This section of the FEDERAL REGISTER

contains notices to the public of the proposed

issuance of rules and regulations. The

purpose of these notices is to give interested

persons an opportunity to participate in the

rule making prior to the adoption of the final

rules.

Proposed Rules Federal Register

63660

Vol. 60, No. 238

Tuesday, December 12, 1995

1 Customers purchase securities at a brokerdealer on either a cash or margin basis, using either

a cash or margin account. When a customer

purchases a security on a cash basis, he either

deposits the full purchase price in the cash account

or asks to have the security sent to his agent

(usually a custodial bank) against full payment of

the purchase price. This latter method is described

in section 220.2(e) of Regulation T as a delivery

against payment, payment against delivery, or

C.O.D. transaction and is generally referred to by

the industry as a DVP transaction.

2 See, e.g., SEC v. Hansen, 726 F. Supp. 74

(S.D.N.Y. 1989).

3Applying the section on revolving-credit

agreements will ensure that banks financing such

purchases establish credit limits for their

customers, including limits on intraday trading.

FEDERAL RESERVE SYSTEM

12 CFR Part 221

[Regulation U; Docket No. R–0905]

RIN 7100–AB65

Securities Credit Transactions; Review

of Regulation U, ‘‘Credit by Banks for

the Purpose of Purchasing or Carrying

Margin Stocks’’

AGENCY: Board of Governors of the

Federal Reserve System.

ACTION: Proposed rule.

SUMMARY: The Board is proposing

amendments to Regulation U, the

regulation that covers extensions of

credit by banks that are secured in

whole or in part by those publicly

traded securities defined as ‘‘margin

stock’’. These amendments are being

proposed as part of the Board’s program

to periodically review its regulations as

well as to fulfill the requirements of

section 303 of the Riegle Community

Redevelopment and Regulatory

Improvement Act of 1994. Two of the

most important effects of the proposed

amendments would be to provide:

Explicit guidance for banks financing

margin stock purchased by their

customers through a broker-dealer on a

delivery-versus-payment (or C.O.D.)

basis; and greater flexibility for

withdrawals and substitutions of

collateral when margin stock is pledged

along with cash equivalents and other

securities by treating the entire credit as

a single loan. In addition, amendments

would conform Regulation U to changes

recently proposed for Regulation T

regarding increased loan value for

exchange-traded options and money

market mutual funds. Technical

amendments would update the

regulation to reflect a 1991 Board

interpretation allowing lead banks to

apply Regulation U to syndicated loans

independent of other credit extended by

syndicate banks and restore language

indicating that the exemption for

temporary financing of customer

securities transactions does not apply to

securities purchased at a broker-dealer.

DATES: Comments should be received on

or before February 15, 1996.

ADDRESSES: Comments should refer to

Docket No. R–0905, and may be mailed

to William W. Wiles, Secretary, Board of

Governors of the Federal Reserve

System, 20th Street and Constitution

Avenue, NW., Washington, DC 20551.

Comments also may be delivered to

Room B–222 of the Eccles Building

between 8:45 a.m. and 5:15 p.m.

weekdays, or to the guard station in the

Eccles Building courtyard on 20th

Street, NW. (between Constitution

Avenue and C Street, NW.) at any time.

Comments received will be available for

inspection in Room MP–500 of the

Martin Building between 9 a.m. and 5

p.m. weekdays, except as provided in 12

CFR 261.8 of the Board’s rules regarding

availability of information.

FOR FURTHER INFORMATION CONTACT:

Scott Holz, Senior Attorney, or Angela

Desmond, Senior Counsel, Division of

Banking Supervision and Regulation,

(202) 452–2781. For users of

Telecommunications Device for the Deaf

(TDD), please contact Dorothea

Thompson, (202) 452–3544.

SUPPLEMENTARY INFORMATION: The Board

is proposing amendments to Regulation

U (12 CFR part 221), ‘‘Credit by Banks

for the Purpose of Purchasing or

Carrying Margin Stocks,’’ as part of its

program to periodically review its

regulations and to satisfy requirements

under section 303 of the Riegel

Community Redevelopment and

Regulatory Improvement Act of 1994.

