Full text of Federal Reserve Bank of New York Circulars : 9462. Margin Regulations

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F E D E R A L R E S E R V E BAIMK
O F MEW YO R K

[

Circular No. 9462 "|
March 3, 1983

MARGIN REGULATIONS
Proposed Revisions of Regulations G and U
To All Banks, Brokers and Dealers, and Persons Extending
Securities Credit 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 published for comment proposals to revise in their entirety Regulation U — margin
credit extended by banks — and Regulation G— margin credit extended by persons other than banks, brokers, and dealers.
The Board asked for comment on its proposals by April 22, 1983.
The proposed revision of Regulations U and G, two of the Board’s four regulations concerning margin requirements,
is part of the Board’s Regulatory Improvement Project in which the Board is reviewing and revising all its regulations to
update them, simplify their language, eliminate obsolete or unneeded language or provisions and lighten the burden of
compliance.
The proposed revisions to Regulation U encompass amendments adopted in January 1982, and in addition, would:
— permit banks to lend on margin stock to Employee Stock Ownership Plans (ESOPs) on a “good faith” basis;
— eliminate a restriction on unsecured loans to lenders other than banks and broker-dealers, including collateral
lenders, as Regulation G directly applies to these lenders; and
— delete requirements for reports presently required of OTC market-makers, third market-makers and block
positioners.
The proposed revisions to Regulation G also incorporate amendments made to the regulation in January 1982. In
addition, the proposals would:
— raise the registration threshold for G-lenders from $100,000 to $200,000 and eliminate the registration require­
ments for those who arrange but do not extend credit secured by margin securities;
— allow G-lenders to extend unsecured credit to a broker or dealer; and
— permit companies and their affiliates to finance employee purchases of company stock without a specific
scheduled paydown of the loan or a three-year lockup of the stock, as is presently required.
The Board is also seeking specific public comment on whether Regulations U and G should be combined to form a
new comprehensive regulation with various subchapters or whether the two regulations should be maintained separately in
their simplified forms.
Printed on the following pages is the summary text of the proposed re visions. The complete text will be
published in the Federal Register, and will also be furnished upon request directed to our Circulars Division (Tel.
No. 212-791-5216).
Comments on the proposed revisions should be submitted by April 22, 1983 and may be sent to our Regulations
Division.




A nthony M . S olomon ,

President.

FEDERAL RESERVE SYSTEM
R egulation

G

( 1 2 CFR 2 0 7 )
[ D o c k e t NOo R - 0 4 5 7 ]
S E C U R I T I E S C R E D I T BY PERSONS OTHER THAN B A N K S 9 BROKERS OR D EAL ER S

Complete R e v i s i o n

and S i m p l i f i c a t i o n

AGENCY:

B o a rd o f G o v e r n o r s o f the F e d e ra l

A C TI ON :

Proposed Rule-

of R egulation G

R e s e r v e System,,

SUMMARY:
The B o a r d p r o p o s e s t o r e v i s e R e g u l a t i o n G i n i t s e n t i r e t y , ,
The
p r o p o s e d R e g u l a t i o n G i s w r i t t e n i n s i m p l i f i e d l a n g u a g e and o r g a n i z e d i n a
more l o g i c a l f a s h i o n s
O b s o l e t e p r o v i s i o n s h a v e b e e n r emovedc
T h is proposed
r e v i s i o n i n c o r p o r a t e s amendments made t o R e g u l a t i o n G i n J a n u a r y 1 9 8 2 w h i c h
(1) removed e x i s t i n g p r o v i s i o n s t h a t p r o h i b i t e d l e n d e r s s u b j e c t to th e r u l e
f r o m e x t e n d i n g b o t h r e g u l a t e d and n o n - r e g u l a t e d c r e d i t t o t h e same b o r r o w e r
and p r o h i b i t e d m i x e d c o l l a t e r a l l o a n s a n d ( 2 ) c l a r i f i e d t h e d e f i n i t i o n o f
t h e t er m " i n d i r e c t l y s e c u r e d " ( 4 7 F e d * R e g n 2 9 8 1 , J a n u a r y 2 1 9 1 9 8 2 ) ,
The p r o p o s e d r e v i s i o n r a i s e s t h e r e g i s t r a t i o n t h r e s h o l d f o r C a l e n d e r s
t o $ 2 0 0 90 0 0 and e l i m i n a t e s t h e r e g i s t r a t i o n . r e q u i r e m e n t s f o r t h o s e who a r r a n g e
b u t do n o t e x t e n d c r e d i t s e c u r e d by m a r g i n s e c u r i t i e s *
In a d d i t i o n , the e x i s t i n g p r o v i s i o n p r o h i b i t i n g u n s e c u r e d l o a n s to
a b r o k e r o r d e a l e r by a G - l e n d e r i s removed,,
The p r o h i b i t i o n i n s e c t i o n 8
o f the S e c u r i t i e s Exchange A c t o f 1934 ( " 1 9 3 4 A c t " ) which p r e v e n t s anyone
e x c e p t a b a n k f r o m l e n d i n g t o a b r o k e r o r d e a l e r on t h e c o l l a t e r a l o f r e g ­
i s t e r e d s e c u r i t i e s i s r e t a i n e d in th e r e g u la t io n , ,
A f u r t h e r r e d u c t i o n i n r e g u l a t o r y b u r d e n w i l l be a c h i e v e d by t h e
the l i b e r a l i z a t i o n o f the " P l a n - l e n d e r " p r o v i s i o n 9 which c o v e r s e x t e n s i o n s
o f c r e d i t u n d e r e m p l o y e e o p t i o n and s t o c k p u r c h a s e p l a n s, ,
The p r o p o s e d
r e v i s i o n w i l l p e r m i t c o m p a n i e s and t h e i r a f f i l i a t e s t o f i n a n c e e m p l o y e e
p u r c h a s e s o f company s t o c k w i t h o u t a s p e c i f i c s c h e d u l e d paydown o f t h e l o a n
o r a t h r e e - y e a r lockup o f the sto ck as i s the p r e s e n t r u l e *
Th e p r o p o s a l
w i l l c o n t i n u e t o p e r m i t a co mp an y t o e x t e n d c r e d i t i n e x c e s s o f t h e c u r r e n t
maximum l o a n v a l u e o f t h e s e c u r i t i e s , ,
The
R egulation G
with v a rio u s
se p a ra te ly in




B o a r d i s s e e k i n g s p e c i f i c p u b l i c comment on t h e q u e s t i o n w h e t h e r
and U s h o u l d be c o m b i n e d t o f o r m a new c o m p r e h e n s i v e r e g u l a t i o n
s u b c h a p t e r s o r w h e t h e r t h e two r e g u l a t i o n s s h o u l d be m a i n t a i n e d
th e ir sim p lifie d form s.
2

DATE:

Comments

s h o u l d be r e c e i v e d on o r b e f o r e A p r i l

22,

1983.

ADDRESS:
C o m m e n t s , w h i c h s h o u l d r e f e r t o D o c k e t No. R - 0 4 5 7 , may be m a i l e d t o
the S e c r e t a r y , Board o f G ov e rn ors o f the Federal R ese rve S y s t e m ,. 2 0 t h S t r e e t
a nd C o n s t i t u t i o n A v e n u e , N. W. , W a s h i n g t o n , D . C . 20551 o r d e l i v e r e d t o Room
B = 2 2 2 3 b et w e en 8 : 4 5 a.m. and 5 : 1 5 p. m.
Comments r e c e i v e d may a l s o be i n s p e c t e d
a t Room 8 = 1 1 2 2 b et w ee n 8 : 4 5 a.m. and 5 : 1 5 p.m.
FOR FURTHER I NF ORMAT ION:
At the Board o f G overnors o f the Federal R eserve
S y ste m , W a s h in g t o n , D.C. 2 05 5 1, c o n t a c t :
L a u r a Homer, S e c u r i t i e s C r e d i t
O f f i c e r , o r R o b e r t L o r d , A t t o r n e y , D i v i s i o n o f B a n k i n g S u p e r v i s i o n and
R e g u la tio n (202) 452=2781.
A t t h e F e d e r a l R e s e r v e B a n k o f New Y o r k , c o n =
tact:
Min dy S i l v e r m a n , A s s i s t a n t C o u n s e l , (21 2 ) 791=5032.




3

FEDERAL RESERVE SYSTEM
Regulation

U

( 1 2 CFR 2 2 1 )
[ D o c k e t No.

R - 0458]

C R E D I T BY BANKS
Complete R e v i s i o n

and S i m p l i f i c a t i o n

AGENCY:

B o a rd o f G o v e r n o r s o f the F e d e r a l

A CTI ON :

Proposed Rule.

of R egulation

U

R e s e r v e System.,

SUMMARY:
The B o a r d p r o p o s e s t o r e v i s e R e g u l a t i o n U i n i t s e n t i r e t y 0 The
p r o p o s e d R e g u l a t i o n U i s w r i t t e n i n s i m p l i f i e d l a n g u a g e and o r g a n i z e d i n a
more l o g i c a l f a s h i o n *
O b s o l e t e p r o v i s i o n s h a v e b e e n removed.,
T h is proposed
r e v i s i o n i n c o r p o r a t e s amendments made t o R e g u l a t i o n U i n J a n u a r y 1 9 8 2 w h i c h
e x e m p t e d b a n k c r e d i t n o t s e c u r e d by m a r g i n s e c u r i t i e s f r o m t h e r e g u l a t i o n
and c l a r i f i e d t h e d e f i n i t i o n o f t h e term " i n d i r e c t l y s e c u r e d " ( 4 7 F e d 0 R eg *
2 9 8 1 ) ( J a n u a r y 21, 1 9 8 2 ).
C e r t a i n f i l i n g r e q u i r e m e n t s h a v e b e e n r em ov ed f r o m t h e p r o posed regulation..
The r e l a t e d f o r m s , F „ R 0 U - 2 , U - 3 , U - 5 and U - 6 , w i l l 9
t h e r e f o r e , be e l i m i n a t e d , ,
A l s o 9 i n c o o p e r a t i o n w i t h t h e S e c u r i t i e s a nd
E x c h a n g e C o m m i s s i o n ( " S E C " ) , r e f e r e n c e s t o SE C f o r m s X ~ 1 7 A ~ 1 2 ( 1 ) and ( 2 ) 9
X = 1 7 A “ 1 6 ( 1 ) a n d ( 2 ) 9 and X - l 7 A - 1 7 a r e b e i n g d e l e t e d s o t h a t t h e SEC may
pro cee d w i t h i t s p r o p o s a l to e l i m i n a t e t h e s e f o r m s „
A new s e c t i o n i s p r o p o s e d t o be a d d e d t o R e g u l a t i o n U t o n o t i f y
nonmember b a n k s who p r o p o s e t o l e n d t o b r o k e r s and d e a l e r s on r e g i s t e r e d
s e c u r i t i e s t h a t t h e y a r e r e q u i r e d by s t a t u t e ( 1 5 UoSoCo § 7 8 h ) t o c o m p l y
w i t h s e c u r i t i e s c r e d i t l a w s a n d r e g u l a t i o n s a p p l i c a b l e t o member b a n k s *
C u r r e n t l y , n o t i c e o f t h i s r e q u ir e m e n t i s c o n t a i n e d in R e g u l a t i o n T (12
CFR P a r t 2 2 0 ) , b u t n o t i n R e g u l a t i o n U*
The B o a r d b e l i e v e s t h a t n o t i c e o f
t h i s r e q u i r e m e n t s h o u l d a l s o be c o n t a i n e d i n R e g u l a t i o n U s i n c e t h e s t a t u t e
p l a c e s an a f f i r m a t i v e d u t y o f c o m p l i a n c e upon b a n k s a s w e l l a s b r o k e r s and
dealers*
T h i s a d d i t i o n t o R e g u l a t i o n U w i l l n o t p l a c e a n y new c o m p l i a n c e
r e s p o n s i b i l i t i e s on b anks*
Under t h i s p r o p o s e d r e v i s i o n o f R e g u l a t i o n U9 the B oard w o u ld remove,
in i t s e n t i r e t y , c u r r e n t s e c t i o n 2 2 1 * 3 ( q ) , w hich r e g u l a t e s lo a n s to c e r t a i n
lenders*
T h i s s e c t i o n was a d d e d t o R e g u l a t i o n U i n 1 9 5 9 t o l i m i t t h e amount
o f c r e d i t a v a i l a b l e t o " c o l l a t e r a l l e n d e r s , " who w er e n e i t h e r b a n k s n o r
b r o k e r - d e a l e r s and, t h e r e f o r e , n o t s u b j e c t to the B o a r d ' s then e x i s t i n g mar­
gin re gu la tio n s*
A c o m p r e h e n s i v e r e g u l a t i o n ( R e g u l a t i o n G, 12 CFR § 2 0 7 * 1




4

e t s e q » ) w a s a d o p t e d by t h e B o a r d i n 1 9 6 8 t o c o v e r a l l l e n d e r s o t h e r t h a n
banks and b r o k e r - d e a l e r s , i n c l u d i n g c o l l a t e r a l l e n d e r s .
B eca u se o f the
a d o p t i o n o f R e g u l a t i o n G s t h e r e t e n t i o n o f s e c t i o n 2 2 1 « 3 ( q ) i s no l o n g e r
considered n e c e s s a ry .
DATE:

Comments s h o u l d be r e c e i v e d on o r b e f o r e A p r i l

22,

1983.

ADDRESS:
C o m m e n t s , w h i c h s h o u l d r e f e r t o D o c k e t No. R - 0 4 5 8 , may be m a i l e d t o
the S e c r e t a r y 9 B o a r d o f G o v e r n o r s o f the F e d e r a l R e s e r v e S y ste m , 2 0th S t r e e t
and C o n s t i t u t i o n A v e n u e , N.Wo, W a s h i n g t o n , D . C e 20551 o r d e l i v e r e d t o Room
B - 2 2 2 3 b e t w e e n 8 : 4 5 a«mo and 5 : 1 5 p 0m0 Comments r e c e i v e d may a l s o be i n s p e c t e d
a t Room B - 1 1 2 2 b et w ee n 8 : 4 5 a.m. and 5 : 1 5 p.m.
FOR FURTHER I M P O R T A T I O N :
A t the B o a rd o f G o v e r n o r s o f the F e d e r a l R e s e r v e
S y s t e m , W a s h i n g t o n , B X o 20551 , c o n t a c t :
L a u r a Homer, S e c u r i t i e s C r e d i t
O f f i c e r , o r R o b e r t L o r d , A t t o r n e y , D i v i s i o n o f B a n k i n g S u p e r v i s i o n and
R e g u la t io n (202) 452-2781.
A t t h e F e d e r a l R e s e r v e Bank o f New Y o r k , c o n ­
tact:
Tin d y S ilv e rm a n , A s s i s t a n t C o u n s e l, (212) 791-5032.




5

FEDERAL RESERVE SYSTEM
Regulation G
(12 CFR 207)
[ D o c k e t No. R - 0 45 7]
S E C U R I T I E S C R E DI T BY PERSONS OTHER T HA N - B AN K S , BROKERS OR DEALERS

C omplete R e v i s i o n

and S i m p l i f i c a t i o n o f R e g u l a t i o n G

AGENCY:

B oa rd o f G o v e r n o r s o f the F e d e r a l

ACTION:

Proposed Rule.

R e s e r v e Sy st em .

