[Federal Register Volume 61, Number 229 (Tuesday, November 26, 1996)]
[Proposed Rules]
[Pages 60168-60170]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-30003]



  Federal Register / Vol. 61, No. 229 / Tuesday, November 26, 1996 / 
Proposed Rules  

[[Page 60168]]



FEDERAL RESERVE SYSTEM

12 CFR Parts 207, 220 and 221

[Regulations G, T and U; Docket No. R-0944]


Securities Credit Transactions; Borrowing by Brokers and Dealers

AGENCY: Board of Governors of the Federal Reserve System.

ACTION: Proposed rule.

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

SUMMARY: On October 11, 1996, the President signed the National 
Securities Markets Improvement Act of 1996 (the Markets Improvement 
Act). Under the Markets Improvement Act, the Board no longer has the 
authority to regulate certain loans to registered broker-dealers unless 
it finds that such rules are necessary or appropriate in the public 
interest or for the protection of investors. The Markets Improvement 
Act also repeals section 8(a) of the Securities Exchange Act of 1934 
(the Exchange Act), which limited the sources of credit for broker-
dealers who pledge exchange-traded equity securities to certain banks 
and other broker-dealers. The Board is soliciting comment on amendments 
to its margin regulations (Regulations G, T and U) to implement the 
statutory amendments in the Markets Improvement Act and further the 
policies behind their adoption.

DATES: Comments should be received by December 26, 1996.

ADDRESSES: Comments should refer to Docket No. R-0944 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-2222 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 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: Oliver Ireland, Associate General 
Counsel (202) 452-3625; Gregory Baer, Managing Senior Counsel (202) 
452-3236; or Scott Holz, Senior Attorney (202) 452-2966, Legal 
Division; for the hearing impaired only, Telecommunications Device for 
the Deaf (TDD), Dorothea Thompson (202) 452-3544.

SUPPLEMENTARY INFORMATION: The Markets Improvement Act (Pub. L. 104-
290) affects the Board's margin authority in two ways. First, the 
Markets Improvement Act amended section 7 of the Exchange Act (15 
U.S.C. 78g) to exclude certain loans to broker-dealers from the Board's 
margin authority. The Board is nevertheless authorized to adopt rules 
and regulations covering these loans if the Board finds such rules are 
``necessary or appropriate in the public interest or for the protection 
of investors.'' Second, the Markets Improvement Act repealed section 
8(a) of the Exchange Act (15 U.S.C. 78h(a)), which limits the sources 
of funding for broker-dealers who pledge exchange-traded equity 
securities to other broker-dealers and certain banks. In a separate 
document published elsewhere in today's Federal Register, the Board is 
issuing an interpretation of Regulations G, T and U to clarify their 
applicability in light of the statutory amendments in the Market 
Improvement Act.
    The Board is seeking comment on appropriate amendments to 
Regulations G, T and U to reflect the changes contained in the Markets 
Improvement Act and to further the policies behind these changes. To 
reflect the repeal of section 8(a) of the Exchange Act, the Board is 
proposing to delete the provisions of its regulations which repeat the 
former statutory restriction on sources of broker-dealer funding. Two 
regulatory sections would be removed in their entirety. These sections, 
Sec. 220.15 of Regulation T and Sec. 221.4 of Regulation U, restate the 
requirements of former section 8(a) of the Exchange Act and identify 
the FR T-1, T-2 as the form to be used by nonmember banks wishing to 
extend credit to brokers and dealers. Regulation U would also be 
amended by revising Sec. 221.5 (special purpose loans to brokers and 
dealers) to eliminate the requirement that nonmember banks making such 
loans have an agreement in force with the Federal Reserve pursuant to 
section 8(a) of the Exchange Act. Use of the FR T-1, T-2 would be 
discontinued, as would the Board's ``K. 22'' publication, which lists 
those nonmember banks with section 8(a) agreements in force. Finally, 
Sec. 207.4 of Regulation G would be revised to delete the general 
prohibition that lenders not extend credit to broker-dealers secured by 
margin stock.
    To address the amendments to section 7 of the Exchange Act, the 
Board is specifically seeking comment on whether the exclusion of loans 
to specified types of broker-dealers from these regulations should be 
accomplished by amending the ``scope'' provision in the first section 
of each regulation 1 or by amending the definition of ``customer'' 
in the second section of each regulation.2 The Board is also 
seeking comment on whether it needs to provide a test to identify 
brokers or dealers or members of a national securities exchange ``a 
substantial portion of whose business consists of transactions with 
persons other than brokers or dealers'' and, if such a test is 
necessary, what an appropriate test would be. The Board believes an 
appropriate test should be able to be readily administered by both 
regulators and market participants while not being more restrictive 
than the Congressional intent behind the Markets Improvement Act. The 
Board seeks comment on whether a test based on volume, revenue, 
transactions or some other measure can achieve these goals. In 
addition, the Board is seeking comment on potential changes specific to 
the various regulations.
---------------------------------------------------------------------------

