F E D E R A L R E S E R V E B A N KO F N E W Y O R K

r Circular No. 7 9 6 9 1

L October 14, 1976 J

AMENDMENT TO REGULATION T Uniform Margin Requirement for Writing Options to Sell or Buy Stock

'I'n All 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 equiva­lent, 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 ra l R e g i s te r , the Board of Governors made the following additional statement:

By notice of proposed rulemaking published in the F ederal R eg ister 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 Federal R eg ister (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 cur- t (“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 ex­changes 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 u s e d 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

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

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(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 op­tions in the special convertible debt security account in the same manner as in the general account.

( 6 ) Section 220.8(j ) has been revised to provide for the use of the current market value of the under­ly in g s to 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 sup­plement 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 .

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BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM

SUPPLEMENT TO REGULATION T

Effective January 1, 1977

SECTION 220.8 - SUPPLEMENT

(a) Maximum loan value for general accounts. The maximum loan value of securities in a general account subject to section 220.3 shall be:

(1 ) Of a registered non-equity security held in the account on March 11, 1968, and continuously thereafter, and of a margin equity security (except as provided in section 220.3(c) and paragraphs (b),(c), and (0 of this section), 50 per cent of the cur­rent market value of such securities.

(2) Of an exempted security held in the account on March 11, 1968, and continuously thereafter, the maximum loan value of the security as deter­mined by the creditor in good faith.

(b) Maximum loan value for a special bond account. The maximum loan value of an exempted security and of a registered non-equity security pursuant to section 220.4(i) shall be the maximum loan value of the security as determined by the creditor in good faith.

(c) Maximum loan value for special convertible debt security account. The maximum loan value of a margin security eligible for a special convertible security account pursuant to section 220.4(j) shall be 50 per cent of the current market value of the security.

(d) Margin required for short sales. The amount to be included in the adjusted debit balance of a general account, pursuant to section 220.3(dX3), as margin required for short sales of securities (other than exempted securities) shall be 50 per cent of the current market value of each security.

(e) Retention requirement. In the case of an account which would have an excess of the adjust­ed debit balance of the account over the maximum loan value of the securities in the account follow­ing a withdrawal of cash or securities from the account, pursuant to section 220.3(bX2):

(l)The “retention requirement” of an exempt­ed 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.

(2) In the case of a special bond account subject to section 220.4(i), the retention requirement of an exempted security and of a registered non­equity security shall be equal to the maximum loan value of the security.

(3) In the case of a special convertible security account subject to section 220.4(j) which would have an excess of the adjusted debit balance of the account over the maximum loan value of the secur­ities in the account following a withdrawal of cash or securities from the account, the retention re­quirement of a security having loan value in the account shall be 70 per cent of the current market value of the security.

(4) For the purpose of effecting a transfer from a general account to a special convertible security account subject to section 220.4(j), the retention requirement of a security described in section 220.4(j), shall be 70 per cent of its current market value.

(0 Securities having no loan value in a general account. No securities other than an exempted security or registered non-equity security held in the account on March 11, 1968, and continuously thereafter, and a margin security, shall have any loan value in a general account except that a mar­gin security eligible for the special convertible debt security account pursuant to section 220.4(j) shall have loan value only if held in the account on March 11, 1968, and continuously thereafter; and no put, call, or combination thereof shall have loan value in a general account.

(g) Account subject to section 8(g). For pur­poses of the computation described in section220.3(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 continu­ously 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.

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

N o v e m b e r 2 , 1 9 7 5 , all t ra n s a c tio n s p e rm it te d b y se c tio n s 2 2 0 .3 (b ) (1 ) an d 2 2 0 .3 (g ) fo r a c c o u n ts n o t su b je c t to se c tio n 8 (g ) shall a lso b e p e rm it te d

in a c c o u n ts su b je c t to se c tio n 8 (g ).