The proposed amendments include

coverage of bank financing of securities

purchased by customers through a

broker-dealer on a cash basis and

treatment of mixed-collateral loans

(loans secured in part by margin stock

and in part by other collateral) as a

single loan if all collateral consists of

securities and cash equivalents.

Conforming amendments are proposed

in light of the recently published

amendments to Regulation T (12 CFR

part 220), ‘‘Credit by Brokers and

Dealers’’ (see 60 FR 33763; June 29,

1995) that would increase the loan value

of exchange-traded options and money

market mutual funds. Two technical

amendments are discussed below.

In addition to the amendments

described in this proposal, comment is

invited on all areas of Regulation U,

including (but not limited to) whether

the regulation can be eliminated,

simplified, or the burdens imposed

thereunder eased.

1. Financing of Securities Purchased on

a DVP Basis

Banks often act as custodians for their

customers’ securities. These securities

are generally purchased via a registered

broker-dealer in a cash account and sent

to the bank on a delivery-versuspayment (DVP) basis.1 Banks

traditionally have not accepted

securities in a DVP transaction if the

customer does not have the funds to

make full payment on hand at the bank.

Accepting securities without having the

customer’s full payment on hand

involves a credit relationship similar to

a customer using a margin account at a

broker-dealer.

In the past few years, System

examiners and staff of the Securities and

Exchange Commission have alleged that

certain banks were financing these DVP

purchases without documentation and

in excess of margin requirements

contained in Regulation U. The banks

were found in violation of Regulation U

or settled charges without admitting or

denying their culpability.2

Provided customers have sufficient

collateral, Board staff believes financing

of securities purchases can be

accommodated within the existing

provision for revolving-credit

agreements found in § 221.3(c) of

Regulation U, with the addition of some

clarifying language.3 However, it should

be noted that this will not result in

exactly equal regulation between banks

and broker-dealers because the

combination of Board, SEC, and SRO

rules applicable to broker-dealers in this

area cannot be recreated in Regulation
Federal Register / Vol. 60, No. 238 / Tuesday, December 12, 1995 / Proposed Rules 63661

4Although the Board does not have a

maintenance margin in its regulations, brokerdealers are required to monitor extensions of

securities credit under SRO rules, call for additional

collateral when market values fall below a specified

percentage, and sell some of the customer’s

securities if the additional collateral is not received.

In addition, SRO rules require customers opening

margin accounts to deposit a minimum amount of

equity in cash or securities (generally $2000).

5The ability of a bank to use a single credit

agreement was a reform instituted in 1983. Before

that time, separate credit agreements were required

for the stock collateral and the nonstock collateral.

6Before 1983, Regulation U covered loans secured

by any stock. A ‘‘mixed-collateral’’ loan was one

secured in part by stock and in part by other

collateral. Now that the regulation’s scope has been

reduced to cover only loans secured by margin

stock, a ‘‘mixed-collateral’’ loan is one secured in

part by margin stock and in part by other collateral.

‘‘Other collateral’’ may include stock that would

have been covered under the previous version of

Regulation U and therefore not subject to the

provisions covering mixed-collateral loans. This

reduction in the scope of the regulation had the

unintended effect of reducing the flexibility for

withdrawals and substitutions of collateral for

mixed-collateral loans.

7See, e.g., Federal Reserve Regulatory Service 5–

923.2, 5–923.41, and 5–923.42.

8Many customers who have securities to pledge

as collateral have more than just margin stock (they

often have debt securities as well). The section on

mixed-collateral loans presumes there will be no

change in the collateral once it has been pledged.

The number of inquiries in this area is an indication

that this is often not the case.

9One of the goals of the section on mixedcollateral loans is to ensure that a lender does not

inflate the loan value of nonmargin collateral to

offset the fact that the margin regulations limit the

value of margin stock to 50 percent of its current

market value. Most financial instruments have

readily available prices, lessening the possibility for

evasion of the margin requirements. Other

collateral, such as real estate, boats and

automobiles, is more likely to have a less well

agreed upon market value.

10For example, although the Securities Exchange

Act of 1934 requires the Board to set margins for

all purchases of securities, it specifically excludes

bank loans on nonconvertible debt securities.