SUMMARY: The B o a r d p r o p o s e s to r e v i s e R e g u l a t i o n G i n i t s e n t i r e t y .
The
p r o p o s e d R e g u l a t i o n G i s w r i t t e n i n s i m p l i f i e d l a n g u a g e and o r g a n i z e d i n a
more l o g i c a l f a s h i o n .
O b s o l e t e p r o v i s i o n s have been removed.
T h is proposed
r e v i s i o n i n c o r p o r a t e s amendments made t o R e g u l a t i o n G i n J a n u a r y 1982 wh ich
( ! ) removed e x i s t i n g p r o v i s i o n s t h a t p r o h i b i t e d l e n d e r s s u b j e c t to the r u l e
f rom e x t e n d i n g b o t h r e g u l a t e d and n o n - r e g u l a t e d c r e d i t t o t he same b o r r o w e r
and p r o h i b i t e d m i x e d c o l l a t e r a l l o a n s and ( 2) c l a r i f i e d the d e f i n i t i o n o f
t h e term “i n d i r e c t l y s e c u r e d " (47 Fed. Reg. 2 9 8 1, J a n u a r y 2 1 8 1 9 8 2 ) .
The p r o p o s e d r e v i s i o n r a i s e s the r e g i s t r a t i o n t h r e s h o l d f o r 6 - l e n d e r s
t o $ 2 0 0 s000 and e l i m i n a t e s the r e g i s t r a t i o n r e q u i r e m e n t s f o r t h o s e who a r r a n g e
b ut do n o t e x t e n d c r e d i t s e c u r e d by m a r g i n s e c u r i t i e s .
I n a d d i t i o n , the e x i s t i n g p r o v i s i o n p r o h i b i t i n g u n s e c u r e d l o a n s to
a b r o k e r or d e a l e r by a G - l e n d e r i s removed.
The p r o h i b i t i o n i n s e c t i o n 8
o f t h e S e c u r i t i e s E x ch a ng e A c t o f 1934 ( " 1 9 3 4 A c t " ) w hi ch p r e v e n t s anyone
e x c e p t a bank f r o m l e n d i n g to a b r o k e r or d e a l e r on the c o l l a t e r a l o f r e g ­
i s t e r e d s e c u r i t i e s i s r e t a i n e d i n the r e g u l a t i o n .
A f u r t h e r r e d u c t i o n i n r e g u l a t o r y burden w i l l be a c h i e v e d by the
t h e l i b e r a l i z a t i o n o f the " P l a n - l e n d e r " p r o v i s i o n , w hi ch c o v e r s e x t e n s i o n s
o f c r e d i t u n de r employee o p t i o n and s t o c k p u r c h a s e p l a n s .
The p r o p o s e d
r e v i s i o n w i l l p e r m i t c o m p a n i e s and t h e i r a f f i l i a t e s t o f i n a n c e employee
p u r c h a s e s o f company s t o c k w i t h o u t a s p e c i f i c s c h e d u l e d paydown o f the l o a n
o r a t h r e e - y e a r l o c k u p o f t h e s t o c k as i s t h e p r e s e n t r u l e .
The p r o p o s a l
w i l l c o n t i n u e t o p e r m i t a company t o e x t e n d c r e d i t in e x c e s s o f the c u r r e n t
maximum l o a n v a l u e o f t he s e c u r i t i e s .
The B o a r d i s s e e k i n g s p e c i f i c p u b l i c conment on t he q u e s t i o n whether
R e g u l a t i o n G and U s h o u l d be combined t o form a new c o m p r e h e n s i v e r e g u l a t i o n
w i t h v a r i o u s s u b c h a p t e r s o r whether the two r e g u l a t i o n s s h o u l d be m a i n t a i n e d
s e p a r a t e l y i n t h e i r s i m p l i f i e d fo rm s.




- 2 DATE:

Comments s h o u l d be r e c e i v e d on o r b e f o r e A p r i l

2 2, 1983.

ADDRESS:
Coranents, w h i c h s h o u l d r e f e r t o D o c k e t No. R - 0 4 5 7 , may be m a i l e d to
t he S e c r e t a r y , B o a r d o f G o v e r n o r s o f t he F e d e r a l R e s e r v e Sy s te m, 2 0t h S t r e e t
and C o n s t i t u t i o n Avenue, N.W., W a s h i n g t o n , D .C. 20551 o r d e l i v e r e d to Room
B “2223 between 8 : 4 5 a.m. and 5 : 1 5 p.m.
Comments r e c e i v e d may a l s o be i n s p e c t e d
a t Room B - 1 1 2 2 between 8 : 4 5 a.m. and 5 : 1 5 p.m.
FOR FURTHER INFORMATION:
At the B o a r d o f G o v e r n o r s o f t he F e d e r a l R e s e r v e
S y s te m , W a s h i n g t o n , D .C. 2 05 5 1 , c o n t a c t :
L a u r a Homer, S e c u r i t i e s C r e d i t
O f f i c e r , o r R o b e r t L o r d , A t t o r n e y , D i v i s i o n o f B a n k i n g S u p e r v i s i o n and
R eg u la tio n (202) 452-2781.
At the F e d e r a l R e s e r v e Bank o f New Y o r k , c o n ­
tact:
Mindy S i l v e r m a n , A s s i s t a n t C o u n s e l , ( 2 1 2 ) 7 9 1 - 5 0 3 2 .
SUPPLEMENTAL INFORMATION:
The B o a r d p r o p o s e s to r e v i s e R e g u l a t i o n G by ( 1 ) s i m p l i f y i n g the
l a n g u a g e in a l l p r o v i s i o n s , ( 2) r e m o v i n g o b s o l e t e p r o v i s i o n s , and ( 3 ) r e o r ­
d e r i n g p r o v i s i o n s i n a more l o g i c a l manner.
E x p l a n a t i o n o f Changes
The p r o p o s e d R e g u l a t i o n G i s d i v i d e d i n t o s even s e c t i o n s w h i c h ,
i n t h e f o l l o w i n g o r d e r , ( 1 ) s t a t e t he l e g a l b a s i s and s c op e o f t h e r e g u l a ­
t i o n , ( 2) d e f i n e t h e ter ms u s e d t h r o u g h o u t the r e g u l a t i o n , ( 3 ) s t a t e the
g e n e r a l r u l e , ( 4 ) s e p a r a t e l y t r e a t l o a n s made t o b r o k e r s o r d e a l e r s f o r s p e c i ­
f i e d p u r p o s e s , ( 5 ) p r o v i d e s p e c i a l t r e a t m e n t f o r l o a n s to employee s t o c k
o p t i o n and s t o c k p u r c h a s e p l a n s m e e t i n g c e r t a i n q u a l i f i c a t i o n s , ( 6 ) s e t f o r t h
the c r i t e r i a f o r i n c l u s i o n on the L i s t o f 0TC M a r g i n S e c u r i t i e s , and ( 7)
e s t a b l i s h the maximum l o a n v a l u e o f d i f f e r e n t t y p e s o f c o l l a t e r a l .
U n l e s s o t h e r w i s e n o te d, no s u b s t a n t i v e c h a n g e s have been made t o
the r e g u l a t i o n .
The r e g u l a t i o n has been r e o r g a n i z e d in a more l o g i c a l
f a s h i o n and the l a n g u a g e h a s been s i m p l i f i e d f o r e a s i e r u n d e r s t a n d i n g .
In
a d d i t i o n , o b s o l e t e ter ms and p r o v i s i o n s have been removed, and p a r t s o f the
r e g u l a t i o n i n c o r p o r a t e B o a r d and s t a f f i n t e r p r e t a t i o n s i s s u e d d u r i n g the
c o u r s e o f a d m i n i s t r a t i o n o f the r u l e .
The r e v i s e d d e f i n i t i o n o f " i n d i r e c t l y s e c u r e d " a dopt ed by the
B o a r d i n J a n u a r y 1982 d i d n o t c o n t a i n a s p e c i f i c e x c e p t i o n ( c o n t a i n e d i n
an e a r l i e r d e f i n i t i o n ) t h a t a l o a n w i l l n o t be c o n s i d e r e d " i n d i r e c t l y
s e c u r e d " i f a l e n d e r i n good f a i t h has n o t r e l i e d upon m a r g i n s e c u r i t i e s
as c o l l a t e r a l .
I t was n o t the i n t e n t o f the B o a r d , however, to remove t h i s
e x c e p t i o n , and i n t e r p r e t a t i o n s have been i s s u e d maki ng t h i s p o i n t c l e a r .
To
a v o i d m i s u n d e r s t a n d i n g , l a n g u a g e h a s been added to the d e f i n i t i o n i n the p r o ­
posed r e v i s i o n to c l a r i f y t h i s p o in t.
A s e c t i o n by s e c t i o n a n a l y s i s o f the p r o p o s e d R e g u l a t i o n G f o l l o w s .
1.

Authority,

P u r p o s e and Scope

T h i s s e c t i o n s t a t e s the B o a r d ' s l e g a l a u t h o r i t y t o p r o m u l g a t e R e gu ­
l a t i o n G, t h e p u r p o s e o f t he r u l e , and t h e f a c t t h a t i t s c o v e r a g e i s l i m i t e d
to l e n d e r s o t h e r th an b a n k s , b r o k e r s , or d e a l e r s .




- 3 -

2.

D e f i ni t i o n s

T h i s s e c t i o n c o n t a i n s e l e v e n d e f i n i t i o n s o f terms u sed t h r o u g h o u t
t he r e g u l a t i o n .
A l l terms o f a r t not d e f i n e d i n t he 1 9 3 4 A c t i t s e l f a r e d e f i n e d
i n t h i s s ec ti on ,,
O t h e r te rm s w h i c h h a v e s o v e r t he p a s t f i v e d e c a d e s , a c h i e v e d
"common u s a g e " s t a t u s i n m a r g i n r e g u l a t i o n p a r l a n c e have been i n c o r p o r a t e d
i n t o the r e g u l a t i o n and a r e , t h e r e f o r e , d e f i n e d i n t h i s s e c t i o n .
Some d e f i n i ­
t i o n s are s c a t t e r e d th ro u g h o u t the c u r r e n t r e g u l a t i o n .
A l l such d e f i n i t i o n s
have been b r o u g h t w i t h i n a s i n g l e d e f i ni t i o n a l •sec t i o n .
3.

Ge n e r a l

Requirements

T h i s s e c t i o n c o n t a i n s the g e n e r a l r u l e s w h i c h l e n d e r s o t h e r t h a n
b a n k s , b r o k e r s and d e a l e r s ( " G - l e n d e r s " ) m u st f o l l o w when e x t e n d i n g , m a i n ­
t a i n i n g o r a r r a n g i n g c r e d i t on the c o l l a t e r a l o f m a r g i n s e c u r i t i e s .
It places
l i m i t s on the amount o f c r e d i t G - l e n d e r s c a n e x t e n d when the p u r p o s e i s to
p u r c h a s e or c a r r y s e c u r i t i e s and the l o a n i s s e c u r e d by m a r g i n s e c u r i t i e s .
The r e g i s t r a t i o n t h r e s h o l d has been r a i s e d f rom $ 1 0 0 , 0 0 0 t o $ 2 0 0 , 0 0 0
and the r e g i s t r a t i o n r e q u i r e m e n t f o r G - l e n d e r s who m e r e l y a r r a n g e c r e d i t has
been e l i m i n a t e d .
R e g i s t e r e d G - l e n d e r s w i l l c o n t i n u e t o be s u b j e c t t o r e s t r i c ­
t i o n s on s e c u r i t i e s c r e d i t t h a t t he y a r r a n g e .
The " g e n e r a l r e q u i r e m e n t s " s e c t i o n a l s o c o n t a i n s the " s i n g l e
c r e d i t " r u l e , w h i c h d i r e c t s G - l e n d e r s to a g g r e g a t e the amount o f p u r p o s e
c r e d i t extended to a s i n g l e customer i n o r d e r to p reve n t e v a s i o n o f the r u l e .
T h i s s e c t i o n a l s o s p e c i f i c a l l y p e r m i t s the use o f o t h e r c o l l a t e r a l w i t h m a r ­
g i n s e c u r i t i e s to su p p o rt a purpose c r e d i t .
U nder t h e p r e s e n t r u l e , as
w r i t t e n , t h e r e i s some a m b i g u i t y as to w h e t h e r s u c h " m i x e d c o l l a t e r a l " l o a n s
are p e rm issib le .
T h i s s e c t i o n a l s o r e q u i r e s G - l e n d e r s who e x t e n d c r e d i t on m a r g i n
s e c u r i t i e s to o b t a i n a Form G - 3 , w h i c h r e q u i r e s t h e b o r r o w e r t o s t a t e
the p u r p o s e and amount o f the l o a n and l i s t the m a r g i n s e c u r i t i e s u s e d as
c o l l a t e r a l f o r the loan.
I n t he c a s e o f r e v o l v i n g c r e d i t a g r e e m e n t s , t h i s
s e c t i o n p e r m i t s the f i l i n g o f a G-3 form a t the ti me o f the i n i t i a l e x t e n ­
s i o n o f c r e d i t and does n o t r e q u i r e a new form G-3 t o be e x e c u t e d e a c h ti me
a ' d i s b u r s e m e n t i s made.
W i t h d r a w a l s and s u b s t i t u t i o n s o f c o l l a t e r a l f o r a n e x i s t i n g l o a n
a r e p e r m i t t e d by t h i s s e c t i o n ( 1) as l o n g as s u c h a c t i o n would n ot r e s u l t i n
an i n c r e a s e i n t h e amount by w h i c h the c r e d i t e x c e e d s the maximum l o a n v a l u e
o f t h e c o l l a t e r a l , o r ( 2 ) a t any time t h a t t h e c o l l a t e r a l has l o a n v a l u e
i n e x c e s s o f t h a t r e q u i r e d by the r e g u l a t i o n .
In a d d it io n , withdraw als of
c o l l a t e r a l a r e p e r m i t t e d t o e n a b l e a c u s t o m e r t o p a r t i c i p a t e i n an e x c h a n g e
o f f e r , p r o v i d e d the s e c u r i t i e s r e c e i v e d i n e x c h a n g e a r e s u b s t i t u t e d f o r t he
s e c u r i t i e s w i t h d r a w n and t r e a t e d as m a r g i n s e c u r i t i e s f o r a p e r i o d o f s i x t y
d a y s f o l l o w i n g the e x c h a n g e .
P r o v i s i o n s r e g a r d i n g e x t e n s i o n s and m a t u r i t i e s o f c r e d i t , t r a n s ­
f e r s o f c r e d i t , m i s t a k e s made i n good f a i t h , and a c t i o n w h i c h a G ° l e n d e r may
t a k e f o r i t s own p r o t e c t i o n have been c o n s o l i d a t e d i n t h i s s e c t i o n .
T hes e
p r o v i s i o n s are s c a t t e r e d throughout the c u r r e n t r e g u l a t i o n .




- 4 F i n a l l y , th is s e c tio n requires a G-lender to f i l e
(Form F . R . G - 4 ) w i t h i t s l o c a l F e d e r a l R e s e r v e Banko

form
40

C r e d i t to B r o k e r s

an a n n u a l

report

and D e a l e r s

I n c o n f o r m i t y w i t h s e c t i o n 8 o f the 1 934 A c t , t h i s s e c t i o n p r o h i b i t s
G - l e n d e r s fr om l e n d i n g on a s e c u r e d b a s i s t o b r o k e r s and d e a l e r s e x c e p t i n
e m e r g e n c i e s o r when t he p u b l i c i n t e r e s t s o demands*
The c u r r e n t p r o h i b i t i o n
a g a i n s t u n s e c u r e d l o a n s by G - l e n d e r s t o b r o k e r s and d e a l e r s has been removed*
5.

C r e d i t to F i n a n c e

Employee S t o c k P l a n s

T h i s s e c t i o n w ould l i b e r a l i z e c u r r e n t r u l e s w i t h r e s p e c t to c r e d i t
e x t e n d e d by a c o r p o r a t i o n t o i t s own e m p l o y e e s and o f f i c e r s f o r t h e p u r p os e o f p u r c h a s i n g the c o m p a n y ’ s s t o c k .
The p r o p o s e d r e v i s i o n w i l l p e r m i t
c o m p a n i e s and t h e i r a f f i l i a t e s t o f i n a n c e e mploy ee p u r c h a s e s o f company s t o c k
w i t h o u t a s p e c i f i c l o a n r e d u c t i o n s c h e d u l e o r a r e s t r i c t i o n on t he d i s p o s i ­
t i o n o f the s t o c k , a s r e q u i r e d u n d e r t h e p r e s e n t r u l e .
Plan le nde rs that
o t h e r w i s e meet the r e g i s t r a t i o n r e q u i r e m e n t s o f the r e g u l a t i o n w i l l c o n t i n u e
t o be r e q u i r e d to r e g i s t e r and t o f i l e a n nu a l r e p o r t s (Form F . R . G- 4) r e q u i r e d
by the r e g u l a t i o n .
The r e g i s t r a t i o n and r e p o r t i n g r e q u i r e m e n t s w i l l p r o v i d e
a mechanis m by w h i c h t he B o a r d c a n m o n i t o r f u t u r e d e v e l o p m e n t s w i t h r e s p e c t
to p l a n - l e n d e r c r e d i t .
6.

L i s t o f PTC M a r g i n S e c u r i t i e s

T h i s s e c t i o n c o n t a i n s the c r i t e r i a f o r i n i t i a l and c o n t i n u e d i n c l u ­
s i o n on the B o a r d ' s L i s t o f OTC M a r g i n S e c u r i t i e s .
T h e se c r i t e r i a were
r e c e n t l y amended to c o n f o r m more c l o s e l y w i t h the l i s t i n g r e q u i r e m e n t s o f
m a j o r s e c u r i t i e s e x c h a n g e s ( 47 Fed. Reg. 21 , 7 5 6 ) ( M a y 20, 1 9 8 2 ).
7.

Su p p le m e n t

T h is f i n a l s e c t i o n a s s i g n s va lu e to v a r i o u s types o f c o l l a t e r a l fo r
p u r p o s e s o f the r e g u l a t i o n .
Th r e e s p e c i f i c t y p e s o f c o l l a t e r a l a r e g i v e n l o a n
value:
( 1 ) m a r g i n s e c u r i t i e s have a maximum l o a n v a l u e o f f i f t y p e r c e n t o f
t h e i r c u r r e n t market v a l u e ; (2) a l l o th e r c o l l a t e r a l , o th e r than puts o r
c a l l s o r c o m b i n a t i o n s t h e r e o f , are a s s i g n e d a " go o d f a i t h " l o a n v a l u e ; and
( 3 ) p u t s , c a l l s and c o m b i n a t i o n s are g i v e n no l o a n v a l u e .
8.

