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F e d er a l R e se r v e Ba n k
DALLAS, TEX A S

of

D allas

75222

Circular No. 73-1+9
March 5? 1973

PROPOSED AMENDMENTS TO REGULATIONS G, T AND U
(Treatment of Puts, Calls and combinations thereof)

INTERPRETATIONS OF REGULATIONS T AND U
(Treatment of Put and Call Options as securities)

To All Banks, Broker/Dealers, and Others Concerned
in the Eleventh Federal Reserve District:
The Board of Governors of the Federal Reserve System proposes to
amend Regulations G, T and U to indicate that certain Puts, Calls or combin­
ations thereof are to be given no loan value as collateral, even if such
options themselves are registered as securities on a national securities
exchange.
Changes are also proposed to indicate in Regulation T that the
adjusted debit balance in a general account must include the amount of any
margin required in connection with the issuance, endorsement or guarantee of
any Put, Call or combination thereof, and in Regulation U to conform the
definition of "stock" to the statutory definition of "equity securities1.
'
Copies of the proposed amendments are attached. Interested persons
should submit relevant data, views or arguments to the Secretary, Board of
Governors of the Federal Reserve System, Washington, D. C. 20551? to be
received no later than March l6, 1973.
Also attached are interpretations by the Board, effective February
20, 1973? relating to the treatment of Puts, Calls and combinations thereof
as securities for the purposes of Regulations T and U.

Very truly yours,
P. E. Coldwell,
President

Attachment

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

TITLE 12 -- BANKS AND BANKING
CHAPTER II -- FEDERAL RESERVE SYSTEM
SUBCHAPTER A -- BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
[Regs. G, T and U]
PARTS 207, 220, 221 -- SECURITIES CREDIT TRANSACTIONS
Treatment of Puts, Calls and Combinations thereof

The Board of Governors proposes to amend Parts 207, 220 and
221 (Regulations G, T and U) in order to provide that any put, call
or combination thereof which is written on an equity security, even
if such option is itself registered as a security on a national secu­
rities exchange, shall have no loan value for the purposes of § 207.1,
§ 220.3 and § 221.1 (Regulations G, T and U ) ; to clarify that the cus­
tomer's adjusted debit balance in a general account under Regulation T
must include the amount of margin required in connection with the
issuance, endorsement or guarantee of any put, call or combination
thereof whether or not such obligations are assumed by the creditor;
and to conform the definition of "stock" in Regulation U to the statu­
tory definition of "equity security."

PART 207 -- SECURITIES CREDIT BY PERSONS
OTHER THAN BANKS, BROKERS OR DEALERS
1.

Section 207.5(a) (the Supplement to Regulation G) would

be amended as set forth below:

- 2 -

Section 207.5 SUPPLEMENT
(a)

Maximum loan value of margin securities.

For the

purpose of § 207.1, the maximum loan value of any margin security,
except convertible securities subject to § 207.1(d) and any put,
call or combination thereof, shall be 35 per cent of its current m a r ­
ket value, as determined by any reasonable method.

No put, call or

combination thereof shall have any loan value for the purposes of
this part.

PART 220 -- CREDIT BY BROKERS AND DEALERS
2a.

Section 220.3(d)(5) would be amended as set forth

below:

Section 220.3 GENERAL A C C O U N T S

*
(d)

*

*

Adjusted debit balance.

*

*

For the purpose of this part,

the adjusted debit balance of a general account, special bond account,
or special convertible debt security account shall be calculated hy
taking the sum of the following items:
*

*

* (5)

the amount of any margin required in connection with

the issuance, endorsement or guarantee of any put, call or combination
thereof.
(b)

Section 220.8(a)(1) and (f) (the Supplement to R eg u l a ­

tion T) is amended to read as follows:

- 3 Section 220.8 SUPPLEMENT
(a)

Maximum loan value for general acco u n ts .

The maximum

loan value of securities in a -general account subject to § 220.3 shall be
(1)

of a registered non-equity security held in the account

on March 11, 1968, and continuously thereafter, and of a margin equity
security (except as provided in § 220.3(c) and paragraphs (b), (c)
and (f) of this section), 35 per cent of the current market value of
such securities.

*
(f)

*

*

*

*

Securities having no loan value in a general a c count.

N o securities other than an exempted security or registered non-equity
security held in the account on March 11, 1968, and continuously
thereafter, and a margin security,shall have any loan value in a
general account except that a margin security eligible for the special
convertible debt security account pursuant to § 220.4( j) shall have
loan value

only if held in the account on March 11, 1968,

tinuously thereafter; and no put, call or

and

combination thereof

con­
shall

have loan value in a general account.

PART
OF
3a.

