Sec. 221.5 Special purpose loans to brokers
and dealers.
(a) Special purpose loans. A lender may extend and maintain purpose credit to brokers and dealers without regard to the limitations set forth in §§ 221.3 and 221.7, if the credit is for any of the specific purposes and meets the conditions set forth in paragraph (c) of this section.
(b) Written notice. Prior to extending credit for more than a day under this section, the lender shall obtain and accept in good faith a written notice or certification from the borrower as to the purposes of the loan. The written notice or certification shall be evidence of continued eligibility for the special credit provisions until the borrower notifies the lender that it is no longer eligible or the lender has information that would cause a reasonable person to question whether the credit is being used for the purpose specified.
(c) Types of special purpose credit. The types of credit that may be extended and maintained on a good faith basis are as follows:
(1) Hypothecation loans. Credit secured by hypothecated customer securities that, according to written notice received from the broker or dealer, may be hypothecated by the broker or dealer under Securities and Exchange Commission (SEC) rules.
(2) Temporary advances in payment-against-delivery transactions. Credit to finance the purchase or sale of securities for prompt delivery, if the credit is to be repaid upon completion of the transaction.
(3) Loans for securities in transit or transfer. Credit to finance securities in transit or surrendered for transfer, if the credit is to be repaid upon completion of the transaction.
(4) Intra-day loans. Credit to enable a broker or dealer to pay for securities, if the credit is to be repaid on the same day it is extended.
(5) Arbitrage loans. Credit to finance proprietary or customer bona fide arbitrage transactions. For the purpose of this section bona fide arbitrage
means:
(i) Purchase or sale of a security in one market, together with an offsetting sale or purchase of the same security in a different market at nearly the same
time as practicable, for the purpose of taking advantage of a difference in prices in the two markets; or
(ii) Purchase of a security that is, without restriction other than the payment of money, exchangeable or convertible within 90 calendar days of the purchase into a second security, together with an offsetting sale of the second security at or about the same
time, for the purpose of taking advantage of a concurrent disparity in the price of the two securities.
(6) Market maker and specialist loans. Credit to a member of a national securities exchange or registered broker or dealer to finance its activities as a market maker or specialist.
(7) Underwriter loans. Credit to a member of a national securities exchange or registered broker or dealer to finance its activities as an underwriter.
(8) Emergency loans. Credit that is essential to meet emergency needs of the broker-dealer business arising from exceptional circumstances.
(9) Capital contribution loans. Capital contribution loans include:
(i) Credit that Board has exempted by order upon a finding that the exemption is necessary or appropriate in the public interest or for the protection of investors, provided the Securities Investor Protection Corporation certifies to the Board that the exemption is
appropriate; or
(ii) Credit to a customer for the purpose of making a subordinated loan or capital contribution to a broker or dealer in conformity with the SEC’s net capital rules and the rules of the broker’s or dealer’s examining authority, provided:
(A) The customer reduces the credit by the amount of any reduction in the loan or contribution to the broker or dealer; and
(B) The credit is not used to purchase securities issued by the broker or dealer in a public distribution.
(10) Credit to clearing brokers or dealers. Credit to a member of a national securities exchange or registered broker or dealer whose nonproprietary business is limited to financing and carrying the accounts of registered market makers.
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