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F ederal Reserve Ban k o f D allas
DALLAS, TEXAS

75222

C i r c u l a r No. 77-59
M ay 19, 1977

R E G U LA TIO N T — C R E D IT BY BROKERS AN D DEALERS

TO A L L B A N K S , B R O K E R S /D E A L E R S ,
R EG U LA TIO N G R E G IS T R A N T S ,
AN D O THERS CO NCERNED IN T H E
E LE V E N TH F EDERAL RESERVE D IS T R IC T :
T h e Board of G o v e rn o rs of the Fe dera l R e s e rv e System has
adopted an am endm ent to R e g ulation T — M a rg in R e q u irem e n ts fo r B ro k e rs
and D e a l e r s - - a n d proposed a f u r t h e r R e gulation T am endm ent, in both
cases affecting the tr a d in g of stock options.
Mem ber banks and others th a t m aintain R egulation B in d e rs
should file the am end m ent, w h ic h is p r in te d on the r e v e r s e of this c ir c u ­
l a r , in t h e i r b i n d e r s . A d d itio n a l copies wi l l be fu r n is h e d upon req u es t
to the S e c r e ta r y 's Office of th is B a n k , E x t. 6267.
In a d d itio n , the Board of G o v ern o rs has issued an e x p la n a to ry
notice r e g a r d in g the am endm ent, e ffe c tiv e June 1, that eases its ru le s for
c a lc u la tin g the m a rg in r e q u ir e d on a "s tra d d le " tra n s a c tio n . A copy of
the notice is enclosed.
P r in te d on the enclosed pages is the B o a rd 's press re le a s e , and
an e x tra c t from the FEDERAL R E G IS TE R of May 5, 1977, c o nta inin g the text
of th e B o a rd 's r e v is e d proposed a m endm ent, r e g a r d in g c r e d it to e xc han ge
s p e c ia lis ts . Comments should be subm itted in w r i t i n g to the S e c r e ta r y ,
B oard of G o v e rn o rs of the Fe d era l R e s e rv e S ys te m , W a s h in g to n , D . C .
20551, to be re c e iv e d not la te r than M ay 31, 1977. A l l m a te ria ls should
in c lu d e docket N o . R -0 0 5 4 .
S in c e r e ly y o u r s ,
R o b e rt H . B o y k in
F ir s t V ic e P re s id e n t
E n clo s u re

Banks and oihers are encouraged to use the follo w in g to ll-fr e e incoming WATS numbers in contacting this Bank;
1-80 0 -49 2 -4 40 3 (intra s ta te ) and 1 -8 0 0 -52 7 -4 97 0 (in te rs ta te ). For c a lls placed lo c a lly , 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)

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

CREDIT BY BROKERS AND DEALERS

A M E N D M E N T TO R EG U LA TIO N T f

Effective Ju n e 1, 1977, Section 220.3 ( i ) (4 ) is
a m e n d e d to rea d as follows:
S E C T I O N 220.3 — G E N E R A L A C C O U N T

* * * * *
(i) O p tio n s

* * *

( 4 ) W h e n b o th a p u t an d a call are issued,
endorsed, o r g u a ra n te e d in a general a c c o u n t o n
the sam e n u m b e r o f shares of the sam e u n derly in g
security, the a m o u n t o f m a rg in re q u ire d shall be
the m a rg in on either th e p u t o r the call, w h ich ev er
is greater, plus an y unrealized loss on th e o th e r
option.

I For this Regulation to be complete, retain:
1) Printed pamphlet containing Regulations X. G, T, and U entitled “Securities Credit Transactions” dated N o ­
vember 1, 1971;
2 ) Amendments effective September 5, 1972, September 18, 1972, October 16, 1972, January 1, 1973, and M ay
23, 1973 (One sheet);
3) Amendments effective July 25, 1974, March 3, 1975, Novem ber 13, 1975, and January 1, 1977;
4 ) Supplement effective January 1, 1977; and
5) This slip sheet.

