Rule 431 Margin Requirements
This rule is no longer applicable.
(a) DEFINITIONS
For purposes of this Rule, the following terms shall have the meanings specified below:
The term "customer" includes a broker or dealer, member, allied member, member organization and their partners, officers or employees (other than clerical) whenever the carrying member organization extends, arranges or maintains any credit on their behalf.
Savings and loan associations are not "banks" as defined in Section (3)(a)(6) of the Securities Exchange Act of 1934 and, therefore, are not included in the term "designated account". Savings and loan associations are deemed other lenders subject to Regulation G of the Board of Governors of the Federal Reserve System.
Foreign institutions do not qualify as "designated accounts" as they are not regulated under the laws of the United States or of a state or political subdivision thereof. The term "foreign institutions" includes but is not limited to, such foreign organizations as banks, brokers, dealers, insurance companies and government agencies.
The term "investment trust" means any investment company registered with the Securities and Exchange Commission under the Investment Company Act of 1940.
The term "bank" means a domestic bank as defined under Section 3(a)(6) of the Securities Exchange Act of 1934.
CATS, TIGERS and similar securities may be treated as "exempted securities" subject to the same requirements as any other government security.
For the purpose of effecting new securities transactions and commitments, the customer shall be required to deposit margin in cash and/or securities in the account which shall be at least the greater of:
Withdrawals of cash or securities may be made from any account which has a debit balance, "short" positions or commitments, provided it is in compliance with Regulation T of the Board of Governors of the Federal Reserve System and Rules 400 through 406 of the Exchange Act and Rules 41.42 through 41.48 of the CEA and after such withdrawal the equity in the account is at least the greater of $2,000 ($25,000 in the case of "pattern day-traders") or an amount sufficient to meet the maintenance margin requirements of this Rule.
Member organizations must adhere to the requirements of this Rule or Regulation T, whichever is greater. Where Regulation T requires "good faith" margin or has no requirements (e.g., exempted securities) then the equity required by this Rule will govern.
Every margin transaction must result in an equity in the account of at least $2,000 except that payment in full for any security purchased will satisfy the requirement. Each customer account, including those instances where more than one margin account is permitted under Regulation T, is subject to the $2,000 requirement except for:
If the equity in an account falls below $2,000 because of a decline in the market value of the security(ies) and no new commitments are made, no deposit or liquidation is necessary. For the purpose of this Rule, a same-day substitution constitutes a new commitment. No withdrawal may be made from an account which would leave less than $2,000 equity after the withdrawal.
A customer who holds profitable options may either sell them or exercise them and simultaneously liquidate the resulting security position without meeting the margin requirement of this section of the Rule. A profitable option is defined as an option to buy or sell a security at a price which is more favorable to the option holder than the current market price of the security on which the option is written.
This same treatment is permitted on bona fide spread positions when, on the same day, a short call is exercised against the customer and he/she exercises their long call to close out the short security position created.
The initial margin required on purchases of FNMA common stock or FNMA convertible debentures will be the same as that required by Regulation T for a margin security at that time. Short sales, which must be made in the margin account, require initial margin equal to the amount required by Regulation T for short sales.
In accordance with the designation of types of accounts permitted under Regulation T, such accounts will be subject to or exempt from the $2,000 minimum equity requirement as follows:
Subject to | Exempt From | |
Margin account | X | |
Special Memorandum Account | X | |
Arbitrage account | X | |
Cash account | X | |
Nonsecurities credit and employee stock ownership account | X | |
Omnibus account | X | |
Broker/dealer credit account | X | |
Market functions account | X | |
Government securities account | X |
The margin which must be maintained in all accounts of customers, except for cash accounts subject to Regulation T unless a transaction in a cash account is subject to other provisions of this rule, shall be as follows:
Transactions in profitable options are exempt from maintenance margin requirements as outlined under Rule 431(b)/03.
Member firm partners should be guided by the following principles in determining margin requirements of partners' accounts:
The requirements described in Rule 431(c)/02 above could apply to a member corporation carrying stockholder accounts. For maintenance margin purposes, when a stockholder has a securities account and is indebted to the member corporation as a result of some other transaction, such indebtedness should be offset against the stockholder's securities account to determine the value of securities that may be carried in the securities account.
Listed and unlisted securities, other than options, may be given value in the computation of maintenance margin requirements.
When a customer sells stock, in any type of account, which carries a due bill representing additional shares of the same stock or another stock, and the certificate covering the sale is not registered in the name of a member firm or its nominee, the carrying firm shall retain out of the proceeds of the sale a sum at least equal to the market value of the shares represented by the due bill until the shares covered thereby are received. If the market value of the shares represented by the due bill increases, the member firm must obtain from the customer additional funds or securities to satisfy the mark to market.
Only excess funds or securities held against these due bill requirements are to be given consideration in determining the status of a customer's account as it relates to maintenance margin for other purposes.
Certain sinking fund transactions fail to qualify for the Nonsecurities Credit and Employee Stock Ownership Account under Regulation T (see Section 220.9(a)/03) because:
See NYSE Rule 431(e)(7)/01 and Regulation T Section 220.09(a)/03.
Although premiums received from writing an option may be withdrawn or used as an offset against requirements on other transactions on the same day, such usage may result in the loss of equity to an account. An "in the money" call option could be sold against a long position in the underlying security, resulting in the underlying security being valued at the call's exercise value, which is below the current market value (pegging). In this case, any withdrawal will result in a loss of equity in the account and conceivably could even result in violation of this Rule. Accordingly, care should be used before any withdrawals are permitted. [See Reg. T Section 220.4(e)/06.]
The purchase or short-sale of a marginable foreign security in a margin account or a sub-account, as allowed in Regulation T, will be subject to this section of the Rule and sub-paragraph (f)(1), "Determination of Value for Margin Purposes" for those securities not traded on a recognized foreign securities market.
Procedures shall be established by member organizations to:
The Rule requires that member organizations determine the total dollar amount of credit to be extended to any one customer or on any one security to limit the potential loss or exposure to the firm. It is important that specific limits be established to prevent any one customer or group of customers from endangering the member firm's capital.
It is suggested that member organizations appoint a credit committee with full authority to formulate credit policies and set limits as to the amount of credit that may be extended. It is recommended that the committee include the finance officer, credit officer and/or margin manager.
The foregoing requirements of this Rule are subject to the following exceptions:
The exceptions referred to in this section apply only to the Special Initial Margin Requirements (Rule 431(f)(8)) and the Maintenance Margin Rule (Rule 431(c)). They do not apply to the $2,000 minimum equity requirement of Rule 431 (b).
When a security carried in a "long" position is exchangeable or convertible within a reasonable time, without restriction other than the payment of money, into a security carried in a "short" position for the same customer, the margin to be maintained on such positions shall be 10% of the current market value of the "long" securities. When the same security is carried "long" and "short" the margin to be maintained on such positions shall be 5% of the current market value of the "long" securities. In determining such margin requirements "short" positions shall be marked to the market.
On net "long" or net "short" positions in obligations (including zero coupon bonds, i.e., bonds with coupons detached or non-interest bearing bonds) issued or guaranteed as to principal or interest by the United States Government or by corporations in which the United States has a direct or indirect interest as shall be designated for exemption by the Secretary of the Treasury, or in obligations that are highly rated foreign sovereign debt securities, the margin to be maintained shall be the percentage of the current market value of such obligations as specified in the applicable category below:
(i) Less than one year to maturity | 1% |
(ii) One year but less than three years to maturity, | 2% |
(iii) Three years but less than five years to maturity, | 3% |
(iv) Five years but less than ten years to maturity, | 4% |
(v) Ten years but less than twenty years to maturity, or | 5% |
(vi) Twenty years or more to maturity. | 6% |
Notwithstanding the above, on zero coupon bonds with five years or more to maturity the margin to be maintained shall not be less than 3% of the principal amount of the obligation.
When such obligations other than United States Treasury bills are due to mature in thirty calendar days or less, a member organization, at its discretion, may permit the customer to substitute another such obligation for the maturing obligation and use the margin held on the maturing obligation to reduce the margin required on the new obligation, provided the customer has given the member organization irrevocable instructions to redeem the maturing obligation.
The terms net "long" or net "short" positions mean positions in the same issue of the same security.
Requirements under this sub-section of the Rule are based on the remaining life of the bond until maturity, not on the bond's nominal life from issuance date to maturity date. Thus, a thirty year bond with only eight (8) years to maturity would require margin of 4%.
Obligations of the International Bank for Reconstruction and Development are treated as obligations of the United States Government. Customer positions in these obligations may be margined in accordance with the requirements of this section of the Rule.
All securities issued by FNMA are deemed to be exempted securities. See Rule 431(b)/04 for special initial margin requirements on FNMA common stock and convertible debentures.
Recognized Government bond dealers may extend credit, under this Rule, to any customer on a mutually agreed upon basis on U.S. Government securities, provided that, if the margin requirements are lower than the proprietary haircut deductions under the uniform net capital rule (SEC Rule 15c3-1, sub-paragraph (c)(2)(vi)(A), Securities Haircuts, Government Securities) a deduction in computing net capital will be made to the extent that the equity in a customer's account is less than such haircuts.
Recognized dealers are those U.S. Government Securities dealers reporting to the Market Reports Division of the Federal Reserve Bank of New York.
Member organizations may permit a customer to roll-over Government securities that are maturing in thirty days or less into another Government security and use the margin maintained on the maturing issue to be used to reduce the margin required on the new issue, providing they have received irrevocable instructions from the customer to redeem the maturing issue. For example, a customer rolls-over a U.S. Treasury bond maturing in 20 days and purchases a new U.S. Treasury bond maturing in 25 years. The new U.S. Treasury requires 6% margin, which is offset in part by the 1% margin presently held on the U.S. Treasury maturing in 20 days. As a result the total margin required is 5%
On any positions in exempted securities other than obligations of the United States, the margin to be maintained shall be 7% of the current market value.
Non-convertible corporate debt securities that are not listed or traded on a registered national securities exchange or do not qualify as an "OTC margin bond" are deemed non-marginable securities and not eligible for the lower margin requirements permitted in this section of the Rule. These bonds must be margined in accordance with Section (c) of this Rule.
For a mortgage related security to qualify for the 5% margin treatment, the security must be in compliance with Section 3(a)(41) of the Securities Exchange Act of 1934 and must qualify as a marginable security.
For the purpose of this Rule, net tangible assets means total assets less total liabilities less intangible assets (i.e., good will, etc.).
"Good faith" loan value may be extended by broker/dealers on certain long-term debt securities issued or guaranteed as a general obligation by a foreign sovereign, its provinces, cities or states, or a supranational entity if there is available an explicit or implicit rating of the entity in one of the two highest rating categories by a nationally recognized statistical rating organization (Reg. T 220.18(b)).
The Exchange initial and maintenance margin requirements shall be the same requirements as non-convertible corporate debt securities (See Rule 431(e)(2)(C)).
Notwithstanding the other provisions of this Rule, a member organization may clear and carry basket transactions of one or more members or member organizations registered as market-makers (who are deemed specialists for purposes of Section 7 of the Securities Exchange Act of 1934 pursuant to the rules of a national securities exchange) upon a margin basis satisfactory to the concerned parties, provided all real and potential risks in accounts carried under such arrangements are at all times adequately covered by the margin maintained in the account or, in the absence thereof, by the carrying member organization's excess net capital under Rule 325.
