Full text of Federal Reserve Bank of New York Circulars : 10721. Credit by Brokers and Dealers

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FEDERAL RESERVE BANK
OF NEW YORK

[

Circular No. 10721 ”1
July 15, 1994

CREDIT BY BROKERS AND DEALERS
Proposed Amendments to Regulation T
Comments Invited by August 15, 1994

To All Banks, Brokers and Dealers, and Others Extending
Securities Credit in the Second Federal Reserve District:

The following is the text of a statement issued by the Board of Governors of
the Federal Reserve System:
The Federal Reserve Board has requested public comment on proposed
amendments to Regulation T (Credit by Brokers and Dealers) regarding settlement of
securities purchases and the status of government securities transactions.
Comments should be received by August 15, 1994.
One proposal specifies that customers must meet initial margin calls or make full
cash payment for securities purchased at a broker-dealer within two business days of
the standard settlement period.
Related amendments would raise the de minimis amount below which liquidation
of unpaid transactions is not required from $500 to $1000, require brokers seeking
extensions of the payment periods to obtain them from their designated examining
authority, and clarify that foreign settlement periods are used to calculate when
restrictions in the cash account are applied to foreign securities.
Other amendments would exempt certain brokers and transactions involving U.S.
government securities from the regulation.

Printed on the following pages is the text of the proposal, which was published
in the Federal Register of July 1. Comments thereon should be submitted by
August 15, 1994, and may be sent to the Board of Governors, as specified in the
Board’s notice, or to our Compliance Examinations Department.
W il l ia m J. M c D o n o u g h ,

President.

Federal Register / Vol. 59, No. 126 / Friday, July 1, 1994 / Proposed Rules
On August
18,1992, the Board published an
advance notice of proposed rulemaking
(Advance Notice) requesting public
comment in connection with a general
review of Regulation T.1 The review is
not yet complete, but the Board believes
that certain developments since the
publication of the Advance Notice
warrant the publication of three
proposed amendments in two areas.
I. Three Day Settlement (T+3).
In light of the adoption by the
Securities and Exchange Commission
(SEC) of a rule shortening the standard
settlement period for securities
transactions from five to three business
days (T+3), the Board proposes to
shorten the tim e periods specified in
Regulation T for customers to meet
margin calls or make full cash payment
by a corresponding tw o days. Related
am endm ents would raise the de
m inim is am ount below which
liquidation of unpaid transactions is not
required from $500 to $1000, require
brokers seeking extensions of the
payment periods to obtain them from
their designated examining authority
(“DEA”), and clarify that foreign
settlem ent periods are used to calculate
w hen restrictions in the cash account
are applied to foreign securities.
Regulation T has always required cash
payment for securities purchases w ithin
seven business days of trade date. The
seven day period was initially chosen
for the cash account because it w as felt
that a custom er should have no
obligation to pay for securities before
they were delivered. The two days
perm itted beyond settlement date
provide a short period of time for
resolution of problems before the broker
is required to act under Regulation T,
i.e. either obtain an extension on the
custom er’s behalf (if it is determ ined
that a valid reason exists) or sell out the
custom er’s position.
The Board’s Advance Notice was
issued before the SEC proposed its rule
adopting a T+3 settlement period. T he
Advance Notice m entioned the Group of
Thirty’s recom m endation of a w orld­
wide settlem ent standard of T+3 and
said the Board “may consider
shortening the tim e for customer
payment once the settlement period is
shortened from the current five days.”
The Board supported the SEC w hen it
proposed requiring T+3 settlement,
calling the proposal “an important and
achievable step” to reduce potential
systemic disturbances to financial
markets and to the economy. The SEC

