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FEDERAL RESERVE BANK
OF NEW YORK
r Circular No. 10792 “1
July 24, 1995
REGULATION T — CREDIT BY BROKERS AND DEALERS
Comment Requested by August 28 on Proposed Amendments
To All Depository Institutions, and Others
Concerned, in the Second Federal Reserve District:
Following is the text of a statement issued by the Board of Governors of the Federal Reserve
System:
The Federal Reserve Board has requested comment on proposed amendments to Regulation T
(Credit by Brokers and Dealers). This action is part of the Board’s program to review periodically all
regulations.
Comment is requested by August 28, 1995.
These amendments reflect consideration of the comments submitted in response to the Board’s
Advance Notice of Proposed Rule/naking. Many of the proposed amendments feature increased
reliance on rules of the Securities and Exchange Commission (SEC) and self-regulatory organizations
(SROs). Others would make Regulation T consistent with Regulation G and Regulation U, the
regulations covering securities credit by lenders other than broker-dealers.
Printed on the following pages is the text of the proposed amendments, as published in the
Federal Register. Comments should be submitted by August 28, 1995 and may be sent to the
Board, as indicated in the notice, or to our Compliance Examinations Department.
W
i l l ia m
J.
M
cD onough,
President.
Federal Register / Vol. 60, No. 125 / Thursday, June 29, 1995 / Proposed Rules
33763
As part of a program to
periodically review its regulations, the
Board is proposing amendments to
Regulation T, the regulation that covers
extensions of credit by and to broker
and dealers (also known as creditors).
These amendments reflect consideration
of the comments submitted in response
to the Board’s Advance Notice of
Proposed Rulemaking. Many of the
proposed amendments feature increased
reliance on rules of the Securities and
Exchange Commission (SEC) and selfregulatory organizations (SROs) and
others would make Regulation T
consistent with Regulation G and
Regulation U, the regulations covering
securities credit by lenders other than
broker-dealers. Proposed changes in the
options area include permitting loan
value for long positions in exchangetraded options and increasing reliance
on the margin rules of the exchange that
trades the option for customer and
specialist transactions. These'changes
would also allow creditors to recognize
the offsetting nature of financial futures
in calculating margin for securities
options. Proposed amendments in the
international area will reduce
restrictions on transactions involving
foreign securities that are not publicly
traded in the United States and foreign
securities being sold on an installment
basis if the U.S. component is a
relatively small percentage of the
offering. Broker-dealers would also be
given more flexibility in computing
overall margin requirements for
customer accounts with securities
denominated in one or more foreign
currencies. In addition to these and
other amendments, technical changes
are being proposed to clarify areas that
have raised questions, update
references, or restore language
inadvertently deleted. The Board is also
soliciting comments on a number of
specific proposals. Finally, a number of
questions regarding the existing
regulation raised by commenters are
being answered.
SUMMARY:
FEDERAL RESERVE SYSTEM
12CFR Part 220
[Regulation T; Docket No. R-0772]
RIN 7100—AB28
Securities Credit Transactions; Review
of Regulation T, “Credit by Brokers
and Dealers”
AGENCY: Board of Governors of the
Federal Reserve System.
ACTION: Proposed rule.
DATES: Comments should be received on
or before August 28, 1995.
ADDRESSES: Comments should refer to
Docket No. R-0772, and may be mailed
to William W. Wiles, Secretary, Board of
Governors of the Federal Reserve
System, 20th Street and Constitution
Avenue, N.W., Washington, DC 20551.
Comments also may be delivered to
Room B-222 of the Eccles Building
between 8:45 a.m. and 5:15 p.m.
weekdays, or to the guard station in the
Eccles Building courtyard on 20th
Street, N.W. (between Constitution
Avenue and C Street, N.W.) at any time.
Comments received will be available for
33764
Federal Register / Vol. 60, No. 125 / Thursday, June 29. 1995 / Proposed Rules
inspection in Room MP-500 of the
Martin Building between 9:00 a.m. and
5:00 p.m. weekdays, except as provided
in 12 CFR 261.8 of the Board’s rules
regarding availability of information.
FOR FURTHER INFORMATION CONTACT:
Scott Holz, Senior Attorney, or Angela
Desmond, Senior Counsel, Division of
Banking Supervision and Regulation
(202) 4 5 2 -2 7 8 1 ; for the hearing
impaired only, Telecommunications
Device for the Deaf (TDD), Dorothea
Thompson (202) 4 5 2 -3 5 4 4 .
SUPPLEMENTARY INFORMATION: In 1992,
the Board issued an advance notice of
proposed rulemaking and request for
comment concerning a general review of
Regulation T.1 Comments were received
from 31 respondents, some of whom
commented more than once. The
comments have been analyzed to help
prepare proposed amendments to the
regulation. These proposed amendments
are consistent with the current tenor of
the regulation and statutory
requirements; however, the comments
raised broad issues as to purposes that
Regulation T serves in light of the
current regulatory environment and
market practices. One comment
questioned the continuing need for the
Regulation T requirements, noting that
possible purposes for the regulation,
such as broker dealer financial integrity
and customer protection, also are
addressed by SEC oversight of brokers
and dealers by means of net capital and
customer protection rules. Comments
also suggested broad changes to
Regulation T that the commenters
believe are appropriate in the current
environment. These changes included,
but were not limited to: (1) Delegating
all responsibility for margins and
related requirements to the selfregulatory organizations under the
oversight of the SEC; (2) applying the
restrictions on arranging credit only to
credit that otherwise violates margin
rules; (3) eliminating margin
requirements on loans to brokers and
dealers; (4) exempting from the margin
rules transactions in all exempt
securities; (5) exempting transactions
with sophisticated customers; (6)
expansion of permissible arrangements
for borrowing and lending securities;
and (7) exempting transactions in
investment grade securities. While the
Board believes that it is important to
proceed with the proposed amendments
in order to address particular problems,
the Board also believes regulatory
structures should be reviewed
continually, not merely to update them,
but also to assess whether different
1 57 FR 37109. August 18. 1992.
reliance on SRO options margin rules
for customers and specialists.
a. Margin account. The margin
account currently specifies positions
which may serve in lieu of the margin
required for writing an option on an
equity security, while incorporating the
rules of the SROs for options written on
anything other than an equity security
(such as a securities index). The Board
proposes to allow SRO rules, which
must be approved by the SEC, to
prescribe appropriate cover for all short
options positions.
Many commenters expressed support
I. Options
for a risk-based options margin system
and/or a recognition of the offsetting
A. Exchange-Traded Options
nature of financial futures based on
1. Loan Value for Long Options
similar indexes, rates, or assets. Under
All securities listed on a national
the Board’s proposal, the SROs would
securities exchange have loan value
be able to further these goals in setting
under Regulation T except for options.
cover requirements for all types of
The Board proposes to eliminate this
securities options.
disparate treatment, which was adopted
b. Cash account. Although the writing
in the early 1970s, and allow exchangeof an option creates a short position
traded options the same 50 percent loan which is normally carried ip the margin
value currently afforded other margin
account, the cash account section was
equity securities. In light of the
amended in the early 1980s to allow
successful growth of standardized
certain covered options transactions to
options trading since the 1970s, the
be effected in this account. Board staff
positive performance of the Options
has since indicated that the cash
Clearing Corporation, and the
account can be used for additional
development of new types of options,
options transactions. These transactions
other securities and financial futures,
are not “covered” in the sense that the
the Board is proposing to treat long
account holds the underlying security.
positions in exchange-traded options
However, the transactions involve a
the same as other registered equity
quantifiably limited risk and the cash
securities for margin purposes.
account in which the transaction is
Granting 50 percent loan value to
effected contains specified assets of
exchange-traded options would also
sufficient value to cover this amount or
address a disparity that has arisen in the an escrow receipt representing such
past few years with the listing of soassets.2 The Board proposes to adopt
called index warrants. Although index
generic language under which a
warrants resemble long-term options,
“covered option transaction” would be
the use of the word “warrant” to
eligible for the cash account under
describe this product has led many
specified conditions. The Board is also
broker-dealers to allow 50 percent loan
adding money market mutual funds to
value for these instruments while long
the list of cash equivalents that may be
term options, such as LEAPs, are not
used to cover a put written in the cash
permitted any loan value under the
account.
current regulation. Treating exchangec. Market functions account.
traded options the same as other
Regulation T permits the extension of
exchange-traded equity securities would credit on a good faith basis to a
eliminate this disparity.
specialist for transactions in its
specialty security. In addition, options
2. Increased Reliance on SRO Rules
specialists can obtain good faith
When Regulation T was adopted in
financing for the underlying security
1934, the amount of margin required for
and other specialists can obtain good
writing a put or call was the amount
faith credit for options overlying their
"customarily required” by the creditor.
specialty securities. These positions are
In the 1970s the Board adopted specific
known as “permitted offsets.” The
requirements based on existing rules of
regulation specifies which positions
one of the self-regulatory organizations
must be held in the account to allow
(SROs). Starting in the 1980s, the Board
permitted offsets and does not provide
has on more than one occasion amended
for offsets in the case of specialists in
Regulation T to incorporate by reference
SRO margin rules for options
2 See. e.g.. Staff Opinion of July 12,1991, Federal
transactions. The Board is proposing to
Reserve Regulatory Service { F R R S ) 5-666.251 and
continue this process by increasing
Staff Opinion of October 11. 1991. F R R S 5-666.26.
structures would better meet regulatory
objectives and even whether regulation
is still necessary. Accordingly, the
Board requests comments including
particular proposals and supporting
legal and policy rationale, not only on
the specific changes to Regulation T set
forth in this notice, but also on the
proposals enumerated above, the
continuing need for Regulation T, and
appropriate changes to its scope and
architecture. The supplementary
information that follows explains what
is being proposed and reasons therefor.
Federal Register / Vol. 60, No. 125 / Thursday, June 29, 1995 / Proposed Rules
index options. The Board proposes to
adopt generic language permitting the
extension of good faith credit for
permitted offsets, provided the position
has been designated as a permitted
offset under SEC-approved rules of the
appropriate SRO.
B. OTC Options
In 1991, Board staff raised no
objection to a broker-dealer that sought
to “arrange” for its customer to write an
OTC option on foreign securities.3 This
position would be codified by the
proposed amendments to the arranging
section concerning foreign securities.
The Board is not proposing to extend
this position to OTC options on
securities which are publicly traded in
the United States. Allowing brokerdealers to arrange for customers to write
OTC options without collecting margin
would not be consistent with the
requirements of the organized options
exchanges. Rules of the New York Stock
Exchange (NYSE) and the National
Association of Securities Dealers
(NASD) both provide that margin is
required for the “issuance, guarantee or
sale (other than a ’long’ sale) for a
customer of a put or call.” The Board is
proposing to add the word “sell” to the
language in the cash account to make
clear that the Board’s rules cover the
same situations covered by NYSE and
NASD rules.
C. Employee Stock Options and Other
Benefit Plans
Section 220.3(e)(4) of Regulation T
was added in 1988 to allow creditors to
help customers with valuable employee
stock options exercise their options by
providing short-term financing of the
exercise price. The short-term loan is
either paid off from the sale of the
securities received pursuant to the
employee stock option or replaced with
a conventional margin loan extended
against those securities. This practice
has come to be known in the industry
as “cashless exercise.” Over the last five
years, Board staff has not objected to the
expansion of the application of
§ 220.3(e)(4) to other types of securities
customers receive under employee
benefit plans, such as certain employee
stock warrants. In addition, Board staff
has allowed brokers to temporarily
finance withholding taxes due on stock
received under employee benefit plans.
New language is being proposed to
reflect these staff opinions. The new
language would also allow the use of
§ 220.3(e)(4) for outside directors and
consultants who are eligible to1
1Staff Opinion of October 22. 1991,
066.27.
