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FED ER A L RESERVE B A N K O F DALLAS DALLAS, TEX AS 75222 Circular No. 76-125 September 2, 1976 A m e ric a n R ev o lu tio n B ic en ten n ia l INTERPRETATION OF REGULATION T Use of Escrow Receipts for Option Transactions Effected in Special Cash Accounts TO ALL BANKS, BROKERS/DEALERS, REGULATION G REGISTRANTS, AND OTHERS CONCERNED IN THE ELEVENTH FEDERAL RESERVE DISTRICT: The Board of Governors of the Federal Reserve System has issued an interpretation of i s Regulation T, "Credit by Brokers and t Dealers," dated August 13, 1976, regarding the use of escrow receipts for option transactions effected in special cash accounts. Member banks and others that maintain regulations binders should f l the amendment, which i printed on the reverse of this circular, in their ie s binders. Any questions concerning this matter should be directed to our Regulations Department at (214) 651-6319 or 651-6325. Additional copies of the amendment will be furnished upon request to the Secretary's Office of this Bank. Sincerely yours, T . W. Plant First Vice President 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 USE OF ESCROW RECEIPTS FOR OPTION TRANSACTIONS EFFE C T E D IN SPECIAL CASH ACCOUNTS The Board of Governors has interpreted §220.4(c) of Regulation T as allowing the use of escrow receipts for option transactions ef fected in a special cash account if the customer represents that the covering securities or funds are held by a bank and the broker independently verifies that the appropriate escrow receipt will be delivered no later than three business days after the option is written. (b) An escrow receipt is an agreement under which a bank represents and warrants that it holds for the account of a customer the securities which are the subject of a cali, or the cash to purchase the securities which are the subject of a put, and will continue to hold the same until the option is either exercised or expires. If the option is exercised, the bank will deliver or accept delivery of the appropriate securities against payment, as the circumstances require. (c) It has been represented to the Board that customers who wish to write covered options in a cash account using escrow receipts are ham SECTION 220.130 — ESCROW RECEIPTS pered because of procedural delays in transmit FO R OPTION TRANSACTIONS ting the escrow receipt from the bank to the broker. Up to three business days may elapse (a) The Board has been asked whether or not before the receipt can be in the physical possession it is permissible under the provisions of §220.4(c) of the broker because, for example, some banks of Regulation T (12 C FR 2 2 0 .4 (3 )) relating to will not issue the receipt until the premium for the special cash account, to allow customers to writing the option is delivered. write put and call securities options which are “covered” by the escrow receipt of a bank when (d) The Board is of the view that a broker the escrow receipt, because of the mechanics of may effect an option transaction in a special the trade, cannot be delivered to the broker on cash account where the customer represents that the day the option is written. When exchangethe required securities or cash are then held for traded securities options were first introduced that customer at a bank and the broker inde in 1973, the Board expressed the view that cer pendently verifies that the appropriate escrow re tain option transactions were permitted in the ceipt will be delivered to the broker by the bank cash account (1973 Bulletin 525; 12 CFR as soon as possible but, in no event, later than 220.126) under circumstances which indicated three business days after the option is written. their nature as bona fide cash transactions. Basi (The term “bank” as defined in section 3 (a )(6 ) cally, that interpretation indicates that the special of the Securities Exchange Act of 1934 includes cash account can be used if the underlying se banks, trust companies, and those branches of curities, or the funds necessary to pay for the foreign banks which are located in the United securities, are held in the account on the day the States and supervised and examined by State option is written. (This is commonly referred banking authorities.) Any delay in delivery of to as a “covered” transaction.) The use of “es the escrow receipt resulting from factors within crow receipts” for option transactions to be effected the customer’s control would, of course, cast in a special cash account was not considered by doubt on the eligibility of the transaction as a the Board at the time of the 1973 interpretation. bona fide cash transaction. 8-13-76