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May 12, 2003

This is in response to your recent e-mail concerning the application of the Board's Regulation T (12 CFR Part 220) to trading in a cash account. Your e-mail contains a fact pattern in which you sell Stock A on Day 1, buy Stock B on Day 2, sell stock B on Day 3, and then buy and sell Stock C on Day 5. You state that all individual purchases cost less than your "account balance" and we assume that Stock A had been paid for it before it was sold on Day 1.

Regulation T allows two methods for paying for securities purchases effected in a cash account (the text of Regulation T can be found at A customer who has sufficient funds in the account on trade date may purchase securities and resell them at any time. A customer who does not have sufficient funds in the account on trade date may purchase securities with the understanding that the securities will not be sold before being paid for in full. "Sufficient funds" does not include sales proceeds that have not yet been received.

The sales proceeds from Stock A will normally be received on Day 4. The purchase of Stock B on Day 2 was based on the agreement described in section 220.8(a)(1)(ii) of Regulation T that "the customer will promptly make full cash payment for the security or asset before selling it and does not contemplate selling it prior to making such payment." The sale of Stock B on Day 3, before the cash to pay for it was received, is inconsistent with this agreement and should put the broker-dealer on notice that you have engaged in a transaction that is not permissible in the cash account. The sales proceeds from the sale of Stock B on Day 3 will normally be received on Day 7. The purchase of Stock C on Day 5 would therefore also have to be made pursuant to section 220.8(a)(1)(ii), with the result that the sale of Stock C on Day 5 was also a transaction that is not permissible in the cash account. In summary, Regulation T requires a customer to wait three days after selling a security to reinvest the proceeds only if the customer is unwilling to agree that he does not intend to sell the new security before paying for it with settled funds.

Regulation T has required customers to pay for securities purchased in a cash account before selling them for over fifty years. The theory behind this requirement is that a customer who sells securities before having the cash to pay for them is engaging in a credit transaction, for which the margin account is the appropriate account. The three-day settlement period currently in effect for equity securities is not imposed by the Federal Reserve. SEC Rule 15c6-1 (17 CFR 240.15c6-1) generally prohibits a broker-dealer from effecting securities transactions that will take more than three business days to settle. However, it is possible for the parities to agree to a shorter period. You may wish to discuss this with your broker. The Board has stated that it is in favor of a shortened settlement period. A shorter settlement period would allow you to reuse cash in your account more quickly. The Board believes that settlement should ideally be accomplished immediately after execution, with payment in same-day funds. The securities industry has discussed the possibility of shortening the settlement period to one day in the next few years.

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2003 Margin Requirements