Full text of Federal Reserve Bank of New York Circulars : 7969. Amendment to Regulation T

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FEDERAL RESERVE BANK
OF NEW YORK

r
L

Circular No.

7 9 6 9 1

October 14, 1976

J

AMENDMENT TO REGULATION T
Uniform Margin Requirement for Writing Options to Sell or Buy Stock
'I'n A ll Brokers and Dealers, and Members of National Securities Exchanges,
in the Second Federal Reserve District :

Following is the text of a statement issued September 28 by the Board of Governors of the
Federal Reserve System:
the Board of Governors of the Federal Reserve System today adopted an amendment to 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.
The new amendment will become effective January 1, 1977.
The principal effect of the amendment to Regulation T—extension of securities credit by brokers and
dealers—will be to set the level of margin required for the writing of uncovered options at 30 percent of the
market value of the underlying security, with additional adjustment for unrealized losses and gains. This is
the current minimum requirement of the major stock exchanges and it is not anticipated that the amendment
will require material changes in current industry practices.
No margin will be required where the option is covered, that is, where the security itself, or its equiva­
lent, is held in the option writer’s account. The amendment specifies what the Board regards as adequate
cover.
The amendment will apply to brokers and dealers when they effect transactions in options written by
their customers. Under a previous Board ruling no credit may be extended by brokers and dealers to their
customers for the purchase of options.
The amendment as adopted is basically the same as a proposal published August 12, 1975.
In submitting the amendment for publication in the F e d e r a l R e g i s t e r , the Board of Governors
made the following additional statement:
By notice of proposed rulemaking published in the F ederal R e g iste r on May 23, 1973 (38 F.R. 13571),
the Board of Governors 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. On August 20, 1975 a revision of that proposal was
published in the F ederal R e g iste r (40 F. R. 36390), and further comments were invited.
After reviewing the comments received and evolving conditions in the options market, the Board has
determined that it is in the public interest to adopt an amendment instituting a uniform margin requirement
in connection with options writing. As proposed in August 1975, the initial margin requirement will be set
at 30 percent of the current market price of the underlying security for “uncovered” options; this is the curt(“lit minimum requirement of the major stock exchanges. No margin will be required if appropriate “cover”
such as the underlying ^security, is held in the account. The amendment designates the security positions which
uni be used as cover . The most significant changes made in the amendment since it was proposed are as
follows:
(1) The minimum amount in paragraph (i) (l ) of section 220.3 has been changed from 10% of the
priu of the underlying security to a flat $250. The $250 minimum is presently in use for exchange-traded
calls and is incorporated in the rule changes for puts of the New York, Midwest and Philadelphia stock ex­
changes which were approved by the Securities and Exchange Commission on June 29, 1976.
(2) Additions to the list of securities positions in paragraph (i) (1) of section 220.3, which may be
in lieu of the margin required, include warrants under certain conditions and long position in puts to
allow "put spreads . The changes are basically consistent with exchange rule changes approved bv the
Securities and Exchange Commission for maintenance margin.
J
used

■ (3L £ Provision for special margin requirements for straddles has been added in sub-paragraph (4) of
section 220.3( i ).
F 6 y



( over)

(4) Section 220.4(i) has been amended to allow the writing of covered options on the common stock
of the Federal National Mortgage Association (“FNMA” ) in the special bond account. FNMA stock is
unique in that it is both an “exempted security” under Regulation T and an equity security traded on a
national securities exchange.
(5) A new provision has been added in section 220.4(j) which will allow the writing of covered op­
tions in the special convertible debt security account in the same manner as in the general account.
ly in g

( 6 ) Section 220.8(j ) has been revised to provide for the use of the current market value of the under­
s t o c k a s t h e basis for the margin calculation for a put instead of the exercise price.

The changes announced by the Board of Governors will become effective January 1, 1977.
Any questions regarding the changes may be directed to the Securities Regulations Division
of our Bank Regulations Department.
Enclosed is a copy of the amendment to Regulation T, together with a copy of a revised sup­
plement to that regulation. Additional copies of the enclosures will be furnished upon request.