11 The exemption for credit to a customer to

temporarily finance the purchase or sale of

securities for prompt delivery contained a

restriction prohibiting its use for securities

purchased at a broker-dealer. This restriction was

inadvertently dropped in 1983 and it is being

reinserted.

U.4 Board staff believes that the

supervisory structure for banking

institutions and the requirement that

banks establish credit agreements before

financing these transactions will lead

banks to impose some additional

limitations themselves, but because the

additional requirements applicable to

broker-dealers are not contained in

Regulation T, they cannot be imposed

by Regulation U.

2. Mixed-Collateral Loans

Regulation U does not apply to

extensions of securities credit that are

not secured at least in part by margin

stock. Loans secured in part by margin

stock and in part by other collateral are

known as ‘‘mixed-collateral’’ loans and

Regulation U has always required some

kind of separation for these types of

loans. Although a single credit

agreement may be used,5 § 221.3(e) of

Regulation U states that a loan secured

in part by margin stock and in part by

other collateral ‘‘shall be treated as two

separate loans.’’ This separation

requirement has been the subject of

numerous inquiries since the last

revision of Regulation U and has led to

this proposal for a relaxation of the

regulation in this area.6

The section on mixed-collateral loans

does not present a problem when first

applied at the time the loan

commitment is made, as it merely

requires a bank to determine the loan

value of margin stock collateral and

then verify that the other collateral has

a good faith loan value sufficient to

make up the difference between the loan

value of the margin stock and the

amount of credit being extended and to

allocate the credit secured by each

tranche.

There have been, however, a number

of inquiries concerning the interplay of

§ 221.3(e) (mixed-collateral loans) and

§ 221.3(f) (withdrawals and

substitutions) of Regulation U. As an

example, suppose the value of a

customer’s nonmargin stock collateral

has increased over time but the value of

the margin stock has not. In spite of the

fact that the overall value of the

collateral has increased, the customer

cannot withdraw margin stock because

this ‘‘separate’’ loan does not have

sufficient loan value to permit the

withdrawal. In other words, changes in

collateral value in one tranche have no

effect on the other tranche. This

separation requirement makes collateral

management extremely difficult.

Board staff has tried to respond to

inquiries in this area through

interpretation of the existing

regulation.7 However, in light of the

growth of revolving credit agreements

secured by more than just margin stock,

it appears that the current rule is

unnecessarily burdensome to effectuate

the statutory scheme of regulation.8

The proposed amendment to the

section on mixed collateral loans would

still require the regulatory segregation of

collateral, but would expand the types

of collateral that could be securing loans

that currently can only be secured by

margin stock to include all financial

instruments (stocks, bonds, and cash

equivalents).9 Acting in good faith, a

bank would be able to value all financial

instruments in accordance with the

margin requirements in the Supplement

to Regulation U (§ 221.8) and permit

substitutions within this group in

conformity with the section on

withdrawals and substitutions, meaning

the aggregate loan value of the

substituted collateral must at least equal

the aggregate loan value of the collateral

withdrawn. Under the proposed

amendment, credit secured by

nonfinancial collateral, such as real

estate, would continue to be treated as

a separate loan. Comment is invited on

the continuing need for separation of

collateral between financial instruments

and other collateral.

3. Conforming Amendments

Although the Board’s margin

regulations provide a level playing field

for lenders extending purpose credit

secured by margin stock, statutory and

other considerations have always made

the scope of Regulations G and U less

broad than that of Regulation T.10 Two

of the proposed amendments to

Regulation T would make it less

restrictive than Regulation U, leading

the Board to propose conforming

amendments. The two amendments

would allow 50 percent margin for

exchange-traded options (currently

given no loan value) and good faith loan

value for money market mutual funds

(currently given 50 percent loan value).

In addition, the definitions of ‘‘cash

equivalent’’ and ‘‘examining authority’’

would be added from the Regulation T

proposal to the definitional section of

Regulation U.

4. Technical Amendments

Two technical amendments are

proposed. The first would add a

sentence to the ‘‘single-credit rule’’ to

reflect a 1991 Board interpretation

allowing the lead bank to perform

Regulation U compliance for syndicated

loans. The other would reinsert

language inadvertently deleted in 1983

from one of the Regulation U

exemptions for credit extended to

persons other than broker-dealers.11

5. Section-by-Section Explanation of

Proposed Changes to Regulation U

Section 221.1 Authority, Purpose and

Scope.

