.S. persons. office of th e bank in th e United States,
(b) A borrower who is no t a U.S. p er­
except t h a t the requirem ent of § 221.3(a) son, b u t is controlled by or acting on
§ 224.2 G eneral rule.
of this ch ap ter (Regulation U) as to ob­ behalf of or in conjunction w ith such
(a)
Credit obtained fro m w ithin the taining a sta te m en t of th e purpose of the person, who obtains credit for the p u r­
United States. A borrower shall n o t ob­ credit shall n o t apply.
pose of bona fide clearing, m ark ettain any purpose credit from w ithin the
(iv) Credit obtained from a foreign making, or arbitrage transactions in off­
United S tates unless he does so in com ­ lender shall conform to th e provisions shore debt securities th a t are convertible
pliance with th e following conditions:
of P a rt 207 of this chapter (Regulation into m argin securities, except th a t any
(1)
Credit obtained from a G -lender G) which would apply if th e person ex­ credit outstanding against collateral con­
shall conform to th e provisions of P a rt tending, arranging, or m aintaining the sisting of such securities shall be brought
207 of this ch ap ter (Regulation G ) , credit were a G -lender, except th a t the into conform ity w ith th e o ther provisions
which is hereby incorporated in this p art
requirem ent of § 207.1(e) of this chapter of this p a rt (Regulation X ) ’ upon the
(Regulation G) as to obtaining a sta te ­ conversion of such securities into m a r­
115 U.S.C. 78g.
m ent of the purpose of th e credit shall gin securities.
(c) A borrower who is n o t a U.S. p er­
' For definition of th e term “U nited S tates
n o t apply. W hen the term “foreign
Person,” see S ta tu to ry Appendix, sec. 7 (f) (2)
son, b u t is controlled by or acting on
(A).
behalf of or in conjunction w ith such
0 For a definition of th e term “b a n k ” m ea n ­ person, who obtains credit from outside
1For definition of th e term "foreign persons

REGULATION X

controlled by a U n ited S ta te s person,” see
Statutory Appendix, sec. 7 (f) (2) (C ) .
*For definition of th e te rm "actin g on be­
half of or in c o n ju n c tio n w ith ,” see § 224.5(a)
•Regulation X ) .

ing “b ank t h a t is subject to R egulation U ” ,
see § 224.5(b) (R egulation X) and S ta tu to ry
Appendix, sec. 3(a) (6).
” For a definition of th e term “purpose
c re d it” see § 224.5(j) (R egulation X ) .

1 Inclu d in g P a rts 207, 220, or 221 of th is
c h ap te r (R egulations G, T, and U) where
applicable.

th e U nited States, which borrower has
been exempted by th e Board of Gover­
nors of the Federal Reserve System, by
order, from th e requirem ents of this p a rt
(Regulation X ), either unconditionally
or upon specified term s an d conditions
or for stated periods, upon a finding th a t
exceptional circum stances w a rra n t th e
grantin g of such an exemption, an d th a t
th e exemption is consonant w ith th e p u r ­
poses of section 7(f) of th e Act and th e
provisions of this p a rt (Regulation X ) .
§ 224.4

R eporls and records.

Every borrower described in § 224.1
who obtains any credit th a t is secured
directly or indirectly, in whole or in part,
by collateral th a t includes any securities,
shall m ain tain such records an d file such
reports as m ay be prescribed by the
B oard of Governors of th e Federal R e­
serve System to enable it to perform th e
functions conferred upon it by th e Act.
§ 224.5

D efinitions.

Unless th e context otherwise requires,
or it is otherwise specified herein, th e
term s used in and for th e purposes of this
p a rt (Regulation X) have th e m eanings
given th em in this section, in sections 3
(a) or 7 (f) of th e Act, or in P a r t 207, 220,
or 221 of this ch ap ter (Regulation G, T,
or U ) . The revelant portions of sections
3(a) and 7(f) of th e Act are set fo rth in
the S tatutory Appendix. In th e case of
inconsistency between definitions a p ­
pearing in this section an d those a p ­
pearing in P a r t 207, 220, or 221 of this
ch ap ter (Regulation G, T, or U ) , the
definition appearing in th e regulation
t h a t applies to the p articu la r credit in ­
volved, w hether P a r t 207, 220, or 221 of
this chapter (Regulation G, T, or U)
shall prevail.
(a) The term “acting on behalf of or
in conjunction w ith” in reference to a
foreign person m eans obtaining credit for
th e purpose of purchasing or carrying a
security in which, or in th e income or
gains or losses from which, a U.S. person
or a foreign person controlled by a U.S.
person has a substantial direct or in ­
direct beneficial interest. Absent these
factors th e term does not include an in ­
terest derived solely from the ownership
of less th a n 50 percent of the o u tstan d ­
ing capital stock issued by such foreign
person who is obtaining such credit.
(b) The term “b an k ” m eans a bank as
defined in section 3(a) (6) of th e Act, in ­
cluding a foreign b ran c h of a bank, ex­
cept th a t such term does not include a
bank which is a mem ber of a national
securities exchange, a foreign affiliate of
a bank, or a foreign bank.
(c) The te rm “b ro k er/d ea le r” means
any broker or dealer including every
mem ber of a n ation al securities ex­
change, and includes a foreign branch or
subsidiary of a broker/dealer.
(d) The term “foreign len der” m eans
a person, other th a n a U.S. person, who
in the ordinary course of his business
extends, m aintains, or arranges purpose
credit outside th e United S tates and who
is not a foreign branch or subsidiary of a
broker/dealer, a foreign branch of a
bank, or a foreign branch of a G-lender.