P

a u l

A.

V

o l c k e r

,

P r e s id e n t.

BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
SUPPLEMENT TO REGULATION T
Effective January 1, 1977

SECTION 220.8 - SUPPLEMENT

(2) In the case of a special bond account subject
to section 220.4(i), the retention requirement of
(a) Maximum loan value for general accounts.
an exempted security and of a registered non­
The maximum loan value of securities in a general
equity security shall be equal to the maximum
account subject to section 220.3 shall be:
loan value of the security.
(1 )
Of a registered non-equity security held in (3) In the case of a special convertible security
the account on March 11, 1968, and continuously
account subject to section 220.4(j) which would
thereafter, and of a margin equity security (except
have an excess of the adjusted debit balance of the
as provided in section 220.3(c) and paragraphs (b),
account over the maximum loan value of the secur­
(c), and (0 of this section), 50 per cent of the cur­
ities in the account following a withdrawal of cash
rent market value of such securities.
or securities from the account, the retention re­
quirement of a security having loan value in the
(2) Of an exempted security held in the account
account shall be 70 per cent of the current market
on March 11, 1968, and continuously thereafter,
value of the security.
the maximum loan value of the security as deter­
mined by the creditor in good faith.
(4) For the purpose of effecting a transfer from
a
general
account to a special convertible security
(b) Maximum loan value for a special bond
account subject to section 220.4(j), the retention
account. The maximum loan value of an exempted
requirement of a security described in section
security and of a registered non-equity security
220.4(j),
shall be 70 per cent of its current market
pursuant to section 220.4(i) shall be the maximum
value.
loan value of the security as determined by the
(0 Securities having no loan value in a general
creditor in good faith.
account. No securities other than an exempted
(c) Maximum loan value for special convertible
security or registered non-equity security held in
debt security account. The maximum loan value of
the account on March 11, 1968, and continuously
a margin security eligible for a special convertible
thereafter, and a margin security, shall have any
security account pursuant to section 220.4(j) shall
loan value in a general account except that a mar­
be 50 per cent of the current market value of the
gin security eligible for the special convertible debt
security.
security account pursuant to section 220.4(j) shall
have loan value only if held in the account on
(d) Margin required for short sales. The amount
March 11, 1968, and continuously thereafter; and
to be included in the adjusted debit balance of a
no put, call, or combination thereof shall have loan
general account, pursuant to section 220.3(dX3),
value
in a general account.
as margin required for short sales of securities
(other than exempted securities) shall be 50 per
(g)
Account subject to section 8(g). For pur­
cent of the current market value of each security.
poses of the computation described in section
(e) Retention requirement. In the case of an
account which would have an excess of the adjust­
ed debit balance of the account over the maximum
loan value of the securities in the account follow­
ing a withdrawal of cash or securities from the
account, pursuant to section 220.3(bX2):
(l)T he “retention requirement” of an exempt­
ed security held in the general account on March
11, 1968, and continuously thereafter, shall be
equal to its maximum loan values as determined by
the creditor in good faith, and the “retention
requirement” of a registered non-equity security
held in such account on March 11, 1968, and
continuously thereafter, and of a margin security,
shall be 70 per cent of the current market value of
the security.
[E n c. Cir. N o. 7969]




220.3(bXlXiO,
(1 )
The maximum loan value of a registered
non-equity security held in the account on March
11, 1968, and continuously thereafter, and of a
margin equity security shall be 70 per cent of the
current market value of such security, and the
maximum loan value of an exempted security held
in the account on March 11, 1968, and continu­
ously thereafter shall be the maximum loan value
of the security as determined by the creditor in
good faith.
(2) The amount to be included in the adjusted
debit balance of the account pursuant to section
220.3(dX3) as margin required for short sales of
securities (other than exempted securities) shall be
30 per cent of the current market value of each
security.