6-1-77

FEDERAL
press

RESERVE

release

ffu r

A p r il 28, 1977

For immediate release

The Board of Governors of the Federal Reserve System today
adopted an amendment to Regulation T -- margin requirements for brokers
and dealers —

and proposed a further Regulation T amendment,

in both

cases affecting the trading of stock options.
Such options may be a "call" —

an option to buy stock at a

specified price within a given time, or a "put" -- a similar option to
sell stock.
The Board amended Regulation T

to permit a minor easing of

the Board's rules for calculating the margin required on a "straddle"
transaction -- where both a put and a call in the same stock are held
in the customer's account.
The Board's rules at present provide special treatment where
puts and calls are issued on the same security, with the same
expiration date and same exercise price.

The revision deletes the

requirement that both the put and the call must have the same expira­
tion date and the same exercise price to qualify for the special margin
requirement.

The margin requirement remains the (30 per cent)*

requirement on either the put or the call, whichever is greater, plus
any unrealized loss on the other option.

Certain other technical

requirements regarding straddles were adopted.

They are set forth

in the attached copy of the amendment of Regulation T.

*The margin requirement generally applicable to purchases or sales of
stock on credit is 50 per cent.

-2 The new requirements for calculating the margin on straddles
will become effective June 1, 1977, to coincide with the beginning of
exchange trading of put options recently approved by the Securities
and Exchange Conmission.
In addition, the Board revised and published for further
comment an amendment to Regulation T first suggested last December .
As originally proposed, this would have permitted option specialists,
in the performance of their market-making function, to purchase, or to
sell short on a 25-per cent margin basis, the securities underlying the
options in which they specialize.
The Board requested comment on its revised proposal through
May 31, 1977.
The proposal as revised would broaden the scope of the rule
to permit specialists, as well as option specialists, to purchase
stock or options —

in connection with transactions

in their

specialty security -- on the 25-per cent margin basis.

The Board

broadened its proposal in view of the fact that the Securities and
Exchange Conmission has recently approved rule changes of some regional
securities exchanges that, for the first time, will permit stock
specialists other than options specialists trading on those exchanges
to take positions in options related to the stocks in which they
specialize.
The revised proposal makes other technical changes set forth
in the attached text of the Board's proposal.
* * * * * *

'Explanatory Notice
C o n c e rn in g J u n e 1
Amendment

E x tra c t From
FEDERAL REGISTER,
VOL. 42, NO. 87,
T h u r s d a y , May 5, 1977
p . 22862
AGENCY: B oard of Governors of the
Federal Reserve System.
ACTION: F inal rule.
SUMMARY: T his am endm ent (1) re ­
laxes th e rule to perm it a p u t and a call
on the sam e underlying security bu t w ith
different exercise prices and different ex­
piration dates to be combined for special
m argin treatm en t in th e same m anner
as a “straddle” (a p u t and a call w ith
identical term s) and (2) deletes refer­
ence in th e existing “straddle” rule to
th e special bond account and th e special
convertible debt security account as it is
im practical to use these accounts fo r the
described transaction.
EFFECTIVE DATE: June 1,1977.
FOR FURTHER INFORMATION CON­
TACT:
L aura Homer, Chief A ttorney, Securi­
ties C redit Regulation, Division of
B anking Supervision and Regulation,
B oard of Governors of th e Federal
Reserve System, W ashington, D.C.
20551, 202-452-2782.
SUPPLEMENTARY INFORMATION:
Comments received on th e B oard’s pro­
posal to establish a uniform m argin for
the w riting of options which appeared
in th e F e d e r a l R e g is t e r of August 20,
1975 (40 FR 36390) suggested th a t th e
proposed rule covering special m argin
for straddles be enlarged to cover com­
binations of puts and calls w ith different
term s. A t th e tim e th e Board adopted
th e proposed rule ( F ed e r a l R e g is t e r of
O ctober 5,1976,41 FR 43895) pu t trading
on exchanges h ad n o t been authorized
by th e Securities and Exchange Commis­
sion. In a le tter dated M arch 4, 1977.
however, th e Commission indicated its
approval of the exchange tradin g of puts
if certain conditions were m et. The
B oard believes it is appropriate to relax
the rule in this area and to remove the
references to accounts o th er th a n the
general account so as to have th e am end­
m ent effective when n u t h a d in g begins
on or a fte r Jun e 1,1977. T he B oard finds
th a t notice and public procedure thereon
are unnecessary because th e am endm ent
is in response to com m ents which were
received on th is specific subject in con­
nection w ith the proposed general rule
and failure to p u t th is am endm ent into
effect before pu t trad in g begins on ex­
changes would be disruptive to custom er
education and Industry operations.