Specific

Comment R eq ue st ed

The B o a r d i s s e e k i n g s p e c i f i c p u b l i c comment on the q u e s t i o n w he th er
R e g u l a t i o n s G and U s h o u l d be c om bi ned t o f orm a new c o m p r e h e n s i v e r e g u l a t i o n
w i t h v a r i o u s s u b c h a p t e r s o r w h e t h e r t he two r e g u l a t i o n s s h o u l d be m a i n t a i n e d
s e p a r a t e l y in t h e i r s i m p l i f i e d forms.

IN ITIAL

REGULATORY F L E X I B I L I T Y A N A L Y S I S :

The B o a r d o f G o v e r n o r s o f the F e d e r a l R e s e r v e S ys te m i s r e q u e s t i n g
comment on a p r o p o s a l t o c o m p l e t e l y r e v i s e i t s m a r g i n r e g u l a t i o n g o v e r n i n g
l e n d e r s o t h e r t h a n b a n k s and b r o k e r s o r d e a l e r s .




- 5 -

Th e s e c h a n g e s a r e p a r t o f a pr ogr am t o s i m p l i f y a l l o f the B o a r d ' s
m a r g i n r e g u l a t i o n s and to r ed u c e s p e c i f i c a d m i n i s t r a t i v e and r e g u l a t o r y
b u r d e n s imposed upon l e n d e r s . The s i m p l i f i c a t i o n o f R e g u l a t i o n G t h a t i s
b e i n g p r o p o s e d a t t h i s time w i l l p r o v i d e b e n e f i t s i n t h e f orm o f o v e r a l l
c l a r i t y and c o n s i s t e n c y o f t r e a t m e n t o f b a n k s and o t h e r l e n d e r s o
The B o a r d s
t h e r e f o r e , c e r t i f i e s f o r t he p u r p o s e s o f 5 U„$,C«, I 6 0 5 ( b ) t h a t the c h a n g e s
p r o p o s e d are n o t e x p e c t e d t o have an a d v e r s e i m p a c t on a s u b s t a n t i a l number
o f s mal l b u s i n e s s e s *
A c c o r d i n g l y , p u r s u a n t to s e c t i o n s 3, 7, 8 and 23 o f the S e c u r i t i e s
E x c h a n ge A c t o f 1934, a s amended (15 U . S . C . § § 7 8 c , 7 8 g , 78h and 78w) t h e B oa rd
p r o p o s e s to c o m p l e t e l y r e v i s e R e g u l a t i o n G ( P a r t 207) t o r e a d as f o l l o w s :




REGULATION G
(12 CFR P a r t 207)

PART 207 -• CRE DI T EXTENDED BY PERSONS OTHER THAN BANKS, BROKERS, OR DEALERS

SeCo
207 ol

Authority:

o o c .. o o c c .. o . o. o o o . . . . o. o . o . o . . o 0 c

2 0 7 c2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

D efinitions

207 =3 o o o o o o o o o c o o o o c o o oo o o o o o o o o o o o o o . o

G e ne ra l

2 0 7 04 o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o o . o

C r e d i t to B ro k e r -D e a le r s

2 0 7 05 o o o o o o o o o o o o o o o o o o o o o o o o o o o o o . oooo

Employee S t o c k O p t i o n and
Stock Purchase Plans

2 0 7 06 ooooooc ooooooooooooooooooooc oeoooo

Requirements f o r the L i s t
o f OTC M a r g i n S e c u r i t i e s

2 0 7 07 oooooooooooooooooc oooooooooooooooc

Sup pl eme nt

Requirements

§ § 3, 7, 8 and 23 o f the S e c u r i t i e s E x c h a n g e A c t o f 1934,

amended (15 U.SoCo § § 7 8 c , 7 8 g , 78h and 78w)»




A u t h o r i t y , P u r p o s e and Scope

as

S e c t i o n 207.1

- - AUTHORITY, PURPOSE AND SCOPE

(a)
A u t h o r i t y and P u r p o s e . R e g u l a t i o n G ( t h i s p a r t ) i s i s s u e d
by the B o a r d o f G o v e r n o r s o f the f e d e r a l R e s e r v e S y s te m ( th e " B o a r d " ) p u r ­
s u a n t t o t h e S e c u r i t i e s E x c h a n g e A c t o f 1934 ( th e " A c t " ) (15 U . S . C . § 78a e t.
seq.).
I t s p r i n c i p a l p u r p o s e i s to r e g u l a t e e x t e n s i o n s o f c r e d i t by p e r s o n s ,
o t h e r t h a n b a n k s , b r o k e r s and d e a l e r s , who e x te n d o r m a i n t a i n c r e d i t f o r t he
p u r p o s e o f p u r c h a s i n g o r c a r r y i n g m ar g i n s e c u r i t i e s .
( b)
Scope.
T h i s p a r t r e q u i r e s r e g i s t r a t i o n by p e r s o n s who e x t e n d
c r e d i t t h a t i s s e c u r e d d i r e c t l y or i n d i r e c t l y by m a r g i n s e c u r i t i e s .
Credit
exte nde d by such p e r s o n s i s r e g u l a t e d by l i m i t i n g t he l o a n v a l u e o f t h e c o l ­
l a t e r a l s e c u r i n g the c r e d i t i f the p u r p o s e o f the c r e d i t i s to p u r c h a s e or
c a r r y margin s e c u r i t i e s .

S e c t io n 207.2 —

DEFIN IT IO N S

The te rm s u s e d i n t h i s p a r t have the m ea ni ngs g i v e n them in s e c t i o n
3 ( a ) o f t h e A c t ( 15 . Uo S. C . § 7 8 c ( a ) ) o r as d e f i n e d i n t h i s s e c t i o n .
(a)
A f f i l i a t e . A p e r s o n t h a t d i r e c t l y , o r i n d i r e c t l y t h r o u g h one
o r more i n t e r m e d i a r i e s , c o n t r o l s , o r i s c o n t r o l l e d by , o r i s u n d e r common c o n ­
t r o l w i t h the l e n d e r .
(b)
C a r r y in g c r e d i t . C re d it that enables a customer to m aintain
a p o s i t i o n in a m a r g i n s e c u r i t y o r r ed uc e o r r e t i r e i n d e b t e d n e s s o r i g i n a l l y
i n c u r r e d to p u r c h a s e a s e c u r i t y t h a t i s c u r r e n t l y a m ar g i n s e c u r i t y .
(c)
C u r r e n t ma rk et v a l u e .
( 1) F o r a s e c u r i t y , t h e c l o s i n g s a l e
p r i c e o f the s e c u r i t y on t h e p r e c e d i n g b u s i n e s s day, as shown by any r e g u ­
l a r l y p u b l i s h e d r e p o r t i n g o r q u o t a t i o n s e r v i c e o r , i f t h e c r e d i t i s used
t o f i n a n c e the p u r c h a s e o f the s e c u r i t y , the s e c u r i t y ' s t o t a l c o s t o f p u r ­
chase.
I f t h e r e i s no c l o s i n g s a l e p r i c e , any r e a s o n a b l e e s t i m a t e o f t he
ma rk et v a l u e o f the s e c u r i t y a s o f the c l o s e o f b u s i n e s s on the p r e c e d i n g
b u s i n e s s day.
C om pu t a t i on o f t o t a l c o s t may i n c l u d e any c o m m i s s i o n s c h a r g e d .
(2)
Any o t h e r c o l l a t e r a l s h a l l be v a l u e d by any r e a s o n a b l e method
in accordance with g e n e r a lly accepted accounting p r i n c i p l e s .
(d)
Customer.
I n c l u d e s any p e r s o n or g r o u p o f p e r s o n s a c t i n g
j o i n t l y , t o o r f o r whom a p e r s o n s u b j e c t t o t h i s p a r t i s e x t e n d i n g o r m a i n ­
tain in g credit.




- 2 (e)
Good f a i t h .
( 1 ) Wi th r e s p e c t to the a c c e p t a n c e o f or n o t i c e
f rom o r o n . b e h a l f o f a c u s t o m e r t h a t the l e n d e r o r i t s d u l y a u t h o r i z e d r e p r e ­
s e n t a t i v e i s a l e r t to the c i r c u m s t a n c e s s u r r o u n d i n g the c r e d i t , and i f i n
p o s s e s s i o n o f i n f o r m a t i o n t h a t would c a u s e a p r u d e n t p e r s o n not t o a c c e p t the
s t a t e m e n t o r n o t i c e w i t h o u t i n q u i r y , i n v e s t i g a t e s and i s s a t i s f i e d t h a t the
statement o r no tice i s t r u t h f u l ;
(2)
W i t h r e s p e c t to the l o a n v a l u e o f c o l l a t e r a l means t h a t amount
w h i c h a l e n d e r , e x e r c i s i n g s ou n d c r e d i t j u d g m e n t , would l e n d on p a r t i c u l a r
c o l l a t e r a l , w i t h o u t r e g a r d to o t h e r a s s e t s o f the c u s t o m e r or o t h e r c o l l a t e r a l
held i n c o n n e c t io n with se p a ra te t r a n s a c t i o n s .
Good f a i t h l o a n v a l u e may
not e x ce ed 1 0 0 p e r c e n t o f the c u r r e n t m a rk e t v a l u e o f the c o l l a t e r a l .
(f)
In d ire c tly secured.
I n c l u d e s any a r r a n g e m e n t w i t h t h e c u s ­
tomer under w h i c h the c u s t o m e r ' s r i g h t o r a b i l i t y t o s e l l , p l e d g e , or o t h e r ­
w i s e d i s p o s e o f m a r g i n s e c u r i t i e s owned by t he c u s t o m e r i s i n any way r e s t r i c t e d
as l o n g a s the c r e d i t r e m a i n s o u t s t a n d i n g o r under w h i c h the e x e r c i s e o f s u c h
r i g h t i s o r may be c a u s e f o r a c c e l e r a t i o n o f the m a t u r i t y o f t h e c r e d i t .
The f o r e g o i n g s h a l l

not ap p ly:

(1)
i f , f o l l o w i n g a p p l i c a t i o n o f the p r o c e e d s o f the c r e d i t , not
more t h a n t w e n t y f i v e p e r c e n t o f the v a l u e o f the a s s e t s s u b j e c t t o the a r r a n g e ­
ment, as d e t e r m i n e d by any r e a s o n a b l e method, a re m a r g i n s e c u r i t i e s ;
(2)
t o a l e n d i n g a r r a n g e m e n t t h a t p e r m i t s a c c e l e r a t i o n o f the
m a t u r i t y o f the c r e d i t a s a r e s u l t o f a d e f a u l t u n d e r , o r t he r e n e g o t i a t i o n
o f the terms o f , a n o t h e r c r e d i t t o t h e same c u s t o m e r by a n o t h e r c r e d i t o r t h a t
i s n o t an a f f i l i a t e o f the l e n d e r ;
(3)
’ i f the m a r g i n s e c u r i t y i s h el d by t he l e n d e r o n l y i n the
c a p a c i t y o f c u s t o d i a n , d e p o s i t a r y , o r t r u s t e e , o r under s i m i l a r c ir c u m s t a n c e s
and the l e n d e r has n ot r e l i e d upon t he m a r g i n s e c u r i t y as c o l l a t e r a l i n e x t e n d i n g
o r m a i n t a i n i n g t he p a r t i c u l a r c r e d i t ; o r
(4)
i f the l e n d e r i n good f a i t h has n o t r e l i e d upon the m a r g i n
s e c u r i t y as c o l l a t e r a l i n the e x t e n s i o n o r m a i n t e n a n c e o f t he p a r t i c u l a r c r e d i t .
(g)
I n the o r d i n a r y c o u r s e o f b u s i n e s s .
O ccurring or reasonably
e x p e c t e d to x c u r from time t o time i n t h e c o u r s e o f any a c t i v i t y o f a p e r s o n
f o r p r o f i t o r the management o r p r e s e r v a t i o n o f p r o p e r t y , or i n the c a s e o f
a p e r s o n o t h e r t h a n an i n d i v i d u a l , c a r r y i n g o u t o r i n f u r t h e r a n c e o f any
busi ness purpose.

of this

national




(h)
part.

Lender.

Any p e r s o n s u b j e c t to the r e g i s t r a t i o n

requirements

(i)
Margi n se c u ri t y .
(1)
Any e q u i t y s e c u r i t y r e g i s t e r e d on a
s e c u r i t i e s exchange o r having u n l i s t e d t r a d i n g p r i v i l e g e s ;
(2)

an OTC m a r g i n s e c u r i t y ;

- 3 (3)
a debt s e c u r i t y which i s c o n v e r t i b l e i n t o a m argin s e c u r i t y
o r c a r r y i n g any w a r r a n t o r r i g h t t o s u b s c r i b e to o r p u r c h a s e a m a r g i n s e c u r i t y ;
(4)

any w a r r a n t o r

r i g h t to s u b s c r i b e t o or p u r c h a s e a m a r g i n

security;
(5)
a n y s e c u r i t y i s s u e d by an i n v e s t m e n t c o m p a n y , o t h e r t h a n a
company l i c e n s e d u n d e r the S m a ll B u s i n e s s I n v e s t m e n t Company A c t o f 1 9 5 8,
as amended ( 15 U . S . C . § 6 6 1 ) , r e g i s t e r e d under s e c t i o n 8 o f the I n v e s t m e n t
Company A c t o f 1 9 40 (15 U . S . C . § 8 0 a = 8 ) .
(j)
Maximum l o a n v a l u e . The p e r c e n t a g e o f c u r r e n t ma rk et v a l u e
a s s i g n e d by the B oa rd under s e c t i o n 2 0 7 , 7 o f t h i s p a r t t o s p e c i f i e d t y p e s
o f c o l 1a t e r a l .
(k)
PTC m a r g i n s e c u r i t y . Any e q u i t y s e c u r i t y not t r a d e d on a
n a t i o n a l s e c u r i t i e s e xc h a ng e t h a t t he B oar d ‘has d e t e r m i n e d has the d e g r e e o f
n a t i o n a l i n v e s t o r i n t e r e s t , the d e p t h and b r e a d t h o f m a r k e t , the a v a i l a b i l i t y
o f i n f o r m a t i o n r e s p e c t i n g t h e s e c u r i t y and i t s i s s u e r , and t h e c h a r a c t e r
and permanence o f the i s s u e r t o w a r r a n t b e i n g t r e a t e d l i k e an e q u i t y s e c u r i t y
t r a d e d on a n a t i o n a l s e c u r i t i e s e x c h a n g e .
The B oa rd w i l l from time t o time
p u b l i s h a l i s t o f the OTC m a r g i n s e c u r i t i e s t h a t the B o a r d has d e t e r m i n e d
meet t h e c r i t e r i a s e t f o r t h i n s e c t i o n 2 0 7 0 7 o f t h i s p a r t ,
(l)
Purpose c r e d i t .
C r e d i t f o r t he p u r p o s e , w h e t h e r i m m e d i a t e ,
i n c i d e n t a l , o r u l t i m a t e , o f p u r c h a s i n g o r c a r r y i n g a m a rg i n sec u r i t y .

