19371027_Minutes.pdf

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A meeting of the Board of Governors of the Federal Reserve

System W5 held in Washington on Wednesday, October 27, 1937, at 3:30

PRESENT: Mr. Eccles, ChairmanMr. SzymczakMr. McKeeMr. Davis

Mr. Morrill, SecretaryMr. Thurston, Special Assistant to the

ChairmanMr. Goldenweiser, Director of the

Division of Research and Statistics

Mr. Parry, Chief of the Division ofSecurity Loans

Mr. Solomon, Assistant Counsel

Mr. McKee moved the adoption of the fol-lowing resolutions:

"Amendment No. 10 of Relation T - Effective November 1, 1937

tio "BE IT RESOLVED, That, effective November 1, 1937, Regula-n T, as amended, is further amended in the following re-

-Pacts.•1.

aoZnon 2(d) of said regulation is amended to read as fol-

'(d) The term "combined account" means thecombination of all accounts (except "special ac-counts") between any creditor and any customer, or

2. , any group of customers acting jointly.'

oection 2(m) of said regulation is amended to reed as fol-lows:

'(m) The term "customer" means any person(including any partner of a creditor firm in hisrelations with the firm) to or for whom, or anygroup of persons to or for whose joint account,a creditor is carrying any short position in se-curities or extending or maintaining any credit;Provided, however, That a partner shall not bedeemed to be a customer of his firm within the

meaning of this regulation with reference tohis financial relations to the firm as reflect-ed in his capital and ordinary drawing accounts.'

Digitized for FRASER http://fraser.stlouisfed.org/ Federal Reserve Bank of St. Louis

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n3.-2-

Clause (2) of section 3(b) of said regulation is amended toread as follows:

t(2) in such account transactions are permit-ted and credit is extended or maintained solelyfor the purpose of enabling such member, broker,or dealer to carry accounts for his customersOther than his partners, and'

4. Clause (3) of section 3(f) of said regulation is amended toreed as follows:

'(3) The current market value of any securi-ties sold short in the account (other than unis-sued securities) plus, for each such security(other than en unissued or exempted security), suchamount as the Board shall prescribe from time totime in the supplement to this regulation as theamount to be included as the margin required forsuch short sales, except that such amount so pre-F,cribed need not be included when there are heldlU the account securities exchangeable or convert-ible into such securities sold short,'

5.The first sentence of the last paragraph of section 3(f) ofsaid regulation is amended to read as follows:

'For the purposes of this regulation, theadjusted debit balance of every account in whichany short position in securities (other than un-issued or exempted securities) is carried or anycredit is extended or maintained for the pur-

ose of purchasing or carrying securities shallbe computed in accordance with the above rules,

regardless of whether it be a combined accountor a special account.'"

"BE IT RESOLVED, That, effective November 1, 1937, thement to Regulation T is amended to read as follows:

'BOARD OF GOVERNORS OF THEFEDERAL RESERVE SYSTW

'SUPPLELENT TO REGULATION T

'Effective

'Maxtmum Loan Values.section 7 of the SecuritieiOn s

0 of its Regulation 1,

November 1, 1937

- Pursuant to the provisions of

Exchange Act of 1934 and sec-

as amended, the Board of Gov-


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7ernors of the Federal Reserve System hereby prescribes the°wing maximum loan values of registered securities (other

-an exempted securities) for the purposes of Regulation T:

(1) General rule. - Except as Provided in paragraphs(2) an(' (3) of this supplement, the maximum loan value of aFegistered security (other than an exempted security) shall°e 60 per cent of the current market value of the security.

dea'(2) Extension of credit to other members, brokers and - The maximum loan value of a registered security

(c)6her than an exempted security) in a special account with!Ic?-ther member, broker or dealer, which special account corn-

with subsection (b) of section 3 of Regulation T, as

nended, shall be 75 per cent of the current market valuethe

security.

