Regulation T

Which regulator has authority over the amount of credit a broker-dealer may extend to a customer buying securities on margin?

1. A.The SEC, which regulates all extensions of credit in connection with securities transactions.Wrong. The Commission oversees the markets broadly but the initial margin authority was given elsewhere.
2. B.The Federal Reserve Board, which sets the initial credit that may be extended on a securities purchase.Correct. Congress placed this with the central bank because margin credit bears on the money supply itself.
3. C.FINRA, which sets both the initial and the maintenance requirements for its member firms.Wrong. Self-regulatory organisations set maintenance requirements beneath the federal initial requirement.
4. D.The Treasury Department, through its authority over government securities dealers.Wrong. Treasury's rulemaking concerns the government securities market rather than margin credit generally.

Why: The Federal Reserve Board sets the initial credit that may be extended in a securities transaction, exercising an authority Congress gave it in the Securities Exchange Act because margin credit affects the money supply and the stability of the banking system, not merely investor protection. Its rules govern credit extended by broker-dealers and separately by banks and other lenders. Beyond that federal floor, the self-regulatory organisations impose maintenance requirements, and individual firms routinely set house requirements stricter still. So three layers apply, and the top layer, the initial extension of credit, belongs to the central bank rather than to the SEC.

A customer buys 4,000 dollars of marginable stock. The Regulation T deposit required is:

1. A.2,000 dollarsCorrect - 50% of 4,000.
2. B.4,000 dollars4,000 dollars is the whole purchase, which is what a cash buyer would pay. The margin question asks how much the customer supplies, with the broker lending the balance.
3. C.1,500 dollars1,500 dollars corresponds to no percentage the rule uses, landing between the halfway point and a quarter. Applying the 50% requirement to 4,000 gives 2,000 with nothing left to interpret.
4. D.1,000 dollars1,000 dollars is a quarter of the purchase rather than a half. The initial requirement splits the trade evenly between the customer and the broker.

Why: Reg T is 50%, so the deposit is 2,000 dollars.

The Regulation T initial margin requirement for common stock is currently:

1. A.30%30% is not a Reg T figure at all. It drifts in from house maintenance levels that some firms set above the exchange minimum, which is a different rule applied at a different point in the life of the position.
2. B.25%25% is the familiar long-position maintenance minimum, which governs how far equity may sink after the trade is on. The stem asks what must be deposited at the outset, and initial and maintenance requirements are separate tests at separate moments.
3. C.50%Correct - Reg T initial margin is 50%.
4. D.100%100% is payment in full, which describes a cash-account settlement rather than a margin requirement. It is the ceiling on what any requirement could be rather than a requirement itself, and Reg T deliberately sets the bar below full payment.

Why: Regulation T sets initial margin at 50% of the purchase amount.

Under Regulation T, what percentage of a marginable stock purchase must the customer deposit initially?

1. A.25 percent25 percent is the FINRA long maintenance minimum, not the Reg T initial requirement.
2. B.30 percent30 percent is the FINRA maintenance minimum for short stock, not initial margin.
3. C.100 percentPaying 100 percent describes a cash-account purchase, not a Reg T margin purchase.
4. D.50 percentCorrect — Reg T initial margin is 50 percent of the purchase price.

Why: Regulation T, set by the Federal Reserve, requires an initial deposit of 50 percent of the purchase price of marginable stock.