Who sets the margin requirements for OTC stocks?

The correct answer is that the Federal Reserve Board (FRB) sets the margin requirements for over-the-counter (OTC) stocks. The FRB is responsible for regulating the monetary policy in the United States and has the authority to establish margin requirements under Regulation T of the Securities Exchange Act. This regulation dictates the amount of credit that a broker may extend to a customer for the purchase of securities, including OTC stocks.

Margin requirements are crucial as they dictate how much capital buyers must have to purchase securities on margin, impacting the leverage they can employ in their investments. The intent is to maintain the stability of the financial system by ensuring that investors do not overextend themselves financially.

Other regulatory bodies such as the Financial Industry Regulatory Authority (FINRA), the Securities and Exchange Commission (SEC), and exchanges like the New York Stock Exchange (NYSE) also play important roles in overseeing trading practices, but they do not directly set margin requirements for OTC securities; instead, they may implement rules that align with FRB regulations or apply to specific trading conditions within their jurisdictions.