FRRS
5-
participate in employee benefit plans
under SEC rules.
II. International Transactions
A. Foreign Broker-Dealers
Any entity required to register as a
broker or dealer with the SEC under
section 15(a) of the Securities Exchange
Act of 1934 (the Act) is a creditor under
Regulation T. Although the definitions
of “broker” and "dealer” in the Act do
not refer to nationality, the SEC’s policy
is to require registration of foreign
broker-dealers only when they are
physically operating in the United
States.4 The Board generally follows the
SEC in this area and does not consider
foreign broker-dealers not required to
register with the SEC as creditors under
Regulation T.
Although the commenters were mixed
on whether the definition of creditor
should be amended to include or
exclude foreign broker-dealers, there
was general agreement that U.S. brokerdealers purchasing securities from or
selling securities to a foreign brokerdealer on a DVP basis should be able to
effect the trades on a broker-to-broker
basis. Proposed language is being added
to the Broker-Dealer Credit Account that
will make clear that foreign brokerdealers may use this account for DVP
transactions with U.S. broker-dealers.
B. Foreign Currency
Since 1990, creditors have been able
to extend margin credit denominated in
foreign currency if it is secured by
foreign margin securities denominated
or traded in the same foreign currency.
If a customer has securities of various
denominations, margin subaccounts
(and, if desired, SMA subaccounts) are
set up so that credit computed in U.S.
dollars and each separate currency can
be isolated. Under the current rule, an
increase in the value of securities used
to support specific foreign currencydenominated debt cannot be used to
offset a deficiency in another margin
subaccount. At the request of
commenters, the Board is proposing to
delete this limitation and permit margin
requirements denominated in any
currency to be offset by equity in any
marginable security or a foreign
currency deposit made in connection
with a security denominated in that
currency. Creditors would be free to
retain the current system of separate
SMAs for each foreign currency
denomination.
Another comment concerning foreign
currency comes from the Securities
Industry Association (SIA), which
■•SEC Release No. 34-27017; 54 FR 30013 (July
18.1989).
33765
believes that any freely convertible
currency should be able to be treated at
its U.S. dollar equivalent for all
purposes of Regulation T. Under the
current version of Regulation T, foreign
currency received in connection with
the purchase, sale or loan of a security
denominated in that currency may be
accounted for in that currency or at its
U.S. dollar equivalent. If there is no
security denominated in that currency,
creditors should convert the currency
into its U.S. dollar equivalent upon
receipt. The conversion can be effected
in a customer’s cash or margin account,
with the resulting balance maintained in
U.S. dollars.
C. Foreign Securities
1. Arranging
In 1990, the Board added an
exception concerning foreign stocks ta
the arranging section of Regulation T
which permits a creditor to arrange for
its customer to receive more credit than
the creditor could extend when its
customer is purchasing a foreign
security with credit from a foreign
lender. The exception, found in section
220.13(d), was based on the theory that
transactions involving foreign securities
do not require the same strictness of
regulation because they do not have a
substantial effect on the U.S. securities
market. Commenters have asked for the
Board to expand the foreign stock
exception to cover short sales as well.
The Board agrees that equal treatment in
the arranging area should be afforded to
both long and short sales.
In gaining experience with the 1990
amendment, however, it has been
noticed that there is an increasing trend
for corporations that have issued stock
abroad to list the securities for trading
in the United States. Therefore, the
Board is proposing a somewhat more
restricted definition of what constitutes
a foreign security for purposes of this
section to assure equal treatment of
foreign and domestic securities that are
publicly traded in the United States. For
example, the German conglomerate
Daimler-Benz recently listed its shares
on the New York Stock Exchange,
thereby enabling U.S. broker-dealers to
extend 50 percent credit against the
stock. Under the current arranging
exception for foreign securities, a
creditor can arrange for its customer to
borrow more than 50 percent on
Daimler-Benz stock if the credit is
extended by a foreign lender (often a
foreign affiliate of the creditor). In
contrast, a creditor may not arrange for
its customer to buy AT&T stock with
less than 50 percent margin, even if the
credit were extended by a foreign
33766
Federal Register / Vol. 60, No. 125 / Thursday, June 29, 1995 / Proposed Rules
lender. Proposed language would
address this situation and ensure equal
treatment for all stocks that are publicly
traded in the United States by
permitting a creditor to arrange for the'
purchase or short sale of a “non-U.S.
traded foreign security,” defined as a
security issued abroad that does not
trade on a national securities exchange
or NASDAQ.
2. Lending Foreign Securities
Under Regulation T, a creditor may
borrow or lend securities for the
purpose of making delivery pursuant to
a short sale or “fail” transaction. In
addition, the regulation limits the type
of collateral that must be pledged to
secure a loan of securities. Several
commenters, such as the SIA and the
SLA-Credit Division, request an
amendment to permit U.S. brokerdealers to lend foreign securities to a
foreign person for any purpose that is
lawful in the foreign country. The NYSE
would like to ensure that foreign
securities loaned abroad do not come
back to the U.S. to cover short sales or
fails. The Board is therefore proposing
to allow loans of foreign securities for
any lawful purpose if the securities are
“non-U.S. traded foreign securities.”
This should prevent these securities
from being used for transactions in the
United States. In addition, the SIA notes
that many securities lending
transactions occurring outside the U.S.
would not meet the collateral
requirements of Regulation T. The
proposed amendment would allow a
creditor to accept any collateral that
may be pledged in the foreign country
for loans of securities, providing the
collateral’s value is at least equal to 100
percent of the market value of the
securities borrowed.
3. Installment Sales
The United Kingdom began a series of
privatizations of state-owned companies
in the late 1970s. Investors in the shares
of these companies paid for them on an
installment basis over a period of at
least six months. Installment sales are
not uncommon in the U.K., but are
generally prohibited in this country
under section 11(d) of the Act.5 The
practice is also prohibited under
Regulation T if the First installment is
less than the initial margin requirement.
Participation of U.S. investors in the
U.K. privatizations was accommodated
by letters written by Board staff.6 The
Board proposes to amend the arranging
provision of Regulation T to state that a
5 15 U.S.C. 78k(d).
'• See. e.g.. Staff Opinion of October 24. 1984.
FFRS 5-615.92.
creditor is not deemed to have arranged
for credit subject to the margin
regulations if it sells a foreign security
that is being offered on an installment
basis, provided that less than 15 percent
of the issue is offered to U.S. persons.
This generic language would allow U.S.
investors to participate in installment
sales of foreign securities when the U.S.
component of the offering is a relatively
small portion of the overall offering and
would cover offerings by foreign
governments and other foreign issuers.
4. Foreign Margin Stocks
In 1990, the Board amended
Regulation T to establish a List of
Foreign Margin Stocks (the “Foreign
List”). These stocks are treated in the
same manner as domestic margin equity
securities. The Board established
criteria for initial inclusion on the
Foreign List and for continued listing.
U.S. broker-dealers certify to an SRO
that specific foreign securities meet the
criteria. The Board uses the information
submitted by the SRO in publishing the
Foreign List. The Foreign List has grown
from approximately 40 stocks in August
1990 to over 700 stocks this year.
Many commenters state that the
system is cumbersome and results in all
broker-dealers benefitting from the
research done by a small number of
firms. Some commenters have suggested
that a stock included in a major foreign
stock index should be automatically
marginable if it meets two criteria: (1)
the SEC or CFTC has approved trading
in the United States of options,
warrants, or futures on a foreign
securities index that contains the
foreign equity security and (2) the SEC
has determined that the stock has a
“ready market” for purposes of its net
capital rule.7 The Board is soliciting
comment whether such a test should be
adopted, which securities would be
covered under the criteria, and
suggestions on how this information
could be integrated into the Board’s
Foreign List.
III. Other Customer Transactions
A. Margin Account/SMA
Most customer transactions involving
credit take place in a margin account,
which may be maintained in
conjunction with a special
memorandum account (SMA). Several
commenters recommend that more than
one customer, such as members of a
family, be permitted to share a single
SMA. One broker-dealer notes that this
would allow the individual customers’
accounts to be cross-collateralized and
7 17 CFR'240.15c3-l(c)(l 1).
cross-guaranteed. The Board is not
proposing to change the SMA at this
time. In addition to operational
problems raised by linked SMAs.
Regulation T and the Board’s other
margin regulations do not allow a
guarantee to have loan value for
securities credit transactions.
The SIA-Credit Division suggests
elimination of the provision in
§ 220.4(f)(2)(ii) concerning withdrawals
of securities received as part of a
distribution attributed to securities
already in the margin account. This
section is permissive in that it permits
some withdrawals which create or
increase a margin deficiency.
Nevertheless, the Board is soliciting
comment on whether such an exception
is still warranted.
1. Convertible Bonds
Under Regulations G and U (12 CFR
Parts 207 and 221), a debt'securrty
convertible into a margin stock is
considered a margin stock. Although no
comparable rule exists in Regulation T,
in 1990 the Board defined foreign
margin stock to include a debt security
convertible into a margin security. The
SIA-Credit Division and several brokerdealers recommend applying this
concept to all convertible debt securities
in Regulation T and the Board is
proposing language to accomplish this.
2. Mutual Funds
a. Exempted securities mutual funds.
Since 1968, the definition of margin
stock in Regulations G and U has
excluded mutual fund shares of
companies whose assets are at least 95
percent invested in exempted securities.
The exclusion of these funds (exempted
securities mutual funds) from the
definition of margin stock is equivalent
to giving them good faith loan value at
lenders other than broker-dealers. The
Investment Company Institute has asked
the Board to amend Regulation T so that
exempted securities mutual funds will
be entitled to good faith loan value at
broker-dealers as well as other lenders.
The Board is proposing to use the
regulatory language found in
Regulations G and U in Regulation T.
b. Money market mutual funds. In
addition to exempted securities mutual
funds, the Board is proposing to give
good faith loan value to monev market
mutual funds. Money market mutual
funds are subject to additional SEC
regulation and are recognized as cash
equivalents by the industry and the
general public.
3. OTC Margin Bonds
Several commenters suggest that the
Board adopt a rating requirement for all
Federal Register / Vol. 60, No. 125 / Thursday, June 29, 1995 / Proposed Rules
debt securities as an alternative to the
current requirement that domestic debt
securities be registered with the SEC.
The Board has adopted the rating
requirement for foreign securities
because the concept of comity argues
against requiring SEC registration. The
fact that “mortgage-related securities’’
require a rating but not SEC registration
was Congressionally mandated in the
Secondary Mortgage Market
Enhancement Act of 1984.
The Board is proposing to strike the
word “mortgage” from the second
section of the definition of “OTC margin
bond” to clarify that all pass-through
securities can meet this definition. The
Board also confirms that the minimum
principal amount required for “OTC
margin bonds” applies to shelf
registrations of a single issue once the
minimum amount has been issued, even
though some of the individual tranches
sold may be smaller.
Although a 1984 staff opinion took
the position that privately-issued
Treasury receipts were not exempted
securities and not entitled to loan
value,8 the Board, SEC and Treasury'
Department have become more
comfortable over time with viewing
these securities as equivalent to exempt
securities. For example, a 1994 Board
staff opinion concerning the GlassSteagall Act concluded that the holder
of a privately-issued Treasury receipt is,
for virtually all purposes, a holder of an
interest in the underlying Treasury’
security.9 The Board therefore does not
object to the treatment of privatelyissued Treasury receipts as exempted
securities for purposes of Regulation T.
The staff opinion to the contrary will be
deleted.