Notwithstanding the foregoing in this sub-section (e)(2),
Member organizations may only use accrued interest to reduce or eliminate a maintenance call that has been created pursuant to this Rule. Accrued interest may not be considered as part of the price of a bond nor used in determining or computing equity in an account.
The Exchange is aware that the amended margin requirements under sub-sections (e)(2)(A), (B) and (C) of this Rule which are fully effective on September 1, 1987, may result in new maintenance calls on previously established positions that were properly margined in accordance with prior Rule 431 requirements. The specific areas affected are obligations of the United States wit twenty or more years to maturity, and the minimum margin requirements imposed on obligations of the United States, all other exempted securities and non-convertible corporate debt securities.
The Exchange will allow member organizations, at their discretion, to continue to carry those customer accounts now subject to the higher requirements in accordance with the prior Rule 431 requirements. However, once the customer's account becomes properly margined under the amended Rule 431 requirements it must be maintained in accordance with the higher requirements.
Member organizations shall supply the Exchange with an itemized list of all customer accounts being maintained pursuant to this "grandfather" provision. Only the customer accounts in the list are subject to the "grandfather clause". The itemized list must be received by the Exchange within thirty (30) business days from the date the member organization adopts the amended Rule 431.
Finally, the itemized list shall record the customer's name, account number(s) and the quantity and description of the security (ies) involved.
On any position resulting from a transaction involving exempted securities, mortgage related securities, or major foreign sovereign debt securities made for or with an "exempt account", no margin need be required and any marked to the market loss on such position need not be collected. However, the amount of any uncollected marked to the market loss shall be deducted in computing the Net Capital of the member organization under the Exchange's Capital Requirements, subject to the limits in paragraph (e)(2)(H) below.
For the purpose of sub-section (e)(2)(F), the term "designated account" shall include any person as defined in sub-section (a)(7) having net tangible assets (as defined in subsection (e)(2)(C)/03) of sixteen million dollars ($16,000,000) or more.
Reverse repurchase agreements in exempted securities shall be maintained in a special account subject to the provisions of this section of the Rule.
For the purpose of this Rule, cash transactions and reverse-repurchase transactions in mortgage related securities as defined in Section 3(a)(41) of the Securities Exchange Act of 1934 may be afforded the same treatment as exempted securities under this sub-section (e)(2)(F).
All GNMA cash transactions for customers and non-customers are subject to the provisions of this section of the Rule. Cash transactions in GNMAs may include transactions in TBAs (to be announced) and standbys. TBAs are delayed delivery and "when issued" type transactions in GNMAs. Generally, GNMA pool numbers are not announced or assigned to these transactions on trade date. Standby commitments represent the equivalent of a short put position in a customer account, which gives the member organization the right to deliver to the customer against payment a specific amount of GNMAs on a specified date.
Unrealized profits in one GNMA transaction may offset any loss from another GNMA transaction in the same customer account and the amount of net unrealized profits may be used to reduce requirements. Only profits (in-the-money amounts), if any, on long standbys are recognized.
Exempt accounts in addition to those provided in this section of the Rule and those established under paragraph /01 above may include (a) all independently audited entities with both more than $1.5 million of net current assets (which may include in the case of mortgage bankers a 3/4 of 1% maximum allowance on loan servicing portfolios) and with more than $1.5 million of net worth and (b) GNMA brokers who act only as agents where the member organizations independently confirm, at least monthly, that such GNMA brokers are acting for accounts qualified above or which are otherwise exempt accounts. In evaluating loan servicing portfolios the generalized 3/4 of 1% allowance is not necessarily appropriate. It is suggested that consideration be given to such factors as: the loan balance, servicing fee, remaining life of the loan, probability of loan survival, delinquency rate, geographic relationships, cost of foreclosure and servicing costs.
In lieu of deducting from original capital 100% of mark-to-market deficits in exempt accounts and having to obtain margin as well as mark-to-market deficits from non-exempt mortgage bankers' accounts, member organizations may make a determination in writing of a risk limit for each such exempt account and non-exempt mortgage banker's account.
The exemption shall apply only to the limit amount which for any one account or a group of commonly controlled accounts cannot exceed 5% of the member firm's tentative net capital. The risk limit determination for positions and mark-to-market exposure shall be made by a qualified credit executive or credit committee of executives qualified under Exchange Rule 342(e), taking into consideration the firm's excess net capital and each customer's net current or tangible assets. Each firm shall establish various levels of credit limits which are to be authorized in writing by appropriate management credit executives or committees depending upon credit levels. Supervisory personnel shall review the activity and status of accounts of customers, as frequently as circumstances warrant but in any event at least quarterly. Member organizations shall also (1) assure themselves that persons entering orders and issuing instructions with respect to customer accounts are doing so upon authority (see Exchange Rule 405.10) and (2) institute procedures to obtain prompt written confirmation of trades.
Exempt accounts shall not be required to put up margin or marks-to-market on their exempt GNMA transactions, i.e., those within their established risk limits. However, a member organization shall charge its capital for any marked-to-market deficits not collected as follows:
Period to Contract Maturity or Delivery Date from Trade Date | Capital Charge Percentage of Mark-to-Market Deficits | |
(a) TBAs | 0 to 120 days | 10% |
121 days to 1 1/2 years | 25% | |
Over 1 1/2 years | 100% | |
(b) Standbys | 0 to 1 year | 15% |
Over 1 year to 2 years | 25% | |
Over 2 years | 100% |
See /046 for possible additional capital charges relating to concentration.
Any transactions in excess of the established risk limit shall be treated as though they were carried for non-exempt accounts subject to the requirements of paragraph /044 below except that cash margin deficiencies need not be obtained.
[See Exhibit I.]
Note: The TBA category 0 to 120 days may include all transactions which provide for a settlement date no later than the last day of the calendar month in which the 120th day after trade date falls.
In non-exempt accounts of other than mortgage bankers, TBA or standby transactions are subject to a 5% margin requirement and marks-to-market, which must be obtained. Any cash margin deficiencies based upon such requirements are to be deducted in the computation of net capital after five (5) business days from the date they arise, until collected. However, on those TBA transactions with delivery dates or contract maturity dates 120 days* or less from trade date no margin or mark-to-market deficits need be obtained, provided 100% of any mark-to-market deficits are deducted by the member organization in computing net capital.
[See Exhibit I.]
*The TBA category 0 to 120 days may include all transactions which provide for a settlement date no later than the last day of the calendar month in which the 120th day after trade date falls.
Non-exempt mortgage bankers' accounts shall not be required to put up margin or marks-to-market on their GNMA transactions, within their established risk limits. However, member organizations shall charge their capital for any mark-to-market deficits not collected as follows:
Period to Contract Maturity or Delivery Date from Trade Date | Capital Charge Percentage of Mark-to-Market Deficits | |
(a) TBAs | 0 to 120 day* | 25% |
121 days to 1 1/2 years | 50% | |
Over 1 1/2 years | 100% | |
(b) Standbys | All transactions | 100% |
*The TBA category 0 to 120 days may include all transactions which provide for a settlement date no later than the last day of the calendar month in which the 120th day after trade date falls.
See /046 for possible additional capital charges relating to concentration.
Any transactions in excess of the established risk limit shall be treated as though they were being carried for nonexempt accounts subject to the requirements of paragraph /044 above except that cash margin deficiencies need not be obtained.
[See Exhibit I.]
With respect to transactions up to the risk limit, a mark-to-market deficit in any one account or combined group of commonly controlled exempt accounts or non-exempt mortgage banker's account shall be charged to capital to the extent it exceeds 5% of the firm's tentative net capital, although the total deduction shall not exceed 100% of the deficit. In addition, if the total mark-to-market deficits in all accounts less the amount of such deficits deducted in computing net capital, exceeds tentative net capital, 50% of such excess shall be deducted in computing net capital.
In computing the capital charges under these interpretations, the trade date and capital charge percentage for TBAs which have been sold to a customer under the terms of a standby agreement shall be the same as the original trade date and capital charge percentage for the standby contract in the account of the writer. As an example, if an exempt account entered into a thirteen (13) month standby contract to purchase GNMAs and the holder of the standby contract exercise his option to sell after twelve (12) months has elapsed, thus selling to the exempt account TBAs with less than 120 days to maturity, the member organization must still charge its capital (for uncollected mark-to-market deficits) on the basis of the original standby contract (25%) and not on the basis of a "new" TBA transaction (10%).
EXHIBIT I
G.N.M.A
Treatment of Customers' Transactions Under Rule 431(e)(2)(F)
Type of Account | Type of Transaction | |||||
Period to Contract Maturity or Delivery Date from Trade Date | ||||||
TBAs | Standbys | |||||
0 to 120 days(1) | 121 days to 1 1/2 years | Over 1 1/2 years | 0 to 1 year |
O ver 1 year to 2 years |
Over 2 years |
|
Exempt Accounts(2) | ||||||
5% Margin | No | No | No | No | No | No |
Mark-to market deficits | Yes(3) | Yes(4) | Yes(5) | Yes(6) | Yes(4) | Yes(5) |
Capital charges | Yes(3) | Yes(4) | Yes(5) | Yes(6) | Yes(4) | Yes(5) |
Non-exempt Accounts Other than Mortgage Bankers | ||||||
5% Margin | No | Yes | Yes | Yes | Yes | Yes |
Mark-to market deficits | Yes(5) | Yes(7) | Yes(7) | Yes(7) | Yes(7) | Yes(7) |
Capital charges | Yes(5) | Yes(7) | Yes(7) | Yes(7) | Yes(7) | Yes(7) |
Non-exempt Mortgage Bankers | ||||||
5% Margin | No | No | No | No | No | No |
Mark-to market deficits | Yes(4) | Yes(8) | Yes(5) | Yes(5) | Yes(5) | Yes(5) |
Capital charges | Yes(4) | Yes(8) | Yes(5) | Yes(5) | Yes(5) | Yes(5) |
CODES
On GNMA transactions only, exempt accounts may include all independently audited entities with both more than $1.5 million of net current assets (which may include in the case of mortgage bankers a 3/4 of 1% maximum allowance on loan servicing portfolios) and with more than $1.5 million of net worth. In addition, GNMA transactions with GNMA brokers who act only as agents may be treated as "exempt account" transactions if the member organization independently confirms at least monthly that such GNMA brokers are acting for accounts qualified as "exempt accounts".
*The term non-member broker/dealer refers to those broker/dealers who are members of another securities exchange or who are registered with the SEC under Section 15 of the Securities Exchange Act of 1934.
Any mark-to-market deficit plus margin on transactions in excess of the established risk limit for an account or a group of commonly controlled accounts is to be deducted in computing net capital by the member organization under the Exchange's capital requirements. In addition, if the total mark-to-market deficits in all accounts less the amount of such deficits deducted in computing net capital, exceeds tentative net capital, 50% of such excess shall be deducted in computing net capital.
In the case of a joint account carried by a member organization, in which such organization, or any partner, member, principal executive or any stockholder (other than a holder of freely transferable stock only) of such member organization participates with others, each participant other than the carrying member organization shall maintain an equity with respect to such interest pursuant to the margin provisions of the Rule as if such interest were in a separate account.
If any employee as part of his compensation is participating in only the profits in a firm account, such an account would be deemed a proprietary account. The Exchange has no objection to such arrangements, provided the employee's participation is recorded as a salary or bonus incentive or in another similar manner. Exchange permission is not required for such arrangements.
