March 22, 2002
Mr. Albert Lucks
Ms. Susan DeMando
Dear Mr. Lucks and Ms. DeMando:
We understand that member firms and examiners have raised questions about the use of the cash account under Regulation T to record repurchase agreements involving Treasury and other exempted securities. We are writing to clarify our views on this matter.
In 1992, the Board issued an advance notice of proposed rulemaking and request for comment regarding Regulation T (57 Federal Register 37109, August 18, 1992). In the advance notice, Board relayed the following information:
Many of the commenters responding to the advance notice suggested that the Board create a new account for exempted securities that could be used for transactions such as repos and forward transactions. In 1994, the Board proposed creation of a new "government securities account" (59 Federal Register 33923, July 1, 1994). The Board's description of the proposed new account including the following information:
The government securities account was adopted by the Board later that year (59 Federal Register 53565, October 25, 1994). In 1998, the Board merged the government securities account into the newly-created "good faith account" currently found in section 220.6 of Regulation T (63 Federal Register 2806, January 16, 1998).
Board staff believes that repurchase agreements involving Treasury, exempted, or any other security entitled to good faith loan value under Regulation T are properly recorded in the good faith account. Use of the cash account for such transactions appears to be a violation of section 220.8(a)(1) of Regulation T. This is because the broker-dealer would be allowing a customer to purchase a security without sufficient funds in the account and without being able to accept in good faith the customer's agreement that the customer will promptly make full cash payment for the security before selling it and does not contemplate selling it prior to making such payment. This is a staff opinion only, as the matter has not been presented to the Board for its consideration.
(Signed) Scott Holz