Federal Register / Vol. 61, No. 88 / Monday, May 6, 1996 / Proposed Rules 20399

1 Regulation X covers U.S. borrowers obtaining

credit outside the United States. Because Regulation

X incorporates the requirements of Regulation T, U,

or G (depending on the lender), any amendments

to those regulations automatically pass through to

Regulation X. Therefore, no amendments to

Regulation X are being proposed.

2 The Board is also continuing to review

Regulations G and U as part of its ongoing effort to

reduce regulatory burden, as mandated by section

303 of the Riegle Community Development and

Regulatory Improvement Act of 1994.

FEDERAL RESERVE SYSTEM

12 CFR Parts 207, 220, and 221

[Regulations G, T, and U; Docket No. R–

0923]

Securities Credit Transactions

AGENCY: Board of Governors of the

Federal Reserve System.

ACTION: Proposed rule.

SUMMARY: In conjunction with a final

rule printed elsewhere in today’s

Federal Register, the Board is

considering further amendments to its

margin regulations, Regulations G, T,

and U. Regulation T covers extensions

of credit by and to brokers and dealers;

Regulation U covers extensions of credit

by banks; and Regulation G covers

extensions of credit by all other U.S.

lenders.

The Board is proposing to: allow a

broker-dealer to extend ‘‘good faith’’

credit on any non-equity security rather

than only those currently permitted by

Board rules; allow lending on nonequity securities to occur in a new

‘‘non-equity’’ account, absent the

restrictions currently imposed in the

margin account; remove restrictions on

the ability of broker-dealers to calculate

required margin for non-equity

securities on a ‘‘portfolio’’ basis; ease or

eliminate the Board’s collateral

requirements for the borrowing and

lending of securities; exempt lending to

foreign persons on foreign securities by

foreign branches of U.S. broker dealers;

remove a Board interpretation that

prevents options from serving as cover

in lieu of margin for a short sale; and

allow banks to lend against exchangetraded options to the extent permitted

by the exchange listing the option.

The Board is also seeking comment on

whether it should expand the number of

equity securities eligible for loan value

under Regulation T, and on whether it

should amend Regulations G and U to

modify their method for determining

which equity securities are eligible for

loan value.

DATES: Comments should be received on

or before July 1, 1996.

ADDRESSES: Comments should refer to

Docket No. R–0923, 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 9:00 a.m. and 5:00 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; Oliver Ireland,

Associate General Counsel (202) 452–

3625 or Gregory Baer, Managing Senior

Counsel (202) 452–3236, Legal Division;

for the hearing impaired only,

Telecommunications Device for the Deaf

(TDD), Dorothea Thompson (202) 452–

3544.

SUPPLEMENTARY INFORMATION: Regulation

T implements the Board’s authority over

securities credit extended by brokerdealers under section 7 of the Securities

Exchange Act of 1934, 15 U.S.C. 78g

(the Act). Section 7 requires the Board

to regulate the amount of credit that

may be extended on securities by a

broker-dealer, requires that collateral for

securities purchases consist of

‘‘exempted securities’’ (U.S. government

and municipal securities) or securities

assigned loan value by the Board, and

prohibits a broker-dealer from extending

unsecured credit for the purpose of

purchasing securities. Regulation T

establishes the margin that a customer

of a broker-dealer must post when

engaging in a securities transaction on

credit. The ‘‘margin’’ for a security is the

converse of the security’s ‘‘loan value;’’

by definition, the two always add up to

100 percent.

Section 7 also authorizes the Board to

regulate credit extended by banks and

all other U.S. lenders. Regulation U

limits credit extended by banks to

finance the purchase or carrying by

customers of margin equity securities

when the credit is collateralized by such

securities. 12 CFR Part 221. Regulation

G limits credit extended by lenders

other than broker-dealers and banks to

finance the purchase or carrying of

margin equity securities when the credit

is collateralized by such securities. 12

CFR Part 207.1

In 1995, the Board published for

comment a series of amendments to

Regulation T that were intended to

remove constraints that were hampering

developing trends in the securities

markets. 60 FR 33763, June 29, 1995.