4. OTC Margin Stock
A comment was received from an
investor who believes stock which does
not trade on NASDAQ should be
marginable if the issuer has another
class of marginable stock whose price is
used to determine the sale price of the
nonmargin stock. This situation is not
being addressed by the proposed
amendments. In addition to the
complexity of covering such a limited
group of stocks, this type of stock
cannot be purchased by the general
public and therefore no bid prices are
available.
5. Nonsecurities Instruments
The Public Securities Association
(PSA) and a broker-dealer comment that
K Staff Opinion of December 13. 1984. FRRS 5f.28.13.
4 Staff Opinion of Januarv 10. 1994. FRRS 4 655.5.
creditors should be able to extend credit
on commercial paper, certificates of
deposit (CDs), and bankers acceptances
(BAs). All of these instruments may be
used collateral for a nonpurpose loan
(i.e., a loan that is not made for the
purpose of purchasing, carrying, or
trading in securities). Section 7(c) of.the
A ct10*prohibits the Board from
permitting broker-dealers to accept
nonsecurities as collateral in a margin
account. Although commercial paper is
a security and can be held in a margin
account, Regulation T denies loan value
to domestic debt securities that are not
SEC-registered. Therefore, commercial
paper is a nonmargin, nonexempted
security and the Supplement to
Regulation T requires a margin of 100
percent if held in a margin account.
B. Cash Account
1. Permissible Transactions
Proposed changes to the cash account
concerning options are discussed in this
preamble in section I.B.2. In addition,
one commenter would like confirmation
that customers may purchase CDs and
other nonsecurities products in the cash
account. A 1988 staff opinion confirmed
that industry practice is to use the cash
account to record the purchase of both
securities and nonsecurities," and the
Board is proposing to add language to
the cash account section of the
regulation to codify this position.
2. Net settlement
In order to guard against free-riding,
net settlement of trades in a cash
account generally is not permitted.
Customers are required to pay for all
purchases in full without netting sale
proceeds from securities purchased and
sold on the same day in order to avoid
imposition of the 90-day freeze
described in § 220.8(c) of Regulation T.
In 1988, Board staff confirmed two
statutory exceptions to this general rule
for transactions in mortgage-related
securities 12 and exempted securities.13
Some broker-dealers comment that
customers should be able to net settle all
transactions in a cash account as long as
the regulation states that day trading is
not permitted in that account. No
changes are being proposed in this area
as allowing net settlement of all trades
in the cash account would complicate a
creditor’s ability to prevent free-riding
in the cash account.
"’ 15 U.S.C. 78g(c).
" F R R S 5-615.955.
12FRRS 5-615.952.
" F R R S 5-628.17.
33767
3. 90-Day Freeze
A customer who sells a securit’’
purchased in a cash account beforp
making full cash paymeru mus have
sufficient funds in the account by trade
date for any purchaser during the nexi
90 days. This restriction is known as the
“90-day freeze.” One broker-dealer
suggested the freeze should not apply if
the cash account holds marginable
securities with sufficient loan value tc
pay for the securities that have been
sold before having been paid for. This
suggestion is contrary to the nature-of
the cash account. A customer who
contemplates the need for credit to
settle securities purchases should be
using a margin account and not a cash
account.
Another broker-dealer believes the
freeze should not apply if a customer
decides to liquidate a purchase made on
a DVP basis when the customer is ready
to make full payment but the selling
broker does not make timely deliver}’
and the security is otherwise
unavailable. The Board agrees that a
customer should not be subject to the
90-day restriction when it decides to
liquidate a transaction that the
counterparty cannot complete.
C. Other Accounts
1. Arbitrage Account
Transactions effected in the arbitrage
account are not subject to Regulation T
margin requirements. The SLA and a
broker-dealer have requested that the
arbitrage account no longer require that
the transactions be entered into to take
advantage of a concurrent disparity in
prices. Flowever, elimination of the
requirement that the two transactions
yield an immediate gain would expand
this special provision beyond those
transactions which perform a market
function by bringing together the prices
of securities or markets which should be
the same. Therefore no changes are
being proposed to the arbitrage account.
2. Broker-Dealer Credit Account
The broker-dealer credit account is
normally available only for brokerdealers.14 However, the brokerage
industry has developed a service known
as “prime brokerage” in which a
customer maintains a cash and/or
margin account with a “prime broker”
to record transactions executed at one or
more executing brokers. Industry
practice has been for the executing
broker to use the broker-dealer credit
account to record the transactions sent
MAs noted in the section on foreign brokerdealers, the Board is proposing to allow foreign
broker-dealers to use the Droker-deaier credit
account when purchasing securities on a DVP basis.
33768
Federal Register / Vol. 60, No. 125 / Thursday, June 29, 1995 / Proposed Rules
to the prime broker (who enforces
Regulation T vis-a-vis the customer).
After discussions with Board staff and
an SPA committee, the SEC issued a no
action letter last year describing
requirements that must be followed in
connection with prime brokerage.15 The
Board is proposing to add language to
the broker-dealer credit account to
officially acknowledge its use in prime
brokerage transactions.
D. Other Transactions
1. Repurchase Agreements
A repurchase agreement from a
broker-dealer’s point of view may be
viewed as a borrowing by the creditor
and should not generally be covered by
the Board’s margin regulations as long
as the security is not subject to the
restrictions imposed by section 8(a) of
the Act. The repurchase agreements
addressed herein are reverse repurchase
agreements in which a customer sells a
security to a creditor with an agreement
to repurchase from the creditor at a later
time. Repurchase agreements in
government securities are permitted in
the government securities account
created last year.16
In addition to repurchase agreements
on government securities the PSA, SIA
and several broker-dealers request an
amendment that would permit
repurchase agreements on all fixed
income securities with good faith loan
value, although the PSA acknowledges
that it may be appropriate to treat these
transactions as margin loans. However,
broker-dealers traditionally require 20
percent margin when financing
nonexempted debt securities and do not
lend the 100 percent implied in
structuring the transaction as a
repurchase agreement. Although the
PSA acknowledges the resemblance
between repurchase agreements and
margin loans, it states that practical
problems make the cash account or a
new account more appropriate.
Although the collection of margin from
a customer by a broker-dealer would
seem to indicate that the transaction is
properly recorded in the margin
account, the Board is soliciting
comment on the advisability of creating
a new account for repurchase
agreements on securities other than
government securities in which margin
would be collected as if the transaction
were a conventional margin loan. The
PSA, SIA, and a law firm also request
creation of a new account to allow
forward transactions, which are not
15 Letter of January 25. 1994. from Brandon
Becker, Esq. to Mr. jeffrev C. Bernstein, reprinted
in CCH Federal Securities Law Reporter at U 76.819.
1<sSee 59 FR 53565 (October 25. 1994).
permitted under Regulation T unless fhe
security is trading on a when-issued
basis or is a government or mortgagerelated security. Comment is also invited on the advisability of
accommodating forward transactions
accompanied by the deposit required for
a conventional margin loan in an
account other than a margin account.
The PSA and SIA would also like
creditors to be able to effect repurchase
agreements on money market
instruments that may not qualify as
securities. Such transactions are
permissible in the nonsecurities credit
account as long as the proceeds are not
used for purpose credit.
2. Two-Tiered Market
The SIA and several broker-dealers
believe the Board should establish an
account or subaccount where creditors
may effect and finance all securities
transactions on a good faith basis for
customers who meet some level of
financial sophistication. In the past, the
Board has amended the arranging
section of Regulation T to permit
creditors to arrange for certain types of
credit for sophisticated customers.17 No
further relaxation of the regulation is
being proposed in this area at this time.
3. Use of Money Market Funds
As noted above,18 the Board is
proposing to add money market mutual
funds to the list of cash equivalents
available to cover a put written in the
cash account and give the fund shares
good faith loan value in a margin
account. The SIA-Credit Division and
two other broker-dealers believe money
market mutual funds should be treated
as cash without having to be liquidated.
Although the Board recognizes that
money market shares are often viewed
as cash equivalents, they are not cash.
A customer who is required to deposit
cash pursuant to Regulation T must
liquidate the shares to realize cash.
IV. Broker-Dealer Transactions
A. Credit Extended to Other BrokerDealers
1. All Broker-Dealers
The commenters were split on the
question of whether broker-dealers
should continue to be treated as
customers under Regulation T. The
principal argument in favor of special
17 For example, the exemption in section
220.13(b) requires that the sale of securities be
effected pursuant to the SEC's private placemen:
exception from registration. Such sales must be
made to sophisticated investors.
IKSee section i.A.2.b. on the cash account under
options and section III.A.2.b. on mutual funds
above.
treatment for broker-dealers is that they
are subject to minimum net capital
requirements that impose a limit on
leverage, albeit greater leverage than
that permitted public customers. The
Board continues to believe special credit
(i.e., lower margin) is appropriate when
broker-dealers perform a market
function, but is not proposing treatment
that differs from that for public
customers for reasons of equity.
2. Specialists and Market-Makers
Regulation T permits special credit for
broker-dealers performing a market
function. The Board is proposing
clarifying language to the provisions
describing OTC market makers and
third-market makers to respond to
questions that have arisen since the
regulation was last revised.
The SIA would like the Board to
permit deficit financing of specialists,
eliminate restrictions on their permitted
offsets and eliminate the restriction in
§ 220.12(b)(4) of Regulation T
concerning free-riding by specialists. As
discussed in this preamble in section
I.A.2.C., the Board is proposing to allow
any permitted offset that is permissible
under SEC-approved rules of the
creditor’s examining authority.
Although the Board supports the
concept of good faith credit for
specialist transactions, deficit financing
is a form of unsecured credit, which is
prohibited by section 7(c) of the Act.19
The restriction on free-riding by
specialists by its terms does not apply
to any specialist on an exchange that
has an SEC-approved rule on the same
subject.
One broker-dealer suggested
expanding the definition of OTC
market-maker to include market makers
of convertible bonds who post their
prices in the “yellow sheets” or deal in
convertible bonds traded pursuant to
SEC Rule 144A.20 Convertible bonds are
equity securities under the A ct21 and
the Board has designated convertible
bonds as OTC margin stock when they
meet the criteria in section 220.17 of
Regulation T. OTC market-makers are
registered with NASDAQ as such and
are required to engage in a certain level
of market-making, as are specialists. The
Board does not permit good faith credit
for broker-dealers making a market in
equity securities via the "pink sheets.”
Consistency argues against permitting
such credit for broker-dealers making a
market in convertible bonds via the
1915 U.S.C. 78g(c).
2017 CFR 230.144A.
21 Section 3(a)(l 1} of the Act (15 L'.S.C. 78c(a)(ll))
defines equity security to include anv security
convertible into an equity security
Federal Register / Vol. 60, No. 125 / Thursday, June 29, 1995 / Proposed Rules
33769
was supported by the SLA, SIA-Credit
Division, NYSE and several brokerdealers.
3. Joint Back Office Arrangements
b. SEC customer protection rule.
