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Regulation T: Difference between revisions
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Amwelladmin (talk | contribs) (Created page with "{{a|PB|}}Federal Reserve Board’s Regulation T permits those buying securities on margin to borrow no more than 50% of the purchase price. It also require...") |
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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]]. | |||
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*[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] | ||