These trends included the erosion of

barriers between broker-dealers and

other lenders, the globalization of

securities markets, the increasing

overlap in the businesses of various

lenders, and the constant development

of new mechanisms for extending

securities credit. The Board also

solicited comment on broader changes

that could be made to Regulation T. The

recent effort to modernize Regulation T

predated but is now encompassed

within the Board’s regulatory review

under section 303 of the Riegle

Community Development and

Regulatory Improvement Act of 1994,

Pub. L. 103–325.

Extensive comment was received on

the Board’s 1995 proposal, including

voluminous responses from the major

securities trade groups. Commenters

generally supported the proposed

amendments to Regulation T, but also

emphasized the need for more

wholesale reform.

Today, the Board is elsewhere

adopting as a final rule many of the

amendments it proposed in 1995.

However, the Board is also proposing

additional amendments to Regulation T,

and seeking comment on provisions of

Regulations G and U as well.2 In

addition, the Board seeks comment on

any other steps it can take to reduce the

burden imposed by Regulation T,

including any steps to reduce the

accounting and recordkeeping burdens

of the regulation, that would be

consistent with the purposes and

requirements of the Act.

1. Good Faith Loan Value for all NonEquity Securities

Regulation T gives ‘‘good faith’’ loan

value to many but not all debt

securities. Good faith loan value means

that a broker-dealer may extend credit

on a particular security in any amount

consistent with sound credit judgment.

12 CFR 220.2. Those debt securities not

eligible for good faith loan value receive

no loan value and therefore have a

margin requirement of 100 percent.

With the adoption of today’s final

rule, the Board currently assigns a debt

security good faith loan value if it is: (1)

listed on a U.S. securities exchange, (2)

a government or municipal security, (3)

an investment grade security; or (4) a

less-than-investment grade security that

is registered with the Securities and

Exchange Commission (SEC) and has an

original principal amount of not less

than $25,000,000. 12 CFR 220.18(b).
20400 Federal Register / Vol. 61, No. 88 / Monday, May 6, 1996 / Proposed Rules

3 Section 7(d) of the Act prohibits the Board from

establishing margin requirements on non-equity

securities at banks. 15 U.S.C. 78g(d). When

Regulation G was adopted in 1968, it was modeled

on Regulation U.

Non-equity securities that are not

registered, are not government or

municipal securities, and are not

investment grade generally will

continue to receive no loan value under

Regulation T.

In contrast, the Board’s Regulations G

and U do not impose any margin

restrictions on non-broker-dealer

lenders (such as banks) when they lend

against non-equity securities, even

securities that receive no loan value

under Regulation T.3 Foreign brokerdealers and other foreign lenders, with

whom U.S. broker dealers increasingly

compete worldwide, are generally also

unconstrained. Thus, customers who

wish to borrow against non-equity

securities that receive no loan value

under Regulation T, and investors who

wish to engage in repo or forward

transactions in such securities, may go

to these other lenders.

The Board proposes to grant good

faith loan value to all non-equity

securities. To effectuate this change, the

Board is proposing to amend revised

section 220.13, discussed below, and

section 220.18 (b), (c), and (d) to include

all non-equity securities among those

securities subject to good faith margin.

A new definition of ‘‘non-equity

security’’ would be added to section

220.2 to include any security that is not

an ‘‘equity security’’ for purposes of

section 3(a)(11) of the Act. This

definition of non-equity security may

include certain equity-linked securities.

The Board seeks comment on whether it

should modify the definition of nonequity security to exclude equity-linked

securities and, if so, what securities

should be excluded.

In a conforming change, the definition

of ‘‘OTC margin bond’’ in section 220.2

would be deleted; since all non-equity

securities would receive loan value, this

definition would no longer be required.

In another conforming change, the

definition of ‘‘margin security’’ in

section 220.2 would be revised to

include any ‘‘non-equity security’’

instead of any ‘‘OTC margin bond.’’

Expanding the types of non-equity

securities eligible for good faith loan

value should expand broker-dealers’

ability to lend and put them on a more

equal footing with other lenders under

Regulations G and U. Broker-dealers

should be no less competent to

determine the loan value of noninvestment grade debt securities than a

bank or other lender would be. Finally,

any remaining regulatory concerns

could be addressed by the selfregulatory organizations (SROs), which

include the exchanges and the National

Association of Securities Dealers, who

still would be able to set their own

margin requirements for these

transactions.

