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F

ederal

R e se r v e Ba n k
DALLAS. TEXAS

of

Dallas

75222

Circular No. 73-108
May 9, 1973

I N T E R P R E T A T I O N OF R E G U L A T I O N T
(Treatment of Simultaneous Long and Short Positions)

To A l l Banks, B r o k e r / D e a l e r s , an d Others
C o n c e r n e d in the Ele v e n t h F e d e r a l Reserve District:

A t t a c h e d is a co p y of an i n t e r p r e t a t i o n o f R egu lati on
T, "Credit b y Brokers an d Dealers'1, re la t i n g to th e t r ea tment of
simultaneous long and short positi ons in a m a r g i n account wi t h
respect to options.
Yours v e r y truly,
P. E. Coldwell,
President

Att ac h m e n t

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

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

CREDIT BY BROKERS AND DEALERS
INTERPRETATION OF REGULATION T

Section 220.128 Treatment of simultaneous long
and short positions in the same margin account
when put or call options or combinations thereof
on such stock are also outstanding in the account.

endorsement or guarantee of any put, call, or
other option;

(a) The Board was recently asked whether
under Regulation T, “Credit by Brokers and Deal­
ers” (12 C.F.R. 220), if there are simultaneous
long and short positions in the same security in
the same margin account (often referred to as a
short sale “against the box”), such positions may
be used to supply the place of the deposit of mar­
gin ordinarily required in connection with the
guarantee by a creditor of a put or call option or
combination thereof on such stock.

(g)
. . . (4) Any transaction which serves to
meet the requirements of paragraph (e) of this
section or otherwise serves to permit any offsetting
transaction in an account shall, to that extent, be
unavailable to permit any other transaction in
such account.

(b) The applicable provisions of Regulation T
are §220.3(d)(3) and (5) and §220.3(g)(4) and (5)
which provide as follows:
“( d ) . . . the adjusted debit balance of a general
accou n t. . . shall be calculated by taking the sum
of the following items:

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(3) the current market value of any securities
(other than unissued securities) sold short in the
general account plus, for each security (other than
an exempted security), such amount as the Board
shall prescribe from time to time in §220.8(d)
(the Supplement to Regulation T) as the margin
required for such short sales, except that such
amount so prescribed in such §220.8(d) need not
be included when there are held in the general
a ccou n t. . . the same securities or securities ex­
changeable or convertible within 90 calendar days,
without restriction other than the payment of
money, into such securities sold short;

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(5) the amount of any margin customarily re­
quired by the creditor in connection with his

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(5) For the purpose of this part (Regulation T),
if a security has maximum loan value under para­
graph (c)(1) of this section in a general account,
or under §220.4(j) in a special convertible debt
security account, a sale of the same security (even
though not the same certificate) in such account
shall be deemed to be a long sale and shall not
be deemed to be or treated as a short sale.”
(c) Rule 431 of the N ew York Stock Exchange
requires that a creditor obtain a minimum deposit
of 25 per cent of the current market value of the
optioned stock in connection with his issuance or
guarantee of a put, and at least 30 per cent in
the case of a call (and that such position be
“marked to the market”), but permits a short posi­
tion in the stock to serve in lieu of the required
deposit in the case of a put and a long position to
serve in the case of a call. Thus, where the appro­
priate position is held in an account, that position
may serve as the margin required by §220.3(d)(5).
(d) In a short sale “against the box”, however,
the customer is both long and short the same se­
curity. He may have established either position,
properly margined, prior to taking the other, or
he may have deposited fully paid securities in his
margin account on the same day he makes a short
sale of such securities. In either case, he will have
directed his broker to borrow securities elsewhere
in order to make delivery on the short sale rather
than using his long position for this purpose (see
also 17 C.F.R. 240.3b-3).

(e) Generally speaking, a customer makes a
short sale “against the box” for tax reasons. Regu­
lation T, however, provides in §220.3(g) that the
two positions must be “netted out” for the pur­
poses of the calculations required by the regula­
tion. Thus, the Board concludes that neither posi­
tion would be available to serve as the deposit of
margin required in connection with the endorse­
ment by the creditor of an option.
(f) A similar conclusion obtains under §220.3(d)
(3). That section provides, in essence, that the mar­
gin otherwise required in connection with a short
sale need not be included in the account if the
customer has in the account a long position in
the same security. In §220.3(g)(4), however, it
is provided that “[A]ny transaction which . . .
serves to permit any offsetting transaction in an
account shall, to that extent, be unavailable to per­
mit any other transaction in such account.” Thus,
if a customer has, for example, a long position
in a security and that long position has been used
to supply the margin required in connection with
a short sale of the same security, then the long
position is unavailable to serve as the margin re­

quired in connection with the creditor’s endorse­
ment of a call option on such security.
(g)
A situation was also described in which a
customer has purported to establish simultaneous
offsetting long and short positions by executing a
“cross” or wash sale of the security on the same
day. In this situation, no change in the beneficial
ownership of stock has taken place. Since there
is no actual “contra” party to either transaction,
and no stock has been borrowed or delivered to
accomplish the short sale, such fictitious positions
would have no value for purposes of the Board’s
margin regulations. Indeed, the adoption of such
a scheme in connection with an overall strategy
involving the issuance, endorsement or guarantee
of put or call options or combinations thereof ap­
pears to be manipulative and may have been em­
ployed for the purpose of circumventing the
requirements of the regulations.
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Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102