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FED ER A L R ESERVE BANK O F N EW YORK [circular No. 7176"] |_ July 5, 1973 J INTERPRETATION OF REGULATION T Questions and Answers on Same-Day Substitution Rule To All Brokers and Dealers, and Members o f National Securities Exchanges, in the Second Federal Reserve District: Printed below is an excerpt from the Federal Register o f June 25, containing the text o f an interpreta tion o f Regulation T, “ Credit by Brokers and Dealers,” adopted June 15 by the Board o f Governors o f the Federal Reserve System. The interpretation is in the form o f questions and answers, and relates to the sam e-day substitution rule in connection with undermargined accounts, specifically those accounts subject to section 220.8(g) o f the regulation. Additional copies o f this circular will be furnished upon request. Alfred Hayes, President. PART 220— CREDIT BY BROKERS AND DEALERS Same-day Substitutions of Securities § 220.129 Applicability of samc-day substitution rule to accounts subject to section 2 2 0 .8 (g ). (a) The Board has been asked numer ous questions regarding the use of the same-day substitution privilege in sec tion 220.3(b) of Regulation T in connec tion with accounts subject to § 220.8(g), generally, accounts having less than 40 percent equity. Prior to the Board’s amendments, effective September 18, 1972 (37 FR 13972, 3, 4, July 15, 1972), a customer whose account was undermar gined to any extent was allowed to sub stitute one security for another on the same day, usually through a sale and purchase for like amounts, without being required to improve his equity in the ac count. The 1972 amendments limit this privilege to accounts with an equity of 40 percent or more; as presently set by the Board. Accordingly, if a customer’s equity is below 40 percent, he is not eligi ble for the same-day substitution priv ilege, but is required to put up margin on any new commitment, and retention requirements are applied to any liquida tion, even though the transactions are effected on the same day. (b) The questions raised with the Board touch upon other provisions of regulation T as well that are affected by the September 1972 amendment to the same-day substitution rule and the im pact of the amendment on these provi sions is also reflected in the examples stated below. In making computations in similar situations It should be borne In mind that the examples are based on a current loan value of 35 percent for margin securities (margin requirements of 65 percent), and 50 percent loan value for exchange-listed convertible bonds, while the retention requirement for all accounts is 70 percent (release 30 percent). Q u e s tio n s and S u b s titu tio n A cco u n ts A n sw ers R u le S u b je c t in to o n th e S a m e -d a y C o n n e c tio n S e c tio n W ith 220.8(g) Based on margin requirements as of No vember 24. 1972 of 65 percent (35 percent loan value) in the general account and 50 percent (50 percent loan value) in the special convertible debt security account, and reten tion requirements with respect to withdraw als in each account of 70 percent (30 percent release). June 1973 1. Q. Customer is long $10,000 margin se curities in his general account, which has an adjusted debit balance of $7,000. Customer has an $8,000 balance in his special miscel laneous account. The general account is sub ject to section 8(g). The customer wishes to purchase margin securities worth $1,000 and sell securities worth $1,000 on the same day. What is the regulation T margin call If any? A. $350, the margin required on the pur chase ($650) minus the margin released on the sale ($300) (net $350). The call may be met by a debit to the customer’s special mis cellaneous account. 2. Q. Customer is long $10,000 margin se curities in his general account which has an adjusted debit balance of $9,000. Customer has an $8,000 balance in his special miscel laneous account. The general account is sub ject to section 8 (g ). May the creditor reduce the special miscellaneous account balance to a level at which time the general account would no longer be subject to section 8(g) ? A. Yes; before such a debit to the special miscellaneous account is made, however, the creditor may wish to obtain the written con sent of the customer. The customer should be fully aware of the procedure to be followed by the creditor and that such an amount could not be transferred back from the gen eral account to the special miscellaneous account at a later date, unless an excess over 65 percent margin in the general account would permit another transfer. 3. Q. Customer's account has a regulation T margin call which was outstanding (and not overdue) as of the close of business on the preceding business day. In computing the account to determine if it is subject to section 8(g), may the creditor consider the outstanding regulation T margin call as collected? A. Yes, for the purpose of computing an account to determine whether it is subject to section 8(g), the creditor may give credit to such an outstanding regulation T margin call which would reduce the adjusted debit balance. 