2. Establishment of Non-Equity Account

Other restrictions beyond margin

requirements are also currently placed

on transactions involving non-equity

securities. Currently, any credit

extended by a broker-dealer on a nonequity security (other than a security

eligible for the government securities

account) must be recorded in the margin

account. 12 CFR 220.4. These

transactions are thus subject to the same

restrictions as equity securities with

respect to when payments must be made

and when positions must be liquidated.

On the other hand, because Regulations

U and G restrict lending only on equity

securities, banks and other lenders may

lend on non-equity securities without

such Board-imposed restrictions. 12

CFR 221.3(a); 12 CFR 207.3(b).

The Board proposes to allow any

transaction involving a non-equity

security to be effected in a new ‘‘nonequity’’ account. For example, a

customer could effect in this account:

(1) purchases of non-equity securities on

credit; (2) repurchase and reverse

repurchase agreements with brokerdealers on non-equity securities; and (3)

the purchase or sale of options on nonequity securities. All transactions in the

account would be subject to good faith

margin. In order to ensure that

unsecured credit would not be extended

under the rubric of good faith margin,

the proposed rule would prohibit any

transaction or withdrawal that would

cause the non-equity account to

liquidate to a deficit—that is, cause the

marked-to-market value of the securities

held in the account to be less than the

credit outstanding.

This account would be otherwise

unregulated. The absence of restrictions

on the terms of credit for non-equity

securities would promote equality of

treatment between broker-dealers and

banks and other lenders, who face no

Federal Reserve regulation when they

lend on non-equity securities.

The Board seeks comment on whether

the creation of a non-equity account

would be beneficial and whether the

account could be better named. The

Board also seeks comment on whether

this account could be merged with the

government securities account (12 CFR

220.6) or the nonsecurities credit

account (220.9) or both.

3. Portfolio Margining

A. Amendment to definition of good

faith margin

As noted above, Regulation T

currently allows good faith margin on

some non-equity securities, and the

Board is proposing to extend this

treatment to all non-equity securities.

‘‘Good faith margin’’ is defined in

Regulation T to mean ‘‘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’’ (emphasis

added). 12 CFR 220.2.

This definition limits so-called

‘‘portfolio margining’’—allowing

positions to be evaluated as a group and

determining collateral requirements

based upon estimated changes in the

value of that portfolio. (It would

continue to do so even if the proposed

non-equity account were adopted, as the

definition of good faith applies

regardless of where the transaction is

booked.) Regulation T has defined

limited positions that can serve as

offsets for each other, but any

combination of positions not

specifically permitted by the regulation

may not offset one another. Commenters

have for some time requested greater

flexibility to engage in cross-margining

(allowing positions in financial futures

to offset the margin required for a given

securities credit) and more broadly in

‘‘portfolio’’ or ‘‘risk-based’’ margining.

In order to remove an impediment to

portfolio margining, the Board would

amend the definition of ‘‘good faith

margin’’ to eliminate the requirement

that such margin be calculated ‘‘for a

specified security position * * *

without regard to the customer’s other

assets or securities positions held in

connection with unrelated

transactions.’’ Instead, ‘‘good faith

margin’’ would be defined to mean ‘‘the

amount of margin the creditor would

require in exercising sound credit

judgment.’’

The Board is seeking comment on

whether this definition should: (1)

apply only in the proposed non-equity

account, thereby continuing to limit

portfolio margining of securities eligible

for good faith margin in the margin

account or market functions account; or

(2) apply regardless of the account—

margin, non-equity, or market

functions—in which the transactions are

booked. In addition, the Board seeks

comment on the extent to which this

change would allow SROs and broker-
Federal Register / Vol. 61, No. 88 / Monday, May 6, 1996 / Proposed Rules 20401

4With the adoption of today’s final rule,

permissible types of collateral include cash,

securities issued or guaranteed by the United States

or its agencies, certain negotiable bank certificates

of deposit and bankers acceptances, and certain

irrevocable letters of credit issued by banks,

marginable foreign sovereign debt securities, and

any collateral acceptable to the SEC when a brokerdealer borrows securities from a customer.

5For example, a broker-dealer prohibited by

Regulation T from extending a customer 100

percent credit on a security could instead borrow

the security from the customer and post 100 percent

cash collateral; the customer could then withdraw

the cash, evading the 50 percent initial or good faith

margin requirement.

