Full text of Federal Reserve Bank of New York Circulars : 7690. Proposed Amendment to Regulation T

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r
FEDERAL RESERVE BANK
OF N E W YORK

r Circular No. 7 6 9 0 -1

L

August 18, 1975

J

PROPOSED AMENDMENT TO REGULATION T
Margin Requirements for Writing Options to Sell or Buy Stock
To All Brokers and Dealers, and Members of National Securities Exchanges,
in the Second Federal Reserve District:

F o llo w in g is the te x t of a s ta te m e n t issued A u g u s t 12 by the B o a rd o f G o v e rn o rs o f th e
F e d e ra l R eserv e S y ste m :

The Board of Governors of the Federal Reserve System today issued for comment a revised proposal
>to amend its Regulation T, designed to prevent the excessive use of credit in connection with the issuance,
endorsement or guarantee of puts and calls, which are options to sell or buy stock.
Comment will be received by the Board through September 30.
The principal effect of the proposed amendment to Regulation T —extension of securities credit by
brokers and dealers—would be to set the level of margin required for uncovered options at 30 per cent
of the market value of the underlying security with additional adjustment for unrealized losses and gains.
No margin would be required where the option is covered, that is, where the security itself, or its
equivalent, is held in the option writer’
s account.
The proposed amendment would apply to the extension of credit by brokers and dealers when they
endorse or guarantee options written bv their customers. Under a previous Board ruling no credit may be
extended for the purchase of an option.
P rin te d below is the te x t of the B o a rd ’s proposal. C om m ents th ere o n should be su b m itte d by
S ep tem b er 30, a n d m ay be sent to o u r B an k R e g u la tio n s D e p a rtm e n t.
P a u l

A.

V o l c k e r ,

President.
[Reg. T]
CREDIT BY BROKERS AND DEALERS
Uniform Margin Requirements for Writing Options
By notice of proposed rulemaking published in the

Federal Register on May 23, 1973 (38 F.R. 13571), the

Board of Governors, pursuant to authority contained in
the Securities Exchange Act of 1934 (15 U.S.C. 78g),
invited comment on a proposal to require a uniform
margin in connection with the issuance, endorsement
or guarantee of any put, call or combination thereof,
based initially upon the current minimum requirements
of the major stock exchanges.
Following consideration of all the comments received,
and taking into consideration changes made in the rules
of the exchanges since the proposal was published, the
Board has revised the proposal to require a uniform
margin of 30 per cent of the current market value of
the underlying security, subject to certain other adjust­
ments as specified in the regulation. The revised pro­
posal is as follows:




In section 220.3, paragraph (d) would be amended
and a new paragraph (i) would be added as set forth
below:
S E C T I O N 220.3—G E N E R A L A C C O U N T
*
*
*
(d)
Adjusted debit balance. For the purpose of this
part, the adjusted debit balance of a general account,
special bond account, or special convertible debt security
account shall be calculated by taking the sum of the
following items:
*

*

*

(5)
The amount of margin as provided for in para­
graph (i) of this section and §220.8 (the Supplement
to Regulation T ) for each transaction involving the is­
suance, endorsement or guarantee of any put, call or
combination thereof.
( over)

*

*

*

(i)
Options. (1) The amount to be included in the
adjusted debit balance of a general account as the
margin required for each transaction involving the issu­
ance, endorsement or guarantee of any put or call
shall be such amount as the Board shall prescribe from
time to time in §220.8 (the Supplement to Regulation
T ) as the margin required for the writing of options,
increased by any unrealized loss on each such commit­
ment, or reduced by any excess of the exercise price
over the current market value of the underlying security
in the case of a call or any excess of the current market
value of the underlying security over the exercise price
in the case of a put. Such sum, however, shall not
exceed the current market value of the underlying se­
curity in the case of a call, or the exercise price in case
of a put, nor be less than 10 per cent of the current
market value of the underlying security in the case of
either a call or a put. Such sum need not be included
in the adjusted debit balance when there is held in the
general account any of the following:
(i) The underlying security in the case of a call or
a short position in the underlying security in the case
of a put;
(ii) Securities immediately convertible into or ex­
changeable for the underlying security without restric­
tion or the payment of money in the case of a call;
(iii) A n agreement under which a bank, which is
holding the underlying securities or the required cash,
is obligated to deliver or accept the underlying securi­
ties against payment of the exercise price upon exercise
of the option; or
(iv) A long position in a call on the same number
of shares of the same underlying security which does
not expire before the expiration date of the call issued,
endorsed or guaranteed, provided that there is also
added to the adjusted debit balance the amount, if any,
by which the exercise price of such long position ex­
ceeds the exercise price of the call issued, endorsed or
guaranteed.




(2) W h e n a security held in the account serves in
lieu of the margin required for a call, such security
shall be valued at no greater than the exercise price of
the call.
(3) W h e n a short position held in the account serves
in lieu of the margin required for a put, the amount
prescribed by paragraph (d)(3) of this section as
the amount to be added to the adjusted debit balance
in respect of short sales shall be increased by any un­
realized loss on the position.
In section 220.8 (the Supplement to Regulation T) a
new paragraph (j) would be added as set forth below:
S E C T I O N 220.8—S U P P L E M E N T
*

*

sfc

(j) Margin required for the writing of options.
The amount to be included in the adjusted debit balance
of a general account, pursuant to paragraphs (d)(5)
and (i) of §220.3, as margin required for the issuance,
endorsement or guarantee of any put or call, adjusted
for any applicable increase or reduction, shall be,
(1) of a put, 30 per cent of the exercise price,
(2) of a call, 30 per cent of the current market value
of the underlying security.
Interested persons are invited to submit relevant data,
views, or arguments concerning this proposal. Any
such material should be submitted in writing to the
Secretary, Board of Governors of the Federal Reserve
System, Washington, D. C. 20551, to be received not
later than September 30, 1975. Such material will be
made available for inspection and copying upon request,
except as provided in §261.6(a) of the Board’
s Rules
Regarding Availability of Information.
By order of the Board of Governors, August 11, 1975.