[Federal Register Volume 60, Number 125 (Thursday, June 29, 1995)]
[Proposed Rules]
[Pages 33763-33779]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-15680]



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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: Proposed rule.

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SUMMARY: As part of a program to periodically review its regulations, 
the Board is proposing amendments to Regulation T, the regulation that 
covers extensions of credit by and to broker and dealers (also known as 
creditors). These amendments reflect consideration of the comments 
submitted in response to the Board's Advance Notice of Proposed 
Rulemaking. Many of the proposed amendments feature increased reliance 
on rules of the Securities and Exchange Commission (SEC) and self-
regulatory organizations (SROs) and others would make Regulation T 
consistent with Regulation G and Regulation U, the regulations covering 
securities credit by lenders other than broker-dealers. Proposed 
changes in the options area include permitting loan value for long 
positions in exchange-traded options and increasing reliance on the 
margin rules of the exchange that trades the option for customer and 
specialist transactions. These changes would also allow creditors to 
recognize the offsetting nature of financial futures in calculating 
margin for securities options. Proposed amendments in the international 
area will reduce restrictions on transactions involving foreign 
securities that are not publicly traded in the United States and 
foreign securities being sold on an installment basis if the U.S. 
component is a relatively small percentage of the offering. Broker-
dealers would also be given more flexibility in computing overall 
margin requirements for customer accounts with securities denominated 
in one or more foreign currencies. In addition to these and other 
amendments, technical changes are being proposed to clarify areas that 
have raised questions, update references, or restore language 
inadvertently deleted. The Board is also soliciting comments on a 
number of specific proposals. Finally, a number of questions regarding 
the existing regulation raised by commenters are being answered.

DATES: Comments should be received on or before August 28, 1995.

ADDRESSES: Comments should refer to Docket No. R-0772, and may be 
mailed to William W. Wiles, Secretary, Board of Governors of the 
Federal Reserve System, 20th Street and Constitution Avenue, N.W., 
Washington, DC 20551. Comments also may be delivered to Room B-222 of 
the Eccles Building between 8:45 a.m. and 5:15 p.m. weekdays, or to the 
guard station in the Eccles Building courtyard on 20th Street, N.W. 
(between Constitution Avenue and C Street, N.W.) at any time. Comments 
received will be available for 

[[Page 33764]]
inspection in Room MP-500 of the Martin Building between 9:00 a.m. and 
5:00 p.m. weekdays, except as provided in 12 CFR 261.8 of the Board's 
rules regarding availability of information.

FOR FURTHER INFORMATION CONTACT: Scott Holz, Senior Attorney, or Angela 
Desmond, Senior Counsel, Division of Banking Supervision and Regulation 
(202) 452-2781; 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 concerning a general 
review of Regulation T.\1\ Comments were received from 31 respondents, 
some of whom commented more than once. The comments have been analyzed 
to help prepare proposed amendments to the regulation. These proposed 
amendments are consistent with the current tenor of the regulation and 
statutory requirements; however, the comments raised broad issues as to 
purposes that Regulation T serves in light of the current regulatory 
environment and market practices. One comment questioned the continuing 
need for the Regulation T requirements, noting that possible purposes 
for the regulation, such as broker dealer financial integrity and 
customer protection, also are addressed by SEC oversight of brokers and 
dealers by means of net capital and customer protection rules. Comments 
also suggested broad changes to Regulation T that the commenters 
believe are appropriate in the current environment. These changes 
included, but were not limited to: (1) Delegating all responsibility 
for margins and related requirements to the self-regulatory 
organizations under the oversight of the SEC; (2) applying the 
restrictions on arranging credit only to credit that otherwise violates 
margin rules; (3) eliminating margin requirements on loans to brokers 
and dealers; (4) exempting from the margin rules transactions in all 
exempt securities; (5) exempting transactions with sophisticated 
customers; (6) expansion of permissible arrangements for borrowing and 
lending securities; and (7) exempting transactions in investment grade 
securities. While the Board believes that it is important to proceed 
with the proposed amendments in order to address particular problems, 
the Board also believes regulatory structures should be reviewed 
continually, not merely to update them, but also to assess whether 
different structures would better meet regulatory objectives and even 
whether regulation is still necessary. Accordingly, the Board requests 
comments including particular proposals and supporting legal and policy 
rationale, not only on the specific changes to Regulation T set forth 
in this notice, but also on the proposals enumerated above, the 
continuing need for Regulation T, and appropriate changes to its scope 
and architecture. The supplementary information that follows explains 
what is being proposed and reasons therefor.

    \1\ 57 FR 37109, August 18, 1992.
I. Options

A. Exchange-Traded Options

1. Loan Value for Long Options
    All securities listed on a national securities exchange have loan 
value under Regulation T except for options. The Board proposes to 
eliminate this disparate treatment, which was adopted in the early 
1970s, and allow exchange-traded options the same 50 percent loan value 
currently afforded other margin equity securities. In light of the 
successful growth of standardized options trading since the 1970s, the 
positive performance of the Options Clearing Corporation, and the 
development of new types of options, other securities and financial 
futures, the Board is proposing to treat long positions in exchange-
traded options the same as other registered equity securities for 
margin purposes.
    Granting 50 percent loan value to exchange-traded options would 
also address a disparity that has arisen in the past few years with the 
listing of so-called index warrants. Although index warrants resemble 
long-term options, the use of the word ``warrant'' to describe this 
product has led many broker-dealers to allow 50 percent loan value for 
these instruments while long-term options, such as LEAPs, are not 
permitted any loan value under the current regulation. Treating 
exchange-traded options the same as other exchange-traded equity 
securities would eliminate this disparity.
2. Increased Reliance on SRO Rules
    When Regulation T was adopted in 1934, the amount of margin 
required for writing a put or call was the amount ``customarily 
required'' by the creditor. In the 1970s the Board adopted specific 
requirements based on existing rules of one of the self-regulatory 
organizations (SROs). Starting in the 1980s, the Board has on more than 
one occasion amended Regulation T to incorporate by reference SRO 
margin rules for options transactions. The Board is proposing to 
continue this process by increasing reliance on SRO options margin 
rules for customers and specialists.
    a. Margin account. The margin account currently specifies positions 
which may serve in lieu of the margin required for writing an option on 
an equity security, while incorporating the rules of the SROs for 
options written on anything other than an equity security (such as a 
securities index). The Board proposes to allow SRO rules, which must be 
approved by the SEC, to prescribe appropriate cover for all short 
options positions.
    Many commenters expressed support for a risk-based options margin 
system and/or a recognition of the offsetting nature of financial 
futures based on similar indexes, rates, or assets. Under the Board's 
proposal, the SROs would be able to further these goals in setting 
cover requirements for all types of securities options.
    b. Cash account. Although the writing of an option creates a short 
position which is normally carried in the margin account, the cash 
account section was amended in the early 1980s to allow certain covered 
options transactions to be effected in this account. Board staff has 
since indicated that the cash account can be used for additional 
options transactions. These transactions are not ``covered'' in the 
sense that the account holds the underlying security. However, the 
transactions involve a quantifiably limited risk and the cash account 
in which the transaction is effected contains specified assets of 
sufficient value to cover this amount or an escrow receipt representing 
such assets.\2\ The Board proposes to adopt generic language under 
which a ``covered option transaction'' would be eligible for the cash 
account under specified conditions. The Board is also adding money 
market mutual funds to the list of cash equivalents that may be used to 
cover a put written in the cash account.

