[Federal Register Volume 59, Number 126 (Friday, July 1, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-16033]


[[Page Unknown]]

[Federal Register: July 1, 1994]


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FEDERAL RESERVE SYSTEM

12 CFR Part 220

[Regulation T; Docket No. R-0840]

 

Credit by Brokers and Dealers

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Proposed rule.

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SUMMARY: As part of its review of Regulation T, the Board is proposing 
three substantive amendments to two areas of the regulation. One 
proposal specifies that customers must meet initial margin calls or 
make full cash payment for securities purchased at a broker-dealer 
within two business days of the standard settlement period and includes 
related technical amendments. The other amendments would exempt certain 
brokers and transactions involving U.S. government securities from the 
regulation.

DATES: Comments should be received on or before August 15, 1994.

ADDRESSES: Comments, which should refer to Docket R-0840, may be mailed 
to Mr. William Wiles, Secretary, Board of Governors of the Federal 
Reserve System, 20th Street and Constitution Avenue, NW., Washington, 
DC 20551. Comments addressed to Mr. Wiles may also be delivered to the 
Board's mail room between 8:45 a.m. and 5:15 p.m., and to the security 
control room outside of those hours. Both the mail room and the 
security control room are accessible from the courtyard entrance on 
20th Street between Constitution Avenue and C Street, NW. Comments may 
be inspected in Room B-1122 between 9 a.m. and 5 p.m., except as 
provided in Sec. 261.8 of the Board's Rules Regarding the Availability 
of Information, 12 CFR 261.8.

FOR FURTHER INFORMATION CONTACT: Scott Holz, Senior Attorney or Angela 
Desmond, Senior Attorney, 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: On August 18, 1992, the Board published an 
advance notice of proposed rulemaking (Advance Notice) requesting 
public comment in connection with a general review of Regulation T.\1\ 
The review is not yet complete, but the Board believes that certain 
developments since the publication of the Advance Notice warrant the 
publication of three proposed amendments in two areas.
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    \1\Docket No. R-0772, 57 FR 37109, August 18, 1992.
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I. Three Day Settlement (T+3).

