Full text of Federal Reserve Bank of New York Circulars : 8345. Proposed Amendment to Regulation T

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FEDERAL RESERVE BANK
O F NEW YORK
Na 8 3 4 5 1
May 15, 1978 J
[Circular

PROPOSED AMENDMENT TO REGULATION T
Extension of Margin Credit on Certain Unlisted Nonconvertible Corporate Bonds
To A ll Brokers and Dealers Extending Securities Credit,
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 regarding a proposed amendment to its Regulation T, “Credit by Brokers and
Dealers.” The proposal would permit a broker or dealer to extend and maintain credit on certain
nonconvertible corporate bonds that are not listed on a national securities exchange, with a 30
percent margin requirement.
The Board of Governors of the Federal Reserve System today [May 4, 1978 ] proposed to amend its
Regulation T (Credit by Brokers and Dealers) to permit a broker or dealer to extend and maintain credit
on certain nonconvertible corporate bonds, with a 30 percent margin requirement.
The Board asked for comment by June 15, 1978.
The proposal would affect certain corporate bonds sold on the Over the Counter (OTC) market, rather
than on a national securities exchange. The existing Regulation T allows credit to be extended and main­
tained on only those bonds which are listed on national securities exchanges.
The Board maintains a list of some 1,100 stocks sold over the counter on which brokers and dealers may
extend credit up to a limit, currently 50 percent, established by the Board. The existing O T C Margin List
includes five convertible corporate bonds (debt issues that may be converted to equity issues) on which mar­
gin credit may be given.
The Board proposed that margin credit be extended and maintained by brokers and dealers on noncon­
vertible corporate debt issues sold on the O T C market, which have the following characteristics:
— At the time credit is extended, the outstanding p rincipal amount of the issue is not less than $25 million.
— All payments of principal and interest on the issues are current at the time credit is extended.
— The issue was registered with the Securities and Exchange Commission and the issuer is providing cur­
rent reports under SEC regulations.
The Board proposed that the margin (down payment) required for nonconvertible corporate bonds, sold
either on the O T C market or on national exchanges, should be 30 percent. The margin requirement for con­
vertible corporate bonds on the Board’s O T C list, or registered on a national exchange, remains 50 percent.

Printed below is the text of the Board of Governors’ proposal. Comments should be sub­
mitted by June 15, 1978, and may be sent to our Regulations Division.
P

aul

A.

V

olcker,

President.
[Regulation T ; Docket No. R-0080]
CREDIT B Y BR O K E R S A N D DEALERS
[12 CFR 220]
Credit by brokers and dealers on nonconvertible corporate debt securities
not listed on a national securities exchange; uniform loan value for all eligible
nonconvertible corporate debt securities.
A G E N C Y : Board of Governors of the Federal Reserve

System.
A C T IO N : Proposed rule.
S U M M A R Y : The Board proposes to amend Regula­

tion T to permit a broker or dealer to extend and main­




tain credit on nonconvertible corporate debt securities
not listed on a national securities exchange which sat­
isfy certain criteria as to size of issue, availability of
information and current payments of principal and in­
terest. In addition, the proposal provides a uniform
loan value for all nonconvertible corporate debt securi-

ties, whether listed or unlisted, that are eligible for
loan value.

(1) A principal amount of not less than $25 million
of the issue is outstanding at the time of the extension
of credit;

D A T E : Comments must be received on or before June

15, 1978.

(2) All payments of principal or interest are current
and not in default at the time of the extension of credit;
and

A D D R E S S : Secretary, Board of Governors of the Fed­
eral Reserve System, Washington, D.C. 20551. All ma­
terials submitted shall be in writing and should include
the docket number R-0080.
FOR

FURTH ER

IN F O R M A T IO N

(3) The issue is registered under the Securities Act
of 1933 and current reports are provided by the issuer
in accordance with the Securities Exchange Act of 1934.
Comments are requested on the advisability of using
this criteria, particularly the requirement of a prin­
cipal amount of bonds outstanding of not less than
$25,000,000.