(e) The term “G -len der” means a p e r­
(2) Credit to enable the borrow er te
son who is n o t a b roker/dealer or bank, reduce or retire indebtedness w h ich was
who in the o rdinary course of his business originally in cu rred to purchase security
extends, m aintains, or arranges credit is for th e purpose of “carry ing” such a
th a t is secured, directly or indirectly, in security.
whole or in p art, by collateral th a t in ­
(3) Credit th a t is secured directly or
cludes any m argin securities, and who is indirectly, in whole or in p a rt, by colsubject to the registration requirem ent lateral th a t includes any securities, is
of § 207.1(a) of this ch ap ter (Regulation presum ed to be for th e purpose o f p u r­
chasing or carrying securities, unless the
G ).
(f) The term “indirectly secured” in ­ borrower has complied w ith the require­
cludes any arran g em en t with th e lender m ents of P a r t 207 (R egulation G).
under w hich the rig h t or ability to sell, P a r t 220 (Regulation T ) , and P a r t 221
pledge, or otherwise dispose of securities of th is chapter (Regulation U) as to the
owned by the borrower (or by any other statem en t of the purpose of a credit, if
person who h as m ade th e use of such such requirem ents are applicable, or in
securities available to the borrower) is in th e case of credit obtained from a for­
any way restricted as long as th e credit eign lender, can furnish satisfacto ry evi­
rem ains outstanding, or u nder which th e dence of th e use of th e credit for a pur­
exercise of such right, w hether by w rit­ pose other th a n purchasing or carrying
ten agreem ent or otherwise, is or may be securities.
(4) An extension of credit provided for
cause for acceleration of m atu rity of the
credit. T he foregoing shall n o t apply, in a plan, program, or investm ent con­
tr a c t offered or sold or otherw ise inihowever—
(1) If such restriction arises solely tiated afte r August 31, 1969, w hich pro­
by virtue of an arran gem ent with the vides for th e acquisition b oth of any
lender w hich p ertains generally to the securities and of goods, services, prop­
borrow er’s assets unless a substantial erty interests, or investments.
(k) The term “obtain cred it” means
p a rt of such assets consists of m argin
to obtain, receive, or enjoy the beneficial
securities, or
(2) If th e lender in good fa ith has not use of credit.
(1) T he term “United S ta te s” includes
relied upon such securities as collateral
in th e extension or m aintenance of the any S tate of the U nited States, th e Dis­
tric t of Columbia, Puerto Rico, the
particu lar credit, or
(3) To securities held by th e lender Canal Zone, the Virgin Islands, or ar
only in the capacity of custodian, deposi­ other possession of the U nited States
tary, or trustee, or under sim ilar circum ­ § 22 1.6 M iscellaneous provisions,
stances, if the lender in good faith has
(a) Innocent mistake. An innocent
no t relied upon such securities as col­ m istake m ade in good faith by a bor­
la tera l in the extension or m aintenance rower in connection with the obtaining
of th e p articu lar credit.
of a credit shall not be deemed to be a
(g) The term “lend er” means a p e r­ violation of this p a rt (R egulation X
son who in th e ordinary course of his if prom ptly afte r discovery of th e mis­
business extends, m aintains, or arranges tak e the borrower takes w hatever action
for credit, including a G-lender, a is practicable to remedy th e noncombroker/dealer, a bank, and a foreign pliance.
lender.
<b) Aiding or abetting. Any person
(h) T he term “m argin security” shall who willfully aids or abets the violation
have the m eaning of “m argin security” by any other person of any provision of
as defined in I 207.2(d) of this chapter this p a rt (Regulation X) shall be deemed
(Regulation G) if th e borrower is ob­ to be in violation of this p a rt (Regulation
tainin g credit from a G -lender or a fo r­ X ) . For the purpose of this subsection
eign lender, the m eaning of “m argin se­ th e term “aids or abets” shall include, but
cu rity ” as defined m 1 220.2(f) of this no t be limited to, counsels, commands
ch ap ter (Regulation T) if th e borrower induces, or procures.
is obtaining credit from a broker/dealer,
[FR Doc.71-14996 Filed 10-12-71;8 :51 ami
an d th e m eaning of “m argin stock” as
defined in I 221.3 (v) of this chapter
(Regulation U) if th e borrower is o b tain ­
ing credit from a bank.
(i) The term “offshore debt security,”
as to this p a r t (Regulation X) means a
debt security offered only outside the
U nited States, th e purchase of which by
a U.S. person would give rise to a liability
un der th e In terest Equalization Tax (26
U.S.C. 4911 et seq.).
(j) T he term “purpose credit” means
credit for th e purpose of purchasing or
carrying securities. T he purpose of a
credit is determ ined by substance ra th e r
th a n form. T he following are some exam ­
ples of purpose credit.
(1)
Credit w hich is for th e purpose,
w hether im mediate, incidental, or u lti­
m ate, of purchasing or carrying a secur­
ity is “purpose credit,” despite any
tem porary application of th e funds
otherwise.

.
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