Section

207,3 —

GENERAL REQUIREMENTS

(a)
R e g istra tio n ; term ination of r e g i s t r a t i o n .
(1) Every person
who, i n the o r d i n a r y c o u r s e o f b u s i n e s s , e x t e n d s o r m a i n t a i n s c r e d i t s e c u r e d ,
d i r e c t l y or i n d i r e c t l y , by any m a r g i n s e c u r i t y s h a l l r e g i s t e r on F e d e r a l R e s e r v e
Form F . R . G-l (0MB No, 055*= R 0 2 6 7) w i t h i n 30 d a y s a f t e r the end o f any c a l e n d a r
q u a r t e r d u r i n g w h i c h ( i ) t he amount o f c r e d i t e x t e n d e d e q u a l s $ 2 0 0 , 0 0 0 o r
m or e, o r ( i i ) t he amount o f c r e d i t o u t s t a n d i n g a t any time d u r i n g t h a t c a l e n d a r
q u a r t e r e q u a l s $ 5 0 0 , 0 0 0 o r more;
(2)
A r e g i s t e r e d l e n d e r may a p p l y t o t e r m i n a t e i t s r e g i s t r a t i o n , by
f i l i n g F e d e r a l R e s e r v e Form F . R , G- 2 (0MB No. 0 5 5 - R 0 2 6 7 ) , i f t he l e n d e r has n o t,
d u r i n g the p r e c e d i n g s i x c a l e n d a r m o n t h s , e xt en de d c r e d i t s e c u r e d , d i r e c t l y
o r i n d i r e c t l y , by any m a r g i n s e c u r i t y and has not had more t h a n $ 2 0 0 , 0 0 0 o f
such c r e d i t o u t s t a n d i n g d u r in g that p e r io d .
R e g i s t r a t i o n s h a l l be deemed
t e r m i n a t e d when the a p p l i c a t i o n i s a p p r o v e d by the B o a r d .
(b)
Ge n e ra l R u l e .
No l e n d e r , e x c e p t a p i a n = l e n d e r , as d e f i n e d i n
§ 2 0 7 . 5 ( a ) [ 1 ) , s h a l l e x t e n d a ny p u r p o s e c r e d i t , s e c u r e d d i r e c t l y o r i n d i r e c t l y
by m a r g i n s e c u r i t i e s i n an amount t h a t e x c e e d s the maximum l o a n v a l u e o f the
c o l l a t e r a l s e c u r i n g t h e c r e d i t , as s e t f o r t h i n § 2 0 7 . 7 o f t h i s p a r t .

in itia lly




(c)
Mai n t a i ni ng c r e d i t .
A l e n d e r may m a i n t a i n a n y c r e d i t
extended without v i o l a t i n g t h i s p a r t , r e g a r d l e s s o f:

th at

it

V

r

- 4 ( 1) r e d u c t i o n i n the c u s t o m e r ' s e q u i t y r e s u l t i n g
m a rk e t p r i c e s ;

from c ha nge in

( 2 ) c ha nge in the maximum l o a n v a l u e p r e s c r i b e d by t h i s

part;

or

margin)

(3)
c ha nge in t he s t a t u s o f the s e c u r i t y
s e c u r i n g an e x i s t i n g p u r p o s e c r e d i t *

(from non-margin to

(d)
A r r a n g i n g c r e d i t . No l e n d e r may a r r a n g e f o r t he e x t e n s i o n
o r m a i n t e n a n c e o f any c r e d i t f o r t h e p u r p o s e o f p u r c h a s i n g o r c a r r y i n g any
m ar g i n s e c u r i t y , e xc ept upon t he same ter ms and c o n d i t i o n s u n d e r w h i c h the
l e n d e r i t s e l f may e x t e n d o r m a i n t a i n such c r e d i t u n de r t h e p r o v i s i o n s o f
t h is part.
( e)
Purpose sta tem ent.
( 1)
Whenever a l e n d e r e x t e n d s c r e d i t
s e c u r e d d i r e c t l y o r i n d i r e c t l y by a m a r g i n s e c u r i t y , t h e l e n d e r s h a l l r e q u i r e
i t s c u s t o m e r t o e x e c u t e F e d e r a l R e s e r v e Form F . R . G-3 (0MB No. 0 5 5 - R 0 2 7 4 ) ,
wh ich s h a l l be s i g n e d and a c c e p t e d by a d u l y a u t h o r i z e d r e p r e s e n t a t i v e o f
the l e n d e r a c t i n g in good f a i t h ;
(2)
I f a l e n d e r e x t e n d s s u ch c r e d i t u n d e r a r e v o l v i n g c r e d i t
agr e eme nt , Form F . R . G-3 need n o t be e x e c u t e d each time a d i s b u r s e m e n t i s
made under the agreement i f :
(i)
is o rig in a lly

Form F . R . G-3 i s e x e c u t e d at the ti me t h e c r e d i t a r r a n g e m e n t
established;

(ii)
t he c u s t om e r a t t h a t time s t a t e s t h a t the p u r p o s e o f any
e x t e n s i o n u n d e r t he agreement i s t o p u r c h a s e o r c a r r y a m a r g i n s e c u r i t y ;
and
(iii)
e i t h e r the c o l l a t e r a l i s s u f f i c i e n t f o r a p u r p o s e c r e d i t
f o r the t o t a l amount c o v e r e d by the a g r eem ent , o r i s s u f f i c i e n t f o r the
amount o f c r e d i t a c t u a l l y d i s b u r s e d - a n d a c u r r e n t l i s t o f c o l l a t e r a l i s
appended t o the e x e c u t e d Form F . R . G-3 each ti me c r e d i t i s d i s b u r s e d u nde r
the agreement.
(f)
Single credit r u le .
(1)
A l e n d e r t h a t has e x t e n d e d p u r p o s e
c r e d i t s e c u r e d by a m a r g i n s e c u r i t y may not s u b s e q u e n t l y e x t e n d u n s e c u r e d p u r ­
pos e c r e d i t to the same c u s t o m e r u n l e s s the combined c r e d i t do es n o t exceed
the maximum l o a n v a l u e o f t h e s e c u r i t y s e c u r i n g t h e p r i o r c r e d i t ;
(2)
I f a l e n d e r e x t e n de d u n s e c u r e d pu rpo se c r e d i t to a c u s t o m e r
p r i o r t o the e x t e n s i o n o f p u r p o s e c r e d i t s e c u r e d by a m a r g i n s e c u r i t y , the
c r e d i t s s h a l l be combined and t r e a t e d as a s i n g l e c r e d i t s o l e l y f o r the
p u r p o s e o f the w i t h d r a w a l and s u b s t i t u t i o n p r o v i s i o n o f p a r a g r a p h (h) o f
t h is section.
(g)
M i x e d c o l l a t e r a l l o a n s . A pu r po s e c r e d i t s e c u r e d i n p a r t by a
m a r g i n s e c u r i t y , and i n p a r t by o t h e r c o l l a t e r a l s h a l l be t r e a t e d as two s e p a ­
r a t e l o a n s , one s e c u r e d by the m a r g i n s e c u r i t y and one by a l l o t h e r c o l l a t e r a l .




p
- 5 A lender may use a single c re d it agreement, but i t shall maintain i t s records
so that each portion of the cre d it and i t s c o l l a te ra l are id entified for the
purpose of evidencing compliance with this part.
(h)
W i t h d r a w a l s and S u b s t i t u t i o n s .
( 1)
A l e n d e r may p e r m i t any
w i t h d r a w a l o r s u b s t i t u t i o n o f c a s h o r c o l l a t e r a l by t h e c u s t o m e r i f , a f t e r
the t r a n s a c t i o n , the w i t h d r a w a l o r s u b s t i t u t i o n would n o t :
(i)
c a u s e t he c r e d i t
co l 1a t e r a l ; o r

t o e x c e e d the maximum l o a n v a l u e o f the

(ii)
i n c r e a s e t he amount by w h i c h the c r e d i t
loan va lu e o f the c o l l a t e r a l .

collateral

exceeds

the maximum

(2)
F o r p u r p o s e s o f t h i s s e c t i o n , the maximum l o a n v a l u e o f the
on t he day o f the w i t h d r a w a l o r s u b s t i t u t i o n s h a l l be used.

(i)
Exchange o f f e r s .
To e n a b l e a c u s t o m e r t o p a r t i c i p a t e i n an
e x c h a n g e o f f e r t h a t i s made t o a l l h o l d e r s o f an i s s u e o f m a r g i n s e c u r i t i e s ,
a l e n d e r may p e r m i t s u b s t i t u t i o n o f t he s e c u r i t i e s r e c e i v e d f o r t h e s e c u r i =
t i e s exchanged.
A nonmar gi n nonexempted s e c u r i t y a c q u i r e d i n e x c h a n g e f o r
a m a r g i n s e c u r i t y s h a l l be t r e a t e d a s i f i t i s a m a r g i n s e c u r i t y f o r a p e r i o d
o f 60 d a y s f o l l o w i n g the e x c h a n g e .
(j)
R e ne wa ls and e x t e n s i o n s o f m a t u r i t y .
A r enewa l o r e x t e n s i o n
o f m a t u r i t y o f a c r e d i t need n ot be c o n s i d e r e d a new e x t e n s i o n o f c r e d i t i f
the amount o f the c r e d i t i s i n c r e a s e d o n l y by the a d d i t i o n o f i n t e r e s t ,
s e r v i c e c h a r g e s o r taxes w it h r e s p e c t to the c r e d i t o
(k)
Transfers of c r e d i t .
(1)
A t r a n s f e r o f a c r e d i t between
c u s t o m e r s o r 1 e n d e r s s t a l 1 not be : o n s i d e r e d a new e x t e n s i o n o f c r e d i t i f :
(1)
(i i )
(iii)
(iv)

the o r i g i n a l c r e d i t
t he t r a n s f e r

is

was i n c o n f o r m i t y w i t h t h i s

not made to evade t h i s

t he amount o f c r e d i t
the c o l l a t e r a l

is

not i n c r e a s e d ;

f o r the c r e d i t

is

part;

part;
and

not c h a n g e d .

(2)
Any t r a n s f e r between c u s t o m e r s a t the same l e n d e r s h a l l be
a c c om p an i e d by a s t a t e m e n t by the t r a n s f e r o r c u s t o m e r d e s c r i b i n g t he c i r c u m ­
s t a n c e s g i v i n g r i s e t o the t r a n s f e r and a c c e p t e d i n good f a i t h and s i g n e d by
an o f f i c e r o f t h e l e n d e r as h a v i n g been s o a c c e p t e d .
The l e n d e r s h a l l keep
s u c h s t a t e m e n t w i t h i t s r e c o r d s o f t he t r a n s f e r e e a c c o u n t .
j(3)
When a t r a n s f e r i s made between l e n d e r s , the t r a n s f e r e e l e n d e r
s h a l l o b t a i n a c o p y o f the Form F . R . G»3 o r i g i n a l l y f i l e d w i t h the t r a n s f e r o r ,
l e n d e r and r e t a i n t he c o p y w i t h i t s r e c o r d s o f the t r a n s f e r e e a c c o u n t .
(l)
A c t i o n f o r l e n d e r ' s own p r o t e c t i o n .
Nothing in t h i s part s t a l l
r e q u i r e a l e n d e r to wa iv e o r f o r e g o any l i e n o r p r e v e n t a l e n d e r from t a k i n g
any a c t i o n t h a t i t deems n e c e s s a r y i n good f a i t h f o r i t s own p r o t e c t i o n .




,

-

%

6 -

(m)
M i s t a k e s i n good f a i t h .
w i t h the e x t e n s i o n o r m a i n t e n a n c e o f c r e d i t s h a l l
part.

A m i s t a k e in good f a i t h in c o n n e c t i o n
n o t be a v i o l a t i o n o f t h i s

( n)
Annual R e p o r t ., E v e r y r e g i s t e r e d l e n d e r s h a l l s w i t h i n 30 days
f o l l o w i n g June 30 o f e v e ry y e a r , f i l e Form F . R . 6 - 4 (0MB No. 0 5 5 - R 0 2 6 7 ) 0
( o)
Where to r e g i s t e r and f i l e a p p l i c a t i o n s and r e p o r t s . R e g i s t r a ­
t i o n s t a t e m e n t s , a p p l i c a t i o n s t o t e r m i n a t e r e g i s t r a t i o n , and annual r e p o r t s
s h a l l be f i l e d w i t h the F e d e r a l R e s e r v e Bank o f the d i s t r i c t in w h i c h the
p r i n c i p a l o f f i c e o f the lender i s lo ca te d .

S e c tio n 207.4 —

C REDIT TO BROKER-DEALERS

No l e n d e r s h a l l e x t e n d o r m a i n t a i n c r e d i t s e c u r e d , d i r e c t l y o r
i n d i r e c t l y , by any ma rg in s e c u r i t y t o a c u s t o m e r who i s s u b j e c t to P a r t 220,
e x c e p t in t h e f o l l o w i n g c i r c u m s t a n c e s :
(a)
Emergency L o a n s .
C r e d i t e xt e n de d in good f a i t h r e l i a n c e upon
a c e r t i f i c a t i o n from t h e c u s t o m e r t h a t t h e c r e d i t i s e s s e n t i a l t o meet emer­
gency needs a r i s i n g from e x c e p t i o n a l c i r c u m s t a n c e s .
Any c o l l a t e r a l f o r s u ch
c r e d i t s h a l l have good f a i t h l o a n v a l u e .
( b)
C a p it a l C o n t r ib u t io n Loans.
C r e d i t t h a t the B o a r d has exempted
by o r d e r upon a f i n d i n g t h a t the e xempti on i s n e c e s s a r y o r a p p r o p r i a t e in
the p u b l i c i n t e r e s t o r f o r the p r o t e c t i o n o f i n v e s t o r s , p r o v i d e d the S e c u r i t i e s
I n v e s t o r P r o t e c t i o n C o r p o r a t i o n c e r t i f i e s t o the B o a r d t h a t the e x em pt i on i s
appropriate.

Se c tio n 207.5 —

EMPLOYEE STOCK OPTION AND STOCK PURCHASE PLANS

( a)
Pla n lender; E l i g i b l e P l a n .
(1)
Plan Lender.
A corporation,
a l e n d e r w h o l l y owned by t h a t c o r p o r a t i o n , or a l e n d e r w hi ch i s a membership
t h r i f t o r g a n i z a t i o n whose membership i s l i m i t e d to e mp lo y ee s and f o r m e r e mp lo y ee s
o f t h a t c o r p o r a t i o n , i t s s u b s i d i a r i e s and a f f i l i a t e s , t h a t e x t e n d s o r m a i n t a i n s
c r e d i t t o f i n a n c e the a c q u i s i t i o n o f s e c u r i t i e s p u r s u a n t t o an e l i g i b l e p l a n ;
(2)
E l i g i b l e Plan.
An employee s t o c k o p t i o n or p u r c h a s e p l a n
a dopt ed by a c o r p o r a t i o n and a p p r o v ed by i t s s t o c k h o l d e r s t h a t p r o v i d e s f o r
the e x t e n s i o n o f c r e d i t to o f f i c e r s o r employees to f i n a n c e t h e i r p u r c h a s e o f
m a r g i n s e c u r i t i e s o f t he c o r p o r a t i o n , i t s s u b s i d i a r i e s o r a f f i l i a t e s .
( b } C r e d i t to e x e r c i s e r i g h t s u nde r e l i g i b l e p l a n s .
( 1)
If a
p l a n - l e n d e r e x t e n d s o r m a i n t a i n s c r e d i t t o i t s o f f i c e r s and e m p l o y e es , o r
t h o s e o f i t s s u b s i d i a r i e s o r a f f i l i a t e s , to f i n a n c e the e x e r c i s e o f r i g h t s
g r a n t e d under an e l i g i b l e p l a n o f t h e c o r p o r a t i o n , a m a r g i n s e c u r i t y t h a t
d i r e c t l y o r i n d i r e c t l y s e c u r e s t h a t c r e d i t s h a l l have good f a i t h l o a n v a l u e .
(2)
C r e d i t extended u n d e r t h i s s e c t i o n s h a l l
fr om c r e d i t e xt e n de d under any o t h e r s e c t i o n i n t h i s p a r t .




be t r e a t e d s e p a r a t e l y

- 7 207.6 —

REQUIREMENTS FOR THE L I S T OF PTC MARGIN S E C U R I T I E S

(a)
R e q u i r e m e n t s f o r i n c l u s i o n on the l i s t o f OTC m a r g i n s e c u r i t i e s .
E x c e p t as p r o v i d e d i n s u b s e c t i o n I d ) o f t h i s s e c t i o n , OTC m a r g i n s e c u r i t y s h a l l
meet tiie r e q u i r e m e n t s t h a t :
(1)
The s e c u r i t y i s r e g i s t e r e d under s e c t i o n 12 o f the A c t
(15 U . S . C . § 7 8 1 ) , i s i s s u e d by an i n s u r a n c e company s u b j e c t t o s e c t i o n
1 2 ( g ) ( 2 ) ( G ) ( 15 U . S . C . § 7 8 1 ( g ) ( 2 ) ( G ) ) , i s i s s u e d by a c l o s e d end i n v e s t m e n t
management company s u b j e c t to r e g i s t r a t i o n p u r s u a n t t o s e c t i o n 8 o f the
I n v e s t m e n t Company A c t o f 1940 (15 U . S . C . § 8 0 a - 8 ) , i s an Am er ic an D e p o s i t o r y
R e c e i p t ( " A D R " ) o f a f o r e i g n i s s u e r whose s e c u r i t i e s are r e g i s t e r e d under
s e c t i o n 12 o f the A c t , or i s a s e c u r i t y o f an i s s u e r r e q u i r e d to f i l e r e p o r t s
u n d e r s e c t i o n 1 5 ( d ) o f the A c t (15 U . S . C . § 7 8 o ( d ) ) ;
(2)
F o u r or more d e a l e r s make a market in the s e c u r i t y and r e g u ­
l a r l y s u b m i t bona f i d e b i d s and o f f e r s t o an automated q u o t a t i o n s s ys tem f o r
t h e i r own a c c o u n t s ;

p ( 3 ) Th e r e are 1 , 2 0 0 o r more h o l d e r s o f r e c o r d , as d e f i n e d in SEC
R u l e 1 2 g 5 - l (17 CFR § 2 4 0 . 1 2 g 5 - 1 ) , o f t h e s e c u r i t y who are n o t o f f i c e r s , d i r e c ­
t o r s o r b e n e f i c i a l o wner s o f 10 p e r c e n t o r more o f the s e c u r i t y , or the a v e r a g e
d a i l y t r a d i n g v olume o f such s e c u r i t y as d et er mi ned by t h e B o a r d , i s a t l e a s t
500 s h a r e s ;
(4)
The i s s u e r or a p r e d e c e s s o r i n i n t e r e s t has been i n e x i s t e n c e
fo r at le a s t three yea rs;
(5)