P rin te d in New York

( over)

(3 )

F o r t h e p e r io d N o v e m b e r 5 , 1 9 7 4 , th r o u g h

(1 0 )

T h e issu e r h a s a t le a s t $5 m illio n o f c a p ita l,

N o v e m b e r 2 , 1 9 7 5 , all tr a n s a c ti o n s p e r m i t te d b y

s u r p lu s , a n d u n d iv id e d p r o f i ts .

s e c tio n s 2 2 0 .3 ( b ) ( 1 ) a n d 2 2 0 .3 ( g ) f o r a c c o u n ts
n o t s u b je c t t o s e c tio n 8 (g ) sh all a ls o b e p e r m i t te d

( i)
Requirements for continued inclusion on List
of OTC Margin Stocks. E x c e p t as p ro v id e d in su b -

in a c c o u n ts s u b je c t t o s e c tio n 8 (g ).

p a r a g r a p h ( 4 ) o f s e c tio n 2 2 0 .2 ( e ) , O T C m a rg in
s to c k sh all m e e t th e r e q u ir e m e n t s t h a t :

Requirements for inclusion on List of OTC
Margin Stocks. E x c e p t as p ro v id e d in s u b p a r a g r a p h
(h )

(4 )

o f s e c tio n 2 2 0 .2 ( e ) , O T C m a rg in s to c k sh all

m e e t th e r e q u ir e m e n ts t h a t :

( 1 ) T h e s to c k c o n ti n u e s t o b e s u b je c t t o re g is­
tra tio n

u n d e r s e c tio n

1 2 ( g X 0 o f t h e S e c u ritie s

E x c h a n g e A c t o f 1 9 3 4 ( 1 5 U .S .C . 7 8 /(g X l))> o r if
iss u e d b y a n in s u r a n c e c o m p a n y s u c h is s u e r c o n ­

( 1 ) T h e s to c k is s u b je c t t o r e g is tr a tio n u n d e r

tin u e s t o b e s u b je c t t o s e c tio n

1 2 (g X 2 X G ) (1 5

s e c tio n 1 2 (g X O o f th e S e c u r itie s E x c h a n g e A c t o f

U .S .C . 7 8 / ( g X 2 X G ) ) a n d t o h a v e a t le a s t S I m illio n

1 9 3 4 (1 5 U .S .C . 7 8 / ( g X l ) ) , is issu e d b y a n in s u r ­

o f c a p ita l a n d s u r p lu s , o r i f iss u e d b y a c lo s e d -e n d

a n c e c o m p a n y s u b je c t t o s e c tio n 1 2 (g X 2 X G ) ( 1 5

in v e s tm e n t m a n a g e m e n t c o m p a n y s u c h issu e r c o n ­

U .S .C . 7 8 /( g ) ( 2 X G ) ) t h a t h a s a t le a s t $1 m illio n o f

t in u e s t o b e s u b je c t t o r e g is tr a tio n p u r s u a n t t o se c ­

c a p ita l a n d s u r p lu s , o r is issu e d b y a c lo s e d -e n d

t io n 8 o f t h e I n v e s tm e n t C o m p a n y A c t o f 1 9 4 0

in v e s tm e n t m a n a g e m e n t c o m p a n y s u b je c t t o re g ­

( 1 5 U .S .C . 8 0 a - 8 ),

is tr a t i o n p u r s u a n t t o s e c tio n 8 o f th e I n v e s tm e n t
C o m p a n y A c t o f 1 9 4 0 (1 5 U .S .C . 8 0 a - 8 ),
( 2 ) F o u r o r m o r e d e a le r s s ta n d w illin g t o , a n d
d o in f a c t, m a k e a m a r k e t in s u c h s to c k in c lu d in g

