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93-23 SEC Approves New NASD Margin Rules

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Executive Summary

On February 24, 1993, the Securities and Exchange Commission (SEC) approved the NASD's new margin rules. The rules conform the NASD's margin rules to those of the New York Stock Exchange (NYSE) by replacing the current provisions of Article III, Section 30, Appendix A of the Rules of Fair Practice with rule language substantially identical to the NYSE margin rules. The rules also specify that they do not apply to any member designated to an examining authority other than the NASD pursuant to SEC Rule 17d-2. The new rules take effect April 19, 1993. The text of the new rules follows this Notice.

Background

On February 24, 1993, the Securities and Exchange Commission (SEC) approved the NASD's new margin rules. The rules conform the NASD's margin rules to those of the New York Stock Exchange (NYSE) by replacing the current provisions of Article III, Appendix A with rule language substantially identical to the NYSE margin rules.

Currently, Sections 2 and 4 of Appendix A provide for initial and minimum margin to be deposited and maintained under rules and formulas that differ from those of the NYSE in several respects. Under current Section 4, members need not evaluate the credit of customers nor establish higher margin requirements for securities or customers based on such evaluation; nor does it provide an option for members to take charges to their net capital in certain instances when good-faith credit has been extended. In addition, current Section 4 permits lower margins on U.S.

Government securities. Finally, under Section 4 members cannot establish "non purpose credit" accounts for customers, and the Section does not establish margin requirements for shelf-registered, control, and restricted securities or for "day traders." The new provisions resolve these differences by conforming the NASD's margin rules to those of the NYSE.