No substantive changes.

Section 221.2 Definitions.

(1) Eliminate letter designations for

definitions in § 221.2 and references

thereto in §§ 221.1(b), 221.3(a) and

221.7(c)(2).

(2) Add definitions (from Regulation

T) for cash equivalent and examining

authority (referred to in § 221.5(c)(9)(ii)).
63662 Federal Register / Vol. 60, No. 238 / Tuesday, December 12, 1995 / Proposed Rules

(3) Exclude money market funds from

definition of margin stock so as to give

allow them good faith loan value.

(4) Edit statement in definition of

maximum loan value that ‘‘[p]uts, calls

and combinations thereof have no loan

value’’ to reflect loan value for

exchange-traded options.

Section 221.3 General Requirements

221.3(a)—General Rule

(1) Edit statement in general rule that

collateral other than margin stock has

good faith loan value to reflect fact that

puts and calls that do not qualify as

margin stock have no loan value.

221.3(c)—Revolving-Credit or MultipleDraw Agreements

(2) Expand subsection to cover

financing of securities purchased on a

payment-against-delivery (or DVP)

basis.

(3) Clarify that FR U–1 is always taken

when arrangement is established and

must be amended for subsequent

disbursements if (i) all collateral is not

pledged up front, or (ii) collateral has

been withdrawn or substituted between

disbursements.

221.3(d)—Single Credit Rule

(4) Clarify that single credit rule does

not cover syndicated loans (see Board

Interpretation on loan participations in

section 221.124 of Regulation U).

221.3(e)—Mixed Collateral Loans

(5) Alter application of rule so that

instead of separating margin stock

collateral from nonmargin stock

collateral, securities and cash

equivalents are separated from other

types of collateral.

Section 221.4 Agreements of

Nonmember Banks

Editorial change reflects combining of

Forms FR T–1 and FR T–2.

Section 221.5 Special Purpose Loans

to Brokers and Dealers

No substantive changes.

Section 221.6 Exempted Transactions

Restore language to 221.6(f) that credit

is not to be used by a customer to

purchase securities from a brokerdealer.

Section 221.7 OTC List

No substantive changes.

Section 221.8 Supplement

Allow options that qualify as margin

stock the same loan value as other

margin stock.

Regulatory Flexibility Act

As noted in the summary, the

proposed amendments should improve

the regulation by providing explicit

guidance on certain lending practices

and greater flexibility in verifying

compliance for certain types of loans.

The Board believes there will be a

beneficial economic impact if this

proposal is adopted. Comments are

invited on this statement.

Paperwork Reduction Act

In accordance with section 3506 of

the Paperwork Reduction Act of 1995

(44 U.S.C. Ch. 35; 5 CFR 1320 Appendix

A.1), the Board reviewed the proposed

rule under the authority delegated to the

Board by the Office of Management and

Budget. Comments on the collections of

information should be sent to the Office

of Management and Budget, Paperwork

Reduction Project (7100–0115),

Washington, DC 20503, with copies of

such comments to be sent to Mary M.

McLaughlin, Federal Reserve Board

Clearance Officer, Division of Research

and Statistics, Mail Stop 97, Board of

Governors of the Federal Reserve

System, Washington, DC 20551.

The collection of information

requirements in this proposed

regulation are found in 12 CFR part 221.

This information is required by

Regulation U and authorized by the

Securities Exchange Act of 1934 (15

U.S.C. 78g and 78w). The respondents

are for-profit financial institutions.

Records must be retained for three years

after the credit is extinguished.

The Federal Reserve may not conduct

or sponsor, and an organization is not

required to respond to, this information

collection unless it displays a currently

valid OMB control number. The OMB

control number is 7100–0115.

No additional reporting requirements

or modifications to existing

recordkeeping requirements are

proposed. The current estimated burden

is 4 minutes per response. There are

10,637 subject respondents making an

estimated average of 212 of the subject

loans annually, for a total of 157,853

hours of annual burden for

recordkeeping. Based on an hourly cost

of $20, the annual cost to the public is

estimated to be $3,157,060.