The s e c u r i t y h a s been p u b l i c l y t r a d e d f o r a t l e a s t s i x mont hs;

(6)
D a i l y q u o t a t i o n s f o r b o th b i d and asked p r i c e s f o r t h e s e c u r i t y
are c o n t i n u o u s l y a v a i l a b l e t o the g e n e r a l p u b l i c ;
(7)
T h e r e are 4 0 0 , 0 0 0 o r more s h a r e s o f such s e c u r i t y o u t s t a n d i n g
i n a d d i t i o n t o s h a r e s h e l d b e n e f i c a l l y by o f f i c e r s , d i r e c t o r s o r b e n e f i c i a l
owners o f more t h a n 10 p e r c e n t o f t h e s e c u r i t y ;

t he B o a r d ,

(8)
is

The minimum a v e r a g e b i d p r i c e o f the s e c u r i t y ,
a t l e a s t $5 p e r s h a r e ; and

(9)
The i s s u e r had a t l e a s t $4 m i l l i o n
undivided p r o f i t s .

of c a p it a l,

as d et er mi ne d by

surplus,

and

(b )
R e q u i r e m e n t s f o r c o n t i n u e d i n c l u s i o n on the l i s t
gin s e c u r i t i e s .

o f OTC mar­

E x c e p t as p r o v i d e d in s u b s e c t i o n (d) o f t h i s
s e c u r i t y s h a l l meet t he f o l l o w i n g r e q u i r e m e n t s :

an OTC margin

(1)
fie d in paragraph




section,

The s e c u r i t y i s r e g i s t e r e d o r i s s u e d u nder t h e c o n d i t i o n s s p e c i ­
(a)(1) o f th is section;

- 8 -

la rly
their

(2)
Th re e or more d e a l e r s make a mark et i n t he s e c u r i t y and r e g u ­
s u b m i t bona f i d e b i d s and o f f e r s t o an a utomat ed q u o t a t i o n s s y s t e m f o r
own a c c o u n t s ;

(3)
Th e r e c o n t i n u e to be 800 o r more h o l d e r s o f r e c o r d , as d e f i n e d
i n SEC R ule 1 2 g 5-1 ( 17 CFR § 240.1 2 g 5 - 1 ) , o f t he s e c u r i t y who a r e not o f f i c e r s ,
d i r e c t o r s , o r b e n e f i c i a l o w ne rs o f 10 p e r c e n t o r more o f the s e c u r i t y , or t he
a v e r a g e d a i l y t r a d i n g v o l u n e o f s u c h s e c u r i t y , as d e t e r m i n e d by t he B o a r d , i s
a t l e a s t 300 s h a r e s ;
( 4)
D a i l y q u o t a t i o n s f o r b o t h b i d and a s k e d p r i c e s
a r e c o n t i n u o u s l y a v a i l a b l e t o the g e n e r a l p u b l i c ;

f o r t he s e c u r i t y

(5)
Ther e a r e 3 0 0 , 0 0 0 o r more s h a r e s o f s u c h s e c u r i t y o u t s t a n d i n g
i n a d d i t i o n t o s h a r e s held b e n e f i c i a l l y by o f f i c e r s , d i r e c t o r s , o r b e n e f i c i a l
owner s o f more t h a n 10 p e r c e n t o f the s e c u r i t y ;
( 6)
b y the B o a r d ,

The minimun a v e r a g e b i d p r i c e o f t he s e c u r i t y ,
i s a t l e a s t $2 p e r s h a r e ; and

(7)
The i s s u e r
undivided p r o f i t s .

has a t l e a s t $2 m i l l i o n o f c a p i t a l ,

as d e t e r m i n e d

surplus,

and

(c)
Removal from the l i s t o f PTC m a r g i n s e c u r i t i e s .
The B oa r d s h a l l
f rom time t o t i me remove from the 0TC m a r g i n s e c u r i t y l i s t s e c u r i t i e s t h a t
cease to:
(1)

e x i s t o r o f w h i c h the i s s u e r c e a s e s to e x i s t ,

(2)

meet s u b s t a n t i a l l y t h e p r o v i s i o n s

of paragraph

or
(b) o f t h i s

section.
(d)
D i s c r e t i o n a r y a u t h o r i t y o f B o a r d . The f o r e g o i n g n o t w i t h s t a n d i n g , the B o a r d may o m i t o r remove any s e c u r i t y t h a t i s not t r a d e d on a n a t i o n a l
s e c u r i t i e s e x c h a n g e f r om or add any s u c h s e c u r i t y t o s u c h l i s t o f 0TC m a r g i n
s e c u r i t i e s , i f i n the j udg ment o f the B o a r d , s u c h a c t i o n i s n e c e s s a r y o r a p p r o ­
p r i a t e in the p u b l i c i n t e r e s t .
( e)
Unlawful R e p r e s e n t a t i o n s .
I t s h a l l be u n l a w f u l f o r a ny c r e d i ­
t o r to make, o r c a u s e t o be made, any r e p r e s e n t a t i o n t o the e f f e c t t h a t the
i n c l u s i o n o f a s e c u r i t y on the l i s t o f 0TC m a r g i n s e c u r i t i e s i s e v i d e n c e t h a t
the B oa r d o r t h e SEC has i n any way p a s s e d upon the m e r i t s o f , o r g i v e n
a p p r o v a l t o , s u c h s e c u r i t y or a n y t r a n s a c t i o n s t h e r e i n .
Any s t a t e m e n t i n an
a d v e r t i s e m e n t o r o t h e r s i m i l a r c o m m u n i c a t i o n c o n t a i n i n g a r e f e r e n c e t o the
Board i n c o n n e c t i o n w i t h the l i s t o r s e c u r i t i e s on t h a t l i s t s h a l l be an u n l a w ­
ful representation.
Section

2 0 7 . 7 °° S u p p l e m e n t

(a)
Maximisn l o a n v a l u e o f a m a r g i n s e c u r i t y . The maximum l o a n
v a l u e o f a m a r g i n s e c u r i t y s h a l l be f i f t y p e r c e n t o f i t s c u r r e n t m a r k e t v a l u e .




- 9 (b)
Maximum l o a n v a l u e o f n o n m a r g i n s e c u r i t i e s and a l l o t h e r c o l l a °
t e r a l « The maximum l o a n v a l u e o f a n o n m a r g i n s e c u r i t y and a l l o t h e r c o l l a t e r a l
e x c e p t p u t s , c a l l s , or c o m b i n a t i o n s t h e r e o f s h a l l be t h e i r good f a i t h l o a n
value«
(c)
Maximun l o a n v a l u e o f o p t i o n s .
t h e r e o f s h a l l have no l o a n value,,

Puts, c a l l s

By o r d e r o f the B o a r d o f G o v e r n o r s o f the F e d e r a l
F e b r u a r y 2 3, 1983.

and c o m b i n a t i o n s

Reserve System,

(signed)
W i l l i a m W. W i l e s
S e c r e t a r y o f the B oar d
[SEAL]




FEDERAL RESERVE SYSTEM
Regulation U
( 1 2 CFR 2 21 )
[ D o c k e t No.

R - 0458]

-

C REDIT BY BANKS
C o mp le te R e v i s i o n and S i m p l i f i c a t i o n o f

AGENCY:

B oa r d o f

G o v e r n o r s o f the F e d e r a l

ACTION:

Proposed

R ul e.

Regulation U

R e s e r v e S y st e m .

SUMMARY:
The B o a r d p r o p o s e s to r e v i s e R e g u l a t i o n U i n i t s e n t i r e t y .
The
p r o p o s e d R e g u l a t i o n U i s w r i t t e n i n s i m p l i f i e d l a n g u a g e and o r g a n i z e d i n a
more l o g i c a l f a s h i o n .
O b s o l e t e p r o v i s i o n s have been removed.
T h is proposed
r e v i s i o n i n c o r p o r a t e s amendments made t o R e g u l a t i o n U i n J a n u a r y 1 982 w h i c h
exempted bank c r e d i t n o t s e c u r e d by m a r g i n s e c u r i t i e s f rom the r e g u l a t i o n
and c l a r i f i e d the d e f i n i t i o n o f the term “ i n d i r e c t l y s e c u r e d " ( 4 7 Fed. Reg.
2 9 8 1 ) ( January 21, 1982).
C e r t a i n f i l i n g r e q u i r e m e n t s have bee n removed f rom the p r o ­
posed r e g u l a t i o n .
The r e l a t e d f o r m s , F . R . U - 2 , U -3 , U-5 and U - 6 , w i l l ,
t h e r e f o r e , be e l i m i n a t e d .
A l s o , i n c o o p e r a t i o n w i t h the S e c u r i t i e s and
E x ch a ng e C o m m i s s i o n ( " S E C " ) , r e f e r e n c e s t o SEC f o r m s X - l 7 A - 1 2 ( 1 ) and ( 2 ) ,
X - l 7 A - 1 6 ( 1 ) and ( 2 ) , and X - 1 7 A - 1 7 a r e b e i n g d e l e t e d s o t h a t the SEC may

proceed with i t s proposal to eliminate these forms.
A new s e c t i o n i s p r o p o s e d to be added to R e g u l a t i o n U t o n o t i f y
nonmember b a n k s who p r o p o s e t o l e n d t o b r o k e r s and d e a l e r s on r e g i s t e r e d
s e c u r i t i e s t h a t t h e y a re r e q u i r e d by s t a t u t e ( 1 5 U . S . C . § 7 3 h ) t o c o m p l y w i t h s e c u r i t i e s c r e d i t l a w s and r e g u l a t i o n s a p p l i c a b l e t o member b a n k s .
C u r r e n t l y , n o t i c e o f t h i s r e q u i r e m e n t i s c o n t a i n e d i n R e g u l a t i o n T (1 2
CFR P a r t 2 2 0 ) , b u t not i n R e g u l a t i o n U.
The Boar d b e l i e v e s t h a t n o t i c e o f
t h i s r e q u i r e m e n t s h o u l d a l s o be c o n t a i n e d i n R e g u l a t i o n U s i n c e the s t a t u t e
p l a c e s an a f f i r m a t i v e d u t y o f c o m p l i a n c e upon b a n k s as w e l l as b r o k e r s and
dealers.
T h i s a d d i t i o n t o R e g u l a t i o n U w i l l n o t p l a c e any new c o m p l i a x e
r e s p o n s i b i l i t i e s on banks.
Under t h i s p r o p o s e d r e v i s i o n o f R e g u l a t i o n U, the B o a r d would remove,
i n i t s e n t i r e t y , c u r r e n t s e c t i o n 221 • 3 ( q ) , w h i c h r e g u l a t e s l o a n s t o c e r t a i n
lenders.
T h i s s e c t i o n was added to R e g u l a t i o n U i n 1 959 to l i m i t the amount
o f c r e d i t a v a i l a b l e t o " c o l l a t e r a l l e n d e r s , " who were n e i t h e r b a n k s nor
b r o k e r - d e a l e r s a n d , t h e r e f o r e , not s u b j e c t to the B o a r d ' s t h e n e x i s t i n g m a r ­
gin regulations.
A c o m p r e h e n s i v e r e g u l a t i o n ( R e g u l a t i o n G, 12 CFR § 207.1




= 2

-

e t s e q . ) was a d opt ed by t he B oa rd i n 1968 to c o v e r a l l l e n d e r s o t h e r th an
ba nk s and b r o k e r - d e a l e r s , i n c l u d i n g ' c o l 1 a t e r a l l e n d e r s .
B e ca u s e o f the
a d o p t i o n o f R e g u l a t i o n G, t h e r e t e n t i o n o f s e c t i o n 2 2 1 . 3 ( q ) i s no l o n g e r
considered necessary.
DATE:

Comments s h o u l d be r e c e i v e d on or b e f o r e A p r i l

2 2, 1 983.

ADDRESS:
Comments, which s h o u l d r e f e r t o D o c k e t No. R - 0 4 5 8 , may be m a i l e d to
the S e c r e t a r y , B o a r d o f G o v e r n o r s o f the F e d e r a l R e s e r v e S y s t e m , 20t h S t r e e t
and C o n s t i t u t i o n Avenue, N.W., W a s h i n g t o n , D.C. 20551 o r d e l i v e r e d t o Room
B -2223 between 8 : 4 5 a.m. and 5 : 1 5 p.m.
Comments r e c e i v e d may a l s o be i n s p e c t e d
a t Room B - 1 1 2 2 between 8 : 4 5 a.m. and 5 : 1 5 p.m.
FOR FURTHER INFORMATION:
At the B o a r d o f G o v e r n o r s o f the F e d e r a l R e s e r v e
System, W a s h i n g t o n , D.C. 2 0551, c o n t a c t :
L a u r a Homer, S e c u r i t i e s C r e d i t
O f f i c e r , or R o b e r t L o r d , A t t o r n e y , D i v i s i o n o f B a n k i n g S u p e r v i s i o n and
R eg ula tio n (202) 452-2781.
At the F e d e r a l R e s e r v e Bank o f New Y o r k , c o n ­
tact:
Mi nd y S i l v e r m a n , A s s i s t a n t C o u n s e l , ( 2 1 2 ) 7 9 1 - 5 0 3 2 .
SUPPLEMENTAL INFORMATION:
The B o a r d p r o p o s e s to r e v i s e R e g u l a t i o n U by ( 1 ) s i m p l i f y i n g the
l a n g u a g e i n a l l p r o v i s i o n s , ( 2 ) r e m o v i n g o b s o l e t e p r o v i s i o n s , and ( 3 ) r e o r d e r i n g
p r o v i s i o n s i n a more l o g i c a l manner.
E x p l a n a t i o n o f C ha nges
The p r o p o s e d R e g u l a t i o n U i s d i v i d e d i n t o e i g h t s e c t i o n s w h i c h ,
i n t h e f o l l o w i n g o r d e r , ( 1 ) s t a t e t h e l e g a l b a s i s and s c o p e o f t h e r e g u l a t i o n ,
( 2 ) d e f i n e t h e ter ms u s e d t h r o u g h o u t the r e g u l a t i o n , ( 3 ) s t a t e the g e n e r a l
r u l e , ( 4) r e q u i r e non-member banks t o f i l e a g r eem ent s w i t h the B oa r d b e f o r e
t he y engage i n s e c u r i t i e s c r e d i t t r a n s a c t i o n s w i t h b r o k e r s o r d e a l e r s , ( 5)
s e p a r a t e l y t r e a t l o a n s made t o b r o k e r s o r d e a l e r s f o r m a r k e t f a c i l i t a t i n g
p u r p o s e s , ( 6 ) s p e c i f y t r a n s a c t i o n s w hi ch a r e exempt f r om the r e q u i r e m e n t s o f
t he r e g u l a t i o n , ( 7 ) s e t f o r t h t h e c r i t e r i a f o r i n c l u s i o n on t h e L i s t o f 0TC
M a r g i n S e c u r i t i e s , and (8) e s t a b l i s h the maximum l o a n v a l u e o f d i f f e r e n t
types of c o l l a t e r a l .
U n l e s s o t h e r w i s e n o te d, no s u b s t a n t i v e c h a n g e s have been made t o
the r e g u l a t i o n .
The r e g u l a t i o n has been r e o r ga n i- z e d in a more l o g i c a l
f a s h i o n and the l a n g u a g e ha s been s i m p l i f i e d f o r e a s i e r u n d e r s t a n d i n g .
In
a d d i t i o n , o b s o l e t e terms and p r o v i s i o n s have been removed, and p a r t s o f the
r e g u l a t i o n i n c o r p o r a t e B oa rd and s t a f f i n t e r p r e t a t i o n s i s s u e d d u r i n g the
c o u r s e o f a d m i n i s t r a t i o n o f the r u l e .
The. r e v i s e d d e f i n i t i o n o f " i n d i r e c t l y s e c u r e d " a dopted by the
B o a r d i n J a n u a r y , 1982 d i d n o t c o n t a i n a s p e c i f i c e x c e p t i o n ( c o n t a i n e d i n
an e a r l i e r d e f i n i t i o n ) t h a t a l o a n w i l l n o t be c o n s i d e r e d " i n d i r e c t l y
s e c u r e d " i f a l e n d e r i n good f a i t h h as n o t r e l i e d upon m a r g i n s e c u r i t i e s
as c o l l a t e r a l .
I t was n o t the i n t e n t o f the B o a r d , however, t o remove t h i s
e x c e p t i o n , and i n t e r p r e t a t i o n s have been i s s u e d ma ki ng t h i s p o i n t c l e a r .
To
a v o i d m i s u n d e r s t a n d i n g , l a n g u a g e h a s been added to t he d e f i n i t i o n i n t h e p r o ­
posed r e v i s i o n to c l a r i f y t h i s p o in t.




\

3
A s e c t i o n by s e c t i o n a n a l y s i s
1.

Authority,

of

the p r o p o s e d

Regulation

U follow s.