Description of Rule Change

Section 1 — New Section 1 of Appendix A exempts NASD members designated to another self-regulatory organization (SRO) for oversight of the member's compliance with applicable securities laws, rules, and regulations, and SRO rules under SEC Rule 17d-2 from the provisions of the rule. The current provisions of Section 1 of Appendix A exempt members of any other national securities exchange. The amendment to Section 1 will permit the designated examining authority to apply its own margin rules rather than the rules of another SRO, significantly simplifying examinations.
Section 2 — New Section 2 consists of definitions covering options transactions that are substantially the same as the definitions in NYSE Rule 700. The definitions apply to the margin requirements for options transactions set forth in Subsection 3(f)(2) of the NASD rule. NYSE Rule 431(f)(2), which is the NYSE's options margin rules, references the definitions in NYSE Rule 700, which is part of the NYSE's general options rules. There are no comparable definitions in current Section 4. Note that Subsection 3(b) will replace current Section 2 relating to initial margin requirements.
Section 3 — Unless stated below, the language of the new Section 3 is the same as NYSE Rule 431 in all material respects. Subsection 3(f)(1) replaces current Section 3 for valuation of securities; however, the provision in current Section 3 permitting the NASD to require additional margin in the event of undue concentration remains intact. The following describes the provisions of new Section 3, and, where applicable, those current provisions of Schedule A that will be replaced:
Subsection 3(a) — Subsections 3(a)(1) through (8) are definitions of general applicability to the new margin rule. There are no comparable definitions in current Section 4.
Subsections 3(b) and 3(c) — New Subsections 3(b) and 3(c) establish initial and maintenance margin requirements and replace Section 2, Subsections 4(a)(1) through (3), and 4(a)(5) of current Appendix A. New Subsection 3(c)(5) establishes margins for American Stock Exchange Emerging Company Marketplace securities as approved by the SEC May 14, 1992 (rule filing SR-NASD-92-10).
Subsection 3(d) — New Subsection 3(d) requires members to establish procedures for evaluating customer credit and imposing higher margin than required by the other provisions of Section 3. Current Subsection 4(b)(3) permits the NASD to require 100 percent margin for certain securities in certain circumstances; otherwise, there is no comparable provision in Section 4.
Subsection 3(e)(1) — New Subsection 3(e)(1) sets margins at 10 percent of the current market value for convertible securities that are carried long and are offset against a short position in the resulting security, and 5 percent of the current market value for long securities when the same security is carried long and short in the same account. Current Subsections 4(b)(1) and (2) require 10 percent in each case.
Subsection 3(e)(2)(A) — New Subsection 3(e)(2)(A) requires margins on obligations of the United States, ranging from 1 percent to 6 percent, based on times to maturity ranging from less than 1 year to 20 years or more, respectively. Current Subsection 4(a)(8)(i) imposes margins ranging from 1/2 percent to 3 percent for maturities of less than 1 year up to 10 years, respectively, and current Subsection 4(a)(7) requires margin at 5 percent for maturities greater than 10 years.
Subsection 3(e)(2)(B) — New Subsection 3(e)(2)(B) sets margins for "all other exempted securities" other than obligations of the United States at the greater of 15 percent of the current market value or 7 percent of the principal amount of the obligation. Current Subsection 4(a)(6) requires 25 and 15 respectively, whichever is lower.
Subsection 3(e)(2)(C) — New Subsection 3(e)(2)(C) sets margins for "non-convertible corporate debt securities" at the greater of 20 percent of the current market value or 7 percent of the principal amount, except for certain mortgage-related securities for which the margin is 5 percent of the current market value. There is no comparable provision in Section 4 currently; however, Subsection 4(a) requires margin of 25 percent of the market value of all securities long in the account, and Subsection 4(a)(8)(ii) permits the NASD to establish lower requirements on application.
Subsection 3(e)(2)(D) — New Subsection 3(e)(2)(D) permits members to clear and carry "basket transactions" for market makers at margin rates satisfactory to the parties, provided the margin is adequate to cover all real and potential risks. This Subsection also permits the carrying member the option of taking a charge to net worth when computing net capital for any margin deficiency in the account, rather than requiring margin from the market maker. This provision differs slightly from the NYSE rule because the NYSE requires the computation of net capital under its Rule 325, while the NASD's rule specifies the computation of net capital under SEC Rule 15c3-1. This provision replaces current Section 12.
Subsection 3(e)(2)(E)(i) — New Subsection 3(e)(2)(E)(i) permits members to offset maintenance margin requirements with accrued interest. This provision replaces current Section 15, which permits members to use only interest in government securities as an offset.
Subsection 3(e)(2)(E)(ii) — New Subsection 3(e)(2)(E)(ii) provides that the NASD may permit lower margin requirements on written application. This provision replaces current Subsection 4(a)(8)(ii).
Subsection 3(e)(2)(F) — New Subsection 3(e)(2)(F) provides that in cash transactions with customers involving issued exempted securities in a cash account, full payment must be made promptly; otherwise, a deposit shall be required as if it were a margin transaction. Transactions with members or non-member broker/dealers in issued exempted securities, however, do not require margin. This provision replaces current Subsection 6(a).
Subsection 3(e)(3) — New Subsection 3(e)(3) permits accounts in which a partner or stockholder of the carrying organization has an interest to maintain margin according to Section 3 for all other participants in the account as if the partner's or stockholder's interest was in a separate account. There is no comparable provision in current Appendix A.
Subsection 3(e)(4) — New Subsection 3(e)(4) exempts international arbitrage accounts of non-member foreign broker/dealers from Appendix A; however, any deficiency between equity and required margin under Appendix A must be charged against the member's net capital. There is no comparable provision in current Appendix A.
Subsection 3(e)(5) — New Subsection 3(e)(5) permits a member to carry the account of a market maker on the margin provided for under the rule, or, as an option, on a margin basis satisfactory to both parties, provided the carrying member takes a deduction against net capital for any deficit below the required margin. This provision, along with Subsection 3(e)(2)(D) and 3(e)(6), replaces current Section 12.
Subsection 3(e)(6) — New Subsection 3(e)(6) permits a member to carry the proprietary account of another broker/dealer on margin satisfactory to the parties that complies with Federal Reserve Board Regulation T. The provision also permits the carrying member to take a deduction against net capital rather than require margin from the broker/dealer, provided the account is not in deficit equity condition. This provision, along with new Subsection 3(e)(2)(D) and 3(e)(5), replaces current Section 12.
Subsection 3(e)(7) — New Subsection 3(e)(7) permits members to establish "non-purpose credit" accounts for customers. The term "non-purpose credit" is defined by reference to Section 220.2(u) of Regulation T. There is no comparable provision in current Appendix A.
Subsection 3(e)(8) — New Subsection 3(e)(8) establishes margin requirements for "shelf-registered," "control" and "restricted" securities. There is no comparable provision in current Appendix A.
Subsection 3(f)(1) — New Subsection 3(f)(1) provides that active securities are to be valued at current market prices, and other securities are to be valued after considering liquidation value, price volatility, and market liquidity. This provision replaces current Section 3.
Subsections 3(f)(2)(D)(i) through 3(f)(2)(K) — New Subsections 3(f)(2)(D)(i) through 3(f)(2)(K) establish margin requirements for options. These provisions typically require margin in excess of 100 percent of the current market value of any short option. These provisions replace current Subsections 4(a)(4), 4(a)(8)(i) through (vi), and Section 7.
Subsection 3(f)(3) — New Subsection 3(f)(3) provides that the margin required for securities "when issued" is the same as if the securities were issued. This provision replaces current Section 5.
Subsections 3(f)(4) and 3(f)(5) — New Subsections 3(f)(4) and 3(f)(5) permit the consolidation of any guaranteed account with another account, or the consolidation of any two accounts of a customer, for margin purposes, provided the guarantee or consolidation is agreed to in writing. These provisions replace current Sections 8 and 9.
Subsections 3(f)(6) and 3(f)(7) — Subsections 3(f)(6) and 3(f)(7) provide that members should collect required margin as quickly as possible and not permit customers routinely to meet Regulation T margin calls through the liquidation of account positions. These provisions replace current Sections 10 and 13.
Subsection 3(f)(8) — New Subsection 3(f)(8)(A) provides that the NASD may establish higher margin requirements than otherwise required by new Section 3. Current Subsection 4(b)(3) is comparable to this provision. New Subsection 3(f)(8)(B), for which there is no comparable provision in the current rule, establishes margin requirements for "day traders" and is consistent with the NYSE's margin rule.
Subsection 3(f)(9) — New Subsection 3(f)(9) provides that members may not permit customers to "free ride" by effecting transactions in cash accounts where the cost of the security is met by the sale of the same securities. There is no comparable provision in current Section 4.
Other changes — Current Sections 11 and 14, relating to recordkeeping requirements and the definition of "margin account," respectively, are being eliminated as redundant. Recordkeeping requirements are adequately covered by the current SEC rules, and the new NASD rules adequately define the terms necessary for interpretation of the rule.

