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FEDERAL RESERVE BANK OF N E W YORK r Circular No. 7 7 1 5 1 •» September 22, 1975 J MARGIN REGULATIONS Reinstatement of “ Same-Day Substitution” Restrictions on November 3 To A ll Persons E xten din g Securities C redit in th e Second F ederal R eserve D istrict: The following is the text of a statement issued September 16 by the Board of Governors of the Federal Reserve System: The Board of Governors of the Federal Reserve System announced today that effective November 3 it will reinstate a rule that limits the use of the same-day substitution privilege in stock m argin accounts. U nder the reinstated rule, use of the same-day substitution privilege will be limited to accounts with an equity of 30 p er cent or more of the m arket value of the stock collateral in the account. This ratio had been set at 40 p er cent prior to suspension of the privilege last November 4. T he rule was suspended to perm it the Board to consider the im pact of the rule on m argin customers, brokerage firms and the stock market. The suspension expires on Septem ber 30 b u t the Board extended it through Novem ber 2 to allow brokerage firms time to make the necessary operating and com puter changes prior to reinstatem ent. In announcing the reinstatem ent, the Board said the benefits of the rule — which is designed to im prove the quality of m argin credit — outweigh any potential adverse effects. U nder the same-day substitution privilege, customers are perm itted to substitute one security for another in their accounts through offsetting purchases and sales m ade on the same day, w ithout applying additional m argin for the purchase or using any of the proceeds of the sale to strengthen an account that is below the initial m argin requirem ent. The reinstatem ent applies to extensions of credit by brokers and dealers (R egulation T ) and loans by banks and other lenders (Regulations U and G, respectively) for the purpose of purchasing or carrying stocks registered on a national exchange or nam ed on the Board’s over-the-counter m argin list. Enclosed is a copy of amendments, effective September 30, 1975, to the Board of Governors’ margin Regulations G, T, and U, reflecting the reinstatement of the rule. In submitting the amendments for publication in the Federal Register, the Board made the following additional statement: The Board’s securities credit regulations, Parts 207, 220, and 221 (Regulations G, T, and U ), generally require th a t in the case of purchase-and-sale substitutions of securities in an underm argined account a specified portion of the sale proceeds m ust be used to strengthen the account. Until Septem ber 18, 1972, there was an exemption from that requirem ent for all accounts when both the purchase and sale were executed on the same day. By am endm ents published in the Federal Register at 37 Fed. Reg. 13972, effective Septem ber 18, 1972, the Board narrow ed the same-day exemption and limited it to accounts in which the custom er s equity was at least 40 per cent. The lim itation in the Septem ber 18, 1972 am endm ents was suspended twice, with the existing sus pension scheduled for expiration on Septem ber 30, 1975, while the Board reviewed the appropriateness or inappropriateness of m aintaining the 40 per cent equity requirem ent with respect to the exemption for sam e-day substitutions. T he Board has determ ined th at the limitation should apply, under present circumstances, to accounts in w hich the custom er’s equity is less than 30 per cent rather than 40 per cent. The suspension from the lim itation will be extended through November 2, 1975, to allow the industry time to make necessary adjustments. Any inquiries regarding these amendments may be directed to the Securities Regulations Division of the Bank Regulations Department of this Bank. Additional copies of the enclosure will be furnished upon request P aul A. V o lc k e r, President. Board of Governors of the Federal Reserve System AMENDMENTS TO REGULATIONS G, T, AND U Effective Septem ber 30, 1975 AM EN D M EN T TO REGULATION G — SECURITIES C R E D IT BY PERSONS O TH E R THAN BANKS, BROKERS, OR DEALERS after, and of a m argin equity security shall be 70 per cent of the current m arket value of such security, and the maximum loan value of an exempted security held in the account on M arch 11, 1968, and continuously thereafter shall be the maximum loan value of the secur ity as determ ined by the creditor in good faith. 1. P art 207 (Reg. G ), paragraph (f) of § 207.5 ( the Supplem ent to Regulation G ) is am ended by lowering the minimum equity ratio from 40 per cent to 30 per cent and changing the final date of the suspension period from Septem ber 30, 1975, to November 2, 1975. The am ended section reads as follows: S e c tio n 207.5 — # * (2) The am ount to be included in the adjusted debit balance of the account pursuant to § 2 2 0 .3 (d )(3 ) as m argin required for short sales of securities ( other than exempted securities) shall be 30 per cent of the current m arket value of each security. S u p p le m e n t * (3 ) For the period Novem ber 5, 1974, through November 2, 1975, all transactions perm itted by §§ 2 2 0 .3 (b )(1 ) and 220.3(g) for accounts not subject to section 8 (g ) shall also be perm itted in accounts subject to sec tion 8 (g ). (f) Minimum equity ratio. The minimum equity ratio of a credit subject to § 207.1 is 30 per cent. For th e period November 5, 1974, through November 2, 1975, all same-day sub stitutions of collateral perm itted by section 207.1 ( j ) (2 ) for credits in which the equity ratio equals or exceeds the minimum equity ratio shall also be perm itted for all credits in which the equity ratio is less than the mini mum equity ratio. AM EN D M EN T TO REGULATION U — C R E D IT BY BANKS FOR T H E PURPOSE O F PURCHASING OR CARRYING MARGIN STOCKS AM EN D M EN T TO REGULATION T — C R E D IT BY BROKERS AND DEALERS 3. Part 221 (Reg. U ), paragraph (f) of §221.4 (th e Supplem ent to Regulation U ) is am ended by changing the minimum equity ratio from 40 per cent to 30 per cent and by changing the expiration date of the suspension period from Septem ber 30, 1975 to November 2, 1975. The am ended section reads as follows: 2. Part 220 (Reg. T ), paragraph (g ) of § 220.8 ( the Supplem ent to Regulation T ) is am ended by changing the figures to be used in the com putation which appear in subpara graphs ( 1 ) and ( 2 ) and by changing the expiration date of the suspension in subpara graph (3 ) to November 2 , 1975. S e c tio n # The am ended section reads as follows: S e c tio n 220.8 — # * S u p p le m e n t S (g) Account subject to section 8 (g). For purposes of the com putation described in § 220.3(b) (1 ) (ii), (1 ) T he maximum loan value of a regis tered non-equity security held in the account on March 11, 1968, and continuously there[e n c . c i k . n o . P R IN T E D IN # S u p p le m e n t * (f) Minimum equity ratio. The minimum equity ratio of a credit subject to § 221.1 is 30 per cent. For the period November 5, 1974, through November 2, 1975, all same-day trans actions perm itted by § 2 2 1 .1 (c ) for credits in which the equity ratio is equal to or exceeds the minimum equity ratio shall also be p er m itted for those credits in which the equity ratio is less than the minimum equity ratio. 7715] 221.4 — NEW YORK
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