Section 220.11(a)(2) of Regulation T
While §220.16 of Regulation T covers
allows broker-dealers to set up a joint
all borrowing and lending of securities
back office (JBO). The owners of the JBO
by creditors, the SEC’s customer
are not considered customers of the
protection rule27 also applies if the
clearing organization and therefore no
creditor is borrowing securities from its
Regulation T margin is required,
customer. Both rules specify permissible
although the clearing firm generally
types of collateral. In 1989 the SEC
obtains the appropriate securities
proposed expanding the types of
haircut from its participants. When the
acceptable collateral specified in its
JBO section was adopted, the Board
rule28 and its staff issued a no action
assumed there would be a reasonable
letter in the interim. Regulation T
B. Borrowing and Lending Securities
relationship between the creditors’
currently expressly provides for all of
Section 220.16 of Regulation T covers these types of collateral, with the
ownership interests and the amount of
business conducted and did not adopt
the borrowing and lending of securities. exception of foreign sovereign debt,
Securities may be borrowed or lent in
an explicit requirement for the amount
which is being proposed as part of this
connection with the need to make
of ownership each broker-dealer should
package. To ensure that acceptable
delivery in short sales and fails to
have in the JBO. Since adoption of the
collateral under § 220.16 of Regulation T
receive. The section covers the
provision, several stock exchanges have
is always at least as broad as that
borrowing and lending of all types of
expressed concern that JBOs are
required by the SEC when creditors
securities,24 including those with good
permitting credit far in excess of the
borrow securities from their customers,
faith loan value, and requires
participant’s interest. Much of the
the Board is proposing to refer to the
enumerated types of collateral worth at
activity was attributed to index options
SEC’s customer protection rule in
least 100 percent of the market value of
specialists seeking good faith financing
§ 220.16 of Regulation T.
for stock baskets, which is not otherwise the securities on a daily basis. Although
c. Other collateral. The SLA and a
permitted under Regulation T. As
stock loans are economically equivalent broker-dealer seek confirmation that any
discussed in the section on the market
to repurchase agreements, the former are freely convertible currency may be
functions account under options, the
based on the need to make delivery and
treated as cash collateral for borrowings
Board is proposing to permit such
are not meant to be financing
of securities. Although this may present
arrangements for the owner of the
financing under SEC-approved rules of
a currency risk not originally
the exchanges and this change should
securities being lent.25
anticipated, the Board believes that this
reduce the pressure on JBOs to extend
is permissible, given that such loans are
1. Collateral
credit greatly disproportionate to the
marked-to-market daily with collateral
a.
Foreign sovereign debt. In 1988, theequal to at least 100 percent of the
amount of equity ownership.
Board amended Regulation T to give
Nevertheless, the Board is also
market value of the securities being
good faith loan value to highly rated
proposing to state explicitly that the
borrowed.
foreign sovereign bonds. Shortly
Several commenters support
participants’ ownership interest in the
thereafter. Board staff indicated that
expanding acceptable collateral to
JBO should be reasonably related to the
these securities should be acceptable as
include options or some or all types of
amount of business conducted through
collateral for stock loans if the currency
marginable securities, while the NYSE
it. Three stock exchanges and one other
is opposed to this concept. Although the
commenter support changes along these of the lent security is the same as the
sovereign bond.26 The Board is
Board has gradually expanded the types
lines.
proposing explicitly to add foreign
of acceptable collateral over the years, it
4. Credit to Other Types of Brokersovereign bonds to the list of collateral
has always required collateral with high
Dealers
in § 220.16 of Regulation T without
liquidity and low volatility.
restriction as to currency. This change
Several commenting broker-dealers
2. Permitted Purposes
suggest additional classes of creditors
a.
Pre-borrowing. Although Regulation
22 See, e.g.. Staff Opinion of August 18, 1986,
that should be entitled to good faith
F R R S 5-621.16.
T currently permits borrowing of
credit. One broker-dealer suggests
23 Staff Opinion of December 16. 1988, F R R S 5 securities for short sales that have been
creating a new category of broker621.18.
effected or are in immediate prospect,
dealers entitled to beneficial margin
24The government securities account can be used
several commenters support the concept
treatment that would be under some
to conduct all types of permissible transactions
of “pre-borrowing,” the borrowing of
affirmative obligation to add liquidity to involving government securities, including
securities in anticipation of a short sale
the market but would not be required to borrowing and lending.
23 The Financial Accounting Standards Board
that may or may not take place in the
be present on the trading floor. The
(FASB) is currently debating the differing treatment
near future. Pre-borrowing can lead to
Board has traditionally allowed good
of repurchase agreements and stock loans and has
an attempt to “squeeze” the market for
faith credit for specialists engaged in
tentatively concluded that repurchase agreements
should be accounted for as collateralized
a security by locking up all available
specialist transactions and deferred to
if the repurchase agreement entitles the
shares and hindering the ability of
the SEC to determine who is a specialist borrowings
party receiving financial assets subject to
others to sell that security short.29
under the Act. It is unclear what the
repurchase to repledge them but not sell them. Most
effect would be on specialists if other
securities lending transactions that entitle the party
27SEC Rule 15c3-3. 17 CFR 240.15c3-3.
receiving the financial assets to sell them would be
broker-dealers with lesser market
for as sales. Staff plans to review the
2MSEC Release No. 34-26608. 54 FR 10680 (March
making obligations were permitted good accounted
Regulation T treatment in this area once FASB
15.1989).
faith credit on certain transactions.
reaches a decision on the matter.
29 Board staff has indicated that a permissible
“yellow sheets” or those trading
pursuant to SEC Rule 144A.
The SIA-Credit Division believes that
^elf-clearing broker-dealers who choose
to go through another broker-dealer
should not be required to post customer
margin. Board staff has addressed this
issue several tim es22 and reiterated “that
the treatment of a broker-dealer depends
on whether it clears the transaction
itself and not whether it could clear the
transaction. In addition, a broker-dealer
suggested that affiliated broker-dealers
should not be treated as customers.
Board staff has indicated that affiliated
(sister) firms are treated as customers 23
and no policy reasons for changing this
have been presented.
Staff Opinion of September 23. 1988,
615.15.
FRRS
5-
alternative to pre-borrowing is the payment of a
Continued
33770
Federal Register / Vol. 60. No. 125 / Thursday, June 29, 1995 / Proposed Rules
b. Dividend reinvestment and stock
purchase plans. In addition to preborrowing, commenters such as the
NYSE and several broker-dealers suggest
that broker-dealers be permitted to
borrow securities in order to participate
in an issuer’s dividend reinvestment
and stock purchase plan. These plans
allow dividends, and often additional
funds, to be used to purchase additional
shares of the issuer, usually at a
discount from the current stock price.
Board staff opinions and SEC
enforcement actions have made clear
that Regulation T as currently written
does not permit the borrowing of
securities for this purpose.30
The Board is not proposing to include
dividend reinvestment and stock
purchase plans as a permitted purpose
for borrowing securities. Permitting
such borrowing would not be consistent
with existing Board policy concerning
borrowing and lending securities. The
Board has permitted securities lending
where it is needed for the smooth
operation of the securities markets, i.e.
short sales and fails to receive
securities. This view was echoed by the
Group of Thirty when they
recommended removing impediments to
securities lending to allow delivery of
securities. Participation in dividend
reinvestment and stock purchase plans
does not help the securities markets
complete transactions as broker-dealers
do not actually want or need possession
of the securities. Nevertheless, in light
of comments received indicating that
many issuers view these programs as a
less costly means of raising capital, the
Board is soliciting comment on whether
section 220.16 of Regulation T should
be amended to accommodate these
plans.
c. Other purposes. The PSA, SIA and
a broker-dealer recommend adding
repurchase agreements to the list of
permitted purposes. Since a repurchase
agreement represents the sale of a
security with a promise to repurchase it
at a later date, a creditor who does not
own the security subject to the
repurchase agreement is engaging in a
short sale and therefore may borrow the
security pursuant to section 220.16 of
Regulation T.31
One broker-dealer believes
institutions such as banks and insurance
commitment fee to a stock lender. See staff opinion
of October 22. 1990. FRRS 5-615.18.
“ Staff Opinions of March 2. 1984. FRRS 5-615.1
and July 6. 1984. FRRS 5-615.01; see also In re RFG
Options, SEC Administrative Proceeding File No.
3-6370, September 26. 1988.
31 As noted in footnote 29, all transactions
involving government securities may be effected in
the government securities account without regard tn
other provisions of Regulation T.
companies should be able to borrow
securities from a creditor if they say it
is for a permitted purpose. However,
Regulation Tand the U.S. securities
markets in general presume that the
borrowing of securities w ill be effected
by the broker-dealer that executes the
trade. Permitting an entity other than a
broker-dealer to borrow securities for a
transaction effected by a broker-dealer
would permit circumvention of the
Board’s margin requirements.
C. Borrowing hy Creditors
All of the commenters addressing
section 8(a) of the Act, which limits the
source of certain loans to broker-dealers
to member banks and some nonmember
banks, support expansion of the types of
lenders described in section 8(a) or a
reduction in the types of transactions
subject to the restriction. The SEC has
recently exempted all listed debt
securities from the scope of section 8(a)
of the Act,32 with the result that only
loans secured by exchange-traded equity
securities are still subject to the
restriction.
A wide variety of commenters
recommend legislation be introduced to
loosen the restrictions of section 8(a).
Such legislation is currently pending in
Congress.33
V. Section-by-Section Explanation of
Proposed Changes
Section 220.2
Definitions
The following new definitions are
being proposed: cash equivalent,
covered option transaction, exem pted
securities mutual fund, foreign person,
money market mutual fund, non-U.S.
traded foreign security, and perm itted
offset position. The following
definitions would be modified: escrow
agreement, in the money, margin
security, OTC margin bond, OTC margin
stock, short call or short put, and
underlying security. The definition of in
or at the money would be deleted and
SEC-approved rules of the appropriate
SRO would govern permitted offsets for
specialists.
Section 220.3
General Provisions
Section 220.3(e)(4), ‘‘Receipt of funds
or securities,” is used by creditors to
temporarily finance the exercise of a
customer’s employee stock option. The
section would be reworded to permit
such short-term financing for anyone
entitled to receive or acquire any
securities pursuant to an SEC-registered
employee benefit plan.
32SEC Rule 3 a l2 -l 1. 17 CFR 2 4 0 .3 a l2 -ll.
published at 59 FR 55342. November 7. 1994.
3,H.R. 1062. 104th Cong.. 1st Sess.
Section 220.3(i). ‘‘Variable annuity
contracts issued by insurance
companies,” would be deleted, although
no substantive change is intended.
Section 220.4
Margin Account
Section 220.4(b) would contain all
provisions of section 220.5. except for
those covering specific options
transactions. The options provisions
would be deleted and SEC-approved
rules of the SROs would apply to thesetransactions.
Section 220.4(c) would no longer
prohibit a margin excess in a foreign
currency subaccount from offsetting a
margin deficiency in another foreign
currency subaccount.
Section 220.5
Account
Special Memorandum
This account would be moved from
section 220.6. No substantive changes
are proposed.
Section 220.6
Account
Government Securities
This account would be moved from
section 220.18. No substantive changes
are proposed.
Section 220.8
Cash Account
Section 220.8(a), Permissible
transactions,” would be amended in two
ways. First, the cash account would
recognize industry practice and
specifically permit the sale to a
customer of any asset on a cash basis.
Second, the covered options
transactions permitted under section
220.8(a)(3) would be broadened to
include any eligible transaction
designated by the SEC-approved rules of
the SROs.
Section 220.8(b). “Time periods for
payment: cancellation or liquidation,”
would permit creditors to accept full
cash payment from customers for the
purchase of foreign securities up to one
day after the regular way settlement
date.
Section 220.11
Account
Broker-Dealer Credit
Three substantive changes are being
proposed to section 220.11(a),
“Permissible transactions.” First,
foreign broker-dealers would be
permitted to use the account for
deliverv-versus-payment transactions
with U.S. broker-dealers. Second, joint
back office arrangements would require
a reasonable relationship between the
owners’ equity interest and the amount
of business effected or financed by the
joint back office. Third, “prime broker”
arrangements set up under SEC
guidelines would be able to use this
Federal Register / VgI. 60, No, 125 / Thursday, June 29, 1995 / Proposed Rules
account for transactions effected at
executing broker-dealers.
Section 220.12
Account
Market Functions
Section 220.12(b), “Specialists,”
would be amended to allow SECapproved rules of the SROs to determine
which permitted offsets can be effected
on a good faith basis.
33771
Margin requirements, Investment
association, or creditor from imposing
additional requirements or taking action
companies, Investments, Reporting and
for its own protection.
recordkeeping requirements, Securities.