CONTACT:

Robert S. Plotkin, Assistant Director, or Laura M.
Homer, Chief Attorney, Securities Regulation, Divi­
sion of Banking Supervision and Regulation, Board of
Governors of the Federal Reserve System, Washing­
ton, D. C. 20551 (202-452-2782).

The Board further considered the level of margin
to be required, should the proposed regulation be
adopted. It noted that whereas present Regulation T
requirements could conceivably permit 100% loan value
to be extended on listed corporate bonds, the major
securities exchanges impose a 25% maintenance re­
quirement and many brokerage houses require a some­
what higher margin (generally 30%). Although price
and volume information is generally available for ex­
change-traded bonds, the Board noted that such infor­
mation for corporate O T C bonds is minimal, and mar­
kets for some issues may, at times, be “thin.” Accord­
ingly, the Board believes that it is necessary to set a
specific level of margin with respect to credit that will
be extended on unlisted corporate bonds in order to
prevent speculative excesses and possible erosion of
equity cushions in margin accounts. In view of the
economic similarity of both the listed and unlisted
markets for bonds and in order to promote regulatory
equality, the Board is of the opinion that the same level
of margin that may be required for unlisted corporate
bonds should also be required for listed corporate bonds.
At the present time, the Board is considering setting
the level of margin required for both listed and unlisted
corporate bonds at 30%, and the public is invited to
submit comments on the appropriateness of that amount.
The proposed requirements will affect only exten­
sions of credit by brokers and dealers subject to Regu­
lation T and will not affect banks subject to Regulation
U since the Act specifically prohibits the Board from
applying margin requirements to credit extended by
banks on non-equity securities.
Pursuant to Sections 7 and 23 of the Securities Ex­
change Act of 1934, as amended (15 U.S.C. 78g and
w), the Board proposes to amend Regulation T (12
C FR 220) as set forth below:

SU PPLEM EN TARY

IN F O R M A T IO N : In July
1968, Congress amended Section 7 of the Securities
Exchange Act of 1934 (15 U.S.C. 78g) (“the Act”)
to authorize the Board to control credit extended or
maintained by banks, brokers, dealers and others with
respect to securities that are not listed on a national
securities exchange but rather are traded in the “overthe-counter” (“O T C ”) market. Prior to this amend­
ment, the Board’s authority was limited, with respect
to brokers and dealers, to credit extended for the pur­
pose of purchasing or carrying securities listed on a
national securities exchange, and the Act contained
an absolute prohibition against the extension of credit
by a broker or dealer on all other securities. “Exempt
securities” (generally Federal and municipal obliga­
tions) have always been excluded from the Board’s
authority to set margin requirements. Since 1968, the
Board has exercised its new authority by adopting cri­
teria and selecting those equity securities traded in the
O T C market that are eligible for margin credit. The
Board publishes a List of O T C Margin Stocks, which
is revised periodically; some 1,100 issues are presently
on the List. For purposes of Regulation T, a debt
security convertible into an equity security is considered
to be an equity security and there are presently five
convertible debt securities on the Board’s List of O T C
Margin Stocks.
The National Association of Securities Dealers, Inc.
(“N A S D ”) has requested the Board to amend Regu­
lation T to permit brokers and dealers to extend and
maintain credit on any unlisted nonconvertible corpo­
rate debt securities which meet certain minimum stand­
ards with respect to size of issue and rating by at least
one nationally recognized statistical rating service.
The Board believes that the N A S D ’s request has
considerable merit. Extending marginability to unlisted
corporate bonds would promote competitive equality
and improve the efficiency of capital markets. Such
action may, moreover, aid companies in marketing new
issues of debt securities and facilitate the trading of
debt securities more easily in the national market
system contemplated by the Securities Act Amend­
ments of 1975. On the other hand, the Board has re­
sponsibility to prevent destabilizing credit from being
extended, and it is generally agreed that certain cri­
teria should be established, so that there is a reasonable
likelihood that debt collateral can be liquidated in an
orderly manner. To this end, the Board is seeking to
adopt a self-executing rule with criteria readily ascer­
tainable by the securities industry and the investing
public— thereby eliminating the need for a published
List. The Board proposes therefore that unlisted nonconvertible corporate debt securities be eligible for
margin credit by brokers and dealers if:



SECTION 220.4— SPECIAL A C C O U N T S
*
*
*
(i) Special bond account.
In a special bond account a creditor may extend and
maintain credit on exempted securities and margin
non-equity securities. The maximum loan value of an
exempted security shall be determined by the creditor
in good faith. The maximum loan value of a margin
non-equity security shall be as prescribed from time
to time in §220.8 (the Supplement to Regulation T).
Call options may be issued, endorsed or guaranteed in
this account on any underlying equity security which
is held in this account because it is an exempted se­
curity. For the purpose of this paragraph, the term
“margin non-equity security” means a debt security
which is listed on a national securities exchange or a
2

debt security which meets all of the following require­
ments :

SECTION 220.8— S U P P L E M E N T
*
*
*

(1) At the time of the extension of credit, a princi­
pal amount of not less than $25,000,000 of the issue is
outstanding.

(b)

The maximum loan value of a margin non-equity
security shall be 70 per cent of its current market value
as determined by any reasonable method.

(2) The issue was registered under section 5 of
the Securities Act of 1933 and the issuer either files
periodic reports pursuant to section 13(a) or 15(d) of
the Securities Exchange Act of 1934 or is an insurance
company which meets all of the conditions specified in
section 12(g)(2)(G) of the Act.

SjS




*

3>S

To aid in consideration of this matter by the Board,
interested persons are invited to submit relevant data,
views, comments, or arguments. All material should
include the docket number R-0080. Such material will
be made available for inspection and copying upon re­
quest, except as provided in § 261.6(a) of the Board’s
Rules Regarding Availability of Information (12 CFR
261.6(a)).

(3) 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 pay­
ments.
*

Maximum Loan Value for a Special Bond

A c c o u n t.

*

3

F

ederal
of

R
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eserve

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Y

B

ank

ork
Second Supplement to
Operating Circular No. 1
(Revised February 1, 1978)
April 24, 1978

CHANGES IN AUTHORIZED SIGNATURES

Notice is hereby given of the changes indicated below in the list of
persons authorized to sign on behalf of the Federal Reserve Bank of New
York, as contained in our Operating Circular No. 1, Revised February 1,
1978, herein referred to as the signature circular, and the First Supple­
ment thereto, dated March 1, 1978.

OFFICERS

A.
T homas C ombader, Buildings Administrator, whose facsimile
signature appears on page 8 of the signature circular, ison leave from the
Bank. Until further notice, his name should be removed from the list of
persons authorized to sign on behalf of the Bank.
T homas C. Barman, Manager, Foreign Department, whose fac­
simile signature appears on page 12 of the signature circular, has resigned
from the Bank. Accordingly, his name should be removed from the list
of persons authorized to sign on behalf of the Bank.




J ohn S. H ill, Senior Economist, whose facsimile signature appears
on page 16 of the signature circular, has resigned from the Bank. Ac­
cordingly, his name should be removed from the list of persons author­
ized to sign on behalf of the Bank.
G eorge W. R yan, formerly Manager, Foreign Department, whose
facsimile signature appears on page 20 of the signature circular, has been
appointed Assistant Vice President.
J erome Bergman, formerly Special Assistant, Planning and Control
Function, has been appointed an officer of the Bank with the title of
Manager, and has been assigned to the Foreign Department. A facsimile
of his signature follows:

