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March 22, 2002

Mr. Albert Lucks
Director, Credit Regulation
New York Stock Exchange
20 Broad Street
New York, New York 10005

Ms. Susan DeMando
Director, Financial Operations
NASD Regulation
1735 K Street, NW
Washington, DC 20006

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:

An SRO has noted that institutions sometimes purchase U.S. government securities in a cash account and finance their purchase through a repurchase agreement. This type of transaction appears to be more appropriate for the margin account given the current language of the cash account, but some customers may be unable to use a margin account. Comment is invited on the appropriate treatment of transactions in exempted securities in a cash account.

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] would allow institutional customers who cannot or will not use a margin account to engage in government securities transactions not specifically authorized in the cash account. For example, the government securities account could be used to effect... repurchase and reverse repurchase agreements.

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.

Yours truly,

(Signed) Scott Holz

Scott Holz

Senior Counsel

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2002 Margin Requirements