20386 Federal Register / Vol. 61, No. 88 / Monday, May 6, 1996 / Rules and Regulations

1 57 FR 37109 (August 18, 1992).

2The proposed amendments were published at 59

FR 33923 (July 1, 1994) and the final rule was

published at 59 FR 53565 (October 25, 1994).

3 60 FR 33763 (June 29, 1995). The comment

period was subsequently extended at the request of

commenters (60 FR 43726, August 23, 1995).

4See also the definition of permitted offset

position in section 220.2, section 220.4(b)(8),

section 220.12(b)(6), and section 220.18(f). Several

options exchanges requested a delay in

effectiveness of Regulation T provisions which

replace Board-specified options rules with reference

to exchange rules. In order to allow the exchanges

to develop rules in these areas and have them

approved by the SEC, the Board is delaying the

effectiveness of the new options provisions in

Regulation T until June 1, 1997.

FEDERAL RESERVE SYSTEM

12 CFR Part 220

[Regulation T; Docket No. R–0772]

RIN 7100–AB28

Securities Credit Transactions; Review

of Regulation T, ‘‘Credit by Brokers

and Dealers’’

AGENCY: Board of Governors of the

Federal Reserve System.

ACTION: Final rule.

SUMMARY: The Board is adopting

amendments to Regulation T, the

regulation that covers extensions of

credit by and to broker and dealers.

These amendments reflect consideration

of the comments submitted in response

to the proposed rule issued by the Board

for public comment on June 29, 1995.

Major amendments include

eliminating restrictions on the ability of

broker-dealers to arrange for credit;

increasing the type and number of

domestic and foreign securities that may

be bought on margin and increasing the

loan value of some securities that are

already marginable; deleting Board rules

regarding options transactions in favor

of the rules of the options exchanges;

and reducing restrictions on

transactions involving foreign persons,

foreign securities, and foreign currency.

In addition, technical changes are being

adopted to provide clarification, update

references, or restore language

inadvertently deleted. The Board is also

soliciting comments on the possibility

of additional Regulation T amendments

in a separate document published

elsewhere in today’s Federal Register.

EFFECTIVE DATE: July 1, 1996.

FOR FURTHER INFORMATION CONTACT:

Scott Holz, Senior Attorney, or Angela

Desmond, Senior Counsel, Division of

Banking Supervision and Regulation

(202) 452–2781; for the hearing

impaired only, Telecommunications

Device for the Deaf (TDD), Dorothea

Thompson (202) 452–3544.

SUPPLEMENTARY INFORMATION: In 1992,

the Board issued an Advance Notice of

Proposed Rulemaking and Request for

Comment to aid in its periodic review

of Regulation T.1 In 1994, the Board

proposed and adopted amendments

exempting transactions involving

government securities and shortening

the time period within which customers

must deposit margin requirements or

make payment for securities in light of

the industry’s move to a three-day

settlement period.2 In June 1995, the

Board published proposed amendments

covering additional areas of Regulation

T.3 Forty-six comment letters were

received in response to the 1995

proposal. The review of Regulation T

predates but is now encompassed

within the Board’s regulatory review

under section 303 of the Riegle

Community Redevelopment and

Regulatory Improvement Act of 1994.

The Board is now adopting a final

rule which covers four major areas:

arranging for credit, loan value of

securities, options transactions, and

international transactions.

In the arranging area, the Board is

eliminating all restrictions on the ability

of broker-dealers to arrange for credit

that does not otherwise violate the

lending provisions of the Board’s

margin regulations.

Amendments regarding the loan value

of securities include changing the loan

value of money market and exempted

securities mutual funds from 50 percent

to ‘‘good faith’’ loan value. The Board is

adopting additional, alternate criteria

for unlisted debt securities so that any

debt security with an investment grade

rating will be entitled to ‘‘good faith’’

loan value. The Board is also adopting

an additional method for foreign stocks

to qualify for margin treatment that will

result in an increase in the number of

foreign margin stocks from

approximately 700 to approximately

1800 stocks. The Board is extending

loan value to convertible bonds that do

not meet the existing margin criteria if

the underlying security is already

marginable. Finally, the Board is

extending loan value to exchange-traded

options, which will be entitled to the

loan value deemed appropriate by the

exchange that trades the option, subject

to the approval of the Securities and

Exchange Commission (SEC).

In addition to giving loan value to

exchange-traded options, other

amendments in the options area will

increase Regulation T’s reliance on the

margin rules of the exchange where the

option is traded for customer and

specialist transactions. This will allow

increased flexibility in recognizing the

offsetting nature of certain transactions

and assets, such as financial futures.

The Board is retaining the current

provisions until June 1, 1997 in

response to requests from options

exchanges for extra time to develop

exchange rules and have them approved

by the SEC.

The Board is reducing Regulation T

restrictions on international transactions

involving the borrowing and lending of

foreign securities that are not publicly

traded in the United States and giving

broker-dealers greater flexibility to

accept foreign currencies, compute

margin requirements using foreign

currencies, and deal with foreign

broker-dealers on the same basis as

domestic broker-dealers. These changes

are discussed more fully below. The

amendments are discussed in the order

they appear in the regulation.

Section 220.2 Definitions

The following new definitions or

amended definitions are being adopted

as proposed: cash equivalent, exempted

securities mutual fund, foreign person,

in the money, margin security, money

market mutual fund, non-U.S. traded

foreign security, and OTC margin stock.

As proposed, the Board will delete the

definition of in or at the money, but this

will be delayed until June 1, 1997, when

the other option-specific rules of

Regulation T are deleted.4 The effect of

the definitions is described below under

the section in which the defined term is

used. Definitional changes that have the

effect of increasing the types and

number of securities that are marginable

are discussed below under section

220.18, Supplement: Margin

requirements.

The following definitions are being

amended based on comments: covered

option transaction, escrow agreement,

OTC margin bond, permitted offset

position, short call or short put, and

underlying security. The modifications

are technical in nature, with the

exception of those discussed in the

following two paragraphs.

The Board proposed to add the word

‘‘sold’’ to the definition of short call or

short put and the list of permissible

transactions in the cash account to

mimic rules of the self-regulatory

organizations (SROs). The word is not

being added in light of comments

pointing out that the Board’s proposal

would cover transactions that are not

covered by SRO rules, which was not

the Board’s intent.
Federal Register / Vol. 61, No. 88 / Monday, May 6, 1996 / Rules and Regulations 20387

5See, Fed. Sec. L. Rep. (CCH) ¶ 76,819.

The definition of underlying security

is being changed to underlying asset to

account for the fact that not every asset

underlying a securities option is a

security. A conforming change has also

been made to the definition of in the

money. The definition is also being

changed from the proposal so that

customers and specialists may hold less

than all of the securities in an index as

cover for a short option position if SECapproved rules of the SRO where the

option is traded allow partial baskets.

The language that was proposed

required that all securities that comprise

an index be held in the same proportion

as the index.

Section 220.3 General Provisions

The Board is amending section

220.3(e)(4), which permits what the

industry refers to as ‘‘cashless exercise’’

of employee stock options, to cover

additional types of securities received

by customers pursuant to an employee

benefit plan and to conform with SEC

rules that determine who is covered

under these plans and therefore who

may take advantage of the ‘‘cashless

exercise’’ procedure. The Board is

modifying the language that was

proposed to accommodate employee

stock award plans.

The Board is also adding a new

paragraph to the general provisions in

section 220.3 to make clear that freely

convertible currency can be accepted by

creditors and treated at its U.S. dollar

equivalent on a marked-to-market basis

for all purposes under Regulation T.

Marking to market should minimize

currency risk.

Section 220.4 Margin Account

Consistent with the amendment to the

general provisions in section 220.3 of

Regulation T allowing freely convertible

foreign currency to be accepted for all

purposes under Regulation T, the Board

is amending Regulation T to enhance

the ability of broker-dealers to extend

credit denominated in a foreign

currency by eliminating the restriction

in section 220.4(c) that prevents an

increase in one foreign currency

subaccount from offsetting a decrease in

another foreign currency subaccount.

The Board is also simplifying the

language that was proposed for section

220.4(b)(8) to allow broker-dealers to

extend credit in any freely convertible

currency, whether or not a security

denominated in that currency is (or was)

held in the account.

As proposed, the Board is completing

the process of deferring to SRO rules for

options transactions by deleting specific

provisions governing cover or positions

in lieu of margin found in section

220.5(c) in favor of SRO rules. This

change will become effective on June 1,

1997. The margin requirement for a

customer who writes an over-thecounter (OTC) option that is purchased

by its broker-dealer will be determined

by the rules of the broker-dealer’s

examining authority.

As proposed, the margin account

exceptions and special provisions in

section 220.5 have been incorporated

into section 220.4 so that each

Regulation T account is described in a

single section. The special

memorandum account and the

government securities account are being

renumbered as section 220.5 and 220.6

respectively. No substantive change is

intended by this renumbering.

Section 220.8 Cash Account

The Board is amending the cash

account, as proposed, to recognize

industry practice by specifically

allowing the purchase of nonsecurities

on a cash basis in the cash account.

Because this change includes foreign

currencies, foreign exchange

transactions can be effected on a cash

basis in the account.

