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 a cornerstone 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 by the settlement date (T+1 as of May 2024). 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.
Good faith deposit: When full payment is not received by settlement, the firm must cancel or liquidate the transaction, or request a Regulation T extension.
90-day freeze: Customers who engage in free-riding in a cash account have the account frozen for 90 days, during which they must have cash in the account before placing orders.
Letters of Free Funds: When securities are held at another broker-dealer, a Letter of Free Funds verifies that the securities are free of liens and available for delivery, supporting Regulation T compliance.

How Loffa Helps You Comply

Freefunds Verified Direct (FVD)

Automated free funds verification: FVD streamlines the Letters of Free Funds process, ensuring that securities identified as available are truly free and unencumbered — a core requirement for Regulation T compliance.
T+1 acceleration: With the move to T+1 settlement, payment deadlines have tightened. FVD's real-time verification helps firms meet compressed timelines for confirming free funds status.
Cash account compliance: FVD supports the documentation and verification needed to ensure cash account transactions comply with Regulation T's payment requirements.
Extension management: When Regulation T extensions are required, FVD's record-keeping capabilities document the extension request and approval process.

Recent Updates

T+1 settlement (May 2024): The move to T+1 settlement has significantly accelerated Regulation T payment deadlines, requiring firms to verify free funds status and collect payments faster than under the prior T+2 regime.
Extension requests: With compressed settlement timelines, the window for requesting and granting Regulation T extensions has narrowed, increasing the importance of automated processes.