The new rules are effective on April 19, 1993. Questions concerning this Notice may be directed to Walter J. Robertson, Director, Compliance Department at (202) 728-8236, or Derrick Black at (202) 728-8225.

Text of Appendix A to Article III, Section 30 of the Rules of Fair Practice

Sec. 1.

Exception

Any member designated to another self-regulatory organization for oversight of the member's compliance with applicable securities laws, rules and regulations, and self-regulatory organization rules under Securities and Exchange Commission Rule 17d-2 is exempt from the provisions of this Appendix.

Sec. 2.

Definitions Related to Options Transactions

The following definitions shall apply to options transactions:

(1) Aggregate Discount Amount —The term "aggregate discount amount" as used with reference to a Treasury bill option contract means the principal amount of the underlying Treasury bill (i) multiplied by the annualized discount (i.e., 100 percent minus the exercise price of the option contract) and (ii) further multiplied by a fraction having a numerator equal to the number of days to maturity of the underlying Treasury bill on the earliest date on which it could be delivered pursuant to the rules of the Options Clearing Corporation in connection with the exercise of the option (normally 91 or 182 days) and a denominator of 360.
(2) Aggregate Exercise Price —The term "aggregate exercise price" as used with reference to an option contract means:
(i) if a single stock underlies the option contract, the exercise price of the option contract multiplied by the number of shares of the underlying stock covered by such option contract,
ii) if a Treasury bond or Treasury note underlies the option contract,
(A) the exercise price of the option contract multiplied by the principal amount of the underlying security covered by such option contract, plus (B) accrued interest:
(1) on bonds (except bonds issued or guaranteed by the United States Government), that portion of the interest on the bonds for a full year, computed for the number of days elapsed since the previous interest date on the basis of a 360-day-year. Each calendar month shall be considered to be 1/12 of 360 days, or 30 days, and each period from a date in one month to the same date in the following month shall be considered to be 30 days.
(2) on bonds issued or guaranteed by the United States Government, that portion of the interest on the bonds for the current full interest period, computed for the actual number of days elapsed since the previous interest date on the basis of actual number of calendar days in the current full interest period. The actual elapsed days in each calendar month shall be used in determining the number of days in a period.
Computation of elapsed days. — The following tables are given to illustrate the method of computing the number of elapsed days in conformity with the above section:
On bonds (except bonds issued or guaranteed by the United States Government):
  • From 1st to 30th of the same month to be figured as 29 days