also received several comment letters
stating that the implementation of T-t 3
settlement will require the Federal
Reserve to address the possible
shortening of its Regulation T payment
periods. Those letters were forwarded to
Board staff for consideration in the
context of the ongoing Regulation T
review.
The Board proposes to reword
Regulation T to specifically incorporate
the standard settlement cycle and th e
current two day cushion. Instead of
requiring paym ent w ithin “seven
business days,” the regulation w ould
require paym ent w ithin “one payment
period,” w ith "payment period” being
defined as the standard settlement
period in the United States plus two
business days. This will not change the
operation of the rule at this time, but
once the new language is put into place
the conversion to T+3 next year will
automatically result in a reduction in
the am ount of tim e brokers can give
their customers to pay for securities or
meet initial margin calls. Future
changes in settlement periods by.the
SEC w ill sim ilarly be automatically
reflected in the Board’s rule w ithout the
necessity of further amendment.
The paym ent periods in Regulation T
can be extended for exceptional
circumstances if the broker applies to a
self-regulatory organization (SRO) for an
extension. In 1988, the New York Stock
Exchange (NYSE) sought SEC approval
of a rule that w ould require a broker
seeking a Regulation T extension to
obtain the extension from the NYSE if
the NYSE is th e broker’s DEA. The
proposal was noted by the Board in the
Advance Notice, as was a suggestion by
the Credit Division of the Securities
Industry Association that brokers be
perm itted to grant customer extensions
w ithout approval of an SRO. The SEC
approved the NYSE rule filing in May
1994.2 In its approval order, the SEC
stated that it does not agree w ith
assertions that the objectives of the
Securities Exchange Act of 1934 (the
“Act”) could be better met by
implementing a uniform system of
sharing extension information. As to the
other objections raised by commenters
(and also raised w ith the Board
pursuant to the Advance Notice), the
SEC found that “the regulatory benefits
from the NYSE rule outweigh any
com petitive concerns raised by the
com m enters.” Finally, the SEC said it
does not agree with those commenters
who argue that broker-dealers should
not be required to submit requests for
extensions of tim e to either their DEA or

' ' Docket No. R-0772, 57 FR 37 109, Angus! 18,
1992.

2 59 FR 2682S, May 24,1994; Securities Exchange
Act Release 3+073, May 17,1994.

SUPPLEMENTARY INFORMATION:

FEDERAL RESERVE SYSTEM

12CFR P art 220
[Regulation T; Docket

No. R-0840J

Credit by Brokers and Dealers

Board of Governors of the
Federal Reserve System.
ACTION: Proposed rule.

AGENCY:

As part of its review of
Regulation T, the Board is proposing
three substantive am endm ents to two
areas of the regulation. One proposal
specifies that customers must meet
initial margin calls or make full cash
paym ent for securities purchased at a
broker-dealer w ithin two business days
of the standard settlement period and
includes related technical am endm ents.
The other am endm ents w ould exempt
certain brokers and transactions
involving U.S. government securities
from th e regulation.
DATES: Comments should be received on
or before August 15,1994.
ADDRESSES: Comments, w hich should
refer to Docket R-Q840, may be m ailed
to Mr. W illiam Wiles, Secretary, Board
of Governors of the Federal Reserve
System, 20th Street and Constitution
Avenue, NW., W ashington, DC 20551
Comments addressed to Mr. W iles may
also be delivered to the Board's m ail
room between 8:45 a.m. and 5:15 p.m.,
and to the security control room outside
of those hours. Both the m ail room and
the security control room are accessible
from the courtyard entrance on 20th
Street between Constitution Avenue and
C Street, NW. Comments may be
inspected in Room B-1122 between 9
a.m. and 5 p.m., except as provided in
§ 261.8 of the Board’s Rules Regarding
the Availability of Information, 12 CFR
261.8.
SUMMARY:

FOR FURTHER INFORMATION CONTACT:

Scott Holz, Senior Attorney or Angela
Desmond, Senior Attorney, Division of
Banking Supervision and Regulation
(202) 452-2781; for the hearing
impaired only, Telecom m unications
Device for the Deaf (TDD), Dorothea
Thom pson (202) 452-3544.