    \2\ See, e.g., Staff Opinion of July 12, 1991, Federal Reserve 
Regulatory Service (FRRS) 5-666.251 and Staff Opinion of October 11, 
1991, FRRS 5-666.26.
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    c. Market functions account. Regulation T permits the extension of 
credit on a good faith basis to a specialist for transactions in its 
specialty security. In addition, options specialists can obtain good 
faith financing for the underlying security and other specialists can 
obtain good faith credit for options overlying their specialty 
securities. These positions are known as ``permitted offsets.'' The 
regulation specifies which positions must be held in the account to 
allow permitted offsets and does not provide for offsets in the case of 
specialists in 

[[Page 33765]]
index options. The Board proposes to adopt generic language permitting 
the extension of good faith credit for permitted offsets, provided the 
position has been designated as a permitted offset under SEC-approved 
rules of the appropriate SRO.

B. OTC Options

    In 1991, Board staff raised no objection to a broker-dealer that 
sought to ``arrange'' for its customer to write an OTC option on 
foreign securities.\3\ This position would be codified by the proposed 
amendments to the arranging section concerning foreign securities. The 
Board is not proposing to extend this position to OTC options on 
securities which are publicly traded in the United States. Allowing 
broker-dealers to arrange for customers to write OTC options without 
collecting margin would not be consistent with the requirements of the 
organized options exchanges. Rules of the New York Stock Exchange 
(NYSE) and the National Association of Securities Dealers (NASD) both 
provide that margin is required for the ``issuance, guarantee or sale 
(other than a 'long' sale) for a customer of a put or call.'' The Board 
is proposing to add the word ``sell'' to the language in the cash 
account to make clear that the Board's rules cover the same situations 
covered by NYSE and NASD rules.

    \3\ Staff Opinion of October 22, 1991, FRRS 5-666.27.
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C. Employee Stock Options and Other Benefit Plans

    Section 220.3(e)(4) of Regulation T was added in 1988 to allow 
creditors to help customers with valuable employee stock options 
exercise their options by providing short-term financing of the 
exercise price. The short-term loan is either paid off from the sale of 
the securities received pursuant to the employee stock option or 
replaced with a conventional margin loan extended against those 
securities. This practice has come to be known in the industry as 
``cashless exercise.'' Over the last five years, Board staff has not 
objected to the expansion of the application of Sec. 220.3(e)(4) to 
other types of securities customers receive under employee benefit 
plans, such as certain employee stock warrants. In addition, Board 
staff has allowed brokers to temporarily finance withholding taxes due 
on stock received under employee benefit plans. New language is being 
proposed to reflect these staff opinions. The new language would also 
allow the use of Sec. 220.3(e)(4) for outside directors and consultants 
who are eligible to participate in employee benefit plans under SEC 
rules.
II. International Transactions

A. Foreign Broker-Dealers

    Any entity required to register as a broker or dealer with the SEC 
under section 15(a) of the Securities Exchange Act of 1934 (the Act) is 
a creditor under Regulation T. Although the definitions of ``broker'' 
and ``dealer'' in the Act do not refer to nationality, the SEC's policy 
is to require registration of foreign broker-dealers only when they are 
physically operating in the United States.\4\ The Board generally 
follows the SEC in this area and does not consider foreign broker-
dealers not required to register with the SEC as creditors under 
Regulation T.

    \4\ SEC Release No. 34-27017; 54 FR 30013 (July 18, 1989).
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    Although the commenters were mixed on whether the definition of 
creditor should be amended to include or exclude foreign broker-
dealers, there was general agreement that U.S. broker-dealers 
purchasing securities from or selling securities to a foreign broker-
dealer on a DVP basis should be able to effect the trades on a broker-
to-broker basis. Proposed language is being added to the Broker-Dealer 
Credit Account that will make clear that foreign broker-dealers may use 
this account for DVP transactions with U.S. broker-dealers.

B. Foreign Currency

    Since 1990, creditors have been able to extend margin credit 
denominated in foreign currency if it is secured by foreign margin 
securities denominated or traded in the same foreign currency. If a 
customer has securities of various denominations, margin subaccounts 
(and, if desired, SMA subaccounts) are set up so that credit computed 
in U.S. dollars and each separate currency can be isolated. Under the 
current rule, an increase in the value of securities used to support 
specific foreign currency-denominated debt cannot be used to offset a 
deficiency in another margin subaccount. At the request of commenters, 
the Board is proposing to delete this limitation and permit margin 
requirements denominated in any currency to be offset by equity in any 
marginable security or a foreign currency deposit made in connection 
with a security denominated in that currency. Creditors would be free 
to retain the current system of separate SMAs for each foreign currency 
denomination.
    Another comment concerning foreign currency comes from the 
Securities Industry Association (SIA), which believes that any freely 
convertible currency should be able to be treated at its U.S. dollar 
equivalent for all purposes of Regulation T. Under the current version 
of Regulation T, foreign currency received in connection with the 
purchase, sale or loan of a security denominated in that currency may 
be accounted for in that currency or at its U.S. dollar equivalent. If 
there is no security denominated in that currency, creditors should 
convert the currency into its U.S. dollar equivalent upon receipt. The 
conversion can be effected in a customer's cash or margin account, with 
the resulting balance maintained in U.S. dollars.