F red C. H erriman, J r ., Manager, formerly assigned to the
Domestic Banking Applications Department, has been assigned to the
Foreign Banking Applications Department. A facsimile of his signature
appears on page 16 of the signature circular.
T heodore N. O ppenheimer, formerly Manager, Foreign Banking
Applications Department, has been appointed Assistant Secretary. A
facsimile of his signature appears on page 20 of the signature circular.
F rancis J. R eischach, formerly Chief, Accounting Operations Divi­
sion, Accounting Department, has been appointed an officer of the Bank
with the title of Manager, and has been assigned to the Foreign Depart­
ment. A facsimile of his signature follows:

W illiam L. R utledge, formerly Chief, Domestic Banking Applica­
tions Division, has been appointed an officer of the Bank with the titleof
Manager, and has been assigned to the Domestic Banking Applications
Department. A facsimile of his signature follows:




2

Susan C. Young, formerly Special Assistant, Personnel Depart­
ment, has been appointed an officer of the Bank with the title of Opera­
tions Analysis Officer. A facsimile of her signature follows:

O T H E R SIGNERS— H E A D OFFICE
Paragraph 1(page 23) of the signature circular has been amended to
include the following persons, who now have authority to sign cor­
respondence relating to the work of the functions or departments in­
dicated after their respective names:
C arol W. Barrett, Chief, Securities Clearance Division, Government
Bond and Safekeeping Department,
(current authority under paragraph 1is terminated)
will sign: (facsimile of signature appears on page 23 of the
signature circular)

J oseph J. G rimshaw, Special Assistant, Government Bond and
Safekeeping Department,
(current authority under paragraphs 10 and 22 is continued)
will sign: (facsimiles of signature appear on pages 27, 70, and 93
of the signature circular)

Karyn A. Kaplan, Special Assistant, Data Processing Function,
(current authority under paragraphs 2 and 10is terminated)
will sign: (facsimiles of signature appear on pages 44 and 74 of
the signature circular)

M ichele Schneider, Special Assistant, Bank Supervision Function,

Susan B. T oder, Administrative Assistant, Management Information
Department,
will sign:




3

Paragraph 2 (page 36) of the signature circular has been amended to
include the following persons, who now have authority to sign cor­
respondence relating to the work of the divisions indicated after their
respective names:
J oseph E. F urey, J r., Senior Systems Specialist, Switching Services
Division, Telecommunications Department,
(current authority under paragraph 2 is terminated; authority under paragraph 10is continued)
will sign: (facsimiles of signature appear on pages 41 and 69 of
the signature circular)

J ames H. G aver, Chief, Central Data Entry Division, User Operations
Department,
will sign:
Stephen P. H anssen, Senior Systems Analyst, Space and Facilities
Division, Building Operating Department,

will sign:

\S f

/J

J ohn C. H eidelberger, Chief, Switching Services Division,
Telecommunications Department,
(current authority under paragraph 2 is terminated; authority under paragraph 10 is continued)
will sign: (facsimiles of signature appear on pages 43 and 71 of
the signature circular)

N oel H. Kaplan, Assistant Chief, Switching Services Division,
Telecommunications Department,
(current authority under paragraph 10 is continued)
will sign: (facsimile of signature appears on page 74 of the
signature circular)

Stella E. L oranca, Senior Regulations Analyst, Bank Analysis
Division, Bank Analysis Department,
will sign:




4

Paragraph 10 (page 63) of the signature circular has been amended
to include the following persons, who now have authority to sign per
procuration advices, receipts, and tickets relating to the routine opera­
tions of the divisions or departments indicated after their respective
names:
O llie M ae A rmstrong

(Collection Division)

(JfoC arol

W.

