A Federal call is a restriction on a trading account imposed by the Federal Reserve Board. They are made if an investor who trades on the margin makes trades exceeding the limits set in the Federal Reserve Board’s Regulation T. This regulation allows traders to buy some securities without paying for them at the time of purchase, which is called trading on the margin. Regulation T places limits on the volume of such trading that any trader can do. Federal calls are also known as Fed calls, Regulation T calls and Reg T calls.
Trading on the margin refers to a method of trading in which investors use funds that they do not have at the time of the trade. It is done from specialized margin accounts. The paperwork to open a margin account specifies the percentage of the purchase price of the securities that the investor must contribute. It also outlines the terms of the loan from the broker, including the interest rate. The holder of a margin account is usually obligated to maintain a deposit balance of a certain percentage of the value of the account’s securities.
Regulation T was enacted by the Federal Reserve Board to enable margin trading and set limits for its practitioners. It allows investors to borrow an amount equal to their deposit, which serves as collateral for the loan. With their deposit plus the loan from the broker, they can purchase securities that they would not have been able to afford. The transaction relies on the broker’s willingness to finance the loan. Regulation T sets an upper limit on allowable lending for the purposes of margin trading, but brokers can set lower limits if they choose.
A Federal call enforces Regulation T by freezing accounts that exceed their trading limits. The call specifies an amount which is equal to half of the amount by which the trader exceeded the limits of his account. This is the amount by which the investor’s deposits fall short of the requirement.
An investor who is subject to a Federal call must rectify the situation within three days. He may deposit funds into the account to cover the call amount. He may also choose to liquidate securities in the account whose value totals twice the amount of the call plus a fee to cover liquidation costs. The liquidation option is available to investors for their first two calls; a third Federal call carries a penalty of a 90-day account freeze.
