Federal Reserve Regulation T: Credit by Brokers and Dealers

Reg T is the FRB's slice of the margin regulatory framework. The Securities Exchange Act of 1934 gave the FRB authority over margin requirements on securities purchases, and the FRB exercises that authority through Reg T. The rule sits alongside the FINRA margin requirements (which covers maintenance margin and other instruments) and the customer-protection rules that govern customer assets.

FRB Authority and Reg T's Role

The Securities Exchange Act of 1934 gives the Federal Reserve Board authority to set margin requirements on the purchase of securities. The FRB exercises that authority by issuing Regulation T, which:

• Sets initial margin for purchases of margin securities
• Defines the Reg T payment date for cash-account purchases
• Establishes the 90-day cash-account freeze for unpaid purchases
• Prohibits free riding

Reg T does NOT cover maintenance margin (that is the FINRA margin requirements) and does NOT cover instruments outside the FRB's statutory jurisdiction (corporate bonds, options, security futures are covered by the FINRA margin requirements instead).

Think of it this way: Reg T is the federal monetary regulator's tool for controlling securities margin credit. The FRB sets initial margin to balance two policy goals: letting investors use leverage to participate in markets (which is good for capital formation) and preventing leverage from amplifying market crashes (which destabilizes the financial system). The 50% initial margin is the FRB's balance point.

Initial Margin: 50% of Purchase Price

Reg T's most-tested provision is the initial margin requirement: 50% of the purchase price for equity securities.

What the 50% Means in Practice

A customer who wants to buy $100,000 of stock on margin must put up $50,000 of equity. The remaining $50,000 is the margin loan from the firm. The customer's equity in the position immediately after purchase is 50%.

After the purchase, the FINRA margin requirements's maintenance margin (25% long) takes over. The customer's equity can drift below 50% as the position's price moves, but it cannot drop below 25% without triggering a maintenance call.

Real-world example: Customer buys 1,000 shares of XYZ at $100 = $100,000 market value. Reg T initial margin: $50,000 equity, $50,000 margin debt. If the stock drops to $80, market value is $80,000, equity is $30,000 ($80K - $50K margin debt), margin percentage is 37.5%. Still above the 25% maintenance floor. If the stock drops to $66.67, market value is $66,670, equity is $16,670, margin is 25%, maintenance call territory.

Exam Tip: Gotchas

• Reg T governs INITIAL margin (50% at purchase); the FINRA margin requirements governs MAINTENANCE margin (25% long, 30% short). Reg T applies once, at the moment of purchase. the FINRA margin requirements applies every day thereafter.

Reg T Payment Date and the T+1 Settlement Cycle

The Reg T payment date is S+1, one business day after settlement. Under the post-2024 T+1 settlement cycle, this works out to:

• Trade date (T): customer places the buy order
• Settlement date (S = T+1): trade settles
• Reg T payment date (S+1 = T+2): customer must have paid by this date

A customer who buys $10,000 of stock on Monday must have paid by close of business Wednesday (T+2).

Promptly = By Reg T Payment Date

The Reg T payment date sets the outer boundary. Most firms expect customers to pay sooner; the rule's deadline is when consequences begin to attach, not when payment is "expected."

Exam Tip: Gotchas

• Reg T payment date is S+1 (one business day after settlement), which is T+2 under the T+1 settlement cycle. Common exam trap: students remember "T+2" or "S+1" but use them interchangeably. They are the same calendar date but expressed differently. A trade on Monday settles Tuesday (T+1) and Reg T payment is due Wednesday (S+1 = T+2).

Cash Account: The 90-Day Freeze

If a customer fails to pay for a purchase in a cash account by the Reg T payment date, the account is frozen for 90 days.

What "Frozen" Means

During the 90-day freeze:

• Any future purchase requires sufficient funds in the account before the order is placed (no buying first and paying later)
• The freeze prevents the customer from rolling forward unpaid purchases

The freeze can be extended under FINRA the margin-extension procedure if the customer's failure was due to extraordinary circumstances. But absent an extension, the rule is automatic: 90 days, full prepayment for any new purchase.

Free Riding: The Cash-Account Specific Prohibition

Free riding is the practice of buying a security in a cash account, then selling it before paying for it, hoping to use the sale proceeds to fund the purchase. Reg T prohibits this:

• A customer who buys $5,000 of stock and sells it for $5,500 before the Reg T payment date has free-ridden
• The customer used the sale proceeds (which are not yet settled) to fund the purchase, effectively getting credit they did not pay for
• The 90-day freeze applies to free-riding violations

Exam Tip: Gotchas

• Reg T governs INITIAL margin and the cash-account 90-DAY FREEZE; the FINRA margin requirements govern MAINTENANCE margin. The 90-day freeze is a Reg T cash-account remedy, not a margin-account remedy. Margin-account violations trigger margin calls under the FINRA margin requirements.
• Free riding is a CASH-ACCOUNT prohibition. A customer cannot buy and sell a security in a cash account before paying for the purchase. The exam may probe whether free riding applies in margin accounts; it is fundamentally a cash-account concept.

How Reg T Interacts with the Other Rules in This Unit

Reg T is the entry point for margin lending. The other rules in this unit layer on top:

A customer's margin transaction touches all of these rules in sequence: Reg T at purchase, SEC credit disclosures at account opening, the FINRA margin requirements for maintenance margin daily, the daily-margin record for documentation, and the margin-extension procedure if anything goes wrong with the Reg T deadline.