' (3) This part does not apply to
For the reasons set out in the
transactions between a customer and a
preamble, the Board proposes to amend
broker or dealer registered only under
12 CFR Part 220 as follows:
section 15C of the Act.
PART 220—CREDIT BY BROKERS
AND DEALERS (REGULATION T)
§ 220.2 Definitions.
The terms used in this part have the
meanings given them in section 3(a) of
Section 220.13 Arranging for Loans by
the Act or as defined in this section.
Others
Cash equivalent means securities
Authority: 15 U.S.C. 78c, 78g, 78h, 78q,
issued or guaranteed by the United
Changes are proposed for this section and 78w.
States or its agencies, negotiable bank
in two areas. First, the provision
certificates of deposit, bankers
2. The table of contents for part 220
allowing U.S. broker-dealers to arrange
acceptances issued by banking
is amended by revising the entries for
for customers to obtain credit from a
§§ 220.1-220.18 and renaming the entry institutions in the United States and
foreign lender to purchase foreign
payable in the United States, or money
for § 220.19 to read as follows:
securities would be expanded to cover
market mutual funds.
short sales while the overall coverage of Sec.
220.1 Authority, purpose, and scope.
Covered option transaction means:
this provision would be limited to
220.2 Definitions.
(1) In the case of a short call, the
foreign securities that are not publicly
220.3 General provisions.
underlying security (or a security
traded in the United States. Second, the 220.4 Margin account.
immediately convertible into the
regulation would explicitly permit U.S.
220.5 Special memorandum account.
underlying security, without the
broker-dealers to sell its customers
220.6 Government securities account.
payment of money) is held in or
foreign securities with installment
220.7 Arbitrage account.
purchased for the account on the same
220.8 Cash account.
features if the offering has only a small
day, and the option premium is held in
220.9
Nonsecurities
credit
and
employee
U.S. component.
the account until cash payment for the
stock ownership account.
Section 220.16 Borrowing and Lending 220.10 Omnibus account.
underlying or convertible security is
received; or
Securities
220.11 Broker-dealer credit account.
(2) In the case of a short put, the
220.12 Market functions account.
Two changes are proposed for this
220.13 Arranging for loans by others.
creditor obtains cash in an amount
section. First, the required collateral
220.14 Clearance of securities, options, and equal to the exercise price or holds in
would be expanded to include
futures.
the account cash equivalents with a
marginable foreign sovereign debt
220.15 Borrowing by creditors.
current market value at least equal to
securities and any collateral that is
220.16 Borrowing and lending securities.
the exercise price and with one year or
220.17 Requirements for the list of
acceptable to the SEC when a brokerless to maturity; or
marginable
OTC
stocks
and
the
list
of
dealer borrows securities from its
(3) Any other transaction involving
foreign
margin
stocks.
customer. Second, U.S. broker-dealers
options or warrants in which the
220.18 Supplement: Margin requirements.
would be able to lend foreign securities
customer’s risk is limited to a fixed
*
*
*
*
*
to a foreign person for any legal purpose
amount and is not subject to early
3. Sections 220.1 through 220.18 are
and against any legal collateral.
exercise if:
revised to read as follows:
(i) The amount at risk is held in the
Section 220.18 Supplement: Margin
account in cash, cash equivalents, or via
§220.1 Authority, purpose, and scope.
Requirements
(a) Authority and purpose. Regulation an escrow receipt; and
Several changes are being proposed.
(ii) The transaction has been defined
T (this part) is issued by the Board of
Options would be given fifty percent
as eligible for the cash account by the
Governors
of
the
Federal
Reserve
loan value if listed on a national
rules of the registered national securities
System (the Board) pursuant to the
securities exchange. Mutual funds
exchange
authorized to trade the option
Securities Exchange Act of 1934 (the
whose portfolio is limited to exempted
or warrant, provided that all such rules
Act)
(15
U.S.C.
78a
et
seq.).
Its
principal
securities would be given good faith
have been approved or amended by the
purpose is to regulate extensions of
loan value, as would money market
SEC.
credit
by
and
to
brokers
and
dealers;
it
mutual funds.
Credit balance means the cash
also covers related transactions within
amount due the customer in a margin
VI. Regulatory Flexibility Act
the Board’s authority under the Act. It
account after debiting amounts
imposes, among other obligations,
The Board believes there will be no
transferred to the special memorandum
initial margin requirements and
significant economic impact on a
account.
payment rules on securities
substantial number of small entities if
Creditor means any broker or dealer
this proposal is adopted. Comments are transactions.
(as defined in sections 3(a)(4) and
(b) Scope. (1) This part provides a
invited on this statement.
3(a)(5) of the Act), any member of a
margin account and eight special
national
securities exchange, or any
VII. Paperwork Reduction Act
purpose accounts in which to record all person associated with a broker or
No additional reporting requirements financial relations between a customer
.dealer (as defined in section 3(a)( 18) of
and a creditor. Any transaction not
or modification to existing reporting
the Act), except for business entities
requirements are proposed.
specifically permitted in a special
controlling or under common control’
account shall be recorded in a margin
with the creditor.
List of Subjects in 12 CFR Part 220
account.
Customer includes:
Banks, banking, Bonds, Brokers,
(2)
This part does not preclude any
(1)
Any person or persons acting
Credit, Federal Reserve System. Margin. exchange, national securities
jointly:
1. The authority citation for Part 220
continues to read as follows:
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Federal Register / Vol. 60, No. 125 / Thursday, June 29, 1995 / Proposed Rules
(1) To or for whom a creditor extends,
arranges, or maintains any credit; or
(ii) Who would be considered a
customer of the creditor according to the
ordinary usage of the trade;
(2) Any partner in a firm who would
be considered a customer of the firm
absent the partnership relationship; and
(3) Any joint venture in which a
creditor participates and which would
be considered a customer of the creditor
if the creditor were not a participant.
Debit balance means the cash amount
owed to the creditor in a margin account
after debiting amounts transferred to the
special memorandum account.
Delivery against paym ent, Payment
against delivery, or a C.O.D. transaction
refers to an arrangement under which a
creditor and a customer agree that the
creditor will deliver to, or accept from,
the customer, or the customer’s agent, a
security against full payment of the
purchase price.
Equity means the total current market
value of security positions held in the
margin account plus any credit balance
less the debit balance in the margin
account.
Escrow agreement means any
agreement issued in connection with a
call or put option under which a bank
or any person designated as a control
location under paragraph (c) of SEC
Rule 15c3—3 (17 CFR 240.15c3-3),
holding the underlying security, foreign
currency, certificate of deposit, or
required cash, is obligated to deliver to
the creditor (in the case of a call option)
or accept from the creditor (in the case
of a put option) the underlying security,
foreign currency, or certificate of
deposit against payment of the exercise
price upon exercise of the call or put.
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.
Exempted securities mutual fund
means any security issued by an
investment company registered under
section 8 of the Investment Company
Act of 1940 (15 U.S.C. 80a-8), provided
the company has at least 95 percent of
its assets continuously invested in
exempted securities (as defined in
section 3(a)(12) of the Act).
Foreign margin stock means: (1) A
foreign security that is an equity
security and that appears on the Board’s
periodically published List of Foreign
Margin Stocks based on information
submitted by a seif-regulatorv
organization under procedures
approved by the Board. Foreign person
means a person other than a United
States person as defined in section Z(f)
of the Act.
Foreign security means a security
issued in a jurisdiction other than the
United States.
Good faith margin means the amount
of margin which a creditor, exercising
sound credit judgment, would
customarily require for a specified
security position and which is
established without regard to the
customer’s other assets or securities
positions held in connection with
unrelated transactions.
In the m oney means the current
market price of the underlying security
or index is not below (with respect to
a call option) or above (with respect to
a put option) the exercise price of the
option.
Margin call means a demand by a
creditor to a customer for a deposit of
additional cash or securities to
eliminate or reduce a margin deficiency
as required under this part.
Margin deficiency means the amount
by which the required margin exceeds
the equity in the margin account.
Margin excess means the amount by
which the equity in the margin account
exceeds the required margin. When the
margin excess is represented by
securities, the current value of the
securities is subject to the percentages
set forth in §220.18 (Supplement:
Margin requirements).
Margin security means:
(1) Any registered security;
(2) Any OTC margin stock;
(3) Any OTC margin bond;
(4) Any OTC security designated as
qualified for trading in the National
Market System under a designation plan
approved by the Securities and
Exchange Commission (NMS security);
(5) Any security issued by either an
open-end investment company or unit
investment trust which is registered
under section 8 of the Investment
Company Act of 1940 (15 U.S.C. 80a—8);
(6) Any foreign margin stock; or
(7) Any debt security convertible into
a margin security.
Money market mutual fund means
any security issued by an investment
company registered under section 8 of
the Investment Company Act of 1940
(15 U.S.C. 80a-8) that is considered a
money market fund under SEC Rule 2a7 (17 CFR 270.2a-7).
Nonexempted security means any
security other than an exempted
security (as defined in section 3(a)(12)
of the Act).
Nonmember bank means a bank that
is not a member of the Federal Reserve
System.
Non-U.S. traded foreign security
means ^foreign security that is neither
a registered security nor one listed on
NASDAQ.
OTC margin bond means:
(1)
A debt security not traded on a
national securities exchange which
meets all of the following requirements:
(1) At the time of the original issue, a
principal amount of not less than
$25,000,000 of the issue was
outstanding;
(ii) The issue was registered under
section 5 of the Securities Act of
1933(15 U.S.C. 77e) and the issuer
either files periodic reports pursuant to
section 13(a) or 15(d) of the Act or is an
insurance company which meets all of
the conditions specified in section
12(g)(2)(G) of the Act; and
(iii) At the time of the extension of
credit, the creditor has a reasonable
basis for believing that the issuer is not
in default on interest or principal
payments; or
(2) A private pass-throdgh security
(not guaranteed by an agency of the U.S.
government) meeting all of the
following requirements:
(i) An aggregate principal amount of
not less than $25,000,000 (which maybe
issued in series) was issued pursuant to
a registration statement filed with the
SEC under section 5 of the Securities
Act of 1933 (15 U.S.C. 77e);
(ii) Current reports relating to the
issue have been filed with the SEC; and
(iii) At the time of the credit
extension, the creditor has a reasonable
basis for believing that mortgage
interest, principal payments and other
distributions are being passed through
as required and that the servicing agent
is meeting its material obligations under
the terms of the offering; or
(3) A mortgage related security as
defined in section 3(a)(41) of the Act; or
(4) A debt security issued or
guaranteed as a general obligation by the
government of a foreign country, its
provinces, states, or cities, or a
supranational entity, if at the time of the
extension of credit one of the following
is rated in one of the two highest rating
categories by a nationally recognized
statistical rating organization:
(i) The issue;
(ii) The issuer or guarantor
(implicitly); or
(iii) Other outstanding unsecured
long-term debt securities issued or
guaranteed by the government or entity;
or
(5) A foreign security that is a
nonconvertible debt security that meets
all of the following requirements:
(i) At the time of original issue, a
principal amount of at least
$100,000,000 was outstanding;
(ii) At the time of the extension of
credit, the creditor has a reasonable
Federal Register / Vol. 60, No. 125 / Thursday, June 29, 1995 / Proposed Rules
basis for believing that the issuer is not
in default on interest or principal
payments; and
(iii) At the time of the extension of
credit, the issue is rated in one of the
two highest rating categories by a
nationally recognized statistical rating
organization, except that an issue that
has not been rated as of the effective
date of this provision shall be
considered an OTC margin bond if a
subsequent unsecured issue of at least
$ 1 0 0 ,0 0 0 , 0 0 0 of the same issuer is rated
in one of the two highest rating
categories by a nationally recognized
statistical rating organization.