4. Q. Customer is long $10,000 margin se curities in his general account which has an adjusted debit balance of $6,075. The account is subject to section 8(g) by an amount less than $100. He wishes to purchase margin se curities valued at $1,000 and sell securities valued at $1,000 in the account on the same day. What regulation T margin call Lf any should be issued? A. $350. Once the determination has been made that an account is subject to section 8(g), purchases in the general account are charged the margin required, currently 65 percent, and sales currently release 30 per cent. The $100 rule in section 220.3(g)(3) does not apply to the 8(g) computation. 5. Q. Customer’s account has an outstand ing maintenance margin call. In computing the account to determine lf it Is subject to section 8(g), may the creditor consider th® Illustrations outstanding maintenance margin call as lateral Is equal to the good faith loan value applied by the creditor. collected’ 10. Q. Customer has an account subject to 1. In a general account A. No; maintenance margin calls are gen a. Purchase $10,000 X 65% erally credited to the customer's special mis 8(g) and wishes to know how much he can margin required________ $6, 500 cellaneous account, and accordingly, the buy or sell without Incurring a regulation T Sell $9,000X30% margin collection o f the maintenance margin call margin call. released________________ 2, 700 A_ (1) Under the current 65 percent mar would not change the adjusted debit balance. gin requirement (in the general aooount), 6. Q. Customer Is long $10,000 margin se Regulation T margin (a) To determine how much a customer curities In his general account which is call ______ __________ 3,800 subject to section 8(g) by $100 and Is in a can buy with the proceeds of a sale In that so-c&lled regular restricted status by $2,600. account, apply this formula: b. Purchase $8,000 X 65% mar He wishes to sell securities worth $9,000 and 30% (margin re gin required_____________ 5, 200 buy margin securities worth $9,000 on the leased on sale) Sell $11,000x30% margin same day. The purchase would require mar = 46.1% (round off 46%) released________________ 3, 300 65% (margin gin of $5,860 and the sale would release $2,700 required on (not $3,150). In what amount should the Regulation T margin purchase) creditor Issue a regulation T margin call? c a l l ________________ 1,900 A. $2,600. The customer would not be re Thus, a sale of $10,000 would permit a pur quired to deposit paore than Is needed to chase of $4,600. 2. In a special convertible debt eliminate the so-called regular restriction. Proof: security account 7. Q. Does a debit to the general account Margin released on sale of a. Purchase $6,000 X 50% mar and a credit to the special miscellaneous $10,000 ______________________ $3,000 gin required__________ ___ 3, 000 account (SMA) increase the customer’s ad Margin required on purchase of Sell $5,000 x 30% margin justed debit balance? $4,600 ------------------------------------ 2,990 released________________ 1, 500 A. Yes; the reference to “net debit bal (b) To determine how much a customer ance” to section 220.3(d) (1) of regulation T, would have to sell to meet the margin re Regulation T margin in connection with the adjusted debit bal quirement on a purchase, apply this caU _____ _______ 1,500 ance computation. Includes any amounts formula: debited to the general account and credited b. Purchase $7,000 X 50% mar 65% (margin to the SMA. It Is quite possible for an ac gin required_____________ 3, 500 required on count to be subject to section 8(g) as a Sell $9,000 x 30% margin purchase) result of such entries. For regulatory pur :216y3% (round off 217%) released________________ 2, 700 30% (margin reposes, the balances of the two accounts leased on sale) should be separately stated, whether the Regulation T margin creditor maintains the SMA by Journal or c a l l________________ 800 Thus, a purchase of $10,000 would require memorandum entry methods. a sale of $21,667. Section 220.4(a) provides that a creditor Proof: 12. Q. Customer’s general account which is may establish an SMA, the purpose of which Margin required on purchase of subject to section 8(g) includes a short posi Is defined to paragraph (f)(6 ), provided it $10,000 ______________________ $6,500 tion to stock A of 100 shares at 100 (market is recorded separately, and confined to its Margin released on sale of value $10,000). Customer buys 200 shares of intended purpose, with an adequate record $21,667 --------- -------------------- 6, 500 the same stock and maintains his short posi maintained. Paragraph (a) (3) further pro(2) Under the current 50 percent margin tion, which results to a long position of 200 ▼ldee that: requirement (to the special convertible debt shares of which 100 shares is considered the security account), • • * If a customer has with a credi long side of the short sale “against the box.” (a) To determine how much a customerDoes this transaction result to the Issuance tor both a general account and one or mors such special accounts, the creditor can buy with the proceeds of a sale to that of a regulation T margin call and for how shall treat each such special account as account, apply this formula: much? if the customer had with the creditor A. Yes; the customer would Incur a regula 30% (margin released no general account • • • tion T margin call of $6,500, the margin re on sale) = 60% quired on the new net commitment of 100 The agreement between the creditor and 50% (margin required shares long. Because the customer’s account the customer should clearly show that two on purchase) is subjecfto section 8(g), the retention re accounts will be maintained and