221 -- CREDIT BY BANKS FOR THE PURPOSE
PURCHASING OR CARRYING MARGIN STOCKS

Section 221.3(_1) would be amended as set forth below:

Section 221.3 MISCELLANEOUS PROVISIONS

*
(1)

*

*

*

*

S t oc k .

The term stock includes any security commonly

known as a stock; any voting trust certificate or other instrument
representing such a security; and any security convertible, with or

- 4

-

without consideration, presently or in the future, into such secu­
rity, certificate, or other instrument, or carrying any warrant or
right to subscribe to or purchase such a security; or any such
warrant or right; or any other security which the Securities and
Exchange Commission shall deem to be of similar nature and consider
necessary or appropriate, by such rules and regulations as it may
prescribe in the public interest or for the protection of investors,
to treat as an equity security such as any certificate of interest
or participation in any profit sharing agreement, preorganization
certificate or subscription, transferable share, limited partnership
interest, interest in a joint venture, or certificate of interest in
a business trust; or any put, call, straddle, or other option or
privilege of buying such a security from or selling such a security
to another without being bound to do so.
(b)

Section 221.4(a) (the Supplement to Regulation U) would

be amended to read as follows:

Section 221.4 SUPPLEMENT
(a)

Maximum loan value of stocks.

For the purpose of § 221.1,

the maximum loan value of any stock except puts, calls and combinations
thereof, whether or not registered on a national securities exchange
shall be 35 per cent of its current market value, as determined by any
reasonable method.
loan value.

Puts, calls and combinations thereof shall have no

-

5 -

The purpose of the proposed changes in Regulations G, T
and U is to Indicate that puts, calls and combinations thereof are
to be given no loan value as collateral even if they become regis­
tered as securities on a national securities exchange.

Clarifying

changes are proposed in § 220.3(d)(5) to indicate that any margin
required in connection with the issuance, endorsement or guarantee
of any put, call or combination thereof must be added to the adjusted
debit balance of a general account and in § 221.1(3)(J.) to designate
specific securities which are to be treated as stock.
Because of the limited life of puts and calls and the avail­
ability of credit if they are exercised the Board deems it necessary,
in order to prevent the excessive use of credit to finance transactions
in securities, t o propose these amendments to Regulations G, T and U
under the authority of section 7(b) of the Securities Exchange Act of
1934 (15 U.S.C. 7 8 g ) .
4a.

The Board is affording interested persons an opportunity

to submit relevant data, views, or arguments concerning the proposed
amendment.

Any such material should be submitted in writing to the

Secretary, Board of Governors of the Federal Reserve System, Washington,
D. C.

20551, to be received not later than inarch 16,1973.

Such

material will be made available for inspection and copying upon request,
except as provided in § 261.6(a) of the Board's Rules Regarding
Availability of Information.

- 6 -

b.

This notice is published pursuant to section 553(b)

of Title 5, United States Code, and § 262.2(a) of the Rules of
Procedure of the Board of Governors of the Federal Reserve System
(12 C.F.R. 262.2(a)).
By order of the Board of Governors, February 20, 1973.

(signed) Michael A. Greenspan
Michael A. Greenspan
Assistant Secretary of the Board

(SEAL)

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

CREDIT BY BROKERS AND DEALERS

IN T E R P R E T A T IO N O F R E G U L A T IO N T

T R E A T M E N T OF P U T A N D C A L L O P T IO N S
A N D C O M B IN A T IO N S T H E R E O F
A S SE C U R IT IE S
§ 2 2 0 .1 2 6 Certain transactions in put and call op ­
tions and combinations thereof m ay be effected in
the special cash account; a put, call or combination
thereof is not considered an “unissued” security or
a security “exchangeable or convertible” into the
underlying security.
(a ) The Board has been asked several questions
about the treatment o f put and call options and
combinations thereof ( “puts and calls” ) under
Regulation T (Part 2 2 0 ) . These questions involve
§ 2 2 0 .3 (d ) Adjusted debit balance, § 2 2 0 .3 (h )
Unissued securities, § 2 2 0 .4 ( c ) Special cash ac­
count and § 2 2 0 .4 ( d ) Special arbitrage account.
(b ) The special cash account under § 2 2 0 .4 ( c )
may be used only for those bona fide transactions
in securities in which the creditor accepts in good
faith the customer’s agreement, if he is a pur­
chaser, that (if he does not already have sufficient
funds in the account) he will promptly make full
cash payment for the security and does not con ­
template selling it prior to making such payment,
and if he is a seller, that he or his principal owns
the security and (if it is not already held in the
account) it will be promptly deposited therein. It
is the Board’s view that subject to these require­
ments, a creditor may effect in a special cash ac­
count ( 1 ) the purchase or sale for cash o f a put
or call; ( 2 ) the exercise o f a call, provided that
full cash payment for the purchased stock is depos­
ited in the account promptly and in any event prior
to the release o f the proceeds o f any resale o f such
security; and ( 3 ) the endorsement, guarantee or
issuance o f a put or call if (in the case o f a put)
sufficient funds to purchase the underlying stock
or (in the case o f a call) the underlying stock
itself are held in the account.
(c ) Generally a put or call option refers to an
agreement to sell a security or to purchase a secur­
ity, at som e future time. A lthough the agreement