P u r p o s e and Scope

T h i s s e c t i o n s t a t e s the B o a r d ' s l e g a l a u t h o r i t y to p r o m u l g a t e
R e g u l a t i o n U, t h e p u r p o s e o f the r u l e , and t h e f a c t t h a t i t s c o v e r a g e i s
l i m i t e d to b a n k s .
2.

Definitions

T h i s s e c t i o n c o n t a i n s e l e v e n d e f i n i t i o n s o f terms u s ed t h r o u g h o u t
t he r e g u l a t i o n .
A l l ter ms o f a r t not d e f i n e d i n the S e c u r i t i e s E x c h a n g e A c t o f
1934 ( " 1 934 A c t " } ( 1 5 U . S . C . § 78a et s e q . ) i t s e l f a r e d e f i n e d i n t h i s s e c t i o n .
The term " b a n k " , a l t h o u g h d e f i n e d i n the 1 934 A c t , i s d e f i n e d more p r e c i s e l y
in the proposed r e g u l a t i o n .
O t h e r ter ms w h i c h ha ve, o v e r t he p a s t f i v e
d e c a d e s , a c h i e v e d "common u s a g e " s t a t u s i n m a r g i n r e g u l a t i o n p a r l a n c e have
been i n c o r p o r a t e d i n t o the r e g u l a t i o n and a r e , t h e r e f o r e , d e f i n e d i n t h i s
section.
Some d e f i n i t i o n s a r e s c a t t e r e d t h r o u g h o u t t h e c u r r e n t r e g u l a t i o n .
A l l s u c h d e f i n i t i o n s have been b r o u g h t w i t h i n a s i n g l e d e f i n i t i o n a l s e c t i o n .
3.

Ge n e ra l

Requirements

T h i s s e c t i o n c o n t a i n s the g e n e r a l r u l e s w h i c h b a n k s must f o l l o w
when e x t e n d i n g , m a i n t a i n i n g o r a r r a n g i n g c r e d i t on t h e c o l l a t e r a l o f m a r g i n
securities.
I t p l a c e s l i m i t s on t h e amount o f c r e d i t b a n k s c a n e x t e n d
when t he p u r p o s e i s t o p u r c h a s e o r c a r r y s e c u r i t i e s and t h e l o a n i s s e c u r e d
by m a r g i n s e c u r i t i e s .
The " g e n e r a l r e q u i r e m e n t s " s e c t i o n a l s o c o n t a i n s the " s i n g l e c r e d i t "
r u l e , w h i c h d i r e c t s b a n k s t o a g g r e g a t e the amount o f p u r p o s e c r e d i t e x t e n d e d
to a s i n g l e c u s t o m e r i n o r d e r t o p r e v e n t e v a s i o n o f the r u l e .
This se c tio n
a l s o s p e c i f i c a l l y p e r m i t s t h e use o f o t h e r c o l l a t e r a l w i t h m a r g i n s e c u r i t i e s
to s u p p o r t a p u r p o s e c r e d i t .
Under the p r e s e n t r u l e , as w r i t t e n , t h e r e i s
some a m b i g u i t y as t o w h e t h e r s u c h " mi x ed c o l l a t e r a l " l o a n s a r e p e r m i s s i b l e .
T h i s s e c t i o n a l s o r e q u i r e s b ank s who e x t e n d c r e d i t on m a r g i n s e c u ­
r i t i e s to o b t a i n a Form F„R. U ° l , , w h i c h r e q u i r e s a b o r r o w e r t o s t a t e t h e p u r ­
pos e and amount o f a l o a n , and l i s t the m a r g i n s e c u r i t i e s u sed a s c o l l a t e r a l .
W i t h d r a w a l s and s u b s t i t u t i o n s o f c o l l a t e r a l f o r an e x i s t i n g l o a n «
a r e p e r m i t t e d by t h i s s e c t i o n ( 1 ) a s l o n g as s u c h a c t i o n would n ot r e s u l t i n
an i n c r e a s e i n the amount by w h i c h t he c r e d i t e x c e e d s the maximum l o a n v a l u e
o f the c o l l a t e r a l , or ( 2 ) a t any time t h a t the c o l l a t e r a l has l o a n v a l u e i n
e x c e s s o f t h a t r e q u i r e d by the r e g u l a t i o n .
In a d d i t i o n , w ith d ra w a ls of c o l ­
l a t e r a l w i l l be p e r m i t t e d to e n a b l e a c u s t o m e r t o p a r t i c i p a t e i n an e x c h a n g e
o f f e r , p r o v i d e d t he s e c u r i t i e s r e c e i v e d i n e x c h a ng e a r e s u b s t i t u t e d f o r the
s e c u r i t i e s w i t h d r a w n and t r e a t e d a s m a r g i n s e c u r i t i e s f o r a p e r i o d o f s i x t y
d a y s f o l l o w i n g the e x c h a n g e .
P r o v i s i o n s r e g a r d i n g e x t e n s i o n s and m a t u r i t i e s o f c r e d i t , t r a n s f e r s
o f c r e d i t , m i s t a k e s made i n good f a i t h , and a c t i o n w h i c h a bank may t a k e f o r
i t s own p r o t e c t i o n have b ee n c o n s o l i d a t e d i n t h i s s e c t i o n .
T he se p r o v i s i o n s
a r e s c a t t e r e d t h r o u g h o u t t he c u r r e n t r e g u l a t i o n .




4
4.

A g re eme nt s o f Non-Member Banks

T h i s i s a new s e c t i o n o f R e g u l a t i o n U.
S e c t i o n 8 o f the 1 934 A c t
( 15 U . S . C . § 7 8 h ) p r o h i b i t s b r o k e r s and d e a l e r s f r om b o r r o w i n g on r e g i s t e r e d
s e c u r i t i e s u n l e s s t h e y bor r ow f rom e i t h e r a member b ank or a nonmember b ank
t h a t has f i l e d an a g re e m e nt w i t h the B o a r d a g r e e i n g t o c o m p l y w i t h a l l l a w s
a p p l i c a b l e t o member ba nk s i n c o n n e c t i o n w i t h s e c u r i t i e s c r e d i t t r a nsac t i o n s 0
T h i s s t a t u t o r y r e q u i r e m e n t i s c u r r e n t l y embodied i n R e g u l a t i o n T ( 1 2 C . F . R .
§ 220.1 e t s e q . ) , w h i c h i s a p p l i c a b l e t o b r o k e r s and d e a l e r s .
However, i t
i s the nonmember bank w hi ch has the a f f i r m a t i v e d u t y t o f i l e s u c h a g r e e m e n t s
( F . R . T=1 and F . R . T - 2 ) w i t h the B o a r d .
I n t h e i n t e r e s t o f p r o v i d i n g nonmember
b a n k s w i t h more a d e q u a t e n o t i c e o f t h i s s t a t u t o r y r e q u i r e m e n t , t h i s s u b s e c t i o n
i s b e i n g added to R e g u l a t i o n Uo
5o

Special

P u r p o s e Loans t o B r o k e r s and D e a l e r s

S i n c e t h e i n c e p t i o n o f R e g u l a t i o n U s the B o a r d r e c o g n i z e d t h a t
b a n k s made c e r t a i n s p e c i a l i z e d l o a n s t o b r o k e r s and d e a l e r s w h i c h were e i t h e r
s h o r t - t e r m l o a n s to f a c i l i t a t e s e t t l e m e n t and c l e a r a n c e or l o a n s r e g u l a t e d
a t a n o t h e r l e v e l 0 T hes e l o a n s have a l w a y s been t r e a t e d d i f f e r e n t l y f rom
r e g u l a r margin lo a n s .
P r o v i s i o n i s made i n a s e p a r a t e s e c t i o n , t h e r e f o r e ,
by w h i c h b a n k s may g i v e a " g o o d f a i t h " v a l u a t i o n t o any c o l l a t e r a l f u r n i s h e d
by b r o k e r s and d e a l e r s who b o rr ow f o r a n y one o r more o f the t h i r t e e n
s p e c i a l i z e d p u r p o s e s l i s t e d i n t he r e g u l a t i o n , ,
S p e c ia l treatm ent o f such
l o a n s i s c o n d i t i o n e d upon r e c e i p t o f c e r t i f i e d s t a t e m e n t s f ro m the b r o k e r o r
d e a l e r a s t o t h e p u r p o s e o f t he l o a n .
C o mp ar ab le e x c e p t i o n s t o the g e n e r a l
c r e d i t l i m i t a t i o n s a r e i n t he c u r r e n t R e g u l a t i o n U, b u t the p r o p o s e d r u l e
c o n s o l i d a t e s a l l o f t h e s e e x c e p t i o n s i n t o one s e c t i o n and r emoves any l i m i t a ­
t i o n s on t h e t y p e o f c o l l a t e r a l s e c u r i n g the loans,,
The p r o v i s i o n s r e g a r d i n g c r e d i t e x t e n d e d t o b l o c k p o s i t i o n e r s , OTC
m a r k e t m a k e r s , and t h i r d m a r k e t maker s w i l l no l o n g e r r e f e r t o SEC Forms
X - 1 7 A - 1 2 ( 1 ) » X - 1 7 A - 1 6 ( 1 ) , and X - 1 7 A - 1 7 .
T h i s w i l l o b v i a t e the need f o r
f i l i n g t h e s e f or m s w i t h the SEC a s a p r e r e q u i s i t e t o e l i g i b i l i t y f o r s p e c i a l
credit.
I t i s the B o a r d ' s u n d e r s t a n d i n g t h a t t h e SEC i s p r e p a r i n g t o r e s c i n d
i t s r u l e s p u r s u a n t to w h i c h t h e s e for ms a r e r e q u i r e d .
6.

Exempted T r a n s a c t i o n s

T h i s s e c t i o n g r a n t s o u t r i g h t e x e m p t i o n s to n i n e s p e c i f i c k i n d s o f
n o n - b r o k e r - d e a l e r bank l o a n s .
A l l b u t one o f t h e s e e x e m p t i o n s a r e c o n t a i n e d
i n v a r i o u s s e c t i o n s o f the c u r r e n t r e g u l a t i o n .
The p r o p o s e d r u l e c o n s o l i d a t e s
the e x i s t i n g e x e m p t i o n s i n t o one s e c t i o n .
A new e x e m p t i o n i s p r o v i d e d f o r
l o a n s t o emp lo ye e s t o c k o w n e r s h i p p l a n s ( E S O P s ) q u a l i f i e d under s e c t i o n 401
o f t h e I n t e r n a l Revenue Code.
The p u r p o s e o f t h i s new e x e m p t i o n i s t o p r o v i d e
b a nk s w i t h an o p p o r t u n i t y t o g i v e t he same k i n d o f t r e a t m e n t f o r e mploy ee
l o a n s a s i s now p r o v i d e d f o r s i m i l a r c o r p o r a t e l e n d e r s r e f e r r e d t o as " p l a n
l e n d e r s " under R e g u l a t i o n G.
7.

L i s t o f OTC M a r g i n S e c u r i t i e s

T h i s s e c t i o n c o n t a i n s the c r i t e r i a f o r i n i t i a l and c o n t i n u e d i n c l u ­
s i o n on the B o a r d ' s L i s t o f OTC M a r g i n S e c u r i t i e s .
T h e s e c r i t e r i a were r e c e n t l y




- 5 amended to c o n f o r m more c l o s e l y w i t h the l i s t i n g
(47 Fed. Reg. 2 l , 7 5 6 ) ( M a y 20, 1 9 8 2 ) .
8.

requirem ents o f major exchanges

Su p p le m e n t

T h is f i n a l s e c t i o n a s s i g n s value to v a r i o u s types o f c o l l a t e r a l f o r
p u r p o s e s , o f the r e g u l a t i o n .
Three s p e c i f i c types of c o l l a t e r a l are g i v e n loan
value:
(1)
m a r g i n s e c u r i t i e s have a maximum l o a n v a l u e o f f i f t y p e r c e n t
o f t h e i r c u r r e n t market v a l u e ; (2)
a l l o t h e r c o l l a t e r a l , o t h e r t h a n p u ts ',
c a l l s o r c o m b i n a t i o n s t h e r e o f , a re a s s i g n e d a "good f a i t h " l o a n v a l u e ; and
( 3 ) p u t s , c a l l s and c o m b i n a t i o n s a r e g i v e n no l o a n v a l u e .
9.

Specific

Comment R eq u e st e d

The B o a r d i s s e e k i n g s p e c i f i c p u b l i c comment on the q u e s t i o n w h e t h e r
R e g u l a t i o n s G and U s h o u l d be c o m b i n e d t o f orm a new c o m p r e h e n s i v e r e g u l a t i o n
w i t h v a r i o u s s u b c h a p t e r s or w h e t h e r the two r e g u l a t i o n s s h o u l d be m a i n t a i n e d
s e p a r a t e l y i n t h e i r s i m p l i f i e d forms.

IN ITIAL

REGULATORY F L E X I B I L I T Y A N A L Y S I S :

The B o a r d o f G o v e r n o r s o f the F e d e r a l R e s e r v e S y s t e m i s r e q u e s t i n g
comment on a p r o p o s a l t o c o m p l e t e l y r e v i s e i t s m a r g i n r e g u l a t i o n g o v e r n i n g
banks.
T hes e c h a n g e s a r e p a r t o f a p r o gr a m to s i m p l i f y a l l o f the B o a r d ' s
m a r g i n r e g u l a t i o n s , g e n e r a l l y , and to r e d u c e s p e c i f i c a d m i n i s t r a t i v e and
r e g u l a t o r y b u r d e n s i m po sed upon l e n d e r s .
The s i m p l i f i c a t i o n o f R e g u l a t i o n U
t h a t i s b e i n g p r o p o s e d a t t h i s time w i l l p r o v i d e b e n e f i t s i n t h e for m o f
o v e r a l l c l a r i t y and c o n s i s t e n c y o f t r e a t m e n t among m a r g i n l e n d e r s .
The
Board, t h e r e f o r e , c e r t i f i e s f o r the purposes o f 5 U.S.C. § 605(b) th a t the
c h a n g e s p r o p o s e d a re not e x p e c t e d to have any a d v e r s e i m p a c t on a s u b s t a n t i a l
n unber o f s m a l l b u s i n e s s e s .
A c c o r d i n g l y , p u r s u a n t to s e c t i o n s 3, 7, 8 and 23 o f the S e c u r i t i e s
E x c h a n g e A c t o f 1 9 3 4 , a s amended (15 U . S . C . § § 78c , 7 8 g , 78h and 78w) the
B oa rd p r o p o s e s to c o m p l e t e l y r e v i s e R e g u l a t i o n U t o r e a d as f o l l o w s :




REGULATION U
(12 CFR F a r t 221)

CRE DI T EXTENDED BY BANKS FOR THE PURPOSE OF PURCHASING OR CARRYING MARGIN S E C U R I T I E S

Sec.
221. 1

.. o o o .. o o o o o . c o . oo . o. A u t h o r i t y ,

P u r p o s e and Scope

2 2 1 . 2 . o.. o. c o o . . . o .. oo. o o . D e f i n i t i o n s
2 2 1 . 3 oooooooooooooc oc ooooo GeHer a1 Req ui re ni en ts
2 2 1 . 4 o . o . . . o . c . o. o. . o o o o o . Agr e eme nts o f Nonmember B ank s
2 2 1 . 5 0 . 000 . 00. 00 0 . 0 0 0 0 0 . 0 . S p e c i a l p u r p o s e l o a n s to b r o k e r s
and d e a l e r s
2 2 1 . 6 o o o o . o . o o o o . o o o o o o o o o Exempted T r a n s a c t i o n s
221.7

o o o o o o o . o . o . o o . o o o o o c R e q u i r e m e n t s f o r t he L i s t o f
OTC M a r g i n S e c u r i t i e s

2 2 1 . 8 0 . 00000 . 00. 0000000000 Supplement

Authority:

§ § 3 S 7 S 8 and 23 o f the S e c u r i t i e s E x c h a n g e A c t o f 1 9 3 4 s as

amended (15 U . S . C . § § 7 8 c s 7 8 g 3 78h and 78w).




