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This rule is no longer applicable.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:
(1) The term "current market value" means the total cost or net proceeds of a security on the day it was purchased or sold or at any other time the preceding business day's closing price as shown by any regularly published reporting or quotation service, except for security futures contracts (see Section (f)(10)(C)(ii). If there is no closing price, a member organization may use a reasonable estimate of the market value of the security as of the close of business on the preceding business day.
(2) The term "customer" means any person for whom securities are purchased or sold or to whom securities are purchased or sold whether on a regular way, when issued, delayed or future delivery basis. It will also include any person for whom securities are held or carried and to or for whom a member organization extends, arranges or maintains any credit. The term will not include the following: (a) a broker or dealer from whom a security has been purchased or to whom a security has been sold for the account of the member organization or its customers, or (b) an "exempted borrower" as defined by Regulation T of the Board of Governors of the Federal Reserve System ("Regulation T"), except for the proprietary account of a broker-dealer carried by a member organization pursuant to Section (e)(6) of this Rule.
/01 Customer Includes
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.
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.
(3) The term "designated account" means the account of (i) a bank (as defined in Section 3(a)(6) of the Securities Exchange Act of 1934), (ii) a savings association (as defined in Section 3(b) of the Federal Deposit Insurance Act), the deposits of which are insured by the Federal Deposit Insurance Corporation, (iii) an insurance company (as defined in Section 2(a)(17) of the Investment Company Act of 1940), (iv) an investment company registered with the Securities and Exchange Commission under the Investment Company Act of 1940, (v) a state or a political subdivision thereof, or (vi) a pension or profit sharing plan subject to ERISA or of an agency of the United States or of a state or a political subdivision thereof.
/01 Savings and Loan Associations
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.
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.
/02 Foreign Institutions
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.
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.
/03 Investment Trust
The term "investment trust" means any investment company registered with the Securities and Exchange Commission under the Investment Company Act of 1940.
The term "investment trust" means any investment company registered with the Securities and Exchange Commission under the Investment Company Act of 1940.
/04 Bank
The term "bank" means a domestic bank as defined under Section 3(a)(6) of the Securities Exchange Act of 1934.
The term "bank" means a domestic bank as defined under Section 3(a)(6) of the Securities Exchange Act of 1934.
(4) The term "equity" means the customer's ownership interest in the account, computed by adding the current market value of all securities "long" and the amount of any credit balance and subtracting the current market value of all securities "short" and the amount of any debit balance. Any variation settlement received or paid on a security futures contract shall be considered a credit or debit to the account for purposes of equity.
(5) the term "exempted security" or "exempted securities" has the meaning as in Section 3(a)(12) of the Securities Exchange Act of 1934 ("the Exchange Act") or "SEA").
/01 CATS, TIGERS and Similar Securities
CATS, TIGERS and similar securities may be treated as "exempted securities" subject to the same requirements as any other government security.
CATS, TIGERS and similar securities may be treated as "exempted securities" subject to the same requirements as any other government security.
(6) The term "margin" means the amount of equity to be maintained on a security position held or carried in an account.
(7) The term "person" has the meaning as in Section 3(a)(9) of the Exchange Act.
(8) The term "basket" shall mean a group of stocks that the Exchange or any national securities exchange designates as eligible for execution in a single trade through its trading facilities and that consists of stocks whose inclusion and relative representation in the group are determined by the inclusion and relative representation of their current market prices in a widely-disseminated stock index reflecting the stock market as a whole.
(b) INITIAL MARGIN
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:
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:
(1) the amount specified in Regulation T of the Board of Governors of the Federal Reserve System, or Rules 400 through 406 of the Exchange Act or Rules 41.42 through 41.48 of the Commodity Exchange act ("CEA"), or
(2) the amount specified in section (c) of this Rule, or
(3) such greater amount as the Exchange may from time to time require for specific securities, or
(4) equity of at least $2,000 except that cash need not be deposited in excess of the cost of any security purchased (this equity and cost of purchase provision shall not apply to "when distributed" securities in a cash account). The minimum equity requirement for a "pattern day trader" is $25,000 pursuant to paragraph (f)(8)(B)(iv)(1) of this Rule.
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.
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.
/01 Compliance with Regulation T
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.
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.
/02 Minimum Equity
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:
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:
• The purchase of "when distributed" securities in a cash account;
• The purchase of exempt securities;
• The purchase of an option ($2,000 needed upon exercise);
• The sale of a put option where the exercise price is less than $20.00 per share;
Every short sale, regardless of the amount involved, is subject to the $2,000 requirement.
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.
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.
/03 Profitable Options
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.
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.
/04 Federal National Mortgage Association (FNMA)
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.
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.
/05 Accounts Subject to Minimum Equity
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:
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 |
(c) MAINTENANCE MARGIN
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:
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:
(1) 25% of the current market value of all securities except for securities futures contracts "long" in the account; plus
(2) $2.50 per share or 100% of the current market value, whichever amount is greater, of each stock "short" in the account selling at less than $5.00 per share; plus
(3) $5.00 per share or 30% of the current market value, whichever amount is greater, of each stock "short" in the account selling at $5.00 per share or above; plus
(4) 5% of the principal amount or 30% of the current market value, whichever amount is greater, of each bond "short" in the account.
/01 Profitable Options
Transactions in profitable options are exempt from maintenance margin requirements as outlined under Rule 431(b)/03.
Transactions in profitable options are exempt from maintenance margin requirements as outlined under Rule 431(b)/03.
/02 Partners' Accounts
Member firm partners should be guided by the following principles in determining margin requirements of partners' accounts:
Member firm partners should be guided by the following principles in determining margin requirements of partners' accounts:
• The net combined deficit, if any, in a partners' capital account, drawing account, other personal accounts and his share of the partnership's undistributed profits and losses, must be deducted in determining the equity in his individual securities account(s).
• Any securities carried in capital accounts must be fully paid for after considering any deficits in individual accounts as described above.
• Any purchase in partners' individual accounts must meet Regulation T initial margin requirements.
/03 Stockholders' 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.
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.
/04 Securities Value
Listed and unlisted securities, other than options, may be given value in the computation of maintenance margin requirements.
Listed and unlisted securities, other than options, may be given value in the computation of maintenance margin requirements.
/05 Sales of Stock Covered by Due Bills
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.
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.
/06 Sinking Fund Transactions
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:
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:
• Retirement of the security is deferred,
• Delivery is delayed beyond the next sinking fund retirement date, or
• The transaction is made with an affiliate of the issuer rather than directly with the issuer.
When a sinking fund transaction that may not be carried in the Nonsecurities Credit and Employee Stock Ownership Account for one or more of the above reasons, qualifies for the margin account under Regulation T, Section 220.4, the margin treatment afforded such transaction may be as follows:
• If 30 calendar days or less to delivery, the transaction may be exempt from margin requirements, but any mark-to-market loss which is not obtained must be deducted in computing net capital. (See SEC Rule 15c3-1(c)(2)(xii)).
• If over 30 calendar days to delivery, the transaction may be exempt from the margin requirements of this Rule, and instead treated as an open proprietary contractual commitment subject to the requirements of SEC Rule 15c3-1 subparagraphs (c)(2)(vi) and (c)(2)(viii). Such treatment, however, should not result in a duplication of deductions under the capital rule (SEC Rule 15c3-1).
See NYSE Rule 431(e)(7)/01 and Regulation T Section 220.09(a)/03.
See NYSE Rule 431(e)(7)/01 and Regulation T Section 220.09(a)/03.
/07 Option Premiums
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.]
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.]
/08 Marginable Foreign Securities
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.
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.
(d) ADDITIONAL MARGIN
Procedures shall be established by member organizations to:
Procedures shall be established by member organizations to:
(1) review limits and types of credit extended to all customers,
(2) formulate their own margin requirements, and
(3) review the need for instituting higher margin requirements, mark-to-markets and collateral deposits than are required by this Rule for individual securities or customer accounts.
/01 Credit Extended
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.
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.
/02 Credit Committee
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.
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.
(e) EXCEPTIONS TO RULE
The foregoing requirements of this Rule are subject to the following exceptions:
The foregoing requirements of this Rule are subject to the following exceptions:
/01 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).
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).
(1) Offsetting "Long" and "Short" Positions
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.
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.
(2) Exempted Securities, Non-equity Securities and Baskets.