The Exchange does not prohibit an employee from sharing in the losses of firm accounts. However, it should be understood that in such instances the member organization is extension or maintaining credit on the employee's behalf. Thus, such an account would represent a "joint venture" between the employee and the member organization. These accounts, as well as general partners' personal accounts, are customer accounts and must be properly margined in their entirety by the respective participant in proportion to their interest.
International arbitrage accounts for non-member foreign brokers or dealers who are members of a foreign securities exchange shall not be subject to this Rule. The amount of any deficiency between the equity in such an account and the margin required by the other provisions of this Rule shall be deducted in computing the Net Capital of the member organization under the Exchange's Capital Requirements.
For the purpose of this paragraph (e)(5)(A), the term "approved specialist or market maker" means either:
Short sale transactions made by an approved specialist or market maker in accordance with a guaranteed over-allotment from an underwriting may be treated as a specialist or market making transaction.
A member organization may carry the proprietary account of another broker/dealer, which is registered with the Securities and Exchange Commission, upon a margin basis which is satisfactory to both parties, provided the requirements of Regulation T of the Board of Governors of the Federal Reserve System and Rules 400 through 406 under the Exchange Act and Rules 41.42 through 41.48 under the CEA are adhered to and the account is not carried in a deficit equity condition. The amount of any deficiency between the equity maintained in the account and the haircut requirements pursuant to SEA Rule 15c3-1 (Net Capital) shall be deducted in computing the Net Capital of the member organization under the Exchange's Capital Requirements. However, when computing Net Capital deductions for transactions in securities covered by paragraphs (e)(2)(F) and (e)(2)(G) of this Rule, the respective requirements of those paragraphs may be used, rather than the haircut requirements of SEA Rule 15c3-1.
An arrangement may be established between two or more registered broker/dealers pursuant to Regulation T 220.7(c) to form a joint back office ("JBO") arrangement for carrying and clearing or carrying accounts of participating broker/dealers. Member organizations must provide written notification to the Exchange prior to establishing JBO (also see Rule 313 for requirements regarding submission of partnership/corporate documents.)
In a nonsecurities credit account, a member organization may extend and maintain nonpurpose credit to or for any customer without collateral or on any collateral whatever, provided:
When a member organization purchases a security for its own account and sells it on a delayed delivery basis to the issuer for sinking fund requirement purposes and such transaction qualifies under Regulation T for the Nonsecurities Credit and Employee Stock Ownership Account, the margin treatment afforded such sinking fund transaction may be as follows:
See NYSE Rule 431(c)/06 and Regulation T, Section 220.9(a)/03.
Unsecured loans are to be charged to net capital in their entirety.
Nonpurpose loans collateralized by negotiable certificates of deposit need not be charged to net capital in their entirety if certain conditions are satisfied. (See SEC Rule 15c3-1(c)(2)(iv)(B)/10).
Member organizations are cautioned to take appropriate steps to ensure that the provisions and conditions of Securities Act Rules 144 and 145(d) have been and are adhered to before extending credit on shelf-registered, control and restricted securities.
It should be noted that Rule 145(d) is not entirely independent, and is partially dependent upon many of the provisions of Rule 144 (i.e., — subsections (c), (e), (f) and (g)). Rule 144 seeks to set forth objective standards intended to be reflective of what is other than a "distribution":
Failure to take appropriate precautions and institute relevant procedures may result in violations of both the Securities Act of 1933, as amended, as well as Exchange Rule 431. It is to be emphasized that value will be accorded only to the securities of those issuers who are subject to the continuous reporting system of the Exchange Act (i.e., Section 12(b), 12(g) and 15(d) companies) who have been subject thereto for a period of at least 90 days and who have filed all required reports during the preceding 12 months.
The equity to be maintained in margin accounts of customers for securities which are the subject of a current and effective registration for a delayed offering (shelf-registered securities) shall be at least the amount of margin required by section (c) of this Rule, provided the member organization:
(Also see paragraph (e)(8)(C).)
Shelf-registered securities are securities registered for continued or delayed offering pursuant to Rule 415 under the Securities Act of 1933.
Shelf-registered securities that meet all of the conditions prescribed in sub-section (e)(8)(A) need not be included in the calculation of excess net capital and net capital deductions required by sub-sections (e)(8)(C) and (D).
A new customer deposits shelf-registered securities with a market value of $100,000 and in accordance with Regulation T (50% loan value) makes a $50,000 withdrawal. All of the conditions in Rule 431(e)(8)(A) are met. If at a future date, the market value of the securities depreciated to $60,000, additional margin required from the customer would be $5,000, computed as follows:
$60,000 | Current Market Value |
50,000 | Debit |
10,000 | Equity |
15,000 | Maintenance requirement (25% pursuant to Rule 431(c)) |
$5,000 | Additional margin which must be collected under Rule 431(c) and (e)(8). |
Assuming no change in value, the $5,000 cash margin deficiency is a deduction in computing net capital under the Exchange's capital requirements, five (5) business days after the date it arises, until collected. [See SEC Rule 15c3-1(c)(2)(xii)]
Mortgage related securities as defined in Section 3(a)(41) of the Securities Act of 1934 that are subject to a shelf registration, may be carried on a margin basis subject to subsection (e)(2)(C) of this Rule. Therefore, this subsection (e)(8)(A) does not apply.
The equity in accounts of customers for control securities and other restricted securities of issuers who continue to maintain a consistent history of filing annual and periodic reports in timely fashion pursuant to the formal continuous disclosure system under the Securities Exchange Act of 1934, which are subject to Rule 144 or 145(d) of the Securities Act of 1933, shall be 40% of the current market value of such securities "long" in the account, provided the member organization:
Member organizations may wish to consider, where practicable, a requirement that customers deposit with them all control or restricted securities of the class on which credit is being extended. Absent this arrangement, or to the extent it is known that additional shares of these securities are not deposited with them, the amount of shares considered good for margin purposes should under certain conditions be reduced by the amount of such shares not held, before member organizations determine the amount of credit to be extended.
A customer deposits control securities with a current market value of $1,000,000 and, in accordance with Regulation T (50% loan value), makes a $500,000 withdrawal. If the saleable amount of such securities, under Securities Act Rule 144, had a current market value of $600,000 and no concentration exists pursuant to sub-section (e)(8)(C)(iv), the "customer margin computation" and "capital charge computation" would be as follows:
"Customer margin computation" | |
$1,000,000 | Value |
500,000 | Debit |
500,000 | Equity |
400,000 | Maintenance requirement (40%) |
Account meets the Rule 431(e)(8)(B) "customer" requirement.
"Capital charge computation" | |
$600,000 | Saleable value |
500,000 | Debit |
100,000 | Equity |
150,000 | 25% requirement for net capital purposes |
$50,000 | Amount to be deducted in computing the member organization's net capital under Rule 325 pursuant to Rule 431(e)(8)(B)(i) and (C)(iv). |
If at a future date, the current market value of the control securities depreciated to $800,000, additional margin of $20,000 would be required from the customer. If, at that date, the saleable amount of such securities under Securities Act Rule 144 had a current market value of only $520,000, the "customer margin computation" and "capital charge computation" would be as follows:
"Customer margin computation" | |
$800,000 | Value |
500,000 | Debit |
300,000 | Equity |
320,000 | Maintenance requirement (40%) |
$ 20,000 | Margin call which must be met by customer pursuant to Rule 431(e)(8)(B). |
"Capital charge computation" | ||
$520,000 | Saleable value | |
500,000 | Debit | |
20,000 | Equity | |
130,000 | 25% requirement for net capital purposes. | |
110,000 | ||
Less | 20,000 | Current outstanding margin call (See 15c3-1(c)(2)(xii)). |
$90,000 | Amount to be deducted in computing the member organization's net capital under Rule 325 pursuant to Rule 431(e)(8)(B)(i) and (C)(iv). |
The reference, in Rule 431, to Rule 144 is to that Rule under the Securities Act of 1933 [17 CFR Section 230.144 (1983)]. Generally, Rule 144 provides that any affiliate of the issuer or other person who sells restricted securities of an issuer for his or her account, or any person who sells restricted or any other securities for the account of an affiliate of the issuer, is not deemed to be engaged in a distribution of the securities, and therefore is not an underwriter as defined in Section 2(11) of the 1933 Act, if the securities are sold in accordance with all the terms and conditions of the Rule.
The reference, in Rule 431, to Rule 145 is to that Rule under the Securities Act of 1933 [17 CFR Section 230.145 (1985)]. Rule 145 provides generally, in part, that any party, or any affiliate of such party, including a corporation (other than the issuer), whose assets or capital structure are affected by certain corporate reorganization transactions specified in the Rule shall be deemed to be an underwriter for purposes of 1933 Act requirements. Rule 145(d) exempts from these requirements, persons, among others, who sell the securities acquired in such transactions in compliance with certain Rule 144 limitations.
Whenever credit is extended under NYSE Rule 431 for control or restricted securities, the Rule presupposes: that the securities have been issued by a seasoned company with an unblemished reporting history and meet the other standards set forth in Rule 431; that the member organization has recourse to the customer upon default pursuant to the signed margin agreement; that credit has been granted to the public customer in the bona fide expectation of repayment on the basis of such customer's general credit worthiness; and that such securities are sold only upon default of the margin loan and not upon the order of the customer.
The term "then saleable", which is used in Rule 431(e)(8)(B)(i) and in (e)(8)(D)(i) & (ii), refers to those specified and quantifiable securities where all the terms and conditions of Securities Act Rule 144 have been completely satisfied, including any applicable holding period, and thus immediately saleable within the parameters of Securities Act Rules 144 and 145(d).
Mortgage related securities as defined in Section 3(a)(41) of the Securities Exchange Act of 1934 which are "restricted securities" solely because they were offered and sold pursuant to the private placement exemption from the registration requirements of the Securities Act of 1933, may be carried on a margin basis subject to sub-section (e)(2)(C) of this Rule. Therefore, this sub-section (e)(8)(B) does not apply.
A member organization extending credit on shelf-registered, control and other restricted securities in margin accounts of customers shall be subject to the following additional requirements:
Member organizations are required to advise their Finance Coordinator, in writing, when the credit extended on shelf-registered, control and restricted securities exceeds the lesser of 10% of excess net capital or $1,000,000.
There is no limit to the total amount of credit which may be extended to all customers on control and restricted securities of any one issuer. However, if the total credit actually extended or agreed to be extended on any one issue exceeds 10% of excess net capital then the amount in excess of 10% shall be deducted from net capital in determining the member organization's status under Rule 326. For example:
A member organization's excess net capital is $10,000,000. A control customer deposits $3,000,000 (current market value) of XYZ securities on which the firm agrees to lend $1,500,000 (Regulation T 50%). The customer withdraws only $1,000,000. The member organization must deduct $500,000 from net capital to determine its status under Rule 326, computed as follows:
Excess net Capital | $10,000,000 | |
10% of excess | $1,000,000 | |
Amount agreed to be extended | 1,500,000 | |
Rule 326 deduction Pursuant to Rule 431(e)(8)(C)(ii) | $ 500,000 |
Calculations necessary to determine compliance with sub-section (e)(8)(C)(ii) must be made at the time that credit is actually extended or agreed to be extended and must include all credit which had previously been extended or agreed to be extended. Each extension of credit impacts the Rule 326 calculations which could require business reduction.
