What Is Regulation X

Regulation X is a rule that governs credit limits granted to foreign persons or organizations for the purchases of U.S. Treasuries such as bonds.

The Board of Governors of the Federal Reserve System (FRS) issued Regulation X. Borrowers who are subject to Regulation X must also prove that the credit they obtain conforms to the limits under Federal Reserve Regulations T (relating to brokers and dealers) and U (banks and lenders).

Key Takeaways

  • Regulation X limits the amount of credit that foreign entities can use to purchase U.S. Treasuries.
  • Regulation X was issued by the Board of Governors of the Federal Reserve System.
  • The rule applies guidelines set forth by Regulation T, which restricts borrowers from using more than 50% financing from brokerage firms when purchasing securities.

How Regulation X Works

Regulation X is part of the Securities Exchange Act of 1934. It applies to credit secured both within and outside the United States. Borrowers who can claim permanent residency outside the United States and do not obtain or carry purpose credit in excess of $100,000 outside the United States are exempt from Regulation X.

Why Regulation X Matters to International Investments in Domestic Securities

The acquisition of U.S. Treasuries such as bonds by international parties can create complex economic and political interdependence. For example, nations such as China frequently acquire bonds and other U.S. Treasuries. The sale of such bonds allows the federal government to finance budget deficits. The U.S. government's debt has been purchased at an appreciable rate since 2008, with international buyers making up a substantial portion of this market. The Federal Reserve buys some of this debt as well. While international entities continue to acquire these securities, it gives the federal government more fiscal leeway to handle budget gaps.

Regulation X serves to enforce policies that limit foreign individuals and organizations from making domestic investments they do not have supporting cash for. The rule applies guidelines set forth by Regulation T, which restricts borrowers from using more than 50% financing from brokerage firms when purchasing securities. When this is applied through the provisions of Regulation X, it narrows the capacity for international buyers to use credit to invest in U.S. securities. Comparable rules under Regulation U also limit the financing available through bank lenders for the purchase of such securities.

The provisions of Regulation X require international investors to pay at least 50% cash toward their domestic investments, regardless of how the remaining credit or financing is structured. This means international investors must be solvent enough to pay at least half the price of their purchases of U.S. Treasuries.

A completely separate and different Regulation X was issued by the Bureau of Consumer Financial Protection to put the Real Estate Settlement Procedures Act of 1974 into effect. This policy offers protection to consumers who possess or apply for federally related mortgages. Regulation X in this context mandates disclosures to be made in relation to the application and servicing of certain secured loans.