6 If this option were adopted, ‘‘loan value’’ would

be defined in Regulation T to mean an amount

equal to ‘‘1 minus the margin requirement for the

security under this part.’’

dealers greater flexibility to develop

portfolio margining systems. The Board

also seeks comment from SROs and

others on the potential benefits and

burdens of adopting a portfolio

margining system in addition to the

existing position-based system, and

whether changing the definition of good

faith margin for any or all accounts is

consistent with section 7(b) of the Act.

B. Separation of Accounts

Section 7 of the Act prohibits a

broker-dealer from extending securities

credit on any collateral other than a

security. Accordingly, Regulation T

requires that futures contracts and nonsecurities be accounted for in their own

account, and section 220.3(b) of

Regulation T generally prohibits using

items in one account (including the

nonsecurities account) from being used

to meet the margin requirements for

items in another account (including the

margin account). However, with

adoption of today’s final rule,

Regulation T will allow financial futures

to serve in lieu of margin for securities

options consistent with SRO rules. This

treatment is consistent with Section 7

because the broker-dealer is not

extending credit on the futures contract

when it considers a futures contract in

determining the amount of credit it can

extend in good faith on a security.

The proposed rule would amend

section 220.3(b) to allow explicitly

commodities and foreign exchange

positions in the nonsecurities account to

be considered in calculating margin for

any securities transaction in the

proposed non-equity account or the

margin account. The Board would

expect that these positions would be

valued in accordance with SRO rules,

where applicable, or in any event not in

excess of their marked-to market value.

The proposed rule would also amend

section 220.18 to remove a requirement

that margin be held for ‘‘each security

position.’’

The Board also seeks comment on

whether further amendments to sections

220.3(b) should be adopted to facilitate

portfolio margining—in particular,

whether the Board should modify the

general prohibition on separation of

accounts in section 220.3(b). Doing so

could allow any excess margin in one

account to be used to meet a margin

deficiency in another account. To the

extent that such a change were adopted,

the Board seeks comment on the

continuing need for a Special

Memorandum Account. As noted above,

the Board is also seeking comment on

whether the government securities

account, nonsecurities account, and

proposed non-equity account should be

combined.

C. Implementation

The Board also seeks comment on any

implementation problems that might

arise with a partial or complete move to

portfolio margining, including the need

for delaying the effective date of any

final rule in order to allow the SROs

time to amend their rules.

4. Borrowing and Lending of Securities

by Brokers-dealers

In order to facilitate short sales and

the curing of failures to deliver a

security (fails), Regulation T allows

broker-dealers to borrow and lend

securities outside of the normal margin

requirements for securities purchases.

To qualify for this treatment, borrowing

and lending transactions must not only

relate to a short sale or fail but also be

secured by cash or similarly liquid

collateral equal to 100 percent of the

value of the securities lent.4 Any

borrowing and lending of securities that

does not meet both the ‘‘purpose test’’

and the ‘‘collateral test’’ is usually a

financing, is not considered a borrowing

and lending of securities for Regulation

T purposes, and therefore is conducted

in a margin account, subject to the

appropriate margin requirement for the

underlying security.

Requiring 100 percent collateral

(marked to market daily) to secure any

stock loan reflects industry practice and

is, the Board believes, consistent with

prudent securities lending. The SEC

imposes similar requirements on the

types and amount of collateral a brokerdealer must post when it borrows

securities from a customer, and the

Department of Labor applies similar

requirements to an ERISA pension plan

when it lends securities.

Nonetheless, the Board is seeking

comment on whether the Board’s

existing collateral requirements are

necessary for Regulation T purposes.

Commenters have sought an expansion

of eligible collateral to include all

securities marginable under Regulation

T. Although the Board has expressed

concern that Regulation T could be

evaded by structuring a financing

transaction as a borrowing and lending,5

the purpose test may be adequate to

prevent such an evasion. The purpose

test limits the exception to transactions

that have a clear market purpose that is

verifiable (as any evasion becomes

evident within a few days, when no

short sale is consummated or the fail

proves illusory). The collateral test

addresses the evasion issue only

indirectly by imposing collateral

arrangements that conform to industry

practice.