The Board is adding money market

mutual funds to the definition of cash

equivalent as proposed to allow these

mutual fund shares to be used to cover

puts in the cash account. In response to

commenters, the Board has added

language to section 220.8(a)(4) to make

clear that cash equivalents covering

options transactions may be held in the

account via an escrow agreement.

The specific option transactions

formerly permitted in the cash account

pursuant to section 220.8(a)(3) have

been incorporated into a definition for

covered option transactions along with

new authority, effective June 1, 1997, for

the SROs to permit additional

transactions with finite risk in this

account. The proposed language has

been modified to permit greater

flexibility for the SROs. This flexibility

includes covering (1) transactions in

which a customer’s risk is not a fixed

dollar amount but is effectively limited

to the value of the assets securing it, (2)

transactions in which early exercise of

any aspect of the transaction results in

contemporaneous exercise of all aspects,

and (3) OTC options transactions. SROs

may designate covered transactions by

category if they choose to do so.

The Board is amending section

220.8(b)(1)(ii), the cash account

provision covering the purchase of

foreign securities with extended

settlement periods, as proposed, so that

a broker-dealer will not be required to

sell a customer’s securities for failure to

make payment until one day beyond the

foreign settlement date. Currently, a

broker-dealer must receive its

customer’s payment by settlement date.

The extra day will allow the brokerdealer to verify that its failure to receive

the customer’s payment is not due to

time zone differences, error, or other

exceptional circumstances.

Section 220.11 Broker-Dealer Credit

Account

Two substantive changes proposed by

the Board are being made to section

220.11(a), Permissible transactions.

First, the Board is amending section

220.11(a) to permit foreign brokerdealers to use this account for deliveryversus-payment transactions with U.S.

broker-dealers. Under this amendment

foreign broker-dealers are referred to as

‘‘persons regulated by a foreign

securities authority.’’ Regulation T

incorporates the definitions from

section 3(a) of the Act, which defines a

‘‘foreign securities authority’’ to include

entities ‘‘empowered by a foreign

government to administer or enforce

laws as they relate to securities

matters.’’ Several commenters stated

that the Board’s proposal may not

encompass entities such as universal

banks that are generally recognized as

broker-dealers but are regulated by a

banking regulator that is also

responsible for securities regulation in

that country. The Board believes that

the phrase ‘‘person regulated by a

foreign securities authority,’’ is broad

enough for purposes of Regulation T to

cover universal banks.

The Board is also amending section

220.11(a) to include ‘‘prime broker’’

arrangements set up under SEC

guidelines 5 in the list of permissible

transactions. This will permit use of the

broker-dealer credit account by

executing broker-dealers so that a

customer’s transactions may be

consolidated at the customer’s prime

broker.

In 1995, the Board proposed an

amendment to clarify that the joint back

office (JBO) arrangements established

pursuant to section 220.11(a)(2), which

allow participant broker-dealers to be

treated as if they were self-clearing

broker-dealers, require a reasonable

relationship between the owners’ equity

interests and the amount of business

transacted through the JBO. The Board’s

intention in 1983 in first permitting the

formation of JBOs was to allow for

economies of scale among registered

broker-dealers, and the Board believed it

was unnecessary to explicitly require a

specific capital structure to ensure

equitable treatment among participants.
20388 Federal Register / Vol. 61, No. 88 / Monday, May 6, 1996 / Rules and Regulations

6The Board adopted Regulation U in 1936 to

cover securities credit extended by banks. In 1968

the Board adopted Regulation G to cover most other

margin lenders in the United States, and in 1971 the

Board adopted Regulation X to cover U.S. borrowers

obtaining margin credit against U.S. securities

abroad.

7Section 11(d) of the Act prohibits a brokerdealer from extending or maintaining or arranging

for the extension or maintenance of credit on any

newly issued security if the broker-dealer has been

involved in the distribution of that security within

the past thirty days. The section is aimed at

preventing a broker-dealer from inducing its

customer to buy on credit securities which it has

undertaken to distribute to the public.

8The SEC requirements are found in Rule

15c3–3 (17 CFR 240.15c3–3).

9See 12 CFR 220.103, a Board Interpretation

reprinted in the Federal Reserve Regulatory Service

at 5–472.

10 17 CFR 240.15c6–1.

Several commenters noted that the

Board’s 1995 proposal was ambiguous;

others suggested that the current

language could be interpreted to prevent

unreasonable arrangements without the

need for amendment; and several

commenters, including some opposed to

the Board’s proposal, were in favor of

involving SROs in this process. After

considering the comments, the Board

has decided not to incorporate its

understanding into the regulation and

believes it is appropriate to rely on the

authority of the JBO’s examining

authority (SRO) to ensure the

reasonableness of JBO arrangements

under its supervision.

Section 220.12 Market Functions

Account

The Board proposed two substantive

amendments to this section and is

adopting both of them. First, the Board

is amending section 220.12(b),

Specialists, to delete the specific

‘‘permitted offset positions’’ established

by the Board in favor of SEC-approved

rules of the SROs. Permitted offset

positions are entitled to good faith

margin, and allowing exchange rules to

govern these transactions is consistent

with the Board’s intention to allow

margin requirements for options

transactions and margin requirements

for specialists to be determined by the

appropriate market, subject to SEC

approval. This change will be effective

June 1, 1997.

Second, the Board is revising the

description of OTC marketmakers and

third marketmakers to respond to

questions raised about the coverage of

this provision. The revision concerning

third marketmakers mirrors the

language in Regulation U, while the

revision concerning OTC marketmakers

ensures that the exempt credit available

to OTC marketmakers, like the exempt

credit for specialists, is in return for

market-making obligations enforced by

the regulatory authority for that market.

Section 220.13 Arranging for Loans by

Others

The Board is amending section 220.13

to permit creditors to arrange for any

credit transaction so long as they do not

willfully arrange credit that otherwise

violates the Board’s margin regulations.

Currently, broker-dealers cannot arrange

for transactions they could not engage in

themselves unless covered by one of the

exceptions found in this section.

Section 7 of the Act requires brokerdealers to comply with Federal Reserve

margin regulations when they ‘‘extend

or maintain credit or arrange for the

extension or maintenance of credit.’’

Since 1938, Regulation T has contained

a provision addressing the ‘‘arranging’’

of credit by broker-dealers. This

provision remained unaltered until

1975, when the Board began to adopt

exceptions to the general prohibition.

Although the arranging prohibition was

intended to prevent a broker-dealer from

circumventing Regulation T by

arranging for another lender to extend

credit that the broker-dealer was

prevented from extending itself, the

Board’s regulations now cover most U.S.

margin lenders directly.6

One of the most basic and frequently

raised trends noted in the comments

received since the Board announced its

review of Regulation T is the erosion of

barriers between broker-dealers and

other lenders, including globalization of

the securities markets and the

increasing overlap in the businesses of

these various lenders. Several trade

associations and broker-dealers

responded favorably to the Board’s

request for comment on applying the

arranging restriction only to credit that

otherwise violates the Board’s margin

regulations.

The Board has concluded that brokerdealers should be permitted to arrange

for any credit that is not directly

prohibited by a Federal Reserve margin

regulation. Because a broker-dealer may

not know all of the credit terms agreed

to between its customer and the actual

lender, the amended language prohibits

a broker-dealer from willfully arranging

credit that violates one of the Board’s

margin regulations. The ability of

broker-dealers to arrange for credit in

connection with new issues of securities

will still be constrained by section 11(d)

of the Act and the rules of the SEC

issued thereunder.7

Section 220.16 Borrowing and Lending

Securities

The Board proposed two changes for

this section, and is adopting both of

them. First, the Board is expanding the

types of permissible collateral for

securities lending transactions to

include marginable foreign sovereign

debt securities and any other collateral

that is acceptable to the SEC when a

broker-dealer borrows securities from its

customer.8

Second, the Board is adding a new

subsection 220.16(b) to allow U.S.

broker-dealers to lend foreign securities

that are not publicly traded in the

United States to a foreign person for any

purpose, and against any collateral,

legally permitted in the foreign country.

Although several commenters stated

their preference for also extending this

liberalized treatment to foreign stocks

that are publicly traded in the United

States, other commenters, including

U.S. securities exchanges, stressed the

importance of equal treatment in this

area for all securities that are publicly

traded in the United States. The Board

is confirming several clarifications in

this area requested by the commenters:

(1) a foreign security not listed on

NASDAQ or a U.S. national securities

exchange is not ‘‘U.S. traded’’ solely

because American Depository Receipts

(ADRs) on the foreign security are

traded in the United States; (2) new

section 220.16(b) is not mandatory and

creditors may continue to borrow and

lend foreign securities under the

existing rule in section 220.16(a); and

(3) coverage of the term ‘‘foreign lender’’

is determined by the status of the

beneficial owner of an account and

includes a non-U.S. person with a U.S.

investment adviser or other fiduciary.

The Board is also amending the

language that was proposed to make

clear that a creditor may borrow foreign

securities pursuant to section 220.16(b)

for the purpose of relending them to a

foreign person (or relending them to a

U.S. person as long as the ultimate

borrower is a foreign person).

