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Margin requirements, margin loans, and margin rates: practice and principles

  • Peter Fortune
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    The Board of Governors of the Federal Reserve System establishes initial margin requirements under Regulations T, U, and X. Recent margin loan increases, both in aggregate value and relative to market capitalization, have rekindled the debate about using margin requirements as an instrument to affect the prices of common stocks. Proponents of a more active margin requirement policy see the regulations as instruments for affecting the level and volatility of stock prices by influencing investors' demand for common stocks. Others believe that the announcement effects of increased margin requirements would have a stabilizing effect on the stock market and on the economy. ; This article discusses the historical background, accounting mechanics, regulation, and economic principles of margin lending. The author analyzes the data on the volume of margin loans, and he describes the history and practice of margin requirements as well the accounting framework. He assesses the extent to which initial margin requirements restrict the amount of margin lending, and he reviews the economics of margin loans, focusing on margin loans to the customers of broker-dealers. The author also develops a model of the link between the value of the put option embedded in margin loans and the margin loan rate, which he applies to determine the characteristics that should explain the high margin loan rates that typically prevail.

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    File URL: http://www.bostonfed.org/economic/neer/neer2000/neer500b.htm
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    File URL: http://www.bostonfed.org/economic/neer/neer2000/neer500b.pdf
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    Article provided by Federal Reserve Bank of Boston in its journal New England Economic Review.

    Volume (Year): (2000)
    Issue (Month): Sep ()
    Pages: 19-44

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    Handle: RePEc:fip:fedbne:y:2000:i:sep:p:19-44
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    1. Peter Fortune, 1995. "Stocks, bonds, options, futures, and portfolio insurance: a rose by any other name," New England Economic Review, Federal Reserve Bank of Boston, issue Jul, pages 25-46.
    2. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-54, May-June.
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