( 2 ) T h r e e o r m o r e d e a le r s s ta n d w illin g t o , a n d
d o in f a c t , m a k e a m a r k e t in s u c h s t o c k in c lu d in g
m a k in g

re g u la rly

p u b lis h e d

bona fide b id s a n d

o f f e r s fo r s u c h s to c k f o r t h e ir o w n a c c o u n ts , o r th e

bona fide b id s a n d

s to c k is r e g is te re d o n a s e c u ritie s e x c h a n g e t h a t is

o f f e r s fo r s u c h s to c k f o r th e i r o w n a c c o u n ts , o r th e

e x e m p t e d b y th e S e c u r itie s a n d E x c h a n g e C o m ­

m a k in g

re g u la rly

p u b lis h e d

s to c k is r e g is te re d o n a s e c u ritie s e x c h a n g e t h a t is

m is s io n f r o m

e x e m p t e d b y th e S e c u r itie s a n d E x c h a n g e C o m ­

e x c h a n g e p u r s u a n t t o s e c tio n 5 o f th e S e c u r itie s

m is sio n f r o m

E x c h a n g e A c t o f 1 9 3 4 ( 1 5 U .S .C . 7 8 e ) ,

r e g is tr a tio n as a n a tio n a l s e c u ritie s

e x c h a n g e p u r s u a n t t o s e c tio n 5 o f th e S e c u ritie s
E x c h a n g e A c t o f 1 9 3 4 ( 1 5 U .S .C . 7 8 e ) ,

r e g is tr a tio n as a n a ti o n a l s e c u ritie s

( 3 ) T h e r e c o n ti n u e t o b e 8 0 0 o r m o r e h o ld e r s
o f r e c o r d , as d e f in e d

in S E C R u le

C .F .R . 2 4 0 .1 2 g 5 - 1), o f th e

s to c k

1 2 g 5 -l (1 7

w h o a re n o t

( 3 ) T h e r e a re 1 ,2 0 0 o r m o r e h o ld e r s o f re c o r d

o f f ic e r s , d i r e c to r s , o r b e n e f ic ia l o w n e r s o f 10 p e r ­

as d e f in e d in S E C R u le 12 g 5 - 1 ( 1 7 C .F .R . 2 4 0 . 12g

c e n t o r m o r e o f th e s t o c k , o r th e a v e ra g e d a ily

5 -1 ), o f th e s to c k w h o are n o t o f f ic e r s , d ir e c to r s ,

tr a d in g v o lu m e o f s u c h s t o c k , as d e te r m i n e d b y th e

o r b e n e f ic ia l o w n e r s o f 10 p e r c e n t o r m o r e o f th e

B o a rd , is a t le a s t 3 0 0 sh a re s ,

s to c k , o r t h e a v era g e d a ily t r a d in g v o lu m e o f s u c h
s t o c k , as d e te r m i n e d b y th e B o a rd , is a t le a s t 5 0 0
sh a re s ,

( 4 ) T h e issu e r c o n ti n u e s t o b e a U .S . c o r p o r a ­
tio n ,
( 5 ) D a ily

( 4 ) T h e issu e r is o r g a n iz e d u n d e r th e law s o f th e
U n ite d S ta te s o r a S ta te d a n d i t, o r a p r e d e c e s s o r in
i n te r e s t , h a s b e e n in e x is te n c e f o r a t le a s t 3 y e a rs ,

q u o t a t i o n s f o r b o t h b id a n d a s k e d

p ric e s f o r th e s to c k a re c o n ti n u o u s l y a v a ila b le t o
th e g e n e ra l p u b lic , a n d
( 6 ) T h e r e are 3 0 0 ,0 0 0 o r m o r e s h a re s o f s u c h
s to c k o u t s t a n d i n g in a d d it i o n t o s h a re s h e ld b e n e ­