(A) Obligations of the United States and Highly Rated Foreign Sovereign Debt Securities.-
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:
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.
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.
/01 Net Positions
The terms net "long" or net "short" positions mean positions in the same issue of the same security.
The terms net "long" or net "short" positions mean positions in the same issue of the same security.
/02 Time to Maturity
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%.
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%.
/03 International Bank
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.
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.
/04 Federal National Mortgage Association (FNMA)
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.
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.
/05 Government Bond Dealers
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.
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.
/06 Roll-Overs
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%
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%
(B) All Other Exempted Securities
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.
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.
(C) Non-Equity Securities.— On any positions in non-equity securities, the margin to be maintained (except where a lesser requirement is imposed by other provisions of this Rule) shall be:
(i) 10% of the current market value in the case of investment grade debt securities; and
(ii) 20% of the current market value or 7% of the principal amount, whichever amount is greater, in the case of all other listed non-equity securities, and all other marginable non-equity securities as defined in paragraph (a)(16) of this Rule.
/01 Non-Marginable Bonds
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.
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.
/02 Mortgage Related Securities
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 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.
/03 Net Tangible Assets
For the purpose of this Rule, net tangible assets means total assets less total liabilities less intangible assets (i.e., good will, etc.).
For the purpose of this Rule, net tangible assets means total assets less total liabilities less intangible assets (i.e., good will, etc.).
/04 Foreign Sovereign Debt Securities
"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)).
"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)).
(D) Baskets
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 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.
(E) Special Provisions
Notwithstanding the foregoing in this sub-section (e)(2),
Notwithstanding the foregoing in this sub-section (e)(2),
(i) A member organization may, at its discretion, permit the use of accrued interest as an offset to the maintenance margin required to be maintained, and
(ii) The Exchange, upon written application, may permit lower margin requirements on a case-by-case basis.
/01 Accrued Interest
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.
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.
/02 Grandfather Clause
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.
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.
(F) Transactions With Exempt Accounts Involving Certain "Good Faith" Securities.
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.
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.
/01 Net Tangible Assets of $16,000,000
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.
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.
/02 Repurchase Agreements
Reverse repurchase agreements in exempted securities shall be maintained in a special account subject to the provisions of this section of the Rule.
Reverse repurchase agreements in exempted securities shall be maintained in a special account subject to the provisions of this section of the Rule.
/03 Mortgage Related Securities
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).
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).
/04 Government National Mortgage Association (GNMA)
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.
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.
/041 Exempt Accounts for GNMAs
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.
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.
/042 Establishing Risk Limits for GNMAs
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.
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.
/043 Exempt Account Requirements for GNMA Transactions
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:
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.
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.
/044 GNMAs — Non-Exempt Accounts Other Than Mortgage Bankers
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.
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.
/045 GNMAs — Non Exempt Mortgage Bankers' Accounts
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:
*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.]
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.]
/046 GNMAs — Concentration Risk Provision
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.
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.
/047 GNMAs — Conversion or Exercise of Standbys
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)
CODES
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
(1) The 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.
(2) Exempt accounts are defined as: member organization, non-member broker/dealer*, "designated account", or any person (as defined under Section 3(a)(9) of the SEC Act of '34) having net tangible assets (stockholders' equity less intangible assets) of $16,000,000 or more.
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.
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.
(3) Mark-to-market losses need not be obtained, provided an amount equal to 10% of the loss, plus the amount of the deficit in each such account or accounts controlled by such persons that exceeds 5% of tentative net capital, is deducted in computing net capital by the member organization under the Exchange's capital requirements.
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.
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.
(4) Same as (3) above, except substitute 25% for 10%.
(5) These mark-to-market losses need not be obtained, provided an amount equal to 100% of the loss is deducted in computing net capital by the member organization under the Exchange's capital requirements.
(6) Same as (3) above, except substitute 15% for 10%.
(7) CMD — Margin and mark-to-market losses (CMDs) must be collected. Such CMDs are to be deducted in computing net capital by the member organization under the Exchange's capital requirements, after five (5) business days from the date they arise, until collected.
(8) Same as (3) above, except substitute 50% for 10%.
(3) Joint Accounts in Which the Carrying Organization or a Partner or Stockholder Therein Has an Interest.—
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.
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.
/01 Employee Participation
(a) Sharing in Profits
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.
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.
(b) Sharing in Losses
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.
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.
(4) International Arbitrage Accounts
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.
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.
(5) Specialists' and Market Makers' Accounts
(A) A member organization may carry the account of an "approved specialist or market maker", which account is limited to specialist or market making transactions, including option hedge transactions established pursuant to the requirements of Rule 105, upon a margin basis which is satisfactory to both parties. The amount of any deficiency between the equity 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.
For the purpose of this paragraph (e)(5)(A), the term "approved specialist or market maker" means either:
For the purpose of this paragraph (e)(5)(A), the term "approved specialist or market maker" means either:
(i) a specialist or market maker, who is deemed a specialist for all purposes under the Securities Exchange Act of 1934 and who is registered pursuant to the rules of a national securities exchange; or
(B) In the case of a joint account carried by a member organization in accordance with paragraph (e)(5)(A) above in which the member organization participates, the equity maintained in the account by the other participants may be in any amount which is mutually satisfactory. The amount of any deficiency between the equity maintained in the account by the other participants and their proportionate share of 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.
/01 Underwritings — Over Allotments
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.
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.
(6)
(A) Broker/Dealer Accounts
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.
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.
(B) Joint Back Offices Arrangements
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.)
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.)
(i) A carrying and clearing, or carrying member organization must:
(1) maintain a minimum Tentative Net Capital of $25 million as computed pursuant to SEA Rule 15c3-1, except that a member organization whose primary business consists of the clearance of options market-maker accounts, may carry JBO accounts provided that it maintains a minimum Net Capital of $7 million as computed pursuant to SEA Rule 15c3-1. In addition, the member organization must include in its ratio of gross options market maker deduction to Net Capital required by the provisions of SEA Rule 15c3-1, gross deductions for JBO participant accounts. Clearance of option market maker accounts shall be deemed a broker/dealer's primary business if a minimum of 60% of the aggregate deductions in the above ratio are options market maker deductions. In the event that a carrying and clearing or carrying member organization's Tentative Net Capital, or Net Capital, respectively, has fallen below the above requirements, the firm shall (a) promptly notify the Exchange in writing of such deficiency, (b) take appropriate action to resolve such deficiency within three consecutive business days, or not permit any new transactions to be entered into pursuant to the Joint Back Office arrangement.
(2) maintain a written risk analysis methodology for assessing the amount of credit extended to participating broker/dealers which shall be made available to the Exchange upon request; and
(3) deduct from Net Capital haircut requirements pursuant to SEA Rule 15c3-1 in excess of the equity maintained in the accounts of the participating broker/dealers. 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.
(ii) A participating broker-dealer must:
(1) be a registered broker/dealer subject to the SEC's Net Capital rule;
(2) maintain an ownership interest in the carrying/clearing member organization pursuant to Regulation T of the Federal Reserve Board Section 220.7; and
(3) maintain a minimum liquidating equity of $1 million in the Joint Back Office arrangement exclusive of the ownership interest established in (2) above. When the minimum liquidating equity decreases below the $1 million requirement, the participant must deposit an amount sufficient to eliminate this deficiency within 5 business days or be subject to margin account requirements prescribed for customers in Regulation T, and the margin requirements pursuant to the other provisions of this Rule.
(7) Nonpurpose Credit.
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:
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:
(A) the account is recorded separately and confined to the transactions and relations specifically authorized by Regulation T of the Board of Governors of the Federal Reserve System;
(B) the account is not used in any way for the purpose of evading or circumventing any regulation of the Exchange or 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; and
(C) the amount of any deficiency between the equity in the 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.
(The term "nonpurpose credit" means an extension of credit other than "purpose credit" as defined in Section 220.2 of Regulation T of the Board of Governors of the Federal Reserve System.)
/01 Sinking Fund Transactions
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:
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:
• If 30 calendar days or less to delivery, the transaction may be exempt from margin requirements but any mark-to-market loss which is not obtained must be deducted in computing net capital. (See SEC Rule 15c3-1(c)(2)(xii)).
• If over 30 calendar days to delivery, the transaction may be exempt from margin requirements of this Rule and instead treated as an open proprietary contractual commitment subject to the requirements of SEC Rule 15c3-1 subparagraphs (c)(2)(vi) and (c)(2)(viii). Such treatment, however, should not result in a duplication of deductions under the capital requirements rule.
