[Federal Register Volume 61, Number 88 (Monday, May 6, 1996)]
[Proposed Rules]
[Pages 20399-20404]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-10608]
Federal Register / Vol. 61, No. 88 / Monday, May 6, 1996 / Proposed
Rules
[[Page 20399]]
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.
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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 non-equity
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 exchange-
traded 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 broker-dealers 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
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\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.
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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.
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\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.
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1. Good Faith Loan Value for all Non-Equity 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).
[[Page 20400]]
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 broker-dealers 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.
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\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.
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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 non-equity 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 non-investment grade debt securities than a bank or other
lender would be. Finally, any remaining regulatory concerns could be
addressed by the self-regulatory 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 non-equity 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 ``non-equity'' 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 broker-dealers on non-equity securities; and (3) the purchase or
sale of options on non-equity 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-
[[Page 20401]]
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 non-securities 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.
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\4\ With 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 broker-
dealer borrows securities from a customer.
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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 broker-dealer 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.
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\5\ For 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.
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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.
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\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.''
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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 broker-dealer 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
[[Page 20402]]
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.
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\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.
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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
[[Page 20403]]
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.
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\8\ Regulation 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).
\9\ Companies 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.
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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 exchange-
traded 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.
[[Page 20404]]
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 Non-equity security in
alphabetical order;
d. By removing the definition of OTC margin bond.
The additions and revisions read as follows:
Sec. 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:
Sec. 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
Sec. 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 Secs. 220.4 and 220.5.
* * * * *
4. Section 220.4(b)(1) is revised to read as follows:
Sec. 220.4 Margin account.
* * * * *
(b) Required margin--(1) Applicability. The required margin for
long or short positions in securities is set forth in Sec. 220.18 (the
Supplement) and is subject to the following exceptions and special
provisions.
* * * * *
5. The text of Sec. 220.13 is redesignated as paragraph (j) of
Sec. 220.3, the section heading of Sec. 220.13 is redesignated as the
heading of newly designated paragraph (j) of Sec. 220.3, and
Sec. 220.13 is removed.
6. New section 220.13 is added to read as follows:
Sec. 220.13 Non-equity account.
(a) Permissible transactions. In a non-equity 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 Sec. 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:
Sec. 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:
Sec. 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
