Regulation T (Reg T)
Regulation T is the Federal Reserve rule governing the extension of credit by broker-dealers to customers for purchasing securities, establishing the initial margin requirement of 50% for equity securities.
🎬 Video Explanation
Exam Tip
Reg T = 50% initial margin from Federal Reserve. FINRA = 25% maintenance. Know free-riding = buying then selling before paying = 90-day freeze!
What is Regulation T?
Regulation T is a Federal Reserve Board regulation that governs the amount of credit broker-dealers can extend to customers to purchase securities. It establishes the initial margin requirement—how much you can borrow to buy stocks.
Key Reg T Requirements
| Requirement | Amount |
|---|---|
| Initial Margin | 50% of purchase price |
| Cash Account Settlement | T+1 (trade date + 1 day) |
| Free-Riding Prohibition | Can't sell before paying |
Margin Account Basics
| Concept | Description |
|---|---|
| Margin | Equity you deposit |
| Debit Balance | What you borrow |
| Market Value | Current securities value |
| Equity | Market Value - Debit Balance |
Initial Margin Example
| Purchase | Amount |
|---|---|
| Stock Value | $10,000 |
| Your Deposit (50%) | $5,000 |
| Broker Loan (50%) | $5,000 |
Reg T Violations
| Violation | Consequence |
|---|---|
| Free-Riding | 90-day cash account freeze |
| Good Faith | 90-day freeze on proceeds |
| Liquidation | Account restrictions |
| Freeriding (pattern) | Account closure possible |
Cash Account Rules
| Rule | Requirement |
|---|---|
| Payment | Full payment by settlement (T+1) |
| Sale | Can't sell before payment settled |
| Free-Riding | Prohibited—must pay before selling |
Margin Account Types
| Type | Description |
|---|---|
| Long Margin | Buy securities on credit |
| Short Margin | Borrow securities to sell |
| Pattern Day Trader | Special $25,000 minimum |
Regulation T vs. FINRA Margin Rules
| Rule | Source | Focus |
|---|---|---|
| Reg T | Federal Reserve | Initial margin (50%) |
| FINRA 4210 | FINRA | Maintenance margin (25%) |
| House Requirements | Broker | Often higher than minimums |
Non-Marginable Securities
Cannot be purchased on margin:
- IPO shares (first 30 days)
- Penny stocks (under $5)
- Options purchases
- Certain OTC securities
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