that when Thus, a sale of $10,000 would permit a pur quirement provision In the regulation transfers of amounts such as dividends, chase of $6,000. (which does not provide for any release on maintenance margin calls, and excess are Proof: the covering of a short position) would made, the general account and the SMA are Margin released on sale of apply. debited or credited as the case may be. $10,000 _________ _____________ $3, 000 13. Q. Customer’s general account Is sub Funds cannot be freely transferred back and Margin required on purchase of ject to section 8(g) and he wishes to buy forth. Generally, while funds can always be $6,000 ------------------------------------ 3,000 and sell the same stock on the same day transferred from the SMA to the general (b) To determine how much a customer (day trade). May he do so without furnishing account, transfers from the general account would have to sell to meet the margin re to the SMA can only be made when certain quirement on a purchase, apply this additional margin under regulation T? (This question assumes that the customer could specific events occur and conditions are met. formula: effect such a day trade In conformance with 8. Q. Customer is long $80,000 convertible exchange requirements.) 50% (margin debt securities to a special convertible debt A. No; regulation T to providing for trans required on security account which has an adjusted debit actions on a given day to section 220.3(g) purchase) balance of $50,000. The account Is subject does not distinguish between same or differ = 166 % % (round off 167 %) to section 8(g). The customer wishes to pur 30% (margin reent securities. Therefore, the amount of de chase $60,000 convertible debt securities leased on sale) posit required would be computed on the (which are margtoable) and sell $60,000 Thus, a purchase of $10,000 would require basis of the margin required on the purchase convertible debt securities on the same day. less the amount released on the sale of the a sale of $16,700. What is the regulation T margin call If any? same stock. Proof: A. $10,000. The margin currently required 14. Q. May the amount deposited to meet Margin required on purchase of on the purchase Is $30,000 and the margin $10,000 ______________________ $5,000 a regulation T margin call to an account currently released on the sale Is $18,000. subject to section 8(g) be credited to the Margin released on sale of However, the customer would not be re $16,700 ................. ...................... 5,010 customer’s special miscellaneous account? quired to deposit more than Is needed to 11. Q. A regulation T margin call Is Issued A. No; any regulation T margin call must eliminate the so-called regular restriction of as a result of a same-day substitution occur be credited directly to the account with re $10,000 In the account. ring In an account that is subject to section spect to which the call was Issued and may 9. Q. Does the 8(g) rule apply to the 8(g). What computation Is required? not be transferred to the customer’s special special bond account? A. The amount may be determined by miscellaneous account. A. No; In a special bond account, the applying this formula: 15. Q. Customer’s general account Is sub maximum loan value of collateral held In the Less: ject to section 8(g). He effects a same-day account Is determined by the creditor In Margin required on commitment substitution by liquidating securities worth good faith, and the retention requirement Margin released on liquidation $21,334, thereby releasing 30 percent ($6,400), which applies to withdrawal of such col Equals: Regulation T margin call and purchasing margin securities worth $10,000, thereby requiring margin of 65 per cent ($ 6 ,5 0 0 ) . Must the customer deposit the $100 difference? A. No; the creditor may waive a regulation T margin call of $100 or less. 16. Q. Customer’s special convertible debt security account is subject to section 8(g). His general account is in a so-called restricted status but not subject to section 8(g). May he effect a same-day substitution of securi ties in like amounts in his general account without incurring a regulation T margin call? A. Yes. Each account is computed sepa rately, either one of which may or may not be subject to section 8 (g ). 17. Q. Customer’s general account is sub ject to section 8(g) and he has a $200 bal ance in his special miscellaneous account. May he withdraw the $200? A. Yes; regulation T would not prevent such a withdrawal. However, exchange and creditor requirements should be considered. 18. Q. A customer’s general account is priced as of the previous night’s close of business and is subject to section 8(g) by $300. On the current day, may the customer deposit $300 directly into his general account and subsequently effect a same-day substitu tion of margin securities without incurring a regulation T margin call? A. No; when an account is subject to sec tion 8(g), a deposit on the current day of the amount by which the account is subject to section 8(g) would not eliminate the section 8 (g) restriction. Accordingly, a regu lation T margin call should be issued in the appropriate amount if there is effected in the account a same-day substitution of mar gin Becurltles. 