Margin Call: Regulation X Basics

by Latham & Watkins LLP

So far, our series on the Federal Reserve’s margin regulations has focused on Regulation U, which imposes margin lending requirements on lenders. Now let’s turn our attention to Regulation X, which governs the securities credit activities of borrowers.

Regulation X has two principal purposes: (1) it extends the margin requirements of Regulation U and Regulation T to US borrowers (including foreign persons that are controlled by, or are acting on behalf of or in conjunction with, a U. S. borrower) who obtain securities credit outside the United States and (2) it makes a violation of Regulation U or Regulation T by a US lender also a violation of the relevant margin regulation by a US borrower, if the borrower willfully causes the violation by the US lender. Regulation X issues often arise in cross-border deals where a US entity or a foreign subsidiary of a US entity is the borrower and non-US lenders are providing credit.


Which borrowers are covered by Regulation X?

  • any United States person, which is defined as a person that is organized or exists under the laws of any State or, in the case of a natural person, a citizen or resident of the United States; a domestic estate; or a trust in which one or more of the foregoing persons has a cumulative direct or indirect beneficial interest in excess of 50% of the value of the trust;
  • any foreign person controlled by a United States person, which is defined as any noncorporate entity in which United States persons directly or indirectly have more than a 50% beneficial interest, and any corporation in which one or more United States persons, directly or indirectly, own stock possessing more than 50% of the total combined voting power of all classes of stock entitled to vote, or more than 50% of the total value of shares of all classes of stock; and
  • any foreign person acting on behalf of or in conjunction with a United States person, which is not defined under Regulation X, but is the subject of interpretive advice by the Federal Reserve. The Federal Reserve takes the position that a foreign person can be considered to be “acting on behalf of or in conjunction with” a United States person when the foreign person is involved in a transaction in which a United States person has a “substantial direct interest” or a “substantial beneficial interest.” On the other hand, the Federal Reserve has also determined that a foreign company that forms a US subsidiary for purposes of acquiring shares of a target company would not be considered to be “acting on behalf of or in conjunction with a United States person” for purposes of Regulation X where the US subsidiary is a “mere vehicle of convenience” for financing the foreign company’s purchase of the target’s stock.

Which borrowers are exempt?

  • any borrower who obtains “purpose credit” within the United States, unless the borrower willfully causes the credit to be extended in contravention of Regulation T or Regulation U;
  • any borrower whose permanent residence is outside the United States and who does not obtain or have outstanding, during any calendar year, a total of more than $100,000 in purpose credit obtained outside the United States; and
  • any borrower exempt from Regulation X by an order of the Federal Reserve.

What is “purpose credit” for purposes of Regulation X?

What constitutes “purpose credit” under Regulation X is different than either Regulation U or Regulation T. However, the practical impact of Regulation X is effectively the same as Regulation U or Regulation T, depending on the type of lender. For purposes of Regulation X, “purpose credit,” includes two types of credit:

  • credit obtained outside the United States to purchase or carry United States securities, which are defined as securities (other than exempted securities) issued by a person incorporated under the laws of any State, or whose principal place of business is within a State; or
  • credit obtained inside the United States to purchase or carry any securities.

The definition of “United States security” under Regulation X is much broader than the definition of “margin stock” under Regulation U or “margin security” under Regulation T. However, because Regulation X incorporates by reference Regulations T and U (depending on the status and location of the lender), the broader definition of purpose credit in Regulation X does not automatically subject credit extended outside the US to a US borrower to either Regulation U or Regulation T if a “United States security” is involved. To determine whether a particular credit that constitutes “purpose credit” for purposes of Regulation X is subject to regulation, you need to look at the requirements of Regulation U or Regulation T, as outlined below. For example, if a US borrower obtains credit outside the United States from a bank to purchase or carry United States securities that are not margin stock for purposes of Regulation U, the borrower would not be required to conform the credit to the requirements of Regulation U.

The Regulation

Transactions outside the United States

Regulation X provides that no US borrower shall obtain purpose credit from outside the United States unless it conforms to the following margin regulations:

  • Regulation T, as it applies to broker-dealers, if the credit is obtained from a foreign branch of a broker-dealer;
  • Regulation U, as it applies to banks, if the credit is obtained from a foreign branch of a bank; and
  • Regulation U, as it applies to nonbank lenders, if the credit is obtained from any other lender outside the United States.

Regulation X does not apply to credit obtained by wholly foreign borrowers to purchase or carry United States securities. In addition, Regulation X does not apply to credit obtained by any US borrower to purchase or carry a non-United States security (i.e., a security of an issuer organized outside the US whose principal place of business is outside the US).

Transactions within the United States

The other key component of Regulation U provides that any US borrower or non-US related person described above who willfully causes credit to be extended in contravention of Regulation T and Regulation U must conform the credit to the margin regulation that applies to the lender extending such credit. This provision in effect makes a violation of Regulation T or U by a US lender also a violation by the borrower.

Burden on borrower

While Regulations T and U impose requirements on lenders to comply with limitations on securities credit, under Regulation X the borrower has the burden of ensuring that the credit it obtains conforms to Regulation T or Regulation U, as applicable.

Practice Points

Issues for lenders

The requirements of Regulation X are imposed on the borrower instead of the lender. However, the Federal Reserve has cautioned that a foreign lender (including a non-US branch of a US bank) that extends purpose credit outside the United States to a borrower that is subject to Regulation X can in theory be liable for aiding and abetting a borrower’s violation of Regulation X if the credit does not conform to the applicable margin regulations. Federal Reserve guidance suggests that such liability would likely require willful conduct by lender in connection with a borrower’s violation of Regulation X.

M&A issues

Generally speaking, a foreign acquirer of a US target will be deemed to be acting on behalf of or in conjunction with a United States person, and thus, will be subject to Regulation X, if the acquirer plans to have the target company merged into a US subsidiary of the foreign acquirer. Remember, however, that a US company formed as a “mere vehicle of convenience” solely to hold margin stock acquired by the foreign parent with funds borrowed from a foreign lender and affect the financing of its purchase of the target’s stock would not trigger applicability of Regulation X to the foreign parent as a “foreign person acting on behalf of or in conjunction with United States person.”

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Latham & Watkins LLP | Attorney Advertising

Written by:

Latham & Watkins LLP

Latham & Watkins LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.