Margin Call, Part Five: Advanced Topics and Practice Points

In previous installments, we covered the basics of the margin regulations. In our final two installments, we’ll cover a few practice points and explore some of the more complex margin issues (particularly under Regulation U), that frequently arise in the context of financing transactions.

Purpose Statements: Regulation U requires a bank that is extending credit (regardless of the purpose of the credit) to obtain a purpose statement from a customer on Federal Reserve Form FR U-1, if the credit is in excess of $100,000 and is secured directly or indirectly by margin stock. A nonbank lender that is subject to registration under Regulation U is required to obtain a purpose statement from the customer on Form FR G-3 when it extends credit in any amount that is secured directly or indirectly by margin stock. In both cases, the customer must describe the purpose of the credit on the relevant form of purpose statement. If the credit is purpose credit (i.e., to purchase or carry margin stock), the lender must list all collateral securing the credit on the form. It is important to remember that it is the presence of margin stock as collateral, not the use of proceeds, which triggers the requirement for a purpose statement.

Purpose statements must be signed by the borrower or its authorized representative and accepted by the lender or its duly authorized representative “in good faith.” Form FR U-1 and Form FR G-3 purpose statements are not filed with the Federal Reserve or any other agency. Lenders are required to retain the purpose statements for three years after the credit is extinguished.

Representations and Warranties: Credit agreements and other lending documents often contain representations and warranties from the borrower about US margin regulation issues. These provisions will often contain, at a minimum, a representation that the proceeds of the credit will not be used to purchase or carry margin stock. That representation does not obviate the need for the lender to obtain a purpose statement on Form FR U-1 or Form FR G-3. Often lenders will also require a borrower to represent that the borrower is not engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying margin stock. Based on Federal Reserve interpretations, credit extended to any borrower engaged in such business can itself be deemed purpose credit. Finally, in transactions where the borrower is providing a negative pledge over some or all of its assets or similar arrangement, lenders will typically seek a representation by the borrower that margin stock makes up 25% or less of the assets subject to the lenders’ negative pledge or similar arrangement. The purpose of this representation is to attempt to ensure that, if possible, the negative pledge or similar arrangement will fall under the exemption from the definition of indirectly secured.

Status of the Stock Matters: Whether a credit that is extended to purchase or carry an equity security constitutes purpose credit depends on the status of the stock at the time a commitment to extend the credit is entered into. If the proceeds of a loan are used to purchase nonmargin securities and those securities subsequently become margin securities (i.e., because of a listing of the stock), the loan is considered to be purpose credit after that point. In that case, the lender is not required to reduce the amount of the loan or require additional collateral if the loan exceeds Regulation U’s 50% maximum loan-to-value ratio except when the borrower seeks to withdraw or substitute collateral. Conversely, if the proceeds of a loan are used to purchase margin stock and the stock subsequently ceases to be a margin stock (i.e., through delisting of the stock), the credit ceases to be purpose credit and is no longer subject to the requirements of Regulation U.

Maintaining Credit: Regulation U provides that, if a lender extends a purpose credit that was initially extended in compliance with Regulation U’s 50% maximum loan-to-value ratio (as determined by the market price of the margin stock collateral on the date that the lender enters into a legally binding commitment to extend credit), the lender will not be required to request additional collateral or reduce the amount of credit if the value of the margin stock collateral subsequently declines as a result of a drop in the market price of the margin stock collateral.

Questions commonly arise as to whether a particular kind of instrument is margin stock. We previously took a look at the definition of margin stock and found that it includes, among other things, publicly traded stock and certain OTC securities. The types of instruments that frequently raise questions include the following:

OTC “Pink Sheets”: Securities quoted in the OTC pink sheets are not margin stock.
OTC Bulletin Board: Securities quoted in the OTC bulletin board (OTCBB) are not margin stock.
Foreign Securities and ADRs: A listing on a non-US securities exchange does not cause a security to be margin stock, but a foreign-listed security will be margin stock if it is also listed on a US exchange. Exchange-listed ADRs are margin stock, and foreign securities underlying such ADRs are also margin stock because they are also technically listed on the exchange in connection with the registration of the ADRs under SEC requirements. ADRs quoted in OTC pink sheets or OTCBB are not margin stock.
Convertible Equity: While debt securities that are convertible into margin stock are included in the definition of margin stock, equity securities convertible into margin stock are not considered margin stock. However, the Federal Reserve has taken the position that credit extended to purchase such convertible equity securities is purpose credit even though the securities are not margin stock.
Common Issues in Acquisition Finance Transactions

The “Junk Bond” Interpretation: The Federal Reserve’s 1986 interpretation on shell corporations (commonly known as the “junk bond interpretation”) is generally considered to be one of the more controversial Regulation U interpretations. The Federal Reserve determined that, where a lender extends credit to a shell company for the purposes of a tender offer for margin stock of a target, by purchasing unsecured debt securities of the shell company in a private offering when the shell company has no other operating business or other assets to support the repayment of the debt securities, the debt securities issued by the shell company will be considered “purpose credit” and such credit will be presumed to be “indirectly secured” by the target’s margin stock acquired by the shell company. Accordingly, the debt securities would be subject to the requirements of Regulation U, including the prohibition on lending more than 50% of the value of the target’s margin stock. The Federal Reserve interpretation is based on the view that, practically speaking, a lender can only extend credit to the shell company by relying on the margin stock as collateral for the loan, since the shell company has no assets other than the margin stock to support its indebtedness to the lender.