Proposal to
R egulation T

E x tract From
FEDERAL REGISTER,
VOL. 42, NO. 87,
T h u r s d a y , May 5, 1977
p p . 22894 - 22896

FEDERAL RESERVE SYSTEM
[ 1 2 CFR Part 2 2 0 ]
[R eg. T ; D o c k e t No. R -0 05 4 ]

CREDIT TO EXCHANGE SPECIALISTS

AGENCY: Board of Governors of th e
Federal Reserve System.
ACTION: Proposed rule.
SUMMARY: This revision of a proposed
am endm ent to the rule governing credit
to exchange specialists, which was pub­
lished in th e F e d e r a l R e g is t e r on
December 21, 1976 (41 FR 55552), con­
tains changes based upon comments
received on th e December 21, 1976 pro­
posal. As revised, th e proposal will
perm it options specialists to both p u r­
chase and sell sh o rt stock underlying
th e options in which they specialize, w ith
a 25 percent m argin requirem ent. No
m aintenance requirem ent is imposed in
this revision unless th e account, if sold
out, would have an unsecured debit
balance. The proposed am endm ent also
recognizes new exchange rules approved
bv the Securities and Exchange Commis­
sion which allow trading in puts and
calls by specialists on their specialty
stock and provides com parable relief for
such hedging activities.

DATE: Comments m ust be received on
or before May 31,1977.
ADDRESS: Secretary, Board of Gover­
nors of th e Federal Reserve System,
W ashington, D.C. 20551. All m aterial
subm itted should be in w riting and
should Include th e docket num ber R 0054.
FOR FURTHER INFORMATION CON­
TACT:
L aura Homer, Chief A ttorney, Securi­
ties Credit Regulation, Division of
B anking Supervision and Regulation,
Board of Governors of th e Federal
Reserve System, W ashington, D.C.
20551 (202-462-2782).
SUPPLEMENTARY
INFORMATION:
The December 21, 1976 proposal was in­
tended to assist option specialists in
perform ing th eir m arket m aking func­
tions by perm itting them , in certain
circum stances, to purchase or sell short,
on preferential credit term s, the securi­
ties underlying th e options in which they
specialize. The revised proposal would
broaden th e scope of perm itted offset
transactions and extend com parable
relief to non-option specialists by per­
m itting them to purchase or w rite
options, on special credit term s, as a
hedgq fo r th eir specialty positions. The
addition relating to non-option special­
ists was made in response to comments
which noted th a t th e Securities and Ex­
change
Commission h ad
recently
approved rule changes of some regional
securities exchanges which, for the first
tim e, will perm it equity specialists on
those exchanges to take positions in
related options.
The revised proposal elim inates refer­
ences to the general account and thereby
simplifies th e calculations th e carrying
broker m ust make. Net short or long
positions in th e specialty security m ay be
m argined on a good fa ith basis.
The original proposal required th a t
additional m argin m ust be provided on
any day w hen a security position estab­
lished as a perm itted offset transaction
no longer served th a t function. The re­
vised proposal allows a five day period
fo r th e specialist to either establish a
new positim to utilize th e perm itted off­
set transaction, liquidate th e position, or
m argin it in accordance w ith current
m argin requirem ents of a general
account. The original proposal estab­
lished a daily m aintenance requirem ent
in certain circum stances. No m ain­
tenance requirem ents are established in
the revision of th e proposed rule; how­
ever, on any day w hen an unsecured
debit balance would rem ain if all posi­
tions in th e account were liquidated, the
proposal requires th a t a m argin call m ust
be m ade and m et on the next business
day.
To aid in th e consideration of this
m aterial by th e Board, interested per­
sons are invited to subm it relevant data,
views, comments, or argum ents. Any
such m aterial should be subm itted in
w riting to the Secretary, Board of Gov­
ernors of th e Federal Reserve System,

