Regulation T: Difference between revisions
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{{a|PB|}}Federal Reserve Board’s [[Regulation T]] permits those [[Margin loan|buying securities on margin]] to borrow no more than 50% of the purchase price. It also requires in-scope customers to open a margin account with their broker before entering any margin loan. The [[SEC no-action letter relating to prime brokerage|SEC no-action letter]] clarifies that where an investor is executing with one [[Executing broker|broker]] to give up to a [[prime broker]], the [[executing broker]] trade doesn’t count for the purpose of [[Reg T]], meaning as long as the customer has an account with the [[prime broker]] and is financing 50% of the purchase price with the PB, it doesn’t need to do so separately with the [[executing broker]]. Thus, the [[Agency problem|financial world can revolve]]. | {{a|PB|}}Federal Reserve Board’s 12 CFR §220 – Code of Federal Regulations, Title 12, Chapter II, Subchapter A, Part 220 — “[[Regulation T]]” to friends and relations — permits those [[Margin loan|buying securities on margin]] to borrow no more than 50% — or such other percentage as the Federal Reserve Board may from time to time sanction, although it not felt the need to adjust it from 50% since at least 1974 — of the purchase price. It also requires in-scope customers to open a margin account with their broker before entering any margin loan. | ||
===Free-riding=== | |||
Regulation T also restricts certain ostensibly fully-paid-for transactions in a cash account. Owing to the normal two-day [[settlement cycle]] a customer could, in theory, buy and then quickly sell a stock and never have to pay the purchase cost (or anything other than the loss it realises, ''if'' it realises a loss. Well, not under Reg T, it couldn’t, without getting its account suspended for 90 days. A prime brokerage give-up looks a bit like a freerider trade, without being one, hence ... | |||
===The [[SEC no-action letter]] relating to [[executing broker]] settlements to a [[prime broker]]=== | |||
The [[SEC no-action letter relating to prime brokerage|SEC no-action letter]] clarifies that where an investor is executing with one [[Executing broker|broker]] to give up to a [[prime broker]], the [[executing broker]] trade doesn’t count for the purpose of [[Reg T]], meaning as long as the customer has an account with the [[prime broker]] and is financing 50% of the purchase price with the PB, it doesn’t need to do so separately with the [[executing broker]]. Thus, the [[Agency problem|financial world can revolve]]. | |||
{{sa}} | {{sa}} | ||
*[http://ecfr.gpoaccess.gov/cgi/t/text/text-idx?c=ecfr&sid=40cc031a4a064ca8d3f500270b0d0fd7&rgn=div8&view=text&node=12:3.0.1.1.1.0.1.12&idno=12 Text of Reg T] | |||
*[[SEC no-action letter]] | *[[SEC no-action letter]] | ||
*[https://www.finra.org/investors/insights/cash-accounts-what-they-are-and-how-avoid-problems FINRA information about cash accounts] | *[https://www.finra.org/investors/insights/cash-accounts-what-they-are-and-how-avoid-problems FINRA information about cash accounts] | ||
Revision as of 18:08, 9 February 2021
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Hedge Funds & Prime Brokerage Anatomy™
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Federal Reserve Board’s 12 CFR §220 – Code of Federal Regulations, Title 12, Chapter II, Subchapter A, Part 220 — “Regulation T” to friends and relations — permits those buying securities on margin to borrow no more than 50% — or such other percentage as the Federal Reserve Board may from time to time sanction, although it not felt the need to adjust it from 50% since at least 1974 — of the purchase price. It also requires in-scope customers to open a margin account with their broker before entering any margin loan.
Free-riding
Regulation T also restricts certain ostensibly fully-paid-for transactions in a cash account. Owing to the normal two-day settlement cycle a customer could, in theory, buy and then quickly sell a stock and never have to pay the purchase cost (or anything other than the loss it realises, if it realises a loss. Well, not under Reg T, it couldn’t, without getting its account suspended for 90 days. A prime brokerage give-up looks a bit like a freerider trade, without being one, hence ...
The SEC no-action letter relating to executing broker settlements to a prime broker
The SEC no-action letter clarifies that where an investor is executing with one broker to give up to a prime broker, the executing broker trade doesn’t count for the purpose of Reg T, meaning as long as the customer has an account with the prime broker and is financing 50% of the purchase price with the PB, it doesn’t need to do so separately with the executing broker. Thus, the financial world can revolve.