There are three circumstances under which a shell corporation’s unsecured debt securities will not be presumed to be indirectly secured by margin stock under the 1986 junk bond interpretation:

the debt securities are guaranteed by the issuer’s parent or another company with substantial nonmargin stock assets or cash flow;
a merger agreement has been entered into between the shell corporation and the target at the time the commitment is made to purchase the debt securities or in any event before funds are advanced; or
the obligations of the purchasers of debt securities to advance funds are contingent on the shell corporation’s acquisition of the minimum number of shares necessary to effect a merger without the approval of either the shareholders or the directors of the target.
There are a couple of additional points to remember about the junk bond interpretation. First, the presumption of indirect security will not apply in the case of a bona fide public offering or Rule 144A offering of the shell company’s debt securities. The Federal Reserve takes the view that purchases of debt securities in a public offering or in a Rule 144A offering do not constitute extensions of credit for margin regulation purposes.

Also, the junk bond interpretation is not applicable if there are any covenants or other arrangements relating to the shell corporation’s debt securities that limit the shell corporation’s ability to sell, pledge or otherwise dispose of the target’s margin stock or that make such sale, pledge or other disposition a cause for acceleration of the debt securities. In that case, the credit would be indirectly secured for Regulation U purposes as a result of such covenants or arrangements, so the presumption of indirect security under the junk bond interpretation would not be relevant.

Other Acquisition-Related Issues: The margin regulations have historically been applied to mergers, acquisitions and other business combination transactions. For example, credit extended to finance the acquisition by a borrower of a controlling block of shares of an issuer that are margin stock is considered purpose credit for purposes of Regulation U. This is the case whether the shares are purchased through a privately negotiated purchase from a substantial holder, in the open market, by a tender offer to public investors, or through some combination of the above. Also, credit extended to finance an acquisition through a cash merger of the borrower or a subsidiary of the borrower with another company is considered purpose credit if, at the time the lender commits to make the loan, the stock of the other company is margin stock. If the stock is subsequently either delisted or extinguished through the merger, the loan will cease to be purpose credit.

Learn More

DOTA 2 The International website live – DOTA 2 Watch beta launches

It’s not long now until the DOTA 2 The International kicks off. Between 3-8 of August the brightest stars of the DOTA 2 world will do battle for that whopping $16 million plus prize pool.

Today Valve launched the official event site, and although the main event doesn’t start until August, the wild card round takes place on 26 July with the groups stage running between 27-30 July so there’s plenty to enjoy before the main event gets underway. You can check the date schedule on the new site here and also view a list of the teams and players that will be making an appearance.

In other DOTA 2 news, valve has just launched the Watch Beta which a hub to view DOTA 2 games and comes with 1080p streams at 60 frames per second as well as featuring real-time stats, graphs and match data.

The matches on the Watch page comprises of games with the most viewers watching through Steam Broadcasting. This beta launch is in preparation of streaming The International matches and will likely be hammered by fans once the event starts.

Let’s hope The International 2015 final is a little more entertaining than last year’s which was a bit of an anticlimax.


Learn More

Witcher 3 Patch 1.07 expected today on PC

Though it hasn’t yet (at the time of writing) appeared for download through GOG, the latest patch (1.07) for The Witcher 3 is due today on the PC.

GOG’s own twitter account states that it’ll appear “in the next 24h” (and that was five hours ago, so within the next 19 now,) and the same 1.07 patch is confirmed as already available to some console users. This does, though, mean it might take as long to show up as Saturday afternoon (or later, depending on your timezone.)

But wait, does that mean CD Projekt Red purposefully delayed the PC Witcher 3 patch to match the console release schedule, even though the PC version wouldn’t require the same certification process? Not according to company employee ‘Benzenzimmern’ over on the CD Projekt Red forums.

“There is no reason for us to artificially delay a PC patch because of consoles,” he writes. “Actually, many patches so far have been released first on PC (1.06 was PC exclusive). We don’t only fix general bugs and improve many features with 1.07, but we also fix issues specific to the platforms; of course including the PC. This means that while some platforms might be in the process of certification, the work on the others continues.”

Patch 1.07 is a sizeable one (you can read the changelog here,) and includes highlights like an alternative movement scheme for Geralt and inventory stashes around the world.