The Board is also amending section

220.16 to address questions regarding

‘‘pre-borrowing,’’ that is the borrowing

of securities in anticipation of a short

sale. Currently, securities may be

borrowed for a permitted purpose when

the transaction has been effected ‘‘or is

in immediate prospect’’.9 The section

will now provide that a creditor who

reasonably anticipates a short sale may

borrow securities up to one standard

settlement cycle in advance of the trade

date. The standard settlement cycle is

contained in SEC Rule 15c6–1 10 and is

currently three business days.
Federal Register / Vol. 61, No. 88 / Monday, May 6, 1996 / Rules and Regulations 20389

11See SEC Rule 15c3–1 (17 CFR 240.15c3–1).

12 58 FR 44310, August 20, 1993.

13Although most customers cannot purchase

exchange-traded options on credit, specialists in

these options and the underlying securities have

been able to obtain good faith credit on options for

some time.

14The Board first used a rating requirement when

it fulfilled Congress’ mandate under the Secondary

Mortgage Market Enhancement Act of 1984 by

making a ‘‘mortgage-related security’’ marginable.

The Congressional definition of ‘‘mortgage-related

security’’ included a requirement that the security

be rated in one of the top two rating categories by

a nationally recognized statistical rating

organization.

Section 220.17 Requirements for the

List of Marginable OTC Stocks and the

List of Foreign Margin Stocks

The Board is adopting additional,

alternative criteria for determining

which foreign stocks qualify as margin

equity securities. The Board has

published a List of Foreign Margin Stock

(Foreign List) since 1990, using criteria

modeled on those for OTC margin

stocks. In the 1995 proposal, the Board

asked for comment on whether foreign

stocks should also be marginable if they

meet two criteria: (1) the SEC or CFTC

has approved trading in the United

States of options, warrants, or futures on

a foreign securities index that contains

the foreign stock and (2) the stock is

deemed to have a ‘‘ready market’’ for

purposes of the SEC’s net capital rule.11

The SEC has issued a no-action letter

that effectively treats all stocks on the

Financial Times/Standard & Poor’s

World Actuaries Indices as having a

‘‘ready market’’ for capital purposes,

and requested comment on adopting

regulatory language to this effect.12

None of the commenters opposed the

Board’s proposal to enlarge the number

of foreign margin stocks, but many

suggested modification of the proposed

criteria. Some commenters asked the

Board to use the SEC’s capital rule’s

‘‘ready market’’ test as a criterion for

determining the margin status of foreign

securities. The Board has concluded

that a determination that a foreign stock

has a ‘‘ready market’’ for purposes of the

SEC’s net capital rule is a more

particularized determination about the

collateral value of the stock than SEC or

CFTC approval for trading in the United

States of an index product containing

the stock. The Board is therefore

adopting this test as an alternate method

by which stocks will be included on the

Foreign List. To implement this change,

stocks on the Financial Times/Standard

& Poor’s Actuaries World Indices will be

added to the Board’s Foreign List as

soon as practical.

Comments were few and

contradictory concerning how a new

test for foreign margin stocks should be

integrated with the Board’s Foreign List.

The Board is requesting additional

comment regarding the Foreign List in

the proposed rule published elsewhere

today in the Federal Register.

Section 220.18 Supplement: Margin

Requirements

The Board is increasing the coverage

of the definitions of margin security and

OTC margin bond and is allowing loan

value for exchange-traded options that

are currently denied loan value.13 The

Board is also changing the loan value of

mutual funds whose portfolios consist

of exempted securities and money

market mutual funds. These mutual

funds were previously subject to the

margin for margin equity securities

(currently 50 percent) and today’s

amendments will instead allow good

faith loan value.

The Board is amending the definition

of margin security to cover a debt

security convertible into a margin

security. This mirrors the treatment of

convertible bonds in Regulations G and

U, as well as Regulation T’s treatment of

foreign convertible bonds.

The Board is also amending the

definition of OTC margin bond to

include any nonconvertible debt

security with an investment grade

rating. Although commenters suggested

a variety of ways to expand the

categories of unlisted debt securities

entitled to good faith margin as ‘‘OTC

margin bonds,’’ at a minimum there was

agreement that an investment grade

rating (i.e. a rating in one of the top four

rating categories by a nationally

recognized statistical rating

organization) should be sufficient to

make a debt security marginable. The

Board has successfully used rating

criteria for unregistered mortgagerelated securities 14 and foreign debt

securities and believes it is now

appropriate to enlarge the number of

qualifying ratings and extend this

treatment to other debt securities.

The Board is permitting loan value for

exchange-traded options, but has

modified its 1995 proposal that options

be given the same fifty percent loan

value if listed on a national securities

exchange as other exchange-traded

equity securities. Commenters,

including some of the options

exchanges, indicated that the time value

of options may make it appropriate to

have higher margin requirements for

options approaching expiration and

expressed support for use of SRO rules

in this area generally. Rather than

adopting a flat 50 percent margin

requirement, the Board is incorporating

into Regulation T the margin

requirements established by the

exchange that trades the option. This

change will also respond to commenters

seeking confirmation that the Board

intends to allow loan value for options

on non-equity securities. To ensure

comparability with exchange-traded

warrants on securities indexes and

warrants on foreign currency, these

products will also be subjected to

exchange maintenance margin rules in

lieu of specific Regulation T

requirements. Margin requirements for

short OTC options will continue to be

subject to the rules of the examining

authority of the broker-dealer involved.

Board Interpretations

The Board has begun to review its

interpretations of Regulation T, and is

deleting eleven interpretations as a first

step. These interpretations have either

been incorporated directly into the

regulation or have become moot due to

subsequent amendments. The Board

will continue its review to cover the

remaining interpretations.

Regulatory Flexibility Act

The amendments being adopted are

intended to simplify regulatory

requirements and eliminate restrictions

currently imposed on broker-dealers

and their customers. The Board is also

increasing reliance on the rules of the

SEC and SROs so that Regulation T will

reflect market developments that are

subsequently approved by regulators

with primary responsibility for the

securities markets. The Board believes

that these benefits will be shared by all

broker-dealers and the amendments will

not have a substantial adverse effect on

a significant number of small brokerdealers.

Paperwork Reduction Act

No collections of information

pursuant to section 3504(h) of the

Paperwork Reduction Act (44 U.S.C.

3501 et seq.) are contained in this rule.

List of Subjects in 12 CFR Part 220

Banks, banking, Brokers, Credit,

Federal Reserve System, Margin, Margin

requirements, Reporting and

recordkeeping requirements, Securities.

For the reasons set out in the

preamble, 12 CFR Part 220 is amended

as follows:

PART 220—CREDIT BY BROKERS

AND DEALERS (REGULATION T)

1. The authority citation for Part 220

continues to read as follows:

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

and 78w.
20390 Federal Register / Vol. 61, No. 88 / Monday, May 6, 1996 / Rules and Regulations

2. Sections 220.1 through 220.18 are

revised to read as follows:

§ 220.1 Authority, purpose, and scope.

(a) Authority and purpose. Regulation

T (this part) is issued by the Board of

Governors of the Federal Reserve

System (the Board) pursuant to the

Securities Exchange Act of 1934 (the

Act) (15 U.S.C. 78a et seq.). Its principal

purpose is to regulate extensions of

credit by and to brokers and dealers; it

also covers related transactions within

the Board’s authority under the Act. It

imposes, among other obligations,

initial margin requirements and

payment rules on securities

transactions.

(b) Scope. (1) This part provides a

margin account and eight special

purpose accounts in which to record all

financial relations between a customer

and a creditor. Any transaction not

specifically permitted in a special

account shall be recorded in a margin

account.

(2) This part does not preclude any

exchange, national securities

association, or creditor from imposing

additional requirements or taking action

for its own protection.

(3) This part does not apply to

transactions between a customer and a

broker or dealer registered only under

section 15C of the Act.

§ 220.2 Definitions.

The terms used in this part have the

meanings given them in section 3(a) of

the Act or as defined in this section.

Cash equivalent means securities

issued or guaranteed by the United

States or its agencies, negotiable bank

certificates of deposit, bankers

acceptances issued by banking

institutions in the United States and

payable in the United States, or money

market mutual funds.

Covered option transaction means:

(1) In the case of a short call, the

underlying asset (or a security

immediately convertible into the

underlying asset, without the payment

of money) is held in or purchased for

the account on the same day, and the

option premium is held in the account

until cash payment for the underlying

asset or convertible security is received;

or

(2) In the case of a short put, the

creditor obtains cash in an amount

equal to the exercise price or holds in

the account cash equivalents with a

current market value at least equal to

the exercise price and, except in the

case of money market mutual funds,

with one year or less to maturity; or

(3) In the case of a short put or short

call, the creditor verifies that the

appropriate escrow agreement will be

delivered to the creditor promptly and

the option premium is held in the

account until such delivery is made; or

(4) Beginning June 1, 1997, any other

transaction involving options or

warrants in which the customer’s risk is

limited and all elements of the

transaction are subject to

contemporaneous exercise if:

(i) the amount at risk is held in the

account in cash, cash equivalents, or via

an escrow receipt; and

(ii) the transaction is eligible for the

cash account by the rules of the

registered national securities exchange

authorized to trade the option or

warrant or by the rules of the creditor’s

examining authority in the case of an

unregistered option, provided that all

such rules have been approved or

amended by the SEC.