Accordingly, the Board is proposing

to amend section 220.16 either to allow

any security that qualifies for loan value

to serve as collateral, valued at its

regulatory loan value,6 or to require a

bona fide posting of collateral equal to

100 percent of the value of the securities

borrowed, without requiring any

specific type of collateral. The Board

also seeks comment on whether the

collateral requirement of section 220.16

could be eliminated altogether. The

Board notes that even if the collateral/

requirements were eliminated, other

concerns might merit continued or

further regulation by the SROs or the

SEC.

5. Extensions of Credit by Foreign

Branches of U.S. Broker-Dealers

Most U.S. broker-dealers conduct

their overseas operations through

separately incorporated subsidiaries of

their holding companies. These

subsidiaries are not subject to

Regulation T or SEC regulations.

However, a few firms maintain foreign

branches that are subject to Regulation

T. The Board is proposing to exclude

these foreign branches from Regulation

T when they extend credit to foreign

persons on foreign securities. This

would be analogous to the exclusion

from Regulation U of foreign branches of

U.S. banks when they extend securities

credit.

6. Option as Cover for a Short Sale of

an Equity Security

In a short sale, a customer generally

sells securities it does not own and

borrows those securities from a brokerdealer in order to meet its delivery

obligation. The customer is then

obligated to redeliver such securities to

the broker-dealer at some time in the

future, but hopes to obtain those

securities for less than the sale price less

financing costs. Regulation T currently
20402 Federal Register / Vol. 61, No. 88 / Monday, May 6, 1996 / Proposed Rules

7 If a marginable debt security is sold short, the

margin required is 100 percent of the current

market value of the security plus the margin

required by the creditor in good faith.

requires margin of 150 percent for a

short sale of an equity security.7 For

example, if a customer sells short 100

shares of XYZ Corp, the broker-dealer

retains 100 percent of the proceeds from

the sale in the customer’s account, and

the customer is required to post an

additional 50 percent of the sale price.

(This parallels the 50 percent margin

requirement for a purchase of the stock;

in each case, the customer’s stake in the

transaction must be 50 percent of its

price.) However, Regulation T requires

margin of only 100 percent—in other

words, allows retaining of the proceeds

of the sale to suffice—if a ‘‘security

exchangeable or convertible * * * into

the security sold short’’ is held in the

customer’s account. The most common

example of such a security is a

convertible bond.

Although it can be argued that both

stock warrants and call options qualify

as a ‘‘security exchangeable or

convertible into another security,’’ the

Board has only permitted the former to

serve in lieu of the additional 50 percent

margin for short sales in Regulation T.

See Board Interpretation 12 CFR

220.126, reprinted in the Federal

Reserve Regulatory Service at 5–488.

Some commenters have criticized this

inequality of treatment, and some have

asked that a call option—in the above

example, a call option for 100 shares of

XYZ stock—be allowed to serve in lieu

of the additional 50 percent margin

requirement.

The Board is seeking comment on

whether to allow the use of a call option

to offset the short sale of a security and

whether doing so would bias the market

in favor of short selling. The Board has

historically sought to ensure that traders

on the short side of the market should

not be in a position, with a given

amount of funds, to exert greater

influence on the market than they could

with the same amount of funds if they

were trading on the long side. However,

under this proposal, a customer wishing

to purchase 100 shares of XYZ would be

required to come up with 50 percent of

the purchase price, but a customer

wishing to sell 100 shares of XYZ short

would only be required to come up with

the premium necessary to purchase a

call option for 100 shares of XYZ, a far

smaller amount. The Board seeks

comment on whether this fact argues

against adoption of the proposed

change.

7. Eligibility of Equity Securities for

Credit Under Regulations G, T, and U

In order to qualify for credit under

Regulation T, an equity security must be

a mutual fund, a bond convertible into

a qualifying equity security, or

registered on a national securities

exchange, trade in NASDAQ’s National

Market System, or appear on the Board’s

quarterly lists of ‘‘marginable OTC

stocks’’ or ‘‘foreign margin stocks.’’

Stocks qualify for inclusion on the

Board’s lists if they meet Regulation T’s

definition of ‘‘OTC margin stock’’ or

‘‘foreign margin stock.’’