OTC margin stock means any equity
security traded over-the-counter that the
Board has determined has the degree of
national investor interest, the depth and
breadth of market, the availability of
information respecting the security and
its issuer, and the character and
permanence of the issuer to warrant
being treated like an equity security
traded on a national securities
exchange. An OTC stock is not
considered to be an OTC margin stock
unless it appears on the Board’s
periodically published list of OTC
margin stocks.
Overlying option means:
(1) A put option purchased or a call
option written against a long position in
an underlying security in the specialist
record in § 220.12(b); or
(2) A call option purchased or a put
option written against a short position
in an underlying security in the
specialist record in § 220.12(b).
Payment period means the number of
business days in the standard securities
settlement cycle in the United States, as
defined in paragraph (a) of SEC Rule
15c6-l (17 CFR 240.15c6-l), plus two
business days.
Permitted offset position means a
position in securities or other assets
underlying options in which a specialist
makes a market or a position in options
overlying the securities in which a
specialist makes a market, provided the
positions qualify as permitted offsets
under the rules of the national securities
exchange with which the specialist is
registered, provided that all such rules
have been approved or amended by the
SEC.
Purpose credit means credit for the
purpose of:
(1) Buying, carrying, or trading in
securities; or
(2) Buying or carrying any part of an
investment contract security which
shall be deemed credit for the purpose
nf buying or carrying the entire security.
Registered security means any
v ‘<uritv that;
(1) Is registered on a national
securities exchange; or
(2) Has unlisted trading privileges t)n
a national securities exchange.
Short call or short put means a call
option or a put option that is issued,
endorsed, guaranteed or sold in or for an
account.
(1) A short call that is not cash-settled
obligates the customer to sell the
underlying asset at the exercise price
upon receipt of a valid exercise notice.
(2) A short put that is not cash-settled
obligates the customer to purchase the
underlying asset at the exercise price
upon receipt of a valid exercise notice.
(3) A short call or a short put that is
cash-settled obligates the customer to
pay the holder of an in the money long
put or call who has exercised the option
the cash difference between the exercise
price and the current assigned value of
the option as established by the option
contract.
Specialist joint account means an
account which, by written agreement,
provides for the commingling of the
security positions of the participants
and a sharing of profits and losses from
the account on some predetermined
ratio.
Underlying security means:
(1) the security that w ill be delivered
upon exercise of an option; or
(2) In the case of a cash-settled option,
the securities which comprise the index
in the same proportion or any other
asset from which the option’s value is
derived.
§ 220.3
General provisions.
(a) Records. The creditor shall
maintain a record for each account
showing the full details of all
transactions.
(b) Separation of accounts. Except as
provided for in the margin account and
the special memorandum account, the
requirements of an account may not be
met by considering items in any other
account. If withdrawals of cash or
securities are permitted under the
regulation, written entries shall be made
when cash or securities are used for
purposes of meeting requirements in
another account.
(c) Maintenance of credit. Except as
prohibited by this part, any credit
initially extended in compliance with
this part may be maintained regardless
of:
(1) Reductions in the customer’s
equity resulting from changes in market
prices;
(2) Any security in an account ceasing
to be margin or exempted; or
(3) Any change in tne margin
reauirements prescribed under this part.
(d) Guarantee of accounts. No.
guarantee of a customer’s account shall
33773
be given any effect for purposes of this
part.
(e) Receipt of funds or securities. (1)
A creditor, acting in good faith, may
accept as immediate payment:
(1) Cash or any check, draft, or order
payable on presentation; or
(ii) Any security with sight draft
attached.
(2) A creditor may treat a security,
check or draft as received upon written
notification from another creditor that
the specified security, check, or draft
has been sent.
(3) Upon notification that a check,
draft, or order has been dishonored or
when securities have not been received
within a reasonable time, the creditor
shall take the action required by this
part when payment or securities are not
received on time.
(4) To temporarily finance a
customer’s receipt of stock pursuant to
an employee benefit plan registered on
SEC Form S-8, a creditor may accept, in
lieu of the securities, a properly
executed exercise notice and
instructions to the issuer to deliver the
stock to the creditor. Prior to
acceptance, the creditor must verify that
the issuer w ill deliver the securities
promptly and the customer must
designate the account into which the
securities are to be deposited.
(f) Exchange of securities. (1) To
enable a customer to participate in an
offer to exchange securities which is
made to all holders of an issue of
securities, a creditor may submit for
exchange any securities held in a
margin account, without regard to the
other provisions of this part, provided
the consideration received is deposited
into the account.
(2)
If a nonmargin, nonexempted
security is acquired in exchange for a
margin security, its retention,
withdrawal, or sale within 60 days
following its acquisition shall be treated
as if the security is a margin security.
(g) Valuing securities. The current
market value of a security shall be
determined as follows:
(1) Throughout the day of the
purchase or sale of a security, the
creditor shall use the security’s total
cost of purchase or the net proceeds of
its sale including any commissions
charged.
(2) At any other time, the creditor
shall use the closing sale price of the
security on the preceding business day,
as shown by any regularly published
reporting or quotation service. If there is
no closing price, the creditor may use
any reasonable estimate of the market
value of the security as of the close of
business on the preceding business day.
33774
Federal Register / Vol. 60, No. 125 / Thursday, June 29, 1995 / Proposed Rules
(6) Contribution to joint venture. If a
margin account is the account of a joint
venture in which the creditor
participates, any interest of the creditor
in the joint account in excess of the
interest which the creditor would have
on the basis of its right to share in the
profits shall be treated as an extension
of credit to the joint account and shall
be margined as such.
§ 220.4 Margin account.
(7) Transfer of accounts, (i) A margin
(a) Margin transactions. (1) All
account that is transferred from one
creditor to another may be treated as if
transactions not specifically authorized
for inclusion in another account shall be it had been maintained by the transferee
from the date of its origin, if the
recorded in the margin account.
(2)
A creditor may establish separate transferee accepts, in good faith, a
margin accounts for the same person to: signed statement of the transferor (or, if
(i) Clear transactions for other
that is not practicable, of the customer),
creditors where the transactions are
that any margin call issued under this
introduced to the clearing creditor by
part has been satisfied.
separate creditors; or
(ii) A margin account that is
(ii) Clear transactions through other
transferred from one customer to
creditors if the transactions are cleared
another as part of a transaction, not
by separate creditors; or
undertaken to avoid the requirements of
(iii) Provide one or more accounts
this part, may be treated as if it had been
over which the creditor or a third party
maintained for the transferee from the
investment adviser has investment
date of its origin, if the creditor accepts
discretion.
in good faith and keeps with the
(b) Required margin—(1)
transferee account a signed statement of
Applicability. The required margin for
the transferor describing the
each long or short position in securities
circumstances for the transfer.
is set forth in § 220.18 (Supplement:
(8) Credit denominated in foreign
Margin requirements) and is subject to
currency. A creditor may extend credit
the following exceptions and special
denominated in a foreign currency
provisions.
secured by foreign margin securities
(2) Short sale against the box. A short denominated or traded in the same
sale ‘‘against the box” shall be treated as foreign currency and specifically
a long sale for the purpose of computing identified on the creditor’s books and
the equity and the required margin.
records as securing the foreign currency
(3) When issued securities. The
debit.
required margin on a net long or net
(c)
When additional margin is
short commitment in a when issued
required—(1) Computing deficiency. All
security is the margin that would be
transactions on the same day shall be
required if the security were an issued
combined to determine whether
margin security, plus any unrealized
additional margin is required by the
loss on the commitment or less any
creditor. For the purpose of computing
unrealized gain.
equity in an account, security positions
(4) Stock used as cover, (i) When a
are established or eliminated and a
short position held in the account serves credit or debit created on the trade date
in lieu of the required margin for a short of a security transaction. Additional
put, the amount prescribed by
margin is required on any day when the
paragraph (b)(1) of this section as the
day’s transactions create or increase a
amount to be added to the required
margin deficiency in the account and
margin in respect of short sales shall be
shall be for the amount of the margin
increased by any unrealized loss on the
deficiency so created or increased.
position.
(2) Satisfaction of deficiency. The
(ii) When a security held in the
additional required margin may be
account serves in lieu of the required
satisfied by a transfer from the special
margin for a short call, the security shall memorandum account or by a deposit of
be valued at no greater than the exercise cash, margin securities, exempted
price of the short call.
securities, or any combination thereof.
(5) Accounts of partners. If a partner
(3) Time limits, (i) A margin call shall
of the creditor has a margin account
be satisfied within one payment period
with the creditor, the creditor shall
after the margin deficiency was created
disregard the partner’s financial
or increased.
relations with the firm (as shown in the
(ii) The payment period may be
partner's capital and ordinary drawing
extended for one or more limited
accounts) in calculating the margin or
periods upon application by the creditor
equity of the partner’s margin account.
to its examining authority unless the
(h) Innocent mistakes. If any failure to
comply with this part results from a
mistake made in good faith in executing
a transaction or calculating the amount
of margin, the creditor shall not be
deemed in violation of this part if,
promptly after the discovery of the
mistake, the creditor takes appropriate
corrective action.
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.
Applications shall be filed and acted
upon prior to the end of the payment
period or the expiration of any
subsequent extension.
(4)
Satisfaction restriction. Any
transaction, position, or deposit that is
used to satisfy one requirement under
this part shall be unavailable to satisfy
any other requirement.
(d) Liquidation in lieu of deposit. If
any margin call is not met in full within
the required time, the creditor shall
liquidate securities sufficient to meet
the margin call or to eliminate any
margin deficiency existing on the day
such liquidation is required, whichever
is less. If the margin deficiency created
or increased is $1000 or less, no action
need be taken by the creditor.
(e) Withdrawals of cash or securities.
(1) Cash or securities may be withdrawn
from an account, except if:
(1) Additional cash or securities are
required to be deposited into the
account for a transaction on the same or
a previous day; or
(ii) The withdrawal, together with
other transactions, deposits, and
withdrawals on the same day, would
create or increase a margin deficiency.
(2) Margin excess may be withdrawn
or may be transferred to the special
memorandum account (§ 220.5) by
making a single entry to that account
which w ill represent a debit to the
margin account and a credit to the
special memorandum account.
(3) If a creditor does not receive a
distribution of cash or securities which
is payable with respect to any security
in a margin account on the day it is
payable and withdrawal would not be
permitted under paragraph, (e) of this
section, a withdrawal transaction shall
be deemed to have occurred on the day
the distribution is payable.
(f) Interest, service charges, etc. (1)
Without regard to the other provisions
of this section, the creditor, in its usual
practice, may debit the following items
to a margin account if they are
considered in calculating the balance of
such account:
(i) Interest charged on credit
maintained in the margin account;
(ii) Premiums on securities borrowed
in connection with short sales or to
effect delivery;
(iii) Dividends, interest, or other
distributions due on borrowed
securities;
(iv) Communication or shipping
charges with respect to transactions in
the margin account; and
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33775
A security owned by the customer
(b)
A purchase of a security which is, (D)
without restriction other than the
has matured or has been redeemed and
payment of money, exchangeable or
a new refunding security of the same
convertible within 90 calendar days of
issuer has been purchased by the
the purchase into a second security
customer, provided:
together with an offsetting sale of the
(2)
The customer purchased the new
second security at or about the same
security no more than 35 calendar days
time, for the purpose of taking
prior to the date of maturity or
advantage of a concurrent disparity in
redemption of the old security;
the prices of the two securities.
(2)
The customer is entitled to the
proceeds of the redemption; and
§ 220.8 Cash accou nt
(J) The delayed payment does not
(a) Permissible transactions. In a cash
exceed 103 percent of the proceeds of
account, a creditor, may:
(1)
Buy for or sell to any customer anythe old security.
