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FEDERAL RESERVE BANK OF NEW YORK I" Circular No. 7 0 0 0 T L September 14, 1972 J AMENDMENTS TO REGULATIONS T AND U “Block Positioners” and “Third-Market Makers” Exemptions T o A ll Banks, B rokers and D ealers, and M em bers of N ational Securities Exchanges, in the Second F ederal R eserve D istric t: F o llo w in g is the te x t o f a s ta te m e n t issu ed S e p tem b e r 12 by the B o a rd of G o v ern o rs o f the F e d e ra l R e se rv e S y ste m : The Board of Governors of the Federal Reserve System today adopted amendments to Regula tions T and U to exempt from margin requirements certain credit extended to so-called “ block posi tioners” and third-market makers. The changes are effective October 16, 1972. The Board’s amendments, which also apply new reporting requirements to exchange specialists, were adopted simultaneously with registration and reporting requirements imposed by the Securities and Exchange Commission in this field. Block positioners are securities firms that stand ready to hold amounts of stock for their own account sufficient to facilitate the sale or purchase by their customers — primarily institutions — of quantities too large to be absorbed by normal exchange transactions. The minimum block of stock that could qualify for the exemption from margin requirements would have a market value of $200,000. A block would also have to be sold by the block positioner within 20 business days although limited extensions of 5 days at a time could be allowed by the stock exchanges or the National Association of Securities Dealers. Third-market makers are firms that make a market off the exchanges in stocks that are listed for exchange trading. Under the new amendments to Regulations T and U stock exchange specialists will be required to report block transactions acquired on exempt credit to the Board. Regulations T and U pertain to security credit by brokers and dealers and banks, respectively. E nclosed a re copies o f the a m e n d m e n ts ; a d d itio n a l copies will be fu rn is h e d upon request. A lfred H a y es, P resid en t. B o ard of G overnors of th e F e d e ra l R eserve System CREDIT BY BROKERS AND DEALERS A M E N D M E N T T O R E G U L A T IO N T Effective October 16, 1972, section 220.4(g) is amended to read as follow s: SECTION 220.4— SPE C IA L ACCO U N TS * * * (g ) Specialist’s account. (1 ) In a special account designated as a specialist’s account, a creditor may effect and finance, for any member of a national securities exchange who is reg istered and acts as a specialist in securities on the exchange, such member’s transactions as a specialist in such securities, or effect and finance, for any joint venture in which the creditor participates, any transactions in any securities of an issue with respect to which all participants, or all participants other than the creditor, are registered and act on a national securities ex change as specialists. (2 ) Such specialist’s account shall be subject to the same conditions to which it would be subject if it were a general account except that if the specialist’s exchange is a national securi ties exchange which requires and submits to the Board of Governors of the Federal Reserve System reports suitable for supplying current information regarding specialist’s use of credit pursuant to this paragraph (g ), the require ments of § 220.6(b) regarding joint ventures shall not apply to such accounts and the maxi mum loan value of a registered security in such account (except a security that has been identi fied as a security held for investment pursuant to a rule of the Commissioner of Internal Reve nue (Regs, section 1-1236-1 ( d ) ) shall be as de termined by the creditor in good faith. P R IN T E D IN N EW YORK B oard of G overnors of th e F e d e ra l R eserve System CREDIT BY BANKS FOR THE PURPOSE OF PURCHASING OR CARRYING MARGIN STOCKS A M E N D M E N T S T O R E G U L A T IO N U Effective October 16, 1972: 1. Paragraphs (a), ( o) , and ( w) of section 221.3 are amended, and paragraphs (y ) and (z) are added to section 221.3, as follows: SECTION 221.3— M ISCELLAN EO U S P R O V ISIO N S (a) Required statement as to stock-secured credit. In connection with an extension of credit secured directly or indirectly by any stock, the bank shall obtain and retain in its records for at least 3 years after such credit is extinguished a statement in conformity with the requirements of Federal Reserve Form U -l executed by the recipient of such extension of credit (sometimes referred to as the “ customer” ) and executed and accepted in good faith by a duly authorized officer of the bank prior to such extension: Provided, That this requirement shall not apply to any credit described in paragraphs ( o) , ( w) , ( x ) , ( y) , or ( z) of this section or §221.2 of this part except for credit described in para graphs 221.2(f), ( g) , and (h) extended to persons who are not brokers or dealers subject to Part 220 of this Chapter (Regulation T ). In determining whether or not an extension of credit is for the purpose specified in § 221.1 or for any of the purposes specified in § 221.2 or this section the bank may rely on the statement executed by the customer if accepted in good faith. To accept the customer’s statement in good faith, the officer must (1 ) be alert to the circumstances surrounding the credit and (2) if he has any information w’hich would cause a prudent man not to accept the statement with out inquiry, have investigated and be satisfied that the customer’s statement is truthful. * * * (o ) Specialist. In the case of credit extended to a member of a national securities exchange who is registered and acts as a specialist