Credit balance means the cash

amount due the customer in a margin

account after debiting amounts

transferred to the special memorandum

account.

Creditor means any broker or dealer

(as defined in sections 3(a)(4) and

3(a)(5) of the Act), any member of a

national securities exchange, or any

person associated with a broker or

dealer (as defined in section 3(a)(18) of

the Act), except for business entities

controlling or under common control

with the creditor.

Customer includes:

(1) Any person or persons acting

jointly:

(i) To or for whom a creditor extends,

arranges, or maintains any credit; or

(ii) who would be considered a

customer of the creditor according to the

ordinary usage of the trade;

(2) Any partner in a firm who would

be considered a customer of the firm

absent the partnership relationship; and

(3) Any joint venture in which a

creditor participates and which would

be considered a customer of the creditor

if the creditor were not a participant.

Debit balance means the cash amount

owed to the creditor in a margin account

after debiting amounts transferred to the

special memorandum account.

Delivery against payment, Payment

against delivery, or a C.O.D. transaction

refers to an arrangement under which a

creditor and a customer agree that the

creditor will deliver to, or accept from,

the customer, or the customer’s agent, a

security against full payment of the

purchase price.

Equity means the total current market

value of security positions held in the

margin account plus any credit balance

less the debit balance in the margin

account.

Escrow agreement means any

agreement issued in connection with a

call or put option under which a bank

or any person designated as a control

location under paragraph (c) of SEC

Rule 15c3–3 (17 CFR 240.15c3–3(c)),

holding the underlying asset or required

cash or cash equivalents, is obligated to

deliver to the creditor (in the case of a

call option) or accept from the creditor

(in the case of a put option) the

underlying asset or required cash or

cash equivalent against payment of the

exercise price upon exercise of the call

or put.

Examining authority means:

(1) The national securities exchange

or national securities association of

which a creditor is a member; or

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

designated by the SEC as the examining

authority for the creditor.

Exempted securities mutual fund

means any security issued by an

investment company registered under

section 8 of the Investment Company

Act of 1940 (15 U.S.C. 80a–8), provided

the company has at least 95 percent of

its assets continuously invested in

exempted securities (as defined in

section 3(a)(12) of the Act).

Foreign margin stock means a foreign

security that is an equity security and

that appears on the Board’s periodically

published List of Foreign Margin Stocks.

Foreign person means a person other

than a United States person as defined

in section 7(f) of the Act.

Foreign security means a security

issued in a jurisdiction other than the

United States.

Good faith margin means the amount

of margin which a creditor,exercising

sound credit judgment, would

customarily require for a specified

security position and which is

established without regard to the

customer’s other assets or securities

positions held in connection with

unrelated transactions.

In or at the money means, until June

1, 1997, the current market price of the

underlying security is not more than

one standard exercise interval below

(with respect to a call option) or above

(with respect to a put option) the

exercise price of the option.

In the money means the current

market price of the underlying asset or

index is not below (with respect to a call

option) or above (with respect to a put

option) the exercise price of the option.

Margin call means a demand by a

creditor to a customer for a deposit of

additional cash or securities to

eliminate or reduce a margin deficiency

as required under this part.
Federal Register / Vol. 61, No. 88 / Monday, May 6, 1996 / Rules and Regulations 20391

Margin deficiency means the amount

by which the required margin exceeds

the equity in the margin account.

Margin excess means the amount by

which the equity in the margin account

exceeds the required margin. When the

margin excess is represented by

securities, the current value of the

securities is subject to the percentages

set forth in § 220.18 (the Supplement).

Margin security means:

(1) Any registered security;

(2) Any OTC margin stock;

(3) Any OTC margin bond;

(4) Any OTC security designated as

qualified for trading in the National

Market System under a designation plan

approved by the Securities and

Exchange Commission (NMS security);

(5) Any security issued by either an

open-end investment company or unit

investment trust which is registered

under section 8 of the Investment

Company Act of 1940 (15 U.S.C. 80a–8);

(6) Any foreign margin stock; or

(7) Any debt security convertible into

a margin security.

Money market mutual fund means

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 considered a

money market fund under SEC Rule 2a–

-7 (17 CFR 270.2a–7).

Nonexempted security means any

security other than an exempted

security (as defined in section 3(a)(12)

of the Act).

Nonmember bank means a bank that

is not a member of the Federal Reserve

System.

Non-U.S. traded foreign security

means a foreign security that is neither

a registered security nor one listed on

NASDAQ.

OTC margin bond means:

(1) A debt security not traded on a

national securities exchange which

meets all of the following requirements:

(i) At the time of the original issue, a

principal amount of not less than

$25,000,000 of the issue was

outstanding;

(ii) The issue was registered under

section 5 of the Securities Act of 1933

(15 U.S.C. 77e) and the issuer either

files periodic reports pursuant to section

13(a) or 15(d) of the Act or is an

insurance company which meets all of

the conditions specified in section

12(g)(2)(G) of the Act; and

(iii) At the time of the extension of

credit, the creditor has a reasonable

basis for believing that the issuer is not

in default on interest or principal

payments; or

(2) A private pass-through security

(not guaranteed by an agency of the U.S.

government) meeting all of the

following requirements:

(i) An aggregate principal amount of

not less than $25,000,000 (which may

be issued in series) was issued pursuant

to a registration statement filed with the

SEC under section 5 of the Securities

Act of 1933 (15 U.S.C. 77e);

(ii) Current reports relating to the

issue have been filed with the SEC; and

(iii) At the time of the credit

extension, the creditor has a reasonable

basis for believing that mortgage

interest, principal payments and other

distributions are being passed through

as required and that the servicing agent

is meeting its material obligations under

the terms of the offering; or

(3) A mortgage related security as

defined in section 3(a)(41) of the Act; or

(4) A debt security issued or

guaranteed as a general obligation by the

government of a foreign country, its

provinces, states, or cities, or a

supranational entity, if at the time of the

extension of credit one of the following

is rated in one of the two highest rating

categories by a nationally recognized

statistical rating organization:

(i) The issue;

(ii) The issuer or guarantor

(implicitly); or

(iii) Other outstanding unsecured

long-term debt securities issued or

guaranteed by the government or entity;

or

(5) A foreign security that is a

nonconvertible debt security that meets

all of the following requirements:

(i) At the time of original issue, a

principal amount of at least

$100,000,000 was outstanding;

(ii) At the time of the extension of

credit, the creditor has a reasonable

basis for believing that the issuer is not

in default on interest or principal

payments; and

(iii) At the time of the extension of

credit, the issue is rated in one of the

two highest rating categories by a

nationally recognized statistical rating

organization; or

(6) Any nonconvertible debt security

that meets all of the following

requirements:

(i) At the time of the extension of

credit, the creditor has a reasonable

basis for believing that the issuer is not

in default on interest or principal

payments; and

(ii) At the time of the extension of

credit, the issue is rated in one of the

four highest rating categories by a

nationally recognized statistical rating

organization.

OTC margin stock means any equity

security traded over-the-counter that the

Board has determined has the degree of

national investor interest, the depth and

breadth of market, the availability of

information respecting the security and

its issuer, and the character and

permanence of the issuer to warrant

being treated like an equity security

traded on a national securities

exchange. An OTC stock is not

considered to be an OTC margin stock

unless it appears on the Board’s

periodically published list of OTC

margin stocks.

Overlying option means:

(1) A put option purchased or a call

option written against a long position in

an underlying asset in the specialist

record in § 220.12(b); or

(2) A call option purchased or a put

option written against a short position

in an underlying asset in the specialist

record in § 220.12(b).

Payment period means the number of

business days in the standard securities

settlement cycle in the United States, as

defined in paragraph (a) of SEC Rule

15c6–1 (17 CFR 240.15c6–1(a)), plus

two business days.

Permitted offset position means, in

the case of an option in which a

specialist makes a market, a position in

the underlying asset or other related

assets, and in the case of other securities

in which a specialist makes a market, a

position in options overlying the

securities in which a specialist makes a

market, provided the positions qualify

as permitted offsets under the rules of

the national securities exchange with

which the specialist is registered, and

further provided all such rules have

been approved or amended by the SEC.

Until June 1, 1997, permitted offsets are

determined by reference to section

220.12(b)(6).

Purpose credit means credit for the

purpose of:

(1) Buying, carrying, or trading in

securities; or

(2) Buying or carrying any part of an

investment contract security which

shall be deemed credit for the purpose

of buying or carrying the entire security.

Registered security means any

security that:

(1) Is registered on a national

securities exchange; or

(2) Has unlisted trading privileges on

a national securities exchange.

Short call or short put means a call

option or a put option that is issued,

endorsed, or guaranteed in or for an

account.

(1) A short call that is not cash-settled

obligates the customer to sell the

underlying asset at the exercise price

upon receipt of a valid exercise notice

or as otherwise required by the option

contract.

(2) A short put that is not cash-settled

obligates the customer to purchase the

underlying asset at the exercise price

upon receipt of a valid exercise notice
20392 Federal Register / Vol. 61, No. 88 / Monday, May 6, 1996 / Rules and Regulations

or as otherwise required by the option

contract.

(3) A short call or a short put that is

cash-settled obligates the customer to

pay the holder of an in the money long

put or long call who has, or has been

deemed to have, exercised the option

the cash difference between the exercise

price and the current assigned value of

the option as established by the option

contract.