For sinking fund transactions that do not qualify for this type of treatment, see NYSE Rule 431(c)/06.
See NYSE Rule 431(c)/06 and Regulation T, Section 220.9(a)/03.
See NYSE Rule 431(c)/06 and Regulation T, Section 220.9(a)/03.
/02 Unsecured Loans
Unsecured loans are to be charged to net capital in their entirety.
Unsecured loans are to be charged to net capital in their entirety.
/03 Nonpurpose Loans Collateralized by Certificates of Deposit
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).
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).
(8) Shelf-Registered, Control and Restricted Securities.
/01 Adherence to Rules 144 and 145(d) — Securities Act of 1933
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":
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":
• Ensuring the availability of adequate current public information about the issuer and distinguishing between regularly reporting and non-reporting companies [Rule 144(c)];
• Placing the unconditional economic risk of the investment more clearly upon the purchaser (and preventing conduit sales on behalf of the issuer) by requiring that "restricted securities" be fully paid and held by the purchaser for a 2-year period [Rule 144(d)];
• Predetermining the market impact of the transaction (in order to avert distributions) by arbitrarily limiting the amount of securities which may be sold (based upon such predicates as volume, number of shares outstanding, "affiliation" with the issuer and the nature of the reporting obligation) [Rule 144(e)], by generally proscribing solicited buy orders and the payment of special compensation [Rule 144(f)] and by mandating that the sale be effected as an ordinary unsolicited brokerage transaction or directly with a "market maker" [Rule 144(f) and (g)].
• Building into the rule safeguarding features relative to the above by imposing upon the selling broker steps of "reasonable inquiry" [Rule 144(g)] and by usually requiring the filing of a notice of sale [Rule 144(h)].
Member organizations are advised to pay particular attention to the volume and varying resale limitations, the currency of the issuer's filings, the tacking and aggregation provisions (including the concepts of "person" and "acting in concert") and to consider requesting a letter containing an irrevocable power to sign Form 144 in the name of and on behalf of the customer or obtaining a Form 144 signed in blank. In either event, it would be necessary to establish a means by which the information required by Form 144 would be continuously updated by the customer. Special inquiry may be advisable where a number of pledgers of the same security ("x") all use the proceeds of their loans to purchase another security ("y").
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.
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.
(A) Shelf-Registered Securities
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:
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:
(i) obtains a current prospectus in effect with the Securities and Exchange Commission, meeting the requirements of Section 10 of the Securities Act of 1933, covering such securities;
(ii) has no reason to believe the Registration Statement is not in effect or that the issuer has been delinquent in filing such periodic reports as may be required of it with the Securities and Exchange Commission and is satisfied that such registration will be kept in effect and that the prospectus will be maintained on a current basis; and
(iii) retains a copy of such Registration Statement, including the prospectus, in an easily accessible place in its files.
Shelf-registered securities which do not meet all the conditions prescribed above shall have no value for purposes of this Rule.
(Also see paragraph (e)(8)(C).)
(Also see paragraph (e)(8)(C).)
/01 Shelf-Registered Securities
Shelf-registered securities are securities registered for continued or delayed offering pursuant to Rule 415 under the Securities Act of 1933.
Shelf-registered securities are securities registered for continued or delayed offering pursuant to Rule 415 under the Securities Act of 1933.
/02 Net Capital Charges
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).
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).
/03 Example — Net Capital Charge
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:
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)]
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)]
/04 Mortgage Related Securities
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.
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.
(B) Control and Restricted Securities
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:
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:
(i) in computing net capital under Rule 325, deducts any margin deficiencies in customers' accounts based upon a margin requirement as specified in sub-paragraph (C)(iv) of this sub-section (e)(8) for such securities and values only that amount of such securities which are then saleable under Rule 144 or 145(d) of the Securities Act of 1933 in conformity with all of the applicable terms and conditions thereof, for purposes of determining such deficiencies; and
(ii) makes volume computations necessary to determine the amount of securities then saleable under Rule 144 or 145(d) of the Securities Act of 1933 on a weekly basis or at such frequency as the member organization and/or the Exchange may deem appropriate under the circumstances.
(Also see paragraph (e)(8)(C).)
/01 Possible Reduction of Marginable Shares
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.
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.
/02 Example of Computations
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:
Account meets the Rule 431(e)(8)(B) "customer" requirement.
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:
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). | |
/03 Rule 144 — Securities Act of 1933
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 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.
/04 Rule 145 — Securities Act of 1933
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.
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.
/05 Application of Rule 144 — Securities Act of 1933
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.
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.
/06 "Then Saleable"
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).
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).
/07 Mortgage Related Securities
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.
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.
(C) Additional Requirements on Shelf-Registered Securities and Control and Restricted Securities
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:
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:
(i) The Exchange may at any time require reports from member organizations showing relevant information as to the amount of credit extended on shelf-registered, control and restricted securities and the amount, if any, deducted from Net Capital due to such security positions.
/01 Reporting 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.
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.
(ii) The greater of the aggregate credit agreed, in writing, to be or actually extended to all customers on control and restricted securities of any one issue that exceeds 10% of the member organization's excess Net Capital shall be deducted from Net Capital for purposes of determining a member organization's status under Rule 326. The amount of such aggregate credit extended, which has been deducted in computing Net Capital under Rule 325, need not be included in this calculation. The Exchange, upon written application, may reduce the deduction to Net Capital under Rule 326 to 25% of such aggregate credit extended on those positions that exceed 10% but are less than 15% of the member organization's excess Net Capital.
/01 Limit on Credit Extended
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:
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 |
/02 Time of Calculation
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.
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.
(iii) The aggregate credit extended on all control and restricted securities reduced by the amount of credit extended which has been deducted in computing Net Capital under Rule 325 shall be deducted from Net Capital on the following basis for purposes of determining a member organization's status under Rule 326:
(1) To the extent such net amount of credit extended does not exceed 50% of a member organization's excess Net Capital, 25% of such net amount of credit extended, and
(2) 100% of such net amount of credit extended which exceeds 50% of a member organization's excess Net Capital.
/01 Aggregate Credit Extended
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.
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.
/011 Example of Computations — Aggregate Credit Extended
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:
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 |
/02 Limit on Credit Extended
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).
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).
/021 Example of Rule 326 Deduction
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:
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:
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 |
(iv) Concentration Reduction
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:
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%
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%
/01 Securities Subject to Concentration Formula
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.
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.
/02 Example of Concentration Computation
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:
When the control securities depreciated in value to $800,000:
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) | |
(v) The amount to be deducted from Net Capital for purposes of determining a member organizations status under Rule 326, pursuant to this paragraph (e)(8)(C), shall not exceed 100% of the aggregate credit extended reduced by any amount deducted in computing Net Capital under Rule 325.
(D) Restricted Securities — Securities either:
(i) then saleable pursuant to the terms and conditions of Rule 144(k) under the Securities Act of 1933, or
(ii) then saleable pursuant to the terms and conditions of Rule 145(d)(2) or (d)(3) under such Act,
shall not be subject to the provisions of this sub-section (e)(8), provided that the issuer continues 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.
/01 Non-Affiliate Exemption
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.
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.
/02 Continuing Requirement for Non-Affiliate Exemption
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.
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.
/03 Optional Member Organization Procedures
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.
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.
/04 Then Saleable
See Rule 431(e)(8)(B)/06.
See Rule 431(e)(8)(B)/06.
(f) OTHER PROVISIONS
(1) Determination of Value for Margin Purposes
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.
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.
/01 Concentration or Volatile Securities
Substantial additional margin must be required:
Substantial additional margin must be required:
• When there are concentrations in single securities (either in particular accounts or in all margin accounts carried) which, due to their size, may not be liquidated promptly; and
• For accounts with positions in volatile securities subject to unusually rapid or violent changes in value.
Accordingly, steps should be taken to:
• Increase margin requirements when it appears that accumulated positions will be difficult to liquidate promptly; and
• Prevent such positions from being acquired.
/02 Suspended Securities
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:
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:
(a) Long positions have no value.
(b) Short positions are valued at the last known sale price prior to suspension and regular maintenance margin requirements are applied.
(c) Long and short positions of the same security are paired-off and only the excess position is margined in accordance with (a) or (b) above.
