What is Regulation T Extension Fee?

What Is a Regulation T Extension Fee at Webull, Fidelity, and Schwab?

To understand a Regulation T extension fee, we must first understand what Reg T is all about. This is the FINRA directive that governs margin accounts and how credit is to be extended in them.

Reg T states that up to 50% of a stock transaction can be borrowed from the broker-dealer. The remaining amount must be paid for in cash. To give a simple example, say you want to buy $6,000 of Exxon Mobil. You could borrow $3,000 from your brokerage firm and pay $3,000 in cash for the entire transaction. The first $3,000 will appear in the account as a loan that eventually has to be repaid.

Reg T also has rules that govern cash accounts in some situations, although the extension fee, which is what we’re trying to get at here, is only applicable in a margin account.

Once that $3,000 loan is taken out, all sorts of additional guidelines kick in. If the stock price goes down, the account can be issued a margin call. This will require more cash to be deposited in the account. Alternatively, some shares of the stock position could be sold. In either cash, the idea is to increase the amount of collateral in the account to cover the $3,000 loan. Brokerage firms are required by Reg T to issue such a margin call when the price of a borrowed stock moves too much in the wrong direction.

Once the margin call is issued, Regulation T requires the account owner to deposit cash or sell some shares within 4 business days. If neither action is taken, and the payment due exceeds $1,000, the brokerage house itself must sell enough shares of the position to bring the account in line with maintenance margin requirements. This is known as a forced margin liquidation.

But there’s one other option the broker-dealer has: it can seek an extension from FINRA under section 220.8(b)(2) of Regulation T. Bureaucracy often has loopholes, and this is one of them. The applicable section allows the brokerage firm:

"up to 35 calendar days to obtain payment if delivery of the security is delayed due to the mechanics of the transaction and is not related to the customer's willingness or ability to pay."

In this situation, an extension can be granted, up to 35 calendar days. Some broker-dealers will charge a fee for this service, which is the Reg T extension fee.

TD Ameritrade is one such brokerage firm with a Reg T extension fee. It charges $25 for an extension. Ally Invest charges $10 plus interest to the settlement date. E*Trade charges nothing, so always check the pricing schedule issued by your broker.

Be aware that a Reg T extension is a different action than a forced margin liquidation. This event may have a separate fee to pay for the broker’s action.

Updated on 2/1/2024.