The aggregate credit extended to each customer for purposes of sub-section (e)(8)(C)(iii) only, shall be determined by the adjusted debit balance, if any, in the customer's account which is deemed to be the total amount of credit extended to that customer. Adjusted debit balance is determining by liquidating all of the long and short security positions in the customer's account, other than long control or restricted securities, at their current market values (debit balance plus market value of short securities, less market value of long securities and any credit balance) except that no long option positions carried for the customer shall be considered to have any value and the short cover value of any short option positions traded in the over-the-counter market shall be considered as an increase (debit) to the adjusted debit balance for their in-the-money amounts, if any. The short cover value of any short listed option positions shall be their market value. In addition, such adjusted debit balance shall include any mark to market losses on positions in "when issued" and "when distributed" securities.
A customer deposits 5,000 shares of XYZ, a restricted security, with a market value of $100,000 ($20 per share). On the same day, in accordance with Regulation T (50% loan value) the customer sells short 1,000 shares of ABC for $40,000 and writes (sells) ten listed call options on DEF at $40 (strike price) at $500 per option (total premium $5,000). No funds are withdrawn from the account.
At a later date, the market values have appreciated to $25 per share for XYZ, $50 per share for ABC and $700 per option for DEF. Based on these prices, the total amount of credit extended on the restricted security is $12,000, which must be included when calculating the amount to be deducted from net capital for purposes of determining the member organizations status under Rule 326.
The above amount is calculated as follows:
Liquidation of short sale of ABC | ||
1,000 shares at $50 | $50,000 | |
Less proceeds of sale | 40,000 | |
Loss | $10,000 | |
Short cover value of DEF calls | ||
10 Calls at $700 | $7,000 | |
Less Premium held | 5,000 | |
Loss | 2,000 | |
Adjusted debit balance | $12,000 |
There is no limit to the amount of credit that may be extended to all customers on control and restricted securities of all issuers combined. However, the total credit actually extended (not the amounts agreed to but not actually extended) will result in a deduction to net capital in determining the member organization's status under Rule 326 based on the formula in sub-section (e)(8)(C)(iii).
Assume that a member organization's excess Net Capital is $2,000,000 and aggregate credit extended to all customers on control and restricted securities totals $1,000,000. The charge to net capital for determining the firm's status under Rule 326 would be $250,000, computed as follows:
Excess net capital | $2,000,000 |
50% limit on excess net capital | 1,000,000 |
Aggregate credit extended | 1,000,000 |
Charge to Rule 326 of 25% as aggregate credit extended does not exceed limit on excess net capital | $ 250,000 |
If in the above example, the member organization's excess Net Capital was $1,600,000, the charge to net capital under Rule 326 would be $400,000, computed as follows:
Excess net capital | $1,600,000 |
50% limit on excess net capital | 800,000 |
Aggregate credit extended | 1,000,000 |
Charge to Rule 326 | |
25% of amount up to 50% ($800,000) of excess net capital | $ 200,000 |
100% of amount exceeding 50% of excess net capital ($1,000,000 - $800,000) | 200,000 |
Total Charge | $400,000 |
A concentration exists whenever the aggregate position in control and restricted securities of any one issue, excluding "excess securities" (as defined below), exceeds (1) 10% of the outstanding shares or (2) 100% of the average weekly volume during the preceding three month period. Where a concentration exists, for purposes of computing sub-paragraph (B)(i) of this sub-section (e)(8), the margin requirement on such securities shall be , based on the greater of (1) or (2), as specified below:
Percent of Outstanding Shares | or | Percent of Average Weekly Volume | Margin Requirement |
Up to 10% | Up to 100% | 25% | |
Over 10% and under 15% | Over 100% and under 200% | 30% | |
15% and under 20% | 200% and under 300% | 45% | |
20% and under 25% | 300% and under 400% | 60% | |
25% and under 30% | 400% and under 500% | 75% | |
30% and above | 500% and above | 100% |
For purposes of this sub-paragraph (e)(8)(C)(iv), "excess securities" shall mean the amount of securities, if any, by which the aggregate position in control and restricted securities of any one issue exceeds the aggregate amount of securities that would be required to support the aggregate credit extended on such control and restricted securities if the applicable margin requirement were 50%
Only control and restricted securities are to be considered in determining when a concentration exists. Shelf-registered securities are not subject to the concentration formula. Securities of other issuers held in the customers account are not subject to the concentration formula.
Assume that the customer's position in the example under (e)(8)(B)/02 represented 11% of the outstanding shares, thereby subjecting the position to a concentration reduction. The "customer's margin computation" would be unchanged, but the "capital charge computation" would be as follows:
At the time the control securities were deposited with a current market value of $1,000,000:
"Capital charge computation" | |
$ 600,000 | Saleable value |
500,000 | Debit |
100,000 | Equity |
180,000 | 30% requirement for net capital purposes pursuant to concentration reduction. |
$ 80,000 | Amount to be deducted in computing the member organization's net capital under Rule 325 pursuant to Rule 431(e)(8)(B)(i) and (C)(iv). |
When the control securities depreciated in value to $800,000:
"Capital charge computation" | ||
$520,000 | Saleable value | |
500,000 | Debit | |
20,000 | Equity | |
156,000 | 30% requirement for net capital purposes pursuant to concentration reduction. | |
$132,000 | ||
Less | 20,000 | Current outstanding margin call (See SEC Rule 15c3-1(c)(2)(xii)) |
$112,000 | Amount to be deducted in computing the member organization's net capital under Rule 325 pursuant to Rule 431(e)(8)(B)(i) and (C)(iv) |
Within the context of this sub-section (e)(8)(D), Securities Act Rules 144(k) and 145(d)(3) permit the sale of securities subject to these Rules without volume limitation or notice requirement upon satisfaction of a two year holding requirement by persons who have not themselves been affiliates of the issuer for the preceding three months. Rule 145(d)(2) permits sales upon satisfaction of a one-year holding period.
The relief afforded by Rule 431(e)(8)(D) is effective only during such time periods as the provisions of 144(k), 145(d)(2) or (d)(3) continue to apply and have been fully satisfied and only in regard to securities of an issuer that continues to maintain a consistent history of filing annual periodic reports; in timely fashion, pursuant to the formal continuous disclosure system under the Securities Exchange Act of 1934.
It should be noted that the provisions of Rule 431(e)(8)(D) permit member organizations to impose such higher maintenance requirements as they may deem appropriate. Moreover, they may wish to establish special supervisory procedures to consider the desirability of and to monitor loan transactions entered into pursuant to Rule 431.
See Rule 431(e)(8)(B)/06.
Active securities dealt in on a national securities exchange shall, for margin purposes, be valued at current market prices. Other securities shall be valued conservatively in view of current market prices and the amount which might be realized upon liquidation. Substantial additional margin must be required in all cases where the securities carried in "long" or "short" positions are subject to unusually rapid or violent changes in value, or do not have an active market on a national securities exchange, or where the amount carried is such that the position(s) cannot be liquidated promptly.
Substantial additional margin must be required:
Securities suspended by the SEC (not those whose trading has been halted or suspended by a self-regulatory organization) that are held in customer's accounts are valued and margined as follows:
Member organizations are required to comply with Rule 431 and should file a written notice with the Chicago Board Options Exchange, as provided in its Rule 12.11, stating that they elect to be bound by the New York Stock Exchange requirements.
Definitions: — for (f)(2)(Numbered for Interpretation Handbook Purposes)
Except where the context otherwise requires, the definitions contained in section (b) of Rule 700, "Applicability, Definitions and References", shall apply to the terms used in this sub-section (f)(2).
When used in respect of a currency index warrant or a stock index warrant, the term "index group value" shall mean $1.00 (1) multiplied by the numerical value reported for the index that is derived from the market prices of the currencies in the index currency group or the stocks in the index stock group and (2) divided by the applicable divisor in the prospectus (if any).
In the case of any put, call, currency warrant, currency index warrant, or stock index warrant carried "long" in a customer's account which expires in 9 months or less, initial margin must be deposited and maintained equal to at least 100% of the purchase price of the option or warrant.
The long condor, short iron condor, long calendar condor and short calendar iron condor spread strategies described in section (f)(2) of this Rule can be structured whereby the interval between the two middle exercise prices is not equal to the interval between the 1st & 2nd, and 3rd & 4th exercise prices. However, the interval between the 1st & 2nd and 3rd & 4th exercise prices must always be equal to each other.
The interval between the two middle exercise prices may be any amount greater than zero, and the call exercise price may not be below the put exercise price in the case of the Short Iron Condor and Short Calendar Iron Condor spreads.
Examples of the above strategies as currently defined, along with examples of the variation strategies that would now be eligible for the same margin requirement are as follows:
Strategy | Current Rule Definition | Variation | Margin Requirement for Both |
Long Condor Spread (Calls) | Long Call Feb 50 Short Call Feb 55 Short Call Feb 60 Long Call Feb 65 | Long Call Feb 50 Short Call Feb 55 Short Call Feb 65 Long Call Feb 70 | Pay for net debit in full. |
Long Condor Spread (Puts) | Long Put Feb 50 Short Put Feb 55 Short Put Feb 60 Long Put Feb 65 | Long Put Feb 50 Short Put Feb 55 Short Put Feb 65 Long Put Feb 70 | Pay for net debit in full. |
Long Calendar Condor Spread (Calls) | Long Call Feb 45 Short Call Feb 50 Short Call Feb 55 Long Call Apr 60 | Long Call Feb 45 Short Call Feb 50 Short Call Feb 70 Long Call Apr 75 | Pay for net debit in full. |
Long Calendar Condor Spread (Puts) | Long Put Feb 45 Short Put Feb 50 Short Put Feb 55 Long Put Apr 60 | Long Put Feb 45 Short Put Feb 50 Short Put Feb 70 Long Put Apr 75 | Pay for net debit in full. |
Short Iron Condor Spread | Long Put Feb 50 Short Put Feb 55 Short Call Feb 60 Long Call Feb 65 | Long Put Feb 50 Short Put Feb 55 Short Call Feb 70 Long Call Feb 75 | Exercise price interval (aggregate) of the put or call spread. Net credit received may be applied. |
Short Calendar Iron Condor Spread | Long Put Feb 45 Short Put Feb 50 Short Call Feb 55 Long Call Apr 60 | Long Put Feb 45 Short Put Feb 50 Short Call Feb 60 Long Call Apr 65 | Exercise price interval (aggregate) of the put or call spread. Net credit received may be applied. |
Long Listed Option or Warrant With An Expiration Exceeding 9 Months. In the case of a put, call, index stock group option, or stock index warrant that is issued by a registered clearing agency, margin must be deposited and maintained equal to at least 75% of the current market value of the option or warrant; provided the option or warrant has a remaining period to expiration exceeding 9 months.
Long OTC Option or Warrant With An Expiration Exceeding 9 Months. In the case of a put, call, index stock group, or stock index warrant carried long that is not issued by a registered clearing agency, margin must be deposited and maintained equal to at least 75% of the option's or warrant's "in-the-money" amount plus 100% of the amount, if any, by which the current market value of the option or warrant exceeds its "in-the-money" amount provided the option or warrant:
The minimum margin on any put, call, currency warrant, currency index warrant or stock warrant issued, guaranteed or carried "short" in a customer's account may be reduced by any "out-of-the-money" (as defined in this subsection (D)(i) below), but shall not be less than 100% of the current market value of the option or warrant plus the percentage of the current value of the underlying component specified in column III of this subsection (D)(i) below, except in the case of any put issued, guaranteed or carried "short" in a customer's account. Margin on such put option contract shall not be less than the current value of the put option plus the percentage of the put option's exercise price as specified in column III of this subsection (D)(i).