C. Foreign Securities

1. Arranging
    In 1990, the Board added an exception concerning foreign stocks to 
the arranging section of Regulation T which permits a creditor to 
arrange for its customer to receive more credit than the creditor could 
extend when its customer is purchasing a foreign security with credit 
from a foreign lender. The exception, found in section 220.13(d), was 
based on the theory that transactions involving foreign securities do 
not require the same strictness of regulation because they do not have 
a substantial effect on the U.S. securities market. Commenters have 
asked for the Board to expand the foreign stock exception to cover 
short sales as well. The Board agrees that equal treatment in the 
arranging area should be afforded to both long and short sales.
    In gaining experience with the 1990 amendment, however, it has been 
noticed that there is an increasing trend for corporations that have 
issued stock abroad to list the securities for trading in the United 
States. Therefore, the Board is proposing a somewhat more restricted 
definition of what constitutes a foreign security for purposes of this 
section to assure equal treatment of foreign and domestic securities 
that are publicly traded in the United States. For example, the German 
conglomerate Daimler-Benz recently listed its shares on the New York 
Stock Exchange, thereby enabling U.S. broker-dealers to extend 50 
percent credit against the stock. Under the current arranging exception 
for foreign securities, a creditor can arrange for its customer to 
borrow more than 50 percent on Daimler-Benz stock if the credit is 
extended by a foreign lender (often a foreign affiliate of the 
creditor). In contrast, a creditor may not arrange for its customer to 
buy AT&T stock with less than 50 percent margin, even if the credit 
were extended by a foreign 

[[Page 33766]]
lender. Proposed language would address this situation and ensure equal 
treatment for all stocks that are publicly traded in the United States 
by permitting a creditor to arrange for the purchase or short sale of a 
``non-U.S. traded foreign security,'' defined as a security issued 
abroad that does not trade on a national securities exchange or NASDAQ.
2. Lending Foreign Securities
    Under Regulation T, a creditor may borrow or lend securities for 
the purpose of making delivery pursuant to a short sale or ``fail'' 
transaction. In addition, the regulation limits the type of collateral 
that must be pledged to secure a loan of securities. Several 
commenters, such as the SIA and the SIA-Credit Division, request an 
amendment to permit U.S. broker-dealers to lend foreign securities to a 
foreign person for any purpose that is lawful in the foreign country. 
The NYSE would like to ensure that foreign securities loaned abroad do 
not come back to the U.S. to cover short sales or fails. The Board is 
therefore proposing to allow loans of foreign securities for any lawful 
purpose if the securities are ``non-U.S. traded foreign securities.'' 
This should prevent these securities from being used for transactions 
in the United States. In addition, the SIA notes that many securities 
lending transactions occurring outside the U.S. would not meet the 
collateral requirements of Regulation T. The proposed amendment would 
allow a creditor to accept any collateral that may be pledged in the 
foreign country for loans of securities, providing the collateral's 
value is at least equal to 100 percent of the market value of the 
securities borrowed.
3. Installment Sales
    The United Kingdom began a series of privatizations of state-owned 
companies in the late 1970s. Investors in the shares of these companies 
paid for them on an installment basis over a period of at least six 
months. Installment sales are not uncommon in the U.K., but are 
generally prohibited in this country under section 11(d) of the Act.\5\ 
The practice is also prohibited under Regulation T if the first 
installment is less than the initial margin requirement.

    \5\ 15 U.S.C. 78k(d).
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    Participation of U.S. investors in the U.K. privatizations was 
accommodated by letters written by Board staff.\6\ The Board proposes 
to amend the arranging provision of Regulation T to state that a 
creditor is not deemed to have arranged for credit subject to the 
margin regulations if it sells a foreign security that is being offered 
on an installment basis, provided that less than 15 percent of the 
issue is offered to U.S. persons. This generic language would allow 
U.S. investors to participate in installment sales of foreign 
securities when the U.S. component of the offering is a relatively 
small portion of the overall offering and would cover offerings by 
foreign governments and other foreign issuers.

    \6\ See, e.g., Staff Opinion of October 24, 1984, FRRS 5-615.92.
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4. Foreign Margin Stocks
    In 1990, the Board amended Regulation T to establish a List of 
Foreign Margin Stocks (the ``Foreign List''). These stocks are treated 
in the same manner as domestic margin equity securities. The Board 
established criteria for initial inclusion on the Foreign List and for 
continued listing. U.S. broker-dealers certify to an SRO that specific 
foreign securities meet the criteria. The Board uses the information 
submitted by the SRO in publishing the Foreign List. The Foreign List 
has grown from approximately 40 stocks in August 1990 to over 700 
stocks this year.
    Many commenters state that the system is cumbersome and results in 
all broker-dealers benefitting from the research done by a small number 
of firms. Some commenters have suggested that a stock included in a 
major foreign stock index should be automatically marginable if it 
meets 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 equity security and (2) the SEC has 
determined that the stock has a ``ready market'' for purposes of its 
net capital rule.\7\ The Board is soliciting comment whether such a 
test should be adopted, which securities would be covered under the 
criteria, and suggestions on how this information could be integrated 
into the Board's Foreign List.

    \7\ 17 CFR 240.15c3-1(c)(11).
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III. Other Customer Transactions

A. Margin Account/SMA

    Most customer transactions involving credit take place in a margin 
account, which may be maintained in conjunction with a special 
memorandum account (SMA). Several commenters recommend that more than 
one customer, such as members of a family, be permitted to share a 
single SMA. One broker-dealer notes that this would allow the 
individual customers' accounts to be cross-collateralized and cross-
guaranteed. The Board is not proposing to change the SMA at this time. 
In addition to operational problems raised by linked SMAs, Regulation T 
and the Board's other margin regulations do not allow a guarantee to 
have loan value for securities credit transactions.
    The SIA-Credit Division suggests elimination of the provision in 
Sec. 220.4(f)(2)(ii) concerning withdrawals of securities received as 
part of a distribution attributed to securities already in the margin 
account. This section is permissive in that it permits some withdrawals 
which create or increase a margin deficiency. Nevertheless, the Board 
is soliciting comment on whether such an exception is still warranted.
1. Convertible Bonds
    Under Regulations G and U (12 CFR Parts 207 and 221), a debt 
security convertible into a margin stock is considered a margin stock. 
Although no comparable rule exists in Regulation T, in 1990 the Board 
defined foreign margin stock to include a debt security convertible 
into a margin security. The SIA-Credit Division and several broker-
dealers recommend applying this concept to all convertible debt 
securities in Regulation T and the Board is proposing language to 
accomplish this.
2. Mutual Funds
    a. Exempted securities mutual funds. Since 1968, the definition of 
margin stock in Regulations G and U has excluded mutual fund shares of 
companies whose assets are at least 95 percent invested in exempted 
securities. The exclusion of these funds (exempted securities mutual 
funds) from the definition of margin stock is equivalent to giving them 
good faith loan value at lenders other than broker-dealers. The 
Investment Company Institute has asked the Board to amend Regulation T 
so that exempted securities mutual funds will be entitled to good faith 
loan value at broker-dealers as well as other lenders. The Board is 
proposing to use the regulatory language found in Regulations G and U 
in Regulation T.
    b. Money market mutual funds. In addition to exempted securities 
mutual funds, the Board is proposing to give good faith loan value to 
money market mutual funds. Money market mutual funds are subject to 
additional SEC regulation and are recognized as cash equivalents by the 
industry and the general public.
3. OTC Margin Bonds
    Several commenters suggest that the Board adopt a rating 
requirement for all 