    \1\ 12 CFR 207.1 (Regulation G), 12 CFR 220.1 (Regulation T), 
and 12 CFR 221.1 (Regulation U).
    \2\ 12 CFR 207.2 (Regulation G), 12 CFR 220.2 (Regulation T), 
and 12 CFR 221.2 (Regulation U).
---------------------------------------------------------------------------

Regulation T

    Regulation T contains nine accounts in which to record financial 
transactions between broker-dealers and their customers. Three of these 
accounts, the omnibus account, the broker-dealer credit account and the 
market functions account allow favorable treatment for certain 
transactions that are generally limited to broker-dealers.
    Under the Markets Improvement Act, most of the transactions 
eligible for execution in the market functions account are excluded 
from the Board's general margin authority because they involve market 
making and underwriting. The omnibus account is used by broker-dealers 
who seek to finance the credit they extend to their public customers 
and these transactions are excluded from the Board's general margin 
authority under the Markets Improvement Act if the borrowing broker-
dealer has a substantial public customer business. The Board is seeking 
comment on whether there is any continuing need for these accounts.
    The broker-dealer credit account contains several permissible 
transactions, some of which are not limited to members of a national 
securities exchange or registered brokers and dealers.3 In 
addition to these

[[Page 60169]]

transactions, broker-dealers who do not meet the test that a 
``substantial portion'' of their business involves public customers may 
continue to be subject to Board rules for certain borowings unless the 
Board exempts them. The Board is seeking comment on whether these 
broker-dealers should continue to be covered by Board rules, and if so, 
whether there is a continuing need for the broker-dealer credit 
account. The Board is also seeking comment on whether transactions 
currently permitted in the broker-dealer credit account that do not 
require the customer to be a member of a national securities exchange 
or a registered broker-dealer should continue to be allowed under 
Regulation T and if so, how this should be accomplished.
---------------------------------------------------------------------------

    \3\ Section 220.11(a)(1) of Regulation T was recently amended to 
allow unregistered foreign broker-dealers to purchase and sell 
securities on a delivery-versus-payment (DVP) basis without 
application of 90-day freeze and letter of free funds requirements 
imposed on DVP transactions in the cash pursuant to Sec. 220.8(c). 
At the same time, Sec. 220.11(a)(5) was added to cover transactions 
with customers that are part of a ``prime-broker'' arrangement 
effected in accordance with SEC guidelines. ``Prime-broker'' 
arrangements involve two or more broker-dealers effecting and 
financing transactions for a nonbroker-dealers customer.
---------------------------------------------------------------------------

    Regulation T covers the borrowing and lending of securities in 
Sec. 220.16 to accommodate short sales and fails to receive while 
preventing circumvention of the margin requirements. Because these 
transactions are traditionally collateralized with cash or other 
collateral equal to at least the market value of the security being 
lent, the lender of the securities can be viewed as receiving 100 
percent credit against the security being lent. If both parties to a 
securities lending transaction are broker-dealers with a substantial 
public customer business, it appears that Sec. 220.16 is no longer 
applicable. The Board is soliciting comment on how to amend the rules 
regarding the borrowing and lending of securities to reflect the Market 
Improvement Act.

Regulations G and U

    The current structure of the Board's margin regulations is based in 
part on the requirements of the recently-repealed section 8(a) of the 
Exchange Act. Section 8(a) sought to limit sources of funding for 
broker-dealers to certain banks and other broker-dealers. Both of these 
types of lenders were themselves subject to Federal Reserve regulation 
when they extended securities credit. The repeal of section 8(a) of the 
Exchange Act raises fundamental questions about the appropriate 
coverage of Regulations G and U.
    In 1968, the Board determined that it was appropriate to extend its 
margin requirements to cover lenders other than banks and broker-
dealers. Rather than extend the provisions of Regulation U to the newly 
covered lenders, Regulation G was adopted as a separate regulation, in 
part because section 8(a) of the Exchange Act mandated a distinction 
between bank and nonbank lenders with respect to loans to broker-
dealers. Over the years, the Board has tried to make Regulations G and 
U more and more similar.4
---------------------------------------------------------------------------

    \4\ Currently, the primary difference between the regulations is 
that Regulation G prohibits most margin-stock-secured lending to 
broker-dealers while Regulation U not only permits such lending, but 
contains numerous exceptions (called special-purpose loans) allowing 
banks to extend credit to broker-dealers without regard to the 
margin requirements otherwise applicable.
---------------------------------------------------------------------------