Because the records would be

maintained at banks and the notices are

not provided to the Federal Reserve, no

issue of confidentiality under the

Freedom of Information Act arises.

Comments are invited on: (a) Whether

the proposed collection of information

is necessary for the proper performance

of the Federal Reserve’s functions;

including whether the information has

practical utility; (b) the accuracy of the

Federal Reserve’s estimate of the burden

of the proposed information collection,

including the cost of compliance; (c)

ways to enhance the quality, utility, and

clarity of the information to be

collected; and (d) ways to minimize the

burden of information collection on

respondents, including through the use

of automated collection techniques or

other forms of information technology.

List of Subjects in 12 CFR Part 221

Banks, banking, Brokers, Credit,

Federal Reserve System, Margin, Margin

requirements, Investment companies,

Investments, Reporting and

recordkeeping requirements, Securities.

For the reasons set out in the

preamble, the Board proposes to amend

12 CFR Part 221 as follows:

PART 221—CREDIT BY BANKS FOR

THE PURPOSE OF PURCHASING OR

CARRYING MARGIN STOCK

(REGULATION U)

1. The authority citation for Part 221

is revised to read as follows:

Authority: 15 U.S.C. 78c, 78g, 78h, 78q,

and 78w.

§ 221.1 [Amended]

2. Section 221.1(b) is amended by

removing the word ‘‘§ 221.2(b)’’ and

adding ‘‘§ 221.2’’ in its place.

3. Section 221.2 is amended as

follows:

a. By removing the alphabetic

paragraph designations from the

definitions and placing the definitions

in alphabetical order;

b. By removing the paragraph

designation (1) in front of the definition

of Bank, by designating the text

following the work Bank as paragraph

(1), by revising newly designated

paragraph (1) introductory text and

paragraph (2) introductory text;

c. By adding new definitions in

alphabetical order for Cash equivalent

and Examining authority;

d. By removing the period at the end

of paragraph (6)(iii) and adding ‘‘; or’’ in

its place, and by adding new paragraph

(6)(iv) to the definition of Margin stock;

e. By revising the third sentence of the

definition of Maximum loan value.

The additions and revisions read as

follows:

§ 221.2 Definitions.

* * * * *

Bank (1) Has the meaning given to it

in section 3(a)(6) of the Act (15 U.S.C.

78c(a)(6)) and includes:

* * * * *

(2) Bank does not include:

* * * * *
Federal Register / Vol. 60, No. 238 / Tuesday, December 12, 1995 / Proposed Rules 63663

Cash equivalent means negotiable

bank certificates of deposit, bankers

acceptances issued by banking

institutions in the United States and

payable in the United States, and any

security issued by an investment

company registered under section 8 of

the Investment Company Act of 1940

(15 U.S.C. 80a–8) that is a money market

fund in compliance with all applicable

requirements of SEC Rule 2a–7 (17 CFR

270.2a–7).

* * * * *

Examining authority means:

(1) The national securities exchange

or national securities association of

which a broker or dealer is a member;

or

(2) If a member of more than one selfregulatory organization, the organization

designated by the Securities and

Exchange Commission (SEC) as the

examining authority for the creditor.

* * * * *

Margin stock * * *

(6) * * *

(iv) A company which is a money

market fund in compliance with all

applicable requirements of SEC Rule

2a–7 (17 CFR 270.2a–7).

Maximum loan value * * * Puts,

calls and combinations thereof that do

not qualify as margin stock have no loan

value. * * *

* * * * *

4. Section 221.3 is amended as

follows:

a. By revising the last sentence of

paragraph (a)(1);

b. By revising paragraph (c);

c. By adding a sentence to the end of

paragraph (d)(1);

d. By revising paragraph (e). The

revisions and additions read as follows:

§ 221.3 General requirements.

(a) * * * (1) * * * All other

collateral, except for puts and calls, has

good faith loan value, as defined in

§ 221.2 of this part.

