[Name deleted]

Dear [Name deleted]:

This responds to your letter of July 22, 1996, concerning the application of the Board's margin regulations to transactions involving your company, a broker-dealer registered with the United States Securities and Exchange Commission (the "U.S. broker-dealer"). All of the transactions also involve your parent company, a foreign broker-dealer not registered with the SEC (the "foreign broker-dealer"). Many of the transactions also involve United States customers of the U.S. broker-dealer. All of the transactions involve foreign stock.

The Federal Reserve has adopted four margin regulations. Copies of the four regulations are enclosed for your convenient reference. The U.S. broker-dealer is subject to Regulation T whenever dealing with a customer. If a U.S. customer of the U.S. broker-dealer obtains credit outside the United States from the foreign broker-dealer, Regulation X applies, but only if the transaction involves a "United states security" as defined in section 224.2(b) of Regulation X.

The simplest situations you describe do not involve U.S. customers. These include the purchase by the U.S. broker-dealer of foreign stocks on margin in the foreign market (scenario 5) and the short selling of foreign stocks by the U.S. broker-dealer in the foreign market (scenario 6), in both cases using the foreign broker-dealer to execute the trades. These transactions generally do not implicate the Board's margin regulations. However, if the foreign stock were registered on a U.S. securities exchange, the U.S. brokerdealer would be prohibited from using the stock as collateral for a loan from the foreign broker-dealer. This is because section 8(a) of the Securities Exchange Act of 1934 and section 220.15 of Regulation T require U.S. broker-dealers to use other U.S. broker-dealers or qualifying domestic or foreign banks when borrowing against equity securities listed on a U. S. exchange.

One of the situations described in your letter involves the purchase of foreign stock by a U.S. customer of the U.S. broker-dealer with margin credit being extended by the U.S. broker-dealer (scenario 3). Under Regulation T, U.S. broker-dealers may extend credit up to 50 percent of the current market value of any equity security (other than an option) that is a margin security. Generally, foreign stocks become margin securities by appearing on the Board's quarterly List of Foreign Margin Stocks, a copy of which is enclosed for your convenient reference. A loan value of 50 percent is the maximum amount of credit that may be initially extended against a margin equity security. Section 220.18(a) of Regulation T further provides that a U.S. broker-dealer may not extend credit against a foreign stock in excess of the amount permitted by the regulatory authority where the trade occurs. Pursuant to section 220.18(e) of Regulation T, U.S. broker-dealers may not extend credit against nonmargin, nonexempted securities. Therefore, the U.S. broker-dealer may extend margin credit to its customer to buy foreign stock only if the stock is a margin security under Regulation T.

Another situation described in your letter is a transaction in which a U.S. customer of the U.S. broker-dealer sells foreign stock short in the foreign market with the short sale proceeds being held in the account until the short sale is closed out (scenario 4). Your letter states the foreign broker-dealer would lend the securities being shorted to the U.S. customer of the U.S. broker-dealer. Traditionally, the securities needed for a short sale executed in a margin account at a U.S. broker-dealer have been borrowed by the U.S. broker-dealer on behalf of its customer. The short sale proceeds are held in the account and are available for the U.S. broker-dealer to pledge as collateral to borrow the securities needed to complete the short. An additional fifty percent margin is required under section 220.18(c) unless the account holds a security exchangeable or convertible within 90 calendar days without restriction other than the payment of money into the security sold short. Please note that a stock need not be a margin security to be sold short. Under Regulation T, any security may be sold short, even if it is a nonmargin, nonexempted security. If the U.S. broker-dealer is neither borrowing securities on behalf of its customer nor extending credit against securities, the analysis described below for scenarios 1 and 2 would apply.

Your letter also describes a situation in which a U.S. customer of the U.S. broker-dealer buys foreign stock in the foreign market, with credit being extended by the foreign broker-dealer (scenario 1). Under the arranging section of Regulation T (section 220.13), a U.S. broker-dealer may arrange for its customer to receive credit that may not be extended under Regulation T, as long as the credit does not violate the Board's other margin regulations (Regulations G, U, and X). The foreign broker-dealer is not subject to either Regulation G or Regulation U and Regulation X does not apply to the customer because the stock is not a "United States security." The U.S. broker-dealer is therefore permitted to arrange for its customer to receive credit against the foreign stock in conformity with foreign law.

The final transaction involves the short selling of a foreign stock in the foreign market by a U.S. customer of the U.S. broker-dealer, with the foreign broker-dealer lending the foreign stock directly to the U.S. customer (scenario 2). The analysis is the same as the previous transaction: the U.S. broker-dealer may take advantage of section 220.13 of Regulation T to arrange for its customer to borrow securities needed for a short sale because the other margin regulations do not prohibit the transaction. As long as the U.S. broker-dealer is not maintaining an open short sale position for its customer, it need not maintain the 150 percent margin specified in section 220.18(c) of Regulation T.

We trust you will find this information responsive to your questions. This is a staff opinion only, as the matter has not been presented to the Board. It is also limited to the facts presented. Different facts could compel a different conclusion.

Yours truly,

(signed) Scott Holz

Scott Holz

Enclosures