Extending Margin Eligibility to OTCQX Stocks

Margin eligibility is an important topic for investors.  Many investors find themselves weighing their capital needs against their ability to hold a stock over the long-term.  If an investor knows they will need access to capital to send their children to college or buy a home, one important consideration is whether they are able to leverage their stock portfolio to borrow funds.

What is Margin Eligibility and Why is it Important?

In its simplest form, holding stocks “on margin” or in a margin account means the investor can borrow money against their holdings.

Rather than liquidating their investments to generate cash, investors that own marginable securities can access the value of their holdings by borrowing against them.   Margin status thus increases the utility of owning those securities and improves market quality.  The benefits of margin status affect main street investors by helping them generate and maintain wealth.

Margin eligible shares can be used to access credit, allowing shareholders to access capital without having to sell their shares. Because margin eligibility enhances the value of the underlying security and therefore impacts an investor’s willingness to purchase a security, it has a direct impact on small company capital formation.

What are the Challenges for OTC Securities?

Margin eligibility is granted to stocks traded on national exchanges, but OTCQX companies are not afforded the same benefit. Because of this, U.S. investors in small businesses that trade on our OTCQX market, including over 100 community banks, are unfairly penalized as they are unable to access the benefits of margin.

The reason for this disparate treatment stems from outdated Treasury regulations and developments in the capital markets landscape. The Federal Reserve historically published a quarterly list of OTC stocks that it deemed “marginable” based on certain standards.  By 1999, the Nasdaq Stock Market had become the primary electronic market for OTC equity securities and Federal Reserve determined to recognize all OTC securities traded on Nasdaq as marginable and cease publication of the quarterly list.

In 2006, Nasdaq became a registered exchange and no longer needed OTC margin status.  Over the following decade, the OTCQX market replaced Nasdaq as the primary OTC trading venue. Despite these changes to the market landscape, the Federal Reserve never reinstated the OTC margin list or provided a path to margin eligibility for qualified OTC-traded companies.

Treasury Regulations should be updated to allow OTCQX securities to be held on Margin

 OTCQX securities meet the margin requirements under Treasury regulations, as they have the “degree of national investor interest, the depth and breadth of market, the availability of information respecting the security and its issuer, and the character and permanence of the issuer to warrant being treated like an equity security traded on a national securities exchange.”

The OTCQX market is designed for established, investor-focused U.S. and global companies that meet high financial standards, demonstrate compliance with U.S. securities laws, and provide current disclosure. Over 580 companies trade on the OTCQX market, including some of the world’s largest international companies like Adidas, Heineken, and Roche, as well as over 150 domestic companies based across 30 U.S. states. These American companies represent many industries, from community banks to life sciences to technology and manufacturing and collectively employ over 50,000 people.

To qualify for the OTCQX market, companies must meet robust financial, disclosure and corporate governance standards.  Penny stocks, bankruptcies and shell companies cannot qualify for the OTCQX market.  Importantly, OTCQX companies are comparable to those on a national securities exchange:

  Total Companies* Avg. Last Sale Price** Median Mkt. Cap** Avg. monthly Dollar Volume***
OTCQX Best Market 585 $24.62 $81.8M $20M
Nasdaq Capital Market 1,354 $7.42 $78.9M $72M
NYSE American 170 $34.16 $59.7M $110M

*As of May 17, 2022

**Based on the average or median of all companies on these markets, as of May 16, 2022. 

***Based on average dollar volume per company during the period from April 16, 2022 to May 16, 2022.

Legislators can effect meaningful change by modernizing Treasury regulations or urging the Federal Reserve to issue guidance concerning which OTC traded stocks qualify to be held on margin.  Recognizing OTCQX securities as margin eligible would enhance shareholder value, improve capital formation, and encourage more American companies to join our public markets.

Check out other posts on Regulation and Compliance or visit our website to learn more.

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As Associate General Counsel, Cass supports regulatory and policy making initiatives at OTC Markets Group, focusing on equity market structure, online capital raising and emerging Fintech and RegTech trends. She represents the company on public panels and before regulatory and legislative groups. Prior to joining OTC Markets Group, Cass represented issuers, broker-dealers and individuals in securities litigation, financing, and various corporate and regulatory matters. Cass earned her JD from Hofstra University School of Law and received her BA from Mount Holyoke College. Cass is a member of the New York Bar.

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