W ashington, D.C. 20551, to be received
not la te r th a n May 31, 1977. All m aterial
subm itted should include th e docket
num ber R-0054. Such inform ation will
be m ade available for inspection and
copying upon request except as provided
in § 261.6(a) of th e Board’s Rules Re­
garding A vailability of Inform ation (12
CFR 261.6(a)).
P ursuant to sections 7 and 23 of th e
Securities and Exchange Act of 1934, as
amended (15 U.S.C. 78 g and w) th e
Board proposes to am end 12 CFR P a rt
220 as follows:

of shares of th e sam e underlying se­
curities which are “in or a t th e money”;
(iii) The account held a sh o rt posi­
tion in an option against w hich an ex­
ercise notice was tendered;
(iv) The account held a long position
in an option which was exercised;
(v> The account holds net long posi­
tions in securities (other th a n options)
in which th e member is registered and
acts as a specialist; or
(vi) The account holds net sh o rt posi­
tions in securities (other th an options) in
which th e member is registered and acts
as a specialist.
§ 2 2 0 .4 S p e c ia l a c c o u n ts.
(3) T he maximum loan value of m ar­
*
•
•
*
*
gin securities in such account including
(g) Specialist’s account. (1) In a any wholly owned m argin securities de­
specialist’s account, a creditor m ay ef­ posited as additional collateral in the
fect and finance for any member of a account shall be:
reporting national securities exchange
(i) Such maximum loan value as th e
who is registered and acts as a specialist B oard shall prescribe from tim e to tim e
in securities on th e exchange, such m em­ in 8 220.8 (the Supplem ent to Regulation
ber’s transactions as a specialist in such T) where (A) th e security is identified
securities, or effect and finance fo r any as held for investm ent pursuant to a
jo in t venture in which the creditor p a r­ rule of th e Commissioner of In tern al
ticipates, transactions in securities of an Revenue (Regs, section l-1 236 -7 (d )), or
issue w ith respect to w hich all partici­ (B) the security is an underlying security
pants, or all p articipan ts other th a n the or an overlying option, no longer serving
creditor, are registered and act on a n a ­ as a perm itted offset, on which a deposit
tional securities exchange as specialists. has been required pursuant to paragraph
(Such transactions are referred to in (g) (6) of this section.
this p aragraph as “specialist tra n s­
(ii) 75 percent of th e cu rrent m arket
actions.”) Specialist transactions may be value of an underlying security o r an
financed on term s m utually agreeable to overlying option th a t is purchased and
th e creditor and the specialist: Provided, held in the account under th e term s of
T h at the securities in which th e special­ paragraph (g) (2) of this section and
ist is registered while serving as collat­ for five full business days thereafter.
eral in th e account may be valued a t
(iii) T he maximum loan value as de­
no more th a n 100 percent of th eir cur­ term ined by th e creditor in good faith
re n t m arket value and th e debit required for all other m argin securities held in
for sh o rt positions in such securities held th e account.
in the account shall be n o t less th a n 100
(4) T he am ount to be included in the
percent of th e curren t m arket value of adjusted debit balance of th e account
either th e securities sold sh o rt or the shall bci
options w ritten.
(i) A good faith deposit for sh o rt posi­
(2)
In th is account a specialist in tions qualifying as specialist tran sac­
options on a national securities exchange tions.
(ii) 125 pecent of the curren t m arket
is perm itted to establish a long or short
position in th e securities underlying th e value of the security sold short or th e
options in w hich such member is regis­ option w ritten and held in th e account
tered and acts as a specialist, and a spe­ under the term s of paragraph (g) (2) of
cialist in securities on a national securi­ this section and for five full business days
ties exchange is perm itted to purchase or thereafter.
(iii) The curren t m arket value of th e
w rite options overlying th e securities in
w hich such member is registered and security sold short or the option w ritten
acts as a specialist only under one or plus such am ount as the Board shall pre­
Tnore of th e following conditions (such scribe from tim e to tim e in 8 220.8 (the
transactions are referred to in th is p ara­ Supplem ent to Regulation T) when the
graph as “perm itted offet tra n s­ security is an underlying security or an
actions”) :
overlying option, no longer serving as a
(i) T he account holds short positions perm itted offset, on which a deposit has
in options in which the member is reg­ been required pursuant to paragraph (g)
istered and acts as a specialist which are (6) of this section.
(5) Except as required by paragraph
“in or a t th e money” b u t only to th e
extent th e positions are not offset in the (g) (7), on any day when additional m ar­
account by long or sh ort positions in gin is required as a result of transactions
options for an equal or greater num ber in the account, the creditor shall issue
of shares of th e same underlying securi­ a call for an additional deposit of cash
ties which are "in or a t the money” ; or m argin securities and allow th e spe­
(ii) T he account holds long positions cialist a maximum of five full business
in options in which the member is regis­ days to m ake a deposit sufficient to meet
tered and acts as a specialist which are the call.
(6) On any day when the account of
“in or a t the money” but only to th e ex­
ten t the positions are not offset in the an option specialist no longer holds an
account by sh ort or long positions in option position against which the under­
options for an equal or greater num ber lying security perm itted to be purchased

