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Zorluk: ZorFederal Reserve Board (FRB) and Margin Regulation

A commercial bank provides a line of credit to a broker-dealer secured by customer margin stock, enabling the broker-dealer to fund customer margin loans. On the same day, a retail customer requests to purchase newly issued mutual fund shares on margin through the broker-dealer. Which of the following statements correctly identifies the governing Federal Reserve Board (FRB) regulations and borrowing restrictions for both scenarios?

  1. Regulation U governs the commercial bank's extension of credit to the broker-dealer, while Regulation T prohibits the broker-dealer from extending credit on the open-end mutual fund shares until they have been held for 30 days.Cevap
  2. B
    Regulation T governs the commercial bank's lending to the broker-dealer, while Regulation U permits the immediate purchase of newly issued mutual fund shares on 50% margin.
  3. C
    FINRA Rule 4210 regulates the commercial bank's extension of credit, while Regulation X governs the customer's purchase of the mutual fund shares.
  4. D
    Regulation X governs the bank loan to the broker-dealer, while Regulation T allows mutual fund shares to be purchased on margin if the transaction is executed as an agency trade.

Cevap

Regulation U governs the commercial bank's extension of credit to the broker-dealer, while Regulation T prohibits the broker-dealer from extending credit on the open-end mutual fund shares until they have been held for 30 days.
The Federal Reserve Board establishes credit regulations under the Securities Exchange Act of 1934. Regulation U governs loans made by banks and non-broker-dealer lenders to customers and broker-dealers when secured by margin stock. Regulation T governs credit extended by broker-dealers to retail customers. Under Regulation T, open-end management company (mutual fund) shares are classified as new issues. Consequently, customers must pay for mutual fund shares in full and cannot buy them on margin or use them as loan collateral until they have been held in the account for at least 30 days.

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1
Identify the FRB regulation governing bank credit to broker-dealers
Regulation U applies to banks and lenders other than broker-dealers extending credit collateralized by margin stock.
Federal Reserve Board Regulation U sets margin requirements and credit extension rules specifically for commercial bank lending against securities.
2
Determine margin eligibility for newly issued mutual fund shares under Regulation T
Under Regulation T and Section 11(d)(1) of the Securities Exchange Act of 1934, open-end investment company (mutual fund) shares are considered new issues and are non-marginable for 30 days after issuance.
Broker-dealers cannot extend credit on new issues during the 30-day seasoning period. After 30 days of ownership, mutual fund shares become fully marginable collateral.
3
Synthesize regulatory applications to select the correct choice
The bank loan is governed by Regulation U, and the mutual fund purchase is restricted by Regulation T's 30-day seasoning requirement.
Combining Regulation U bank rules and Regulation T customer credit restrictions yields the complete and accurate regulatory framework.

Anahtar Kavram

Scope of FRB Margin Regulations (Regulation T vs. Regulation U) and Seasoning Requirements for Investment Company Shares
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Konular

Federal Reserve Board (FRB) and Margin Regulation

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