Regulation T — Credit by Brokers and Dealers

Overview

Regulation T is a Federal Reserve Board regulation that governs the extension of credit by brokers and dealers to customers for the purchase of securities. It establishes the initial margin requirement, currently 50%, meaning customers must deposit at least half the purchase price of securities bought on margin. The regulation also governs cash accounts, payment timing, and the treatment of free-riding violations.

Regulation T is the foundation of margin regulation and works alongside FINRA's margin rules (Rule 4210) and individual firm requirements to create a layered framework for credit risk management.

Official citation: 12 CFR Part 220

Who It Applies To

Regulation T applies to brokers and dealers registered under the Securities Exchange Act of 1934. It governs credit extended to all customers, whether individuals or institutions, for the purpose of purchasing, carrying, or trading securities.

Key Requirements

50% initial margin: Customers purchasing securities on margin must deposit at least 50% of the purchase price at the time of the transaction.
Cash account rules: Securities purchased in a cash account must be paid for in full within the payment period: the standard settlement cycle plus two business days. Under T+1 settlement (May 2024), that is the third business day after trade date. Free-riding in cash accounts is prohibited.
Margin account requirements: Margin accounts must be documented with a signed margin agreement and are subject to initial and maintenance margin requirements.
Late payment: When full payment is not received within the payment period, the firm must cancel or liquidate the transaction, or request an extension from its examining authority. For delivery-versus-payment (DVP) trades delayed by the mechanics of delivery, not by the customer, 220.8(b)(2) allows up to 35 calendar days.
90-day freeze: When a security is sold, or delivered to another broker or dealer, before the customer pays for it in full, the cash account is frozen for 90 days. During the freeze, the customer must have cash in the account before each purchase.
Letters of Free Funds: No freeze applies when the security is delivered to another broker or dealer for deposit in a cash account that holds enough funds to pay for it, as on a DVP trade. The executing broker may rely on the receiving broker's written statement, accepted in good faith, that the funds are there (220.8(c)(2)(ii)). That statement is the Letter of Free Funds.

How Loffa Helps You Comply

Freefunds Verified Direct (FVD)

Automated free funds verification: FVD sends Letter of Free Funds requests and returns the receiving broker's written statement electronically, so the executing broker has the statement Regulation T lets it rely on, tied to the trade it covers.
T+1 timing: With the move to T+1 settlement, payment deadlines have tightened. FVD's dashboards track each open request against processing cutoffs, and FVD-R lets the receiving firm's desk answer a request with one action.
Records: FVD keeps each request, response, and status change in WORM storage with a time-stamped audit trail for eight years, so the letter behind each DVP trade is ready when an examiner asks.

Recent Updates

T+1 settlement (May 28, 2024): The payment period is the standard settlement cycle plus two business days, so payment for a cash account purchase is now due by the third business day after trade date, a day earlier than under T+2.
Extension requests: Under 220.8(d)(2), an extension application has to be filed and acted on before the payment period ends, so T+1 moved that deadline a day earlier too.