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Federal Register / Vol. 59, No. 126 / Friday, July 1, 1994 / Proposed Rules

any SRO. The Board believes, along
with the SEC, that a good case has been
made to restore to the broker’s DEA sole
responsibility for granting and
monitoring extensions of time and the
language proposed by the Board today
reflects this conclusion.
II. Government Securities
In light of the recent enactment of the
Government Securities Act
Am endm ents of 1993, the Board
proposes to exempt most transactions
involving government securities from
the restrictions of Regulation T. This
would be accom plished w ith two
separate but related actions. First,
Regulation T w ould exclude
government securities brokers and
dealers who register w ith the SEC under
section 15C of the Securities Exchange
Act of 1934 (the “A ct”) from the
definition of “creditor” in Regulation T.
Second, general broker-dealers effecting
customer transactions that could be
effected by a section 15C broker-dealer
would be able to record the transactions
in a new government securities account
in w hicb the other restrictions in
Regulation T w ould not apply.
Before the enactm ent of the
Government Securities Act of 1986,
brokers-dealers who lim ited themselves
to transactions in government securities
were hot subject to a comprehensive
regulatory scheme and were not
required to be registered w ith the SEC.
Although such brokers were w ithin the
definition of “creditor,” there was no
practical way to enforce Regulation T
for them. The Government Securities
Act of 1986 required SEC registration of
all nonbank government securities
brokers and dealers under a new section
15C of the Act. The Government
Securities Act of 1986 also added the
term “government securities” to the Act.
The Advance Notice invited comment
on two areas involving government
securities: repurchase agreements
(“Repos”) and the borrowing and
lending of securities. The Advance
Notice explained that the Board has not
specified the exact treatm ent of
repurchase agreements while noting that
repos of government securities do not
raise credit issues under Regulation T
because the good faith loan value of
such securities is often close to 100
percent of their current market value.
Many of the commenters suggested that
the Board create a new account for
exempted securities that could be used
for transactions such as Repos and
forward transactions. Most of the
commenters supported exempting
government securities from § 220.16 of
Regulation T. This w ould allow loans of
government securities w ithout the




current requirem ent that a broker
document that the reason for the
borrowing stems from a short sale or
failure to receive securities required for
delivery.
Under today’s proposal, whenever a
general broker-dealer effects a
transaction for a customer that could be
effected by a section 15C broker, the
transaction could be recorded in a new
government securities account. The
account w ould allow these transactions
to be effected w ithout regard to other
restrictions in Regulation T. The
account w ould be permissive; brokers
could continue to let customers who
wish to use the cash or margin account
for transactions involving government
securities do so. It w ould allow
institutional customers who cannot or
will not use a margin account to engage
in government securities transactions
not specifically authorized in the cash
account. For example, the government
securities account could be used to
effect purchases of government
securities on credit or for cash as well
as repurchase and reverse repurchase
agreements. Borrowing and lending of
government securities could also be
effected in the proposed account
w ithout being subject to the “permitted
purpose” requirement in § 220.16 of
Regulation T that requires brokers to
limit and document the reasons for their
securities borrowings. The account
would also permit net settlement of
offsetting purchases and sales of
government securities. Government
securities purchased or deposited in a
margin account w ould still be subject to
the current Regulation T rules and
would therefore still be available to
finance the purchase of other securities
in a margin account.
The Board is not proposing to include
additional types of exempted securities,
such as m unicipal securities, in the
proposed government securities
account. Government securities
constitute an unusually deep and liquid
market and are subject to a unique
scheme of regulation, as evidenced by
the Government Securities Act of 1986.
Regulatory Flexibility Act
The Board believes there will be no
significant economic impact on a
substantial num ber of small entities if
this proposal is adopted. Comments are
invited on this statement.
Paperwork Reduction Act
No additional reporting requirements
or modification to existing reporting
requirements are proposed.

List of Subjects in 12 CFR Part 220
Banks, banking, Bonds, Brokers,
Commodity futures, Credit, Federal
Reserve System, Investment companies,
Investments, Margin, Margin
requirements, National Market System
(NMS Security), Reporting and
recordkeeping requirements, Securities.
For the reasons set out in the
preamble, the Board proposes to amend
12 CFR Part 220 as follows:
PART 220—CREDIT BY BROKERS
AND DEALERS (REGULATION T)

1. The authority citation for Part 220
is revised to read as follows:
Authority: 15 U .S.C . 78c, 78g. 78h. 78q.
and 78w .
§220.1

[Amended]

2. In § 220.1 the word “seven” in the
first sentence of paragraph (b)(1) is
revised to read “eight”.
3. Section 220.2 is amended as
follows:
a. A new sentence is added to the end
of paragraph (b).
b. Paragraph (h) is revised.
c. Paragraphs (w) through (aa) are
redesignated as paragraphs (x) through
(bb) and new paragraph (w) is added.
The additions and revisions read as
follows:
§ 220.2

Definitions.