    In light of the adoption by the Securities and Exchange Commission 
(SEC) of a rule shortening the standard settlement period for 
securities transactions from five to three business days (T+3), the 
Board proposes to shorten the time periods specified in Regulation T 
for customers to meet margin calls or make full cash payment by a 
corresponding two days. Related amendments would raise the de minimis 
amount below which liquidation of unpaid transactions is not required 
from $500 to $1000, require brokers seeking extensions of the payment 
periods to obtain them from their designated examining authority 
(``DEA''), and clarify that foreign settlement periods are used to 
calculate when restrictions in the cash account are applied to foreign 
securities.
    Regulation T has always required cash payment for securities 
purchases within seven business days of trade date. The seven day 
period was initially chosen for the cash account because it was felt 
that a customer should have no obligation to pay for securities before 
they were delivered. The two days permitted beyond settlement date 
provide a short period of time for resolution of problems before the 
broker is required to act under Regulation T, i.e. either obtain an 
extension on the customer's behalf (if it is determined that a valid 
reason exists) or sell out the customer's position.
    The Board's Advance Notice was issued before the SEC proposed its 
rule adopting a T+3 settlement period. The Advance Notice mentioned the 
Group of Thirty's recommendation of a world-wide settlement standard of 
T+3 and said the Board ``may consider shortening the time for customer 
payment once the settlement period is shortened from the current five 
days.'' The Board supported the SEC when it proposed requiring T+3 
settlement, calling the proposal ``an important and achievable step'' 
to reduce potential systemic disturbances to financial markets and to 
the economy. The SEC also received several comment letters stating that 
the implementation of T+3 settlement will require the Federal Reserve 
to address the possible shortening of its Regulation T payment periods. 
Those letters were forwarded to Board staff for consideration in the 
context of the ongoing Regulation T review.
    The Board proposes to reword Regulation T to specifically 
incorporate the standard settlement cycle and the current two day 
cushion. Instead of requiring payment within ``seven business days,'' 
the regulation would require payment within ``one payment period,'' 
with ``payment period'' being defined as the standard settlement period 
in the United States plus two business days. This will not change the 
operation of the rule at this time, but once the new language is put 
into place the conversion to T+3 next year will automatically result in 
a reduction in the amount of time brokers can give their customers to 
pay for securities or meet initial margin calls. Future changes in 
settlement periods by the SEC will similarly be automatically reflected 
in the Board's rule without the necessity of further amendment.
    The payment periods in Regulation T can be extended for exceptional 
circumstances if the broker applies to a self-regulatory organization 
(SRO) for an extension. In 1988, the New York Stock Exchange (NYSE) 
sought SEC approval of a rule that would require a broker seeking a 
Regulation T extension to obtain the extension from the NYSE if the 
NYSE is the broker's DEA. The proposal was noted by the Board in the 
Advance Notice, as was a suggestion by the Credit Division of the 
Securities Industry Association that brokers be permitted to grant 
customer extensions without approval of an SRO. The SEC approved the 
NYSE rule filing in May 1994.\2\ In its approval order, the SEC stated 
that it does not agree with assertions that the objectives of the 
Securities Exchange Act of 1934 (the ``Act'') could be better met by 
implementing a uniform system of sharing extension information. As to 
the other objections raised by commenters (and also raised with the 
Board pursuant to the Advance Notice), the SEC found that ``the 
regulatory benefits from the NYSE rule outweigh any competitive 
concerns raised by the commenters.'' Finally, the SEC said it does not 
agree with those commenters who argue that broker-dealers should not be 
required to submit requests for extensions of time to either their DEA 
or any SRO. The Board believes, along with the SEC, that a good case 
has been made to restore to the broker's DEA sole responsibility for 
granting and monitoring extensions of time and the language proposed by 
the Board today reflects this conclusion.
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    \2\59 FR 26826, May 24, 1994; Securities Exchange Act Release 
34073, May 17, 1994.
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II. Government Securities

    In light of the recent enactment of the Government Securities Act 
Amendments of 1993, the Board proposes to exempt most transactions 
involving government securities from the restrictions of Regulation T. 
This would be accomplished with two separate but related actions. 
First, Regulation T would exclude government securities brokers and 
dealers who register with the SEC under section 15C of the Securities 
Exchange Act of 1934 (the ``Act'') from the definition of ``creditor'' 
in Regulation T. Second, general broker-dealers effecting customer 
transactions that could be effected by a section 15C broker-dealer 
would be able to record the transactions in a new government securities 
account in which the other restrictions in Regulation T would not 
apply.
    Before the enactment of the Government Securities Act of 1986, 
brokers-dealers who limited themselves to transactions in government 
securities were not subject to a comprehensive regulatory scheme and 
were not required to be registered with the SEC. Although such brokers 
were within the definition of ``creditor,'' there was no practical way 
to enforce Regulation T for them. The Government Securities Act of 1986 
required SEC registration of all nonbank government securities brokers 
and dealers under a new section 15C of the Act. The Government 
Securities Act of 1986 also added the term ``government securities'' to 
the Act.
    The Advance Notice invited comment on two areas involving 
government securities: repurchase agreements (``Repos'') and the 
borrowing and lending of securities. The Advance Notice explained that 
the Board has not specified the exact treatment of repurchase 
agreements while noting that repos of government securities do not 
raise credit issues under Regulation T because the good faith loan 
value of such securities is often close to 100 percent of their current 
market value. Many of the commenters suggested that the Board create a 
new account for exempted securities that could be used for transactions 
such as Repos and forward transactions. Most of the commenters 
supported exempting government securities from Sec. 220.16 of 
Regulation T. This would allow loans of government securities without 
the current requirement that a broker document that the reason for the 
borrowing stems from a short sale or failure to receive securities 
required for delivery.
    Under today's proposal, whenever a general broker-dealer effects a 
transaction for a customer that could be effected by a section 15C 
broker, the transaction could be recorded in a new government 
securities account. The account would allow these transactions to be 
effected without regard to other restrictions in Regulation T. The 
account would be permissive; brokers could continue to let customers 
who wish to use the cash or margin account for transactions involving 
government securities do so. It would allow institutional customers who 
cannot or will not use a margin account to engage in government 
securities transactions not specifically authorized in the cash 
account. For example, the government securities account could be used 
to effect purchases of government securities on credit or for cash as 
well as repurchase and reverse repurchase agreements. Borrowing and 
lending of government securities could also be effected in the proposed 
account without being subject to the ``permitted purpose'' requirement 
in Sec. 220.16 of Regulation T that requires brokers to limit and 
document the reasons for their securities borrowings. The account would 
also permit net settlement of offsetting purchases and sales of 
government securities. Government securities purchased or deposited in 
a margin account would still be subject to the current Regulation T 
rules and would therefore still be available to finance the purchase of 
other securities in a margin account.
    The Board is not proposing to include additional types of exempted 
securities, such as municipal securities, in the proposed government 
securities account. Government securities constitute an unusually deep 
and liquid market and are subject to a unique scheme of regulation, as 
evidenced by the Government Securities Act of 1986.