[[Page 33767]]
debt securities as an alternative to the current requirement that 
domestic debt securities be registered with the SEC. The Board has 
adopted the rating requirement for foreign securities because the 
concept of comity argues against requiring SEC registration. The fact 
that ``mortgage-related securities'' require a rating but not SEC 
registration was Congressionally mandated in the Secondary Mortgage 
Market Enhancement Act of 1984.
    The Board is proposing to strike the word ``mortgage'' from the 
second section of the definition of ``OTC margin bond'' to clarify that 
all pass-through securities can meet this definition. The Board also 
confirms that the minimum principal amount required for ``OTC margin 
bonds'' applies to shelf registrations of a single issue once the 
minimum amount has been issued, even though some of the individual 
tranches sold may be smaller.
    Although a 1984 staff opinion took the position that privately-
issued Treasury receipts were not exempted securities and not entitled 
to loan value,8 the Board, SEC and Treasury Department have become 
more comfortable over time with viewing these securities as equivalent 
to exempt securities. For example, a 1994 Board staff opinion 
concerning the Glass-Steagall Act concluded that the holder of a 
privately-issued Treasury receipt is, for virtually all purposes, a 
holder of an interest in the underlying Treasury security.9 The 
Board therefore does not object to the treatment of privately-issued 
Treasury receipts as exempted securities for purposes of Regulation T. 
The staff opinion to the contrary will be deleted.

    \8\  Staff Opinion of December 13, 1984, FRRS 5-628.13.
    \9\  Staff Opinion of January 10, 1994, FRRS 4-655.5.
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4. OTC Margin Stock
    A comment was received from an investor who believes stock which 
does not trade on NASDAQ should be marginable if the issuer has another 
class of marginable stock whose price is used to determine the sale 
price of the nonmargin stock. This situation is not being addressed by 
the proposed amendments. In addition to the complexity of covering such 
a limited group of stocks, this type of stock cannot be purchased by 
the general public and therefore no bid prices are available.
5. Nonsecurities Instruments
    The Public Securities Association (PSA) and a broker-dealer comment 
that creditors should be able to extend credit on commercial paper, 
certificates of deposit (CDs), and bankers acceptances (BAs). All of 
these instruments may be used collateral for a nonpurpose loan (i.e., a 
loan that is not made for the purpose of purchasing, carrying, or 
trading in securities). Section 7(c) of the Act 10 prohibits the 
Board from permitting broker-dealers to accept nonsecurities as 
collateral in a margin account. Although commercial paper is a security 
and can be held in a margin account, Regulation T denies loan value to 
domestic debt securities that are not SEC-registered. Therefore, 
commercial paper is a nonmargin, nonexempted security and the 
Supplement to Regulation T requires a margin of 100 percent if held in 
a margin account.

    \10\ 15 U.S.C. 78g(c).
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B. Cash Account

1. Permissible Transactions
    Proposed changes to the cash account concerning options are 
discussed in this preamble in section I.B.2. In addition, one commenter 
would like confirmation that customers may purchase CDs and other 
nonsecurities products in the cash account. A 1988 staff opinion 
confirmed that industry practice is to use the cash account to record 
the purchase of both securities and nonsecurities,11 and the Board 
is proposing to add language to the cash account section of the 
regulation to codify this position.

    \11\ FRRS 5-615.955.
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2. Net settlement
    In order to guard against free-riding, net settlement of trades in 
a cash account generally is not permitted. Customers are required to 
pay for all purchases in full without netting sale proceeds from 
securities purchased and sold on the same day in order to avoid 
imposition of the 90-day freeze described in Sec. 220.8(c) of 
Regulation T. In 1988, Board staff confirmed two statutory exceptions 
to this general rule for transactions in mortgage-related securities 
12 and exempted securities.13 Some broker-dealers comment 
that customers should be able to net settle all transactions in a cash 
account as long as the regulation states that day trading is not 
permitted in that account. No changes are being proposed in this area 
as allowing net settlement of all trades in the cash account would 
complicate a creditor's ability to prevent free-riding in the cash 
account.

    \12\ FRRS 5-615.952.
    \13\ FRRS 5-628.17.
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3. 90-Day Freeze
    A customer who sells a security purchased in a cash account before 
making full cash payment must have sufficient funds in the account by 
trade date for any purchases during the next 90 days. This restriction 
is known as the ``90-day freeze.'' One broker-dealer suggested the 
freeze should not apply if the cash account holds marginable securities 
with sufficient loan value to pay for the securities that have been 
sold before having been paid for. This suggestion is contrary to the 
nature of the cash account. A customer who contemplates the need for 
credit to settle securities purchases should be using a margin account 
and not a cash account.
    Another broker-dealer believes the freeze should not apply if a 
customer decides to liquidate a purchase made on a DVP basis when the 
customer is ready to make full payment but the selling broker does not 
make timely delivery and the security is otherwise unavailable. The 
Board agrees that a customer should not be subject to the 90-day 
restriction when it decides to liquidate a transaction that the 
counterparty cannot complete.

C. Other Accounts

1. Arbitrage Account
    Transactions effected in the arbitrage account are not subject to 
Regulation T margin requirements. The SIA and a broker-dealer have 
requested that the arbitrage account no longer require that the 
transactions be entered into to take advantage of a concurrent 
disparity in prices. However, elimination of the requirement that the 
two transactions yield an immediate gain would expand this special 
provision beyond those transactions which perform a market function by 
bringing together the prices of securities or markets which should be 
the same. Therefore no changes are being proposed to the arbitrage 
account.
2. Broker-Dealer Credit Account
    The broker-dealer credit account is normally available only for 
broker-dealers.14 However, the brokerage industry has developed a 
service known as ``prime brokerage'' in which a customer maintains a 
cash and/or margin account with a ``prime broker'' to record 
transactions executed at one or more executing brokers. Industry 
practice has been for the executing broker to use the broker-dealer 
credit account to record the transactions sent 

[[Page 33768]]
to the prime broker (who enforces Regulation T vis-a-vis the customer). 
After discussions with Board staff and an SIA committee, the SEC issued 
a no action letter last year describing requirements that must be 
followed in connection with prime brokerage.15 The Board is 
proposing to add language to the broker-dealer credit account to 
officially acknowledge its use in prime brokerage transactions.