Specialist joint account means an

account which, by written agreement,

provides for the commingling of the

security positions of the participants

and a sharing of profits and losses from

the account on some predetermined

ratio.

Underlying asset means:

(1) the security or other asset that will

be delivered upon exercise of an option;

or

(2) In the case of a cash-settled option,

the securities or other assets which

comprise the index or other measure

from which the option’s value is

derived.

§ 220.3 General provisions.

(a) Records. The creditor shall

maintain a record for each account

showing the full details of all

transactions.

(b) Separation of accounts. Except as

provided for in the margin account and

the special memorandum account, the

requirements of an account may not be

met by considering items in any other

account. If withdrawals of cash or

securities are permitted under the

regulation, written entries shall be made

when cash or securities are used for

purposes of meeting requirements in

another account.

(c) Maintenance of credit. Except as

prohibited by this part, any credit

initially extended in compliance with

this part may be maintained regardless

of:

(1) Reductions in the customer’s

equity resulting from changes in market

prices;

(2) Any security in an account ceasing

to be margin or exempted; or

(3) Any change in the margin

requirements prescribed under this part.

(d) Guarantee of accounts. No

guarantee of a customer’s account shall

be given any effect for purposes of this

part.

(e) Receipt of funds or securities. (1)

A creditor, acting in good faith, may

accept as immediate payment:

(i) Cash or any check, draft, or order

payable on presentation; or

(ii) Any security with sight draft

attached.

(2) A creditor may treat a security,

check or draft as received upon written

notification from another creditor that

the specified security, check, or draft

has been sent.

(3) Upon notification that a check,

draft, or order has been dishonored or

when securities have not been received

within a reasonable time, the creditor

shall take the action required by this

part when payment or securities are not

received on time.

(4) To temporarily finance a

customer’s receipt of securities pursuant

to an employee benefit plan registered

on SEC Form S–8 or the withholding

taxes for an employee stock award plan,

a creditor may accept, in lieu of the

securities, a properly executed exercise

notice, where applicable, and

instructions to the issuer to deliver the

stock to the creditor. Prior to

acceptance, the creditor must verify that

the issuer will deliver the securities

promptly and the customer must

designate the account into which the

securities are to be deposited.

(f) Exchange of securities. (1) To

enable a customer to participate in an

offer to exchange securities which is

made to all holders of an issue of

securities, a creditor may submit for

exchange any securities held in a

margin account, without regard to the

other provisions of this part, provided

the consideration received is deposited

into the account.

(2) If a nonmargin, nonexempted

security is acquired in exchange for a

margin security, its retention,

withdrawal, or sale within 60 days

following its acquisition shall be treated

as if the security is a margin security.

(g) Valuing securities. The current

market value of a security shall be

determined as follows:

(1) Throughout the day of the

purchase or sale of a security, the

creditor shall use the security’s total

cost of purchase or the net proceeds of

its sale including any commissions

charged.

(2) At any other time, the creditor

shall use the closing sale price of the

security on the preceding business day,

as shown by any regularly published

reporting or quotation service. If there is

no closing price, the creditor may use

any reasonable estimate of the market

value of the security as of the close of

business on the preceding business day.

(h) Innocent mistakes. If any failure to

comply with this part results from a

mistake made in good faith in executing

a transaction or calculating the amount

of margin, the creditor shall not be

deemed in violation of this part if,

promptly after the discovery of the

mistake, the creditor takes appropriate

corrective action.

(i) Foreign currency. Freely

convertible foreign currency may be

treated at its U.S. dollar equivalent,

provided the currency is marked-tomarket daily.

§ 220.4 Margin account.

(a) Margin transactions. (1) All

transactions not specifically authorized

for inclusion in another account shall be

recorded in the margin account.

(2) A creditor may establish separate

margin accounts for the same person to:

(i) Clear transactions for other

creditors where the transactions are

introduced to the clearing creditor by

separate creditors; or

(ii) Clear transactions through other

creditors if the transactions are cleared

by separate creditors; or

(iii) Provide one or more accounts

over which the creditor or a third party

investment adviser has investment

discretion.

(b) Required margin—(1)

Applicability. The required margin for

each long or short position in securities

is set forth in § 220.18 (the Supplement)

and is subject to the following

exceptions and special provisions.

(2) Short sale against the box. A short

sale ‘‘against the box’’ shall be treated as

a long sale for the purpose of computing

the equity and the required margin.

(3) When-issued securities. The

required margin on a net long or net

short commitment in a when-issued

security is the margin that would be

required if the security were an issued

margin security, plus any unrealized

loss on the commitment or less any

unrealized gain.

(4) Stock used as cover. (i) When a

short position held in the account serves

in lieu of the required margin for a short

put, the amount prescribed by

paragraph (b)(1) of this section as the

amount to be added to the required

margin in respect of short sales shall be

increased by any unrealized loss on the

position.

(ii) When a security held in the

account serves in lieu of the required

margin for a short call, the security shall

be valued at no greater than the exercise

price of the short call.

(5) Accounts of partners. If a partner

of the creditor has a margin account

with the creditor, the creditor shall

disregard the partner’s financial

relations with the firm (as shown in the

partner’s capital and ordinary drawing

accounts) in calculating the margin or

equity of the partner’s margin account.

(6) Contribution to joint venture. If a

margin account is the account of a joint

venture in which the creditor

participates, any interest of the creditor

in the joint account in excess of the
Federal Register / Vol. 61, No. 88 / Monday, May 6, 1996 / Rules and Regulations 20393

interest which the creditor would have

on the basis of its right to share in the

profits shall be treated as an extension

of credit to the joint account and shall

be margined as such.

(7) Transfer of accounts. (i) A margin

account that is transferred from one

creditor to another may be treated as if

it had been maintained by the transferee

from the date of its origin, if the

transferee accepts, in good faith, a

signed statement of the transferor (or, if

that is not practicable, of the customer),

that any margin call issued under this

part has been satisfied.

(ii) A margin account that is

transferred from one customer to

another as part of a transaction, not

undertaken to avoid the requirements of

this part, may be treated as if it had been

maintained for the transferee from the

date of its origin, if the creditor accepts

in good faith and keeps with the

transferee account a signed statement of

the transferor describing the

circumstances for the transfer.

(8) Credit denominated in foreign

currency. A creditor may extend credit

denominated in any freely convertible

foreign currency.

(9) Options. The following provisions

are in force until June 1, 1997:

(i) Margin or cover for options on

exempted debt securities, certificates of

deposit, stock indices, or securities

exchange traded options on foreign

currencies. The required margin for

each transaction involving any short put

or short call on an exempted debt

security, certificate of deposit, stock

index, or foreign currency (if the option

is traded on a securities exchange), shall

be the amount or position in lieu of

margin set forth in § 220.18 (the

Supplement).

(ii) Margin for options on equity

securities. The required margin for each

transaction involving any short put or

short call on an equity security shall be

the amount set forth in § 220.18 (the

Supplement).

(iii) Cover or positions in lieu of

margin. No margin is required for an

option written on an equity security

position when the account holds any of

the following:

(A) The underlying asset in the case

of a short call, or a short position in the

underlying asset in the case of a short

put;

(B) Securities immediately convertible

into or exchangeable for the underlying

asset without the payment of money in

the case of a short call, if the right to

convert or exchange does not expire on

or before the expiration date of the short

call;

(C) An escrow agreement for the

underlying security or foreign exchange

(in the case of a short call) or cash (in

the case of a short put);

(D) A long call on the same number

of shares of the same underlying asset

if the long call does not expire before

the expiration date of the short call, and

if the amount (if any), by which the

exercise price of the long call exceeds

the exercise price of the short call is

deposited in the account;

(E) A long put on the same number of

shares of the same underlying asset if

the long put does not expire before the

expiration date of the short put, and if

the amount (if any), by which the

exercise price of the short put exceeds

the exercise price of the long put is

deposited in the account;

(F) A warrant to purchase the

underlying asset, in the case of a short

call, if the warrant does not expire on

or before the expiration date of the short

call, and if the amount (if any), by

which the exercise price of the short call

is deposited in the account. A warrant

used in lieu of the required margin

under this provision shall contribute no

equity to the account.

(iv) Straddles. When both a short put

and a short call are in a margin account

on the same number of shares of the

same underlying security, the required

margin shall be the margin on either the

short put of the short call, whichever is

greater, plus any unrealized loss on the

other option.

(v) Exclusive designation. The

customer may designate at the time the

option order is entered which security

position held in the account is to serve

in lieu of the required margin, if such

service is offered by the creditor; or the

customer may have a standing

agreement with the creditor as to the

method to be used for determining on

any given day which security position

will be used in lieu of the margin to

support an option transaction. Any

security held in the account which

serves in lieu of the required margin for

a short put or a short call shall be

unavailable to support any other option

transaction in the account.

(c) When additional margin is

required—(1) Computing deficiency. All

transactions on the same day shall be

combined to determine whether

additional margin is required by the

creditor. For the purpose of computing

equity in an account, security positions

are established or eliminated and a

credit or debit created on the trade date

of a security transaction. Additional

margin is required on any day when the

day’s transactions create or increase a

margin deficiency in the account and

shall be for the amount of the margin

deficiency so created or increased.