(d) Long stock versus short warrants representing the same security are treated the same as (c) above.
(e) Long exchangeable or convertible securities versus equivalent shorts of the underlying security position are treated as follows:
(1) there is no maintenance requirement, if there is no conversion cost or other restrictions, or
(2) if there is a conversion cost but no other restriction, the requirement is the conversion cost or the regular maintenance requirement on the short position, whichever is less, or
(3) if there is a restriction to the conversion other than a conversion cost, the positions are margined in accordance with items (a) and (b) above.
(2) Puts, Calls, Other Options, Currency Warrants, Currency Index Warrants and Stock Index Warrants.
/01 Compliance With Rule
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.
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.
(A) Except as provided below, and in the case of a put, call, index stock group option, or stock index warrant with a remaining period to expiration exceeding 9 months, no put, call, currency warrant, currency index warrant or stock index warrant carried for a customer shall be considered of any value for the purpose of computing the margin to be maintained in the account of such customer.
(B) The issuance, guarantee or sale (other than a "long" sale) for a customer of a put, a call, a currency index warrant or a stock index warrant shall be considered a security transaction subject to section (b) of this Rule.
(C) For purposes of this sub-section (f)(2), obligations issued by the United States Government shall be referred to as United States Government obligations. Mortgage pass-through obligations guaranteed as to the timely payment of principal and interest by the Government National Mortgage Association shall be referred to as GNMA obligations.
Definitions: — for (f)(2)(Numbered for Interpretation Handbook Purposes)
Definitions: — for (f)(2)(Numbered for Interpretation Handbook Purposes)
(i) The terms "current market value" or "current market price" of an option, currency warrant, currency index warrant or stock index warrant are as defined in Section 220.2 of Regulation T of the Board of Governors of the Federal Reserve System.
(ii) The term "exercise settlement amount" shall mean the difference between the "aggregate exercise price" and the "aggregate current index value" (as such terms are defined in the pertinent By-Laws of the Options Clearing Corporation).
(iii) The term "stock option (contract)" shall mean an option contract on a single stock. The term "index stock group option (contract)" shall mean an option contract on an index stock group.
(iv) The terms "currency warrant", currency index warrant", index currency group", stock index warrant" and, in respect of stock index warrants, "industry index stock group" shall have the meanings that paragraph (a) of Rule 414 (Index and Currency Warrants) assigns to them.
(v) The terms "call" and "put" as used in connection with currency, currency index or stock index warrant mean a warrant structured as a "call" or "put" (as appropriate) on the underlying currency, index currency group or index stock group (as the case may be).
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).
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).
(vi) A "registered clearing agency" shall mean a clearing agency as defined in Section 3(a)(23) of the Securities Exchange Act of 1934 that is registered with the Securities and Exchange Commission pursuant to Section 17A(b)(2) of the Act.
(vii) The term "underlying component" shall mean in the case of stock, the equivalent number of shares; industry and broad index stock groups, the current index group value and the applicable index multiplier; U.S. Treasury bills, notes and bonds, the underlying principal amount; foreign currencies, the units per foreign currency contract; and interest rate contracts, the interest rate measure based on the yield of U.S. Treasury bills, notes or bonds and the applicable multiplier. The term "interest rate measure" represents, in the case of short term U.S. Treasury bills, the annualized discount yield of a specific issue multiplied by ten or, in the case of long term U.S. Treasury notes and bonds, the average of the yield to maturity of the specific multiplied by ten.
(viii) The term "butterfly spread" means an aggregation of positions in three series of either puts or calls, structured as either: (A) a "long butterfly spread" in which two short options in the same series are offset by one long option with a higher exercise price and one long option with a lower exercise price or (B) a "short butterfly spread" in which two long options in the same series offset one short option with a higher exercise price and one short option with a lower exercise price, all of which have the same contract size, underlying component or index and time of expiration, are based on the same aggregate current underlying value, where the interval between the exercise price of each series is equal, and the exercise prices are in ascending order.
(ix) The term "box spread" means an aggregation of positions in a long call and short put with the same exercise price ("buy side") coupled with a long put and short call with the same exercise price ("sell side") structured as: (A) a "long box spread" in which the sell side exercise price exceeds the buy side exercise price or, (B) a "short box spread" in which the buy side exercise price exceeds the sell side exercise price, all of which have the same contract size, underlying component or index and time of expiration, and are based on the same aggregate current underlying value.
(x) The term "calendar spread" or "time spread" means the sale of one option and the simultaneous purchase of another option of the same type, both specifying the same underlying component with the same exercise price or different exercise prices, where the "long" option expires after the "short" option.
(xi) The term "long condor spread" means an aggregation of positions in four series of either puts or calls, structured as a long option with the lowest exercise price, two short options with the next two consecutively higher exercise prices and a long option with the highest exercise price, all of which have the same contract size, underlying component or index and time of expiration, are based on the same aggregate current underlying value, where the interval between the exercise price of each series is equal, and the exercise prices are in consecutive order. This strategy can also be considered as a combination of two long butterfly spreads, as defined in this subsection (f)(2)(C).
(xii) The term "short iron butterfly spread" means an aggregation of positions in two series of puts and two series of calls, structured as a short put and a short call with the same exercise price, offset by a long put with a lower exercise price and a long call with a higher exercise price, all of which have the same contract size, underlying component or index and time of expiration, are based on the same aggregate current underlying value, where the interval between the exercise price of each series is equal, and the exercise prices are in consecutive order. This strategy can also be considered as a combination of one long butterfly spread and one short box spread, as defined in this subsection (f)(2)(C).
(xiii) The term "short iron condor spread"" means an aggregation of positions in two series of puts and two series of calls, structured as a long put with the lowest exercise price, a short put and a short call with the next two consecutively higher exercise prices, and a long call with the highest exercise price, all of which have the same contract size, underlying component or index and time of expiration, are based on the same aggregate current underlying value, where the interval between the exercise price of each series is equal, and the exercise prices are in consecutive order. This strategy can also be considered a combination of two long butterfly spreads and one short box spread, as defined in this subsection (f)(2)(C).
(xiv) The term "long calendar butterfly spread" means an aggregation of positions in three series of either puts or calls, structured as two short options with the same exercise price, offset by a long option with a lower exercise price and a long option with a higher exercise price, all of which have the same contract size, underlying component or index, are based on the same aggregate current underlying value, where the interval between the exercise price of each series is equal, the exercise prices are in consecutive order, and one long option expires after the other three options expire concurrently. However, a long calendar butterfly spread cannot be composed of cash-settled, European style index options. This strategy can also be considered a combination of one long calendar spread and one long butterfly spread, as defined in this subsection (f)(2)(C).
(xv) The term "long calendar condor spread" means an aggregation of positions in four series of either puts or calls, structured as a long option with the lowest exercise price, two short options with the next two consecutively higher exercise prices and a long option with the highest exercise price, all of which have the same contract size, underlying component or index, are based on the same aggregate current underlying value, where the interval between the exercise price of each series is equal, the exercise prices are in consecutive order, and one long option expires after the other three options expire concurrently. However, a long calendar condor spread cannot be composed of cash-settled, European style index options. This strategy can also be considered a combination of one long calendar spread and two long butterfly spreads, as defined in this subsection (f)(2)(C).
(xvi) The term "short calendar iron butterfly spread" means an aggregation of positions in two series of puts and two series of calls, structured as a short put and a short call with the same exercise price, offset by a long put with a lower exercise price and a long call with a higher exercise price, all of which have the same contract size, underlying component or index, are based on the same aggregate current underlying value, where the interval between the exercise price of each series is equal, the exercise prices are in consecutive order, and one long option expires after the other three options expire concurrently. However, a short calendar iron butterfly spread cannot be composed of cash-settled, European style index options. This strategy can also be considered a combination of one long calendar spread, one long butterfly spread, and one short box spread, as defined in this subsection (f)(2)(C).
(xvii) The term "short calendar iron condor spread" means an aggregation of positions in two series of puts and two series of calls, structured as a long put with the lowest exercise price, a short put and a short call with the next two consecutively higher exercise prices and a long call with the highest exercise price, all of which have the same contract size, underlying component or index, are based on the same aggregate current underlying value, where the interval between the exercise price of each series is equal, the exercise prices are in consecutive order, and one long option expires after the other three options expire concurrently. However, a short calendar iron condor spread cannot be composed of cash-settled, European style index options. This strategy can also be considered a combination of one long calendar spread, two long butterfly spreads, and one short box spread, as defined in this subsection (f)(2)(C).
