This Legal Update explores why, in order for an underlying loan to be included in a warehouse facility's borrowing base, the underlying loan cannot be margin stock.
EXAMPLE OF ELIGIBILITY CRITERIA:
- Such Loan does not constitute "Margin Stock" (as defined under Regulation U of the Securities Exchange Act).
WHAT IS MARGIN STOCK?
- The Federal Reserve Board defines "Margin Stock" generally as (i) equity securities registered on a national securities exchange; (ii) over-the-counter securities that trade in the Nasdaq Stock Market's National Market; (iii) debt securities that can be converted into margin stock; (iv) warrants or rights to purchase margin stock; or (v) securities issued by an investment company registered under the Investment Company Act.
- With some limited exceptions, the definition is broad enough to capture most publicly traded securities, over-the-counter stocks and mutual funds.
WHAT ARE REGULATIONS T, U AND X?
- Regulations T, U and X of the Securities Exchange Act are often collectively referred to as the "margin regulations."
- Regulation U is a Federal Reserve Board regulation that restricts the amount of loans lenders can provide to finance the purchase or carrying of margin stock.
- Regulation T is a similar regulation but applies to extensions of credit by broker-dealers rather than bank lenders.
- Regulation X regulates the ability of borrowers to borrow from non-US lenders or broker-dealers in a manner that would violate Regulations T and U.
WHY DO LENDERS CARE IF THE COLLATERAL INCLUDES MARGIN STOCK?
Lenders need to ensure that the SPV borrower to which they are providing advances is not using the proceeds of those advances to purchase or carry "Margin Stock." Otherwise, the lenders could be in violation of Regulation U, resulting in fines, regulatory sanctions, reputational damage and liability for the lenders. For this reason, SPV warehouse facilities customarily include an eligibility criterion that the Eligible Loan not be "Margin Stock." In addition, warehouse facilities will typically include a representation from the borrower that its performance under the credit facility will not violate Regulations T, U or X and a requirement in the "use of proceeds" negative covenant that no proceeds of the advances from the lenders be used to purchase or carry Margin Stock.
CONCLUSION
Violation of Regulations T, U and X can result in significant consequences for lenders. For this reason, care should be taken to ensure that no portion of the Collateral being transferred to the SPV borrower in a warehouse facility includes Margin Stock. Therefore, a prohibition on Margin Stock should be included in the eligibility criteria for any such warehouse, with a mandatory repurchase obligation in the event of a violation of that criteria.
Visit us at mayerbrown.com
Mayer Brown is a global services provider comprising associated legal practices that are separate entities, including Mayer Brown LLP (Illinois, USA), Mayer Brown International LLP (England & Wales), Mayer Brown (a Hong Kong partnership) and Tauil & Chequer Advogados (a Brazilian law partnership) and non-legal service providers, which provide consultancy services (collectively, the "Mayer Brown Practices"). The Mayer Brown Practices are established in various jurisdictions and may be a legal person or a partnership. PK Wong & Nair LLC ("PKWN") is the constituent Singapore law practice of our licensed joint law venture in Singapore, Mayer Brown PK Wong & Nair Pte. Ltd. Details of the individual Mayer Brown Practices and PKWN can be found in the Legal Notices section of our website. "Mayer Brown" and the Mayer Brown logo are the trademarks of Mayer Brown.
© Copyright 2025. The Mayer Brown Practices. All rights reserved.
This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.