( 5 ) T h e s to c k h a s b e e n p u b lic ly t r a d e d fo r a t

fic ia lly b y o f f ic e r s , d i r e c to r s , o r b e n e f ic ia l o w n e r s
o f m o r e th a n

le a s t 6 m o n th s ,

10 p e r c e n t o f th e s t o c k ; a n d sh all

m e e t tw o o f th e th r e e a d d itio n a l r e q u ir e m e n t s t h a t :
( 6 ) D a ily

q u o t a t i o n s f o r b o t h b id a n d a sk e d

p ric e s fo r th e s to c k are c o n ti n u o u s l y a v a ila b le to
th e g e n e ra l p u b lic , a n d
( 7 ) T h e r e a re 5 0 0 ,0 0 0 o r m o re s h a re s o f su c h
s to c k o u t s t a n d i n g in a d d it i o n t o s h a re s h e ld b e n e f i ­
c ia lly b y o f f ic e r s , d i r e c to r s , o r b e n e f ic ia l o w n e r s o f
m o r e t h a n 10 p e r c e n t o f th e s t o c k , a n d sh all m e e t
tw o o f th e th r e e a d d it i o n a l r e q u ir e m e n t s t h a t .

( 7 ) T h e s h a re s d e s c rib e d in s u b p a r a g r a p h ( 6 ) o f
t h is p a r a g r a p h c o n ti n u e t o h a v e a m a r k e t v a lu e o f
a t le a s t $ 2 .5 m illio n .
( 8 ) T h e m in im u m

a v era g e

b id

p ric e o f s u c h

s to c k , as d e te r m in e d b y t h e B o a r d , is a t le a s t $3
p e r s h a re , a n d
( 9 ) T h e issu e r c o n ti n u e s t o h a v e a t le a s t $ 2 .5
m illio n o f c a p ita l, s u r p lu s , a n d u n d iv id e d p r o f its .

(j) Margin required for the writing of options.
( 8 ) T h e s h a re s d e s c rib e d in s u b p a r a g r a p h ( 7 ) o f

T h e a m o u n t to b e in c lu d e d in th e a d ju s te d d e b it

t h is p a r a g r a p h h a v e a m a r k e t v a lu e o f a t le a s t $5

b a la n c e o f a g e n e ra l a c c o u n t, sp e c ia l b o n d a c c o u n t

m illio n ,

o r sp e c ia l c o n v e rtib le d e b t s e c u rity a c c o u n t p u r ­

(9 ) T h e

m in im u m

a v era g e

b id

p ric e o f s u c h

s to c k , as d e te r m i n e d b y th e B o a r d , is a t le a s t $5
p e r s h a re , a n d 6

s u a n t to p a r a g r a p h s (d)(5) a n d (i) o f s e c tio n 2 2 0 .3 ,
as th e m a r g in re q u ire d fo r th e issu a n c e , e n d o r s e ­
m e n t o r g u a r a n te e o f a n y p u t o r c a ll s h a ll b e 30
p e r c e n t o f th e c u r re n t m a r k e t v a lu e o f th e u n d e r ­
ly in g s e c u rity w ith an a d ju s tm e n t f o r a n y a p p lic a ­

6 As defined in 15 U.S.C. 78c(a)(16).




b le in c re a s e o r re d u c tio n .

Board of Governors of the Federal Reserve System
CREDIT BY BROKERS AND DEALERS
A M E N D M E N T TO R E G U L A T IO N T
Effective January 1, 1977, Regulation T is
amended as follows:
1. In §220.3, paragraph (d) is amended, and
a new paragraph (i) is added, to read as fol­
lows :
SECTION 220.3—GENERAL ACCOUNT
*
*
*
(d)
Adjusted debit balance. For the pur­
pose of this part, the adjusted debit balance of
a general account, special bond account, or spe­
cial convertible debt security account shall be
calculated by taking the sum of the following
items:
*
*
*
(5)
The amount of margin as provided for
in paragraph (i) of this section and section
220.8 (the Supplement to Regulation T) for
each transaction involving the issuance, endorse­
ment or guarantee of any put, call or combina­
tion thereof.
*
*
*
(i)
Options. (1) The amount to be included
in the adjusted debit balance of an account as
the margin required for each transaction involv­
ing the issuance, endorsement or guarantee of
any put or call shall be such amount as the
Board shall prescribe from time to time in sec­
tion 220.8 (the Supplement to Regulation T)
as the margin required for the writing of op­
tions, increased by any unrealized loss on each
such commitment, 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 security in the case of a call, or the
exercise price in case of a put, nor be less than