Regulatory Flexibility Act

    The Board believes there will be no significant economic impact on 
a substantial number of small entities if this proposal is adopted. 
Comments are invited on this statement.

Paperwork Reduction Act

    No additional reporting requirements or modification to existing 
reporting requirements are proposed.

List of Subjects in 12 CFR Part 220

    Banks, banking, Bonds, Brokers, Commodity futures, Credit, Federal 
Reserve System, Investment companies, Investments, Margin, Margin 
requirements, National Market System (NMS Security), 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 is revised to read as 
follows:

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


Sec. 220.1  [Amended]

    2. In Sec. 220.1 the word ``seven'' in the first sentence of 
paragraph (b)(1) is revised to read ``eight''.
    3. Section 220.2 is amended as follows:
    a. A new sentence is added to the end of paragraph (b).
    b. Paragraph (h) is revised.
    c. Paragraphs (w) through (aa) are redesignated as paragraphs (x) 
through (bb) and new paragraph (w) is added.
    The additions and revisions read as follows:


Sec. 220.2  Definitions.

* * * * *
    (b) * * * Creditor does not include a broker or dealer registered 
only under section 15C of the act.
* * * * *
    (h) 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.
* * * * *
    (w) Payment period means the number of business days in the 
standard securities settlement cycle in the United States plus two 
business days.
* * * * *
    4. In Sec. 220.4, the figure ``$500'' in paragraph (d) is revised 
to read ``$1000'' and paragraph (c)(3) is revised to read as follows:


Sec. 220.4  Margin account.

* * * * *
    (c) * * *
    (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.
* * * * *
    5. In Sec. 220.8, the figure ``$500'' in paragraph (b)(4) is 
revised to read ``$1000'' and paragraphs (b)(1)(i) introductory text, 
(b)(1)(ii), (b)(3), (c)(2)(i), and (d) are revised to read as follows:


Sec. 220.8  Cash account.

* * * * *
    (b) * * *
    (1) * * *
    (i) Within one payment period of the date:
* * * * *
    (ii) In the case of the purchase of a foreign security, within one 
payment period of the trade date or 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.
* * * * *
    (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 by not more than one additional payment period.
* * * * *
    (c) * * *
    (2) * * *
    (i) Within one payment period of the trade date, or in the case of 
the purchase of a foreign security, within the period specified in 
paragraph (b)(1)(ii) 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
* * * * *
    (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.
    6. Section 220.18 is redesignated as Sec. 220.19 and new 
Sec. 220.18 is added to read as follows:


Sec. 220.18  Government securities account.

    In a government securities account, a creditor may effect and 
finance transactions involving government securities, provided the 
transaction would be permissible for a broker or dealer registered 
under section 15C of the act.

    By order of the Board of Governors of the Federal Reserve 
System, June 27, 1994.
William W. Wiles,
Secretary of the Board.
[FR Doc. 94-16033 Filed 6-30-94; 8:45 am]
BILLING CODE 6210-01-P