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Which regulation empowers the Federal Reserve to regulate credit associated with the purchase of securities?
A. The Exchange Act of 1934
B. The Securities Act of 1933
C. Regulation T
D. Regulation U
Correct Answer: A. The Exchange Act of 1934
Rationale: Section 7 of the Exchange Act of 1934 empowers the Federal Reserve to regulate credit associated with respect to the purchase of securities, also known as margin. Its intent is to manage the amount of speculative activity that can be applied to securities transactions and to manage the supply of money in the credit markets.The Federal Reserve responded to its new powers by enacting Regulation T, which places credit restrictions on broker-dealers by establishing initial margin requirements and prescribing how a margin transaction must be maintained. Initial margin requirements are currently set at 50%. Regulation T was soon followed in 1936 by Regulation U, which imposes credit restrictions on other lenders that would finance margin transactions, such as banks. Regulation U forbids banks from extending more credit than the “maximum loan value” for margin securities, which it identifies as 50% of the stock’s current market value.
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