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FE D E R A L R E SE R V E BANK
O F N EW YORK
rCircular No. 8863 "I
L
AM ENDM ENT
TO
R E G U L A T IO N
June 25, 1980
J
T
C r e d it E x t e n d e d b y B r o k e r s a n d D e a le r s to E x c h a n g e S p e c ia lis t s
To All Brokers and Dealers, and Members of National
Securities Exchanges, in the Second Federal Reserve District:
The Board of Governors of the Federal Reserve System has adopted an amendment, effective
August 11, 1980, to its Regulation T, “Credit by Brokers and Dealers,” regarding credit extended
by brokers and dealers to stock specialists and options market-makers. In a related action, the Board
of Governors has terminated, effective August 11, the suspension, for options specialists, of the
effective date of a rule establishing uniform margin requirements for the writing of options.
The following is quoted from a statement issued by the Board regarding these actions:
The amendment, which reflects comment received on a proposal for public comment, is effective August 11.
The principal features of the amendment, as adopted, are:
1. In general, the amendment permits good faith financing of positions in securities in which a specialist
makes a market, but requires a 25 percent margin for positions in the related security acquired for hedging or
covering purposes and the generally applicable margin (50 percent) for other securities.
2. Creditors extending credit to a specialist’s joint account will no longer be required to participate in
the account.
3. Specialists and options market-makers will be able to use securities issued by the United States Gov
ernment or its agencies as collateral in their specialist accounts.
4. Several other changes, including: a rule restricting “free-riding” on underlying stock positions carried
in an options market-maker’s account which will apply only to market-makers whose own exchange has not
adopted a rule on “free riding” approved by the Securities and Exchange Commission; a rule affecting the
withdrawal of cash or securities from their accounts by specialists and market-makers; and a rule defining
positions that may be carried on preferential credit terms in the accounts of specialists and market-makers.
The Board today rescinded, effective August 11, suspension of the effective date of a rule, as it applies
to options specialists, establishing uniform margin requirements for the writing of options. The suspension
was adopted in January 1977 until the Board could consider a separate, self-contained rule for options
specialists. This has now been done, making the suspension no longer necessary.
A copy of the amendment to Regulation T is enclosed. Printed on the reverse side of this
circular is an excerpt from the Federal Register of June 17, 1980, containing the text of the Board’s
notice regarding the termination of the suspension, for options specialists, of the uniform margin
requirements rule.
Questions regarding Regulation T may be directed to our Regulations Division (Tel. No.
212-791-5914)
A
n t h o n y
M . S
o lo m o n
,
President.
( over)
[Reg. T ]
C R E D IT BY B R O K E R S AND D E A L E R S
12 CFR Part 220
[Docket No. R-0004]
Termination of Suspension of Uniform
Margin Requirements for Options
Specialists
AGENCY: B oard o f G o v e r n o r s o f th e
F e d e r a l R e s e r v e S y ste m .
Rescission of order of
suspension.
ACTION:
s u m m a r y : In Jan uary, 1977, th e B oard o f
G o v e r n o r s s u s p e n d e d , for o p tio n s
s p e c ia lis ts , th e e ffe c tiv e d a te o f a n e w
ru le e s ta b lis h in g u n iform m argin
req u ir e m e n ts for th e w ritin g o f o p tio n s
(42 FR 752). T h e s u s p e n s io n w a s put in to
e ffe c t u n til th e B oa rd c o u ld c o n s id e r a
se p a r a te , se lf-c o n ta in e d ru le for o p tio n s
s p e c ia lis ts . S in c e th e B oard h a s a d o p te d
su c h a se p a r a te ru le to d a y b y a fin a l
a m e n d m e n t o f § 220.4(g) o f R e g u la tio n T,
th e s u s p e n s io n ord er is n o lo n g e r
n e c e s s a r y . Lifting th e s u s p e n s io n is a
h o u s e k e e p in g m a tter th at w ill h a v e n o
p r a c tic a l e ffe c t.