in securities on the exchange for the purpose of financing such member’s transactions as a spe cialist in such securities, the maximum loan value of any stock (except stock that has been identified as a security held for investment pur suant to a rule of the Commissioner of Internal Revenue (Regs, section 1-1236-1 ( d ) ) ) shall be as determined by the bank in good faith: Provided, That the specialist’s exchange is a national securities exchange which requires and submits to the Board of Governors of the Fed eral Reserve System reports suitable for supply ing current information regarding specialist’s use of credit pursuant to this section. * * * (w ) OTC market maker exemption. (1 ) In the case of credit extended to an OTC market maker, as defined in subparagraph (2 ) of this paragraph ( w) , for the purpose of purchasing or carrying an OTC margin stock in order to conduct the market-making activity of such a market maker, the maximum loan value of any OTC margin stock (except stock that has been identified as a security held for investment pur suant to a rule of the Commissioner of Internal Revenue (Regs, section 1-1236-1 ( d ) ) ) shall be determined by the bank in good faith : Provided, That in respect of each such stock the OTC market maker shall have filed with the Securi ties and Exchange Commission a notice of his intent to begin or continue such market-making activity (Securities and Exchange Commission Form X-17A-12 ( 1 ) ) and all other reports required to be filed by market makers in OTC margin stock pursuant to a rule of the Commis sion (Rule 17a-12(17 CFR 240.17a-12)), shall not have ceased to engage in such market-mak ing activity, and shall have a reasonable average rate of inventory turnover in such stock: And provided further, That the bank shall obtain and retain in its records for at least 3 years after such credit is extinguished a statement in con formity with the requirements of Federal Re serve Form U-2, executed by the OTC market maker who is the recipient of such credit and executed and accepted in good faith9 by a duly 9 As described in paragraph (a) of this section. PR IN TE D IN N E W YO RK authorized officer of the bank prior to such extension. In determining whether or not an extension of credit is for the purpose of con ducting such market-making activity, a bank may rely on such a statement if executed and accepted in accordance with the requirements of this paragraph (w ) and paragraph (a) of this section. * * * (y ) Third-market maker exemption. (1 ) In the case of credit extended to a third-market maker, as defined in subparagraph (2 ) of this paragraph ( y) , for the purpose of purchasing or carrying a stock that is registered on a national securities exchange (other than a con vertible debt security described in paragraph (t) (1 ) of this section) in order to conduct the market-making activity of such a market maker, the maximum loan value of any stock (except (i) a convertible debt security described in paragraph (t) (1 ) of this section, and (ii) stock that has been identified as a security held for investment pursuant to a rule of the Commis sioner of Internal Revenue (Regs, section 1-1236-1 (d ) ) ) shall be determined by the bank in good faith : Provided, That in respect of each such stock he shall, at least five full business days prior to such extension of credit, have filed with the Securities and Exchange Commission a notice of his intent to begin or continue such market-making activity, and thereafter all other reports required to be filed by third-market makers pursuant to a rule of the Securities and Exchange Commission and (except when such activity is unlawful, shall not have ceased to engage in such market-making activity: And provided further, That the bank shall obtain and retain in its records for at least 3 years after such credit is extinguished a statement in con formity with the requirements of Federal Re serve Form U-3, executed by the third-market maker who is the recipient of such credit and executed and accepted in good faith10 by a duly authorized officer of the bank prior to such extension. In determining whether or not an extension of credit is for the purpose of con ducting such market-making activity, a bank may rely on such a statement, if executed and accepted in accordance with the requirements of this paragraph (y ) and paragraph (a) of this section. (2 ) A third-market maker with respect to a stock that is registered on a national securities exchange is a dealer who has and maintains net capital, as defined in a rule of the Securities and Exchange Commission (Rule 15c3-l (17 As described in paragraph (a) of this section. CFR 240.15c3-l)), or in the capital rules of an exchange of which he is a member if the mem bers thereof are exempt therefrom by Rule 15c3-l ( b ) ( 2 ) of the Commission (17 CFR 240.15c3-l ( b ) ( 2 ) ) , of $100,000 plus $20,000 for each stock in excess of five in respect of which he has filed and not withdrawn a notice with the Securities and Exchange Commission (but in no case does this subparagraph (2 ) require net capital of more than $500,000) who is in compliance with such rule of the Commis sion and who, except when such activity is unlawful, meets all the following conditions with respect to such stock: (i) He furnishes bona fide, competitive bid and offer quotations to other brokers and dealers, in the stocks for which he makes a market, at all times on request, (ii) he is ready, willing, and able to effect trans actions for his own account in reasonable amounts, and at his quoted prices, with other brokers and dealers, and (iii) he has a reason able average rate of inventory turnover in the stock. (3 ) If all or a portion of the credit extended