Monday, October 16, 2006
WASHINGTON — Federal regulators are expected to ease requirements for buying securities with borrowed funds, rules put into effect after the 1929 stock market crash.
The staff of the Securities and Exchange Commission has approved the New York Stock Exchange's application for a new type of trading account that would set requirements for using borrowed funds, called margin, based on the types and weightings of securities in the account _ stocks, options and futures.
"It's a very significant change," said Robert Colby, deputy director of the SEC division that oversees U.S. stock markets.
If approved by a majority of the five SEC commissioners, as is expected, the proposal would allow for margin requirements for financial institutions and hedge funds that are below current levels of as much as 50 percent _ cutting trading costs. Proponents say the new system would make margin requirements more closely reflect the risks involved and make U.S. financial markets more competitive with those abroad.
The proposal, first reported Monday by The Financial Times, is expected to be voted on by the SEC commissioners within a few weeks.
Margin requirements, set by the Federal Reserve, limit borrowing to 25 percent to 50 percent of a security's purchase price. Under the new system, they could be reduced to as low as 15 percent for institutional investors.
Ordinary investors buy stocks on margin by borrowing part of the purchase price from their brokerage firm and putting up the securities as collateral for the loan. The requirements set by the Fed are considered minimum levels; most brokerages impose higher margins.
© 2006 The Associated Press