BOARD OF GOVERNORS

OF THE

FEDERAL RESERVE SYSTEM

WASHINGTON, D.C. 20551

DIVISION OF BANKING

SUPERVISION AND

REGULATION

November 5, 2007

Leonard J. Essig

Lewis, Rice & Fingersh, L.C.

500 N. Broadway, Suite 2000

St. Louis, Missouri 63102-2147

Dear Mr. Essig:

This is in response to your letter, on behalf of your client, Stifel Financial Corp.

("Stifel Financial"), dated September 18, 2007 (the "request"), regarding the regulatory

capital treatment of the Regulation T margin debits ("Reg. T margin loans") of the

registered U.S. broker-dealer subsidiaries of Stifel Financial: Stifel, Nicolaus &

Company, Incorporated and Century Securities Associates, Inc. You ask that Stifel

Financial be granted an exception from the Board's risk-based capital adequacy

guidelines for bank holding companies (the "guidelines") (12 CFR part 225, App. A),

which require a 100 percent risk weight for Reg. T margin loans. Specifically, you ask

for an exception from the guidelines to permit Stifel Financial to assign a 10 percent risk

weight to its Reg. T margin loans, consistent with the capital treatment that the Board

approved for Citigroup Inc. in a letter dated June 15,2007.

In the request, you contend that the risk-based capital requirement for such loans

is excessive and represent that Stifel Financial has a de minimis internal economic capital

charge for credit risk on Reg. T margin loans.

A margin account at a broker-dealer registered with the Securities and Exchange

Commission ("SEC") is a leveraged account, through which securities can be purchased,

sold short, carried, or traded using a loan from the broker-dealer and a deposit of cash or

securities by the customer. The amount ofleverage available to a customer is limited by

the Board's Regulation T (12 CFR part 220), the margin-maintenance rules of the

Financial Industry Regulatory Authority (NYSE Rule 431 and NASD Rule 2520), and

the lender's internal margin-maintenance requirements. The request also explains that

Stifel Financial generally applies internal margin-maintenance requirements that exceed

those in Regulation T, NYSE Rule 431, and NASD Rule 2520.

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As noted above, Reg. T margin loans held by U.S. bank holding companies

("BRCs") currently are assigned to the 100 percent risk weight category under the

guidelines, resulting in a risk-based capital requirement of 8 percent. In contrast, other

domestic and foreign firms, including foreign banking organizations that own U.S.

broker-dealers, as well as U.S. broker-dealers and consolidated supervised entities

("CSEs") regulated by the SEC, are currently required to hold either no or de minimis

regulatory capital against Reg. T margin loans.

After carefully considering the request, and subject to the conditions listed below,

the Board has approved an exception to the guidelines that permits Stifel Financial to

treat Reg. T margin 10ans in a manner that differs from that set forth in the guidelines.

Specifically, the Board will allow Stifel Financial to apply a 10 percent risk weight to its

Reg. T margin loans. The Board has approved this exception under the reservation-ofauthority provision contained in the guidelines (12 CFR part 225, App. A, § IILA). This

provision permits the Board, on a case-by-case basis, to determine the appropriate risk

weight for any asset or off-balance-sheet item that imposes risks on a BRC that are

incommensurate with the risk weight otherwise specified in the guidelines.

To qualify for the capital treatment outlined above, Stifel Financial's Reg. T margin

loans must meet the following conditions:

1. The securities collateral for the Reg. T margin loans is liquid and readily

marketable;

2. The Reg. T margin loans and associated collateral are marked to market each

business day;

3. The Reg. T margin loans are subject to initial margin requirements under

Regulation T and daily margin-maint~nancerequirements under NYSE Rule 431

or NASD Rule 2520; and

4. Stifel Financial has a reasonable basis for concluding that it would be able to

liquidate the collateral for the Reg. T margin loans without undue delay, even in

the case of bankruptcy or insolvency of the borrower.

The Board believes that the capital treatment approved above for Stifel Financial's

Reg. T margin loans provides a more risk-sensitive treatment for these transactions than

their treatment under the guidelines. The combination of initial margin requirements

under Regulation T, ongoing margin-maintenance requirements under NYSE Rule 431 or

NASD Rule 2520, generally higher ongoing margin-maintenance requirements under

Stifel Financial's internal policies, Stifel Financial's daily mark-to-market and margin-call

policies, the high liquidity of the collateral, Stifel Financial's typical right to terminate the

loan at any time, and Stifel Financial's general protection from the automatic stay in

bankruptcy makes these loans a low-credit-risk product that warrants a 10 percent risk

weight.

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This exception accommodates Stifel Financial's broker-dealer activities in a risksensitive manner, helps remove an artificial and anachronistic constraint on certain of

Stifel Financial's securities-based lending operations, and brings Stifel Financial's riskbased capital requirement for Reg. T margin loans more in accord with the capital

requirement for such loans that the SEC imposes on broker-dealers and CSEs. Stifel

Financial should be aware, however, that the Board may in the future impose a regulatory

capital treatment for Reg. T margin loans that differs from the treatment described in the

request, depending in part on the outcome of the current efforts to implement the Basel II

Capital Accord in the United States.

This determination is conditioned on Stifel Financial's compliance with all the

commitments and representations it has made to the Board in connection with the request.

These commitments and representations are deemed to be conditions imposed in writing

by the Board in connection with granting the request and, as such, may be enforced in

proceedings under applicable law. Further, this determination is based on the specific

facts and circumstances described in the request and in your discussions with Federal

Reserve staff. Any material change in those facts and circumstances or any failure by

Stifel Financial to observe any of its commitments or representations may result in a

different view or in a revocation of the regulatory capital treatment permitted under this

determination.

The capital treatment set forth in this letter for Reg. T margin loans will be made

available to similarly situated institutions that request and receive Board approval for

such treatment.

If you have any questions with regard to this letter, please direct them to Norah

Barger, Associate Director, at (202) 452-2402, or Juan C. Climent, Supervisory Financial

Analyst, at (202) 872-7526, in the Division of Banking Supervision and Regulation; or

Mark E. Van Der Weide, Senior Counsel, at (202) 452-2263, or April Snyder, Senior

Attorney, at (202) 452-3099, in the Legal Diyision.

Sincerely,

~T~le V--

Director

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