pursuant to this paragraph (y ) ceases to be for the purpose specified in subparagraph (1 ) of this paragraph or the dealer to whom the credit is extended ceases to be a third-market maker as defined in subparagraph (2 ) of this para graph, the credit or such portion thereof shall thereupon be treated as “ a credit subject to § 221.1”. (z ) Block positioner exemption. (1 ) In the case of credit extended to a block positioner, as defined in subparagraph (2 ) of this para graph ( z ) , for the purpose of financing the activity of block positioning, the maximum loan value of any margin stock obtained in the ordi nary course of the activity of block positioning as described in subparagraph (2 ) of this para graph ( z ) (except (i) a convertible debt securi t y described in paragraph (t) (1 ) of this section and (ii) stock that has been identified as a security held for investment pursuant to a rule of the Commissioner of Internal Revenue (Regs, section 1-1236-ld))) shall be deter mined by the bank in good faith: Provided, That in respect of such activity he shall have filed with the Securities and Exchange Commis sion a notice of undertaking such activity as prescribed by the Commission, and all reports required to be filed by block-positioners: And provided further, That the bank shall obtain and retain in its records for at least 3 years after such credit is extinguished a statement in con formity with the requirements of Federal Re serve Form U-5 and paragraph (a) of this section, executed by the block positioner who is the recipient of such credit and executed and accepted in good faith11 by a duly authorized officer of the bank prior to such extension. In determining whether or not an extension of credit is for the purpose of conducting such block positioning activity, a bank may rely on such a statement if executed and accepted in accordance with the requirements of this para graph (z ) and paragraph (a) of this section. In determining whether or not an extension of time has been granted pursuant to subparagraph (4) of this paragraph (z ) and whether or not such extension of time is commensurate with the circumstances the bank may rely on a statement executed by an officer of the exchange or asso ciation on behalf of the committee in conformity with the requirements of Federal Reserve Form U-6 and paragraph (a ) of this section. (2 ) A block positioner is a dealer who (i) is registered with the Securities and Exchange Commission under section 15 of the Securities Exchange Act of 1934 (15 U.S.C. 78o) and has a minimum net capital, as defined in a rule of the Securities and Exchange Commission (Rule 15c3-l (17 CFR 240.15c3-l)) or in the capital rules of an exchange of which he is a member if the members thereof are exempt therefrom by Rule 15c3-1 ( b ) ( 2 ) of the Commission (17 CFR 240.15c3-l (b ) ( 2 ) ) , of $1 million, (ii) engages in the activity of purchasing long or selling short as principal, from time to time, from or to a customer (other than a partner or a joint venture or other entity in which a partner of the dealer, or the dealer itself, par ticipates or a person “ associated with” such dealer is defined in section 3( a) (18) of the Securities Exchange Act of 1934) a block of stock (other than a convertible debt security as described in paragraph ( t ) ( l ) of this sec tion) with a current market value of $200,000 or more in a single transaction or in several transactions at approximately the same time from a single source to facilitate a sale or pur chase by such customer, (iii) certifies to the lending bank that he has determined in the exer 11 As described in paragraph (a) of this section. cise of reasonable diligence that the block could not be sold to or purchased from others on equivalent or better terms, and (iv) sells the shares comprising such block as rapidly as pos sible commensurate with the circumstances. In the case where a block positioner acquires a block from a broker who acts as agent for several sellers, such acquisition shall be deemed for purposes of this section to be an acquisition from a single source. (3 ) No credit shall be extended or main tained pursuant to this paragraph (z ) in respect of any such block of stock or portion thereof which the block positioner has held continuously for more than 20 business days, and any credit extended pursuant to this paragraph (z ) shall be extinguished or brought into conformity with the initial margin requirements of §§ 221.1 and 221.4 before the expiration of such 20-day period. For the purposes of this subparagraph, a block or portion thereof shall be treated as not having been held continuously only to the extent that there has been a net sale (or in the case of short positions, net purchase) of such securi ties (w'hether or not represented by the same certificate) during such 20-day period. (4 ) In exceptional cases the 20-day period specified in subparagraph (3 ) of this paragraph (z ) may on the application of the block-posi tioner, be extended for one or more periods limited to 5 business days each commensurate with the circumstances by any regularly con stituted committee of a national securities ex change having jurisdiction over the business conduct of its members, of which the block positioner is a member or through which his block transaction was effected, or by a com mittee of a national securities association, if effected in the over-the-counter market: Pro vided, That such committee is satisfied that the block-positioner is acting in good faith in mak ing the application and that the circumstances in fact warrant such treatment. 2. Footnote 9 in section 221.4 (the Supple ment) is redesignated as footnote 12.
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