EFFECTIVE DATE: A u g u st 11, 1980.
FOR FURTHER INFORMATION CONTACT:
Robert Lord, Securities Regulation
Section, Division of Banking Supervision
and Regulation, Board of Governors of
the Federal Reserve System,
Washington, D.C. 20551, (2 0 2 -4 5 2 -2 7 8 1 ).
SUPPLEMENTARY INFORMATION: O n
S e p te m b e r 2 7 ,1 9 7 6 , th e B oard a d o p te d
an a m e n d m e n t to R e g u la tio n T, e ffe c tiv e
January 1 ,1 9 7 7 , w h ic h e s t a b lis h e d a
u n iform m argin r eq u irem en t for th e
w r itin g o f o p tio n s. (41 FR 43895)
A lth o u g h th is ru le w a s in te n d e d
g e n e r a lly to a p p ly to c u sto m e r a c c o u n ts ,
it a ls o a ffe c te d S p e c ia lis ts ’ a c c o u n ts
u n d er th e th e n -e x istin g term s o f
§ 220.4(g) o f R e g u la tio n T, w h ic h
req u ired , w ith tw o e x c e p tio n s , th at
c r e d it term s to S p e c ia lis ts co n fo rm to
th o s e a v a ila b le to p u b lic c u sto m e r s in a
general accou n t
O n D e c e m b e r 1 5 ,1 9 7 6 , th e B oard
p r o p o se d a n a m e n d m e n t to § 220.4(g)
w h ic h w o u ld h a v e a llo w e d o p tio n s
s p e c ia lis ts to c a lc u la te req u ired m argin
d iffe r e n tly from th a t p r o v id e d in th e
n e w u n iform m argin rule a p p lic a b le to
p u b lic c u sto m e r s. (41 FR 55552) T h e
B oard w a s , h o w e v e r , u n a b le to a c t on
th e p r o p o se d a lte r n a te m e th o d o f
c a lc u la tio n b y January 1 ,1 9 7 7 , th e
e ffe c tiv e d a te o f th e n e w u n iform rule. It
th erefo re, su s p e n d e d , for o p tio n s
s p e c ia lis ts , th e e ffe c tiv e d a te o f th e
u n iform rule. (42 FR 752, January 4 ,1 9 7 7 )
In e ffe c t, th e s u s p e n s io n p erm itted
o p tio n s s p e c ia lis ts to u s e th e p re
e x is tin g p r o v is io n s o f § 220.3(d)(5)
in s te a d o f th e n e w g e n e r a l a c c o u n t
p r o v is io n s.
T o d a y , th e B oard a d o p te d a fin a l
a m e n d m e n t to th e s p e c ia lis t’s c red it rule
(§ 220.4(g)), e ffe c tiv e A u g u st 1 1 ,1 9 8 0 .
T h e n e w ru le is s e lf-c o n ta in e d a n d d o e s
n o t in co rp o ra te b y r e fe r e n c e th e
c o n d itio n s o f th e r e g u la tio n a p p lic a b le
to g e n e r a l c u sto m e r s, a s d id th e prior
rule.
S in c e th e p rior ord er tem p orarily
su s p e n d in g th e a p p lic a b ility o f
§§ 220.3(d)(5) a n d 220.3(i) to o p tio n s
s p e c ia lis ts w ill n o lo n g e r b e n e c e s s a r y ,
th e B oard h e r e b y r e s c in d s th at prior
o rd er e ffe c tiv e A u g u st 1 1 ,1 9 8 0 (th e d a te
th e a m e n d m e n t to $ 220.4(g) b e c o m e s
e ffe c tiv e ).
By order of the Board of Governors of the
Federal Reserve System, June 11,1988.
Griffith L. Garwood,
Assistant Secretary of the Board.
