Regulation T (Reg T): Definition, Requirement, and Example

What is Regulation T?

Regulation T (Reg T) is a Federal Reserve rule that governs the extension of credit by brokers and dealers to customers for the purchase of securities. Its primary purpose is to limit how much an investor can borrow from a brokerage to finance securities purchases and to set payment rules for cash accounts.

Key requirements

• Initial margin limit: Investors may borrow at most 50% of the purchase price of marginable securities at the time of purchase. The investor must provide the remaining 50% in cash or eligible marginable collateral.
• Applies to margin accounts: To use broker credit you must open a margin account that grants borrowing privileges and agrees to pay interest on borrowed funds.
• Cash accounts: Investors with cash accounts cannot borrow from the broker and must fully pay for purchases with cash.
• Brokers can impose stricter rules: A firm may require a higher initial margin than 50% or set additional restrictions.

Buying on margin — how it works

Buying on margin means using borrowed funds from a brokerage to purchase securities. The securities and other eligible assets in the margin account serve as collateral for the loan. Reg T sets the initial borrowing cap (50%), but ongoing requirements such as maintenance margin and margin calls are governed by the brokerage and exchange rules.

Freeriding and cash-account rules

Reg T also addresses cash-account behavior. Because settlement takes time, buying and then selling the same security before fully paying for it (freeriding) is prohibited. If a broker detects freeriding, it must freeze the cash account for 90 days; during the freeze, all purchases must be paid in cash on the trade date.

Example

An investor wants to buy 10 shares priced at $100 each (total $1,000).
* Under Reg T, the investor may borrow up to 50% ($500) from the broker.
* The investor must provide the remaining $500 in cash or marginable securities.
* The borrowed amount will accrue interest per the broker’s margin rate.

Practical considerations

• Reg T sets only the initial margin at purchase; maintenance margin and margin-call procedures are set by brokers and exchanges and can trigger additional cash or liquidations.
• Brokers often charge interest on margin loans and may set tiered rates.
• Not all securities are marginable; check broker policies for eligible instruments.
• Regulatory settlement cycles (e.g., T+1) affect timing and cash flows related to trades.

Key takeaways

• Reg T limits broker lending for securities purchases to a maximum initial loan of 50% of the purchase price.
• Use of broker credit requires a margin account and exposes the investor to amplified gains and losses.
• Freeriding is prohibited; violations lead to a 90‑day cash-account freeze.
• Brokers may require stricter margins and enforce maintenance requirements beyond Reg T.