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federal reserve

Ba n k

DALLAS, TEXA S

of

Dallas

75222

Circular No. 80-133
July 10, 1980

AMENDMENT TO REGULATION T

TO ALL MEMBER BANKS
AND OTHERS CONCERNED IN THE
ELEVENTH FEDERAL RESERVE DISTRICT:
The Board of Governors of the Federal Reserve System has
amended, effectiv e August 11, 1980, its Regulation T, "Credit for Brokers
and Dealers".
Printed on the following pages is the press release and the text
of the Board's order as submitted for publication in the Federal Register.
Enclosed is the final copy of the amendment in slip sheet form. It should
be inserted into your Regulations Binders.
Any questions concerning Regulation T should be directed to the
Consumer Affairs Section of our Bank Supervision and Regulations De­
partment, Ext. 6171.
Sincerely yours,
Robert H. Boykin
First Vice President
Enclosure

Banks and others are encouraged to use the following incoming W A T S numbers in contacting this Bank:
1-800-442-7140 (intrastate) and 1-800-527-9200 (interstate). For calls placed locally, please use 651 plus the
extension referred to above.

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

FEDERA^RESERV^pi^s^^lease
For Immediate release

June 12, 1980

The Federal Reserve Board today announced adoption of an
amendment to Its Regulation T -- margin requirements for brokers and
dealers —

affecting specialists and options market-makers.
The amendment, which reflects comment received on a proposal for

public comment, Is effective August 11.
The principal features of the amendment, as adopted, are:
1.

In general, the amendment permits good faith financing of

positions in securities in which a specialist makes a market, but requires
a 25 percent margin for positions in the related security acquired for
hedging or covering purposes and the generally applicable margin (50 percent)
for other securities.
2.

Creditors extending credit to a specialist's joint account

will no longer be required to participate in the account.
3.

Specialists and options market-makers will be able to use

securities issued by the United States Government or its agencies as
collateral in their specialist accounts.
4.

Several other changes, including:

a rule restricting

"free-riding" on underlying stock positions carried in an options marketmaker's account which will apply only to market-makers whose own exchange has
not adopted a rule on "free riding" approved by the Securities and Exchange
Commission;

a rule affecting the withdrawal of cash or securities from their

accounts by specialists and market-makers;

and a rule defining positions that

may be carried on preferential credit terms in the accounts of specialists
and market-makers.

The Board today rescinded, effective August 11, suspension of the
effective date of a rule, as it applies to options specialists, establishing
uniform margin requirements for the writing of options. The suspension
was adopted in January 1977 ant11 the Board coaid consider a separate,
self-contained rule for options specialists. This has now been done, timfc-fng
the suspension oo longer necessary.
The Board's orders in these matters are attached.

Final Rulemaking
Title 12 - Banks and Banking
Chapter II - FEDERAL RESERVE SYSTEM
SUBCHAPTER A - BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
[Regulation T; Docket No. R-0054]
PART 220 - CREDIT BY BROKERS AND DEALERS
Credit extended to Exchange Specialists

AGENCY:

Board of Governors of the Federal Reserve System

ACTION:

Final rule

SUMMARY: This amendment revises a proposed amendment published by the
Board in the federal Register on August 15, 1979 (44 F.R. 47775) to reflect
coranents received. It will permit stock specialists and option marketmakers to finance with a broker/dealer certain offsetting positions in
related securities on more advantageous terms than are available to the
ordinary customer. This concession is given to those exchange-registered
dealers who are obliged to promote fair and orderly markets in their specialty
securities. The present rule limits margin concessions to the financing
of specialty securities only. This action derives from the advent of
exchange-traded options in 1973.
EFFECTIVE DATE: August 11, 1980
FOR FURTHER INFORMATION CONTACT: Laura Homer, Chief Attorney or
Patsy Abelle, Senior Attorney, Securities Regulation Section, Division
of Banking Supervision and Regulation, Board of Governors of the Federal
Reserve System, (202) 452-2781.
SUPPLEMENTARY INFORMATION: The final rule includes a number of revisions
to the August 15, 1979 proposal, based upon comments received. These
include:
(1) In response to comments received from the Securities and
Exchange Commission ("SEC") and the National Association of Securities
Dealers, Inc. ("NASD") references to a "registered securities association"
are being deleted from the rule. These agencies noted that it may be
inappropriate to include broker-dealers making markets in the over-the-counter
market within the definition of "specialist" since under the Securities
Exchange Act of 1934 that term is used only in connection with securities
exchange markets. As an alternative they suggested that the financing
of the market-making activities of these firms be treated in a separate
section of Regulation T.
(2) The rule has also been revised to permit a specialist to
purchase or sell short in the account securities other than the specialist
securities or the permitted offset positions if the regular margin require­
ments are met. This revision was made at the request of the Chicago
Board Options Exchange, Inc. ("CBOE") which noted that the August 15
proposal required creditors "to perform the time consuming and burdensome

