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FEDERAL RESERVE BANK
OF NEW YORK
I- Circular No. 9253 ~l
March 3, 1982
MARGIN REGULATIONS
Proposal Regarding Futures Contracts Based on Stock Indexes
To A ll Banks, Brokers and Dealers, and Persons Extending
Securities Credit in the Second Federal Reserve District:
Following is the text of a statement issued February 25 by the Board of Governors of the
Federal Reserve System:
The Federal Reserve Board today issued for comment a regulatory framework that could be used to
establish margin requirements on futures contracts based on stock indexes. Comments should be
received by April 30.
Last week, the Board decided not to specify a margin requirement on stock index futures contracts
at this time, following action by the Commodity Futures Trading Commission permitting the Kansas
City Board of Trade to trade such a contract.
The Board noted actions taken by the KCBOT to increase its own initial margin requirements on
these futures contracts and to narrow the definition of hedging for margin purposes. In view of this, the
Board decided not to take immediate action of its own.
However, the Board indicated that, because formal margin requirements on stock index futures
contracts may be appropriate later to limit the use of speculative credit and to assure competitive equality
with stock options — on which margin requirements are currently imposed — it plans to monitor the
development and operation of this market closely.
The Board therefore asked for comment both on specific issues related to establishment of margin
requirements on stock index futures contracts and related instruments and on a proposed framework for
such regulation.
Enclosed — for institutions subject to Regulations G,T, and U in this District — is the text of
the Board’s proposal, together with a copy of a letter on this matter from Chairman Volcker of the
Board of Governors to the Chairman of the Commodity Futures Trading Commission. The proposal
will be published in the Federal Register, and will also be furnished upon request directed to our
Circulars Division (Tel. No. 212-791-5216).
Comments on the proposal should be submitted by April 30, 1982 and may be sent to our
Regulations Division.
A nthony
M.
S olom on,
President.
(Complete text not available)
BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
[Docket No. R-0385]
AGENCY:
Board of Governors of the Federal Reserve System.
ACTION:
Advance notice of proposed rulemaking.
SUMMARY: The Board of Governors, pursuant to it s authority under the Securi
t ie s Exchange Act of 1934, i s considering establishing margin requirements
for futures contracts based on stock indexes. The Board is now requesting
comments on a proposed regulatory framework which could be used to implement
a decision to establish margin requirements for futures contracts based on
stock indexes.
DATE:
Comments should be received on or before April 30, 1982.
ADDRESS: Comments, which should refer to Docket No. R-0385, may be mailed
to the Secretary, Board of Governors of the Federal Reserve System, 20th
Street and Constitution Avenue, N.W., Washington, D.C. 20551 or delivered
to Room B-2223 between 8:45 a.m. and 5:15 p.m. Comments received may also
be inspected at Room B-1122 between 8:45 a.m. and 5:15 p.m. except as
provided in section 261.6(a) of the Board's Rule Regarding A v aila b ility
of Information (12 CFR § 261.6(a)).
FOR FURTHER INFORMATION CONTACT: Laura Homer, Securities Credit Officer
or Robert Lord, Attorney, Division of Banking Supervision and Regulation,
Board of Governors of the Federal Reserve System, Washington, D.C. 20551
(202) 452-2781.
SUPPLEMENTARY INFORMATION: The Board has reviewed the question of applying
margin requirements to any futures contracts involving a broadly-based stock
index in light of approval by the Commodity Futures Trading Commission (CFTC)
of an application by the Kansas City Board of Trade ("the Applicant") to trade
such a contract. In considering the matter, the Board took into account
that stock index futures contracts can, to an important degree, compete
with, and be an economic substitute for, stock options, on which margin
requirments are currently imposed. In addition to limiting the use of spec
ulative c re d it, margin requirements, therefore, may be appropriate to assure
competitive equality among functionally sim ilar instruments.
The Board understands that the Applicant has raised the i n i t i a l
margin on it s stock index futures contract for a non-hedging position to a
dollar level approximately equal to ten percent of the current value of the
contract, and has raised margin requirements for hedging transactions to one
half of that amount. In addition, the Board understands that the Applicant
has taken steps to narrow the definition of hedging for margin purposes to
better assure that situations permitting the lower margin requirement represent
a true hedging transaction, a direction the Board believes appropriate.
The actions by the Applicant would appear to a llev ia te the need
for immediate action by the Board and, consequently, the Board has decided
not to specify at this time particular margin requirements on stock index
[Enc. Cir. No. 9253]
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futures contracts such as the one approved by the CFTC. The Board plans to
monitor closely the development and operation of the market in stock index
futures contracts so that an informed judgment on the matter can be reached
based on experience.