( h ) Requirements for inclusion on List of OTC Margin Stocks. E x c e p t as p ro v id e d in su b p a ra g ra p h(4 ) o f se c tio n 2 2 0 .2 (e ) , O T C m arg in s to c k shall m e e t th e r e q u ire m e n ts th a t :

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

se c tio n 12(gX O o f th e S e c u r itie s E x ch a n g e A c t o f 1 9 3 4 (1 5 U .S .C . 7 8 / ( g X l) ) , is issu ed b y an in su r ­an ce c o m p a n y su b je c t to se c tio n 1 2 (g X 2 X G ) (1 5 U .S .C . 7 8 /(g ) (2 X G )) th a t h a s a t lea s t $1 m illio n o f c a p ita l a n d su rp lu s , o r is issu ed b y a c lo sed -e n d 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 su b je c t to reg ­

is tr a t io n p u rs u a n t to s e c tio n 8 o f th e In 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 re d e a le rs s ta n d w illin g to , a n d

d o in f a c t , m a k e a m a rk e t in su c h s to 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 fe rs fo r su c h s to c k fo r th e ir o w n a c c o u n ts , o r th e s to c k is re g is te re d o n a se c u ritie s e x c h a n g e th a t is e x e m p te d b y th e S e c u r itie s a n d E x ch a n g e C o m ­m issio n f ro m re g is tra tio n as a n a tio n a l se c u ritie s e x c h a n g e p u r s u a n t to 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 ) ,

(3 ) T h e re are 1 ,2 0 0 o r m o re h o ld e rs o f re c o rd

as d e f in e d in SE C R u le 12 g 5 -1 (1 7 C .F .R . 2 4 0 .12g 5 -1 ), o f th e s to c k w h o are n o t o ff ic e rs , d ire c to rs ,

o r b e n e f ic ia l o w n e rs o f 10 p e rc e n t o r m o re o f th e s to c k , o r th e average d a ily t r a d in g v o lu m e o f su ch

s to c k , as d e te rm in e d b y th e B o a rd , is a t lea s t 5 0 0

sh a res ,

(4 ) T h e issu er is o rg 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 an d i t , o r a p re d e c e s so r in in te r e s t , h a s b e e n in e x is te n c e fo r a t lea s t 3 y e a rs ,

( 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

lea s t 6 m o n th s ,

(6 ) D aily q u o ta t io n s fo r b o th b id an d ask ed

p ric e s fo r th e s to c k are c o n tin u o u s ly av ailab le to

th e g e n e ra l p u b lic , and

(7 ) T h e re are 5 0 0 ,0 0 0 o r m o re sh a res o f such s to c k o u ts ta n d in g in a d d it io n to sh a res h e ld b e n e f i ­c ia lly b y o ff ic e rs , d i r e c to r s , o r b e n e f ic ia l o w n e rs o f m o re th a n 10 p e rc e n t o f th e s to c k , an d shall m e e t

tw o o f th e th re e a d d it io n a l re q u ire m e n ts th a t .

(8 ) T h e sh a res d e sc rib e d in su b p a ra g ra p h (7 ) o f th is p a ra g ra p h h ave a m a rk e t va lue o f a t le a s t $5

m illio n ,

(9 ) T h e m in im u m average b id p rice o f su c h s to c k , as d e te rm in e d b y th e B o a rd , is a t lea s t $5

p e r sh a re , an d 6

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

( 1 0 ) T h e issuer h a s a t le a s t $5 m illio n o f c a p ita l ,

s u rp lu s , an d u n d iv id e d p ro f i ts .

( 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 sub- p a ra g ra p h (4 ) o f se c tio n 2 2 0 .2 (e ) , O T C m arg in s to c k shall m e e t th e r e q u ire m e n ts th a t :

( 1 ) T h e s to c k c o n tin u e s to b e su b je c t to reg is­t r a t io n u n d e r s e c tio n 1 2 ( g X 0 o f th e S e c u ritie s

E x ch 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 issu ed b y an in su ra n c e c o m p a n y su c h issu e r c o n ­tin u e s to b e su b je c t to s e c tio n 1 2 (g X 2 X G ) (1 5 U .S .C . 7 8 /(g X 2 X G ))a n d to h av e a t lea s t S I m illio n o f c a p ita l a n d su rp lu s , o r i f issu ed b y a c lo sed -e n d 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 su c h issu er c o n ­t in u e s to b e su b je c t to re g is tra tio n p u rs u a n t to sec­t io n 8 o f th e In 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 ) T h re e o r m o re d e a le rs s ta n d w illin g to , a n d

d o in f a c t , m a k e a m a rk e t in su c h s to c k in c lu d in g m ak in g re g u la rly p u b lish e d bona fide b id s an d

o f fe rs fo r su c h s to c k fo r th e ir o w n a c c o u n ts , o r th e s to c k is re g is te red o n a se c u ritie s e x c h a n g e th a t is e x e m p te d b y th e S e c u r itie s an d E x c h a n g e C o m ­m iss io n f ro m re g is tra tio n as a n a tio n a l se c u ritie s e x c h a n g e p u rs u a n t to se c tio n 5 o f th e S e c u r itie s