(ii) In the case of the purchase of a
security or other asset if:
§ 220.5 Special memorandum account.
foreign security, within one payment
(1)
There
are
sufficient
funds
in
the
(a) A special memorandum account
period of the trade date or within one
account; or
(SMA) may be maintained in
day after the date on which settlement
(ii)
The
creditor
accepts
in
good
faith
conjunction with a margin account. A
is required to occur by the rules of the
the customer’s agreement that the
single entry amount may be used to
foreign securities market, provided this
customer
will
promptly
make
full
cash
represent both a credit to the SMA and
period does not exceed the maximum
payment
for
the
security
or
asset
before
a debit to the margin account. A transfer
time permitted by this part for delivery
selling
it
and
does
not
contemplate
between the two accounts may be
selling it prior to making such payment; against payment transactions.
effected by an increase or reduction in
(2) Delivery against payment. If a
(2) Buy from or sell for any customer
the entry. When computing the equity
creditor purchases for or sells to a .
any security or other asset if:
in a margin account, the single entry
(i) The security is held in the account; customer a security in a delivery against
amount shall be considered as a debit in or
payment transaction, the creditor shall
the margin account. A payment to the
(ii) The creditor accepts in good faith
have up to 35 calendar days to obtain
customer or on the customer’s behalf or the customer’s statement that the
payment if delivery of the security is
a transfer to any of the customer’s other
security is owned by the customer or the delayed due to the mechanics of the
accounts from the SMA reduces the
customer’s principal, and that it will be
transaction and is not related to the
single entry amount.
promptly deposited in the account;
customer’s willingness or ability to pay.
(b) The SMA may contain the
(3) Issue, endorse, guarantee, or sell
(3) Shipm ent of securities, extension.
following entries:
an option for any customer as part of a
If any shipment of securities is
(1) Dividend and interest payments;
covered option transaction; and
incidental to consummation of a
(2) Cash not required by this part,
(4) Use an escrow agreement in lieu
transaction,
a creditor may extend the
including cash deposited to meet a
of the cash or underlying security
payment period by the number of days
maintenance margin call or to meet any
position if:
required for shipment, but not by more
requirement of a self-regulatory
(i) In the case of a short call or a short than one additional payment period.
organization that is not imposed by this
put, the creditor is advised by the
(4) Cancellation; liquidation;
part;
customer that the required securities or
minimum amount. A creditor shall
(3) Proceeds of a sale of securities or
cash are held by a person authorized to
promptly cancel or otherwise liquidate
cash no longer required on any expired
issue an escrow agreement and the
a transaction or any part of a transaction
or liquidated security position that may
creditor independently verifies that the
for which the customer has not made
be withdrawn under § 220.4(e); and
appropriate escrow agreement will be
full
cash payment within the required
(4) Margin excess transferred from the delivered by the person promptly; or
time. A creditor may, at its option,
margin account under § 220.4(e)(2).
(ii) In the case of a call issued,
disregard any sum due from the
endorsed, guaranteed, or sold on the
§ 220.6 Governm ent securities account.
customer not exceeding $1000.
same day the underlying security is
(c)
90 day freeze. (1) If a nonexempted
In a government securities account, a
purchased in the account and the
creditor may effect and finance
underlying security is to be delivered to security in the account is sold or
delivered to another broker or dealer
transactions involving government
a person authorized to issue an escrow
without
having been previously paid for
securities, provided the transaction is
agreement, the creditor verifies that the
in full by the customer, the privilege of
not prohibited by section 15C of the Act appropriate escrow agreement will be
delaying payment beyond the trade date
or any rule thereunder.
delivered by the person promptly.
shall be withdrawn for 90 calendar days
(b)
Time
periods
for
payment;
§ 220.7 Arbitrage account.
following the date of sale of the security.
cancellation or liquidation— (1 ) Full
In an arbitrage account a creditor may cash payment. A creditor shall obtain
Cancellation of the transaction other
effect and finance for any customer
than to correct an error shall constitute
full cash payment for customer
bona fide arbitrage transactions. For the purchases—
a sale.
purpose of this section, the term “bona
(2)
The 90 day freeze shall not apply
(i)
Within one payment period of the
fide arbitrage” means:
if:
date:
(a)
A purchase or sale of a security in (A) Any nonexempted security was
(i)
Within the period specified in
one market together with an offsetting
paragraph (b)(1) of this section, full
purchased;
sale or purchase of the same security in
(B) Any when issued security was
payment is received or any check or
a different market at as nearly the same
made available by the issuer for deliver}’ draft in payment has cleared and the
time as practicable for the purpose of
to purchasers;
proceeds from the sale are not
taking advantage of a difference in
(C) Any "when distributed” securitv
withdrawn prior to such payment or
prices in the two markets; or
was distributed under a published plan; check clearance; or
(v)
Any other service charges which
the creditor may impose.
(2)
A creditor may permit interest,
dividends, or other distributions
credited to a margin account to be
withdrawn from the account if:
(i) The withdrawal does not create or
increase a margin deficiency in the
account; or
(ii) The current market value of any
securities withdrawn does not exceed
10 percent of the current market value
of the security, with respect to which
they were distributed.
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33776
(ii) The purchased security was
delivered to another broker or dealer for
deposit in a cash account which holds
sufficient funds to pay for the security.
The creditor may rely on a written
statement accepted in good faith from
the other broker or dealer that sufficient
funds are held in the other cash
account.
(d)
Extension of 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:
(1) 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 within the
period specified in paragraph (b)(l)(ii)
of this section, or the expiration of any
subsequent extension.
§ 220.9 Nonsecurities credit and employee
stock ownership account.
(a) In a nonsecurities credit account a
creditor may:
(1) Effect and carry transactions in
commodities;
(2) Effect and carry transactions in
foreign exchange;
(3) Extend and maintain secured or
unsecured nonpurpose credit, subject to
the requirements of paragraph (b) of this
section; and
(4) Extend and maintain credit to
employee stock ownership plans
without regard to the other sections of
this part.
(b) Every extension of credit, except
as provided in paragraphs (a)(1) and
(a)(2) of this section, shall be deemed to
be purpose credit unless, prior to
extending the credit, the creditor
accepts in good faith from the customer
a written statement that it is not purpose
credit. The statement shall conform to
the requirements established by the
Board. To accept the customer's
statement in good faith, the creditor
shall be aware of the circumstances
surrounding the extension of credit and
shall be satisfied that the statement is
truthful.
§220.10 Omnibus account.
(a)
In a n o m n i b u s a c c o u n t , a c r e d i t o r
m a y e f f e c t a n d f i n a n c e t r a n s a c t i o n s for
a b r o k e r or d e a le r w h o is r e g is t e r e d w i t h
the SEC under section 15 of the Act and
who gives the creditor written notice
that:
(1) All securities will be for the
account of customers of the broker or
dealer; and
(2) Any short sales effected will be
short sales made on behalf of the
customers of the broker or dealer other
than partners.
(b)
The written notice required by
paragraph (a) shall conform to any SEC
rule on the hypothecation of customers’
securities by brokers or dealers.
§ 220.11
Broker-dealer credit account.
(a) Permissible transactions. In a
broker-dealer credit account, a creditor
may:
(1) Purchase any security from or sell
any security to another creditor or
person regulated by a foreign securities
authority under a good faith agreement
to promptly deliver the security against
full payment of the purchase price.
(2) Effect or finance transactions of
any of its owners if the creditor is a
clearing and servicing broker or dealer
owned jointly or individually by other
creditors, provided that the owners’
interest is reasonably related to the
amount of business they transact
through the joint back office.
(3) Extend and maintain credit to any
partner or stockholder of the creditor for
the purpose of making a capital
contribution to, or purchasing stock of,
the creditor, affiliated corporation or
another creditor.
(4) Extend and maintain, with the
approval of the appropriate examining
authority:
(i) Credit to meet the emergency needs
of any creditor: or
(ii) Subordinated credit to another
creditor for capital purposes, if the other
creditor:
(A) Is an affiliated corporation or
would not be considered a customer of
the lender apart from the subordinated
loan; or
(B) Will not use the proceeds of the
loan to increase the amount of dealing
in securities for the account of the
creditor, its firm or corporation or an
affiliated corporation.
(5) Effect transactions for a customer
as part of a “prime broker’’ arrangement
in conformity with SEC guidelines.
(b) Affiliated corporations. For
purposes of paragraphs (a)(3) and (a)(4)
of this section “affiliated corporation”
means a corporation all the common
stock of which is owned directly or
indirectly by the firm or general
partners and employees of the firm, or
by the corporation or holders of the
controlling stock and employees of the
corporation and the affiliation has been
approved by the creditor's examining
authority.
§ 220.12 Market functions account.
(a) Requirements. In a market
functions account, a creditor may effect
or finance the transactions of market
participants in accordance with the
following provisions. A separate record
shall be kept for the transactions
specified for each category described in
paragraphs (b) through (e) of this
section. Any position in a separate
record shall not be used to meet the
requirements of any other category.
(b) Specialists—(1) Applicability. A
creditor may clear or finance specialist
transactions and permitted offset
positions for any specialist, or any
specialist joint account, in which all
participants, or all participants other
than the creditor, are registered as
specialists on a national securities
exchange that requires regular reports
on the use of specialist credit from.the
registered specialists.
(2) Required margin. The required
margin for a specialist’s transactions
shall be:
(i) Good faith margin for:
(A) Any long or short position in a
security in which the specialist makes a
market;
(B) Any wholly-owned margin
security or exempted security; or
(C) Any permitted offset position.
(ii) The margin prescribed by § 220.18
(Supplement: Margin requirements)
when a security purchased or sold short
in the account does not qualify as a
specialist or permitted offset position.
(3) A dditional margin; restriction on
“free-riding”, (i) Except as required by
paragraph (b)(4) of this section, the
creditor shall issue a margin call on any
day when additional margin is required
as a result of specialist transactions. The
creditor may allow the specialist a
maximum of one payment period to
satisfy a margin call.
(ii) If a specialist fails to satisfy a
margin call within the period specified
in paragraph (b)(3) of this section (and
the creditor is required to liquidate
securities to satisfy the call), the creditor
shall be prohibited for a 15 calendar day
period from extending any further credit
to the specialist to finance transactions
in nonspecialty securities.
(iii) The restriction on “free-riding”
shall not apply to:
(A) Any specialist on a national
securities exchange that has an SECapproved rule on “free-riding" by
specialists; or
(B) The acquisition or liquidation of a
permitted offset position.
(4) Deficit status. On any day when a
specialist’s separate record would
Federal Register / Vol. 60, No. 125 / Thursday, June 29, 1995 / Proposed Rules
Securities Act of 1933 under section
liquidate to a deficit, the creditor shall
4(2) of section 4(6) of the Act:
not extend any further specialist credit
(3) A subsequent loan or advance on
in the account and shall issue a margin
a face-amount certificate as permitted
call at least as large as the deficit. If the
under 15 U.S.C. 80a-28(d); or
call is not met by noon of the following
(4)
~Credit extended by a foreign
business day, the creditor shall liquidate
person in connection with the purchase
positions in the specialist’s account:
(5)
Withdrawals ^Withdrawals may be or short sale of non-U.S. traded foreign
securities.
permitted to the extent that the equity
(b)
A creditor shall not be deemed to
exceeds the margin requirements
have arranged credit by effecting the
specified in paragraph (b)(2) of this
sale of a foreign security offered on an
section.
installment basis if no more than 15
(c) Underwriters and distributors. A
percent of the issue is offered to United
creditor may effect or finance for any
States persons as defined in section 7(f)
dealer or group of dealers transactions
of the Act.
for the purpose of facilitating the
underwriting or distribution of all or a
§ 220.14 Clearance of securities, options,
part of an issue of securities with a good and futures.
faith margin.