(2) Satisfaction of deficiency. The

additional required margin may be

satisfied by a transfer from the special

memorandum account or by a deposit of

cash, margin securities, exempted

securities, or any combination thereof.

(3) Time limits. (i) A margin call shall

be satisfied within one payment period

after the margin deficiency was created

or increased.

(ii) The payment period may be

extended for one or more limited

periods upon application by the creditor

to its examining authority unless the

examining authority believes that the

creditor is not acting in good faith or

that the creditor has not sufficiently

determined that exceptional

circumstances warrant such action.

Applications shall be filed and acted

upon prior to the end of the payment

period or the expiration of any

subsequent extension.

(4) Satisfaction restriction. Any

transaction, position, or deposit that is

used to satisfy one requirement under

this part shall be unavailable to satisfy

any other requirement.

(d) Liquidation in lieu of deposit. If

any margin call is not met in full within

the required time, the creditor shall

liquidate securities sufficient to meet

the margin call or to eliminate any

margin deficiency existing on the day

such liquidation is required, whichever

is less. If the margin deficiency created

or increased is $1000 or less, no action

need be taken by the creditor.

(e) Withdrawals of cash or securities.

(1) Cash or securities may be withdrawn

from an account, except if:

(i) Additional cash or securities are

required to be deposited into the

account for a transaction on the same or

a previous day; or

(ii) The withdrawal, together with

other transactions, deposits, and

withdrawals on the same day, would

create or increase a margin deficiency.

(2) Margin excess may be withdrawn

or may be transferred to the special

memorandum account (§ 220.5) by

making a single entry to that account

which will represent a debit to the

margin account and a credit to the

special memorandum account.

(3) If a creditor does not receive a

distribution of cash or securities which

is payable with respect to any security

in a margin account on the day it is

payable and withdrawal would not be

permitted under paragraph (e) of this

section, a withdrawal transaction shall

be deemed to have occurred on the day

the distribution is payable.

(f) Interest, service charges, etc. (1)

Without regard to the other provisions

of this section, the creditor, in its usual

practice, may debit the following items
20394 Federal Register / Vol. 61, No. 88 / Monday, May 6, 1996 / Rules and Regulations

to a margin account if they are

considered in calculating the balance of

such account:

(i) Interest charged on credit

maintained in the margin account;

(ii) Premiums on securities borrowed

in connection with short sales or to

effect delivery;

(iii) Dividends, interest, or other

distributions due on borrowed

securities;

(iv) Communication or shipping

charges with respect to transactions in

the margin account; and

(v) Any other service charges which

the creditor may impose.

(2) A creditor may permit interest,

dividends, or other distributions

credited to a margin account to be

withdrawn from the account if:

(i) The withdrawal does not create or

increase a margin deficiency in the

account; or

(ii) The current market value of any

securities withdrawn does not exceed

10 percent of the current market value

of the security with respect to which

they were distributed.

§ 220.5 Special memorandum account.

(a) A special memorandum account

(SMA) may be maintained in

conjunction with a margin account. A

single entry amount may be used to

represent both a credit to the SMA and

a debit to the margin account. A transfer

between the two accounts may be

effected by an increase or reduction in

the entry. When computing the equity

in a margin account, the single entry

amount shall be considered as a debit in

the margin account. A payment to the

customer or on the customer’s behalf or

a transfer to any of the customer’s other

accounts from the SMA reduces the

single entry amount.

(b) The SMA may contain the

following entries:

(1) Dividend and interest payments;

(2) Cash not required by this part,

including cash deposited to meet a

maintenance margin call or to meet any

requirement of a self-regulatory

organization that is not imposed by this

part;

(3) Proceeds of a sale of securities or

cash no longer required on any expired

or liquidated security position that may

be withdrawn under § 220.4(e); and

(4) Margin excess transferred from the

margin account under § 220.4(e)(2).

§ 220.6 Government securities account.

In a government securities account, a

creditor may effect and finance

transactions involving government

securities, provided the transaction is

not prohibited by section 15C of the Act

or any rule thereunder.

§ 220.7 Arbitrage account.

In an arbitrage account a creditor may

effect and finance for any customer bona

fide arbitrage transactions. For the

purpose of this section, the term ‘‘bona

fide arbitrage’’ means:

(a) A purchase or sale of a security in

one market together with an offsetting

sale or purchase of the same security in

a different market at as nearly the same

time as practicable for the purpose of

taking advantage of a difference in

prices in the two markets; or

(b) A purchase of a security which is,

without restriction other then the

payment of money, exchangeable or

convertible within 90 calendar days of

the purchase into a second security

together with an offsetting sale of the

second security at or about the same

time, for the purpose of taking

advantage of a concurrent disparity in

the prices of the two securities.

§ 220.8 Cash account.

(a) Permissible transactions. In a cash

account, a creditor, may:

(1) Buy for or sell to any customer any

security or other asset if:

(i) There are sufficient funds in the

account; or

(ii) The creditor accepts in good faith

the customer’s agreement that the

customer will promptly make full cash

payment for the security or asset before

selling it and does not contemplate

selling it prior to making such payment;

(2) Buy from or sell for any customer

any security or other asset if:

(i) The security is held in the account;

or

(ii) The creditor accepts in good faith

the customer’s statement that the

security is owned by the customer or the

customer’s principal, and that it will be

promptly deposited in the account;

(3) Issue, endorse, or guarantee, or sell

an option for any customer as part of a

covered option transaction; and

(4) Use an escrow agreement in lieu

of the cash, cash equivalents or

underlying asset position if:

(i) In the case of a short call or a short

put, the creditor is advised by the

customer that the required securities,

assets or cash are held by a person

authorized to issue an escrow agreement

and the creditor independently verifies

that the appropriate escrow agreement

will be delivered by the person

promptly; or

(ii) In the case of a call issued,

endorsed, guaranteed, or sold on the

same day the underlying asset is

purchased in the account and the

underlying asset is to be delivered to a

person authorized to issue an escrow

agreement, the creditor verifies that the

appropriate escrow agreement will be

delivered by the person promptly.

(b) Time periods for payment;

cancellation or liquidation—(1) Full

cash payment. A creditor shall obtain

full cash payment for customer

purchases—

(i) Within one payment period of the

date:

(A) Any nonexempted security was

purchased;

(B) Any when-issued security was

made available by the issuer for delivery

to purchasers;

(C) Any ‘‘when distributed’’ security

was distributed under a published plan;

(D) A security owned by the customer

has matured or has been redeemed and

a new refunding security of the same

issuer has been purchased by the

customer, provided:

(1) The customer purchased the new

security no more than 35 calendar days

prior to the date of maturity or

redemption of the old security;

(2) The customer is entitled to the

proceeds of the redemption; and

(3) The delayed payment does not

exceed 103 percent of the proceeds of

the old security.

(ii) In the case of the purchase of a

foreign security, within one payment

period of the trade date or within one

day after the date on which settlement

is required to occur by the rules of the

foreign securities market, provided this

period does not exceed the maximum

time permitted by this part for delivery

against payment transactions.

(2) Delivery against payment. If a

creditor purchases for or sells to a

customer a security in a delivery against

payment transaction, the creditor shall

have up to 35 calendar days to obtain

payment if delivery of the security is

delayed due to the mechanics of the

transaction and is not related to the

customer’s willingness or ability to pay.

(3) Shipment of securities, extension.

If any shipment of securities is

incidental to consummation of a

transaction, a creditor may extend the

payment period by the number of days

required for shipment, but not by more

than one additional payment period.

(4) Cancellation; liquidation;

minimum amount. A creditor shall

promptly cancel or otherwise liquidate

a transaction or any part of a transaction

for which the customer has not made

full cash payment within the required

time. A creditor may, at its option,

disregard any sum due from the

customer not exceeding $1000.

(c) 90 day freeze. (1) If a nonexempted

security in the account is sold or

delivered to another broker or dealer

without having been previously paid for

in full by the customer, the privilege of
Federal Register / Vol. 61, No. 88 / Monday, May 6, 1996 / Rules and Regulations 20395

delaying payment beyond the trade date

shall be withdrawn for 90 calendar days

following the date of sale of the security.

Cancellation of the transaction other

than to correct an error shall constitute

a sale.

(2) The 90 day freeze shall not apply

if:

(i) Within the period specified in

paragraph (b)(1) of this section, full

payment is received or any check or

draft in payment has cleared and the

proceeds from the sale are not

withdrawn prior to such payment or

check clearance; or

(ii) The purchased security was

delivered to another broker or dealer for

deposit in a cash account which holds

sufficient funds to pay for the security.

The creditor may rely on a written

statement accepted in good faith from

the other broker or dealer that sufficient

funds are held in the other cash

account.

(d) Extension of time periods;

transfers. (1) Unless the creditor’s

examining authority believes that the

creditor is not acting in good faith or

that the creditor has not sufficiently

determined that exceptional

circumstances warrant such action, it

may upon application by the creditor:

(i) Extend any period specified in

paragraph (b) of this section;

(ii) Authorize transfer to another

account of any transaction involving the

purchase of a margin or exempted

security; or

(iii) Grant a waiver from the 90 day

freeze.