o r sold sh o rt in th e account under the
term s of paragraph (g) (2) of th is section
can be offset, or when th e account of a
security specialist no longer holds secu­
rity positions against which th e overly­
ing option perm itted to be purchased or
w ritten in th e account under th e term s
of paragraph (g) (2) of this section can
be offset, th e creditor shall have five
full business days to either liquidate the
position or obtain a deposit into the
account of cash or securities equal to the
deposit th a t would be required to estab­
lish such a position in th e general ac­
count, reduced by a sum equal to 25 per­
cent of th e cu rrent m arket value of the
security. The liquidation or deposit re ­
quirem ent need not be m et if a new off­
setting position is established in th e in ­
terim .
(7) Any credit initially extended in
conform ity w ith th is paragraph may be
m aintained on a basis m utually agree­
able to th e creditor and the specialist,
except th a t on any day when th e account
would liquidate to a defiicit, the creditor
shall not extend any fu rth e r credit in
th e account, and shall issue a call for
additional collateral which shall be m et
by noon of the following business day.
In th e event sufficient collateral is not
deposited in th e account th e creditor
shall take steps to liquidate prom ptly
existing positions in th e account.
(8) For the purpose of this p arag rap h :
(i) A “reporting national securities ex­
change” is a national securities exchange
which subm its to th e Board of Governors
of th e Federal Reserve System reports
suitable for supplying curren t inform a­
tion regarding specialists’ use of credit
pursuant to this paragraph (g ).
(ii)
The term "Joint venture” does not
include any account which, by w ritten
agreem ent w ith a creditor, perm its the
commingling of th e security positions of
a specialist or a specialist u n it w ith
those of other specialists or specialist
units unless such agreem ent provides fo r
a sharing of profits and losses from die
account on some predeterm ined ratio;
(ill) The term "underlying security”
m eans th e security which will be de­
livered upon exercise of the option;
(iv) The term “overlying option”
m eans (a) a p u t option purchased or
a call option w ritten against an existing
long position in th e specialist’s account,
or (b) a call option purchased or a put
option w ritten against an existing short
position in the specialist’s account;
(v) The term “in or a t the money”
means, with respect to a call option,
th a t the curren t m arket price of the
underlying security is not m ore th a n 5
per cent below th e exercise price of the
option, and, w ith respect to a put option,
th e current m arket price of the under­
lying security is n o t m ore th a n 5 per cent
above th e exercise price of the option.
By order of the Board of Governors,
April 27,1977.
T h e o d o r e E. A l l is o n ,
Secretary of the Board.
(F R Doc.77—
12860 F ile d 6 -4 -7 7 :8 :4 6 am ]