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Federal Reserve Bank
OF DALLAS
August 7 , 1985
,
d a lla s te x a s
75222
C i r c u l a r 85-104
TO:
The Chie f Executive O f f i c e r o f a l l
member banks and o t h e r s concerned
in the Eleventh Federal Reserve
D istrict
SUBJECT
Amendment to Regulation T ~ Credit By Brokers and Dealers
DETAILS
The Board of Governors o f t he Federal Reserve System has announced an
amendment e f f e c t i v e September 30, 1985, t h a t changes t he i n i t i a l margin
r equir em ents f o r the w r i t i n g o f o p t i o n s on e q u i t y s e c u r i t i e s . The amendment
w ill permit a uniform premium-based system o f margin requ iremen ts f o r a l l
types o f option c o n t r a c t s .
The Board a ls o i n d i c a t e s t h a t i t i s c o n s i d e ri n g d e l e t i n g p aragraphs
( c ) ( 3 ) ( 4 ) ( 5 ) and (6) in Se ct ion 220.5 o f R egu l at i on T i f t he exchanges and t he
NASD i n c o r p o r a t e the substa nce of t ho s e p ro v i s i o n s in t h e i r r a t e s .
ATTACHMENTS
The B oa rd' s pre ss r e l e a s e and t he amendment as s ub mi tt ed f o r
p u b l i c a t i o n in the Federal R e g i s te r a re a t t a c h e d .
MORE INFORMATION
For f u r t h e r in fo r m a ti o n , p l e a s e c o n t a c t t he Bank's Legal Department
a t (214) 651-6228.
Sincerely yours,
For additional copies of any circular please contact the Public Affairs Department at (214) 651-6289. Banks and others are
encouraged to use the following incoming WATS numbers in contacting this Bank (800) 442-7140 (intrastate) and (800)
527-9200 (interstate).
This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)
FEDERALRESERVEpressrelease
For immediate r e l e a s e
June 21, 1985
The Fe de ral Reserve Board today adopted an amendment t o i t s R eg u l a t i o n T
( C r e d it by Brokers and D e a le rs ) t h a t changes t h e i n i t i a l margin requi reme nt s f o r
t h e w r i t i n g of options on eq uit y s e c u r i t i e s .
The amendment becomes e f f e c t i v e September 30, 1985.
The amendment wi l l permit a uniform premium-based system of margin
r equir eme nts f o r a l l typ e s of o p t i o n c o n t r a c t s .
This system wi l l i n c o r p o r a t e t he
maintenance margin r e q u ir e d by t h e n a t i o n a l s e c u r i t i e s exchanges or a s s o c i a t i o n s
under r u le s approved by th e S e c u r i t i e s and Exchange Commission.
This a c t i o n i s
i nte nd ed t o reduce computer programming req ui rem en t s f o r t h e b rokerage i n d u s t r y
because i t wi l l use one basi c program f o r a l l t y p e s of o p t i o n s .
The B oard' s n o t i c e i s a t t a c h e d .
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Attachment
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FEDERAL RESERVE SYSTEM
Regulation T
(12 CFR 220)
[Docket No. R-0538]
Credit By Brokers and Dealers
AGENCY:
Board of Governors of the Federal Reserve System.
ACTION:
Final Rule.
SUMMARY:
The Board is amending Regulation T (12 CFR 220, Credit By Brokers
and Dealers) in order to continue the Board's present policy of requiring an
initial margin for the writing of options that is identical to the main
tenance margin required by exchange or association rules that have been
approved by the Securities and Exchange Commission ("SEC").
The amend
ment states that the initial margin shall be the amount specified by the
rules of the national securities exchanges or association authorized to
trade the option if the SEC has approved the rules.
It will no longer specify
what that amount is for options on equity securities and will consolidate
the existing provisions for different option products into a single rule.
A further provision is added to cover options not effected on exchanges or
association facilities.
EFFECTIVE DATE:
September 30, 1985.
FOR FURTHER INFORMATION CONTACT:
Laura Homer, Securities Credit Officer or
Susan Meyers, Securities Regulation Analyst, Division of Banking Supervision
and Regulation, (202) 452-2781, or Joy W. O'Connell, Telecommunication Device
for the Deaf (TDD) (202) 452-3244.
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SUPPLEMENTARY INFORMATION:
A new margining system for the writing of options has been pro
posed to the SEC by the exchanges that trade options.
The formula for any
option product would be the premium, plus a percentage of the current
market value of the underlying security, index, or other instrument on which
the option is based, minus the amount the option is "out of the money".
minimum amount would be established for each option.
A
This amount and the
percentage of current market value for each product has been established
for existing products based upon annualized volatility studies.
They reflect
the risks involved for the broker of adverse price movements over a period
of time.
The Board's existing rules for option products would accommodate
this new system with the exception of the rule for an option on a single
equity security.
The Board proposed an amendment to the equity option pro
vision (50 Fed. Reg. 5766, Feb. 12, 1985) in order to facilitate the industry's
change to the "premium plus" system.
Comments were all favorable to the "premium plus" concept.
One
coramenter, however, voiced concern over the delegation of authority to the
SROs.
Commenters and the SEC staff have asked for a delayed effective date
so that computer programs can be changed to the new system.
A three-month
period has been provided to allow for computer program changes and for SEC
action on the rule changes that will implement the new margining system.
The Board also wishes to give notice that it is considering delet
ing paragraph (c)(3)(4)(5) and (6) in section 220.5 of Regulation T if all of
the exchanges and the NASD incorporate the substance of those provisions in
the SRO rules.
Each of the various national securities exchanges and the
NASD should notify the Board when similar rules have been adopted.
3
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FINAL REGULATORY FLEXIBILITY ANALYSIS:
The Initial Regulatory Flexibility Analysis indicated that the
change proposed would reduce some administrative and regulatory burdens
faced by the brokerage community and was not expected to have any adverse
impact on a substantial number of small businesses.
trary were received.
No comments to the con
The Board, therefore, certifies for purposes of 5 U.S.C.
605(b) that this amendment to Regulation T will not have any adverse impact
on a substantial number of small businesses.
List of Subjects in 12 CFR Part 220
Banks, Banking Borrowers, Brokers, Credit, Federal Reserve System,
Margin, Margin Requirements, Investments, Reporting and Recordkeeping Require
ments, Securities.
Accordingly, the Board amends 12 C.F.R. 220 (Regulation T) as
set forth below:
PART 220 —
CREDIT BY BROKERS AND DEALERS
1.
The authority citation for 12 C.F.R. 220 is revised to
read as follows:
AUTHORITY:
Secs. 3, 7, 8, 17 and 23 of The Securities
Exchange Act of 1934, as amended (15 U.S.C. 78c, 78g,
78h, 78q and 78w).
2.
Section 220.5 (c)(2) is revised to read as set forth
below:
SECTION 220.5 —
Margin Account Exceptions and Special Provisions
*
(c) ***
*
*
*
*
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(2)
4
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Margin for options on equity securities. The required margin
for each transaction involving any short put or short call on an equity
security shall be the amount set forth in section 220.19 (the Supplement).
*
3.
*
*
*
*
Section 220.18 is revised to read as follows:
SECTION 220.13 —
Supplement:
Margin Requirements
The required margin for each security position held in a margin
account shall be as follows:
(a)
Margin equity security, except for an exempted security or a
long position in an option:
50 percent of the current market value of the
security.
(b)
Exempted security, registered nonconvertible debt security or
OTC margin bond:
(c)
the margin required by the creditor in good faith.
Short sale of nonexempted security:
150 percent of the current
market value of the security, or 100 percent of the current market value if a
security exchangeable or convertible within 90 calendar days without restric
tion other than the payment of money into the security sold short is held in
the account.
(d)
Short sale of an exempted security:
100 percent of the current
market value of the security plus the margin required by the creditor in good
faith.
(e)
option:
Nonmargin, nonexempted security or a long position in any
100 percent of the current market value.
(f)
Short put or short call on a security, certificate of deposit,
securities index or foreign currency:
(1)
in the case of puts and calls issued by a registered clearing
corporation and listed or traded on a registered national securities exchange
or a registered securities association, the amount, or other position (except
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in the case of an option on an equity security), specified by the rules of the
registered national securities exchange or the registered securities association
authorized to trade the option, provided that all such rules have been approved
or amended by the SBC; or
(2)
in the case of all other puts and calls, the amount, or other
position (except in the case of an option on an equity security), specified by
the maintenance rules of the creditor's self-regulatory organization.
By order of the Board of Governors of the Federal Reserve System,
June 19, 1985.
(signed) William W. Wiles
William W. Wiles
Secretary of the Board
@FedFRASER