may itself be deemed to be a security, it cannot be
an “ u n is s u e d ” s e c u r ity , u n d er § 2 2 0 . 3 ( h ) or
§ 2 2 0 . 4 ( c ) ( 3 ) , for the reasons set forth by the
Board in discussing a similar question in regard to
mutual funds shares (1 9 6 2 Bulletin 1427; 12
C.F.R. 2 2 0 .1 1 8 ). Accordingly, in respect o f a
transaction involving puts or calls, payment is
required within the period o f time provided by
§ 2 2 0 . 3 ( b ) ( 1 ) if the transaction occurs in the
general account (or if the transaction occurs in a
special cash account, by § 2 2 0 . 4 ( c ) ( 2 ) ) without
regard to whether there has been a delay in obtain­
ing the endorsement, or for any other reason the
option has not yet technically been issued.
(d ) A question has been asked whether puts
and calls may be considered to be securities which
are exchangeable or convertible into other secur­
ities, within 90 calendar days, without restriction
other than the payment o f money. If held in a gen­
eral account, such exchangeable or convertible
securities are acceptable in lieu o f the margin
r e q u ir ed in r e s p e c t o f a sh o rt s a le u n d er
§ 2 2 0 . 3 ( d ) ( 3 ) . If held in a special arbitrage ac­
count under § 2 2 0 .4 ( d ) , exchangeable or convert­
ible securities will support the sale, for purposes of
bona fide arbitrage, of the security into which they
are so exchangeable or convertible. The board con ­
cludes that puts and calls m ay not be considered, for
either purpose, as securities that are exchangeable
or convertible into other securities. The Board’s
view stems from the policies underlying the sec­
tions in question.
(e ) T he margin restrictions in respect of short
sales were im posed in order that
“. . . traders on the short side o f the market
should not be in a position, with a given
amount o f funds, to exert a greater influence
on the market than they could with the same
amount o f funds if they were trading on the
long side.” (A nnual Report, Board o f G over­
nors, 1937, p. 20 8 )
(O V ER )

not likely that true arbitrage w ould take place
between an option and an underlying security.
Such options w oud be used, rather, for purposes
of “hedging,” that is to say, to protect an investor
against loss while he holds a security in the hope
(f)
The use o f the special arbitrage account o f profiting by changes in its price. Such market
under § 2 2 0 .4 ( d ) is limited to the simultaneous
strategies may be beneficial to individual investors.
purchase and sale o f the same or equivalent secur­
However, they do not perform a comparable
ities for the purpose o f taking advantage o f a dif­
market function.
ference in price. Arbitrage is permitted to be
carried on without additional deposit o f margin
because it tends to equalize prices between markets
and between equivalent securities. Because the rela­
2 /2 0 /7 3
tively high initial cost o f a put or call option must
be deducted from the potential profit due to the
disparity in price between the tw o securities, it is
* * * * *
Permitting call options to be used in lieu o f the
margin required in respect o f a short sale would
be inconsistent with that general policy (parallel
considerations would apply in the case o f puts.)

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

CREDIT BY BANKS FOR THE PURPOSE OF PURCHASING
OR CARRYING MARGIN STOCKS

IN TER PR ETA TIO N OF R EG U LA TIO N U

SE C T IO N 2 21 .1 2 2 B O N A F ID E A R B IT R A G E
T R A N S A C T IO N S .

purchase of a security which is, without restric­
tion other than the payment of m oney exchange­
able or con v ertib le. . . into a second security” so
(g )
Section 221.2 o f this chapter provides that as to qualify such purchase, w hen effected together
with an offsetting sale o f the second security, as a
“a bank may extend and may maintain any credit
bona fide arbitrage transaction, and the Board’s
for the purpose specified in § 221.1, without re­
conclusion is also applicable to subsection (j) o f
gard to the limitations prescribed therein, or in
§ 221 . 2.
§ 221.3 ( t ) , if the credit com es within any o f the
follow ing descriptions.” Subsection (j) contains
the follow ing description: “ (j) A n y credit extended
to a member o f a national securities exchange for
2 /2 0 /7 3
the purpose o f financing his or his customers’ bona
fide arbitrage transactions in securities.” The Board
has: concluded that a purchase o f a put or call is
not embraced within the term in § 2 2 0 .4 (d ) “a

* * * * *

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