  • From 1st to 31st of the same month to be figured as 30 days

  • From 1st to 1st of the following month to be figured as 30 days.
Where interest is payable on 30th or 31st of the month:
  • From 30th or 31st to 1st of the following month to be figured as 1 day

  • From 30th or 31st to 30th of the following month to be figured as 30 days

  • From 30th or 31st to 31st of the following month to be figured as 30 days

  • From 30th or 31st to 1st of second following month, figured as 1 month, 1 day
On bonds issued or guaranteed by the United States Government:
  • From 15th of a 28-day month to the 15th of the following month is 28 days

  • From 15th of a 30-day month to the 15th of the following month is 30 days

  • From 15th of a 31-day month to the 15th of the following month is 31 days.
The six month's interest period ending:
  • January 15 is 184 days

  • February 15 is 184 days

  • March 15 is 181* days

  • April 15 is 182* days

  • May 15 is 181* days

  • June 15 is 182* days

  • July 15 is 181* days

  • August 15 is 181* days

  • September 15 is 184 days

  • October 15 is 183 days

  • November 15 is 184 days

  • December 15 is 183 days
* Leap Year adds 1 day to this period.
(iii) if a Treasury bill underlies the option contract, the difference between the principal amount of such Treasury bill and the aggregate discount amount;
(iv) if an index stock group under-lies the option contract, the exercise price of the option contract times the index multiplier; or
(v) if a GNMA underlies the option contract, the exercise price of the option contract multiplied by the nominal principal amount of the underlying GNMA covered by such option contract.
In the case of an underlying GNMA, if the remaining unpaid principal balance of a GNMA delivered upon exercise of an option contract is a permissible variant of, rather than equal to, the nominal principal amount, the aggregate exercise price shall be adjusted to equal the product of the exercise price and such remaining unpaid principal balance, plus in each case the appropriate differential.
(3) Annualized Discount — The term "annualized discount" as used with reference to a Treasury bill means the percent discount from principal amount at which the Treasury bill may be purchased or sold, expressed as a discount for a term to maturity of 360 days.
(4) Applicable Current Options Disclosure Document — The term "applicable current Options Disclosure Document" means, as to any kind of option, the most recent edition of the Options Disclosure Document and any supplement that pertains to that kind of option and that meets the requirements of Rule 9b-1 under the Securities Exchange Act of 1934, as amended.
(5) Appropriate Differential — The term "appropriate differential" as used with reference to a GNMA option contract means a positive or negative amount equal to the product of (i) the difference between the remaining unpaid principal balance of a GNMA delivered upon exercise of that contract and the nominal principal amount, and (ii) the difference between the current cash market price of GNMAs bearing the same stated rate of interest as that borne by the GNMA delivered upon exercise and the exercise price.
(6) Broad Index Stock Group —The term "broad index stock group" means an index stock group of 25 or more 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 or an inter-industry sector of the stock market.
(7) Broad Index Stock Group Option (Contract) — The term "broad index stock group option (contract)" means an option contract on a broad index stock group.
(8) Call — The term "call" means an option contract under which the holder has the right, in accordance with the terms of the option, to purchase from The Options Clearing Corporation:
(i) the number of shares of the underlying stock (if a single stock underlies the option contract);
(ii) the principal amount of the underlying security (if a Government security underlies the option contract);
(iii) the multiple of the current index group value of the underlying group (if an index stock group underlies the option contract); or
(iv) the nominal principal amount or any permissible variant of the underlying GNMA (if a GNMA underlies the option contract) covered by the option contract.
(9) Class (of Options) — The term "class (of options)" means all option contracts of the same type and kind covering the same underlying security or underlying stock group.
(10) Clearing Member — The term "clearing member" means a member which has been admitted to membership in The Options Clearing Corporation pursuant to the provisions of the rules of The Options Clearing Corporation.
(11) Closing Purchase Transaction — The term "closing purchase transaction" means an option transaction in which the purchaser's intention is to reduce or eliminate a short position in the series of options involved in such transaction.
(12) Closing Sale Transaction — The term "closing sale transaction" means an option transaction in which the seller's intention is to reduce or eliminate a long position in the series of options involved in such transaction.
(13) Complement — The term "complement," as used with reference to an annualized discount, means the difference between 100 percent and the annualized discount.
(14) Covered
(i) The term "covered" in respect of a short position in a call option contract means that the writer's obligation is secured either by a "specific deposit" or an "escrow deposit" meeting the conditions of Rule 610(e) or 610(h), respectively, of the rules of The Options Clearing Corporation, or by a letter of guarantee meeting the requirements of Section 3(f)(2)(H)(iv) of the appendix or that the writer holds in the same account as the short position,
(A) on a share-for-share basis (if a single stock underlies the option contract),
(B) on the basis of a matching principal amount (if a Government security underlies the option contract),
(C) on the basis of market value("covering" underlying stocks) or of the index multiplier ("covering" option contracts) (if an index stock group underlies the option contract), or