etc (3) Extension of credit to distributors, syndicates,- The maximum loan value of a registered security (other

:11,11 an exempted security) in a special account with a dis-outor, syndicate, etc., which special account complies

:Vn subsection (c) of section 3 of Regulation T, as amended,1 be 80 per cent of the current market value of the se-

e'arity,

pro ,111.1:alajle_11.4.Lred on Short Sales. - Pursuant to the193,7,-"ions of section 7 of the Securities Exchange Act of

and section 3 of Regulation T, as amended, the BoardGovernors of the Federal Reserve System hereby prescribes

4/It the amount to be included in the adjusted debit balancea8 an account, pursuant to section 3(f)(3) of Regulation T,(02:mended,

Per than unissued or exempted securities) shall be 50

as margin required on short sales of securities

exe cent of the current market value of each such securitytriembePt that in the case of a special account with anotherwit er, broker or dealer, which special account complies

,2"-":11 sUbsection (b) of section 3 of Regulation T, 8S amended,

-amount shall be 35 per cent of such current market!alue, I t,

six, "BE IT RESOLVED, That, effective November 1, 1937, the1304;Plelnent to Regulation U is amended by changinc. the maxi-or 1°an value figure '45 per cent' in the first paragraph3ala,aid supplement to '60 per cent', and by changing the

1.4'11111.1ra loan value figure '60 per cent' in the second pare-sz:Ph of said supplement to '75 per cent', so that as thus

Ilded the supplement will read as follows:


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°Paratio

10/27/37-4-

"WPPLEKENT TO REGULATION U

'ISSUED BY THE BOARD OF GOVERNORS OF TEEFEDERAL RESERVE SYSTEM

'Effective November 1, 1937

r 'For the Purpose of section 1 of Regulation U, themult loan value of any stock, whether or not registered

n,a national securities exchange, shall be 60 per cent ofmet11.- current market value, as determined by any reasonable

r__ e 'Loans to brokers and dealers. Notwithstanding theg goinc,, a stock, if registered on a national securities

nehange shall have a special maximum loan value of 75 per,ent ofut, current market value, as determined by any rea-

rnable method, in the case of a loan to a broker or dealertr°Im whom the bank accepts in good faith a signed statement

Re

o the effect (1) that he is subject to the provisions oftoguletion T (or that he does not extend or maintain credit

were °Is for customers except in accordance therewith as if he

subit thereto), end (2) that the securities hypoth-aucated to secure the loan are securities carried for the

count of his customers other than his partners."

For some time the members of the Board had been studying the

n of the existing margin requirements prescribed in the supple-

to m'Iaguletion T, Extension and Maintenance of Credit by Brokers,

lpetliel*s' and Members of National Securities Exchanges, and Regulation

141411s bY Banks for the Purpose of Purchasing or Carrying Stocksileelstezed

a(ivi,s,ab::::::ional Securities Exchange, and had been considering

changes in such requirements and of the adoption

or Intll'gin requirements in connection with short sales. The Board's

4erf had.

made

various studies the results of which had been examinedbY the

1114-ibara of the Board, and current developments in market andedit ndi

e° —lions had been under constant observation.

The studies and discussions that preceded the adoption of the


10/27/37-5-

resolutz n10 had been prolonged by the consideration of a general revision

°f Regulation Ty including careful analysis of suggestions and comments

received from the Reserve banks and others. There had also been under

stalelY various suggested formulae by which margins would be adjusted

aut°Inatically Without the necessity of formal Board action from timetOtjj

21nce such action, it was recognized, might be regarded insome

quarters as reflecting a desire on the part of the Board to

influence the trend of securities prices. By this time it had be-come

apparent that considerably more time and study would be required

before a satisfactory rule or formula could be developed and that thedeeirability of any

such automatic formula was open to question.