A. Foreign Margin Stocks Under

Regulation T

The Board is adopting as a final rule

an amendment to Regulation T that

includes as a foreign margin stock any

foreign stock that has a ‘‘ready market’’

for purposes of the SEC’s net capital

rule. 17 CFR 240.15c3–1(c)(11)(i). SEC

staff has stated that they will take no

action against broker-dealers that treat

any foreign stock listed on the Financial

Times-Actuaries World Indices as

having a ready market for purposes of

computing a broker-dealer’s net capital.

Thus, these stocks will be added to the

Board’s foreign list.

Although there is considerable

overlap between the stocks on the

Financial Times Indices and the Board’s

list of foreign margin stocks, the

Financial Times list contains

substantially more foreign stocks than

the Board’s list, and there are also a

significant number of foreign stocks that

appear on the Board’s list but not the

Financial Times list. The Board did not

receive comment on whether its current

list of, and test for, foreign margin

stocks would continue to be necessary

if this new test were adopted.

Accordingly, the Board seeks comment

on whether it should rely on the ready

market test exclusively and phase out

the Board’s own test and list.

B. Domestic Margin Stocks

The Board is also seeking comment on

whether it should supplement or

replace the current criteria for

qualification as an OTC margin stock in

section 220.17 of Regulation T by

allowing a broker-dealer to extend credit

on any stock traded on a national

securities exchange, quoted on

NASDAQ, or otherwise having a ‘‘ready

market’’ for purposes of the SEC’s net

capital rule. In the domestic area, SEC

staff has taken the position that a stock

has a ‘‘ready market’’ if: (1) three or

more market makers quote its prices

through the so-called ‘‘pink sheets,’’ and

(2) the broker-dealer can show the

existence of bona fide inter-dealer trades

within five business days before or after

the date of valuation that are of

sufficient volume to justify a reasonable

belief that the price used would support

the liquidation of the entire position at

or near that price.

This proposal would make 1700

NASDAQ stocks, as many as 5400

stocks quoted on the NASD’s electronic

bulletin board, and an unknown number

of additional ‘‘pink sheet’’ stocks

eligible for broker-dealer credit for the

first time. Some of these stocks are

thinly traded when compared to

currently marginable stocks, including

those that qualify as OTC margin stocks.

The Board seeks comment on whether

such stocks should be eligible to serve

as collateral for securities credit.

The Board particularly seeks

comment on whether an expansion in

the number of OTC margin stocks

should be made only for purposes of

Regulation T, or for purposes of

Regulations G and U as well. Although

all the Board’s margin regulations

currently contain a common definition

of ‘‘OTC margin stock,’’ this common

definition does not result in common

treatment of all lenders. Under

Regulation T, a broker-dealer is

prohibited from lending on any

domestic stock that does not qualify as

an OTC margin stock; conversely, a

bank or other lender is unregulated by

Regulations U and G when it lends on

any stock that does not qualify as an

OTC margin stock. Thus, qualification

of a stock as an OTC margin stock

increases its loan value under

Regulation T from zero to 50 percent,

but subjects it for the first time to

coverage by Regulations G and U and

thereby decreases its loan value to the

extent that banks and other lenders had

previously been willing to give the stock

loan value of greater than 50 percent.

Conversely, disqualification of a stock

as an OTC margin stock eliminates its

loan value under Regulation T and

thereby prevents broker-dealers from

lending on it, but eliminates its coverage

by Regulations G and U and allows

banks and other lenders to lend as much

as they deem appropriate.

Thus, using the ready market

definition for purposes of Regulations G

and U would impose burdens on banks

and other lenders. Use of the definition

would limit the amount of credit that

banks could extend on thousands of

additional stocks and would also

require banks to obtain a ‘‘purpose

statement’’ (FR U–1) whenever they

lend more than $100,000 on those

stocks. In addition, it would no longer

be possible for the Board to publish a

complete ‘‘List of Marginable OTC
Federal Register / Vol. 61, No. 88 / Monday, May 6, 1996 / Proposed Rules 20403

8Regulation G does not contain a paperwork

exemption for loans of $100,000 or less, so all loans

secured by these new OTC margin stocks would

require a ‘‘purpose statement’’ (Form FR G–3).

9Companies that extend credit to employers in

connection with an employee benefit plan adopted

by the company and approved by its stockholders

are not subject to the 50 percent requirement

normally imposed on loans secured by margin

stock. 12 CFR 207.5. However, these companies

must register with the Federal Reserve and provide

annual reports of their securities credit activities.