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

(3 ) T h e re c o n tin u e to b e 8 0 0 o r m o re h o ld e rs

o f re c o rd , as d e f in e d in SEC R u le 1 2 g 5 -l (1 7 C .F .R . 2 4 0 .1 2 g 5 -1), o f th e s to c k w h o a re n o t o ff ic e rs , d i r e c to r s , o r b e n e f ic ia l o w n e rs o f 10 p e r ­c e n t o r m o re o f th e s to c k , o r th e average d a ily tra d in g v o lu m e o f su ch s to c k , as d e te rm in e d b y th e B o a rd , is a t lea s t 3 0 0 sh a res ,

(4 ) T h e issuer c o n tin u e s to b e a U .S . c o rp o ra ­

t io n ,

(5 ) D aily q u o ta t io n s fo r b o th b id an d a sk e d p rice s fo r th e s to c k a re c o n tin u o u s ly av ailab le to

th e gen era l p u b lic , an d

(6 ) T h e re are 3 0 0 ,0 0 0 o r m o re sh a res o f su c h s to c k o u ts ta n d in g in a d d it io n to sh a res h e ld b e n e ­

fic ia lly b y o ff ic e rs , d i r e c to r s , o r b e n e f ic ia l o w n e rs o f m o re th a n 10 p e rc e n t o f th e s to c k ; a n d shall

m e e t tw o o f th e th re e a d d it io n a l re q u ire m e n ts th a t :

(7 ) T h e sh a res d e sc rib e d in su b p a ra g ra p h (6 ) o f th is p a ra g ra p h c o n tin u e to h ave a m a rk e t va lue o f

a t lea s t $ 2 .5 m illio n .(8 ) T h e m in im u m average b id p rice o f su ch

s to c k , as d e te rm in e d b y th e B o a rd , is a t lea s t $3

p e r sh a re , an d

(9 ) T h e issu er c o n tin u e s to h av e a t le a s t $ 2 .5 m illio n o f c a p ita l , su rp lu s , an d u n d iv id e d p ro f i ts .

(j) Margin required for the writing of options.T h e a m o u n t to be in c lu d ed in th e a d ju s te d d e b it

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

o r specia l co n v e rtib le d e b t se c u rity acc o u n t p u r ­su a n t to p a ra g ra p h s (d)(5) a n d (i) o f sec tio n 220 .3 , as th e m a rg in re q u ire d fo r th e issuance , e n d o rse ­

m en t o r g u a ra n te e o f a n y p u t o r ca ll sh a ll b e 30 p e r cen t o f th e c u rre n t m a rk e t v a lu e o f th e u n d e r ­ly ing se c u rity w ith an a d ju s tm e n t fo r any a p p lic a ­

ble in crease o r re d u c tio n .

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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 fol­lows :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 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 paragraph (i) of this section and section 220.8 (the Supplement to Regulation T) for each transaction involving the issuance, endorse­ment or guarantee of any put, call or combina­tion thereof.

* * *(i) Options. (1) The amount to be included

in the adjusted debit balance of an account as the margin required for each transaction involv­ing the issuance, endorsement or guarantee of any put or call shall be such amount as the Board shall prescribe from time to time in sec­tion 220.8 (the Supplement to Regulation T) as the margin required for the writing of op­tions, 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 put;

(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 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 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 se­curity which does not expire before the expira­tion date of the put 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 the put issued, en­dorsed 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.

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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 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 unreal­ized 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 stand­ing 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 trans­actions 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) Special convertible debt security ac­count.

♦ * *

(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 under­lying security into which a margin debt security held in the account is convertible, and put op­tions 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 loan value of such securities see §220.8(b), the Supplement to Regulation T.

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