(xviii) The term "escrow agreement", when used in connection with cash settled calls, puts, currency warrants, currency index warrants or stock index warrants, carried short, means any agreement issued in a form acceptable to the Exchange under which a bank holding cash, cash equivalents, one or more qualified equity securities or a combination thereof in the case of a call or warrants, or cash, cash equivalents or a combination thereof in the case of a put or warrant is obligated (in the case of an option) to pay the creditor the exercise settlement amount in the event an option is assigned an exercise notice or, (in the case of a warrant) the funds sufficient to purchase a warrant sold short in the event of a buy-in.
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.
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.
/01 Condor Spreads
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:
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 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:
(1) is guaranteed by the carrying broker/dealer,
(2) has an American style exercise provision, and
(3) has a remaining period to expiration exceeding 9 months.
(D) The margin required on any put, call, currency warrant, currency index warrant, or stock index warrant issued, guaranteed or carried "short" in a customer's account shall be:
(i) In the case of puts and calls issued by a registered clearing agency, 100% of the current market value of the option plus the percentage of the current value of the underlying component specified in column II of this subsection (D)(i) below. In the case of currency warrants, currency index warrants and stock index warrants, 100% of the current market value of each such warrant plus the percentage of the warrant's current "underlying component value" (as column IV of this sub-section (D)(i) describes) specified in column II of this subsection (D)(i) below.
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).
*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:
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.
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.
(ii) In the case of puts and calls issued by a registered clearing agency which represent options on GNMA obligations in the principal amount of $100,000, 130% of the current market value of the option plus $1,500, except that the margin required need not exceed $5,000 plus the current market value of the option.
(iii) In the case of puts and calls not issued by a registered clearing agency the percentage of the current value of the underlying component and the applicable multiplier if any, specified in column II of this subsection (f)(2)(D)(iii) below, plus any "in-the-money amount" (as defined in this subsection (f)(2)(D)(iii).
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.
*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 contracts under category (4) must be for a principal amount of not less than $500,000.
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.
/01 Mergers and acquisitions
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:
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 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)
(iv) Puts and calls not issued by a registered clearing agency and representing options on U.S. Government and U.S. Government Agency debt securities that qualify for exemption pursuant to Rule 3a12-7 under the Securities Exchange Act of 1934, must be for a principal amount of not less than $500,000, and shall be subject to the following requirements:
(1) For exempt accounts, 3% of the current value of the underlying principal amount on thirty (30) year U.S. Treasury bonds and non-mortgage backed U.S. Government agency debt securities; and 2% of the current value of the underlying principal amount on all other U.S. Government and U.S. Government agency debt securities, plus any "in-the-money amount" (as defined in subsection (f)(2)(D)(iii) or minus any "out-of-the-money amount" (as defined in subsection (f)(2)(D)(i)). The amount of any deficiency between the equity in the account and the margin required shall be deducted in computing the Net Capital of the member organization under the Exchange's Capital Requirements on the following basis:
(a) On any one account or group of commonly controlled accounts to the extent such deficiency exceeds 5% of a member organization's tentative Net Capital (net capital before deductions on securities), 100% of such excess amount, and
(b) On all accounts combined to the extent such deficiency exceeds 25% of a member organization's tentative Net Capital, 100% of such excess amount, reduced by any amount already deducted pursuant to (a) above.
(2) For non-exempt accounts, 5% of the current value of the underlying principal amount on thirty (30) year U.S. Treasury bonds and non-mortgage backed U.S. Government agency debt securities; and 3% of the current value of the underlying principal amount on all other U.S. Government and U.S Government agency debt securities, plus any "in-the-money amount" or minus any "out-of-the-money amount", provided the minimum margin shall not be less than 1% of the current value of the underlying principal amount.
For purposes of this subsection (f)(2)(D)(iv), an "exempt account" shall be defined as a member organization, non-member broker/dealer, "designated account", any person having net tangible assets of at least sixteen million dollars or in the case of mortgage-related debt securities transactions an independently audited mortgage banker with both more than $1.5 million of net current assets (which may include 3/4 of 1% maximum allowance on loan servicing portfolios) and with more than $1.5 million of net worth.
(E)
(i) Each put or call shall be margined separately and any difference between the current value of the underlying component and the exercise price of a put or call shall be considered to be of value only in providing the amount of margin required on that particular put or call. Substantial additional margin must be required on options issued, guaranteed or carried "short" with an unusually long period of time to expiration, or written on securities which are subject to unusually rapid or violent changes in value, or which do not have an active market, or where the securities subject to the option cannot be liquidated promptly.
(ii) No margin need be required on any "covered" put or call.
(F)
(i) Where both a put and a call specify the same underlying component are issued by a registered clearing agency and are carried "short" for a customer, the amount of margin required shall be the margin on the put or call, whichever is greater, as required pursuant to (f)(2)(D)(i) above, plus the current market value of the other option.
When:
When:
(1) a currency call warrant position is carried "short" for a customer account and is offset by a "short" currency put warrant and/or currency put option position;
(2) a currency put warrant position is carried "short" for a customer account and is offset by a "short" currency call warrant and/or currency put option position;
(3) a currency index call warrant position is carried "short" for a customer account and is offset by a "short" currency index put warrant and/or currency put option position;
(4) a currency index put warrant position is carried "short" for a customer account and is offset by a "short" currency index call warrant and/or currency index call option position;
(5) a stock index call warrant position is carried "short" for a customer account and is offset by a "short" stock index put warrant and/or stock index put option position;
(6) a stock index put warrant position is carried "short" for a customer account and is offset by a "short" stock index call warrant and/or stock index call option position;
(7) a broad index stock group call option position is carried "short" for a customer account and is offset by a "short" broad index stock group put option position; or
(8) a broad index stock group put option position is carried "short" for a customer account and is offset by a "short" broad index stock group call option position
and the offset position is of equivalent underlying value on the same currency, currency index or index stock group, as appropriate, then the amount of margin required shall be the margin on the put position or the call position, whichever is greater, as required pursuant to (D)(i) above, plus the current market value of the other warrant and/or option position.
(ii) Where either or both the put and call specifying the same underlying component are not issued by a registered clearing agency and are issued, guaranteed or carried "short" for a customer by the same broker-dealer (as defined in subsection (f)(2)(G) below), the amount of margin required shall be the margin on the put or call, whichever is greater, as required pursuant to (f)(2)(D)(iii) and (D)(iv) above, plus any unrealized loss on the other option. Where either or both the put or call are not issued, guaranteed or carried by the same broker-dealer then the put or call must be margined separately pursuant to subsections (F)(2)(D)(iii) and (D)(iv) above, however, the minimum margin shall not apply to the other option.
(iii) If both a put and call for the same GNMA obligation in the principal amount of $100,000 are issued, guaranteed or carried "short" for a customer, the amount of margin required shall be the margin on the put or call, whichever is greater, as required pursuant to (F)(2)(D)(ii) above, plus the current market value of the other option.
(G)
(i) Where a call that is issued by a registered clearing agency is carried "long" for a customer's account and the account is also "short" a call issued by a registered clearing agency, expiring on or before the date of expiration of the "long" listed call and specifying the same underlying component, the margin required on the "short" call 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 "long" call exceeds the exercise price of the "short" call.
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 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.
(ii) Where a call 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 call option, and/or a call warrant, on the same underlying currency, index currency group, or index stock group, which "short" call position(s) expire on or before the date of expiration of the "long" call 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" call(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 of the "long" call exceeds the exercise price(s) of the "short" call(s).
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 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.
(iii) Where a call that is issued by a registered clearing agency is carried "long" for a customer's account and the account is also "short" a call issued by a registered clearing agency, expiring on or before the date of expiration of the "long" listed call and written on the same GNMA obligation in the principal amount of $100,000, the margin required on the "short" call 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 "long" call exceeds the exercise price of the "short" call multiplied by the appropriate multiplier factor set forth below.
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 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.
(iv) Where a call that is issued by a broker-dealer is carried "long" for a customer's account and the account is also "short" a call issued by the same broker-dealer, expiring on or before the date of expiration of the "long" call and specifying the same underlying component, the margin required on the "short" call 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 "long" call exceeds the exercise price of the "short" call.
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.
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.