Stocks’’ (OTC List), as the stocks that

met the SEC’s ready market test would

be ever changing and outside the

Board’s control. Banks therefore would

be responsible for determining on their

own whether a given OTC equity

security was subject to Regulation U.

The burden imposed on Regulation G

lenders would be similar.8 In addition,

the number of lenders potentially

covered by Regulation G would expand

to include as many as 6600 additional

companies to the extent that those

companies extended credit to their

employees secured with company

stock.9 Although the Board currently

alerts companies with OTC margin stock

to the possibility of registration under

Regulation G, elimination of the OTC

list would prevent the Board from

continuing this practice.

Accordingly, the Board is seeking

comment on possible solutions to the

disparate treatment of broker-dealers

and other lenders, and the resulting

increase in burden for one group

whenever burden is reduced for the

other. The Board seeks comment on

whether it should establish separate

regimes for determining coverage by

Regulation T on the one hand, and

Regulations G and U on the other; for

example, any domestic stock that has a

ready market for purposes of the SEC’s

net capital rule might receive loan value

under Regulation T, while only

domestic stocks that are listed on an

exchange might be subject to

Regulations G and U.

8. Options Under Regulation U

On December 12, 1995, the Board

published proposed amendments to

Regulation U, including one that

concerned the treatment of exchangetraded options. The proposal mirrored

the treatment proposed by the Board for

broker-dealers under Regulation T.

Specifically, the Board proposed to

allow the same 50 percent loan value for

long positions in exchange-traded

options currently permitted for other

exchange-traded equity securities.

Because the final rule under Regulation

T ties the loan value of these securities

to the rules of the exchange authorized

to trade the option, the Board is

proposing, as a matter of parity between

Regulations T and U, to amend

Regulation U so that banks can lend

against exchange-traded options to the

extent permitted by the rules of the

options exchanges. The Board seeks

comment on the practicality of requiring

banks to comply with rules of SROs of

which they are not members.

9. Technical Amendments

The Board is also prescribing

technical amendments to Regulation T

that are intended to streamline and

rationalize the regulation without

altering its substance. The Board is

proposing to add a definition of ‘‘margin

equity security,’’ a term currently used

but not defined in the regulation. The

Board is seeking comment on whether

the definition of ‘‘covered option

transaction’’ can be shortened to include

‘‘any transaction eligible for the cash

account under the rules of the registered

national securities exchange authorized

to trade the option or warrant or 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.’’ This change

could not take effect until the provision

in the final rule delegating authority

over options to the SROs became

effective.

Regulatory Flexibility Act

The Board has concluded after

reviewing the proposed regulation that,

if adopted, it would not impose a

significant economic hardship on small

institutions. The proposal does not

necessitate the development of

sophisticated recordkeeping or reporting

systems by small institutions; nor will

small institutions need to seek out the

expertise of specialized accountants,

lawyers, or managers in order to comply

with the regulation. The proposal is

designed to reduce the complexity and

burden of Regulation T. The Board

therefore certifies pursuant to section

605b of the Regulatory Flexibility Act (5

U.S.C. 605b) that the proposal, if

adopted, will not have a significantly

adverse economic impact on a

substantial number of small entities

within the meaning of the Regulatory

Flexibility Act (5 U.S.C. 601 et. seq.).

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 Projects 7100–0001 (or 7100–

0004), 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

implications of the proposal to amend

this regulation are found in 12 CFR part

220. This information is required to

evidence compliance with the

requirements of the Securities Exchange

Act of 1934 (15 U.S.C. 78g). The

respondents are for-profit financial

institutions (7100–0001) and public

corporations (7100–0004).

Implications for Reporting

The proposal to change the definition

of ‘‘OTC margin stock by allowing a

broker-dealer to extend credit on any

stock traded on a national securities

exchange, quoted on NASDAQ, or

otherwise having a ‘ready market’

* * *’’ could lead to an increase in the

number of respondents for the OTC

Margin Stock Report (FR 2048; OMB No.

7100–0004) because of the increase in

the number of firms whose stock would

be marginable. The burden per response

of 0.25 hours would not change.

