Fed Eases Restrictions On Loans Made for Securities Purchases

Tearing down barriers erected after the 1929 stock market crash, the Federal Reserve Board Thursday made it significantly easier to borrow money to buy certain securities.

Effective April 1, banks may lend up to 100% of the purchase price of so-called "small cap" stocks listed by Nasdaq. The margin requirement in Regulation U had prevented buyers of many of these securities from borrowing more than half the purchase price from a bank.

Not affected by the change are equities traded on major exchanges, such as the New York Stock Exchange or the other securities listed by Nasdaq.

A federal law prevents banks from financing more than half the purchase prices of these issues.

"This is consistent with where the Fed has been heading," said Gil Schwartz, a partner in the Washington law firm of Schwartz & Ballen.

"They want to be very flexible on the margin requirements. They can't get rid of them, but they want to reduce the burden."

The Fed also gave banks permission to lend up to half the purchase price of exchange-traded options.

Currently, banks may not lend any portion of the purchase price of these securities.

The changes also affect broker-dealers, such as securities firms and section 20 units of bank holding companies.

They will be allowed to extend credit for up to half the purchase price of small cap stocks.

Currently, they may not lend any money toward the purchase of most of these assets.

Also, broker-dealers may lend up to 100% of the purchase price of debt securities, such as municipal revenue bonds.

Banks have always had this authority, but broker-dealers were subject to various restrictions.

Finally, the agency clarified a 1996 law that exempted bank loans to broker-dealers from a 50% margin requirement if the firm primarily serves consumers, instead of trading for its own account.

Broker-dealers are exempt if they have more than 1,000 active customers, receive more than $10 million annually in gross revenue from consumer accounts, or get 10% of their total revenue from consumer accounts.

The Fed noted that its changes do not affect margin requirements imposed by other regulators, such as the major stock exchanges.

But officials noted that, historically, these other regulators adjust their rules to match the Fed's policies.

In a related proposal, the Fed asked for comment about other changes it should make to its margin requirements.

For instance, the Fed asked if it should expand an exemption on loans to foreigners to include loans to the U.S. branches of foreign banks.

Comments are due April 1.