[FR Doc. 60-18196 Filed 6-16-80; 8:45 am]
B o a rd o f G o v e r n o r s o f th e F e d e r a l R e se r v e
C R E D IT
BY
BROKERS
AND
S y ste m
DEALERS
AM ENDM ENT TO REGULATION T
( e f f e c ti v e A u g u s t n , i p 8 o )
broker dealers making markets in the
over-the-counter market within the
definition of "specialist” since under the
Securities Exchange Act of 1934 that
Credit by Brokers and Dealers; Credit
term is used only in connection with
Extended to Exchange Specialists
securities exchange markets. As an
a g e n c y : Board of Governors of the
alternative they suggested that the
Federal Reserve System.
financing of the market-making
activities of these firms be treated in a
a c t i o n : Final rule.*
I
separate section of Regulation T.
s u m m a r y : This amendment adopts and
(2) The rule has also been revised to
revises a proposed amendment
permit a specialist to purchase or sell
published by the Board in the Federal
short in the account securities other
Register on August 15,1979 (44 FR
than the specialist securities or the
47775) to reflect comments received. It
permitted offset positions if the regular
will permit stock specialists and option
margin requirements are met. This
marketmakers to finance with a broker/
revision was made at the request of the
dealer certain offsetting positions in
Chicago Board Options Exchange, Inc.
related securities on more advantageous
(“CBOE") which noted that the August
terms than are available to the ordinary
15 proposal required creditors "to
customer. This concession is given to
perform the time consuming and
those exchange-registered dealers who
burdensome task of manually
are obliged to promote fair and orderly
transferring certain stock positions from
markets in their specialty securities. The
a specialist’s account to a general
present rule limits margin concessions to account." The Board believes this
the financing of specialty securities
revision will substantially reduce this
only. This action derives from the
operation problem.
advent of exchange-traded options in
(3) The dehnition of an "in or at the
1973.
money" option has been broadened to
e f f e c t i v e D A T E : August 11, 19(10.
permit specialists to offset their options
FO R FU R T H E R I N F O R M A T I O N C O N T A C T :
positions with the underlying security
I aura Homer. Chief Attorney or Patsy
provided the price of the security is
Abelle, Senior Attorney, Securities
within one standard exercise interval of
Regulation Section, Division of Banking
the option being offset. The August 15
Supervision and Regulation. Board of
proposal required the underlying
Governors of the Federal Reserve
security to be within $2.50 or 5 percent
System. (202) 452-2781.
of the option being offset. This change is
S U P P L E M E N T A R Y I N F O R M A T I O N : The final
intended to provide greater flexibility to
specialists in employing hedging and
rule includes a number of revisions to
the August 15,1979 proposal, based
spreading strategies to reduce the risk
upon comments received. These include:
associated with making a market in
(1) In response to comments received options. It will also reduce an
from the Securities and Exchange
operational problem. The CBOE in
commenting on this aspect of the August
Commission (‘‘SEC’’) and the National
Association of Securities Dealers, Inc.
15 proposal noted that it did not provide
("NASD”) references to a "registered
sufficient opportunities for hedging with
securities association” are being deleted
the underlying security.
from the rule. These agencies noted that
(4) The requirement has been deleted
it may be inappropriate to include
that the creditor call for additional
12 CFR Part 220
[Regulation T; Docket Mo. R-0054]
margin whenever securities no longer
serving as permitted offset positions
continue to bo retained in the account.
Several commenters, including the New
York Stock Exchange, Inc. (“NYSE"), the
American Stock Exchange, Inc. (“ASE”)
and the CBOE, noted that this provision
constitutes a maintenance margin
requirement and that historically the
Board has left the promulgation of rules
governing maintenance margins to the
exchanges. The Board in reviewing this
matter was satisfied that the 25 percent
initial margin requirement on the
purchase of permitted offset positions,
when viewed together with the
limitations on the withdrawal of equity
contained in the rule, provided a
reasonable cushion against adverse
variations in market prices.