(D) on the basis of the remaining unpaid principal balance (if a GNMA underlies the option contract), a long position either in the underlying security or underlying index stock group or in an option contract of the same class having an expiration date on or subsequent to the expiration date of the option contract in such short position and having an exercise price equal to or less than the exercise price of the option contract in such short position.
(ii) The term "covered" in respect of a short position in a put option contract means that the writer's obligation is secured by a letter of guarantee meeting the requirements of Section 3(f)(2)(H)(iv) of this appendix or that the writer holds in the same account as the short position,
(A) on a share-for-share basis (if a single stock underlies the option contract),
(B) on the basis of a matching principal amount (if a Government security underlies the option contract),
(C) on the basis of the index multiplier (if an index stock group underlies the option contract), or
(D) on the basis of a matching remaining unpaid principal balance (if a GNMA underlies the option contract), a long position in an option contract of the same class having an expiration date on or subsequent to the expiration date of the option contract in such short position and having an exercise price equal to or greater than the exercise price of the option contract in such short position.
(iii) In the case of a "covering" underlying GNMA, the remaining unpaid principal balance must equal to or be a permissible variant of, the nominal principal amount and the "covering" underlying GNMA must bear a qualifying rate of interest.
(15) Current Cash Market Price —The term "current cash market price" as used with reference to GNMAs means the prevailing price in the cash market for GNMAs bearing a particular stated rate of interest to be delivered on the next applicable monthly settlement date determined in the manner specified in the rules of The Options Clearing Corporation.
(16) Current Options Disclosure Document — See "Applicable Current Options Disclosure Document."
(17) Current Index Group Value — The term "current index group value" means $1.00 multiplied by the current value reported for the index that is derived from the current market prices of the stocks in the group. When used with reference to the exercise of an index stock group option, the value is the last one reported on the day of exercise or, if the day of exercise is not a trading day, on the last trading day before exercise.
(18) Designated Rate — The term "designated rate" as used with reference to a GNMA option means a rate of interest of eight percent or such other rate as may be designated in the manner specified in the rules of The Options Clearing Corporation.
(19) Dominant Underlying Stock — The term "dominant underlying stock" means, when used with reference to an industry index stock group, a stock that accounts for 30 percent or more of the index group value.
(20) Exchange Option Transaction — The term "Exchange option transaction" means an option transaction effected on the floor of a registered securities exchange between or among members.
(21) Exchange Options Trading — The term "Exchange options trading" means options trading on the floor of a registered securities exchange.
(22) Exercise Price — The term "exercise price" in respect of an option contract means:
(i) if a single stock underlies the option contract, the stated price per share at which the underlying stock;
(ii) if a Treasury bond or Treasury note underlies the option contract, the specified percentage of the principal amount at which the underlying Treasury security;
(iii) if a Treasury bill underlies the option contract, the specified complement of the annualized discount at which the underlying Treasury bill;
(iv) if an index stock group under-lies the option contract, the specified index group value at which the current index group value; or
(v) if a GNMA underlies the option contract, the specified percentage of the nominal principal amount (assuming delivery of a GNMA bearing a stated rate of interest equal to the designated rate at which the underlying GNMA) may be purchased (in the case of a call) or sold (in the case of a put) upon the exercise of such option contract. In the case of an underlying GNMA, if the stated rate of interest of a GNMA delivered upon exercise of an option contract is a qualifying rate other than the designated rate, the exercise price shall be an amount which provides the same yield to maturity as the amount which would have been payable if the stated rate of interest had been equal to the designated rate (assuming a 30-year term and prepayment at the end of the twelfth year of the mortgage obligations underlying GNMAs).
(23) Expiration Date — The term "expiration date" in respect of an option contract means the date and time fixed by the rules of The Options Clearing Corporation for the expiration of all option contracts covering the same underlying security or underlying index stock group and having the same expiration month as such option contract.
(24) Expiration Month — The term "expiration month" in respect of an option contract means the month and year in which such option contract expires.
(25) GNMA — The term "GNMA" means a mortgage pass-through security guaranteed as to timely payment of principal and interest by the Government National Mortgage Association, as described in the current standard prospectus of the Department of Housing and Urban Development covering such securities, bearing a stated rate of interest which is a qualifying rate. Any two or more separate certificates representing GNMAs bearing the same qualifying rate delivered in accordance with the rules of The Options Clearing Corporation upon exercise of an option contract shall, for purposes of this Section, be deemed to be a single GNMA, having a remaining unpaid principal balance equal to the sum of the remaining unpaid principal balances of such separate certificates.
(26) GNMA Option (Contract) —The term "GNMA option (contract)" means an option contract on GNMAs.