(2) Applications shall be filed and

acted upon prior to the end of the

payment period, or in the case of the

purchase of a foreign security within the

period specified in paragraph (b)(1)(ii)

of this section, or the expiration of any

subsequent extension.

§ 220.9 Nonsecurities credit and employee

stock ownership account.

(a) In a nonsecurities credit account a

creditor may:

(1) Effect and carry transactions in

commodities;

(2) Effect and carry transactions in

foreign exchange;

(3) Extend and maintain secured or

unsecured nonpurpose credit, subject to

the requirements of paragraph (b) of this

section; and

(4) Extend and maintain credit to

employee stock ownership plans

without regard to the other sections of

this part.

(b) Every extension of credit, except

as provided in paragraphs (a)(1) and

(a)(2) of this section, shall be deemed to

be purpose credit unless, prior to

extending the credit, the creditor

accepts in good faith from the customer

a written statement that it is not purpose

credit. The statement shall conform to

the requirements established by the

Board. To accept the customer’s

statement in good faith, the creditor

shall be aware of the circumstances

surrounding the extension of credit and

shall be satisfied that the statement is

truthful.

§ 220.10 Omnibus account.

(a) In an omnibus account, a creditor

may effect and finance transactions for

a broker or dealer who is registered with

the SEC under section 15 of the Act and

who gives the creditor written notice

that:

(1) All securities will be for the

account of customers of the broker or

dealer; and

(2) Any short sales effected will be

short sales made on behalf of the

customers of the broker or dealer other

than partners.

(b) The written notice required by

paragraph (a) of this section shall

conform to any SEC rule on the

hypothecation of customers’ securities

by brokers or dealers.

§ 220.11 Broker-dealer credit account.

(a) Permissible transactions. In a

broker-dealer credit account, a creditor

may:

(1) Purchase any security from or sell

any security to another creditor or

person regulated by a foreign securities

authority under a good faith agreement

to promptly deliver the security against

full payment of the purchase price.

(2) Effect or finance transactions of

any of its owners if the creditor is a

clearing and servicing broker or dealer

owned jointly or individually by other

creditors.

(3) Extend and maintain credit to any

partner or stockholder of the creditor for

the purpose of making a capital

contribution to, or purchasing stock of,

the creditor, affiliated corporation or

another creditor.

(4) Extend and maintain, with the

approval of the appropriate examining

authority:

(i) Credit to meet the emergency needs

of any creditor; or

(ii) Subordinated credit to another

creditor for capital purposes, if the other

creditor:

(A) Is an affiliated corporation or

would not be considered a customer of

the lender apart from the subordinated

loan; or

(B) Will not use the proceeds of the

loan to increase the amount of dealing

in securities for the account of the

creditor, its firm or corporation or an

affiliated corporation.

(5) Effect transactions for a customer

as part of a ‘‘prime broker’’ arrangement

in conformity with SEC guidelines.

(b) Affiliated corporations. For

purposes of paragraphs (a)(3) and (a)(4)

of this section ‘‘affiliated corporation’’

means a corporation all the common

stock of which is owned directly or

indirectly by the firm or general

partners and employees of the firm, or

by the corporation or holders of the

controlling stock and employees of the

corporation and the affiliation has been

approved by the creditor’s examining

authority.

§ 220.12 Market functions account.

(a) Requirements. In a market

functions account, a creditor may effect

or finance the transactions of market

participants in accordance with the

following provisions. A separate record

shall be kept for the transactions

specified for each category described in

paragraphs (b) through (e) of this

section. Any position in a separate

record shall not be used to meet the

requirements of any other category.

(b) Specialists.—(1) Applicability. A

creditor may clear or finance specialist

transactions and permitted offset

positions for any specialist, or any

specialist joint account, in which all

participants, or all participants other

than the creditor, are registered as

specialists on a national securities

exchange that requires regular reports

on the use of specialist credit from the

registered specialists.

(2) Required margin. The required

margin for a specialist’s transactions

shall be:

(i) Good faith margin for:

(A) Any long or short position in a

security in which the specialist makes a

market;

(B) Any wholly-owned margin

security or exempted security; or

(C) Any permitted offset position.

(ii) The margin prescribed by § 220.18

(the Supplement) when a security

purchased or sold short in the account

does not qualify as a specialist or

permitted offset position.

(3) Additional margin; restriction on

‘‘free-riding.’’ (i) Except as required by

paragraph (b)(4) of this section, the

creditor shall issue a margin call on any

day when additional margin is required

as a result of specialist transactions. The

creditor may allow the specialist a

maximum of one payment period to

satisfy a margin call.

(ii) If a specialist fails to satisfy a

margin call within the period specified

in paragraph (b)(3) of this section (and

the creditor is required to liquidate

securities to satisfy the call), the creditor

shall be prohibited for a 15 calendar day
20396 Federal Register / Vol. 61, No. 88 / Monday, May 6, 1996 / Rules and Regulations

period from extending any further credit

to the specialist to finance transactions

in nonspecialty securities.

(iii) The restriction on ‘‘free-riding’’

shall not apply to:

(A) Any specialist on a national

securities exchange that has an SECapproved rule on ‘‘free-riding’’ by

specialists; or

(B) the acquisition or liquidation of a

permitted offset position.

(4) Deficit status. On any day when a

specialist’s separate record would

liquidate to a deficit, the creditor shall

not extend any further specialist credit

in the account and shall issue a margin

call at least as large as the deficit. If the

call is not met by noon of the following

business day, the creditor shall liquidate

positions in the specialist’s account.

(5) Withdrawals. Withdrawals may be

permitted to the extent that the equity

exceeds the margin requirements

specified in paragraph (b)(2) of this

section.

(6) Permitted offset positions. Until

June 1, 1997, a specialist in options may

establish, on a share-for-share basis, a

long or short position in the securities

underlying the options in which the

specialist makes a market, and a

specialist in securities other than

options may purchase or write options

overlying the securities in which the

specialist makes a market, if the account

holds the following permitted offset

positions:

(i) A short option position which is

‘‘in or at the money’’ and is not offset

by a long or short option position for an

equal or greater number of shares of the

same underlying security which is ‘‘in

the money’’;

(ii) A long option position which is

‘‘in or at the money’’ and is not offset

by a long or short option position for an

equal or greater number of shares of the

same underlying security which is ‘‘in

the money’’;

(iii) A short option position against

which an exercise notice was tendered;

(iv) A long option position which was

exercised;

(v) A net long position in a security

(other than an option) in which the

specialist makes a market; or

(vi) A net short position in a security

(other than an option) in which the

specialist makes a market.

(c) Underwriters and distributors. A

creditor may effect or finance for any

dealer or group of dealers transactions

for the purpose of facilitating the

underwriting or distribution of all or a

part of an issue of securities with a good

faith margin.

(d) OTC marketmakers and third

marketmakers. (1) A creditor may clear

or finance with a good faith margin,

marketmaking transactions for a creditor

who is a registered NASDAQ

marketmaker or a qualified third

marketmaker as defined in SEC Rule

3b–8 (17 CFR 240.3b-8).

(2) If the credit extended to a

marketmaker ceases to be for the

purpose of marketmaking, or the dealer

ceases to be a marketmaker for an issue

of securities for which credit was

extended, the credit shall be subject to

the margin specified in § 220.18 (the

Supplement).

(e) Odd-lot dealers. A creditor may

clear and finance odd-lot transactions

for any creditor who is registered as an

odd-lot dealer on a national securities

exchange with a good faith margin.

§ 220.13 Arranging for loans by others.

A creditor may arrange for the

extension or maintenance of credit to or

for any customer by any person,

provided the creditor does not willfully

arrange credit that violates parts 207,

221, or 224 of this chapter.

§ 220.14 Clearance of securities, options,

and futures.

(a) Credit for clearance of securities.

The provisions of this part shall not

apply to the extension or maintenance

of any credit that is not for more than

one day if it is incidental to the

clearance of transactions in securities

directly between members of a national

securities exchange or association or

through any clearing agency registered

with the SEC.

(b) Deposit of securities with a

clearing agency. The provisions of this

part shall not apply to the deposit of

securities with an options or futures

clearing agency for the purpose of

meeting the deposit requirements of the

agency if:

(1) The clearing agency:

(i) Issues, guarantees performance on,

or clears transactions in, any security

(including options on any security,

certificate of deposit, securities index or

foreign currency); or

(ii) Guarantees performance of

contracts for the purchase or sale of a

commodity for future delivery or

options on such contracts;

(2) The clearing agency is registered

with the Securities and Exchange

Commission or is the clearing agency for

a contract market regulated by the

Commodity Futures Trading

Commission; and

(3) The deposit consists of any margin

security and complies with the rules of

the clearing agency that have been

approved by the Securities and

Exchange Commission or the

Commodity Futures Trading

Commission.

§ 220.15 Borrowing by creditors.

(a) Restrictions on borrowing. A

creditor may not borrow in the ordinary

course of business as a broker or dealer

using as collateral any registered

nonexempted security, except:

(1) From or through a member bank of

the Federal Reserve System; or

(2) From any nonmember bank that

has filed with the Board an agreement

as prescribed in paragraph (b) of this

section, which agreement is still in

effect; or

(3) From another creditor if the loan

is permissible under this part.

(b) Agreements of nonmember banks.