(5)
The “free-riding” penalty has been
relaxed to exempt the acquistion or
liquidation of permitted offset positions
and to reduce the number of days the
"free-riding" penalty must be in effect
from 30 to 15 calendar days. Those
commenting on the August 15 proposal
stated that the "free-riding” penalty was
unduly harsh and recommended it be
deleted and that the exchanges be
allowed to adopt "anti-free-riding" rules
of their own. The Board notes that the
SEC in its “Report of the Special Study
of the Options Markets” (the "Option
Study”) cited "free-riding" as one of the
practices prevalent in the options
markets and recommended that the
Board consider adopting rules curtailing
it. The Board recognizes that the
exchanges through their surveillance
and enforcement program are in a better
position to police this activity, and this
revised amendment provides a means
through which these agencies may adopt
their own rules to limit this activity. If
the level of enforcement of the exchange
rule is not sufficient to curtail the
practice, the Board will consider
eliminating the exemption.
For this Regulation to be complete, retain:
1) Regulation T, as amended effective June 1, 1977, printed in the pamphlet
“Securities Credit Transactions.”
2) The Supplement to Regulation T, effective January 1, 1977.
3) Amendments effective June 15, 1978, July 12, 1978, October 30, 1978, and June 2, 1980.
4) This slip sheet.
P R I N T E D IN N E W Y O R K , F R O M FEDERAL REGISTER, V O L . 45, NO. 118
[Enc. Cir. No. 8863]
( o v er )
The Board continues to believe that a
25 percent margin is appropriate for
permitted offset positions. Three option
exchanges asked that it be changed to a
"good faith” margin. Under the rule
being adopted, the 25 percent initial
margin requirement on permitted offset
positions in concert with the limitations
on the withdrawal of equity serve as the
basis for accommodating market needs
without permitting the excessive use of
credit for purchasing or carrying
securities.
Accordingly, pursuant to sections 7
and 23 of the Securities Exchange Act of
1934, as amended (15 U.S.C. 78g and w),
the Board revises section 220.4(g) of
Regualtion T (12 CFR 220.4(g)) to read as
follows:
(v)
"In the money,” with respect to a
call option, indicates that the current
market price of the underlying security
is not below the exercise price of the
option and, with respect to a put option,
that the current market price of the
underlying security is not above the
exercise price of the option.
(3) P e r m itte d o ffs e t p o s itio n s .
A
specialist in options is permitted to
establish in this account on a share-forshare basis a long or short position in
the securities underlying the options in
which the specialist makes a market,
and a specialist in securities other than
options is permitted to purchase or write
options overlying the securities in which
the specialist makes a market, only
under one or more of the following
conditions (such positions are referred
§ 220.4 Special accounts.
to in this paragraph as "permitted offset
*
*
*
*
*
positions”):
(g) S p e c ia lis t's A c co u n t. (1)
(i) The account holds a short option
A p p lic a b ility . In a specialist’s account, a position which is “in or at the money”
creditor may clear and finance for a
and is not offset by a long or short
specialist who is a member of a national option position for an equal dr greater
securities exchange the member’s
number of shares of the same underlying
specialist transactions or transactions of security which is "in the money";
any joint account in which all
(ii) The account holds a long option
participants, or all participants other
position which is “in or at the money"
than the creditor, are registered and act
and is not offset by a long or short
as specialists. The provisions of this
option position for an equal or greater
subsection are available to a specialist
number of shares of the same underlying
a ho is a member of a national securities
security which is "in the money";
exchange which submits to the Board of
(iii) The account held a short option
Governors of the Federal Reserve
position against which an exercise
System reports suitable for supplying
notice was tendered;
current information regarding the use of
(iv) The account held a long option
specialist credit.
position which was exercised;
(2)
D e fin itio n s. For the purpose of this (v) The account holds a net long
position in a security (other than an
subsection:
option) in which the specialist makes a
(i) “Joint account” means an account
market; or,
in which the creditor may participate
(vi) The account holds a net short
and which by written agreement permits
position in a security (other than an
the commingling of the security
option) in which the specialist makes a
positions of the participants and
market.