However, if it is decided that the stock

of any firm listed on the NASD

SmallCap market is automatically

marginable, as currently is the case for

the stocks of firms listed on the NASD

National Market System, the FR 2048

could be eliminated. Currently, the FR

2048 is filed by approximately 75

respondents each quarter. The current

annual burden of the FR 2048 is

estimated to be 75 hours. Based on an

hourly cost of $20, the annual cost to

the public is estimated to be $1,500.

The Federal Reserve may not conduct

or sponsor, and an organization is not

required to respond to, an information

collection unless it displays a currently

valid OMB control number.

Comments are invited on: (a) whether

the proposed amendments to this

collection of information are 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.
20404 Federal Register / Vol. 61, No. 88 / Monday, May 6, 1996 / Proposed Rules

List of Subjects

12 CFR Part 207

Banks, banking, Credit, Federal

Reserve System, Reporting and

recordkeeping requirements, Securities.

12 CFR Parts 220 and 221

Banks, banking, Bonds, 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 220 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.

2. Section 220.2 is amended as

follows:

a. By adding a new definition of

Margin equity security in alphabetical

order;

b. By revising paragraph (3) in the

definition of Margin security;

c. By adding a new definition of Nonequity security in alphabetical order;

d. By removing the definition of OTC

margin bond.

The additions and revisions read as

follows:

§ 220.2 Definitions.

* * * * *

Margin equity security means a

margin security that is an equity

security (as defined in section 3(a)(11)

of the Act.).

* * * * *

Margin security * * *

(3) Any non-equity security;

* * * * *

Non-equity security means a security

that is not an equity security (as defined

in section 3(a)(11) of the Act).

* * * * *

3. Section 220.3(b) is revised to read

as follows:

§ 220.3 General provisions.

* * * * *

(b) Separation of accounts—(1) In

general. The requirements of one

account may not be met by considering

items in another 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.

(2) Exceptions. Notwithstanding

paragraph (b) (1) of this section—

(i) For purposes of calculating the

required margin for a security in the

non-equity account or margin account,

assets described in § 220.9(a) (1) or (2)

may serve in lieu of margin;

(ii) Transfers may be effected between

the margin account and the special

memorandum account pursuant to

§§ 220.4 and 220.5.

* * * * *

4. Section 220.4(b)(1) is revised to

read as follows:

§ 220.4 Margin account.

* * * * *

(b) Required margin—(1)

Applicability. The required margin for

long or short positions in securities is

set forth in § 220.18 (the Supplement)

and is subject to the following

exceptions and special provisions.

* * * * *

5. The text of § 220.13 is redesignated

as paragraph (j) of § 220.3, the section

heading of § 220.13 is redesignated as

the heading of newly designated

paragraph (j) of § 220.3, and § 220.13 is

removed.

6. New section 220.13 is added to

read as follows:

§ 220.13 Non-equity account.

(a) Permissible transactions. In a nonequity account, a creditor may effect

and finance any transaction involving

any non-equity security. No transaction

or withdrawal shall be allowed if it

would cause the account to liquidate to

a deficit.

(b) Required margin. The required

margin for transactions effected in the

non-equity account is set forth in

§ 220.18 (the Supplement).

7. Section 220.16 is amended by

revising the second sentence of

paragraph (a) and the last sentence of

paragraph (b) to read as follows:

§ 220.16 Borrowing and lending securities.

Option 1 for Paragraph (a)

(a) * * * 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), 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, or any margin security, valued

at its loan value.* * *

Option 2 for Paragraph (a)

(a) * * * Each borrowing shall be

secured by a bona fide deposit of

collateral equal to at least 100 percent

of the market value of the securities

borrowed.* * *

(b) * * * Each borrowing shall be

secured by a bona fide deposit of

collateral equal to at least 100 percent

of the market value of the securities

borrowed.

8. Section 220.18 is amended by

revising the introductory text and

paragraphs (b) through (d) to read as

follows:

§ 220.18 Supplement: Margin

requirements.

The required margin for positions

held in a margin account shall be as

follows:

* * * * *

(b) Exempted security, non-equity

security, 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 non-equity

security: 150 percent of the current

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

or non-equity security: 100 percent of

the current market value of the security

plus the margin required by the creditor

in good faith.

* * * * *

By order of the Board of Governors of the

Federal Reserve System, April 24, 1996.

William W. Wiles,

Secretary of the Board.

[FR Doc. 96–10608 Filed 5–3–96; 8:45 am]

BILLING CODE 6210–01–P