Section 221.1 ~

Authority, Purpose and Scope

(a) Authority and Furposeo Regulation U ( " t h i s p a rt"), i s issued
by the Board of Governors of the Federal Reserve System ("the Board") pursuant
to the S e c u r itie s Exchange Act of 1934 ("the Act") (15 U.S.C. § 78a, et sep.)
It s p rincip al purpose i s to regulate banks that extend or maintain credit
for the purpose of purchasing or carrying s e c u r itie s.
(b) Scope. This part imposes credit r e s t r i c t i o n s upon "banks",
as that term i s defined in section 221.2(b) of t h is part, that extend cred it
for the purpose of purchasing or carrying margin s e c u r it ie s i f the cred it is
secured d ir e c t ly or in d ire c tly by margin se c u r itie s. Banks extending such
credit may not extend more than the maximum loan value of the c o lla te ra l
securing the cred it. The maximum loan value of a margin security, set by the
Board, can be found in the Supplement to Regulation U (12 CFR I 221.8) and
is stated in terms of a percentage o f the current market value of the
c o lla t e r a l. A ll other c o lla te ra l has "good fa ith " loan value, which is
defined in section 221.2(f) o f t h is part.
Section 221.2 — D e fin itio n s
The terms used in t h i s - p a r t have the meanings given them in sec­
tion 3(a) o f the Act (15 U.S.C. I 78c( a ) ) or as defined in th is section.
(a) “A f f i l i a t e " (1) a bank holding company of which a bank i s
a su b sid iary within the meaning of the Bank Holding Company Act of 1956,
as amended, (12 U.S.C. § 1841(d)); (2) any other su b sid ia ry of such bank hoi din
company; or (3) any other corporation, business tru st, association, or other
sim ila r organization that is an a f f i l i a t e as defined in section 2(b) of
the Banking Act of 1933 (12 U.S.C. I 221a).
(b) "Bank" has the meaning given to i t in section 3(a)(6)
of the Act (15 U.S.C. § 78c(a)(6)) and includes a su b sid iary of a bank,
a corporation organized under § 25(a) of the Federal Reserve Act
(12 U.S.C. I 611) and an agency or branch of a foreign bank located within
the United States. "Bank" does not include a savings and loan association,
a c re d it union, any lending in s t it u t io n that i s an instrum entality or agency
of the United States, or any member of a national s e c u r itie s exchange.
' (c) " Carrying c r e d it " is c red it that enables a customer to maintain a p o sitio n in a margin se c u rity or reduce or r e tire indebtedness o r i g i ­
n a lly incurred to purchase a se curity that is currently a margin security.




=

2

=

.(d) " Current market value" means: (1) For a s e c u r it y , the c l o s in g
sa le price of the se c u rity on the preceding business day, as shown by any
re g u la rly published reporting or quotation se rvice*
I f the c r e d it is used
to finance the purchase of the s e c u r ity , the bank may use the s e c u r i t y 's
total c o st of purchase* Computation of total c o st may include any commissions
charged*
I f there i s no c lo s in g sale price, the bank may use any reasonable
estimate of the market value of the se c u rity as of the c lo se of business on
the preceding business day*
(2)
Any other c o lla t e r a l sh all be valued by any reasonable method
in accordance with generally accepted accounting p r in c ip l e s and sound bank­
ing p ractices*
(e) " Customer" includes any person or group of persons acting
j o i n t l y , to or fo r whom a bank i s extending or maintaining c re d it*
(f) " Good f a i t h " (1) with respect to the acceptance of or notice
or c e r t i f i c a t i o n from or on behalf of a customer that the bank or i t s duly
authorized representative i s a l e r t to the circumstances surrounding the
c r e d it , and i f in possession of information that would cause a prudent person
not to accept the statement or notice without in q u ir y , in v e stig a te s and is
s a t is f i e d that the statement or notice i s tr u th fu l;
(2) with respect to the loan value of c o l l a t e r a l means that
amount which a bank, e x e rc isin g sound banking judgment, would lend on part i c u l a r c o l l a t e r a l , without regard to other asse ts of the customer or other
c o lla t e r a l held in connection with separate tra n sa c tio n s* Good f a it h
loan value may not exceed 100 per cent of the current market value of the
col la t e r a l *
(g) " In d ir e c t ly secured" includes any arrangement with the customer
under which the customer's r ig h t or a b i l i t y t o . s e l l , pledge, or otherwise
dispose of margin se c u rity owned by the customer i s in any way re stric te d as
long as the c r e d i t remains outstanding or under which the exercise of such
r ig h t is or may be cause for a c ce leratio n of the maturity of the c r e d it *
The foregoing sh a ll not apply:
(1) i f , follow ing a p p lic a tio n of the proceeds of the c r e d it , not
more than twenty-five per cent of the value of the assets subject to the
arrangement, as determined by any reasonable method, c o n s is t s of margin
securi t i e s ;
(2) to a lending arrangement that permits acce leration of the
maturity of the c r e d it as a r e s u lt of a default under, or the renegotiation
of the terms o f, another c r e d it to the same customer by another lender that
i s not an a f f i l i a t e of the bank;
(3) i f the margin s e c u r it y i s held by the bank only in the capac­
i t y of cu stod ian , d epositary, or tru stee , or under s im ila r circ w n stan c e s; or
(4) i f the bank in good f a it h has not r e lie d upon the margin secu­
r i t y as c o lla t e r a l in the extension or maintenance of the p a r t ic u la r c r e d it *




S '

v

- 3 (h)
" M a r g i n s e c u r i t y " ( 1 ) a n y e q u i t y s e c u r i t y r e g i s t e r e d on a
n a t i o n a l s e c u r i t i e s e x c h a n g e o r h a v i n g u n l i s t e d t r a d i n g p r i v i l e g e s ( 2 ) any
OTC m a r g i n s e c u r i t y ; ( 3) a n y d e b t s e c u r i t y w h i c h i s c o n v e r t i b l e i n t o a m a r g i n
s e c u r i t y , o r c a r r y i n g a w a r r a n t o r r i g h t t o s u b s c r i b e to o r p u r c h a s e a m a r g i n
s e c u r i t y ; ( 4 ) a n y w a r r a n t o r r i g h t to s u b s c r i b e t o or p u r c h a s e a marg-in sec ur i t y ; ( 5 ) any s e c u r i t y i s s u e d by an i n v e s t m e n t c o mp an y , o t h e r t h a n a company
l i c e n s e d u nder t h e Small B u s i n e s s I n v e s t m e n t Company A c t , as amended
(15 U . S . C . § 6 6 1 ) , r e g i s t e r e d under, s e c t i o n 8 o f t he I n v e s t m e n t Company
A c t o f 1940 (1 5 U . S . C , § 8 0 a - 8 ) .
(i )
" Maximum 1 oan v a l ue"
i s the p e r c e n t a g e o f c u r r e n t market
v a l u e a s s i g n e d by the B oa rd u n d e r s e c t i o n 2 2 1 . 8 o f t h i s p a r t t o s p e c i f i e d
t y p e s o f c o l 1a t e r a l .
(j)
" PTC m a r g i n s e c u r i t y " i s a n y e q u i t y s e c u r i t y not t r a d e d on a
n a t i o n a l s e c u r i t i e s e xc ha ng e t h a t t he B oa r d has d e t e r m i n e d has the d e g r e e
o f n a t i o n a l i n v e s t o r i n t e r e s t , the d e p t h and b r e a d t h o f m a r k e t , the a v a i l a b i l i t y o f i n f o r m a t i o n r e s p e c t i n g t h e s e c u r i t y and i t s i s s u e r , and t he c h a r °
a c t e r and permanence o f the i s s u e r t o w a r r a n t b e i n g t r e a t e d l i k e an e q u i t y
s e c u r i t y t r a d e d on a n a t i o n a l s e c u r i t i e s e x c h a n g e .
The B oa rd w i l l f rom
time t o ti me p u b l i s h a l i s t o f t he OTC m a r g i n s e c u r i t i e s t h a t i t has
d e t e r m i n e d meet t he c r i t e r i a s e t f o r t h i n s e c t i o n 2 2 1 . 7 o f t h i s p a r t .
(k)
" Purpose c r e d i t " i s any c r e d i t that i s f o r the purpose,
whether immediate, i n c i d e n t a l , o r u lt i m a t e , o f p u r c h a s i n g o r c a r r y i n g
m argin s e c u r it ie s . ,

Section

221.3--General

Requirements

(a)
E x t e n d i n g , m a i n t a i n i n g , and a r r a n g i n g c r e d i t .
( 1)
c redi t .
No b ank s h a l l e x t e n d any p u r p o s e c r e d i t , s e c u r e d d i r e c t l y o r
i n d i r e c t l y by m a r g i n s e c u r i t i e s , i n a n amount t h a t e x c e e d s the maximum l o a n
va lu e o f the c o l l a t e r a l s e c u r i n g the c r e d i t .
The maximum l o a n v a l u e o f a
m a r g i n s e c u r i t y ( s e t f o r t h i n s e c t i o n 2 2 1 . 8 o f t h i s p a r t ) i s a s s i g n e d by t he
B o a r d i n ter ms o f a p e r c e n t a g e o f t h e c u r r e n t m a r k e t v a l u e o f the m a r g i n
security.
A l l o t h e r c o l l a t e r a l has " g o od f a i t h " l o a n v a l u e , as d e f i n e d i n
se ction 2 21.2(f) of th is part.

Extending

(2)
Mai n t a i ni ng c r e d i t .
A bank may m a i n t a i n a ny c r e d i t t h a t i t
i n i t i a l l y extended without v i o l a t i n g t h i s p a r t , r e g a r d l e s s o f :
(i) r e d x t io n
i n t h e c u s t o m e r ' s e q u i t y r e s u l t i n g f r om c h a n g e i n m a rk e t p r i c e s ; ( i i ) c h a n g e
i n the m a r g i n r e q u i r e m e n t s p r e s c r i b e d by t h i s p a r t ; o r ( i i i ) c h a n g e i n the
s t a t u s o f the s e c u r i t y ( f r o m n o n m ar gi n t o m a r g i n ) s e c u r i n g an e x i s t i n g p u r p o s e
c r e d i t.
(3)
Arranging c r e d it .
No bank may a r r a n g e f o r t h e e x t e n s i o n or
m a i n t e n a n c e o f any c r e d i t f o r t h e p u r p o s e o f p u r c h a s i n g o r c a r r y i n g any
m a r g i n s e c u r i t y , e x c e p t upon t h e same terms and c o n d i t i o n s u nde r w h i c h the bank
i t s e l f may e x t e n d o r m a i n t a i n s u c h c r e d i t u n de r t h e p r o v i s i o n s o f t h i s p a r t .
(b)
P u r p o se s t a t e m e n t .
( 1 ) W h er ev er a b ank e x t e n d s c r e d i t
s e c u r e d d i r e c t l y o r i n d i r e c t l y by m a r g i n s e c u r i t y , t h e bank s h a l l r e q u i r e i t s




4

c u s t o m e r t o e x e c u t e Form F . R . U-l (0MB N o . 7 100-011 5) s w h i c h s h a l l be s i g n e d
and a c c e p t e d by a d u l y a u t h o r i z e d o f f i c e r of the b ank a c t i n g i n good f a i t h .
(2)
I f a bank e x t e n d s s u c h c r e d i t u nde r a r e v o l v i n g c r e d i t
a g r e e m e n t . Form F . R . U-l need not be e x e c u t e d e a c h time a d i s b u r s e m e n t i s
made u n d e r the a gr eem ent i f :

is

(i)
origina lly

Form F . R . U- l
established;

is

e x e c u t e d a t the time the c r e d i t

arrangement

(ii)
the c u s t o m e r a t t h a t time s t a t e s t h a t the p u r p o s e o f any
e x t e n s i o n u n d e r the agr eement i s t o p u r c h a s e o r c a r r y m a r g i n s e c u r i t i e s ;
and
(iii)
e i t h e r the c o l l a t e r a l i s s u f f i c i e n t f o r a p u r p o s e c r e d i t
f o r the t o t a l amount c o v e r e d by the a g r e e m e n t , o r i s s u f f i c i e n t f o r the
amount o f c r e d i t a c t u a l l y d i s b u r s e d and a c u r r e n t l i s t o f c o l l a t e r a l i s
appended t o the e x e c u t e d Form F . R . U - l e ac h time c r e d i t i s d i s b u r s e d u nde r
the a g re e m e nt .
(c)
Si n g l e c r e d i t r u l e .
(1)
A bank t h a t has e x t e n d e d p u r p o s e
c r e d i t s e c u r e d by m a r g i n s e c u r i t i e s may not s u b s e q u e n t l y e x t e n d u n s e c u r e d
p u r p o s e c r e d i t t o the same c u s t o m e r u n l e s s the c o m b i n e d c r e d i t does n o t
e xc e ed the maximum l o a n v a l u e o f t h e s e c u r i t y s e c u r i n g t h e p r i o r c r e d i t .
(2)
I f a bank e x t e n d e d u n s e c u r e d p u r p o s e c r e d i t t o a c u s t o m e r
p r i o r t o the e x t e n s i o n o f p u r p o s e c r e d i t s e c u r e d by m a r g i n s e c u r i t y , the
c r e d i t s s h a l l be c o mb in ed and t r e a t e d a s a s i n g l e c r e d i t s o l e l y f o r the
p u r p o s e s o f t h e w i t h d r a w a l and s u o s t i t u t i o n p r o v i s i o n o f p a r a g r a p h ( e) o f
th is section.
(d)
M i x e d c o l l a t e r a l l o a n s . A p u r p o s e c r e d i t s e c u r e d i n p a r t by
m a r g i n s e c u r i t y , and i n p a r t by o t h e r c o l l a t e r a l s h a l l be t r e a t e d as two
s e p a r a t e l o a n s , one s e c u r e d by m a r g i n s e c u r i t y and one by a l l o t h e r c o l l a t e r a l
A bank may use a s i n g l e c r e d i t a g r e e m e n t , b ut i t s h a l l m a i n t a i n i t s r e c o r d s
s o t h a t e ac h p o r t i o n of the c r e d i t and i t s c o l l a t e r a l a r e i d e n t i f i e d f o r
the purpose o f e v id e n c in g com pliance w ith t h i s p a rt.
( e)
W i t h d r a w a l s and S u b s t i t u t i o n s ( 1 ) A bank may p e r m i t any
w i t h d r a w a l o r s u b s t i t u t i o n o f c a s h o r c o l l a t e r a l by t h e c u s t o m e r i f , a f t e r
the t r a n s a c t i o n , the w i t h d r a w a l o r s u b s t i t u t i o n wo ul d n o t :
( i ) c a u s e the
c r e d i t to e xc e ed the maximum l o a n v a l u e o f the c o l l a t e r a l ; o r ( i i ) i n c r e a s e
the amount by w h i c h the c r e d i t e x c e e d s the maximum l o a n v a l u e o f the c o l l a t e r a

collateral

(2)
F o r p u r p o s e s o f t h i s s e c t i o n , the maximum l o a n v a l u e o f the
on t h e day o f the w i t h d r a w a l o r s u b s t i t u t i o n s h a l l be used.

(f)
E xc ha ng e o f f e r s . To e n a b l e a c u s t o m e r t o p a r t i c i p a t e i n an
e x c h a n g e o f f e r t h a t i s made t o a l l h o l d e r s o f an i s s u e o f m a r g i n s e c u r i t i e s ,
a bank may p e r m i t s u b s t i t u t i o n o f t h e s e c u r i t i e s r e c e i v e d .
A nonmargin,
nonexempted s e c u r i t y a c q u i r e d i n e x c h a n g e f o r a m a r g i n s e c u r i t y s h a l l be




- 5 -

treated as i f I t i s a margin s e c u r i t y f o r a p e rio d o f 60 days f o llo w in g the
exchange*

(g) Renewals and e xte n sio n s of m a t u r it y o A renewal or exte nsio n
of m a tu rity o f a c r e d i t need not be consid e re d a new e x te n sio n o f c r e d i t i f
the amount o f the c r e d it i s in cre ase d o n ly by the a d d itio n of i n t e r e s t or
s e r v ic e c h arge s with respect to the c r e d it *
( h) T ra n sfe rs o f c r e d i t * (1) A t r a n s f e r of a c r e d i t between
customers o r banks s h a ll not be c o nsid e re d a new e x te n sio n o f c r e d i t i f :
( i ) the o r i g i n a l c r e d it was in c o nfo rm ity with t h i s p a rt; ( i i ) the t r a n s f e r
i s not made to evade t h i s p a r t ; ( i i i ) the amount of c r e d i t i s not in cre ase d ;
and ( i v ) the c o l l a t e r a l fo r the c r e d i t i s not changed*
(2) Any t r a n s f e r between customers at the same bank s h a ll be
accompanied by a statement by the t r a n s f e r o r customer d e s c r ib in g the
circum stances g i v i n g r is e to the t r a n s f e r and accepted in good f a i t h and
signed by an o f f i c e r of the bank as having been so accepted* The bank
s h a ll keep such statement w ith i t s records o f the tra n sfe re e account*
(3) When a t r a n s f e r i s made between b a n k s , the tr a n s f e r e e bank
s h a ll o b tain a copy o f the Form F *R e U-l o r i g i n a l l y f i l e d with the t r a n s f e r o r
bank and r e t a i n the copy with i t s records of the t r a n sfe r e e account*
(i)
M istakes i n good f a i t h . A mistake in good f a i t h i n c o n n e ction
with the e xte n sio n or maintenance of c r e d i t s h a l l not be a v i o l a t i o n of
t h i s p art*
(j)
A c tio n f o r ban k’s own p r o t e c t io n * Nothing in t h i s p a rt
s h a l l re q u ire a bank to waive o r forego any l i e n o r prevent a bank from
ta k in g any a c t io n that i t deems necessary in good f a i t h fo r i t s own
p ro t e c tio n .