(v) The following requirements set forth the minimum amount of margin which must be maintained in margin accounts of customers having positions in components underlying options, stock index warrants, when such components are held in conjunction with certain positions in the overlying option or warrant. The option or warrant must be issued by a registered clearing agency or guaranteed by the carrying broker-dealer. In the case of a call or warrant carried in a short position, a related long position in the underlying component shall be valued at no more than the call/warrant exercise price for margin equity purposes.
(a) Long Option or Warrant Offset. When a component underlying an option or warrant is carried long (short) in an account in which there is also carried a long put (call) or warrant specifying equivalent units of the underlying component, the minimum amount of margin which must be maintained on the underlying component is 10% of the option/warrant exercise price plus the "out-of-the-money" amount, not to exceed the minimum maintenance required pursuant to paragraph (c) of this Rule.
(b) Conversions: When a call or warrant carried in a short position is covered by a long position in equivalent units of the underlying component and there is also carried with a long put or warrant specifying equivalent units of the same underlying component and having the same exercise price and expiration date as the short call or warrant, the minimum amount of margin which must be maintained for the underlying component shall be 10% of the exercise price.
(c) Reverse Conversions: When a put or warrant carried in a short position is covered by a short position in equivalent units of the underlying component and is also carried with a long call or warrant specifying equivalent units of the same underlying component and having the same exercise price and expiration date as the short put or warrant, the minimum amount of margin which must be maintained for the underlying component shall be 10% of the exercise price plus the amount by which the exercise price of the put exceeds the current market value of the underlying, if any.
(d) Collars: When a call or warrant carried in a short position is covered by a long position in equivalent units of the underlying component and is also carried with a long put or warrant specifying equivalent units of the same underlying component and having a lower exercise price and the same expiration date as the short call/warrant, the minimum amount of margin which must be maintained for the underlying component shall be the lesser of 10% of the exercise price of the put plus the put "out-of-the-money" amount or 25% of the call exercise price.
(e) Butterfly Spread: This subparagraph applies to a butterfly spread as defined in subparagraph (f)(2)(C)(viii) of this Rule where all option positions are issued by a registered clearing agency or guaranteed by the carrying broker-dealer.
(1) With respect to a long butterfly spread as defined in subparagraph (f)(2)(C)(viii) of this Rule, the net debit must be paid in full.
(2) With respect to a short butterfly spread as defined in subparagraph (f)(2)(C)(viii) of this Rule, margin must be deposited and maintained equal to at least 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. The net proceeds from the sale of short option components may be applied to the requirement.
(f) Box Spread: This subparagraph applies to box spreads as defined in subparagraph (f)(2)(C)(ix) of this Rule, where all option positions are issued by a registered clearing agency or guaranteed by the carrying broker-dealer.
(1) With respect to a long box spread as defined in subparagraph (f)(2)(C)(ix) of this Rule, the net debit must be paid in full.
(2) With respect to a short box spread as defined in subparagraph (f)(2)(C)(ix) of this Rule, margin must be deposited and maintained equal to, at least the amount of the aggregate difference between the exercise prices. The net proceeds from the sale of short option components may be applied to the requirement.
(g) Long Box Spread in European Style Options: With respect to a long box spread as defined in subparagraph (f)(2)(C)(ix) of this Rule, in which all component options have a European style exercise provision and are issued by a registered clearing agency or guaranteed by the carrying broker-dealer, margin must be deposited and maintained equal to at least 50% of the aggregate difference in the exercise prices. The net proceeds from the sale of short option components may be applied to the requirement. For margin purposes, the long box spread may be valued at an amount not to exceed 100% of the aggregate difference in the exercise prices.
(H)
(i) Where a call is issued, guaranteed or carried "short" against an existing net "long" position in the security under option or in any security immediately exchangeable or convertible, other than warrants, without restriction including the payment of money into the security under option, no margin need be required on the call, provided (1) such net long position is adequately margined in accordance with this Rule and (2) the right to exchange or convert the net "long" position does not expire on or before the date of expiration of the "short" call. Where a put is issued, guaranteed or carried "short" against an existing net "short" position in the security under option, no margin need be required on the put, provided such net "short" position is adequately margined in accordance with this Rule.
/01 Convertible Bond Hedge
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.
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.
/02 Control or Restricted Securities Covering Options Sold
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.
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.
(ii) Where a call representing stock options is issued, guaranteed or carried "short" against an existing net "long" position in a warrant convertible into the underlying security under option, margin shall be required on the call equal to any amount by which the conversion price of the "long" warrant exceeds the exercise price of the call, provided (1) such net long position is adequately margined in accordance with this Rule and (2) the right to convert the net "long" position does not expire on or before the date of expiration of the "short" call. However, when a payment of money is required to convert the "long" warrant such warrant shall have no value for purposes of this Rule.
(iii) In determining net "long" and net "short" positions, for purposes of sub-paragraphs (f)(2)(H)(i) and (ii) above, offsetting "long" and "short" positions in exchangeable or convertible securities (including warrants) or in the same security, as discussed in sub-section (e)(1) of this Rule, shall be deducted. In computing margin on such an existing net security position carried against a put or call, the current market price to be used shall not be greater than the exercise price in the case of a call or less than the current market price in the case of a put and the required margin shall be increased by any unrealized loss.
/01 Net Positions
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.
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.
(iv) Where a put or call option or stock index warrant is issued, guaranteed or carried "short" in the account of a customer against a letter of guarantee, or in the case of a call, an "escrow receipt", that
(1) is in form satisfactory to the Exchange
(2) is issued by a third party custodian bank or trust company (the "custodian");
(3) either is held in the account at the time the put or call is written or is received in the account promptly thereafter; and
(4) in the case of an escrow receipt, is in compliance with the requirements of Rule 610 of The Options Clearing Corporation.
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.
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.
/01 OTC Government Options
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
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
/02 Use of Government Security Under Escrow Receipt
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
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
/03 Indices Option Deposit Letter — Under Collateralized
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
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
/04 Option Deposit Letter
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:
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:
• The Exchange's prescribed forms of option deposit letters for puts and calls on equity securities or U.S. Government securities and for puts on indices and the OCC's prescribed forms of escrow receipts are the only forms that may be accepted by member organizations. Any other form of option deposit letter is not acceptable for purposes of Rule 431 absent prior written approval of the Exchange.
• Member organizations must comply with Rule 405 (Diligence as to Accounts) as it relates to the customer trading the options and to the bank or trust company issuing the option deposit letter.
• Option deposit letters may not be accepted unless the securities or cash held by the bank or trust company are free of all liens or encumbrances.
• Member organizations should set a limit on the number of customers from whom option deposit letters will be accepted, or the number of option deposit letters to be accepted on behalf of any one customer.
• Option deposit letters should be recorded on the member organization's books and records (see Rule 440 (Books and Records)).
• Member organizations should establish a limit on the total dollar amount of all outstanding option deposit letters accepted from any one bank or trust company and a total dollar amount of all option deposit letters accepted in relation to the member organization's net worth.
• If the security against which an option is written is being carried in a member account, the security position must be maintained at the member organization.
• Banks acting as fiduciaries for trust clients may issue option deposit letters for their trust accounts.
Exhibits I and II are the Exchange's prescribed forms of option deposit letters for puts and calls, respectively, on equity securities or U.S. Government securities. Exhibit III is the Exchange's prescribed form of option deposit letter for puts on indices.
