Regulation T (Reg T): Definition of Requirement and Example

Regulation T (Reg T) is a regulation that was created by the Federal Reserve Board in 1934. It is designed to protect investors by requiring brokers and dealers to deposit cash or securities equal to 50% of the purchase price of any security purchased on margin. This means that if you buy a stock worth $100, you must deposit $50 in cash or securities.

The purpose of Reg T is to ensure that investors have enough money to cover their losses if the value of their securities declines. If the value of your securities falls below the amount of your margin deposit, your broker will issue a margin call. This means that you will have to deposit additional funds or sell some of your securities to bring your margin account back into compliance with Reg T.

There are a few exceptions to Reg T. For example, you do not have to make a margin deposit if you are buying a government security or a municipal bond. You also do not have to make a margin deposit if you are trading in a cash account.

Reg T is an important regulation that helps to protect investors from the risks of margin trading. By requiring investors to make a margin deposit, Reg T helps to ensure that they have enough money to cover their losses if the value of their securities declines.