(1) A nonmember bank shall file an

agreement that conforms to the

requirements of section 8(a) of the Act

(See Form FR T–1, T–2).

(2) Any nonmember bank may

terminate its agreement if it obtains the

written consent of the Board.

§ 220.16 Borrowing and lending securities.

(a) Without regard to the other

provisions of this part, a creditor may

borrow or lend securities for the

purpose of making delivery of the

securities in the case of short sales,

failure to receive securities required to

be delivered, or other similar situations.

Each borrowing shall be secured by a

deposit of one or more of the following:

cash, cash equivalents, foreign sovereign

nonconvertible debt securities that are

margin securities, collateral acceptable

for borrowings of securities pursuant to

SEC Rule 15c3–3 (17 CFR 240.15c3–3),

or irrevocable letters of credit issued by

a bank insured by the Federal Deposit

Insurance Corporation or a foreign bank

that has filed an agreement with the

Board on Form FR T–1, T–2. Such

deposit made with the lender of the

securities shall have at all times a value

at least equal to 100 percent of the

market value of the securities borrowed,

computed as of the close of the

preceding business day. If a creditor

reasonably anticipates a short sale, such

borrowing may be made up to one

standard settlement cycle in advance of

trade date.

(b) A creditor may lend non-U.S.

traded foreign securities to a foreign

person (or borrow such securities for the

purpose of relending them to a foreign

person) for any purpose lawful in the

country in which they are to be used.

Each borrowing shall be secured with

collateral having at all times a value at

least equal to 100 percent of the market

value of the securities borrowed,

computed as of the close of the

preceding business day.
Federal Register / Vol. 61, No. 88 / Monday, May 6, 1996 / Rules and Regulations 20397

§ 220.17 Requirements for the list of

marginable OTC stocks and the list of

foreign margin stocks.

(a) Requirements for inclusion on the

list of marginable OTC stocks. Except as

provided in paragraph (f) of this section,

OTC margin stock shall meet the

following requirements:

(1) Four or more dealers stand willing

to, and do in fact, make a market in such

stock and regularly submit bona fide

bids and offers to an automated

quotations system for their own

accounts;

(2) The minimum average bid price of

such stock, as determined by the Board,

is at least $5 per share;

(3) The stock is registered under

section 12 of the Act, is issued by an

insurance company subject to section

12(g)(2)(G) of the Act, 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 is a stock of an issuer

required to file reports under section

15(d) of the Act;

(4) Daily quotations for both bid and

asked prices for the stock are

continuously available to the general

public;

(5) The stock has been publicly traded

for at least six months;

(6) The issuer has at least $4 million

of capital, surplus, and undivided

profits;

(7) There are 400,000 or more shares

of such stock outstanding in addition to

shares held beneficially by officers,

directors or beneficial owners of more

than 10 percent of the stock;

(8) There are 1,200 or more holders of

record, as defined in SEC Rule 12g5–1

(17 CFR 240.12g5–1), of the stock who

are not officers, directors or beneficial

owners of 10 percent or more of the

stock, or the average daily trading

volume of such stock as determined by

the Board, is at least 500 shares; and

(9) The issuer or a predecessor in

interest has been in existence for at least

three years.

(b) Requirements for continued

inclusion on the list of marginable OTC

stocks. Except as provided in paragraph

(f) of this section, OTC margin stock

shall meet the following requirements:

(1) Three or more dealers stand

willing to, and do in fact, make a market

in such stock and regularly submit bona

fide bids and offers to an automated

quotations system for their own

accounts;

(2) The minimum average bid price of

such stocks, as determined by the

Board, is at least $2 per share;

(3) The stock is registered as specified

in paragraph (a)(3) of this section;

(4) Daily quotations for both bid and

asked prices for the stock are

continuously available to the general

public;

(5) The issuer has at least $1 million

of capital, surplus, and undivided

profits;

(6) There are 300,000 or more shares

of such stock outstanding in addition to

shares held beneficially by officers,

directors, or beneficial owners of more

than 10 percent of the stock; and

(7) There continue to be 800 or more

holders of record, as defined in SEC

Rule 12g5–1 (17 CFR 240.12g5–1), of the

stock who are not officers, directors, or

beneficial owners of 10 percent or more

of the stock, or the average daily trading

volume of such stock, as determined by

the Board, is at least 300 shares.

(c) Requirements for inclusion on the

list of foreign margin stocks. Except as

provided in paragraph (f) of this section,

a foreign margin stock shall be a foreign

security deemed to have a ‘‘ready

market’’ for purposes of SEC Rule 15c3–

1 (17 CFR 240.15c3–1) or meet the

following requirements:

(1) The security is listed for trading on

or through the facilities of a foreign

securities exchange or a recognized

foreign securities market and has been

trading on such exchange or market for

at least six months;

(2) Daily quotations for both bid and

asked or last sale prices for the security

provided by the foreign securities

exchange or foreign securities market on

which the security is traded are

continuously available to creditors in

the United States pursuant to an

electronic quotation system;

(3) The aggregate market value of

shares, the ownership of which is

unrestricted, is not less than $1 billion;

(4) The average weekly trading

volume of such security during the

preceding six months is either at least

200,000 shares or $1 million; and

(5) The issuer or a predecessor in

interest has been in existence for at least

five years.

(d) Requirements for continued

inclusion on the list of foreign margin

stocks. Except as provided in paragraph

(f) of this section, a foreign margin stock

shall be a foreign security deemed to

have a ‘‘ready market’’ for purposes of

SEC Rule 15c3–1 (17 CFR 240.15c3–1)

or meet the following requirements:

(1) The security continues to meet the

requirements specified in paragraphs (c)

(1) and (2) of this section;

(2) The aggregate market value of

shares, the ownership of which is

unrestricted, is not less than $500

million; and

(3) The average weekly trading

volume of such security during the

preceding six months is either at least

100,000 shares or $500,000.

(e) Removal from the lists. The Board

shall periodically remove from the lists

any stock that:

(1) Ceases to exist or of which the

issuer ceases to exist; or

(2) No longer substantially meets the

provisions of paragraph (b) or (d) of this

section or the definition of OTC margin

stock.

(f) Discretionary authority of Board.

Without regard to other paragraphs of

this section, the Board may add to, or

omit or remove from the list of

marginable OTC stocks and the list of

foreign margin stocks and equity

security, if in the judgment of the Board,

such action is necessary or appropriate

in the public interest.

(g) Unlawful representations. It shall

be unlawful for any creditor to make,or

cause to be made, any representation to

the effect that the inclusion of a security

on the list of marginable OTC stocks or

the list of foreign margin stocks 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 similar

communication containing a reference

to the Board in connection with the lists

or stocks on those lists shall be an

unlawful representation.

§ 220.18 Supplement: Margin

requirements.

The required margin for each security

position held in a margin account shall

be as follows:

(a) Margin equity security, except for

an exempted security, money market

mutual fund or exempted securities

mutual fund, warrant on a securities

index or foreign currency or a long

position in an option: 50 percent of the

current market value of the security or

the percentage set by the regulatory

authority where the trade occurs,

whichever is greater.

(b) Exempted security, registered

nonconvertible debt security, OTC

margin bond, money market mutual

fund or exempted securities mutual

fund: The margin required by the

creditor in good faith or the percentage

set by the regulatory authority where the

trade occurs, whichever is greater.

(c) Short sale of a nonexempted

security, except for a registered

nonconvertible debt security or OTC

margin bond: 150 percent of the current
20398 Federal Register / Vol. 61, No. 88 / Monday, May 6, 1996 / Rules and Regulations

market value of the security, or 100

percent of the current market value if a

security exchangeable or convertible

within 90 calendar days without

restriction other than the payment of

money into the security sold short is

held in the account.

(d) Short sale of an exempted security,

registered nonconvertible debt security

or OTC margin bond: 100 percent of the

current market value of the security plus

the margin required by the creditor in

good faith.

(e) Nonmargin, nonexempted security:

100 percent of the current market value.

(f) Put or call on a security, certificate

of deposit, securities index or foreign

currency or a warrant on a securities

index or foreign currency:

(1) In the case of puts and calls issued

by a registered clearing corporation and

listed or traded on a registered national

securities exchange or a registered

securities association and registered

warrants on a securities index or foreign

currency, the amount, or other position

(except in the case of an option on an

equity security until June 1, 1997),

specified by the rules of the registered

national securities exchange or the

registered securities association

authorized to trade the option or

warrant, provided that all such rules

have been approved or amended by the

SEC; or

(2) In the case of all other puts and

calls, the amount, or other position,

specified by the maintenance rules of

the creditor’s examining authority.

§ 220.19 [Removed]

3. Section 220.19 is removed.

§§ 220.106, 220.107, 220.109, 220.112,

220.114–220.116, 220.120, 220.125, 220.129,

220.130 [Removed]

Interpretations

4. The following sections are removed

and reserved: 220.106, 220.107, 220.109,

220.112, 220.114, 220.115, 220.116,

220.120, 220.125, 220.129, and 220.130.

By order of the Board of Governors of the

Federal Reserve System, April 24, 1996.

William W. Wiles,

Secretary of the Board.

[FR Doc. 96–10607 Filed 5–3–96; 8:45 am]

BILLING CODE 6210–01–P