(27) GNMA Production Rate —The term "GNMA production rate" means a rate of interest .50 percent below the maximum stated rate of interest on residential mortgages which the Federal Housing Administration is willing to insure and which the Veterans Administration is willing to guarantee, as it may vary from time to time in accordance with official announcements of changes in such rates made by the Federal Housing Administration.
(28) Government Security — The term "Government security" means a bond, note, bill, debenture or other evidence of indebtedness that is a direct obligation of, or an obligation guaranteed as to principal or interest by, the United States or a corporation in which the United States has a direct or indirect interest (except debt securities guaranteed as to timely payment of principal and interest by the Government National Mortgage Association).
(29) Government Security Option(Contract) — The term "Government security option (contract)" means an option contract on Government securities.
(30) Index Multiplier — The term "index multiplier" as used with reference to an index stock group option contract means the amount specified in the contract by which the current index group value is to be multiplied to arrive at the value required to be delivered to the holder of a call or by the holder of a put upon valid exercise of the contract.
(31) Index Stock Group — The term "index stock group" means either a broad index stock group or an industry index stock group.
(32) Index Stock Group Option(Contract) — The term "index stock group option (contract)" means either a broad index stock group option contract or an industry index stock group option contract.
(33) Industry Index Stock Group —The term "industry index stock group" means an index stock group of six or more 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 a particular industry or closely-related industries.
(34) Industry Index Stock Group Option (Contract) — The term "industry index stock group option (contract)" means an option contract on an industry index stock group.
(35) Kind of Option — The term "kind of option" means either a stock option contract, a Government security option contract, a broad index stock group option contract, an industry index stock group option contract or a GNMA option contract.
(36) Long Position — The term "long position" means the number of outstanding option contracts of a given series of options held by a person (purchaser).
(37) Nominal Principal Amount —The term "nominal principal amount" as used with reference to a GNMA option means the remaining unpaid principal balance of GNMAs required to be delivered to the holder of a call or by the holder of a put upon exercise of an option without regard to any variance in the remaining unpaid principal balance permitted to be delivered upon such exercise and shall be $100,000 in the case of a single call or put.
(38) Opening Purchase Transaction — The term "opening purchase transaction" means an option transaction in which the purchaser's intention is to create or increase a long position in the series of options involved in such transaction.
(39) Opening Writing Transaction — The term "opening writing transaction" means an option transaction in which the seller's (writer's) intention is to create or increase a short position in the series of options involved in such transaction.
(40) Option (Contract) — The term "option (contract)" means a put or a call issued, or subject to issuance, by The Options Clearing Corporation pursuant to the rules of The Options Clearing Corporation.
(41) Option Transaction — The term "option transaction" means a transaction for the purchase or sale of an option contract, or for the closing out of a long or short position in an option contract.
(42) Options Trading — The term "options trading" means trading in any option issued by The Options Clearing Corporation, whether or not of a type, class or series which has been approved for trading on Nasdaq or on a national securities exchange.
(43) Outstanding — The term "out-standing" in respect of an option contract means an option contract which has been issued by The Options Clearing Corporation and has neither been the subject of a closing sale transaction on or through the facilities of, or otherwise subject to the rules of, a Participating Exchange or Association nor been exercised nor reached its expiration date.
(44) Participating Exchange(Association) — The term "Participating Exchange (Association)" means a national securities exchange (association) which has qualified for participation in The Options Clearing Corporation.
(45) Primary Market — The term "primary market" means (i) in respect of an underlying security that is principally traded on a national securities exchange, the principal exchange market in which the underlying security is traded and (ii) in respect of an underlying security that is principally traded in the over-the-counter market, the market reflected by any widely recognized quotation dissemination system or service (The National Association of Securities Dealers, Inc. Automated Quotation System ("NASDAQ") in the case of a NASDAQ stock).
(46) Public Customer of a Member Organization — The term "public customer of a member organization" means a customer that is not a broker or a dealer.
(47) Put — The term "put" means an option contract under which the holder has the right, in accordance with the terms of the option, to sell to The Options Clearing Corporation:
(i) the number of shares of the underlying stock (if a single stock underlies the option contract);
(ii) the principal amount of the underlying security (if a Government security underlies the option contract);
(iii) the multiple of the current index group value of the underlying group (if an index stock group underlies the option contract); or
(iv) the nominal principal amount or any permissible variant of the underlying GNMA (if a GNMA underlies the option contract) covered by the option contract.
(48) Qualifying Rate — The term "qualifying rate" as used with reference to a GNMA option means any rate of interest equal to or less than the GNMA production rate; provided that:
