Regulation T

Regulation T
Name	Regulation T
Issued by	Board of Governors of the Federal Reserve System
Also known as	Regulation T (FR)
Citation	12 C.F.R. § 220
Enacted	1934
Status	in force

Regulation T is a federal administrative rule promulgated by the Board of Governors of the Federal Reserve System that governs credit extended by brokers and dealers for the purchase of securities. It establishes initial margin requirements, sets standards for extension of credit, and interacts with rules administered by the Securities and Exchange Commission, Financial Industry Regulatory Authority, Federal Deposit Insurance Corporation, and Commodity Futures Trading Commission. The regulation is central to rules affecting New York Stock Exchange, NASDAQ, Chicago Board Options Exchange, Municipal Securities Rulemaking Board, and market intermediaries such as Goldman Sachs, Morgan Stanley, JP Morgan Chase, and Charles Schwab.

Background and Purpose

Regulation T was adopted under authority granted by the Securities Exchange Act of 1934 to address credit risks following the Wall Street Crash of 1929 and the Great Depression, aligning with stabilization efforts led by the New Deal and agencies like the U.S. Department of the Treasury. Its purpose is to limit speculative leverage through initial margin standards, coordinate with capital and conduct rules enforced by the Securities and Exchange Commission and harmonize with banking regulations from the Federal Reserve Bank of New York and the Office of the Comptroller of the Currency. The rule aims to promote market integrity across trading venues including the Philadelphia Stock Exchange and clearinghouses such as the Depository Trust Company.

Scope and Coverage

Regulation T applies to credit extended by brokers and dealers registered with the Securities and Exchange Commission and members of national securities exchanges like New York Stock Exchange American and NASDAQ OMX Group. It covers transactions in equity securities, certain corporate debt, and securities approved by clearing agencies such as the Options Clearing Corporation and the Fixed Income Clearing Corporation, while intersecting with margin rules for derivatives on the Chicago Mercantile Exchange and Chicago Board Options Exchange. Exemptions and special provisions reference institutions like Federal Reserve Banks and state-chartered banks when acting as broker-dealers or custodians.

Margin Requirements and Credit Provisions

The regulation sets initial margin requirements commonly expressed as a percentage of the purchase price, historically adjusted from its original level to current standards applied by the Board of Governors of the Federal Reserve System and implemented by broker-dealers such as E*TRADE Financial Corporation and Robinhood Markets. It defines permitted forms of collateral, treatment of cash and securities, and the mechanics of maintenance margin calls traditionally enforced in coordination with the Financial Industry Regulatory Authority. The rule addresses special accounts including margin accounts, cash accounts, and options accounts at firms like Interactive Brokers, stipulating provisions for liquidation authority, customer notifications, and the calculation of debit balances and loan value tied to clearing practices at the Depository Trust Company and National Securities Clearing Corporation.

Compliance and Enforcement

Enforcement of Regulation T involves coordination among the Board of Governors of the Federal Reserve System, the Securities and Exchange Commission, and self-regulatory organizations such as the Financial Industry Regulatory Authority and national exchanges including the New York Stock Exchange. Violations can lead to civil monetary penalties, disgorgement actions by the Securities and Exchange Commission, suspension or revocation of registration by the Commodity Futures Trading Commission when cross-market issues arise, and disciplinary proceedings before panels such as those at the Financial Industry Regulatory Authority. Broker-dealers implement internal controls, compliance programs, and audit procedures informed by guidance from the Federal Reserve Bank of San Francisco and legal opinions from firms like Skadden, Arps, Slate, Meagher & Flom.

Historical Developments and Amendments

Regulation T was promulgated in 1934 after the passage of the Securities Exchange Act of 1934 and has been amended in response to market events including the 1970s stagflation, the 1987 stock market crash, the 2008 financial crisis, and regulatory reforms such as the Dodd–Frank Wall Street Reform and Consumer Protection Act. Key amendments altered initial margin percentages, clarified credit treatment for short sales, and integrated coordination with margin methodologies used by clearing agencies like the Options Clearing Corporation and Depository Trust & Clearing Corporation. Notable administrative actions and interpretive releases have involved the Federal Reserve and the Securities and Exchange Commission in rulemaking rounds affecting firms including Bear Stearns, Lehman Brothers, and Citigroup.

Impact on Markets and Investors

Regulation T influences leverage available to retail platforms like Robinhood Markets and institutional desks at BlackRock and Vanguard Group, affecting liquidity, volatility, and systemic risk across exchanges such as NASDAQ and the New York Stock Exchange. Adjustments to margin requirements can alter trading behavior around events tied to companies like Tesla, Inc., Apple Inc., or during market stress exemplified by episodes involving GameStop and AMC Entertainment Holdings, Inc.. Its interaction with capital rules for banks such as Bank of America and Wells Fargo and with clearinghouse practices at the National Securities Clearing Corporation shapes resilience and investor protection outcomes monitored by the Securities and Exchange Commission and the Board of Governors of the Federal Reserve System.

Category:United States federal financial regulations