-2 -

task of manually transferring certain stock positions from a specialist's
account to a general account." The Board believes this revision will
substantially reduce this operational problem.
(3)
Hie definition of an "in or at the money" option has been
broadened to permit specialists to offset their options positions with
the underlying security provided the price of the security is within
one standard exercise interval of the option being offset. The August 15
proposal required the underlying security to be within $2.50 or 5 percent
of the option being offset. This change is intended to provide greater
flexibility to specialists in employing hedging and spreading strategies
to reduce the risk associated with making a market in options. It will
also reduce an operational problem. The CBOE in commenting on this aspect
of the August 15 proposal noted that it did not provide sufficient
opportunities for hedging with the underlying security.
(4> The requirement has been deleted that the creditor call for
additional margin whenever securities no longer serving as permitted offset
positions continue to be retained in the account. Several commenters,
including the New York Stock Exchange, Inc. ("NYSE"), the American Stock
Exchange, Inc. ("ASE") and the CBOE, noted that this provision constitutes
a maintenance margin requirement and that historically the Board has
left the promulgation of rules governing maintenance margins to the
exchanges. The Board in reviewing this matter was satisfied that the
25 percent initial margin requirement on the purchase of permitted offset
positions, when viewed together with the limitations on the withdrawal
of equity contained in the rule, provided a reasonable cushion against
adverse variations in market prices.
(5) The "free-riding" penalty has been relaxed to exenpt the
acquisition or liquidation of permitted offset positions and to reduce
the number of days the "free-riding" penalty must be in effect from 30 to
15 calendar days. Those commenting on the August 15 proposal stated that
the "free-riding" penalty was unduly harsh and recommended it be deleted
and that the exchanges be allowed to adopt "anti-free-riding" rules
of their own. The Board notes that the SEC in its "Report of the Special
Study of the Cptions Markets" (the "Option Study") cited "free-riding"
as one of the practices prevalent in the options markets and recommended
that the Board consider adopting rules curtailing it. The Board recognizes
that the exchanges through their surveillance and enforcement program are
in a better position to police this activity, and this revised amendment
provides a means through which these agencies may adopt their own rules
to limit this activity. If the level of enforcement of the exchange rule
is not sufficient to curtail the practice, the Board will consider
eliminating the exemption.
The Board continues to believe that a 25 percent margin is
appropriate for permitted offset positions. Three option exchanges asked
that it be changed to a "good faith" margin. Under the rule being adopted,
the 25 percent initial margin requirement on permitted offset positions

-3 -

in concert with the limitations on the withdrawal of equity serve as the
basis for accommodating market needs without permitting the excessive
use of credit for purchasing or carrying securities.
Accordingly, pursuant to sections 7 and 23 of the Securities
Exchange Act of 1934, as amended (15 U.S.C. 78g and w), the Board revises
section 220.4(g) of Regulation T (12 CFR 220.4(g)) to read as follows:
220.4 - SPECIAL ACCOUNTS
*

*

*

*

*

*

*

T i t l e 12— Banks and Banking

CHAPTER II— FEDERAL RESERVE SYSTEM
SUBCHAPTER A— BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
PART 220— CREDIT BY BROKERS AND DEALERS
[Docket No. R-0004]
Notice of Termination of Suspension of Uniform
Margin Requirements for Options Specialists
AGENCY:

Board of Governors of the Federal Reserve System.

ACTION:

Rescission of order of suspension.

SUMMARY: In January, 1977, the Board of Governors suspended, for options
specialists, the effective date of a new rule establishing uniform margin
requirements for the writing of options (42 Fed. Reg. 752). The suspension
was put into effect until the Board could consider a separate, self-contained
rule for options specialists. Since the Board has adopted such a separate
rule today by a final amendment of section 220.4(g) of Regulation T, the
suspension order is no longer necessary. Lifting the suspension is a
housekeeping matter that will have no practical effect.
EFFECTIVE DATE: August 11, 1980
FOR FURTHER INFORMATION CONTACT: Robert Lord, Securities Regulation Section,
Division of Banking Supervision and Regulation, Board of Governors of
the Federal Reserve System, Washington, D. C. 20551, (202-452-2781).
SUPPLEMENTARY INFORMATION: Ch September 27, 1976, the Board adopted an
amendment to Regulation T, effective January 1, 1977, which established a
uniform margin requirement for the writing of options. (41 Fed. Reg. 43895)
Although this rule was intended generally to apply to customer accounts, it
also affected Specialists' accounts under the then-existing terms of Section
220.4(g) of Regulation T, which required, with two exceptions, that credit
terms to Specialists conform to those available to public customers in a
general account.
On December 15, 1976, the Board proposed an amendment to § 220.4(g)
which would have allowed options specialists to calculate required margin
differently from that provided in the new uniform margin rule applicable
to public customers. (41 Fed. Reg. 55552) The Board was, however, unable
to act on the proposed alternate method of calculation by January 1, 1977,
the effective date of the new uniform rule. It therefore suspended, for
options specialists, the effective date of the uniform rule. (42 Fed. Reg.
752, January 4, 1977) In effect, the suspension permitted options specialists
to use the pre-existing provisions of § 220.3(d)(5) instead of the new
general account provisions.

Today, the Board adopted a final amendment to the specialist's
credit rule (section 220.4(g)), effective August 11, 1980.
The new rule
is self-contained and does not incorporate by reference the conditions of
the regulation applicable to general customers, as did the prior rule.
Since the prior order temporarily suspending the applicability of sections
220.3(d)(5) and 220.3(i) to options specialists will no longer be necessary,
the Board hereby rescinds that prior order effective August 11, 1980 (the
date the amendment to section 220.4(g) becomes effective).
By order of the Board of Governors of the Federal Reserve
System, June 11, 1980.

(signed) Griffith L. Garwood
Griffith L. Garwood
Assistant Secretary of the Board

[SEAL]

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

CREDIT BY BROKERS AND DEALERS
A M E N D M E N T S TO R E G U L A T IO N T f
1. E ffective July 12, 1978, section 2 2 0 .4 is
a m e n d e d to r e a d as follows:

te re d security, O T C m a rg in stock o r O T C m a rg in
b ond.

* * * * *

S E C T I O N 2 2 0 .4 — S P E C I A L A C C O U N T S

* * * * *
(f) Special m iscellaneous account. In a special
m iscellan eo u s ac c o u n t, a c re d ito r m ay:

(2) * * *

* * * * *

(ii)— E x te n d a n d m a in ta in a su b o rd in a te d
lo a n to a n o th e r c re d ito r f o r cap ital purposes:
Provided, T h a t
( a ) E ith er th e le n d e r o r th e b o rr o w e r is a firm
o r c o rp o r a tio n w hich is a m e m b e r o f a n a tio n a l
securities ex ch an g e o r natio n al securities asso cia­
tion, the o th e r p arty to the c re d it is a n affiliated
c o rp o r a tio n o f such firm o r c o rp o r a tio n , the credit
is n o t in c o n tra v e n tio n o f any rule o f the e x c h a n g e
o r association an d the cred it h as th e a p p ro v a l
o f a p p r o p r ia t e c o m m itte e s o f th e e x c h a n g e o r
association, o r
( b ) T h e le n d e r as well as th e b o r r o w e r is a
cre d ito r , as defined in section 220.2(b), th e su b ­
o rd in a te d loan a g re e m e n t h as th e a p p ro v a l o f the
a p p ro p r ia te E x a m in in g A u th o rity as defined in
S ecurities a n d E x c h a n g e C o m m iss io n R u le 15c3-l
(c)( 12) (12 C F R 2 4 0 .1 5 c 3 -l(c )(1 2 )) a n d su ch E x ­
am in in g A u th o rity is satisfied, in the case o f a
b o rr o w e r w ho w o u ld b e co n sid e re d a c u s to m e r of
th e le n d e r a p a r t fr o m the s u b o r d in a te d loan, tha t
the lo a n will n ot be used to in crease the a m o u n t
o f dealing in securities fo r th e a c c o u n t o f th e
b o rro w er, his firm o r c o rp o r a tio n o r an affiliated
c o rp o r a tio n o f su ch firm o r c o rp o ra tio n .
2. E ffe c tiv e O c to b e r 3 0 , 1978, sectio n s 2 2 0 .2
and 2 2 0.4 are am en ded to read as follows:
S E C T I O N 2 2 0 .2 — D E F I N I T I O N S

* * * * *
(f)

(i)
T h e te rm “ O T C m a rg in b o n d ” m e a n s a d e b t
security n o t tra d e d o n a n a tio n a l securities ex ­
c h a n g e w h ich m eets all o f th e follow ing re q u ire ­
m ents:
(1) A t th e tim e o f th e ex ten sio n o f credit, a
p rin cip al a m o u n t of no t less th a n $ 2 5 ,0 0 0 ,0 0 0 of
th e issue is o u tstan d in g .
(2) T h e issue was registered u n d e r sectio n 5
o f the Securities A ct o f 1933 a n d th e issuer e ith e r
files p eriodic re p o rts p u rs u a n t to section 13(a) or
15(d) o f th e S ecurities E x c h a n g e A c t o f 1934 o r
is an in s u ra n c e c o m p a n y w h ic h m eets all o f th e
c o n d itio n s specified in sectio n 12 (g)(2)(G) o f th e
A ct.
(3) A t th e tim e o f the ex ten sio n o f credit,
th e c re d ito r h as a re a s o n a b le basis fo r believing
th a t the issuer is n o t in d e fa u lt o n interest o r
p rincipal p aym ents.
S E C T I O N 220.4— S P E C I A L A C C O U N T S

* * * * *
(i) Special bond account.
In a special b o n d a c c o u n t a c re d ito r m a y ex te n d
a n d m a in ta in c re d it on an y ex e m p te d security,
registered n o n -e q u ity secu rity o r O T C m a rg in
bon d. T h e m a x im u m lo an value o f securities h eld
in th is a c c o u n t shall be as p re s c rib e d fr o m tim e
to tim e in § 220.8 (the S u p p le m e n t to R e g u la tio n
T). C all o p tio n s m a y be issued, e n d o rs e d o r g u a r­
an te e d in this a c c o u n t o n any u n d e rly in g e q u ity
s ecu rity w h ich is h eld in this a c c o u n t b ecau se it
is a n e x e m p te d security.

T h e te rm m a rg in security m e a n s a n y regis­

* * * * *

f The complete Regulation comprises:
1) Regulation T, as amended effective June 1, 1977, printed in the
pamphlet “ Securities Credit Transactions.”
2) The Supplement to Regulation T (section 220.8) dated October 1978,
effective October 30, 1978.
3) This slip sheet. (Destroy slip sheet dated October 1978.)

JUNE 1980

3.
Effective August 11, 1980. section 220.4(g) is
am ended to read as follows:
S E C T IO N 2 20 .4— S P E C IA L A C C O U N T S

* * * * *
(g)
S p e c ia lis t’s A ccount. ( I ) A p p lic a b ility. In a
sp ecialist's account, a creditor may clear and finance
for a specialist w ho is a m em b er o f a national securi­
ties exchange the m e m b er’s specialist transactions or
transactions of any joint account in w hich all partici­
pants, or all participants other than the creditor, are
registered and act as specialists. T he provisions o f
this subsection are available to a specialist w ho is a
m em ber of a national securities exchange which sub­
mits to the B oard o f G o verno rs o f the Federal R e­
serve System reports suitable for supplying current
inform ation regarding the use o f specialist credit.
(2) D e fin itio n s . F or the purpose o f this su b se c ­
tion:
(i) “ Joint a c c o u n t” m ean s an account in w hich
the c re d ito r m ay p articipate and w hich by w ritten
agreem ent perm its the com m in glin g o f the security
positions o f the participants and provides for a shar­
ing o f profits and losses from the account on some
predeterm ined ratio;
(ii) “ U n d e rly in g s e c u r it y ” m e a n s th e secu rity
w hich will be delivered upon exercise of the option
and does not include a security convertible into the
underlying security;
(iii) "O v e rly in g o p tio n ” means (A) a put option
purchased o r a call option written against an existing
long position in a specialist’s o r m a rket-m aker’s ac­
count, or (B) a call option purchased or a'p u t option
w ritten ag ain st a short p osition in a s p e c ia list’s or
m arket-m ak er’s account.
(iv) “ In or at the m o n e y ," with respect to a call
option, indicates that the c u n e n t market price o f the
un d erly in g security is no t m ore than one standard
exercise interval below the exercise price o f the o p­
tion, and, w ith respect to a put option, that the cur­
rent m a rket price o f the un d erly in g security is not
more than one standard exercise interval above the
exercise price o f the option.
(v) “ In the m o n e y ,” w ith respect to a call o p ­
tion, in dicates that the curren t m a rket price o f the
underlying security is not below the exercise price of
the option and, with respect to a put option, that the
current m arket price of the underlying security is not
above the exercise price of the option.
(3) P erm itted offset positions. A specialist in op­
tions is p erm itted to establish in this acco u n t on a
share-for-share basis a long or short position in the
securities un d erly in g the o p tions in w hich the sp e­

cialist m akes a market, and a specialist in securities
other than options is perm itted to purchase or write
options overlying the securities in which the special­
ist m akes a m arket, only under one or more o f the
follow ing conditions (such positions are referred to
in this paragraph as “ perm itted offset positions' ):
(i) T h e a c c o u n t h o ld s a s h o r t o p tio n p o s itio n
which is " i n or at the m o n e y " and is not offset by a
long or short option position for an equal o r greater
n u m b e r o f sh ares o f the sam e un d erly in g security
which is " i n the m o n e y " :
(ii) T h e a c c o u n t h o ld s a lo n g o p tio n p o s itio n
w hich is “ in or at the m o n e y " and is not offset by a
long or short option position for an equal or greater
n u m b e r o f shares o f the sam e u n d erly in g security
which is " i n the m o n e y " :
(iii) T h e a c c o u n t h eld a s h o rt o p tio n p o sitio n
against w hich an exercise notice was tendered:
(iv ) T h e a c c o u n t h e ld a lo n g o p ti o n p o s itio n
which was exercised:
(v) The account holds a net long position in a se­
curity (other than an option) in w hich the specialist
makes a market: or,
(vi) T he a cco u n t holds a net short position in a
security (other than an option) in which the special­
ist makes a market.
(4) M a x i m u m lo a n v a lu e . T h e m a x im u m loan
value o f securities w hich may be used as collateral
in the account shall be:
(i) No more than 100 per cent o f the current m ar­
ket value o f any long position in a security in which
the sp e c ia list m a k es a m a rk e t or a w h o lly -o w n e d
margin security;
(ii) 75 per cent of the current market value o f any
u n d erly in g security or o v e rly in g option pu rch ased
and held in the account as a perm itted offset po si­
tion;
(iii) T h e m a xim um loan value prescribed by the
Board in section 220.8 (the Sup plem ent to R egula­
tion T) w hen a security p u rchased and held in the
account does not qualify as a specialist or perm itted
offset position.
(5) A d ju ste d debit b alance. T h e am ount to be in­
cluded in the adjusted debit balance o f the account
shall be:
(i) Not less than 100 per cent o f the current m ar­
ket value o f either a security sold short or an option
written w here such position qualifies as a specialist
transaction;
(ii) 125 per cent of the cu rren t m a rket value o f
any security sold short o r option written and held in
the account as a perm itted offset Position;
(iii) T he am ount prescribed by the Board in sec­
tion 2 20.8 (the Supplem ent to Regulation T) when a
security sold short in the account does not qualify as

a sp ecialist o r p erm itted offset position plus, for a
short position in a security other than an option, the
current m arket value o f the security sold short.
(6)
Additional margin; “free-rid in g ." Except as
required by paragraph (g)(8), on any day w hen addi­
tional margin is required as a result o f transactions
in the acco unt, the c red ito r shall issue a call for a
deposit o f cash o r securities having loan value and
m ay a llo w the s p e c ia lis t a m a x im u m o f five full
business days to m ake a dep osit sufficient to meet
the call. T o prevent “ free-ridin g” in the account, a
cre d ito r w h o has not o b ta in e d this d e p o sit (and is
therefore required to liquidate sufficient securities to
meet the call) is prohibited for a 15 day period from
extending any further credit in the account to finance
transactio ns in securities in w h ich the specialist is
not registered to m ake a m arket. T h e acquisition or
liquidation o f a perm itted offset position shall not be
subject to this “ free-riding ” penalty. T he restriction
on “ free-riding” shall not apply to any national se­
curities exchange adopting a “ free-riding” rule ap­
plicable to specialists w hich has been approved by

the Securities and E xchange C om m ission.
(7) Withdrawals. O n any d ay w hen a specialist
requests a withdrawal o f cash or securities from the
account, the creditor shall com pute the status o f the
account for non-specialist securities positions in ac­
co rdance w ith the provisio ns o f section 2 20.8 (the
Supplem ent to R egulation T ), perm itted offset posi­
tio n s in a c c o r d a n c e w ith th e p r o v is io n s o f p a r a ­
graphs (g)(4)(ii) and (g)(5)(ii), and specialist po si­
tions on a “ good faith” basis. W ithdraw als shall be
perm itted to the e x ten t that the adju sted debit bal­
ance in the accoun t does not exceed the m ax im um
loan value o f all o f the collateral held in the account
after the withdrawal has been made.
(8) D eficit accounts. O n any day w h en the a c ­
count w ould liquidate to a deficit, the creditor shall
n ot e x te n d any fu r th e r c re d it in the a c c o u n t, and
shall issue a call for ad d itio n a l cash or co llateral,
w hich shall be met by noon o f the follow ing busi­
ness day. In the event sufficient cash or collateral is
not deposited the creditor shall liquidate existing po­
sitions in the account.