The Securities and Exchange Act of 1934 provides that the Board of Governors of the Federal Reserve System shall prescribe rules and regulations with respect to the amount of credit that may be initially extended and subsequently maintained on securities. Regulation T has been issued pursuant to this provision.

The requirements with regard to "Cash Accounts" under Section 220.8 are discussed here.


The "Cash Account" (technically termed the "Special Cash Account") described in the Regulation is one in which customer transactions are effected with the understanding that they will be settled promptly--that is, within the two or three days required by use of the usual transmittal facilities.


On purchase transactions the Regulation further states that, if full payment is not made within five business days after the trade date, the broker/dealer shall cancel or otherwise liquidate the transaction, or the unsettled portion thereof. There are exceptions to this requirement:


If the amount of money due from any customer in a special cash account does not exceed $500, this amount may de disregarded for the purpose of the Regulation (at the sole discretion of the lending broker/dealer).


If the security when purchased is an unissued security the period of five full business days begins to run from the date on which the security is made available by the issuer for delivery to purchasers.


If any shipment of securities is incidental to the consummation of the transaction the five full business day period is extended by the number of days required for such shipments, but not by more than five additional full business days.


If a purchase is made by a customer with the understanding that payment is to be made on delivery, the broker/dealer may treat the transaction as one in which the applicable period is not five full business days but thirty-five calendar days, but the broker/dealer has the obligation to deliver and obtain payment as soon as possible and he may not deliberately delay delivery. Delivery to a bank for the account of a customer is equivalent to delivery to the customer.


The Regulation provides that if a security is either delivered to another broker/dealer or is sold (cancellation of a transaction otherwise than to correct an error, shall be deemed to constitute a sale before being paid for in full) the account must be frozen for a period of ninety calendar days. Subsequent purchases can be effected only if cash is on hand prior to execution, or if proper authorization, based upon exceptional circumstances, is obtained from the appropriate sources indicated below under "Extensions of Time." However, this restriction may be disregarded in the following instances; if, in the case of a sale without prior payment, full payment is, however, received before the expiration of the five full business days and provided the proceeds of the sale have not been withdrawn on or before the day on which payment is received; or, in the case of delivery to another broker/dealer, the delivering broker obtains from the receiving broker a written statement that the securities are being accepted for a "Special Cash Account" of the customer in which there are already sufficient funds to make full cash payment for the securities so received.

If the last day of either the thirty-five or ninety calendar day period falls on a Saturday, Sunday, or holiday, such period extends to the next full business day.


If any exceptional circumstances have prevented payment for securities within periods specified in the Regulation, application for limited extensions of time to obtain such payment may be made to any national securities exchange or to the National Association of Securities Dealers, Inc. The Association provides a special form upon which applications may be made and requires that only such form shall be used.

The Regulation is clear in its statement that applications for extensions of time must be based upon exceptional circumstances, and clear recitation of those circumstances in necessary. If the periods of time allotted by the Regulation have expired, a violation has already occurred, and no authorization exists to grant an extension on such a transaction. In fact, an extension erroneously granted after a violation has occurred is of no value.

The foregoing is a brief review of those portions of the cash account provisions of Regulation T with which a broker/dealer is ordinarily concerned. There are many other provisions in the Regulation which could be very important to any broker/dealer whose business involves other than merely cash transactions.


Complete text of Regulation T can be found here.