(i) in the event of any increase in the GNMA production rate, a GNMA issued prior to the date of any such change bearing a stated rate of interest equal to any such increased GNMA production rate (or any lower rate of interest which was not a qualifying rate on the day prior to that date) shall be deemed not to bear a qualifying rate until the expiration of 45 days from the date of such increase or until after the settlement date for options on GNMAs following the next expiration date for any series of such options, whichever shall last occur unless such GNMA bears a stated rate of interest deemed to constitute a qualifying rate in accordance with subparagraph (ii) below; and
(ii) in the event of any decrease in the GNMA production rate, a GNMA bearing a stated rate of interest which was equal to the GNMA production rate (or any lower rate of interest which is not otherwise a qualifying rate) on the day prior to the date of any such decrease shall be deemed to continue to bear a qualifying rate for a period of 45 days from the date of such decrease or until the settlement date for options on GNMAs following the next expiration date for any series of such options, whichever shall last occur.
(49) Registered Clearing Agency — The term "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.
(50) Registered Options Principal — The term "Registered Options Principal" means a person who has qualified as a "Registered Options Principal."
(51) Registered Options Representative — The term "Registered Options Representative" means a registered representative who has qualified as a "Registered Options Representative."
(52) Related Security — The term "related security" means:
(i) as used with reference to a Government security option, (A) all securities underlying Government security options, (B) futures contracts on such underlying security and (C) all options on such futures contracts;
(ii) as used with reference to a stock option, the underlying stock; and
(iii) as used with reference to an index stock group options, (A) all futures contracts on the underlying stock group or on any substantially identical index stock group, all options contracts on any substantially identical index stock group, and all options on such futures contracts and (B) also, in the case of an industry index stock group option only, all underlying stocks accounting for five percent or more of the current index group value of the underlying industry index stock group and all individual stock options on such underlying stocks.
(53) Rules of The Options Clearing Corporation — The term "rules of The Options Clearing Corporation" means the by-laws and the rules of The Options Clearing Corporation and all written interpretations thereof, as the same may be in effect from time to time.
(54) Series (of Options) — The term "series (of options)" means all option contracts of the same class of options having the same expiration date, exercise price and unit of trading.
(55) Shares — The term "shares" means the basic unit of issue of a stock.
(56) Short Position — The term "short position" means the number of outstanding option contracts of a given series of options with respect to which a person is obligated as a writer (seller).
(57) Stock — The term "stock" shall be broadly interpreted to mean any equity security, as defined in Section 3(a)(11) of the Securities Exchange Act of 1934, as amended, and Rule 3a11-1 under the Act, that confers directly on the holder a present equity ownership or participation interest in an enterprise.
(58) Stock Option (Contract) —The term "stock option (contract)" means an option contract on a single stock.
(59) Stock-Related Option(Contract) — The term "stock related option (contract)" means either a stock option contract, a broad industry index stock group option contract or any industry index stock group option contract.
(60) The Options Clearing Corporation — The term "The Options Clearing Corporation" means The Options Clearing Corporation, a subsidiary of the Participating Exchanges and Association.
(61) Treasury Bill — The term "Treasury bill" means a Government security sold by the U.S. Treasury Department at a discount from principal amount, bearing no interest and normally having a term to maturity of not more than one year at the time of original issue.
(62) Treasury Bond — The term "Treasury bond" means a Government security sold by the U.S. Treasury that has been designated by the U.S. Treasury Department with reference to its term to maturity as a "bond" (normally confined to Treasury securities with a term to maturity of more than ten years at the time of original issue).
(63) Treasury Note — The term "Treasury note" means a Government security sold by the U.S. Treasury Department that has been designated by the U.S. Treasury Department with reference to its term to maturity as a "note" (normally confined to Treasury securities with a term to maturity of more than one year but not more than ten years at the time of original issue).
(64) Type of Option — The term "type of option" means the classification of an option contract as either a put or a call.
(65) Uncovered — The term "uncovered" in respect of a short position in an option contract means that the short position is not covered.
(66) Underlying Government Security — The term "underlying Government security" means an underlying security that is a Government security.
(67) Underlying GNMA — The term "underlying GNMA" means an underlying security that is a GNMA.
(68) Underlying (Index) StockGroup — The term "underlying (index) stock group" as used with reference to an index stock group option contract means the index stock group, a multiple of the current index group value of which The Options Clearing Corporation is obligated to sell (in the case of a call) or purchase (in the case of a put) upon valid exercise of the contract.
(69) Underlying Security — The term "underlying security" means:
(i) as used with reference to an option contract other than an index stock group option contract, the security which The Options Clearing Corporation is obligated to sell (in the case of a call) or purchase (in the case of a put) upon valid exercise of the contract; and
(ii) as used with reference to an index stock group option contract, any of the stocks included in the underlying index stock group.
(70) Underlying Stock — The term "underlying stock" means an underlying security that is a stock.