I Type of Option |
II Initial and/or Maintenance Margin Required |
III Minimum Margin Required |
IV Underlying Component Value |
(01) Stock | 20% | 10% | The equivalent number of shares at current market prices |
(2) Option on Industry index stock group | 20% | 10% | The product of the current index group value and the applicable index multiplier |
(3) Option on Broad index stock: group | 15% | 10% | The product of the current index group val and the applicable index multiplier |
(4) U.S. Treasury bills-95 days or less to maturity | 35% | 1/2% | The underlying principal amount |
(5) US, Treasury notes | 3% | 1/2% | The underlying principal amount |
(6) U.S, Treasury bonds | 3.5% | 1/2% | The underlying principal amount |
(7) Foreign Currency Options and Warrants | The product of units per foreign currency contract and the closing spot price | ||
Australian dollar | 4% | 3/4% | |
British pound | 4% | 3/4% | |
Canadian dollars | 1% | 3/4% | |
German marks | 4% | 3/4% | |
European | |||
Currency Unit | 4% | 3/4% | |
French franc | 4% | 3/4% | |
Japanese yen | 4% | 3/4% | |
Swiss franc | 4% | 3/4% | |
(8) Currency Index warrants | * | * | The product of the index group value and the applicable index multiplier |
(9) Stock Index Warrant on broad index stock group | 15% | 10% | The product of the index group value and the applicable index multiplier |
(10) Stock Index Warrant on Industry index stock group | 20% | 10% | The product of the index group value and the applicable index multiplier |
(11) Interest rate contracts | 10% | 5% | The product of the current interest rate measure and the applicable multiplier |
*Subject to the approval of the Securities and Exchange Commission, the Exchange shall determine applicable initial, maintenance and minimum margin requirements for currency index warrants on a case-by-case basis.
For the purposes of this subsection (D)(i), "out-of-the-money amounts" are determined as follows:
Option or Warrant Issue | Call | Put |
Stock options | Any excess of the aggregate exercise price of the option over the current market value of the equivalent number of shares of the underlying security. | Any excess of the current market value of the equivalent number of shares of the underlying security over the aggregate exercise price of the option. |
U.S. Treasury options | Any excess of the aggregate exercise price of the option over the current market value of the underlying principal amount. | Any excess of the current market value of the underlying principal amount over the aggregate exercise price of the option. |
Index stock group options, currency index warrants and stock index warrants | Any excess of the aggregate exercise price of the option or warrant over the product of the current index group value and the applicable multiplier. | Any excess of the product of the current index group value and the applicable multiplier over the aggregate exercise price of the option or warrant. |
Foreign currency options and warrants | Any excess of the aggregate exercise price of the option or warrant over the product of units per foreign currency contract and the closing spot prices. | The produce of units per foreign currency contract and the closing spot prices over the aggregate price of the option or warrant. |
Interest rate options | Any excess of the aggregate exercise price of the option over the product of the current interest rate measure value and the applicable multiplier. | Any excess of the product of the Current interest rate measure value and the applicable multiplier over the aggregate exercise price of the option. |
If the option or warrant contract provides for the delivery of obligations with different maturity dates or coupon rates, the computation of the "out-of-the-money amount" if any, where required by this Rule, shall be made in such a manner as to result in the highest margin requirement on the short option or warrant position.
In the case of options not issued by a registered clearing agency, the margin on any put or call issued, guaranteed or carried "short" in a customer's account may be reduced by any "out-of-the-money amount" (as defined in subsection (f)(2)(D)(i)), but shall not be less than the percentage of the current value of the underlying component and the applicable multiplier if any, specified in column III of this subsection (f)(2)(D)(iii) below, except in the case of any put issued, guaranteed or carried "short" in a customer's account. Margin on such put option contract shall not be less than the percentage of the put option's exercise price as specified in column III of this subsection (f)(2)(D)(iii) below.
I Type of Options |
II Initial and/or Maintenance Margin Required |
III Minimum Margin Required |
IV Underlying Component Value |
(1) Stock and convertible corporate debt securities | 30% | 10% | The equivalent number of shares at current market prices for stocks or the underlying principal amount for convertible corporate debt securities |
(2) Industry index stock group | 30% | 10% | The product of the current index group value and the applicable index multiplier |
(3) Broad index stock group | 20% | 10% | The product of the current index group value and the applicable index multiplier |
(4) U.S. Government or U.S. Government Agency debt securities other than those exempted by Rule 3a12-7 under the Securities Exchange Act of 1934 * | 5% | 3% | The underlying principal amount |
(5) Corporate debt securities registered on a national securities exchange and marginable OTC corporate debt securities as defined in Regulation T Section 220.2** | 15% | 5% | The underlying principal amount |
(6) All other OTC options not covered above | 45% | 20% | The underlying principal amount |
*Option contracts under category (4) must be for a principal amount of not less than $500,000.
**Option transactions on all other OTC margin bonds are not eligible for the margin requirements contained in this provision. Margin requirements for such securities are to be computed pursuant to category (6).
For the purpose of this subsection (f)(2)(D)(iii), "in the money amounts" are Determined as follows:
Option Issue | Call | Put |
Stock options | Any excess of the current market value of the equivalent number of shares of the underlying security over the aggregate exercise price of the option. | Any excess of the aggregate exercise price of the option over the current market value of the equivalent number of shares of the underlying security. |
Index stock group options | Any excess of the product of the current index group value and the applicable multiplier over the aggregate exercise price of the option. | Any excess of the aggregate exercise price of the option over the product of the current index group value and the applicable multiplier. |
U.S. Government mortgaged related or corporate debt securities options | Any excess of the current value of the underlying principal amount over the aggregate exercise price of the option. | Any excess of the aggregate exercise price of the option over the current value of the underlying principal amount. |
*Option contracts under category (4) must be for a principal amount of not less than $500,000.
When an options exchange ceases trading in a option, issued by a registered clearing agency, of a specific company because the "underlying asset" (as defined in Regulation T, Section 220.2 —Definitions) no longer trades due to a merger or acquisition and the registered clearing agency has formerly announced that all outstanding options will settle for cash in an amount equal to the difference between a fixed dollar amount and the strike price of the option, the margin required on such options may, at the member organization's discretion, be computed as follows:
Out-of-the-money options — | no requirement |
In-the-money options - | The amount of the difference between the dollar amount set by the registered clearing corporation and the strike price of the option or the amount of margin required by the registered clearing corporation, whichever is greater. |
The difference between the amount of margin previously required pursuant to Rule 431(f)(2)(D)(i) and the above requirements, if any, may be released to the customer on the effective date as established by the registered clearing agency.
(FRB letter to CBOE dated April 12,1990)
When:
Where a put that is issued by a registered clearing agency is carried "long" for a customer's account and the account is also "short" a put issued by a registered clearing agency, expiring on or before the date of expiration of the "long" listed put and specifying the same underlying component, the margin required on the "short" put shall be the lower of (1) the margin required pursuant to (F)(2)(D)(i) above or (2) the amount, if any, by which the exercise price of the "short" put exceeds the exercise price of the "long" put.
Where a put warrant issued on an underlying currency, index currency group or index stock group is carried "long" for a customer's account and the account is also "short" a registered clearing agency-issued put option, and/or a put warrant, on the same underlying currency, index currency group, or index stock group, which "short" put position(s) expire on or before the date of expiration of the "long" put position and specify the same number of units of the same underlying currency or the same index multiplier for the same index currency group or index stock group, as the case may be, the margin required on the "short" put(s) shall be the lesser of (a) the margin required by (D)(i) above or (b) the amount, if any, by which the exercise price(s) of the "short" put(s) exceed the exercise price of the "long" put.
Where a put that is issued by a registered clearing agency is carried "long" for a customer's account and the account is also "short" a put issued by a registered clearing agency, expiring on or before the date of expiration of the "long" listed put and written on the same GNMA obligation in the principal amount of $100,000, the margin required on the "short" put shall be the lower of (1) the margin required pursuant to sub-paragraph (f)(2)(D)(ii) above or (2) the amount, if any, by which the exercise price of the "short" put exceeds the exercise price of the "long" put multiplied by the appropriate multiplier factor set forth below.
For purposes of this sub-paragraph (f)(2)(G)(iii), the multiplier factor to be applied shall depend on the then current highest qualifying rate as defined by the rules of the national securities exchange or the national securities association on or through which the option is listed or traded. If the then current highest qualifying rate is less than 8%, the multiplier factor shall be 1; if the then current highest qualifying rate is greater than or equal to 8% but less than 10%, the multiplier factor shall be 1.2; if the then current highest qualifying rate is greater than or equal to 10% but less than 12%, the multiplier factor shall be 1.4; if the then current highest qualifying rate is greater than or equal to 12% but less than 14%, the multiplier factor shall be 1.5; if the then current highest qualifying rate is greater than or equal to 14% but less than 16%, the multiplier factor shall be 1.6; and if the then current highest qualifying rate is greater than or equal to 16% but less than or equal to 18%, the multiplier factor shall be 1.7. The multiplier factor or factors for higher qualifying rates shall be established by the Exchange is required.
Where a put that is issued by a broker-dealer is carried "long" for a customer's account and the account is "short" a put issued by the same broker-dealer, expiring on or before the date of expiration of the "long" put and specifying the same underlying component, the margin required on the "short" put shall be the lower of (1) the margin required pursuant to subsections (f)(2)(D)(iii)or (D)(iv) above or (2) the amount, if any, by which the exercise price of the "short" put exceeds the exercise price of the "long" put.
A "long" call and a "short" call or a "long" put and a "short" put are deemed to be issued by the same broker-dealer when either the broker-dealer has issued or guaranteed both options or issued or guaranteed one of the options and the other option was issued by a registered clearing agency on behalf of that broker-dealer. If the options are not issued by the same broker-dealer then the "short" put or "short" call must be margined separately pursuant to subsections (f)(2)(D)(iii) or (D)(iv) above.
Convertible bonds carried long in margin or cash accounts may be considered as a hedge for short call options sold in margin or cash accounts for an equivalent amount of common stock into which the bonds are convertible.
The sale (writing) of listed call options against securities subject to Rules 144 and 145 of the Securities Act of 1933 is permissible. However, any sale of securities subject to Rules 144 or 145, through the sale of options, will require that all conditions of the Rules must be satisfied both at the time of sale of the option and at the time that the underlying security is delivered pursuant to an exercise notice.
Cash accounts
Calls may be sold against fully paid securities, providing Rules 144 and 145 are adhered to. There are no Exchange requirements on such positions in cash accounts, as they are deemed covered calls.
Margin accounts
Margin accounts are treated the same as cash accounts except that any credit extended on securities subjects the account to sub-section (e)(8) of this Rule.
In the case of convertible hedge positions (i.e., where a security carried in a long position is exchangeable or convertible within a reasonable time, without restriction, other than the payment of money, into a security carried in a short position) or "short against the box" positions in a customer's account, neither the long nor the short position is available to offset the margin required on any option position carried for such customer.
No margin need be required on the put or call.
