Legal Definitions - Regulation T

Definition: Regulation T is a rule created by the Federal Reserve Board that limits the amount of money a securities broker or dealer can lend to a customer. It also sets the initial margin requirements and payment rules for securities transactions. This means that customers must provide a certain percentage of the purchase price, usually between 40% and 60%, to complete the transaction.

Example: Let's say you want to buy $10,000 worth of stock. With Regulation T, your broker can only lend you a certain amount of money to make the purchase. If the margin requirement is 50%, you would need to provide $5,000 of your own money and your broker could lend you the other $5,000. This helps prevent customers from taking on too much debt and protects the financial system from potential risks.

Explanation: Regulation T is designed to prevent excessive borrowing and promote responsible investing. By limiting the amount of credit that brokers can extend to customers, it helps ensure that investors have enough skin in the game to make informed decisions and manage their risks. This also helps prevent market volatility and systemic risks that could harm the economy as a whole.