Federal Reserve Regulation T

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 a 90-day cash-account restriction for sale or delivery of unpaid nonexempt securities, subject to exceptions
• Prohibits free riding

FINRA sets maintenance margin requirements. Reg T also addresses instruments beyond ordinary equities: nonconvertible debt generally receives good-faith margin treatment, and listed options use requirements prescribed by their options exchange or association. Security futures have a separate joint SEC and Commodity Futures Trading Commission margin framework.

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

• Initial margin and maintenance margin serve different purposes. Reg T generally requires 50% for margin equity purchases; FINRA sets maintenance requirements. Reg T also governs later transactions and withdrawals, so it does not disappear after the opening purchase.

Reg T Payment Date and the T+1 Settlement Cycle

The Reg T payment date is S+2, two business days after settlement. Under the 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+2 = T+3): customer must have paid by this date

A customer who buys $10,000 of stock on Monday must have paid by close of business Thursday (T+3).

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+2 (two business days after settlement), which is T+3 under the T+1 settlement cycle. The Reg T payment period is the standard settlement cycle plus two business days. Common exam trap: a trade on Monday settles Tuesday (T+1), and Reg T payment is due Thursday (T+3 = S+2), not Wednesday.

Cash Account: The 90-Day Freeze

If full payment is not obtained within the prescribed period, the firm must promptly cancel or liquidate the unpaid transaction, subject to exceptions or an approved extension. The firm may disregard an amount of $1,000 or less under the rule's payment provision.

The separate 90-day restriction applies when a nonexempt security is sold or delivered before full payment. Cancellation counts as a sale for this test. Apply the rule's exceptions, including qualifying delivery and payment arrangements, and any examining-authority waiver rather than treating every unpaid amount as an automatic restriction.

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 examining authority may extend the payment period or waive the 90-day restriction when exceptional circumstances warrant it. These are distinct forms of relief. A payment-period extension is not an extension of the restriction itself. FINRA members use FINRA when it is their designated examining authority.

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.

What Should You Check on Exam Day?

• Do you know Reg T's initial margin requirement: 50% of the purchase price for equity securities bought on margin?
• Can you state the Reg T payment date under the T+1 settlement cycle: S+2, which equals T+3?
• Can you distinguish prompt cancellation or liquidation for an unpaid transaction from the 90-day restriction for selling or delivering an unpaid nonexempt security?
• Can you distinguish free riding (buying then selling before paying in a cash account) from an ordinary margin-account violation?