SEC no-action letter relating to prime brokerage: Difference between revisions

[[Regulation T]] provides that anyone investing on margin has to have an account open, and can borrow up to a maximum of 50% of the purchase price. All good stuff, as a result of the 1929 crash where many investors were as much as 10 times levered. Never again said the US authorities, until we’ve fully forgotten the lessons of 1929, which didn’t happen till 1999, and notwithstanding quite hearty reminders in 1987 and 1998. But [[Regulation T|Reg T]] has remained.  

Okay: so much for background. Now the market practice of “give-ups” rather queered the pitch seeing as [[hedge fund]]<nowiki/>s like to flash the cash and trade across the street with lots of [[executing broker]]<nowiki/>s, but only have one (or at any rate a ''few'') [[prime broker]]<nowiki/>s. Would the executing broker trade by fouled up by [[Regulation T]]?

The prime broker committee, chaired by Bear Stearns (remember them?) proposed to treat the trade settlement transaction between the [[prime broker]] and [[executing broker]] as an inter-dealer (principal) trade even though theoretically executed as agent for the client.