Regulation U

Regulation U is the Federal Reserve rule at 12 CFR Part 221 that restricts credit extended by banks and other covered nonbroker lenders when the credit is used to buy or carry margin stock and is secured directly or indirectly by margin stock. The rule does not impose a 50% limit on every loan backed by securities.

Key Takeaways

• The loan-value restriction generally requires both purpose credit and direct or indirect security by margin stock.
• “Purpose credit” means credit used to buy or carry margin stock, including credit used to reduce or retire debt incurred for that purpose.
• “Margin stock” is a defined category and is not identical to every stock, bond, fund, or security.
• The current maximum loan value of margin stock is 50% of current market value.
• A bank generally obtains Federal Reserve Form U-1 when credit secured by margin stock exceeds USD 100,000, even when the borrower states the credit is nonpurpose.
• A later market-price decline does not automatically make an initially compliant loan violate Regulation U, although the contract or another rule may require more collateral.

The Three-Part Coverage Test

Analyze Regulation U in this order:

1. Lender: Is the lender a bank or another person covered by or required to register under Regulation U?
2. Purpose: Will the proceeds buy or carry margin stock, or repay debt incurred for that purpose?
3. Security: Is the credit secured directly or indirectly by margin stock?

If the purpose or security element is absent, the 50% maximum loan-value restriction generally does not apply. Documentation and registration requirements can still matter, especially when collateral includes margin stock.

Margin Stock and Loan Value

Margin stock includes specified exchange-traded equity securities, certain over-the-counter securities, debt convertible into margin stock, warrants or rights to subscribe to margin stock, and most shares of registered investment companies, subject to the current definition and exclusions.

The Regulation U supplement assigns:

• margin stock a maximum loan value of 50% of current market value;
• nonmargin stock and most other collateral a good-faith loan value; and
• puts, calls, and combinations no loan value unless they themselves qualify as margin stock.

“Maximum loan value” is the amount of collateral value available under the rule, not the lender’s required advance rate. A lender can choose a lower amount under its own credit policy.

Worked Example: Purpose Loan Secured by Purchased Stock

Assume a bank customer wants to borrow to purchase USD 200,000 of exchange-listed margin stock and pledge that stock as the loan’s collateral.

Maximum loan value = USD 200,000 x 50% = USD 100,000

The bank generally cannot extend more than USD 100,000 of this purpose credit based solely on that margin stock. The borrower would need to provide the remaining purchase funds or other collateral with recognized loan value, subject to the rule and bank policy.

If the stock later falls to USD 160,000, Regulation U generally permits the bank to maintain credit that was properly extended initially despite the decline in customer equity. The loan agreement may still require additional collateral or repayment, and other safety-and-soundness controls remain relevant.

Purpose Statements and Evidence

A purpose statement documents whether the credit is for buying or carrying margin stock. Subject to stated exceptions, a bank requires Form U-1 when it extends more than USD 100,000 of credit secured directly or indirectly by margin stock. Covered nonbank lenders use Form G-3 without that bank threshold. The lender must accept the statement in good faith and consider facts that would make the response unreliable.

Useful evidence includes:

• use-of-proceeds instructions and closing flows;
• collateral schedules and market-value sources;
• existing debt being refinanced;
• negative pledges or other terms that may create indirect security;
• borrower representations and purpose forms; and
• later substitutions, withdrawals, or releases of collateral.

A label such as “working capital” does not control if the actual immediate, incidental, or ultimate purpose is to buy or carry margin stock.

Regulation T, U, and X

The rules share margin-control objectives but apply to different parties and transaction structures.

Common Mistakes and Limitations

• Applying the 50% limit to every securities-backed line of credit.
• Assuming every security is margin stock.
• Looking only at the stated purpose while ignoring actual proceeds and refinanced debt.
• Treating a guarantee as collateral with loan value under Regulation U.
• Ignoring indirect security created by covenants or surrounding arrangements.
• Assuming a compliant initial extension can never face a contractual margin call.
• Confusing maximum regulatory loan value with a lender’s underwriting or maintenance requirement.
• Applying Regulation T broker rules directly to a bank loan.

Authoritative Sources

• Federal Reserve Regulation U: current rule
• Federal Reserve Regulation U background and summary
• Federal Reserve section 221.1: purpose and scope
• Federal Reserve section 221.3: general requirements and purpose statements
• Federal Reserve section 221.7: maximum loan value
• Federal Reserve Regulation U compliance guide

Related Terms

• Regulation T: Broker-dealer margin-credit rule.
• Regulation O: Insider-lending rule based on the borrower’s relationship to a bank.
• Regulation W: Affiliate-transaction rule based on relationships among banking entities.
• Collateral: Asset or claim supporting repayment, whose regulatory loan value can differ from market value.

FAQs

This page provides general financial and regulatory education, not legal, lending, securities, or compliance advice. Use current definitions, forms, interpretations, and transaction documents for an actual credit decision.