*

*
*
*
*
(b) * * * Creditor does not include a
broker or dealer registered only under
section 15C of the act.
★

★

fc

it

*

(h) Examining authority means:
(1) The national securities exchange
or national securities association of
which a creditor is a member; or
(2) If a member of more than one selfregulatory organization, the organization
designated by the SEC as the examining
authority for the creditor.
* * ' * * *
(w)
Payment period means the
num ber of business days in the standard
securities settlement cycle in the United
States plus two business days.
*
*
*
★
*
4. In § 220.4, the figure “$500" in
paragraph (d) is revised to read “$1000"
and paragraph (c)(3) is revised to read
as follows:
§220.4

*

Margin account.

*
*
★* ★
(c) * * *
(3) Time limits, (i) A margin call shall
be satisfied w ithin one payment period
after the margin deficiency was created
or increased.
(ii)
The payment period may be
extended for one or more limited

/d w
Federal Register / Vol. 59, No. 126 / Friday, July 1, 1994 / Proposed Rules
periods upon application by the creditor
to its examining authority unless the
examining authority believes that the
creditor is not acting in good faith or
that the creditor has not sufficiently
determ ined that exceptional
circumstances warrant such action.
Applications shall be filed and acted
upon prior to the end of the payment
period or the expiration of any
subsequent extension.
*
*
*
*
*
5.
In § 220.8, the figure “$500” in
paragraph (b)(4) is revised to read
“$1000” and paragraphs (b)(l)(i)
introductory text, (b)(l)(ii), (b)(3),
(c)(2)(i), and (d) are revised to read as
follows:
§2 2 0.8
*
*

Cash acc o u n t
*
*
*

(b) * * *
(1) * * *

(i) Within one payment period of the
date:
*
*
*
*
*
(ii) In the case of the purchase of a
foreign security, within one payment
period of the trade date or the date on
which settlement is required to occur by
the rules of the foreign securities
market, provided this period does not
exceed the maximum time permitted by
this part for delivery against payment
transactions.
(3)
Shipm ent o f securities, extension.
If any shipm ent of securities is
incidental to consum m ation of a
transaction, a creditor may extend the
payment period by the num ber of days
required for shipm ent, but by not more
than one additional payment period.
*
*
*
*
*
(c) * * *
(2) * * *
(i)
Within one payment period of the
trade date, or in the case of the purchase
of a foreign security, w ithin the period
specified in paragraph (b)(l)(ii) of this
section, full payment is received or any
check or draft in payment has cleared
and the proceeds from the sale are not
withdrawn prior to such payment or
check clearance; or
*
*
*
*
*
(d) Extension o f tim e periods;
transfers. (1) Unless the creditor’s
examining authority believes that the
creditor is not acting in good faith or
that the creditor has not sufficiently
determined that exceptional
circumstances warrant such action, it
may upon application by the creditor:
(i) Extend any period specified in
paragraph (b) of this section;
(ii) Authorize transfer to another
account of any transaction involving the




purchase of a margin or exempted
security; or
(iii)
Grant a waiver from the 90 day
freeze.
(2)
Applications shall be filed and
acted upon prior to the end of the
payment period, or in the case of the
purchase of a foreign security w ithin the
period specified in paragraph (b)(l)(ii)
of this section, or the expiration of any
subsequent extension.
6.
Section 220.18 is redesignated as
§ 220.19 and new § 220.18 is added to
read as follows:
§ 220.18

Governm ent securities a c c o u n t

In a government securities account, a
creditor may effect and finance
transactions involving government
securities, provided the transaction
would be permissible for a broker or
dealer registered under section 15C of
the act.
By order o f the Board o f G overnors o f the
Federal R eserve S ystem , June 27, 1994

William W. Wiles,
Secretary of the Board.
[FR Doc. 9 4 -1 6 0 3 3 F iled 6 -3 0 -9 4 ; 8:45 am i
BILLING CODE 6210-01-P

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