    \14\ As noted in the section on foreign broker-dealers, the 
Board is proposing to allow foreign broker-dealers to use the 
broker-dealer credit account when purchasing securities on a DVP 
basis.
    \15\ Letter of January 25, 1994, from Brandon Becker, Esq. to 
Mr. Jeffrey C. Bernstein, reprinted in CCH Federal Securities Law 
Reporter at para. 76,819.
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D. Other Transactions

1. Repurchase Agreements
    A repurchase agreement from a broker-dealer's point of view may be 
viewed as a borrowing by the creditor and should not generally be 
covered by the Board's margin regulations as long as the security is 
not subject to the restrictions imposed by section 8(a) of the Act. The 
repurchase agreements addressed herein are reverse repurchase 
agreements in which a customer sells a security to a creditor with an 
agreement to repurchase from the creditor at a later time. Repurchase 
agreements in government securities are permitted in the government 
securities account created last year.16

    \16\ See 59 FR 53565 (October 25, 1994).
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    In addition to repurchase agreements on government securities the 
PSA, SIA and several broker-dealers request an amendment that would 
permit repurchase agreements on all fixed income securities with good 
faith loan value, although the PSA acknowledges that it may be 
appropriate to treat these transactions as margin loans. However, 
broker-dealers traditionally require 20 percent margin when financing 
nonexempted debt securities and do not lend the 100 percent implied in 
structuring the transaction as a repurchase agreement. Although the PSA 
acknowledges the resemblance between repurchase agreements and margin 
loans, it states that practical problems make the cash account or a new 
account more appropriate. Although the collection of margin from a 
customer by a broker-dealer would seem to indicate that the transaction 
is properly recorded in the margin account, the Board is soliciting 
comment on the advisability of creating a new account for repurchase 
agreements on securities other than government securities in which 
margin would be collected as if the transaction were a conventional 
margin loan. The PSA, SIA, and a law firm also request creation of a 
new account to allow forward transactions, which are not permitted 
under Regulation T unless the security is trading on a when-issued 
basis or is a government or mortgage-related security. Comment is also 
invited on the advisability of accommodating forward transactions 
accompanied by the deposit required for a conventional margin loan in 
an account other than a margin account.
    The PSA and SIA would also like creditors to be able to effect 
repurchase agreements on money market instruments that may not qualify 
as securities. Such transactions are permissible in the nonsecurities 
credit account as long as the proceeds are not used for purpose credit.
2. Two-Tiered Market
    The SIA and several broker-dealers believe the Board should 
establish an account or subaccount where creditors may effect and 
finance all securities transactions on a good faith basis for customers 
who meet some level of financial sophistication. In the past, the Board 
has amended the arranging section of Regulation T to permit creditors 
to arrange for certain types of credit for sophisticated 
customers.17 No further relaxation of the regulation is being 
proposed in this area at this time.

    \17\ For example, the exemption in section 220.13(b) requires 
that the sale of securities be effected pursuant to the SEC's 
private placement exception from registration. Such sales must be 
made to sophisticated investors.
---------------------------------------------------------------------------

3. Use of Money Market Funds
    As noted above,18 the Board is proposing to add money market 
mutual funds to the list of cash equivalents available to cover a put 
written in the cash account and give the fund shares good faith loan 
value in a margin account. The SIA-Credit Division and two other 
broker-dealers believe money market mutual funds should be treated as 
cash without having to be liquidated. Although the Board recognizes 
that money market shares are often viewed as cash equivalents, they are 
not cash. A customer who is required to deposit cash pursuant to 
Regulation T must liquidate the shares to realize cash.

    \18\ See section I.A.2.b. on the cash account under options and 
section III.A.2.b. on mutual funds above.
---------------------------------------------------------------------------

IV. Broker-Dealer Transactions

A. Credit Extended to Other Broker-Dealers

1. All Broker-Dealers
    The commenters were split on the question of whether broker-dealers 
should continue to be treated as customers under Regulation T. The 
principal argument in favor of special treatment for broker-dealers is 
that they are subject to minimum net capital requirements that impose a 
limit on leverage, albeit greater leverage than that permitted public 
customers. The Board continues to believe special credit (i.e., lower 
margin) is appropriate when broker-dealers perform a market function, 
but is not proposing treatment that differs from that for public 
customers for reasons of equity.
2. Specialists and Market-Makers
    Regulation T permits special credit for broker-dealers performing a 
market function. The Board is proposing clarifying language to the 
provisions describing OTC market makers and third-market makers to 
respond to questions that have arisen since the regulation was last 
revised.
    The SIA would like the Board to permit deficit financing of 
specialists, eliminate restrictions on their permitted offsets and 
eliminate the restriction in Sec. 220.12(b)(4) of Regulation T 
concerning free-riding by specialists. As discussed in this preamble in 
section I.A.2.c., the Board is proposing to allow any permitted offset 
that is permissible under SEC-approved rules of the creditor's 
examining authority. Although the Board supports the concept of good 
faith credit for specialist transactions, deficit financing is a form 
of unsecured credit, which is prohibited by section 7(c) of the 
Act.19 The restriction on free-riding by specialists by its terms 
does not apply to any specialist on an exchange that has an SEC-
approved rule on the same subject.

    \19\ 15 U.S.C. 78g(c).
---------------------------------------------------------------------------

    One broker-dealer suggested expanding the definition of OTC market-
maker to include market makers of convertible bonds who post their 
prices in the ``yellow sheets'' or deal in convertible bonds traded 
pursuant to SEC Rule 144A.20 Convertible bonds are equity 
securities under the Act 21 and the Board has designated 
convertible bonds as OTC margin stock when they meet the criteria in 
section 220.17 of Regulation T. OTC market-makers are registered with 
NASDAQ as such and are required to engage in a certain level of market-
making, as are specialists. The Board does not permit good faith credit 
for broker-dealers making a market in equity securities via the ``pink 
sheets.'' Consistency argues against permitting such credit for broker-
dealers making a market in convertible bonds via the 

[[Page 33769]]
``yellow sheets'' or those trading pursuant to SEC Rule 144A.