Barrett

f

(Government B o n d and Safekeeping Department)

will sign:
per pro
A ntoinette C ummins

(facsimile of signature appears on page 23 of the
signature circular)

(Collection Division)

(current authority under paragraph 9 is terminated)

will sign:
per pro
M artin F arrell

(facsimile of signature appears on page 57 of
signature circular)

(Check Processing Division (Day))

w U s% Pro
E stelle G ermain

(Accounting Operations Division of the Accounting

Department)

will sign:
per pro
Barbara J. J ohnson (Accounting

Operations Division of the Accounting

Department)

will sign:
per pro
F lora Santostefano

(Wire Transfer Division of the Collection

Department)

m il sign:
per pro




d

5

N ancy R. R ivera (Accounting Control Division of the Accounting

Department)
will sign:
per pro
C harles R. R ussell, Sr .(Switching Services Division of the Tele­

communications Department)
will sign:
per pro

Paragraph 13 (page 85) of the signature circular has been amended
to include the following person, who now has authority to sign per pro­
curation receipts and advices of credit relating to the routine operations
of the Paying and Receiving Division, Cash Department:
Robert J. G unter
will sign:
per pro

Paragraph 22 (page 92) of the signature circular has been amended
to include the following person, who now has authority to sign on behalf
of the Bank, as fiscal agent of the agencies indicated in paragraph 22,
those authentication certificates provided for in that paragraph.
Carol W. Barrett
will sign: (facsimile of signature appears on page 23 of the
signature circular)

O T H E R SIGNERS— C R A N F O R D OFFICE
Paragraph 32 (page 98) of the signature circular has been amended
to include the following persons, who now have authority to sign per
procuration advices, receipts, and tickets relating to the routine opera­
tions of the North Jersey Regional Check Processing Division:
H elen M. A llison
will sign:
per pro




6

C arla J. C rusius
(current authority under paragraph 10 is terminated)
will sign:
per pro
Loretta M. H uber
will sign:
per pro
A nita P. Ross
will sign:
per pro
L araine M. Stephens
will sign:
per pro

O T H E R SIGNERS— JERICHO OFFICE
Paragraph 33 (page 100) of the signature circular has been amended
to include the following person, who now has authority to sign cor­
respondence relating to the work of the Jericho Office:
Steven L azerus, Chief, Regional Check Processing Division,
(current authority under paragraph 33 is terminated; authority under paragraph 35 is continued)
will sign: (facsimiles of signature appear on pages




100 and 101 of the signature circular)

7

O T H E R SIGNERS— UTICA OFFICE

Paragraph 37 (page 102) of the signature circular has been amended
to include the following person, who now has authority to sign cor­
respondence relating to the work of the Northeastern New York
Regional Check Processing Division:
W illiam M. Kirk, Assistant Chief, Northeastern New York Regional
Check Processing Division,
will sign:

Paragraph 40 (page 103) of the signature circular has been amended
to include the following person, who now has authority to sign per pro­
curation advices, receipts, and tickets relating to the routine operations
of the Northeastern New York Regional Check Processing Division:
W illiam M. Kirk
will sign:
per pro

(facsimile of signature appears above)

O T H E R SIGNERS— BUFFALO B R A N C H

Paragraph 42 (page 105) of the signature circular has been amended
to include the following person, who now has authority to sign cor­
respondence relating to the work of the Management Information Staff
of the Buffalo Branch:
R oger A. M ocny, Senior Technical Systems Specialist, Management
Information Staff,
will sign:




8

TERMINATION OF SIGNING AUTHORITY

The authority of the following persons to sign on behalf of the Bank
as indicated in the paragraphs of the signature circular referred to below
have been terminated:
Ida L. Bullock (paragraph 10)
Veronica Burns (paragraph 10)
Ruth E. B yrd (paragraph 10)
C arolyn F. D onlon (paragraphs 10 and 18)
P atricia F lanagan (paragraph 10)
E dward M cG raw (paragraph 10)
A u r e l i a P ochynok (paragraph 10)
A nna M. Rowane (paragraph 2)
D aniel N. Spallone (paragraph 10)

Accordingly, their names should be removed from the list of persons
authorized to sign on behalf of the Bank.




P aul A. Volcker,
President

9