Regulators Warn About Margin Debt, Broker Incentives

Regulators have been busy painting a picture of margin debt exploding out of control. Yet a report released by the SIA in February shows that margin debt as a percentage of market capitalization is well within historical norms.Securities lending now accounts for slightly more than 2 percent of the nearly 18 trillion dollars of total stock market capitalization, the SIA report says. The ratio of margin

Regulators have been busy painting a picture of margin debt exploding out of control. Yet a report released by the SIA in February shows that margin debt as a percentage of market capitalization is well within historical norms.

Securities lending now accounts for slightly more than 2 percent of the nearly 18 trillion dollars of total stock market capitalization, the SIA report says. The ratio of margin debt to market capitalization has remained between 2 percent to 3 percent for the past two decades. And within the past five years, margin debt has been at the lower end of that range (see chart).

The nominal growth in debt, however, has been notable, and it's been accelerating. During November and December 1999, margin loans increased 25 percent from October levels, to 228.5 billion dollars at year's end, according to the SIA. Margin debt was up 62 percent for all of 1999.

The SIA report notes that industry debt also includes other types of borrowings as well as derivatives exposure. In an informal survey, the SIA found that securities firms have placed stricter lending limits on active traders and on purchases of particularly volatile stocks.

The report is available at www.sia.com/publications/pdf/marginVol1-1.pdf.

A joint statement from the NASD and NYSE in February urged member firms to review or curtail broker incentive programs "that would promote the solicitation of margin accounts."

Of the wirehouses, Morgan Stanley Dean Witter and Merrill Lynch pay or reward reps for margin debt.

MSDW credits 15 basis points of the average daily margin balances in client accounts. Payments are made once a year at the grid payout in July of the following year.

Merrill counts margin interest toward its measure of "total revenue" (different from gross). Total revenue is used in calculating deferred compensation and can help a broker qualify for recognition clubs.

Neither MSDW nor Merrill responded to requests for comment.

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