$250 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 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 p u t;
(ii) Securities immediately convertible into
or exchangeable for the underlying security
without restriction or the payment of money in
the case of a call, provided that the right to
convert or exchange does not expire on or before
the expiration date of the option.
(iii) An agreement under which a bank,
which is holding the underlying securities or
the required cash, is obligated to deliver, in the
case of a call, or accept, in the case of a put,
the underlying securities against payment of the
exercise price upon exercise of the option;
(iv) A long position in a call on the same
number of shares of the same underlying
security which does not expire before the ex­
piration 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 posi­
tion exceeds the exercise price of the call issued,
endorsed or guaranteed;
(v) A long position in a put on the same
number of shares of the same underlying se­
curity which does not expire before the expira­
tion date of the put issued, endorsed or guaran­
teed, provided that there is also added to the
adjusted debit balance the amount, if any, by
which the exercise price of the put issued, en­
dorsed or guaranteed exceeds the exercise price
of such long position; or
(vi) A warrant to purchase the underlying

For this Regulation to be complete, retain:
1) Regulation T, as amended effective May 15, 1970, printed in the pam­
phlet “Securities Credit Transactions.’’
2) Amendment pamphlet dated June 1974.
3) Amendments effective July 25, 1974; March 3, 1975; and November
13, 1975.
4) The Supplement to Regulation T, effective January 1, 1977.
5) This slip sheet.
PRINTED IN NEW YORK

[Enc. Cir. No. 7969]




( over)

security, in the case of a call, which does not
expire on or before the expiration date of the
call, provided that there is also added to the
adjusted debit balance the amount, if any, by
which the exercise price of the warrant exceeds
the exercise price of the call, issued, endorsed
or guaranteed. A warrant used in lieu of the
required margin under this provision shall have
no loan value in the account.
(2) When 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) When a short position held in the ac­
count 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 unreal­
ized loss on the position.
(4) When both a put and a call are issued,
endorsed or guaranteed in a general account,
special bond account or special convertible deb*
security account on the same number of shares
of the same underlying security with the same
expiration date and the same exercise price (a
straddle), the amount of margin required shall
be the margin on either the put or the call
whichever is greater plus any unrealized loss
on the other option.
(5 ) Any security position held in the account
which serves in lieu of the margin required for
a put or a call shall be unavailable to support
any other option transaction in the account.
(6 )
The customer may either designate at
the time the option order is entered which
security position held in the account is to serve
in lieu of the margin required or have a stand­
ing agreement with the creditor as to the
method to be used for making the determination
on any given day as to which security position
will be used in lieu of the margin to support
an option transaction.




2.
In §220.4, paragraph (i) is amended, and a
new subparagraph ( 6 ) is added to paragraph
(j ), to read as follows:
SECTION 220,4— SPECIAL ACCOUNTS
♦

*

*

(i) Special bond account. In a special bond
account a creditor may effect and finance trans­
actions in exempted securities and registered
non-equity securities for any customer. 5 Call
options may be issued, endorsed or guaranteed
in this account on shares of any underlying
equity security which is held in this account
because it is an exempted security.
(j)
count.

Special convertible debt security ac­

♦

*

*

(6 )
Without regard to the margin required
for the writing of options in section 2 2 0 8 (j)
(Supplement to Regulation T ), call options
may be issued, endorsed or guaranteed in this
account on the number of shares of an under­
lying security into which a margin debt security
held in the account is convertible, and put op­
tions may be issued, endorsed or guaranteed in
this account on the number of shares of an
underlying security sold short in the account.
Such option positions may be carried in the
account in conformity with the requirements
of section 220.3(d) and (i).
5 F o r maximum lo an value of such securities see
§220.8(b), the Supplement to Regulation T.