In the case of a call option or warrant on index stock group, the letter of guarantee or escrow receipt must certify that the custodian holds for the account of the customer as security for the letter either (1) cash, (2) cash equivalents, (3) one or more qualified securities, or (4) any combination thereof, having an aggregate market value, computed as at the close of business on the day the call is written, of not less than 100% of the aggregate current index value computed as at the same time and that the custodian will promptly pay the member organization the exercise settlement amount in the event the account is assigned an exercise notice. The letter of guarantee or escrow receipt may provide for substitution of qualified securities held as collateral provided that the substitution shall not cause the value of the qualified securities held to be diminished. A qualified security means (1) an equity security, other than a warrant, right or option, that is listed on any national securities exchange, or (2) any equity security, other than a warrant, listed in the current list of Marginable Over-the-Counter Stocks as published by the Board of Governors of the Federal Reserve System.
In the case of a call option contract, the letter of guarantee or escrow receipt must certify that the custodian holds for the account of the customer as security for the letter, the underlying security (or a security immediately convertible into the underlying security without the payment of money) or foreign currency and that the custodian will promptly deliver to the member organization the underlying security or foreign currency in the event the account is assigned an exercise notice.
In the case of a put option contract (including a put on a broad index stock group option) or stock index warrant, the letter of guarantee must certify that the custodian holds for the account of the customer as security for the letter, cash or cash equivalents which have an aggregate market value, computed as at the close of business on the day the put is written, of not less than 100% of the aggregate exercise price of the put and that the guarantor will promptly pay the member organization the exercise settlement amount (in the case of a put on a broad index stock group) or the aggregate exercise price (in the case of any other put on an option contract) in the event the account is assigned an exercise notice. Cash equivalents shall mean securities issued or guaranteed by the United States and having a maturity of one year or less to maturity.
Regulation T, Section 220.18(b) states that the margin on exempted securities is that required by the creditor in "good faith". Under Rule 3a12-7 of the Securities Act of 1934, over-the-counter options on government securities which represent obligations of $250,000 or more are designated as exempt securities. Therefore, an escrow receipt for an OTC government option where the underlying value is $250,000 or more may be collateralized by cash.
An escrow receipt for an OTC government option where the underlying value is less than $250,000 requires that the underlying security be held as collateral for the receipt.
FRB Letter to CBOE Dated December 12, 1986
It is not permissible for the underlying security backing an escrow receipt that is collateralizing an OTC government option to be sold under a repurchase agreement. Further, the underlying security may not be used to secure another obligation.
FRB Letter to CBOE Dated December 12, 1986
If a member organization is notified by the issuing bank or trust company (pursuant to the terms of the letter) that the value of the deposit has fallen below 50% of the current aggregate position value, the deposit letter will cease to be acceptable in lieu of margin unless the member organization promptly obtains additional collateral.
Interp. Memo No 87-1 Dated January 14, 1987
The privilege of using option deposit letters may be extended to any customer of a member organization provided such letter by a third party custodian bank or trust company.
In this regard:
Exhibit I
EQUITY/TREASURY
OPTION DEPOSIT LETTER
(PUT)
[Bank Letterhead]
______________
(Date)
To: ____________________________
(Broker/Dealer Name)
The undersigned (the "Bank") having an office located at________________________ hereby certifies and warrants that:
Trade Date: | Underlying Securities: | ||||
Options Series | |||||
Number of Contracts | Option Type | Expiration | Aggregate Exercise Price Per Contact | ||
Month | Year | ||||
Put |
The Bank represents and convents that, in consideration of your carrying the above described option contract(s) "short" in the account of the Customer on your books, it will maintain the Deposit for your benefit in an account segregated on its books, separate and apart from all other accounts held by it, and will not subject nor consent to the Customer subjecting the Deposit or any portion thereof to any lien or encumbrance, or cause or permit the Deposit or any portion thereof to be applied to or used in satisfaction of any claim by the Bank (in any capacity whatsoever) against the Customer or any other person or entity or used by the Bank as an offset in whole or in part in any manner whatsoever. The Bank will use its beat efforts to promptly notify you if any notice of lien, levy, court order, or other process that may or purports to affect the Deposit or any portion thereof is served upon it.
The Customer shall have the right from lime to fee to deposit with the Bank, as escrow agent to be held by the Bank hereunder and subject to all of the provisions hereof cash or cash equivalents and thereupon to withdraw from the Deposit cash or cash equivalents which hive in aggregate market value of the cash or cash equivalents so deposited (valuing cash equivalents at face value), provided, however, that the aggregate market value of the Deposit immediately after such deposit and withdrawal shall not be less than the aggregate market value of the Deposit immediately prior to such events.
The Bank agrees that it will hold the Deposit in accordance with the terms hereof until this deposit letter is released or the Bank is directed to make payment as hereinafter provided.
Upon presentation of this deposit letter to the Bank at the address shown above, with the Endorsement of Release below that, in the Bank's reasonable belief, has been duly executed on your behalf, the Bank may release the Deposit held pursuant to this deposit letter to the Customer.
Upon (a) presentation of this deposit letter to the Bank at the address shown above, with the Payment Order below that, in the Bank's reasonable belief, has been duly executed on your behalf, and (b) delivery to the Bank for the account of the Customer of the securities underlying the above-described option contract(s), which securities shall be in form to constitute good delivery under the rules of the OCC, the Bank will pay you, out of the Depositor the proceeds thereof; the exercise settlement amount as to each of the option contracts described above, plus all applicable commission and other charges due you.
In the event of any cash or stock dividend, interest payment, stock distribution, stock split, rights offering, distribution, reorganization, recapitalization or reclassification, or other similar event, affecting the securities underlying the above-described option contract(s), the amount to be paid by the Bank to you and/or the securities or other property to be delivered by you to the Bank shall be adjusted as may be required by the OCC.
The Bank has been authorized by the Customer to confirm the Customer's understanding that if the short position described above is closed out, it is the Customer's responsibility to ensure that this deposit letter is released by you, and until this deposit letter is so released, you shall retain the right to demand payment upon the assignment of an exercise notice to any short position in a series of options identified above carried in the Customer's account.
If the Customer is the Bank acting in a fiduciary or similar capacity, or is a trust, custodial, or similar account maintained with the Bank, it is nonetheless understood that is issuing this deposit letter and as escrowee and bailee of the Deposit, the Bank is acting in its general capacity. Nothing herein shall be deemed to require the Bank to make payment in contravention of any court order or judgment binding on the Bank in its capacity as escrowee and bailee hereunder, which on its face affects the Deposit or the proceeds thereof.
Bank______________________________________________________
By_______________________________
Date _____________________
(Authorized Signature)
ENDORSEMENT OF RELEASE (to be completed by the Broker/Dealer)
The undersigned hereby releases all rights of the undersigned with respect to this Option Deposit Letter.
_____________________________________
(Broker/Dealer)
By_________________________________
Date______________________________
PAYMENT ORDER (to be completed by the Broker/Dealer)
The undersigned hereby (1) certifies to the above-named Bank that an exercise notice filed with the Options Clearing Corporation has been assigned to the short position of the undersigned which includes the option contract(s) described above, (2) delivers to the Bank the securities underlying the above-described option contract(s), and (3) demands payment that will settle such assignment, plus applicable commissions and other charges, in the amount of $_________.
_________________________________
(Broker/Dealer)
By________________________________
Date__________________________
Exhibit II
EQUITY/TREASURY
OPTION DEPOSIT LETTER
(CALL)
[Bank Letterhead]
_________________________
(Date)
To: _______________________________
(Broker/Dealer Name)
The undersigned (the "Bank"), having an office located at___________________, hereby certifies and warrants that:
Trade Date: | Underlying Securities: | ||||
Options Series | |||||
Number of Contracts | Option Type | Expiration | Aggregate Exercise Price Per Contact | ||
Month | Year | ||||
Call |
The Bank represents and covenants that, in consideration of your carrying the above described option contract(s) "short" in the account of the Customer on your books, it will maintain the Deposited Securities (or other securities satisfying the definition of Deposited Securities set forth above, which other securities, upon deposit with the Bank, shall be included within the term Deposited Securities as hereinafter referred to) for your benefit in an account segregated on its books, separate and apart form all other accounts held by it, and will not subject nor consent to the Customer subjecting the Deposited Securities or any portion thereof to any lien or incumbrance, or cause or permit the Deposited Securities or any portion thereof to be applied to or used in satisfaction of any claim by the Bank (in any capacity whatsoever) against the Customer or any other person or entity or used by the Bank as an offset in whole or in part in any manner whatsoever. The Bank will use its best efforts to promptly notify you if any notice of lien, levy, court order, or other process that may or purports to affect the Deposited Securities or any portion thereof is served upon it.
The Bank agrees that it will hold the Deposited Securities in accordance wall the terms hereof until this deposit letter is released or the Bank is directed to make delivery as hereinafter provided.
Upon the presentation of this deposit letter to the Bank at the address shown above, with the Endorsement of Release below that, in the Banks reasonable belief has been duly executed on your behalf, the Bank may release the Deposited Securities held pursuant to this deposit letter to the Customer.
Upon presentation of this deposit letter to the Bank at the address shown above, with the Payment Order below that, in the Bank's reasonable belief has been duly executed on your behalf, and delivery to the Bank of an amount equal to the product of (a) the aggregate exercise price per contract described above, times (b) the number of option contracts described above, minus ail applicable commissions and other charges due you, the Bank will deliver the Deposited Securities to you for the account of the Customer.
In the event of any cash or stock dividend, interest payment, stock distribution, stock split, rights offering, distribution, reorganization, recapitalization or reclassification, or other similar event affecting the securities underlying the above-described option contract(s), the amount to be paid by you to the Bank and/or the securities or other property to be delivered by the Bank to you shall be adjusted as may be required by the OCC.
The Bank has been authorized by the Customer to confirm the Customer's understanding that if the short position described above is closed out, it is the Customer's responsibility to ensure that this deposit letter is released by you, and until this deposit letter is so released, you shall retain the right to demand delivery of the Deposited Securities as herein provided upon the assignment of an exercise notice to any short position in a series of options identified above carried in the Customer's account.
If the Customer is the Bank acting in a fiduciary or similar capacity, or is a trust, custodial, or similar account maintained with the Bank, it is nonetheless understood that in issuing this deposit letter and functioning as escrowee and bailee of the Deposited Securities, the Bank is acting in its general capacity. Nothing herein shall be deemed to require the Bank to make delivery in contravention of any court order or judgment binding on the Bank in its capacity as escrowee and bailee hereunder, which on its face affects the Deposited Securities or the proceeds thereof.
Bank _______________________________________________________
By_____________________________
Date________________________
(Authorized Signature)
ENDORSEMENT OF RELEASE (to be completed by the Broker/Dealer)
The undersigned hereby releases all rights of the undersigned with respect to this Option Deposit Letter.
_____________________________
(Broker/Dealer)
By________________________
Date_________________________
PAYMENT ORDER (to be completed by the Broker/Dealer)
The undersigned hereby (1) certifies to the above-named Bank that an exercise notice filed with the Options Clearing Corporation has been assigned to the short position of the undersigned which includes the option contract(s) described above, (2) delivers to the Bank an amount equal to the product of (a) the aggregate exercise price per contract described above, times (b) the number of option contracts described above, minus all applicable commissions and other charges due the undersigned, and (3) demands delivery of the Deposited Securities sufficient to permit the undersigned to settle such assignment.
