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FEDERAL RESERVE BANK OF N EW YORK TCircular No. 71411 L May 14, 1973 J INTERPRETATION OF REGULATION T Treatment of Short Sales “ Against the Box” With Respect to Options To All Brokers and Dealers, and Members o f National Securities Exchanges, in the Second Federal Reserve District: Printed below is an excerpt from the Federal Register of May 9, containing the text of an interpreta tion of Regulation T, “ Credit by Brokers and Dealers,” adopted April 16 by the Board of Governors of the Federal Reserve System. The interpretation relates to the treatment of simultaneous long and short positions in a margin account with respect to options. Additional copies of this circular will be furnished upon request. Alfred Hayes, President. Title 12— Banks and Banking CHAPTER II— FEDERAL RESERVE SYSTEM SUBCHAPTER A— BOARD OF GOVERNORS OF TH E FEDERAL RESERVE SYSTEM [Reg. T] PART 220— CREDIT BY BROKERS AND DEALERS Treatment of Simultaneous Long and Short Positions In a Margin Account With Re spect to Options Simultaneous long and short positions In the same security in the same margin account (often referred to as a short sale “against the box” ) may not be used to supply tihe place of the deposit of margin ordinarily required in connection with the guarantee by a creditor of a put or call option or combination thereoi on su ch stock , in accordance with § 220.3(d) (3) and (5) and § 220.3(g) (4) and (5). (g) * * • (4) Any transaction which serves to meet the requirements of paragraph (e) of this section or otherwise serves to permit any offsetting transaction in an account shall, to that extent, be unavailable to per mit any other transaction in such account. (5) For the purposes of this part (regula (b) The applicable provisions of regu tion T), if a security has maximum loan value under paragraph (c) (1) of this section lation T are § 220.3(d) (3) and (5) and in a general account, or under § 220.4(J) in a § 220.3(g) (4) and (5) which provide as special convertible debt security account, a follows: sale of the same security (even though not the same certificate) in such account shall (d) • * * the adjusted debit balance of a be deemed to be a long sale and shall not be general account * * * shall be calculated by deemed to be or treated as a short sale. taking the sum of the following items: short sale “against the box” ) , such posi tions may be used to supply the place of the deposit of margin ordinarily required in connection with the guarantee by a creditor of a put or call option or com bination thereof on such stock. • • * * * (3) The current market- value of any securities (other than unissued securities) sold short in the general account plus, for each security (other than an exempted se curity) , such amount as the board shall pre scribe from time to time in § 220.8(d) (the supplement to regulation T) as the margin required for such short sales, except that such amount so prescribed in such § 220.8(d) § 2 2 0 .1 2 8 T reatm en t o f sim ultaneous need not be included when there are held in lo n g and short position s in the sam e the general account * * * the same securities m argin a ccou n t when put or call o p or securities exchangeable or convertible tions o r com bin a tion s th e re o f on such within 90 calendar days, without restriction stock are also ou tstan din g in the other than the payment of money, into such accou n t. securities sold short; (a) The Board was recently asked * • • » • whether under regulation T, “Credit by (5) The amount of any margin customarily Brokers and Dealers” (12 CFR part 220), required by the creditor in connection with his endorsement or guarantee of any put, if there are simultaneous long and short call, or other option; positions in the same security in the same * * * ♦ • margin account (often referred to as a (c) Rule 431 of the New York Stock Exchange requires that a creditor obtain a minimum deposit of 25 percent of the current market value of the optioned stock in connection with his issuance or guarantee of a put, and at least 30 per cent in the case of a call (and that such position be “marked to the market”) , but permits a short position in the stock to serve in lieu of the required deposit in the case of a put and a long position to serve in the case of a call. Thus, where the appropriate position is held in an account, tnat position may serve as the margin required by § 220.3(d) (5). (d) In a short sale “against the box,” however, the customer is both long and short the same security. He may have established either position, properly mar gined, prior to taking the other, or he (Over) may have deposited fully paid securities in his margin account on the same day he makes a short sale of such securities. In either case, he will have directed his broker to borrow securities elsewhere in order to make delivery on the short sale rather than using his long position for this purpose (see also 17 CFR 240.3b-3). (e) Generally speaking, a customer makes a short sale “against the box’* for tax reasons. Regulation T, however, provides in § 220.3(g) that the two posi tions must be “netted out” for the pur poses oX the calculations required by the regulation. Thus, the board concludes that neither position would be available to serve as the deposit of margin required in connection with the endorsement by the creditor of an option. (f) A similar conclusion obtains under § 220.3(d) (3). That section provides, in essence, that the margin otherwise re quired in connection with a short sale need not be included in the account if the change in the beneficial ownership of customer has in the account a long posi stock has taken place. Since there is no tion in the same security. In § 220.3(g) actual " contra" party to either transac (4), however, it is provided that “ [Alny tion, and no stock has been borrowed or transaction which * * * serves to permit delivered to accomplish the short sale, any offsetting transaction in an account such fictitious positions woud have no shall, to that extent, be unavailable to value for purposes of the Board’s mar permit any other transaction in such ac gin regulations. Indeed, the adoption of count.” Thus, if a customer has, for ex such a scheme in connection with an ample, a long position in a security and overall strategy involving the issuance, that long position has been used to sup endorsement, or guarantee of put or ply the margin required in connection call options or combinations thereof ap with a short sale of the same security, pears to be manipulative and may have then the long position Is unavailable to been employed for the purpose of cir serve as the margin required in connec cumventing the requirements of the tion with the creditor’s endorsement of regulations. a call option on such security. By order of the Board of Governors, (g) A situation was also described in April 16, 1973. which a customer has purported to establish simultaneous offsetting long [sealI Chestek B. Feldberg, and short positions by executing a Assistant Secretary of the Board. “cross” or wash sale of the security on the same day. In this situation, no IFR Doc.73-9125 Filed 5-8-73;8:45 am]
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