    \20\ 17 CFR 230.144A.
    \21\ Section 3(a)(11) of the Act (15 U.S.C. 78c(a)(11)) defines 
equity security to include any security convertible into an equity 
security.
---------------------------------------------------------------------------

3. Joint Back Office Arrangements
    Section 220.11(a)(2) of Regulation T allows broker-dealers to set 
up a joint back office (JBO). The owners of the JBO are not considered 
customers of the clearing organization and therefore no Regulation T 
margin is required, although the clearing firm generally obtains the 
appropriate securities haircut from its participants. When the JBO 
section was adopted, the Board assumed there would be a reasonable 
relationship between the creditors' ownership interests and the amount 
of business conducted and did not adopt an explicit requirement for the 
amount of ownership each broker-dealer should have in the JBO. Since 
adoption of the provision, several stock exchanges have expressed 
concern that JBOs are permitting credit far in excess of the 
participant's interest. Much of the activity was attributed to index 
options specialists seeking good faith financing for stock baskets, 
which is not otherwise permitted under Regulation T. As discussed in 
the section on the market functions account under options, the Board is 
proposing to permit such financing under SEC-approved rules of the 
exchanges and this change should reduce the pressure on JBOs to extend 
credit greatly disproportionate to the amount of equity ownership. 
Nevertheless, the Board is also proposing to state explicitly that the 
participants' ownership interest in the JBO should be reasonably 
related to the amount of business conducted through it. Three stock 
exchanges and one other commenter support changes along these lines.
4. Credit to Other Types of Broker-Dealers
    Several commenting broker-dealers suggest additional classes of 
creditors that should be entitled to good faith credit. One broker-
dealer suggests creating a new category of broker-dealers entitled to 
beneficial margin treatment that would be under some affirmative 
obligation to add liquidity to the market but would not be required to 
be present on the trading floor. The Board has traditionally allowed 
good faith credit for specialists engaged in specialist transactions 
and deferred to the SEC to determine who is a specialist under the Act. 
It is unclear what the effect would be on specialists if other broker-
dealers with lesser market-making obligations were permitted good faith 
credit on certain transactions.
    The SIA-Credit Division believes that self-clearing broker-dealers 
who choose to go through another broker-dealer should not be required 
to post customer margin. Board staff has addressed this issue several 
times 22 and reiterated that the treatment of a broker-dealer 
depends on whether it clears the transaction itself and not whether it 
could clear the transaction. In addition, a broker-dealer suggested 
that affiliated broker-dealers should not be treated as customers. 
Board staff has indicated that affiliated (sister) firms are treated as 
customers 23 and no policy reasons for changing this have been 
presented.

    \22\ See, e.g., Staff Opinion of August 18, 1986, FRRS 5-621.16.
    \23\ Staff Opinion of December 16, 1988, FRRS 5-621.18.
---------------------------------------------------------------------------

B. Borrowing and Lending Securities

    Section 220.16 of Regulation T covers the borrowing and lending of 
securities. Securities may be borrowed or lent in connection with the 
need to make delivery in short sales and fails to receive. The section 
covers the borrowing and lending of all types of securities,24 
including those with good faith loan value, and requires enumerated 
types of collateral worth at least 100 percent of the market value of 
the securities on a daily basis. Although stock loans are economically 
equivalent to repurchase agreements, the former are based on the need 
to make delivery and are not meant to be financing arrangements for the 
owner of the securities being lent.25

    \24\ The government securities account can be used to conduct 
all types of permissible transactions involving government 
securities, including borrowing and lending.
    \25\ The Financial Accounting Standards Board (FASB) is 
currently debating the differing treatment of repurchase agreements 
and stock loans and has tentatively concluded that repurchase 
agreements should be accounted for as collateralized borrowings if 
the repurchase agreement entitles the party receiving financial 
assets subject to repurchase to repledge them but not sell them. 
Most securities lending transactions that entitle the party 
receiving the financial assets to sell them would be accounted for 
as sales. Staff plans to review the Regulation T treatment in this 
area once FASB reaches a decision on the matter.
---------------------------------------------------------------------------

1. Collateral
    a. Foreign sovereign debt. In 1988, the Board amended Regulation T 
to give good faith loan value to highly rated foreign sovereign bonds. 
Shortly thereafter, Board staff indicated that these securities should 
be acceptable as collateral for stock loans if the currency of the lent 
security is the same as the sovereign bond.26 The Board is 
proposing explicitly to add foreign sovereign bonds to the list of 
collateral in Sec. 220.16 of Regulation T without restriction as to 
currency. This change was supported by the SIA, SIA-Credit Division, 
NYSE and several broker-dealers.

    \26\  Staff Opinion of September 23, 1988, FRRS 5-615.15.
    b. SEC customer protection rule. While Sec. 220.16 of Regulation T 
covers all borrowing and lending of securities by creditors, the SEC's 
customer protection rule 27 also applies if the creditor is 
borrowing securities from its customer. Both rules specify permissible 
types of collateral. In 1989 the SEC proposed expanding the types of 
acceptable collateral specified in its rule 28 and its staff 
issued a no action letter in the interim. Regulation T currently 
expressly provides for all of these types of collateral, with the 
exception of foreign sovereign debt, which is being proposed as part of 
this package. To ensure that acceptable collateral under Sec. 220.16 of 
Regulation T is always at least as broad as that required by the SEC 
when creditors borrow securities from their customers, the Board is 
proposing to refer to the SEC's customer protection rule in Sec. 220.16 
of Regulation T.

    \27\ SEC Rule 15c3-3, 17 CFR 240.15c3-3.
    \28\ SEC Release No. 34-26608, 54 FR 10680 (March 15, 1989).
---------------------------------------------------------------------------

    c. Other collateral. The SIA and a broker-dealer seek confirmation 
that any freely convertible currency may be treated as cash collateral 
for borrowings of securities. Although this may present a currency risk 
not originally anticipated, the Board believes that this is 
permissible, given that such loans are marked-to-market daily with 
collateral equal to at least 100 percent of the market value of the 
securities being borrowed.
    Several commenters support expanding acceptable collateral to 
include options or some or all types of marginable securities, while 
the NYSE is opposed to this concept. Although the Board has gradually 
expanded the types of acceptable collateral over the years, it has 
always required collateral with high liquidity and low volatility.
2. Permitted Purposes
    a. Pre-borrowing. Although Regulation T currently permits borrowing 
of securities for short sales that have been effected or are in 
immediate prospect, several commenters support the concept of ``pre-
borrowing,'' the borrowing of securities in anticipation of a short 
sale that may or may not take place in the near future. Pre-borrowing 
can lead to an attempt to ``squeeze'' the market for a security by 
locking up all available shares and hindering the ability of others to 
sell that security short.29

    \29\ Board staff has indicated that a permissible alternative to 
pre-borrowing is the payment of a commitment fee to a stock lender. 
See staff opinion of October 22, 1990, FRRS 5-615.18. 