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:
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:
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:
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:
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_________________
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:
(i) it is a bank or trust company, doing business in corporate form, organized under the laws of United States or any State thereof and is supervised and examined by State or Federal authorities having supervision over banks or trust companies;
(ii) as escrow agent, it has on deposit in the United States for the account of ___________________ (the "Customer"), cash or cash equivalents meeting the requirements of Sec.220.8(a)(4)(i) of Regulation T of the Board of Governors of the Federal Reserve System (the Deposit) having an aggregate market value not less than $__________ (valuing cash equivalents at face value), which amount equals the product obtained by multiplying (a) the "aggregate exercise price," as that term is defined in the pertinent By-Laws of the Options Clearing Corporation (the "OCC"), of each option contract referred to below by (b) the number of such contracts referred to below; and
(iii) the Bank has received specific authorization from the Customer to issue this deposit letter and to hold the Deposit pursuant to the provisions hereof, in respect of the Customer's position (the "short position") as a writer of the following option contact(s):
| 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:
(i) it is a bank or trust company, doing business in corporate form, organized under the laws of the United States or any State thereof and is supervised and examined by State or Federal authorities having supervision over banks or trust companies;
(ii) as escrow agent, it has on deposit in the United States for the account of ________________________ (the "Customer"), in form to constitute good delivery under the rules of the Options Clearing Corporation (the "OCC"), the securities that underlie the option contract(s) described below or other securities which are immediately convertible into or exchangeable for such securities without the payment of money (which right to convert or exchange does not expire on or before the expiration date of the option contract(s) described below), such deposited securities being hereinafter referred to as the Deposited Securities; and
(iii) the Bank has received specific authorization from the Customer to issue this deposit letter and to hold the Deposited Securities pursuant to the provisions hereof, in respect of the Customer's position (the "short position") as a writer of the following option contract(s):
| 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:
(i) it is a bank or trust company, doing business in corporate form, organized under the laws of the United States or any State thereof and is supervised and examined by State or Federal authorities having supervision over banks or trust companies;
(ii) as escrow agent, it has on deposit in the United States for the account of _________________________(the "Customer"), cash or cash equivalents meeting the requirements of Section 220.8(a)(4)(i) of Regulation T of the Board of Governors of the Federal Reserve System (the "Deposit") having an aggregate market value not less than $____________(valuing cash equivalents at face value), which amount equals the product obtained by multiplying (a) the "aggregate exercise price," as that term is hereinafter defined, of each market index option contract referred to below by (b) the number of such contracts referred to below; and
(iii) the Bank has received specific authorization from the Customer to issue this deposit letter and to hold the Deposit pursuant to the provisions hereof, in respect of the Customer's position (the "short position") as a writer of the following market index option contract(s):
| 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:
(i) it is a bank or trust company, doing business in corporate form, organized under the laws of the United States or any state thereof and is supervised and examined by State or Federal authorities having supervision over banks or trust companies;
(ii) as escrow agent, it has on deposit in the United States for the account of _____________________________________________ (the "Customer"), (a) cash, (b) cash equivalents meeting the requirements of Regulation T of the Board of Governors of the Federal Reserve System, (c) one or more qualified securities as defined in New York Stock Exchange Rule 431(f)(2)(H)(iv), or (d) any combination thereof (the "Deposit");
(iii) the aggregate market value of the Deposit, computed as of the close of business on the trade date referred to below (valuing cash equivalents at face value and qualified securities at their last sale price, as reported on such trade date pursuant to an effective transaction reporting plan as defined in Rule 11Aa3-1 under the Securities Exchange Act of 1934 or their last bid price, if not subject to East sale reporting) was not less than the aggregate current index value set forth In the table below;
(iv) to the extent the Deposit includes securities such securities are in good deliverable form, or the Bank has the unrestricted power to put such securities into good deliverable form, in accordance with the requirements of the primary market for such securities and the Customer has duly authorized the Bank to liquidate such securities to the extent necessary to perform the Banks obligations thereunder; and
(v) the Bank has reserved written affirmation from the Customer that alt index call options covered by this deposit letter are written against a diversified stock portfolio and has also received specific authorization from the Customer to issue this deposit letter and to hold the Deposit pursuant to the provisions hereof, in respect of the Customer's position (the "short position") as a writer of the over-the-counter call option contract on the underlying Index referred to below:
| 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_________________
(I) When a member or member organization issues or guarantees an option or stock index warrant to receive or deliver securities or foreign currencies for a customer, such option or stock index warrant shall be margined as if it were a put or call
(J) Registered Specialists, market makers or traders. — Notwithstanding the other provisions of this subsection (f)(2), a member organization may clear and carry the listed option transaction of one or more registered specialist, registered market makers or registered traders of one or more registered traders in options (which registered traders are deemed specialists for all purposes under the Securities Exchange Act of 1934 pursuant to the rules of a national securities exchange) (hereinafter referred to as "specialist(s)"), upon a "Good Faith" margin basis satisfactory to the concerned parties, provided the "Good Faith" margin requirement is not less than the Net Capital haircut deduction of the member organization carrying the transaction pursuant to Rule 325. In lieu of collecting the "Good Faith" margin requirement, a carrying member organization may elect to deduct in computing its Net Capital the amount of any deficiency between the equity maintained in the account and the "Good Faith" margin required.
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:
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:
(i) A short option position which is "in or at the money" and is not offset by a long or short option position for an equal or greater number of shares of the same underlying security which is "in the money";
(ii) A long option position which is "in or at the money" and is not offset by a long or short option position for an equal or greater number of shares of the same underlying security which is "in the money";
(iii) A short option position against which an exercise notice was tendered;
(iv) A long option position which was exercised;
(v) A net long position in a security (other than an option) in which a specialist makes a market;
(vi) A net short position in a security (other than an option) in which the specialist makes a market; or
(vii) A specified portfolio type as referred to in SEA Rule 15c3-1— Appendix A.
For purposes of this paragraph (f)(2)(J), the term "in or at the money" means the current market price of the underlying security is not more than two standard exercise intervals below (with respect to a call option) or above (with respect to a put option) the exercise price of the option; the term "in the money" means the current market price of the underlying asset or index is not below (with respect to a call option) or above (with respect to a put option) the exercise price of the option; and, the term "overlying option" means a put option purchased or a call option written against a long position in an underlying asset; or a call option purchased or a put option written against a short position in an underlying asset.
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.
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.
/01 Specialists' Option Hedging — Rule 105
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.
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.
(K) The Exchange may at any time impose higher margin requirements in respect to any option or warrant position(s) when it deems such higher margin requirements are appropriate.
(L) Exclusive designation. — A customer may designate at the time an option order is entered which security held in the account is to serve in lieu of the required margin, if such service is offered by the member organization; or the customer may have a standing agreement with the member organization as to the method to be used for determining on any given day which security position will be used in lieu of the margin to support an option transaction. Any security held in the account which serves in lieu of the required margin for a short put or short call shall be unavailable to support any other option transaction in the account.
(M) Cash account transactions. — A member organization may make option transactions in a customer's cash account, providing:
(i) The transaction is permissible under Section 220.8 of Regulation T of the Board of Governors of the Federal Reserve System; or
(ii) Spreads. A European style cash-settled index stock group option or stock index warrant carried in a short position is deemed a covered position, and eligible for the cash account, provided a long position in a European style cash-settled stock group index option, or stock index warrant having the same underlying component or index that is based on the same aggregate current underlying value, is held in or purchased for the account on the same day provided:
(A) the long position and the short position expire concurrently,
(B) the long position is paid in full, and
(C) there is held in the account at the time the positions are established, or received into the account promptly thereafter:
(1) cash or cash equivalents of not less than any amount by which the aggregate exercise price of the long call or call warrant (short put or put warrant) exceeds the aggregate exercise price of the short call or call warrant (long put or put warrant), to which requirement of net proceeds from the sale of the short position may be applied, or
(2) an escrow agreement.
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.
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.
(D) A long warrant may offset a short option contract and a long option contract may offset a short warrant provided they have the same underlying component or index and equivalent aggregate current underlying value.
(iii) Butterfly Spreads. Put or call options carried in a short position are deemed covered positions and eligible for the cash account provided the account contains long positions of the same type which in conjunction with the short options, constitute a butterfly spread as defined in subparagraph (f)(2)(C)(viii) of this Rule and provided:
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:
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:
(1) cash or cash equivalents of not less than the amount of the aggregate difference between the two lowest exercise prices with respect to short butterfly spreads comprised of call options or the aggregate difference between the two highest exercise prices with respect to short butterfly spreads comprised of put options, to which requirement the net proceeds from the sale of short option components may be applied, or
(2) an escrow agreement.
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.
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.
(iv) Box Spreads. Puts and calls carried in a short position are deemed covered positions and eligible for the cash account provided the account contains long positions which in conjunction with the short options constitute a box spread as defined in subparagraph (f)(2)(C)(ix) of this Rule provided:
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:
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:
(1) cash or cash equivalents of not less than the amount of the aggregate difference between the exercise prices, which requirement of the net proceeds from the sale of short option components may be applied, or
(2) an escrow agreement.
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 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.
(3) "When Issued and "When Distributed" Securities.
(A) Margin Accounts
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.
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.
/01 Offsetting 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.
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.