Throughout consideration of the subject the members had been

--°,ment that the margin requirements theretofore in effect hadnot

-- an important factor in the decline in prices of securities,but

nevertheless they felt that it would be preferable that any actionto chance margin

requirements be taken during a quiet period when the

iliel‘ket had leveled off. When that period seemed to have been reached,e,tdas

4 result of their consideration of the problems involved thertlezber

8 of the Board present agreed that it would be desirable to re-

the m

T an argin requirements prescribed in the supplements to Regulations

1J) to-‘,upose margin requirements in connection with short sales,

wat

eed substantially upon the following considerations:

zlirrer. It was apparent that the progress of economic recovery

or IszIng an interruption. Security offerings in the third quarter

lake certain incidental changes in Regulation T. This decision

was

7 were the smallest since the revival of activity in the capital


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markets in the early part of 1935. The total of corporate offerings

was about 4*0,000,000 as compared with 060,000,000 in the preceding

(11411ter and 0'7000in the first quarter of the year. Prices

cf both securities and canmodities had declined sharply. Productive

ectivit3, following a year of output at the highest levels since 1929

declined-n September and October to about the level of a year ago.

The construction industry had experienced a disappointing year.

Since September 1 there had been a decline in the loans of

rePQrting member banks to brokers and dealers of 4440,000,000, thelarv„"8L decline since 1931, and such loans had reached the lowestevel

in two Years. Credit extended by brokers to their customers

heci declined over 20%, from 41,560,000,000 in April to 41,200,000,000,

1)(Arit aPProximately 0.00,000,000 below the level at the time the

Present margin reauirements were established when, contrary to the

131%""it trend, brokers loans were increasing.

The Provisions of the Securities Exchange Act of 1934 under

Which raergin requirements had been established expressly authorized

the B to

t° (10 so orr the accommodation of commerce and industry, having due

reard to thecredit situation of the country. The members of the

ikl"(1 Present viewed the proposed action as a step in the direction

0

1

ill°cierating credit conditions in accord with the intent of the Se-

elll'ities ExchangeAct.

reduce margin requirements when it deems it appropriate


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Consideration was also given to the fact that the provisions

the Securities Exchange Act of 1934, which provided for the estab-

lieliment of-- margin requirements in connection with such loans, author-

the establishment of margin requirements in connection with short

Bales, which had not heretofore been prescribed. The Board had informal-ly A,

-,kbreed, in previous discussions, that margins on short sales should

be Prescribed and announced in connection with the revised Regulation Tthen

Preparation or the next change in margin requirements whichever

was first. It was felt that traders on the short side of the marketshould

not be in a position, with a given amount of funds, to exert a

Wee no

influence on the market than they could with the same amount oftInds

they were trading on the long side. In this connection it

ted that to establish margin requirements of less than 50 perCent on „

sales would result, for considerably more than one-halfthe to,"al number of stocks listed on the New York Stock Exchange, in

ablishment of a reouirement which would be on a lower level thanthe exi

the est

sting requirements of the Exchange.

In taki n6 action to reduce the margin requirements on loans

or brI6kers and banks, it was agreed that no change should be made inthe spread

between the margin requirements for omnibus accounts and

th4e 1*(3r loans to customers and, therefore, the reduction in the re-

g.14remett for omnibus accounts continued the same spread that had been14 etrect

previousiy.

changes effected by the amendment to Regulation T were

4ee4a17 es an incident to the establishment of margin requirements


10/27/37

O n short sales.

- 8-

Mr. McKee's motion was adopted by unani-mous vote, with the understanding that copiesOf the resolutions would be released to thePress not earlier than 6:00 p.m. today forpublication in the morning papers of Thurs-day, October 28, 1937, and also that copiesOf the resolutions would be transmitted bywire to the Federal reserve banks with therequest that they print the amendment andsupplements as promptly as possible and dis-tribute copies to interested persons.

,4Pi'oved:̀ -1

4

Thereupon the meeting adjourned.

Chairman.

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