[Federal Register Volume 61, Number 88 (Monday, May 6, 1996)]
[Rules and Regulations]
[Pages 20386-20398]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-10607]
[[Page 20385]]
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Part IV
Federal Reserve System
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12 CFR Parts 207, 220, and 221
Securities Credit Transactions; Rule and Proposed Rule
Federal Register / Vol. 61, No. 88 / Monday, May 6, 1996 / Rules and
Regulations
[[Page 20386]]
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.
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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.
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\1\ 57 FR 37109 (August 18, 1992).
\2\ The 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).
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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.
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\4\ See 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.
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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.
[[Page 20387]]
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 SEC-approved 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-
the-counter (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 broker-dealer 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 broker-dealers to use this
account for delivery-versus-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.
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\5\ See, Fed. Sec. L. Rep. (CCH) para. 76,819.
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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.
[[Page 20388]]
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 broker-dealers 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
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\6\ The 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.
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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 broker-dealers 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
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\7\ Section 11(d) of the Act prohibits a broker-dealer 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.
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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
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\8\ The SEC requirements are found in Rule 15c3-3 (17 CFR
240.15c3-3).
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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.
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\9\ See 12 CFR 220.103, a Board Interpretation reprinted in the
Federal Reserve Regulatory Service at 5-472.
\10\ 17 CFR 240.15c6-1.
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[[Page 20389]]
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\
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\11\ See SEC Rule 15c3-1 (17 CFR 240.15c3-1).
\12\ 58 FR 44310, August 20, 1993.
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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.
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\13\ Although 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.
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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 mortgage-related
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.
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\14\ The 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.
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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 broker-dealers.
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.
[[Page 20390]]
2. Sections 220.1 through 220.18 are revised to read as follows:
Sec. 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.
Sec. 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 self-regulatory 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.
[[Page 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 Sec. 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
Sec. 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
Sec. 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
[[Page 20392]]
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.
Sec. 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-
to-market daily.
Sec. 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 Sec. 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
[[Page 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 Sec. 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 Sec. 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 (Sec. 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
[[Page 20394]]
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.
Sec. 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
Sec. 220.4(e); and
(4) Margin excess transferred from the margin account under
Sec. 220.4(e)(2).
Sec. 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.
Sec. 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.
Sec. 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
[[Page 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.
Sec. 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.
Sec. 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.
Sec. 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.
Sec. 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 Sec. 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
[[Page 20396]]
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
SEC-approved 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 Sec. 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.
Sec. 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.
Sec. 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.
Sec. 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.
Sec. 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.
[[Page 20397]]
Sec. 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.
Sec. 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
[[Page 20398]]
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.
Sec. 220.19 [Removed]
3. Section 220.19 is removed.
Secs. 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