(a) Credit for clearance of securities.
(d) OTC marketmakers and third
The provisions of this part shall not
marketmakers. (1) A creditor may clear
apply to the extension or maintenance
or finance with a good faith margin,
of any credit that is not for more than
marketmaking transactions for a creditor one day if it is incidental to the
who is a registered NASDAQ
clearance of transactions in securities
marketmaker or a qualified third
directly between members of a national
securities exchange or association or
marketmaker as defined in SEC Rule
through any clearing agency registered
3b—8 (17 CFR 240.3b-8).
with the SEC.
(2)
If the credit extended to a
(b) Deposit of securities with a
marketmaker ceases to be for the
clearing agency. The provisions of this
purpose of marketmaking, or the dealer
part shall not apply to the deposit of
ceases to be a marketmaker for an issue
securities with an options or futures
of securities for which credit was
clearing agency for the purpose of
extended, the credit shall be subject to
meeting the deposit requirements of the
the margin specified in § 220.18
agency if:
(Supplement: Margin requirements).
(1) The clearing agency:
(e) Odd-lot dealers. A creditor may
(1) Issues, guarantees performance on,
clear and finance odd-lot transactions
or clears transactions in, any security
for any creditor who is registered as an
(including options on any security,
odd-lot dealer on a national securities
certificate of deposit, securities index or
exchange with a good faith margin.
foreign currency); or
(ii) Guarantees performance of
§220.13 Arranging for loans by others.
(a)
A creditor may not arrange for the contracts for the purchase or sale of a
extension or maintenance of credit to or commodity for future delivery or
options on such contracts;
for any customer by any person upon
(2) The clearing agency is registered
terms and conditions other than those
with the Securities and Exchange
upon which the creditor may itself
Commission or is the clearing agency for
extend or maintain credit under the
a
contract market regulated by the
provisions of this part, except that this
Commodity Futures Trading
limitation shall not apply to credit
Commission; and
arranged for a customer which does not
(3) The deposit consists of any margin
violate parts 207 and 221 of this chapter
security and complies with the rules of
and results solely from:
the clearing agency that have been
(1) Investment banking services,
approved by the Securities and
provided by the creditor to the
Exchange Commission or the
customer, including, but not limited to,
Commodity Futures Trading
underwritings, private placements, and
Commission.
advice and other services in connection
with exchange offers, mergers, or
§ 220.15 Borrowing by creditors.
acquisitions, except for underwritings
(a) Restrictions on borrowing. A
that involve the public distribution of
creditor may not borrow in the ordinary
an equity security with installment or
course of business as a broker or dealer
other deferred payment provisions:
using as collateral any registered
(2) The sale of nonmargin securities
nonexempted security, except:
(including securities with installment or
(1) From or through a member bank of
other deferred payment provisions) if
the Federal Reserve System; or
'he sale is exempted from the
(2) From any nonmember bank that
registration requirements of the
has filed with the Board an agreement
33777
as prescribed in paragraph (b) of this
section, which agreement is still in
effect: or
(3)
From another creditor if the loan
is permissible under this part.
(b) Agreements of nonmember banks.
(1) A nonmember bank shall file an
agreement that conforms to the
requirements of section 8(a) of the Act
(See Form FR T -l, T-2).
(2)
Any nonmember bank may
terminate its agreement if it obtains the
written consent of the Board.
§ 220.16
Borrowing and lending securities.
(a) Without regard to the other
provisions of this part, a creditor may
borrow or lend securities for the
purpose of making delivery of the
securities in the case of short sales,
failure to receive securities required to
be delivered, or other similar situations.
Each borrowing shall be secured by a
deposit of one or more of the following:
cash, cash equivalents, foreign sovereign
nonconvertible debt securities'that are
margin securities, collateral acceptable
for borrowings of securities pursuant to
SEC Rule 15c3—3 (17 CFR 240.15c3-3),
or irrevocable letters of credit issued by
a bank insured by the Federal Deposit
Insurance Corporation or a foreign bank
that has filed an agreement with the
Board on Form FR T - l, T-2. Such
deposit made with the lender of the
securities shall have at all times a value
at least equal to 100 percent of the
market value of the securities borrowed,
computed as of the close of the
preceding business day.
(b) A creditor may lend non-U.S.
traded foreign securities to a foreign
person for any purpose lawful in the
country in.which they are to be used.
Each borrowing shall be secured with
collateral having at all times a value at
least equal to 100 percent of the market
value of the securities borrowed,
computed as of the close of the
preceding business day.
§ 220.17 Requirem ents for the list of
m arginable O TC stocks and the list of
foreign margin stocks.
(a) Requirements for inclusion on the
list of marginable OTC stocks. Except as
provided in paragraph (f) of this section,
OTC margin stock shall meet the
following requirements:
(1) Four or more dealers stand willing
to, and do in fact, make a market in such
stock and regularly submit bona fide
bids and offers to an automated
quotations system for their own
accounts;
(2) The minimum average bid price of
such stock, as determined by the Board,
is at least $5 per share;
(3) The stock is registered under
section 12 of the Act, is issued bv an
33778
Federal Register / Vol. 60, No. 125 / Thursday, Tune 29, 1995 / Proposed Rules
beneficial owners of 10 percent or more
insurance company subject to section
of the stock, or the average daily trading
12(g)(2)(G) of the Act, is issued by a
volume of such stock, as determined by
closed-end investment management
the Board, is at least 300 shares.
company subject to registration
(c) Requirements for inclusion on the
pursuant to section 8 of the Investment
Company Act of 1940 (15 U.S.C. 80a-^5), list of foreign margin stocks. Except as
provided in paragraph (f) of this section,
is an American Depository Receipt
foreign margin stock shall meet the
(ADR) of a foreign issuer whose
following requirements:
securities are registered under section
(1) The security is listed for trading on
12 of the Act, or is a stock of an issuer
or through the facilities of a frreign
required to file reports under section
securities exchange or a recognized
15(d) of the Act;
foreign securities market and has been
(4) Daily quotations for both bid and
trading on such exchange or market for
asked prices for the stock are
at least six months;
continuously available to the general
(2) Daily quotations for both bid and
public;
(5) The stock has been publicly traded asked or last sale prices for the security
provided by the foreign securities
for at least six months;
exchange or foreign securities market on
(6) The issuer has at least $4 million
which the security is traded are
of capital, surplus, and undivided
continuously available to creditors in
profits;
(7) There are 400,000 or more shares
the United States pursuant to an
of such stock outstanding in addition to electronic quotation system;
(3) The aggregate market value of
shares held beneficially by officers,
shares, the ownership of which is
directors or beneficial owners of more
unrestricted, is not less than S i billion;
than 10 percent of the stock;
(4) The average weekly trading
(8) There are 1,200 or more holders of
record, as defined in SEC Rule 12g5volume of such security during the
preceding six months is either at least
1(17 CFR 240.12g5-l), of the stock who
are not officers, directors or beneficial
200.000 shares or Si million; and
(5) The issuer or a predecessor in
owners of 10 percent or more of the
interest has been in existence for at least
stock, or the average daily trading
five years.
volume of such stock as determined by
(d) Requirements for continued
the Board, is at least 500 shares; and
inclusion on the list of foreign margin
(9) The issuer or a predecessor in
interest has been in existence for at least stocks. Except as provided in paragraph
(f) of this section, foreign margin stock
three years.
(b) Requirements for continued
shall meet the following requirements:
(1) The security continues to meet the
inclusion on the list of marginable OTC
stocks. Except as provided in paragraph requirements specified in paragraphs (c)
(1) and (2) of this section;
(f) of this section, OTC margin stock
(2) The aggregate market value of
shall meet the following requirements:
(1) Three or more dealers stand
shares, the ownership of which is
willing to. and do in fact, make a market unrestricted, is not less than $500
in such stock and regularly submit bona million; and
(3) The average weekly trading
fide bids and offers to an automated
volume of such security during the
quotations system for their own
preceding six months is either at least
accounts;
(2) The minimum average bid price of 100.000 shares or $500,000.
(e) Removal from the lists. The Board
such stocks, as determined by the
Board, is at least $2 per share;
shall periodically remove from the lists
(3) The stock is registered as specified any stock that:
(1) Ceases to exist or of which the
in paragraph (a)(3) of this section;
(4) Daily quotations for both bid and
issuer ceases to exist; or
asked prices for the stock are
(2) No longer substantially meets the
continuously available to the general
provisions of paragraphs (b) or (d) of
public;
this section or the definition of OTC
(5) The issuer has at least $1 million
margin stock.
of capital, surplus, and undivided
(f) Discretionary authority of Board.
profits;
Without regard to other paragraphs of
(6) There are 300,000 or more shares
this section, the Board may add to, or
of such stock outstanding in addition to omit or remove from the list of
shares held beneficially by officers,
marginable OTC stocks and the list of
directors, or beneficial owners of more
foreign margin stocks and equity
than 10 percent of the stock; and
security, if in the judgment of the Board,
(7) There continue to be 800 or more
such action is necessary or appropriate
holders of record, as defined in SEC
in the public interest.
Rule 12g5—1 (17 CFR 240.12g5-l), of the
(g) Unlawful representations. It shall
stock who are not officers, directors, or
be unlawful for any creditor to make, or
cause to be made, any representation to
the effect that the inclusion of a security
on the list of marginable OTC stocks or
the list of foreign margin stocks is
evidence that the Board or the SEC has
in any way passed upon the merits of.
or given approval to, such security or
any transactions therein. Any statement
in an advertisement or other similar
communication containing a reference
to the Board in connection with the lists
or stocks on those lists shall be an
unlawful representation.
§220.18 Supplement: Margin
requirements.
The required margin for each security
position held in a margin account shall
be as follows:
(a) Margin equity security, except for
an exempted security, money market
mutual hind or exempted securities
mutual fund: 50 percent of the current
market value of the security or the
percentage set by the regulatory
authority where the trade occurs,
whichever is greater.
(b) Exempted security, registered
nonconvertible debt security, OTC
margin bond, money market mutual
fund or exempted securities mutual
fund: The margin required by the
creditor in good faith or the percentage
set by the regulatory' authority where the
trade occurs, whichever is greater.
(c) Short sale of nonexempted
security, except for a registered
nonconvertible debt security or OTC
margin bond: 150 percent of the current
market value of the security, or 100
percent of the current market value if a
security exchangeable or convertible
within 90 calendar days without
restriction other than the pavment of
money into the security sold short is
held in the account.
(d) Short sale of an exempted security,
registered nonconvertible debt security
or OTC margin bond: 100 percent of the
current market value of the security plus
the margin required by the creditor in
good faith.
(e) Nonmargin, nonexempted security:
100 percent of the current market value.
(f) Short put or short call on a
security, certificate of deposit, securities
index or foreign currency:
(1) In the case of puts and calls issued
by a registered clearing corporation and
listed or traded on a registered national
securities exchange or a registered
securities association, the amount, or
other position, specified by the rules of
the registered national securities
exchange or the registered securities
association authorized to trade the
option, provided that all such rules have
been approved or amended by the SEC;
or
Federal Register / Vol. 60, No. 125 / Thursday, June 29, 1995 / Proposed Rules
(2)
In the case of all other puts and
calls, the amount, or other position,
specified by the maintenance rules of
the creditor’s examining authority.
§220.19
[Removed]
4. Section 229.19 is removed.
By order of the Board of Governors of
the Federal Reserve System, June 21,
1995.
William W. Wiles,
Secretary of the Board.
|FR Doc. 95-15680 Filed 6-28-95; 8:45 am]
BILLING CODE 6210-01-P
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