* * * * *

(c) Purpose statement for agreements

involving revolving or multiple-draw

credit or financing of securities

purchases on a payment-againstdelivery basis. (1) If a bank extends

credit, secured directly or indirectly by

any margin stock, in an amount

exceeding $100,000, under an

agreement involving revolving or other

multiple-draw credit or financing of

securities purchases on a paymentagainst-delivery basis, Form FR U–1

must be executed at the time the credit

arrangement is originally established

and must be amended as described in

paragraph (c)(2) of this section for each

disbursement if all of the collateral for

the agreement is not pledged at the time

the agreement is originally established.

(2) If a purpose statement executed at

the time the credit arrangement is

initially made indicates that the purpose

is to purchase or carry margin stock, the

credit will be deemed in compliance

with this part if the maximum loan

value of the collateral at least equals the

aggregate amount of funds actually

disbursed or at the end of any day on

which credit is extended under the

agreement, the bank calls for additional

collateral sufficient bring the credit into

compliance with § 221.8 (the

Supplement). For any purpose credit

disbursed under the agreement, the

bank shall obtain and attach to the

executed Form FR U–1 a current list of

collateral which adequately supports all

credit extended under the agreement.

(d) * * * (1) * * * Syndicated loans

need not be aggregated with other

unrelated purpose credit extended by

the same bank.

* * * * *

(e) Mixed collateral loans. (1) A

purpose credit secured in part by

margin stock and in part by collateral

other than securities and cash

equivalents shall be treated as two

separate loans, one secured by margin

stock and any other securities and cash

equivalents and one by all other

collateral. A bank may use a single

credit agreement, if it maintains records

identifying each portion of the credit

and its collateral.

(2) A purpose credit secured entirely

by securities and cash equivalents may

be treated as a single loan.

* * * * *

5. Section 221.4 is amended by

revising the parenthetical phrase in the

middle of paragraph (a) to read as

follows:

§ 221.4 Agreements of nonmember banks.

(a) * * * (See Form FR T–1, T–2)

* * *

* * * * *

6. Section 221.6 is amended by

revising paragraph (f) to read as follows:

§ 221.6 Exempted transactions.

* * * * *

(f) To any customer, other than a

broker or dealer, to temporarily finance

the purchase or sale of securities for

prompt delivery, if the credit is to be

repaid in the ordinary course of

business upon completion of the

transaction and is not extended to

enable the customer to pay for securities

purchased in an account subject to part

220 of this chapter;

* * * * *

7. Section 221.7 is amended by

revising paragraph (c)(2) to read as

follows:

§ 221.7 Requirements for the list of OTC

margin stocks.

* * * * *

(c) * * *

(2) No longer substantially meets the

provisions of paragraph (b) of this

section or the definition of OTC margin

stock in § 221.2 of this part.

* * * * *

8. Section 221.8 is amended by

revising paragraphs (a) and (c) to read as

follows:

§ 221.8 Supplement, maximum loan value

of margin stock and other collateral.

(a) Maximum loan value of margin

stock. The maximum loan value of any

margin stock is fifty percent of its

current market value.

* * * * *

(c) Maximum loan value of options.

Except for options that qualify as margin

stock, puts, calls, and combinations

thereof have no loan value.

By order of the Board of Governors of the

Federal Reserve System, December 6, 1995.

William W. Wiles,

Secretary of the Board.

[FR Doc. 95–30131 Filed 12–11–95; 8:45 am]

BILLING CODE 6210–01–P

DEPARTMENT OF TRANSPORTATION

Federal Aviation Administration

14 CFR Part 39

[Docket No. 95–NM–98–AD]

Airworthiness Directives; Boeing

Model 747–400 Series Airplanes

Powered by General Electric CF6–80C2

or Pratt & Whitney PW4000 Series

Engines

AGENCY: Federal Aviation

Administration, DOT.

ACTION: Notice of proposed rulemaking

(NPRM).

SUMMARY: This document proposes the

adoption of a new airworthiness

directive (AD) that is applicable to

certain Boeing Model 747–400 series

airplanes. This proposal would require

modification of the engine fuel feed

system. This proposal is prompted by

reports indicating that the coupling nut

on the fuel tube on the outboard strut

(engine position 1) fractured. The

actions specified by the proposed AD

are intended to prevent such fracturing

of the coupling nut, which could result

in release of fuel onto the engine

cowling and a subsequent fire.