Definition of Regulation U:
Regulation U is a Federal Reserve Board regulation that governs loans by entities involving securities as collateral and the purchase of securities on margin. Regulation U limits the amount of leverage that can be extended for loans secured by securities for the purpose of buying more securities. Securities involved typically include stocks, mutual funds, and other market-traded securities.
Regulation U is designed to mitigate the adherent risks that exist when using margin leverage in securities trading, especially when too much leverage is granted to an individual or business. By limiting the margin amount, Regulation U aims to limit the potential losses that both borrowers and banks or lenders can sustain in instances where leverage can lead to very large losses relative to the physical capital extended.
A Federal Reserve regulation that governs loans made my companies other than brokerage firms (a bank or credit union) to fund stock purchases.
How to use Regulation U in a sentence?
- Regulation U is a Federal Reserve requirement for lenders who extend credit secured by margin stock—excluding securities brokers and dealers.
- The regulation applies to commercial banks, savings and loan associations, federal savings banks, credit unions, production credit associations, insurance companies, and companies with employee stock option plans.
- Regulation U puts limits on entities that give out credit for the purpose of buying or carrying margin stock, using securities as collateral for the loans.
- Margin stock includes equity security registered on a national exchange, such as the NYSE, over-the-counter (OTC) security trading on the Nasdaq, debt security that can be converted into a margin stock, and most mutual funds.
Meaning of Regulation U & Regulation U Definition