provides for a sharing of profits and
(4) Maximum loan value. The
losses from the account on some
maximum loan value of securities which
predetermined ratio;
may be used as collateral in the account
(ii) "Underlying security" means the
shall be:
security which will be delivered upon
(i) No more than 100 per cent of the
exercise of the option and does not i
current market value of any long
include a security convertible into the
position in a security in which the
underlying security;
specialist makes a market or a wholly(iii) "Overlying option" means (A) a
owned margin security;
put option purchased or a call option
(ii) 75 per cent of the current market
written against an existing long position
value of any underlying security or
in a specialist’s or market-maker’s
overlying option purchased and held in
account, or (B) a call option purchased
the account as a permitted offset
or a put option written against a short
position.
position in a specialist’s or market(iii) The maximum loan value
maker's account.
prescribed
by the Board in § 220.8 (the
(iv) "In or at the money,” with respect
Supplement to Regulation T) when a
to a call option, indicates that the
security purchased and held in the
current market price of the underlying
account does not qualify as a specialist
security is not more than one standard
or permitted offset position.
exercise interval below the exercise
(5) A d ju s te d d e b it b a la n c e . The
price of the option, and, with respect to
amount to be included in the adjusted
a ()ut option, that the current market
debit balance of the account shall be:
price of the underlying security is not
(i)
Not less than 100 per cent of the
more than one standard exercise
current market value of either a security
interval above the exercise price of the
sold short or an option written where
option.
such position qualifies as a specialist
transaction;
(ii) 125 per cent of the current market
value of any security sold short or
option written and held in the account
as a permitted offset position.
(iii) The amount prescribed by the
Board in § 220.8 (the Supplement to
Regulation T) when a security sold short
in the account does not qualify as a
specialist or permitted offset position
plus, for a short position in a security
oilier than un option, the current market
value of the security sold short.
(«l) A d d itio n a l nun-yin; “fre e-rid in g ."
Except as required by paragraph (g)(8),
on any day when additional margin is
required as a result of transactions in
the account, the creditor shall issue a
call for a deposit of cash or securities
having loan value and may allow the
specialist a maximum of five full
business days to make a deposit
sufficient to meet the call. To prevent
"free-riding" in the account, a creditor
who has not obtained this deposit (and
is therefore required to liquidate
sufficient securities to meet the call) is
prohibited for a 15 day period from
extending any further credit in the
account to finance transactions in
securities in which the specialist is not
registered to make a market. The
acquisition or liquidation of a permitted
offset position shall not be subject to
this “free-riding” penalty. The restriction
on “free-riding” shall not apply to any
national securities exchange adopting a
"free-riding" rule applicable to
specialists which has been approved by
the Securities and Exchange
Commission.
(7) W ith d r a w a ls . On any day when a
specialist requests a withdrawal of cash
or securities from the account, the
creditor shall compute the status of the
account for non-specialist securities
positions in accordance with the
provisions of § 220.8 (the Supplement to
Regulation T), permitted offset positions
in accordance with the provisions of
paragraphs (g)(4)(ii) and (g)(5)(ii), and
specialist positions on a "good faith”
basis. Withdrawals shall be permitted to
the extent that the adjusted debit
balance in the account does not exceed
the maximum loan value of all of the
collateral held in the account after the
withdrawal has been made.
(8) D e fic it a c co u n ts. On any day when
the account would liquidate to a deficit,
the creditor shall not extend any further
credit in the account, and shall issue a
call for additional cash or collateral,
which shall be met by noon of the
following business day. In the event
sufficient cash or collateral is not
deposited the creditor shall liquidate
existing positions in the account.
By order of the Board of Governors of the
Federal Reserve System, June 11,1980.
Griffith L. Garwood,
A ssistant Secretary o f the Board,
@FedFRASER