_____________________________
(Broker/Dealer)
By_________________________________
Date______________________________
EXHIBIT III
MARKET INDEX
OPTION DEPOSIT LETTER
(PUT)
[Bank Letterhead]
_______________
(Date)
To: ____________________________________
(Broker/Dealer Name)
The undersigned (the "Bank"), having in office located at___________________, hereby certifies and warrants that:
Trade Date: | Underlying Index: | ||||
Options Series | |||||
Number of Contracts | Option Type | Expiration | Aggregate Exercise Price Per Contact | ||
Month | Year | ||||
Put |
The Bank represents and covenants that, in consideration of your carrying the above described market index option contract(s) "short" in the account of the Customer on your books, it will maintain the Deposit for your benefit in an account segregated or its books, separate and apart from all other accounts held by it, and will not subject nor consent to the Customer subjecting the Deposit or any portion thereof to any lien or encumbrance, or cause or permit the Deposit or any portion thereof to be applied to or used in satisfaction of any claim by the Bank (in any capacity whatsoever) against the Customer or any other person or entity or used by the Bank as an offset in whole or in part in any manner whatsoever. The Bank will use its best efforts to promptly notify you if any notice of lien, levy, court order, or other process that mayor purports to affect the Deposit or any portion thereof is served upon it.
The Customer shall have the right from tune to time to deposit with the Bank, as escrow agent to be held by the Bank hereunder and subject to all of the provisions hereof, cash or cash equivalents and thereupon to withdraw from the Deposit cash or cash equivalents which have an aggregate market value of the cash or cash equivalents so deposited (valuing cash equivalents at face value), provided, however, that the aggregate market value of the Deposit immediately after such deposit and withdrawal shall not be less than the aggregate market value of the Deposit immediately prior to such events.
The Bank agrees that it will hold the Deposit in accordance with the terms hereof until this deposit letter is released or the Bank is directed to make payment as hereinafter provided.
Upon presentation of this deposit letter to the Bank at the address shown above, with the Endorsement of Release below that, in the Bank's reasonable belief, has been duty executed on your behalf, the Bank may release the Deposit held pursuant to this deposit letter to the Customer.
Upon presentation of this deposit letter to the Bank at the address shown above, with the Payment Order Wow that, in the Bank's reasonable belief, hat been duly executed on your behalf the Bank will pay you, out of the Deposit or the proceeds thereof, the exercise settlement amount as to each of the market index option contract) described above, which, as to each such contract, shall be the amount by which the "aggregate exercise price" of such contract it greater than the "aggregate current index value" of the underlying index (as those quoted terms are defined in the pertinent By-Laws of the Options Clewing Corporation), plus all applicable commissions and other charges due you.
The Bank has been authorized by the Customer to confirm the Customer's understanding that if the short position described above is closed out, it is the Customer's responsibility to ensure that this deposit letter it released by you, and until this deposit letter is so released, you shall retain the right to demand payment upon the assignment of an exercise notice to any short position in a series of options identified above carried in the Customer's account.
If the Customer is the Bank acting in a fiduciary or similar capacity, or is a trust, custodial, or similar account maintained with the Bank, it is nonetheless understood that in issuing this deposit letter and functioning as escrowee and bailee of the Deposit, the Bank is acting in its general capacity. Nothing herein shall be deemed to require the Bank to make payment in contravention of any court order or judgment binding on the Bank in its capacity as escrowee and bailee hereunder, which on its face affects the Deposit or the proceeds thereof.
Bank________________________________________________________
By________________________________(Authorized Signature)
Date______________________________
ENDORSEMENT OF RELEASE (to be completed by the Broker/Dealer)
The undersigned hereby releases all rights of the undersigned with respect to this Market Undo Option Deposit Letter.
_______________________________
(Broker/Dealer)
By _______________________________ Date______________________
PAYMEMT ORDER (to be completed by the Broker/Dealer)
The undersigned hereby (1) certifies to the above-named Bank that an exercise notice filed with the Options Clearing Corporation has been assigned to the short portion of the undersigned which includes the option market index contract(s) described above and (2) demands payment that will settle such assignment, plus applicable commissions and other charges due, m the amount of $ _____________.
_______________________________
(Broker/Dealer)
By_______________________________ Date________________________________
Exhibit IV
MARKET INDEX
OPTION DEPOSIT LETTERS
(CALL)
______________________(Date)
To: _______________________________
(Broker/Dealer Name)
The undersigned (the "Bank"), having an office located at _______________________________, hereby certifies and warrants to you ("Broker/Dealer") that:
Trade Date: | Expiration Date: | Underlying Index: | ||
Number of Contracts | Option Type | Aggregate Current Index Value | Index Multiplier | Exercise Price |
Call | $ |
The Bank represents and covenants that, in consideration of Broker/Dealer carrying the above described index option contract(s) 'short' in the account of the Customer on Broker/Dealer's books, it will maintain the Deposit for Broker/Dealer's benefit in an account segregated on is books, separate end apart from all other accounts held by it, and will not subject nor consent to the Customer subjecting the Deposit or any portion thereof to any lien or encumbrance, or cause or permit the Deposit in any portion thereof to be applied to or used in satisfaction of any claim by the Bank (in any capacity whatsoever) against the Customer or any other person or entity or used by the Bank as an offset in whole or part in any manner whatsoever. The Bank will use its best efforts to promptly notify Broker/Dealer if any notice of lien, levy, court order, or other process that may or purports to affect the deposit or any portion thereof is served upon it.
The Customer shall have the right from time to time to deposit with the Bank, as escrow agent to be held by the Bank hereunder and subject to all the provision hereof, cash, cash equivalents, or qualified securities as described in clause (ii) above and thereupon to withdraw from the Deposit cash, cash equivalents, or qualified securities which have an aggregate market value not exceeding the market value of the cash, cash equivalents, or qualified securities so deposited, with the result that the aggregate market value of the Deposit immediately after such deposit and withdrawal shall not be less than the aggregate market value of the Deposit immediately prior to such events. For purposes of this paragraph, aggregate market value shall be determined in the manner indicated in clause (iii) above, except that qualified securities shall be valued as of the close of business on the preceding business day of the date of such deposit and withdrawal.
Upon the requested the Broker/Dealer, the Bank will promptly provide the Broker/Dealer with a written listing of the cash, cash equivalents, and/or qualified securities included in the Deposit. If at any time the current aggregate market value of the Deposit shall be less than the greater of either (a)55% of the product of (A) the number of contracts indicated above and (B) the aggregate current index value of the underlying index determined on the immediately preceding business day (such product being the "Current Index Amount") or 130% of the aggregate Exercise Settlement Amount (as defined in Rule 431(f)(2) of The New York Stock Exchange) of option contracts referred to herein, the Bank shall promptly notify the Broker/Dealer and the Customer in writing of such fact end request that the Customer supplement the Deposit. As used herein, the term "aggregate current index value" means the "current index value" as such term is defined by the By-Laws of The Options Clearing Corp., multiplied by the "Index Multiplier" in the above table.
If at any time the current aggregate market value of the Deposit shall at any time be less than the greater of either (x) 50% of the Current Index Amount or (y) 120% of the Exercise Settlement Amount of option contracts referred to herein, whether or not a request to the Customer for supplementation is then pending, the Bank will immediately advise the Broker/Dealer in writing thereof. For purposes of determining the market value of the Deposit qualified securities shall be valued as of the close of business on the preceding business day.
If any cash equivalent or qualified security shall cease to meet the requirements of clause (ii) above, such cash equivalents or qualified security shall be assigned no value for purposes of determining current aggregate market value pursuant to this paragraph.
The Bank agrees that it will hold the Deposit in accordance with the terms hereof until this deposit letter is released or the Bank is directed to make delivery as hereinafter provided. Upon presentation of this deposit letter to the Bank at the address shown above, with the Endorsement of Release below that, in the Banks reasonable belief, has been duly executed on Broker/Dealer's behalf, the Bank may release the Deposit held pursuant to this deposit letter to the Customer.
Upon presentation of this deposit letter to the Bank at the address shown above, with the Payment Order below that, in the Bank's reasonable belief has been duly executed on Broker/Dealer behalf, the Bank will pay Broker/Dealer, out of the Deposit or the proceeds thereof, the Exercise Settlement Amount as to each of the market index option contracts described above, plus all applicable commissions and other charges due Broker/Dealer.
The Bank has been authorized by the Customer to confirm the Customer's understanding that if the short position described above is closed out, it is the Customer's responsibility to ensure that this deposit letter is released by the Broker/Dealer, and until this deposit letter is so released, the Broker/Dealer shall retain the right to demand payment upon the assignment of any Exercise Notice to any short position in a series of options identified above carried in the Customer's account.
If the Customer is the Bank acting in a fiduciary or similar capacity, or is a trust, custodial, or similar account maintained with the Bank, it is nonetheless understood that in issuing this deposit letter and functioning as escrowee and bailee of the Deposit, the Bank is acting in its general capacity. Nothing herein shall be deemed to require the Bank to make delivery in contravention of any court order or judgment binding on the Bank in its capacity as escrowee and bailee hereunder, which on its face effects the Deposit or the proceeds thereof.
Bank________________________________________________________
By___________________________________(Authorized Signature)
Date______________________
ENDORSEMENT OF RELEASE (to be completed by the Broker/Dealer)
The undersigned hereby releases all rights of the undersigned with respect to this OTC Index Option Deposit letter.
___________________________
(Broker/Dealer)
By___________________________ Date____________________________
PAYMENT ORDER (to be completed by the Broker/Dealer)
The undersigned hereby (1) certifies to the above-named Bank that it has, as holder, exercised the OTC call option contracts referred to above and (2) demands payment that will settle such exercise, plus applicable commissions and other charges due, in the amount of $ ________________.
___________________________
(Broker/Dealer)
By___________________________ Date_________________
For purposes of this paragraph (f)(2)(J), a permitted offset position means, in the case of an option in which a specialist makes a market, a position in the underlying asset or other related assets, and in the case of other securities in which a specialist makes a market, a position in options overlying the securities in which a specialist makes a market. Accordingly, a specialist in options may establish, on a share-for-share 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 may purchase or write options overlying the securities in which the specialist makes a market, if the account holds the following permitted offset positions:
Securities, including options, in such accounts shall be valued conservatively in the light of current market prices and the amount which might be realized upon liquidation. Substantial additional margin must be required or excess Net Capital maintained in all cases where the securities carried: (i) are subject to unusually rapid or violent changes in value including volatility in the expiration months of options, (ii) do not have an active market, or (iii) in one or more or all accounts, including proprietary accounts combined, are such that they cannot be liquidated promptly or represent undue concentration of risk in view of the carrying organization's Net Capital and its overall exposure to material loss.
Transactions in options effected by a specialist pursuant to Rule 105 (Specialists' Interest in Pools and Options) are deemed "market maker transactions", and shall be subject to the margin requirements of this sub-section (f)(2)(J). Therefore, the amount of margin which the specialist must maintain with the clearing firm may be determined by mutual agreement between the clearing firm and the specialist. However, such an account may not be carried in a "deficit equity" position. The margin treatment under section (f)(2)(J) may be applied when the clearing firm does not carry the equity position(s) of the specialist.