19. Q. Customer is long a profitable call option on 100 shares of margin stock A at 50 in his general account which is subject to section 8(g). He wishes to exercise the option and hold the stock which is currently at 55. What is the regulation T margin call If any? A. $3,250, the margin required on the pur chase of $5,000. In pricing the account sub sequent to the purchase, loan value would be applied to the stock’s current market value of $5,500. 20. Q. Customer is long a profitable call option on 100 shares of margin stock B at 50 in his general account which is subject to section 8(g). He wishes to exercise the option by buying stock B at 50 and selling stock B at 55 on the same day What is the regulation T margin call if any? A. $1,600, the margin required on the pur chase ($3,250) minus the margin released on the sale ($1,650). 21. Q. Is It possible under regulation T for a customer who is long a profitable option In his general account which is subject to section 8(g) to terminate his position In the option and have Immediate access to the funds representing the profit? A. Yes; he may give instructions to his broker to transfer the option from his gen eral account to his special cash account where he could sell the option itself either back to the broker or to others. 22. Q. A customer’s general account is sub ject to section 8 (g ). May he transfer a profit able call option from his general account to his special cash account where he would ex ercise it? A. Yes; provided that full cash payment for the purchased stock is available in the spe cial cash account or is deposited promptly. Such payment must be deposited In the special cash account prior to the release of the proceeds of the resale of the security, tf 'the customer wishes to liquidate the p ositio n in the security acquired upon exercise. 23. Q. Customer is short an uncovered call option on 100 shares of stock C with a strik ing price of 50 in his general account which is subject to section 8(g). His net debit bal ance was reduced by $1,500 (30 percent margin requirement) when the short option position was taken (made up by receipt of $500 premium and additional deposit of $1,000, both credited to the general account). Presently, the market value of stock C is up to 60 and customer’s adjusted debit balance now includes $2,800 ($6,000X30 percent = $1,800 plus the mark to the market loss of $1,000). The call is exercised against him at 60 and customer purchases the stock and delivers it the same day. What is the regu lation T margin call, if any? A. $2,400, the margin required on the pur chase of stock C ($3,900) minus the margin released on the sale of stock C ($ 1 ,5 0 0 ) . When an account is subject to section 8(g), the retention requirement provisions in the reg ulation do not provide for any release of any portion of the amount included in the ad justed debit balance computation in con nection with the option prior to its exercise. The account, of course, may subsequently be refigured for any regulation T excess. 24. Q. Customer’s account is the same as in question 23. However, when the call is exer cised against him at 60, customer borrows the stock for delivery (without buying i n), there by establishing a short position in stock C. What is the regulation T margin call if any? A. $3,250, the margin required on the newly established short position in stock C. Here, too, because the account is subject to sec tion 8(g), the regulation would not permit the broker to offset the regulation T margin call by any portion of the amount previously included in the adjusted debit balance com putation in connection with the outstanding option prior to its exercise. It should be fur ther noted that subsequent to the exercise and during the time the customer maintains the short position in stock C, the adjusted debit balance computation for the short posi tion would be based on the current market value of the security. 25. Q. Customer’s account is the same as in question 23. However, when the call is exer cised, the customer assumes a short position of 100 shares in stock C. Later in the day the customer covers his short position by pur chasing on the open market 100 shares of stock C at 60. What is the regulation T mar gin call, if any? A. $2,400, the margin required on the pur chase of stock C ($3,900) minus the margin released on the sale of stock C ($1,500). 26. Q. Customer is short an uncovered call option on 100 shares of stock D with a strik ing price of 50 in his general account which is subject to section 8(g). His net debit bal ance was reduced by $1,500 ( 30 percent mar gin requirement) when the short option posi tion was taken. Presently, the market value of stock D is down to 40 and customer’s ad justed debit balance now includes $200 ($4,000X30 percent = $1,200 minus the mark to the market gain of $1,000). The holder of the option allows It to expire. May the cus tomer who is short the option withdraw any portion of the amount Included as margin in the adjusted debit balance computation in connection with the option or use the amount against another transaction? A. No. When an account is subject to sec tion 8(g), the retention requirement provi sions in the Regulation do not provide for any release erf any portion of the amount in cluded as margin in the adjusted debit bal ance computation In connection with the option. By order of the Board of Governors, June 15, 1973. [s e a l] C h e s t e r B. F e ld b e r g , Assistant Secretary of the Board. [FR Doc.73-12713 Piled 6-22-73;8:45 am]
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