Learn More

Panesterra War Efforts

Panesterra is Beritra’s final assault into Atreia and it is up to Daevas to put an end to Beritra’s development of dimensional teleportation technology. With any contested area, the rivalry between Asmodian and Elyos grows stronger. During these chaotic times, additional supplies are being delivered to those who step up to the challenge Panesterra presents. New supplies are heading to the front line. Enter Panesterra every Saturday at 6 PM Server Time and take up arms to claim your hold on Panesterra.

For level 65 players who attend the Panesterra sieges, a survey will be available during the hour of the siege. Effective Saturday, July 4, the survey includes:
– Administrator’s Boon (1 time use)
– Resurrection Stone
For the unsuccessful server faction, up to 100 participating level 65 players will be awarded the following the Monday after the siege:
– 51 GP via quest items
– Dragon’s Improvement Box
For all those participating regardless of server or faction, there will be a chance to get a bonus reward.
Ten randomly chosen players will get either:
– Drakenspire Depths Idian Bundle
– Ahserion’s Flight Ancient Manastone Bundle
Two randomly chosen players will get either:
– Kennercan’s Egg (30 days)
– Pagati Veyron (30 days)

Bonus items will be delivered by Monday after the siege. See you on Saturday, Daevas!

Learn More

Ant-Man Is a Great Comic-Book About a Terrible Superhero

The guy running around in one of Marvel’s oldest superhero identities isn’t all that great when it comes to fighting crime. Ant-Man is not a very good boss, either. And, honestly, he could stand to improve a lot as a dad. But his struggles to be a decent dude are what make his comic a great read.

I haven’t read Ant-Man since checking out the first issue a few months ago. So, with the movie hitting this weekend, I decided to catch up the series. Five issues in, it’s an exceptionally funny book that isn’t afraid to make fun of its main character and superhero storytelling tropes.

Scott Lang is always dodging. Yes, he’s got to shrink out of the path of bullets and punches. But the second man to wear the insect telepathy helmet of Ant-Man is also bobbing and weaving around expectations and disappointment. Lang is an ex-con and divorced dad, a combo that makes him hard to employ and constantly in search of stability.

After a job interview with Tony Stark falls through and his ex-wife moves to Miami with his daughter, Lang tries getting a bank loan to start up a security consultation business. It doesn’t go so well.

Don’t worry: once Ant-Man beat the Nazi robot that turned stuff to gold—and secretly resisted a very lucrative temptation—he got the loan. But then came another challenge. Who’s going to want to work for a B-list superhero? C-list supervillains, it turns out. Right after they stop trying to kill him.

With The Grizzly and nefarious AI genius Machinesmith on board as Scott’s employees, Ant-Man is duplicating much of the ensemble charm of Spencer’s last series, Superior Foes of Spider-Man. That book— much beloved by fans and pros alike— was a ensemble title about a crew of also-ran villains trying to score big. Ant-Man turns that conceit on its nose by having Scott struggling to listen to his better angels. Doing the big hero thing doesn’t come easy for him, especially since it doesn’t score him any points with his family.

This week’s Ant-Man Annual #1 is a super-size example of the series’ ethos. Part of it is because it stars Hank Pym, the first Ant-Man and creator of evil robot Ultron, in his Giant Man identity. Spencer uses Pym to show that A-list first-class superhero geniuses also have the same doubts and challenges as their lesser-light counterparts and enemies. Lang and Pym team up to take out bad guy Egghead and a squad of Pym-built Avengers robots—Avengers robots that Pym made to help him deal with insecurity and anxiety.

Hank Pym’s mention of a dark time in his life is telling. The founding Avenger managed to get past that personal quagmire but Scott Lang doesn’t seem to be able to do that just yet. He’s a superhero who isn’t even-keeled and hyper-competent. Heck, he stole his powers at first. Both he and his daughter have died in the line of duty (and come back!). It feels a little guilt-inducing to get so much enjoyment out of someone who’s unable to get his life together. But that’s what makes Ant-Man such a great read.

Learn More

Huge Flashpoint & Operations Changes Coming With Star Wars: The Old Republic


Bioware today released a new post on the The Star Wars: The Old Republic blog that sees Senior Designer George Smith detail forthcoming changes to popular Operations and Flashpoints with the arrival of the next expansion due to arrive later this year, Knights of the Fallen Empire. Among the points discussed players will want to pay special attention to the newly revealed solo Flashpoints that will see the game return to true storytelling routes.

The overall changes to Flashpoints will see the popular content take a more tactical approach, available to all players from level 10 to 65 and can be played multiple times with a Hardmode available for players level 50 through to 65. Operations will see a raise in level requirements to level 65 and will drop a new variety of items including Elder Game gear, vanity items, mounts, stronghold decorations and vehicles. Changes are also coming for the Group Finder.

As you can see, while leveling your character, and when your character reaches level 65, there is a whole Galaxy out there available to you. So whether you want to take the journey alone, or with 15 of your closest friends, we can’t wait for you to get your hands on Knights of the Fallen Empire!


Learn More