Regulation U

Regulation T, which sets the initial margin requirement, is issued by...

1. A.The SECThe SEC oversees markets but does not set the Reg T initial margin.
2. B.FINRAFINRA sets maintenance minimums, but the initial requirement under Reg T is the Fed's.
3. C.The national securities exchangesExchanges set listing and trading rules, not the federal margin requirement.
4. D.The Federal Reserve BoardCorrect — Regulation T is a Federal Reserve Board rule.

Why: Regulation T is a rule of the Federal Reserve Board, which sets how much credit a broker-dealer may extend to customers for securities purchases.

Cormac Ferris does not want to use his broker-dealer's margin department. Instead he approaches a commercial bank, pledges his portfolio of listed stocks as collateral, and borrows in order to buy additional listed stocks. Which statement about the federal credit rules is correct?

1. A.Regulation U governs credit extended by banks and other non-broker lenders to purchase or carry margin stock, and Regulation X makes the borrower responsible for compliance, including credit obtained abroadCorrect. Reg T covers broker-dealers, Reg U covers other lenders, and Reg X reaches the borrower.
2. B.Only the SEC regulates purpose credit; the Federal Reserve's authority is limited to broker-dealersThe Federal Reserve issues Regulations T, U and X; the SEC does not set margin credit limits.
3. C.Regulation T applies directly to the bank because the loan finances a securities purchaseRegulation T governs credit extended by broker-dealers, not by banks.
4. D.No federal margin limit applies, because the lender is not a broker-dealerRegulation U applies precisely to this kind of lender.

Why: The Federal Reserve regulates purpose credit through a family of rules keyed to who is lending. Regulation T governs credit extended by broker-dealers. Regulation U governs credit extended by banks and other non-broker lenders for the purpose of purchasing or carrying margin stock, and it imposes its own limits and purpose-statement requirements. Regulation X closes the circle by placing the obligation on the BORROWER to comply, including a borrower who obtains credit outside the United States, so an investor cannot escape the limits by choosing a different lender or a foreign one.