    The Board seeks comment on whether it is still appropriate to 
distinguish between Regulation G and Regulation U lenders. For example, 
is it appropriate to retain in Regulation U the concept of special-
purpose loans to broker-dealers for those broker-dealers, a substantial 
portion of whose business does not consist of transactions with public 
customers, when the broker-dealer is engaged in activities other than 
market making and underwriting. If so, should these special-purpose 
loans be part of Regulation G as well. Should Regulation G continue to 
allow good faith credit to broker-dealers for emergency needs arising 
from exceptional circumstances, based on a certification from the 
broker-dealer, and should this treatment be extended to Regulation U. 
Finally, the Board seeks comment on the advisability of conforming some 
or all of the provisions of Regulations G and U or combining 
Regulations G and U into one regulation.

Regulatory Flexibility Act

    As discussed in the preamble, the proposed amendments have been 
developed to implement section 104 of the National Securities Markets 
Improvement Act (Pub. L. 104-290), which reduced the scope of the 
Board's statutory authority for margin regulation. The Board is 
requesting comment to identify potential burden effects of the proposed 
amendments. After reviewing the comments, the Board should be able to 
address the impact of the amendments on small broker-dealers.

Paperwork Reduction Act

    In accordance with the Paperwork Reduction Act of 1995 (44 U.S.C. 
3506; 5 CFR 1320 Appendix A.1), the Board reviewed the rule under the 
authority delegated to the Board by the Office of Management and 
Budget.
    The collection of information requirements in this regulation are 
found in 12 CFR 220.15(b). This information collection was mandatory 
under 15 U.S.C. 78h, which was repealed by the National Securities 
Markets Improvement Act of 1996 (Pub. L. 104-290). The respondents are 
for-profit broker-dealers. The estimated burden per response is 1.0 
hour. It is estimated that there is 1 respondent and an average 
frequency of 1 response per respondent each year. Therefore the total 
amount of annual burden is estimated to be 1.0 hour. The annual cost 
burden over the annual hour burden is estimated to be $20. As a result 
of the Board's proposed action, this collection of information would be 
discontinued.
    Send comments regarding any aspect of this collection of 
information to: Secretary, Board of Governors of the Federal Reserve 
System, 20th and C Streets, N.W., Washington, DC 20051; and to the 
Office of Management and Budget, Paperwork Reduction Project (7100-
0191), Washington, DC 20503.

List of Subjects in 12 CFR Parts 207, 220 and 221

    Banks, banking, Brokers, Credit, Federal Reserve System, Margin, 
Margin requirements, Reporting and recordkeeping requirements, 
Securities.

    For the reasons set out in the preamble, the Board proposes to 
amend 12 CFR Parts 207, 220 and 221 as follows:

PART 207--SECURITIES CREDIT BY PERSONS OTHER THAN BANKS, BROKERS, 
OR DEALERS (REGULATION G)

    1. The authority citation for Part 207 continues to read as 
follows:

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

    2. Section 207.4 is revised to read as follows:


Sec. 207.4   Credit to broker-dealers.

    A lender may extend or maintain credit secured, directly or 
indirectly, by any margin stock to a creditor who is subject to part 
220 of this chapter. If the credit is extended in good faith reliance 
upon a certification from the customer that the credit is essential to 
meet emergency needs arising from exceptional circumstances, any 
collateral for the credit shall have good faith loan value. In all 
other cases, collateral shall be valued in accordance with Sec. 207.7.

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, 78q, and 78w.

[[Page 60170]]

Sec. 220.15   [Removed and Reserved]

    2. Section 220.15 is removed and reserved.

PART 221--CREDIT BY BANKS FOR THE PURPOSE OF PURCHASING OR CARRYING 
MARGIN STOCK (REGULATION U)

    1. The authority citation for Part 221 continues to read as 
follows:

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


Sec. 221.4   [Removed and Reserved]

    2. Section 221.4 is removed and reserved.
    3. In Sec. 221.5, paragraph (a) is revised to read as follows:


Sec. 221.5   Special purpose loans to brokers and dealers.

    (a) A bank may extend and maintain purpose credit to brokers and 
dealers without regard to the limitations set forth in Secs. 221.3 and 
221.8 if the credit is for any of the specific purposes and meets the 
conditions set forth in paragraph (c) of this section.
* * * * *
    By order of the Board of Governors of the Federal Reserve 
System, November 19, 1996.
William W. Wiles,
Secretary of the Board.
[FR Doc. 96-30003 Filed 11-25-96; 8:45 am]
BILLING CODE 6210-01-P