The escrow agreement must certify that the bank holds for the account of the customer as security for the agreement 1) cash, 2) cash equivalents, or 3) a combination thereof having an aggregate market value at the time the positions are established of not less than any amount by which the aggregate exercise price of a long call or call warrant (short put or put warrant) exceeds the aggregate exercise price of a short call or call warrant (long put or put warrant) and that the bank will promptly pay the member organization such amount in the event the account is assigned an exercise notice or that the bank will promptly pay the member organization funds sufficient to purchase a warrant sold short in the event of a buy-in.
all component options are listed, or guaranteed by the carrying broker-dealer,
all component options are European style,
all component options are cash settled,
the long options are held in, or purchased for the account on the same day,
with respect to a long butterfly spread as defined in subparagraph (f)(2)(C)(viii) of this Rule, the net debit is paid in full, and
with respect to a short butterfly spread as defined in subparagraph (f)(2)(C)(viii) of this Rule, are held in the account at the time the positions are established or received into the account promptly thereafter:
The escrow agreement must certify that the bank holds for the account of the customer as security for the agreement 1) cash, 2) cash equivalents or 3) a combination thereof having an aggregate market value at the time the positions are established of not less than the amount of the aggregate difference between the two lowest exercise prices with respect to short butterfly spreads comprised of calls or the aggregate difference between the two highest exercise prices with respect to short butterfly spreads comprised of puts and that the bank will promptly pay the member organization such amount in the event the account is assigned an exercise notice on the call (put) with the lowest (highest) exercise price.
all component options are listed, or guaranteed by the carrying broker-dealer,
all component options are European style,
all component options are cash settled,
the long options are held in, or purchased for the account on the same day,
with respect to a short box spread as defined in subparagraph (f)(2)(C)(ix) of this Rule, the net debit is paid in full, and
with respect to a short box spread as defined in subparagraph (f)(2)(C)(ix) of this Rule, there is held in the account at the time the positions are established, or received into the account promptly thereafter:
The escrow agreement must certify that the bank holds for the account of the customer as security for the agreement 1) cash, 2) cash equivalents or 3) a combination thereof having an aggregate market value at the time the positions are established of not less than the amount of the aggregate difference between the exercise prices and that the bank will promptly pay the member organization such amount in the event the account is assigned an exercise notice on either short option.
The margin to be maintained on any transaction or net position in each "when issued" security shall be the same as if such security were issued.
Each position in a "when issued" security shall be margined separately and any unrealized profit shall be of value only in providing the amount of margin required on that particular position.
When an account has a "short" position in a "when issued" security and there are held in the account securities upon which the "when issued" security may be issued, such "short" position shall be marked to the market and the balance in the account shall for the purpose of this Rule be adjusted for any unrealized loss in such "short" position.
When an account has a short position in a "when issued" security and the underlying security is held in the account, no margin need be required on the short position.
On any transaction or net position resulting from contracts for a "when issued" security in an account other than that of a member organization, non-member broker-dealer, or a "designated account", equity must be maintained equal to the margin required were such transaction or position in a margin account.
On any net position resulting from contracts for a "when issued" security made for or with a non-member broker/dealer, no margin need be required, but such net position must be marked to the market.
On any net position resulting from contracts for a "when issued" security made for a member organization or for or with a "designated account", no margin need be required and such net position need not be marked to the market. However, where such net position is not marked to the market, an amount equal to the loss at the market in such position shall be deducted in computing the Net Capital of the member organization under the Exchange's Capital Requirements.
The provisions of this paragraph shall not apply to any position resulting from contracts on a "when issued" basis in a security
The term "when issued" as used herein also means "when distributed".
No margin need be obtained for contracts to sell "when issued" securities when the underlying security is held in the account or the member organization has been informed that the customer owns the underlying securities. Any sale based on ownership by the customer of the underlying security must be made in reliance upon an agreement accepted by the member organization in good faith that the customer will not dispose of the underlying security while the contract of sale remains outstanding and that upon consummation of the plan, the underlying security will be promptly deposited in the account and exchanged for the new security. Since the "when issued" sale may remain outstanding for a relatively long period of time, the member organization's files should contain a written memorandum regarding the customer's agreement.
When one or more accounts are guaranteed by another account and the total margin deficiencies guaranteed by any guarantor exceeds 10% of the member organization's excess Net Capital, the amount of the margin deficiency being guaranteed in excess of 10% of excess Net Capital shall be deducted in computing the Net Capital of the member organization under the Exchange's Capital Requirements.
The Exchange will permit the consolidation of margin accounts and sub-accounts for maintenance purposes without requiring conversion of the foreign currency or foreign denominated security into U.S. dollars. Member organizations must recognize the possibility that fluctuations between foreign currencies and the U.S. dollar may have an adverse effect on the total equity in a margin account. Additional margin should generally be required to compensate for potential losses in equity that may occur due to such currency fluctuations.
[Info. Memo. 90-20, dated May 16, 1990.]
The fifteen day period begins on the first business day that follows the date on which the margin deficiency occurred, not the day the member organization may have so notified the customer nor the fifth business day when net capital charges were required.
The exchange will only grant additional time upon written request, which must fully explain the reason for the request, description of the security and total positions involved.
In general, the Exchange will only consider those situations involving concentrations of a security which is difficult to liquidate, large volatile positions that would effect the market or price of the security and other similar conditions as the basis for approving a request for additional time.
As part of the Exchange's regular examination process, every carrying member organization will be monitored to determine compliance with the fifteen (15) business day limit.
This prohibition on liquidations shall only apply to those accounts that, at the time of liquidation, are not in compliance with the equity to be maintained pursuant to the provisions of this Rule.
Member organizations should have a complete understanding of how the customer intends to finance a margin transaction. If funds are not available in the account, margin is to be furnished by the deposit of cash or securities. If the customer intends to liquidate other securities to finance the transaction, that sale should tale place at or before the time of the new commitment.
Any special initial margin requirements imposed by the Exchange shall, without regard to the other provisions of this Rule, be imposed only on the day of a new transaction. Thereafter, the maintenance requirement will be applicable.
Equity in the margin account which is in excess of Exchange maintenance requirements may be used to satisfy special initial margin requirements. However, the credit balance in a customer's Special Memorandum Account may not be used toward the margin required.
The required margin for any margin purchase or any short sale of special requirement securities must be in the account before any new order is accepted. It is not necessary to deposit more than the initial margin required on any new transaction or group of transactions on a given day.
The special initial margin requirements will not apply to:
Transactions in profitable options as outlined under Rule 431(b)/03 are exempt from special initial margin requirements.
If a customer enters an order to purchase a security and sells the same security within the same day, but for reasons beyond the customer's control e.g., price, the purchase was executed in smaller blocks, it will be considered as one day-trade. However, the member organization must be able to demonstrate that it was the customer's intent to execute one day-trade. This will also apply to when a customer enters a sale order and buys the same security within the same day. In addition, the trades would have to have been executed in sequential order.
One purchase and several subsequent sale transactions of the same security, where the sales were executed in sequential order within the same day, shall constitute one day-trade. One sale and several subsequent purchases of the same security, where the purchases were executed in sequential order within the same day, shall also constitute one day-trade.
Whenever day-trading occurs in a customer's margin account the special maintenance margin required for the day-trades in equity securities shall be 25% of the cost of all trades made during the day. For non-equities securities, the special maintenance margin shall be as required pursuant to the other provisions of this Rule. Alternatively, when two or more day-trades occur on the same day in the same customer's account, the margin required may be computed utilizing the highest (dollar amount) open position during that day. To utilize the highest open position computation method, a record showing the "time and tick" of each trade must be maintained to document the sequence in which each day-trade was completed.
Option day-trades are subject to this sub-section (f)(8)(B). For day-trades executed in accounts of customers not deemed pattern day-traders the requirement is 100% of the premium received on the "long" or "short" transaction, whichever occurred first.
If a customer is a pattern day-trader, the day-trading transactions are treated as having created a naked short option position and, therefore, subject to the margin requirements as prescribed in sub-section (f)(2)(D) of this Rule. However, if the member organization can substantiate that the purchase side of the day-trade took place prior to the sell side of the day-trade, the margin required will be 100% of the premium on the "long" option. A written record of the time of each executed option transaction must be maintained to demonstrate that the purchase was prior to the sale.
For a proprietary account of a registered broker/dealer subject to the SEC's Net Capital Rule, "day-trading buying power" means the equity in the account at the close of business of the previous day, less any haircut requirement as prescribed in SEA Rule 15c3-1, multiplied by six, for equity securities.
Member organizations may use any settled and available funds, or any available market value from fully paid for securities, including money market mutual funds, held long in the customer's cash account to satisfy the $25,000 minimum equity requirement, without moving the funds or securities to the margin account. The member organization must have adequate procedures in place in order to prevent the funds in the cash account from being used for other withdrawal purposes such as debit card and check withdrawals. Any funds, securities or money market mutual funds held in the cash account cannot be used for the calculation of day-trading buying power unless they have been moved to the margin account one business day prior to calculating the day-trading buying power. In the event money market mutual funds are to be moved to the margin account, member organizations must adhere to SEA Rule 11(d)(1). In addition, for both minimum equity and day-trade buying power, member organizations may use money market mutual funds provided the member organization has custody of the fund shares and the exclusive ability to liquidate the fund shares.
Member organizations shall not allow a pattern day-trader to day-trade until the minimum equity of $25,000 has been satisfied. When a pattern day-trader's account falls below the $25,000 minimum equity requirement, based on the previous business day's close, the member organization needs to have procedures in place in order to prevent the pattern day-trader from day-trading. In addition, the $25,000 must be in the margin account or cash account one business day prior to resuming any day-trading.
Cash available means 1x Rule 431 excess. No "time and tick" calculations will be allowed for accounts on a 90-day day-trading restriction.
Member organizations may look to funds in a customer's cash account to satisfy a day-trade call without moving the funds to the margin account. This exception will only be permitted if the member organization has adequate procedures in place to prevent the circumvention of the two (2) day hold requirement on funds deposited into or held in that account i.e., the customer must be prohibited from using the funds for other withdrawal purposes such as debit card and check withdrawals relative to this balance while it is being used to satisfy the day-trade margin call. Funds deposited into the cash account within two business days prior to the creation of a day-trade call, which the member organization can utilize to satisfy the day-trade call, are subject to the two day holding period following the close of business on the day of deposit.
In addition, on the sixth business day only, member organizations are required to deduct from Net Capital the amount of unmet maintenance margin calls pursuant to SEA Rule 15c3-1.
When a customer of a member organization has multiple day-trade calls outstanding and the due date of the first day-trade call is still within the five business days, then the customer can meet the highest day-trade call amount. This will satisfy the remaining day-trade calls that are outstanding. However, once a call is aged past the 5th business day, the customer will be required to satisfy that call separately. Member organizations are advised not to allow customers to make a practice of meeting multiple day-trade calls in this manner.
A customer may liquidate securities to satisfy a day-trade call, but only the maintenance margin requirement of the liquidated securities will be released. However, the Exchange discourages such practice because the member organization should consider the customer's ability to meet their commitments.
The provisions of Section 220.8(c) of Regulation T of the Board of Governors of the Federal Reserve System dictate the prohibitions and exceptions against customers' free riding. Member organizations may apply to the Exchange in writing for a waiver of a 90-day freeze not exempted by Regulation T.
Customers making a practice of purchasing securities in a cash account and selling them before payment is received, are to be placed on a restricted status for a period of 90 calendar days following the trade date of the sale. Unless funds sufficient to pay for a new purchase in full are in the account during this 90-day freeze, no security may be purchased for or sold to that customer in their cash account. Two or more such occurrences, without extenuating circumstances, may warrant restriction. When a member organization believes a restriction should be lifted, it may apply in writing for relief to Credit Regulation, Member Firm Regulation Division, New York Stock Exchange, Inc.
Each application for a waiver of the 90-day freeze should be signed by an authorized person of the member organization and should contain the following information:
SUPPLEMENTARY MATERIAL
In the case of an account conforming to the conditions described in paragraph (e)(3)(C), the application should also include the following information as of the date of the request: