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F ed e r a l Re s e r v e Ba n k
DALLAS. TEXAS

of

Dallas

75222

C i r c u l a r No. 76-178
D e c e m b e r 29, 1976

American Revolution Bicentennial

PROPOSED AMENDMENT TO REGULATION T
C r e d i t to E x c h a n g e S p e c i a l i s t s in O p tio n s

TO ALL BANKS, BROKERS/DEALERS,
REGULATION G REGISTRANTS,
AND OTHERS CONCERNED IN THE
ELEVENTH FEDERAL RESERVE DISTRICT:
T h e B o a r d of G o v e r n o r s o f th e F e d e r a l R e s e r v e S y s te m
fo r c o m m e n t a p r o p o s e d a m e n d m e n t to its R e g u l a ti o n T ( C r e d i t b y
D e a l e r s ) to p e r m i t r e g i s t e r e d m a r k e t m a k e r s o r s p e c i a l i s t s in t h e
to o b ta in s t o c k , in c e r t a i n lim ited c i r c u m s t a n c e s , on a 25 p e r c e n t
m e n t.

has p u b lish e d
B rokers and
options m a rk e t
m argin r e q u i r e ­

T h e B o a r d r e q u e s t e d co m m e n t on th e p r o p o s e d a m e n d m e n t t h r o u g h
J a n u a r y 17, 1977.
On som e e x c h a n g e s , m a r k e t s in o p ti o n s a r e m a d e b y " r e g i s t e r e d m a r k e t
m a k e r s " w h i l e on o t h e r e x c h a n g e s " s p e c i a l i s t s " p e r f o r m th i s f u n c t i o n . U n d e r th e
p r o p o s a l , s u c h o p tio n s p e c i a l i s t s c o u l d p u r c h a s e a n d c a r r y s t o c k , a s a h e d g e in
t h e i r o p t i o n s o p e r a t i o n s , u n d e r s p e c i f i e d lim ita tio n s , a t th e lo w e r m a r g i n r a t h e r
th a n th e c u r r e n t 50 p e r c e n t m a r g i n r e q u i r e d w h e n s t o c k s a r e b o u g h t o r c a r r i e d
on c r e d it.
T h e p u r p o s e of th e p r o p o s a l is to f a c i l i t a t e t h e m a k in g o f m a r k e t s in
o p t i o n s —t h a t is , m a i n t e n a n c e of c o n t i n u o u s a n d n a r r o w d i f f e r e n c e s b e t w e e n b id
a n d a s k p r i c e s for o p t i o n s . A n o p tio n is a n a g r e e m e n t , w h i c h is it s e lf d e f i n e d
a s a s e c u r i t y , u n d e r w h i c h th e h o l d e r h a s th e r i g h t to p u r c h a s e o r sell a p a r t i c u ­
l a r s to c k a t a n a g r e e d p r i c e d u r i n g a s p e c i f i e d tim e p e r i o d . O p tio n m a r k e t m a k e r s
m a y n e e d a t ti m e s , to a v o i d u n d u e r i s k , to p u r c h a s e o f f s e ttin g h o l d i n g s in th e
s to c k i n v o l v e d .
T h i s w o u ld n o t c h a n g e c u r r e n t p r o v i s i o n s p e r m i t t i n g s p e c i a l i s t s to
r e c e i v e g o o d fa ith loan v a l u e on s t o c k s th e y h o ld a s i n v e n t o r y o r a s c o l la t e r a l
in t h e i r o p t i o n s a c c o u n t s .

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)

- 2 -

T h e p r o p o s a l w o u ld a l s o p e r m i t s p e c i a l i s t s to u s e a n a l t e r n a t e m a r g i n
c o m p u ta t io n from t h a t p r o v i d e d b y th e B o a r d ' s u n ifo rm m a r g i n r u l e fo r th e w r i t i n g
of o p t i o n s , w h i c h is to b e c o m e e f fe c tiv e J a n u a r y 1, 1977.
In a r e l a t e d d e v e l o p m e n t , th e B o a r d h a s b e e n a d v i s e d b y th e S e c u r i t i e s
a n d E x c h a n g e C o m m is s io n t h a t it d o e s n o t p r o p o s e to t a k e a n y a c t io n if e x c h a n g e
s p e c i a l i s t s a n d m a r k e t m a k e r s do n o t e n g a g e in f u t u r e t r a n s a c t i o n s in s e c u r i t i e s
u n d e r l y i n g e x c h a n g e - l i s t e d o p t i o n s o t h e r w i s e th a n in c o m p lia n c e w ith t h e a m e n d ­
m e n ts th e F e d e r a l R e s e r v e B o a r d p r o p o s e d . In a d d i t i o n , t h e C o m m issio n will
r e q u i r e t h a t e x c h a n g e s p e c i a l i s t s a n d m a r k e t m a k e r s r e d u c e a n y d e f i c i e n c y in
t h e i r e x i s t i n g m a r g i n p o s i t i o n s , c a l c u l a t e d in a c c o r d a n c e w ith th e p r o p o s e d r u l e
a m e n d m e n t , so t h a t , b y F e b r u a r y 1, 1977, a n y s u c h d e f i c i e n c y s h a ll h a v e b e e n
r e d u c e d to 50 p e r c e n t , a n d , b y May 1, 1977, a n y s u c h d e f i c i e n c y sh a ll h a v e b e e n
e l im i n a te d c o m p le t e ly .
F o r y o u r r e v i e w a n d c o m m e n t, th e B o a r d ' s p r o p o s a l is c o n t a i n e d in
t h e e x t r a c t from th e F e d e r a l R e g i s t e r w h i c h is p r i n t e d o n t h e fo llo w in g p a g e s .
C om m ents s h o u l d b e s u b m it te d in w r i t i n g to th e S e c r e t a r y , B o a r d of G o v e r n o r s
o f t h e F e d e r a l R e s e r v e S y s t e m , W a s h in g to n , D . C . 20551, to be r e c e i v e d n o t la te r
t h a n J a n u a r y 17, 1977. All m a t e r i a l s s h o u l d i n c l u d e th e D o cket N u m b e r R -0 0 5 4 .
S in ce rely y o u rs ,
R o b e r t H . B o y k in
F i r s t V ic e P r e s i d e n t

E x t r a c t F rom
FEDERAL REGISTER
VOL. 41, NO. 246
T u e s d a y , D e c e m b e r 21, 1976
p p . 55552 - 55553
FEDERAL RESERVE SYSTEM
[12 CFR Part 220]
[R eg. T ; D o c k e t N o. R -005 4]

CREDIT BY BROKERS AND DEALERS
Credit to Exchange Specialists in Options

The Board of Governors of the Federal
Reserve System, pursuant to authority
contained In sections 7 and 23 of the
Securities Exchange Act of 1934, as
amended (15 U.S.C. 78g and w ), proposes
for comment an amendment to the pro­
visions in Regulation T which govern
credit which a broker or dealer extends
to exchange specialists. The purpose of
this amendment It to provide 'appro­
priate relief to option specialists who,
in furtherance of their obligation to
promote an orderly and efficient market,
are required to assume certain security
positions.
, Th* amendment Would permit a spe­
cialist in options, In certain limited cir­
cumstances, to purchase’or sell short In
the specialist's account with a broker or
dealer, securities underlying the options
In which the specialist Is registered. It
would also provide a reduced margin re­
quirement for such underlying securities
a t any time when they serve as a hedge
against a short option position which is
not offset by a corollary long option posi­
tion. The proposed amendment would
also provide an alternative method of
calculating the adjusted debit balance in
a specialist's account In order to provide
relief for specialists with short security
positions comparable to th at presently
provided to specialists with long security
positions. The existing rule for specialist
credit was written before the advent of
exchange-traded options and, therefore,
the concessions which it grants are not
specifically structured for the mechanics
of the options markets.
H ie proposed amendment is a response

to a request for rulemaking made by the
Chicago Board Options Exchange as well
as a recognition by the Board of Gover­
nors th a t option specialists m ight need
certain specific relief from the Board’s
uniform margin rule for the writing of
options which is scheduled to go into ef­
fect on January 1, 1977. The uniform
rule was published In the F ed e r a l R e g i s ­
t e r on October 5, 1976 (41 F R 43895).
The Board's proposal would allow tne
purchase and short sale of a security
underlying a n option In a specialist’s
account when the account has a short
option position wbMh Is susceptible to
exercise and the aeaount does not hold
an offsetting position In a comparable
"in-or-at-the-m oney” option on the
same underlying seotirity. 'While the un­
derlying stock which has been purchased
or sold short In the account serves as
such a hedge, a margin of 25 per cent
(instead of the current margin require­
ment of 50 per cent) will be required.
If the underlying stock or short position
is not liquidated when it no longer serves
as an allowable hedge, the current m ar­
gin requirements will be operative. Any
account which carries positions in under­
lying stock whloh were purchased or sold
short under the terms of the proposed
rule must be m aintained on a dally basis
with no excess of the adjusted debit bal­
ance over the maximum loan value Of the
securities in the account.
.
The amendment is not intended' to af­
fect specialists who are not option spe­
cialists.
The proposed amended paragraph is
set forth below:
§ 220.4

*

Special Accounts.

*

*

*

*

(g) Specialist’s account. (1) In a, spe­
cial account designated as a specialist’s
account, a creditor may effect and fi­
nance, for any mem ber-tf a national securlties exobange who Is registered and
acts as a specialist in securities on the
exchange, such member’s transactions as
a specialist in ouch securities, or effect
and finance, for any Joint venture in
which th e creditor participates, any
transactions in any securities of an issue
with respect to which all participants, or
all participants other than the creditor,
are registered and act on a national se­

curities exchange as specialists.
(2) Such specialist’s account shall be
subject to the same conditions to which
it would be subject if it were a general
account unless the specialist’s exchange
is a national securities exchange which
requires and submits to the Board of
Governors of the Federal Reserve Sys­
tem reports suitable for supplying cur­
rent information regarding specialist’s
use of credit pursuant to this paragraph
(g), in which case, the following modi­
fications of and exceptions to the gen­
eral rule will apply:
(I) The required calculations of § 220.3(b) (1) (11) to determine if an account
Is an “account subject to $ 220.8(g) ’’ and
the requirements of § 220.6(b) regarding
joint ventures shall not apply.
(II) The maximum loan value of regis­
tered securities In such account shall be:
(a> Such maximum loan value as the
Board shall prescribe from tim e to time
in S 220.8 (the Supplement to Regula­
tion T) where (1) the security is identi­
fied as held for investment pursuant to a
rule of the Commissioner of Internal
Revalue (Regs, section 1-1236-1 (d )), or
(2) the security is an underlying security
acquired in the account as permitted
under paragraph (g) (3) of this section
and held in th e account on any day when
it is not eligible to be held pursuant to
paragraph (g) (3) (1) of this section.
(b) 75 per cent of the current m arket
value of an underlying security th a t Is
purchased in the account under the terms
of paragraph (g) (3) of this section and
held In the account on any day when
it is eligible to be held pursuant to para­
graph (g) (3) (1) of this section.
(c) The maximum loan value as deter­
mined by th e creditor in good faith for
any other registered security.
(iii) The amount to be included in the
adjusted debit balance of th e account
shall be:
(o)
The margin required for the writ­
ing of options may be either the amount;
required by 5 220.3 (i) ajtid 220.8 (the
Supplement to Regulation T> or 130 per
cent of the current m arket value of each
option held in a short position in the
account which Is not offset by one of the
positions which may be used in lieu ol’
margin under § 220.3(i)(l).
(b) The margin required in connection
with the sale of a security sold short in

conformity witn tnis paragraph shall be
the current m arket value of the security
sold short plus either 25 per cent of such
current m arket value on any day when
the position Is eligible to be held pur­
suant to the conditions provided in para­
graph (g) (3) (1) of this section or such
margin as the Board shall prescribe for
short sales in 8 220.8 (the Supplement
to Regulation T) for positions not so
held.
(It) At any time when a position in
an underlying security which was pur­
chased or sold short in th e account under
the term s of paragraph (g)(3) et this
section Is held in the account, the ac­
count shall be maintained on a dally
basis with no excess of th e adjusted debit
balance over the maximum loan value of
the securities in the account.
(3) In this account, a specialist in op­
tions on a national securities exchange
is permitted to purchase or sell short the
securities underlying the options in which
such member is registered and acts as a
specialist only under one or more of the
following conditions:
(i) The account holds short positions
in call options in which the member is
registered and acts as a specialist which
are “in or a t the money” but only to the
extent the positions are not offset in the
account by long positions in call options
for an equal or greater number of shares
of the same underlying securities which
are “in or a t the money” and do not
expire before the short positions in call
options;
«

»

*

*

•

(ii) the account holds short positions
in put options in which th e member Is
registered and acts as a specialist which
are “in or at the money” but only to the
extent the positions are not offset In the
account by long positions in put options
for an equal or greater number of shares
of the same underlying securities which
are “in or at the money” and do not ex­
pire before the short positions in put op­
tions;
(iii) The account held a short position
in an option against which an exercise
notice was tendered; or
(iv) The account held a long position
in an option which was exercised.
(4) For the purpose of this paragraph:
(i) The term “underlying security”

means the security which will be deliv­
ered upon exercise of the option.
(ii) The term “joint venture” does not
include any account which, by written
agreement with a credftpr, permits the
commingling of th e security positions of
a specialist or a specialist unit with those
of other specialists or specialist units un­
less such agreement provides for a shar­
ing of profits and losses from the ac­
count on some predetermined ratio.
(iii) The term “in or a t the money”
means, with respect to a call, th at the
current m arket pirce of the underlying
security is not more than 5 per cent be­
low the exercise price of the option, and,
with respect to a put, the current m ar­
ket price of the underlying security is
not more than 5 per cent above the exer­
cise price of the option.
To aid in the consideration of this m at­
ter by the Board interested persons are
invited to submit relevant data, views,
comments, or arguments. Any such m a­
terial should be submitted in writing to
the Secretary, Board erf Governors of
the Federal Reserve System, Washing­
ton, D.c. 20551, to be received not later
than January 17, 1977. All m aterial
should include the docket number R 0054. Such m aterial will be made avail­
able for inspection and copying upon
request, except as provided In S 261.6(a)
of
Board’s rales regarding avaliabtnty of Information (12 CPR 361.6
(a )).
This notice Is published pursuant to
section 653(b) of Title 5 of the United
States Code and 1262.2(a) of the
Board’s Rules of Procedure (12 CFR
262.2(a)).
By order of the Board of Governors.
December 15, 1976.
T h e o d o r* E . A llis o n ,

Secretary o f the Board.
(P R Doc.70-37414 F iled 12-16-76; 1:63 pm ]


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102