What Is Regulation T?
Let me explain Regulation T directly: it's a set of rules that control investors' cash accounts and how much credit brokerage firms and dealers can give you for buying securities. Under Reg T, you can borrow up to 50% of the securities' purchase price from a broker or dealer, but you have to cover the other 50% with your own cash.
Key Takeaways
- Regulation T governs cash accounts and the credit broker-dealers can extend to you for securities purchases.
- If you want to buy securities using broker credit, you need to apply for a margin account.
- Reg T requires that you can borrow no more than 50% of the purchase price, with the rest paid in cash.
Understanding Regulation T (Reg T)
You might know buying securities with borrowed money as buying on margin, which means putting up assets with your broker to get a loan. Regulation T also sets payment rules for certain transactions in cash accounts.
The Federal Reserve Board's Board of Governors created Regulation T to regulate credit extensions by brokers and dealers, and to manage cash accounts. If you have a cash account, you can't borrow from a broker-dealer—you must pay the full securities price in cash.
Margin accounts let you borrow to cover part of your purchase. Since borrowing for securities can lead to bigger sudden losses than cash-only buys, the Federal Reserve limited borrowing to no more than 50% of the price.
This 50% is the initial margin, setting the minimum borrowing at purchase time. Some brokers might require more than 50%.
Important Note
Regulation T caps the credit you can get from your broker for margin securities buys.
Special Considerations
While Reg T mainly governs margin, it also adds transaction rules for cash accounts. Securities trades can take up to one day to settle, with cash going to the seller. This can lead to you buying and selling the same securities before paying from your cash account, known as freeriding, which Reg T prohibits.
In these cases, your broker freezes your cash account for 90 days, meaning you fund purchases with cash on the trade date.
Example of Reg T
To borrow from a brokerage for securities, you apply for a margin account with borrowing rights. When you borrow in this account, you pay interest based on the broker's rate schedule.
Say you want to buy 10 shares of a company at $100 each, totaling $1,000. Reg T says you can borrow no more than 50%, or $500, from the broker, and you pay the remaining $500 in cash.
Other articles for you
A fund of funds invests in multiple other funds to offer diversification and expert management but often involves higher fees and complexity.
IRS Form 6252 is used to report income from installment sales of property, allowing gains to be spread over multiple years.
Double-entry accounting is a standard method that records every business transaction as equal debits and credits in two places to maintain balance in the accounting equation.
Make-to-order is a manufacturing strategy where products are produced only in response to confirmed customer orders to meet specific demands and reduce waste.
Full employment is the economic state where all willing workers are employed, though in practice it allows for low unemployment to prevent inflation.
Up volume refers to rising security prices accompanied by increased trading volume, signaling potential bullish trends.
The risk-free rate of return is a theoretical benchmark for zero-risk investments, often proxied by short-term government securities like U.S
Technical indicators are tools used in technical analysis to predict future price movements based on historical data like price and volume.
A normal yield curve slopes upward, indicating higher yields for longer-term bonds due to increased risk.
Leveraged ETFs use derivatives and debt to amplify daily returns of an underlying index, but they carry high risks and are suited only for short-term trading.