Although the Board has decided not to specify margin requirements
on stock index futures contracts at this time, there is a clear p o ssib ility
that Board action may be necessary in the future. Therefore, the Board is
asking for comment on specific issues, including a regulatory framework
suggested by i t s s t a f f , so that the Board may be fu lly prepared in the
event a formal margin regulation become necessary. The public is asked
to comment on the following sp e cific issues in connection with stock index
futures contracts and related instruments:
1.
The appropriate level of margin;
2.
the appropriate definition of a hedged transaction;
3.
the use of Regulation G or T to cover futures
commission merchants that may not otherwise be
subject to the Board's margin regulations;
4.
the proper customer account to use in Regulation T
for these instruments; and
5.
the treatment of bank loans and loans from other
lenders for the purpose of meeting margin c a lls
and related costs.
The objective of several of the foregoing questions is to design
a regulatory framework that would create the least operational problems
for broker-dealers presently subject to Regulation T and those firms not
presently covered, while providing comparable treatment of the two groups.
Specific comment is invited with respect to the following framework which
has been suggested by Board s ta ff.
F i r s t , a futures commission merchant would be considered a
"creditor" subject to Regulation T, but only with respect to transactions
in stock index futures contracts. Second, any Regulation T "creditor" who
executes a stock index futures contract for a public customer would be
required to obtain a specified i n i t i a l margin. Third, transactions in
stock index futures contracts would be required to be maintained in the
"special commodity account" which presently exists in Regulation T.
Fourth, credit extended to customers by banks and other lenders for the
purpose of meeting a commitment under a stock index futures contract would
be considered "purpose" cred it. Thus, credit extended for such a purpose
would be subject to the current margin level applicable to other "purpose"
loans c o lla te ra lize d by margin s e cu ritie s. F in a lly , the level of margin
would be placed in the Supplement to Regulation T with other margin levels.
BOARD OF DOV E RN 0 R5
FEDERAL R ESER VE SYSTEM
WASHINGTON, D. C. 2 0 5 5 1
P A U L A. V O L C K C N
February 17, 1982
CHAIRMAN
The Honorable P h ilip McBride Johnson
Chaiman
Cccmiodity Futures Trading Commission
2033 K S treet, H.W.
Washington, D.C. 20581
Dear Mr. Chairman:
This i s in response to our discussions concerning the announced
plans of the Kansas C ity Board of Trade (• KCBOT") to in it ia t e trading
on the KCBOT in a futures contract for cash settlem ent based on the
Value Line Average, a broadly based stock price index. I understand
that on February 16 the Commission approved the KCBOT's application
for approval to trade in stock market index futures contracts.
The Board has reviewed the question o f applying margin require
ments to the KCBOT futures contract. As you know, we believe that the
Board's authority to impose margin requirements under the S ecu rities
Exchange Act authorizes the imposition of margin requirements on the
type of futures contacts proposed by the KCBOT. Moreover, in considering
th is matter i t i s important to take in to account that the stock market
futures contract proposed by the KCBOT can, to an important degree,
compete with, and be an economic su b stitu te fo r , options oontracts,
on which margin requirements are currently Imposed. Thus, margin require
ments may be appropriate not only to lim it use of cred it for speculative
purposes, but a lso to assure competitive equality among functionally
sim ilar instruments.
We understand, however, that the board of directors of the
KCBOT on February 16, 1982, has acted to ra ise i n i t ia l margin requirements
on the futures oontract for a non-hedging p osition to the le v e l of $6,500,
approximately equal to 10 per cent of the current value o f the oontract,
and to r a ise margin requirements for hedging transactions to approximately
one-half of the non-hedging margin. We a lso understand that the KCBOT
ha8 taken a step towards narrowing the d e fin itio n o f ■hedging” so as
to better assure that situ a tio n s in which the lower margin requirement
would apply represent a true hedging situ a tio n , a direction the Board
b eliev es appropriate.
These self-reg u la to ry actions by the KCBOT would appear to
a lle v ia te the need for any lanediate action by the Board, and, consequently
the Board has decided not to sp ecify a t th is time particular margin
The Honorable P h ilip McBride Johnson
Page Two
requirements on stock index futures contracts such as the BCBOT futures
contract. We do plan to monitor c lo se ly the development and operation
o f the market in stock index futures contracts as i t develops so that
we can reach an informed judgment, based on exp ertise, as to whether
imposition o f a formal rule with respect to margin requirements would
be appropriate. We would welcome working with the CFTC in following
market developments, and I have asked my s t a f f to cooperate fu lly with
your8 in monitoring developments.
So that we may be f u lly prepared in the event a formal margin
regulation becomes necessary in the lig h t of market developments and
experience, we are in vitin g in terested parties to submit comments on
the establishment of margin requirements on stock market index futures
contracts and related instruments. To f a c ilit a t e comments, we w ill
publish a proposed framework for such regulations and relevant questions.
The Board plans to review th is matter in about s ix months.
I appreciate your e ffo r ts to work with us and to keep us informed
of developments in th is area.
@FedFRASER