[[Page 33770]]

---------------------------------------------------------------------------

    b. Dividend reinvestment and stock purchase plans. In addition to 
pre-borrowing, commenters such as the NYSE and several broker-dealers 
suggest that broker-dealers be permitted to borrow securities in order 
to participate in an issuer's dividend reinvestment and stock purchase 
plan. These plans allow dividends, and often additional funds, to be 
used to purchase additional shares of the issuer, usually at a discount 
from the current stock price. Board staff opinions and SEC enforcement 
actions have made clear that Regulation T as currently written does not 
permit the borrowing of securities for this purpose.30

    \30\ Staff Opinions of March 2, 1984, FRRS 5-615.1 and July 6, 
1984, FRRS 5-615.01; see also In re RFG Options, SEC Administrative 
Proceeding File No. 3-6370, September 26, 1988.
---------------------------------------------------------------------------

    The Board is not proposing to include dividend reinvestment and 
stock purchase plans as a permitted purpose for borrowing securities. 
Permitting such borrowing would not be consistent with existing Board 
policy concerning borrowing and lending securities. The Board has 
permitted securities lending where it is needed for the smooth 
operation of the securities markets, i.e. short sales and fails to 
receive securities. This view was echoed by the Group of Thirty when 
they recommended removing impediments to securities lending to allow 
delivery of securities. Participation in dividend reinvestment and 
stock purchase plans does not help the securities markets complete 
transactions as broker-dealers do not actually want or need possession 
of the securities. Nevertheless, in light of comments received 
indicating that many issuers view these programs as a less costly means 
of raising capital, the Board is soliciting comment on whether section 
220.16 of Regulation T should be amended to accommodate these plans.
    c. Other purposes. The PSA, SIA and a broker-dealer recommend 
adding repurchase agreements to the list of permitted purposes. Since a 
repurchase agreement represents the sale of a security with a promise 
to repurchase it at a later date, a creditor who does not own the 
security subject to the repurchase agreement is engaging in a short 
sale and therefore may borrow the security pursuant to section 220.16 
of Regulation T.31

    \31\ As noted in footnote 29, all transactions involving 
government securities may be effected in the government securities 
account without regard to other provisions of Regulation T.
---------------------------------------------------------------------------

    One broker-dealer believes institutions such as banks and insurance 
companies should be able to borrow securities from a creditor if they 
say it is for a permitted purpose. However, Regulation T and the U.S. 
securities markets in general presume that the borrowing of securities 
will be effected by the broker-dealer that executes the trade. 
Permitting an entity other than a broker-dealer to borrow securities 
for a transaction effected by a broker-dealer would permit 
circumvention of the Board's margin requirements.
C. Borrowing by Creditors

    All of the commenters addressing section 8(a) of the Act, which 
limits the source of certain loans to broker-dealers to member banks 
and some nonmember banks, support expansion of the types of lenders 
described in section 8(a) or a reduction in the types of transactions 
subject to the restriction. The SEC has recently exempted all listed 
debt securities from the scope of section 8(a) of the Act,32 with 
the result that only loans secured by exchange-traded equity securities 
are still subject to the restriction.

    \32\ SEC Rule 3a12-11, 17 CFR 240.3a12-11, published at 59 FR 
55342, November 7, 1994.
---------------------------------------------------------------------------

    A wide variety of commenters recommend legislation be introduced to 
loosen the restrictions of section 8(a). Such legislation is currently 
pending in Congress.33

    \33\ H.R. 1062, 104th Cong., 1st Sess.
---------------------------------------------------------------------------

V. Section-by-Section Explanation of Proposed Changes

Section 220.2  Definitions

    The following new definitions are being proposed: cash equivalent, 
covered option transaction, exempted securities mutual fund, foreign 
person, money market mutual fund, non-U.S. traded foreign security, and 
permitted offset position. The following definitions would be modified: 
escrow agreement, in the money, margin security, OTC margin bond, OTC 
margin stock, short call or short put, and underlying security. The 
definition of in or at the money would be deleted and SEC-approved 
rules of the appropriate SRO would govern permitted offsets for 
specialists.

Section 220.3  General Provisions

    Section 220.3(e)(4), ``Receipt of funds or securities,'' is used by 
creditors to temporarily finance the exercise of a customer's employee 
stock option. The section would be reworded to permit such short-term 
financing for anyone entitled to receive or acquire any securities 
pursuant to an SEC-registered employee benefit plan.
    Section 220.3(i), ``Variable annuity contracts issued by insurance 
companies,'' would be deleted, although no substantive change is 
intended.

Section 220.4  Margin Account

    Section 220.4(b) would contain all provisions of section 220.5, 
except for those covering specific options transactions. The options 
provisions would be deleted and SEC-approved rules of the SROs would 
apply to these transactions.
    Section 220.4(c) would no longer prohibit a margin excess in a 
foreign currency subaccount from offsetting a margin deficiency in 
another foreign currency subaccount.

Section 220.5  Special Memorandum Account

    This account would be moved from section 220.6. No substantive 
changes are proposed.

Section 220.6  Government Securities Account

    This account would be moved from section 220.18. No substantive 
changes are proposed.

Section 220.8  Cash Account

    Section 220.8(a), Permissible transactions,'' would be amended in 
two ways. First, the cash account would recognize industry practice and 
specifically permit the sale to a customer of any asset on a cash 
basis. Second, the covered options transactions permitted under section 
220.8(a)(3) would be broadened to include any eligible transaction 
designated by the SEC-approved rules of the SROs.
    Section 220.8(b), ``Time periods for payment; cancellation or 
liquidation,'' would permit creditors to accept full cash payment from 
customers for the purchase of foreign securities up to one day after 
the regular way settlement date.

Section 220.11  Broker-Dealer Credit Account

    Three substantive changes are being proposed to section 220.11(a), 
``Permissible transactions.'' First, foreign broker-dealers would be 
permitted to use the account for delivery-versus-payment transactions 
with U.S. broker-dealers. Second, joint back office arrangements would 
require a reasonable relationship between the owners' equity interest 
and the amount of business effected or financed by the joint back 
office. Third, ``prime broker'' arrangements set up under SEC 
guidelines would be able to use this 

[[Page 33771]]
account for transactions effected at executing broker-dealers.

Section 220.12  Market Functions Account

    Section 220.12(b), ``Specialists,'' would be amended to allow SEC-
approved rules of the SROs to determine which permitted offsets can be 
effected on a good faith basis.