221*4 — Agreements of Normember Banks
(a) Banks not members o f the Federal Reserve System s h a l l execute
s Form F*R* T-] o r F*R* T-2, p r i o r to extending any c r e d i t secured by any non­
exempt s e c u r i t y re g iste re d on a ra tio n a l s e c u r i t i e s exchange to persons sub­
je c t to R e g u la tio n T (12 CFR Part 220), as fo llo w s :
(1) Form F.R. T-l s h a ll be f i l e d by any nonmember bank that has
i t s p r in c ip a l place of b u sin e ss in the United States*
(2)

Form F.R. T-2 s h a l l be f i l e d by a l l other nonmember banks*

(b) Any nonmember bank may terminate i t s agreement i f i t o b tain s
the w r itte n consent of the Board*

S e c tio n 221*5

—

Special Purpose Loans to Brokers and s e a le r s

(a)
A member bank, and a nonmember ^ank that i s in compliance
with s e c t io n 221*4 o f t h i s p a rt may extend and m aintain purpose c r e d i t on a



6

good f a i t h l o a n v a l u e b a s i s to b r o k e r s and d e a l e r s w i t h o u t r e g a r d t o t he
l i m i t a t i o n s s e t f o r t h i n s e c t i o n 221=3 o f t h i s p a r t i f the c r e d i t i s f o r
any o f t h e s p e c i f i c p u r p o s e s s e t f o r t h i n p a r a g r a p h ( c ) o f t h i s s e c t i o n
and meets the c o n d i t i o n s s e t f o r t h t h e r e i n .
(b)
P r i o r to e x t e n d i n g any c r e d i t t o a b r o k e r o r d e a l e r p u r ­
s u a n t to t h i s s e c t i o n , the bank s h a l l i n good f a i t h o b t a i n and a c c e p t a
w r i t t e n n o t i c e o r c e r t i f i c a t i o n from the b o r r o w e r as t o t h e p u r p o s e s o f
the l o a n .
The w r i t t e n n o t i c e o r c e r t i f i c a t i o n s h a l l be e v i d e n c e o f c o n ­
tinued e l i g i b i l i t y f o r the s p e c ia l c r e d i t p r o v i s i o n s u n t i l the b ro k e r or
d e a l e r n o t i f i e s the bank t h a t i t i s no l o n g e r e l i g i b l e or the b ank has
i n f o r m a t i o n t h a t would c a u s e a r e a s o n a b l e p e r s o n to q u e s t i o n w h e t h e r the
p r o c e e d s o f t h e c r e d i t a r e b e i n g us ed f o r the p u r p o s e s p e c i f i e d .
( c ) The t y p e s o f c r e d i t t h a t may be e x t e n d e d and m a i n t a i n e d on
a good f a i t h l o a n v a l u e b a s i s a r e as f o l l o w s :
(1)
H y p o t h e c a t i o n l o a n s . C r e d i t s e c u r e d by h y p o t h e c a t e d c u s t o ­
mer s e c u r i t i e s t h a t , a c c o r d i n g to w r i t t e n n o t i c e r e c e i v e d by the bank
from the b r o k e r o r d e a l e r , a r e s e c u r i t i e s c a r r i e d f o r the a c c o u n t s o f c u s ­
tomers t h a t t he b r o k e r or d e a l e r i s p e r m i t t e d to h y p o t h e c a t e u nder S e c u r i t i e s
and E x c h a n ge C o m m i s s i o n ( " S E C " ) r u l e s .
(2)
T e mp or a ry a d v a n c e s i n p a y m e n t - a g a i n s t - d e l i v e r y t r a n s a c t i o n s .
C r e d i t e x t e n d e d t o f i n a n c e t h e p u r c h a s e o r s a l e o f s e c u r i t i e s f o r pr ompt
d e l i v e r y , i f t h e c r e d i t i s to be r e p a i d i n f u l l upon c o m p l e t i o n o f the
transac tion.
(3)
Loans f o r s e c u r i t i e s i n t r a n s i t or t r a n s f e r .
C r e d i t extended
to f in a n c e s e c u r i t i e s i n t r a n s i t o r surrendered f o r t r a n s f e r , i f the c r e d i t
i s to be r e p a i d upon c o m p l e t i o n o f the t r a n s a c t i o n .
( 4)
Intra-day lo a n s.
C r e d i t t h a t i s to be r e p a i d on t h e same
day i t i s e x t e n d e d f o r the p u r p o s e o f e n a b l i n g a b r o k e r or d e a l e r
to p ay f o r s e c u r i t i e s p u r c h a s e d f o r c u s t o m e r s .
(5)
A r b i t r a g e l o a n s . C r e d i t to f i n a n c e p r o p r i e t a r y or c u s t o m e r
bona f i d e a r b i t r a g e t r a n s a c t i o n s .
F o r t h e p u r p o s e o f t h i s s e c t i o n bona
f i d e a r b i t r a g e means:
~
’
(i)
p u r c h a s e or s a l e o f a s e c u r i t y i n one m a r k e t , t o g e t h e r
w i t h an o f f s e t t i n g s a l e o r p u r c h a s e o f t h e same s e c u r i t y i n a d i f f e r e n t
m a r k e t , at as n e a r l y the same time a s p r a c t i c a b l e , f o r t he p u r p o s e o f t a k ­
i n g a d v a n t a g e o f a d i f f e r e n c e i n p r i c e s i n the two m a r k e t s ; o r
(ii)
purchase of a s e c u r i t y that i s , without r e s t r i c t i o n other
t h a n t he payment o f money, e x c h a n g e a b l e o r c o n v e r t i b l e w i t h i n 90 c a l e n d a r
d a ys o f the p u r c h a s e i n t o a s e c o n d s e c u r i t y , t o g e t h e r w i t h an o f f - s e t t i n g
s a l e o f t h e s e c o n d s e c u r i t y , a t o r a b o u t t h e same t i m e , f o r t h e p u r p o s e o f
t a k i n g a d v a n t a g e o f a c o n c u r r e n t d i s p a r i t y i n the p r i c e o f the two s e c u r i t i e s .

se curitie s




(6)
D istribution loans.
to c u s t o m e r s .

C r e d i t t o f i n a n c e the d i s t r i b u t i o n o f




- 7 -

(7)
QdcUlot l o a n s .
C r e d i t to fin a n c e the o d d - l o t t r a n s a c t i o n
o f a p e r s o n r e g i s t e r e d as an o d d - l o t d e a l e r on a n a t i o n a l s e c u r i t i e s
exc hange,
(8)
Emergency l o a n s .
C r e d i t e x t e n d e d i n good f a i t h r e l i a n c e
upon a c e r t i f i c a t i o n from the b r o k e r o r d e a l e r t h a t i t i s e s s e n t i a l t o
meet eme rg en cy needs a r i s i n g fr om e x c e p t i o n a l c i r c u m s t a n c e s .
(9)
Capital c o n trib u tio n lo a n s ,
( i ) C r e d i t t h a t t he B oa rd
has exempted by o r d e r upon a f i n d i n g t h a t the e x e m p t i o n i s n e c e s s a r y or
a p p r o p r ia t e i n the p u b lic i n t e r e s t o r f o r the p r o t e c t i o n o f i n v e s t o r s
p r o v i d e d , the S e c u r i t i e s I n v e s t o r P r o t e c t i o n C o r p o r a t i o n c e r t i f i e s
t o t he B o a r d t h a t the e x e m p t i o n i s a p p r o p r i a t e ; o r
(ii)
c r e d i t to a c u s t o m e r f o r the p u r p o s e o f m a k i ng a s u b o r ­
dinated lo a n o r c a p i t a l c o n t r i b u t i o n to a b roker o r d e a l e r i n c o n f o r m it y
w i t h the S E C ' s net c a p i t a l r u l e s and the r u l e s o f the b r o k e r ' s o r d e a l e r ' s
Examining A u t h o r i t y , pro vid ed :
(A)
any r e d u c t i o n

t h a t the c u s t o m e r s h a l l r e d u c e the c r e d i t by t h e amount o f
i n t he l o a n o r c o n t r i b u t i o n t o t h e b r o k e r o r d e a l e r ; and

(B)
t he c r e d i t i s n o t us ed to p u r c h a s e s e c u r i t i e s
the b r o k e r o r d e a l e r i n a p u b l i c d i s t r i b u t i o n ,

i s s u e d by

(10)
Loa ns t o s p e c i a l i s t s .
C r e d i t e x t e n d e d t o a members o f a
n a t i o n a l s e c u r i t i e s e xc h a ng e who a r e r e g i s t e r e d and a c t i n g as s p e c i a l i s t s
on t h e e x c h a n g e f o r the p u r p o s e o f f i n a n c i n g the s p e c i a l i s t t r a n s a c t i o n s ,
p r o v i d e d t h e s p e c i a l i s t s ' e x c h a ng e r e q u i r e s , and s u b m i t s t o t he B o a r d ,
r e p o r t s s u i t a b l e f o r s u p p l y i n g c u r r e n t i n f o r m a t i o n r e g a r d i n g the s p e c i a l i s t ' s
u se o f c r e d i t .
(11)
PTC m a r k e t maker c r e d i t .
C r e d i t to a d e a l e r who has g i v e n
w r i t t e n n o t i c e t o the bank t h a t i t i s a " q u a l i f i e d OTC m a r k e t m ak er " i n an
OTC m a r g i n s e c u r i t y as d e f i n e d i n SEC R u l e 3 b - 8 ( 1 7 CFR § 2 4 0 . 3 b - 8 ) and
t h a t t he c r e d i t w i l l be used s o l e l y f o r t h e p u r p o s e o f f i n a n c i n g the m a r k e t
m aki ng a c t i v i t y ,
(12)
T h i r d m a r k e t maker l o a n s .
C r e d i t to a d e a l e r who has g i v e n
w r i t t e n n o t i c e t o the bank t h a t i t i s a " q u a l i f i e d t h i r d m a r k e t m a k e r , " as
d e f i n e d i n SEC R u l e 3b- 8 ( 1 7 CFR § 2 4 0 . 3 b - 8 ) and t h a t the c r e d i t w i l l be used
s o l e l y f o r t h e p u r p o s e o f f i n a n c i n g p o s i t i o n s i n s e c u r i t i e s as sir ned a s a
" q u a l i f i e d t h i r d m a rk e t m a k e r , "
(13)
Block p o s it io n e r c r e d i t .
C r e d i t t o a d e a l e r who has g i v e n
w r i t t e n n o t i c e t o the bank t h a t i t i s a " q u a l i f i e d b l o c k p o s i t i o n e r " f o r a
b l o c k of s e c u r i t i e s , as d e f i n e d i n SEC R u l e 3 b- 8 ( 1 7 CFR § 2 4 0 . 3 P - 8 ) and t h a t
c r e d i t w i l l be used t o f i n a n c e a p o s i t i o n i n t h a t b l o c k .

S e c t i o n 221,6

°°

Exempted T r a n s a c t i o n s

A b ank may e x t e n d and m a i n t a i n p u r p o s e c r e d i t
the p r o v i s i o n s o f t h i s p a r t i f such c r e d i t i s extended:

without regard

to

the

-

8 -

(a)

to any bank;

(b)

to any foreign banking in stitution;

(c)

outside the United States; or

(d) to an employee security ownership plan ("ESOP") qualified under
section 401 of the Internal Revenue Code (26 U.S.C. § 401)
(e) to any "plan lender" as defined in Regulation G (12 CFR Part
207) to finance such a plan, provided the bank has no recourse to any
securities purchased pursuant to the plan;
(f) to any customer, other than a broker or dealer, to temporarily
finance the purchase or sale of securities for prompt delivery, i f the credit
is to be repaid in the ordinary course of business upon completion of the
transaction;
(g) against securities in t r a n s i t , i f the credit is not extended
to enable the customer to pay for securities purchased in an account subject
to Regulation T (12 CFR Part 220); or
(h) to enable a customer to meet emergency expenses not reasonably
foreseeable The extension of credit shall be supported by a statement
executed by the customer and accepted in good faith and signed by an officer
of the bank as having been so accepted. For this purpose, such emergency
expenses shall include expenses arising from circumstances such as the
death or d i s a b i l it y of the customer, or some other change in circumstances
involving extreme hardship, not reasonably foreseeable at the time the
credit was extended. The opportunity to realize monetary gain or to avoid
loss i s not a "change in circumstances" for this purpose.
221.7 ~ REQUIREMENTS FOR THE LIST OF PTC MARGIN SECURITIES
(a)
Requirements for inclusion on the l i s t of PTC margin s e c u r i t i e s .
Except as provided in subsection (d) of this section, an OTC margin security
shall meet the requirements that:
(1)
The security is registered under section 12 of the Act
(15 U.S.C. § 781) s i s issued by an insurance company subject to section
12(g)(2)(G) (15 U.S.C. § 781(g)(2)(G)), is issued by a closed end investment
management company subject to registration pursuant to section 8 of the
Investment Company Act of 1940 (15 U.S.C. § 80a-8), is an American Depository
Receipt ("ADR") of a foreign issuer whose securities are registered under
section 12 of the Act, or i s a security of an issuer required to f i l e
reports under section 15(d) of the Act (15 U.S.C. § 78o(d));
. (2) Four or more dealers make a market in such a security and
regularly submit bona fide bids and offers to an automated quotations system
for their own accounts;




- 9 -

(3) There are 1,200 or more holders of record, as defined in SEC
Rule 12g5-l (17 CFR § 240.12g5-l), of the security who are not o f f i c e r s , direc­
tors or beneficial owners of ten percent or more of the secu rit y, or the average
daily trading volume of such a security as determined by the Board, i s a least
500 shares;
(4) The issuer or a predecessor in interest has been in existence
for at least three years;
(5)

The security has been publicly traded for at least six months;

(6) Daily quotations for both bid and asked prices for the security
are continuously available to the general public;
(7) There are 400,000 or more shares of such security outstanding
in addition to shares held benefically by o f fi c er s, directors or beneficial
owners of more than ten percent of the security;
(8) The minimum average bid price of such security, as determined by
the Board, i s at least five dollars per share; and
(9) The issuer had at least four million dollars of c a p i ta l , surplus,
and undivided prof its,
(b)
gin s e c u r i t i e s .

Requirements for continued inclusion on the l i s t of PTC mar°

Except as provided in subsection (d) of this section, an 0TC margin
security shall meet the following requirements:
(1) The security i s registered or issued under the conditions specified
in paragraph (a)(1) of this section;
(2) Three or more dealers make a market in such security and regularly
submit bona fide bids and offers to an automated quotations system for
their own accounts;
(3) There continue to be 800 or more holders of record, as defined
in SEC Rule 12g5-l (17 CFR § 240.12g5-l), of the security who are not o f fi c e r s ,
directors, or beneficial owners of ten percent or more of the security, or the
average daily trading volume of such security, as determined by the Board, is
at least 300 shares;
(4) Daily quotations for both bid and asked prices for the security
are continuously available to the general public;
(5) There are 300,000 or more shares of such security outstanding in
addition to shares held beneficially by o f f i c e r s , directors, or beneficial
owners of more than ten percent of the security;
(6) The minimum average bid price of such security, as determined
by the Board, is at least two dollars per share; and




>

-

10

-

(7)
The issuer has at least two million dollars of c a p i t a l , sur­
plus, and undivided profits*
(c) Removal from the l i s t of PTC margin s e c u r i t i e s * The Board
shall from time -to time remove from the OTC margin security l i s t se c u ri t ie s
that cease to:
(1)

ex ist or of which the issuer ceases to e x i s t , or

(2)

meet substantially the provisions of paragraph (b) of this

sec ti on*
(d) Piscretionary authority of Board. The foregoing notwithstandi ng, the Board may omit or remove any security that is not traded on a national
sec urities exchange from or add any such security to such l i s t of OTC margin
s e c u r i t i e s , i f in the judgment of the Board, sue h action is necessary or appro­
priate in the public interest*
(e) Unlawful Representations* I t shall be unlawful for any bank
to make, or cause to be made, any representation to the effect that the
inclusion of a security on the l i s t of OTC margin se cu rit ie s 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 simil ar communica ti on contai ni ng a reference to the
Board in connection with the l i s t or se c u ri t ie s on that l i s t shall be an unlaw­
ful representation*
Section 221*8

Supplement

(a) Maximun loan value of margin s e c u r i t i e s . The maximum loan
value of any margin security is f i f t y per cent of i t s current market value*
(b) Maximum loan value of nonmargin secu rit ies and all other c o l l a t e r a l *
The maximum loan value of nonmargin se c u r i t ie s and a i l other c o l l a t e r a l except
puts, c a l l s , or combinations thereof is their good faith loan value.
(c) Maximum loan value of options-.
thereof have no loan value*

Puts, c a l l s , and combinations

By order of the Board of .Governors of the Federal Reserve System,
February 23, 1 983*

(signed) William W* Wiles
Secretary of the Board
[SEAL]