(B) Cash Accounts
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
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
(i) which is the subject of a primary distribution in connection with a bona fide offering by the issuer to the general public for "cash", or
(ii) which is exempt by the Exchange as involving a primary distribution.
The term "when issued" as used herein also means "when distributed".
The term "when issued" as used herein also means "when distributed".
/01 Offsetting Position
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.
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.
(4) Guaranteed Accounts. — Any account guaranteed by another account may be consolidated with such other account and the margin to be maintained may be determined on the net position of both accounts, provided the guarantee is in writing and permits the member organization carrying the account, without restriction, to use the money and securities in the guaranteeing account to carry the guaranteed account or to pay any deficit therein; and provided further that such guaranteeing account is not owned directly or indirectly by (a) a partner, member or any stockholder (other than a holder of freely transferable stock only) in the organization carrying such account or (b) a member, member organization, a partner or any stockholder (other than a holder of freely transferable stock only) therein having a definite arrangement for participating in the commissions earned on the guaranteed account. However, the guarantee of a limited partner or of a holder of non-voting stock, if based upon his resources other than his capital contribution to or other than his interest in a member organization, is not affected by the foregoing prohibition, and such a guarantee may be taken into consideration in computing margin to be maintained in the guaranteed account.
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.
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.
(5) Consolidation of Accounts. — When two or more accounts are carried for a customer, the margin to be maintained may be determined on the net position of said accounts, provided the customer has consented that the money and securities in each of such accounts may be used to carry or pay any deficit in all such accounts.
/01 Foreign Currency Sub-Accounts
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 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.]
(6) Time Within Which Margin or "Mark to Market" Must Be Obtained. — The amount of margin or "mark to market" required by any provision of this Rule shall be obtained as promptly as possible and in any event within fifteen business days from the date such deficiency occurred, unless the Exchange has specifically granted the member organization additional time.
/01 Fifteen Day Period
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 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.
/02 Exchange-Approved Additional Time
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.
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.
/03 Exchange Oversight
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.
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.
(7) Practice of Meeting Regulation T Margin Calls by Liquidation Prohibited. — When a "margin call", as defined in Section 220.2 of Regulation T of the Board of Governors of the Federal Reserve System, is required in a customer's account, no member organization shall permit a customer to make a practice of either deferring the deposit of cash or securities beyond the time when such transactions would ordinarily be settled or cleared, or meeting the margin required by the liquidation of the same or other commitments in the account.
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.
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.
/01 Liquidation
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.
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.
(8) Special Initial and Maintenance Margin Requirements
(A) Notwithstanding the other provisions of this Rule, the Exchange may, whenever it shall determine that market conditions so warrant, prescribe:
(i) higher initial margin requirements for the purpose of effecting new securities transactions and commitments in accounts of customers with respect to specific securities traded on the Exchange,
(ii) higher maintenance margin requirements for accounts of customers with respect to any securities, and
(iii) such other terms and conditions as the Exchange shall deem appropriate relating to initial and/or maintenance margin requirements for accounts of customers with respect to any securities.
/01 Special Initial Requirements
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.
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.
/02 Exemptions
The special initial margin requirements will not apply to:
The special initial margin requirements will not apply to:
• purchases of stocks to cover existing short positions;
• accounts long that sell short against the box;
• puts, calls and other options held in accounts prior to the establishment of special margin requirements on the underlying security in accordance with this Rule (Note: Such options issued after the establishment of special margin requirements must be margined as though the potential security positions were established at that time.);
• transactions in cash accounts; and
• transactions in U.S. Government and Municipal obligations
/03 Profitable Options
Transactions in profitable options as outlined under Rule 431(b)/03 are exempt from special initial margin requirements.
Transactions in profitable options as outlined under Rule 431(b)/03 are exempt from special initial margin requirements.
(B) Day-Trading. —
(i) The term "day-trading" means the purchasing and selling or the selling and purchasing of the same security on the same day in a margin account except for:
(a) a long security position held overnight and sold the next day prior to any new purchases of the same security, or
(b) a short security position held overnight and purchased the next day prior to any new sales of the same security.
(ii) The term "pattern day-trader" means any customer who executes four (4) or more day trades within five (5) business days. However, if the number of day-trades is 6% or less of total trades for the five (5) business day period, the customer will no longer be considered a pattern day-trader and the special requirements under paragraph (f)(8)(B)(iv) of this Rule will not apply.
/01 Multiple Purchases and Sales
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.
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.
(iii) The term "day-trading buying power" means the equity in a customer's account at the close of business of the previous day, less any maintenance margin requirement as prescribed in paragraph (c) of this Rule, multiplied by four, for equity securities.
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.
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.
/01 Option Day-Trade
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.
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.
/02 Day-Trading Buying Power
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.
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.
(iv) Special Requirements for Pattern Day-Traders.
(1) Minimum Equity Requirement for Pattern Day-Traders.-The minimum equity required for the accounts of customers deemed to be pattern day-traders shall be $25,000. This minimum equity must be maintained in the customer's account at all times (see Supplementary Material .40 of this Rule).
/01 Minimum Equity Requirement
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.
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.
(2) Pattern day-traders cannot trade in excess of their day-trading buying power as defined in paragraph (f)(8)(B)(iii) above. In the event a pattern day-trader exceeds their day-trading buying power, which created a special maintenance margin deficiency, the following actions will be taken by the member organization:
(a) The account will be margined based on the cost of all the day-trades made during the day, and
(b) The customer's day-trading buying power will be limited to the equity in the customer's account at the close of business of the previous day, less the maintenance margin required in paragraph (c) of this Rule, multiplied by two, for equity securities.
(3) Pattern day-traders who fail to meet their special maintenance margin calls as required within five business days from the date the margin deficiency occurs will be permitted to execute transactions only on a cash available basis for 90 days or until the special maintenance margin call is met.
/01 Cash Available
Cash available means 1x Rule 431 excess. No "time and tick" calculations will be allowed for accounts on a 90-day day-trading restriction.
Cash available means 1x Rule 431 excess. No "time and tick" calculations will be allowed for accounts on a 90-day day-trading restriction.
(5) Funds, deposited into a day-trader's account to meet the minimum equity or maintenance margin requirements of this Rule 431(f)(8)(B) cannot be withdrawn for a minimum of two business days following the close of business on the day of deposit.
/01 Deposit of Funds
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.
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.
(C) When the equity in a customer's account, after giving consideration to the other provisions of this Rule, is not sufficient to meet the requirements of paragraph (f)(8)(A) or (B) additional cash or securities must be received into the account to meet any deficiency within five business days of the trade date.
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.
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.
/01 Multiple Day-Trade Calls
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.
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.
/02 Liquidation to Meet a Day-Trade Call
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.
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.
(9) Free Riding in Cash Accounts Prohibited. — No member organization shall permit a customer (other than a broker/dealer or a "designated account") to make a practice, directly or indirectly, of effecting transactions in a cash account where the cost of securities purchased is met by the sale of the same securities. No member organization shall permit a customer to make a practice of selling securities with them in a cash account which are to be received against payment from another broker/dealer where such securities were purchased and are not yet paid for. A member organization transferring an account which is subject to a Regulation T 90-day freeze to another member organization shall inform the receiving member organization of such 90-day freeze.
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.
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.
/01 90-Day Freeze
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:
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:
• the full name and address of the customer;
• the name and description of the security or securities involved, purchase and sale prices, and the respective dates of purchase and sale;
• a statement describing the circumstances upon which the request is made; and
• the date on which full payment for the purchase was received.
SUPPLEMENTARY MATERIAL
.10 Request for exemption from sub-section (e)(3) of Rule 431 above. — Requests for exemption from the provisions of sub-section (e)(3) should be submitted in writing to the Exchange and, in addition to indicating the names and interests of the respective participants in the joint account, should contain a statement that the conditions described in paragraph (e)(3)(A), (B) or (C) actually exist.
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:
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:
(A) complete description of the security;
(B) cost price, offering price and principal amount of obligations which have been purchased or may be required to be purchased;
(C) date on which the security is to be purchased or on which there will be a contingent commitment to purchase the security;
(D) approximate aggregate indebtedness;
(E) approximate Net Capital; and
(F) approximate total market value of all readily marketable securities (i) exempted and (ii) non-exempted, held in organization accounts, partners' capital accounts, partners' individual accounts covered by approved agreements providing for their inclusion as partnership property, accounts covered by subordination agreements approved by the Exchange and customers' accounts in deficit.