Section 220.13  Arranging for Loans by Others

    Changes are proposed for this section in two areas. First, the 
provision allowing U.S. broker-dealers to arrange for customers to 
obtain credit from a foreign lender to purchase foreign securities 
would be expanded to cover short sales while the overall coverage of 
this provision would be limited to foreign securities that are not 
publicly traded in the United States. Second, the regulation would 
explicitly permit U.S. broker-dealers to sell its customers foreign 
securities with installment features if the offering has only a small 
U.S. component.
Section 220.16  Borrowing and Lending Securities

    Two changes are proposed for this section. First, the required 
collateral would be expanded to include marginable foreign sovereign 
debt securities and any collateral that is acceptable to the SEC when a 
broker-dealer borrows securities from its customer. Second, U.S. 
broker-dealers would be able to lend foreign securities to a foreign 
person for any legal purpose and against any legal collateral.

Section 220.18  Supplement: Margin Requirements

    Several changes are being proposed. Options would be given fifty 
percent loan value if listed on a national securities exchange. Mutual 
funds whose portfolio is limited to exempted securities would be given 
good faith loan value, as would money market mutual funds.

VI. 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.

VII. 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, Credit, Federal Reserve System, 
Margin, Margin requirements, Investment companies, Investments, 
Reporting and recordkeeping requirements, Securities.

    For the reasons set out in the preamble, the Board proposes to 
amend 12 CFR Part 220 as follows:

PART 220--CREDIT BY BROKERS AND DEALERS (REGULATION T)

    1. The authority citation for Part 220 continues to read as 
follows:


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

    2. The table of contents for part 220 is amended by revising the 
entries for Secs. 220.1-220.18 and renaming the entry for Sec. 220.19 
to read as follows:
Sec.
220.1  Authority, purpose, and scope.
220.2  Definitions.
220.3  General provisions.
220.4  Margin account.
220.5  Special memorandum account.
220.6  Government securities account.
220.7  Arbitrage account.
220.8  Cash account.
220.9  Nonsecurities credit and employee stock ownership account.
220.10  Omnibus account.
220.11  Broker-dealer credit account.
220.12  Market functions account.
220.13  Arranging for loans by others.
220.14  Clearance of securities, options, and futures.
220.15  Borrowing by creditors.
220.16  Borrowing and lending securities.
220.17  Requirements for the list of marginable OTC stocks and the 
list of foreign margin stocks.
220.18  Supplement: Margin requirements.
* * * * *
    3. 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 security (or a 
security immediately convertible into the underlying security, 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 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 with one year or less to maturity; or
    (3) Any other transaction involving options or warrants in which 
the customer's risk is limited to a fixed amount and is not subject to 
early 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 has been defined as eligible for the cash 
account by the rules of the registered national securities exchange 
authorized to trade the option or warrant, 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: 

[[Page 33772]]

    (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), holding the underlying security, foreign currency, 
certificate of deposit, or required cash, 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 security, foreign 
currency, or certificate of deposit 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: (1) A foreign security that is an 
equity security and that appears on the Board's periodically published 
List of Foreign Margin Stocks based on information submitted by a self-
regulatory organization under procedures approved by the Board. 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 the money means the current market price of the underlying 
security 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.
    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 (Supplement: Margin 
requirements).
    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 maybe 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 

[[Page 33773]]
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, except that an issue that has not been 
rated as of the effective date of this provision shall be considered an 
OTC margin bond if a subsequent unsecured issue of at least 
$100,000,000 of the same issuer is rated in one of the two 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 security 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 security 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), plus two business 
days.
    Permitted offset position means a position in securities or other 
assets underlying options in which a specialist makes a market or 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, provided that all such rules have been 
approved or amended by the SEC.
    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, guaranteed or sold 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.
    (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.
    (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 call who has 
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 security means:
    (1) the security that will be delivered upon exercise of an option; 
or
    (2) In the case of a cash-settled option, the securities which 
comprise the index in the same proportion or any other asset 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 stock pursuant 
to an employee benefit plan registered on SEC Form S-8, a creditor may 
accept, in lieu of the securities, a properly executed exercise notice 
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. 

[[Page 33774]]

    (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.


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 
(Supplement: Margin requirements) 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 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 a foreign currency secured by foreign margin 
securities denominated or traded in the same foreign currency and 
specifically identified on the creditor's books and records as securing 
the foreign currency debit.
    (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 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 

[[Page 33775]]

    (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 
than 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, 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 or underlying 
security 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 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 security is purchased in the account and 
the underlying security 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 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 

[[Page 33776]]

    (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) 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, provided that the owners' interest is 
reasonably related to the amount of business they transact through the 
joint back office.
    (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 (Supplement: Margin 
requirements) 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 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 

[[Page 33777]]
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.
    (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 (Supplement: Margin 
requirements).
    (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) A creditor may not arrange for the extension or maintenance of 
credit to or for any customer by any person upon terms and conditions 
other than those upon which the creditor may itself extend or maintain 
credit under the provisions of this part, except that this limitation 
shall not apply to credit arranged for a customer which does not 
violate parts 207 and 221 of this chapter and results solely from:
    (1) Investment banking services, provided by the creditor to the 
customer, including, but not limited to, underwritings, private 
placements, and advice and other services in connection with exchange 
offers, mergers, or acquisitions, except for underwritings that involve 
the public distribution of an equity security with installment or other 
deferred payment provisions;
    (2) The sale of nonmargin securities (including securities with 
installment or other deferred payment provisions) if the sale is 
exempted from the registration requirements of the Securities Act of 
1933 under section 4(2) of section 4(6) of the Act;
    (3) A subsequent loan or advance on a face-amount certificate as 
permitted under 15 U.S.C. 80a-28(d); or
    (4) Credit extended by a foreign person in connection with the 
purchase or short sale of non-U.S. traded foreign securities.
    (b) A creditor shall not be deemed to have arranged credit by 
effecting the sale of a foreign security offered on an installment 
basis if no more than 15 percent of the issue is offered to United 
States persons as defined in section 7(f) of the Act.


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


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 

[[Page 33778]]
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, foreign 
margin stock shall 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, 
foreign margin stock shall 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 paragraphs (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: 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 nonexempted security, except for a registered 
nonconvertible debt security or OTC margin bond: 150 percent of the 
current market value of the security, or 100 percent of the current 
market value if a security exchangeable or convertible within 90 
calendar days without restriction other than the payment of money into 
the security sold short is held in the account.
    (d) Short sale of an exempted security, 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) Short put or short call on a security, certificate of deposit, 
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, the amount, or other 
position, specified by the rules of the registered national securities 
exchange or the registered securities association authorized to trade 
the option, provided that all such rules have been approved or amended 
by the SEC; or 

[[Page 33779]]

    (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]

    4. Section 229.19 is removed.
    By order of the Board of Governors of the Federal Reserve System, 
June 21, 1995.
William W. Wiles,
Secretary of the Board.
[FR Doc. 95-15680 Filed 6-28-95; 8:45 am]
BILLING CODE 6210-01-P