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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

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