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Federal calls restrict trading accounts if investors exceed limits set by Regulation T, which allows margin trading. Investors can borrow an amount equal to their deposit, but brokers can set lower limits. A federal call enforces Regulation T by freezing accounts that exceed limits, and investors must rectify the situation within three days or face penalties.
A federal call is a restriction on a trading account imposed by the Federal Reserve Board. They are made if an investor operating on margin makes operations that exceed the limits established in Regulation T of the Federal Reserve Board. This regulation allows traders to buy some securities without paying for them at the time of purchase, called margin trading. Regulation T sets limits on the volume of such trading that any trader can do. Federal calls are also known as Fed calls, Regulation T calls, and Rule T calls.
Trading on margin refers to a method of trading in which investors use funds that they did not have at the time of the trade. It is done from specialized margin accounts. The documentation for opening a margin account specifies the percentage of the purchase price of the securities that the investor must contribute. It also describes the terms of the broker’s loan, including the interest rate. A margin account holder is generally required to maintain a deposit balance of a certain percentage of the value of the securities in the account.
Regulation T was enacted by the Federal Reserve Board to allow margin trading and set limits for its professionals. It allows investors to borrow an amount equal to their deposit, which serves as collateral for the loan. With their deposit plus the broker’s loan, they can buy securities they couldn’t afford. The transaction is based on the broker’s willingness to finance the loan. Regulation T sets an upper limit for loans allowed for margin trading, but brokers can set lower limits if they wish.
A federal call enforces Regulation T by freezing accounts that exceed their trading limits. The call specifies an amount that is equal to half the amount by which the trader exceeded your account limits. This is the amount by which the investor’s deposits do not meet the requirement.
An investor who is subject to a federal recall must rectify the situation within three days. He can deposit funds into the account to cover the amount of the call. He may also choose to settle securities in the account whose total value is twice the amount of the call plus a fee to cover settlement costs. The liquidation option is available to investors for their first two calls; a third federal call carries a 90-day account freeze penalty.
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