Does portfolio margining make borrowing more attractive?

- How did the 2005-2008 changes to margin rules affect the U.S. securities markets?
- We hypothesise that the change in margin rules has increased aggregate margin debt.
- The data used are monthly U.S. margin debt from January 1997 to February 2014.
- The hypothesis is tested using unit root and structural change tests.
- The statistical evidence supports the hypothesis.

This paper investigates the effects of a change in the margin rules of the U.S. financial securities markets. These rules determine how much investors can borrow to leverage their investments. Since the 1929 stock market crash, margin loans have been tightly regulated by the Securities and Exchange Act Regulation T. Between 2005 and 2008, the Securities and Exchange Commission modified these margin rules because they were perceived as not adequately reflecting investment risk. The amended rules have made it more attractive for investors to borrow by opening new margin accounts and diversifying their investment positions. This paper tests the hypothesis that the change in the margin rules has increased margin debt across the U.S. securities markets. It provides statistical evidence that this structural change can be dated to the amendments in the rules.