Sec. 3.

Margin Requirements

Definitions

(a) For purposes of this Section, 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. 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 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.
(3) The term "designated account" means the account of a bank, trust company, insurance company, investment trust, state or political subdivision thereof, charitable or non profit educational institution regulated under the laws of the United States or any state, or pension or profit sharing plan subject to ERISA or of any agency of the United States or of a state or a political subdivision thereof.
(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.
(5) The term "exempted security" or "exempted securities" has the meaning as in Section 3(a)(12) of the Securities Exchange Act of 1934.
(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 Securities Exchange Act of 1934.
(8) The term "basket" shall mean a group of stocks that the Association 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.

Initial margin

(b) 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
(2) the amount specified in section (c) of this Section; or
(3) such greater amount as the Association 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).
Withdrawals of cash or securities may be made from any account which has a debit balance, "short" position or commitments, provided it is in compliance with Regulation T of the Board of Governors of the Federal Reserve System and after such withdrawal the equity in the account is at least the greater of $2,000 or an amount sufficient to meet the maintenance margin requirements of this Section.
Maintenance margin
(c) The margin which must be maintained in margin accounts of customers shall be as follows:
(1) 25 percent of the current market value of all securities "long" in the account; plus
(2) $2.50 per share or 100 percent 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 percent 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 percent of the principal amount or 30 percent of the current market value, whichever amount is greater, of each bond "short" in the account.
(5) In the case of securities listed on the Emerging Company Marketplace of the American Stock Exchange (AMEX), 100 percent of the market value in cash, of each security held "long" in the account, unless the AMEX determines that the security satisfies the criteria enumerated in Sections 220.17(a) and (b) of Regulation T of the Board of Governors of the Federal Reserve System for inclusion and continued inclusion on the List of OTC Margin Stocks, except for the requirement relating to the number of dealers in Sections 220.17(a)(1) and (b)(1).
Additional margin
(d) Procedures shall be established by members 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 Section for individual securities or customer accounts.
Exceptions to Section
(e) The foregoing requirements of this Section are subject to the following exceptions:
(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 percent 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 percent 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, Marginable Corporate Debt Securities and Baskets
(A) Obligations of the United States — 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 issued or guaranteed 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, 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 percent
(ii) One year but less than three years to maturity, 2 percent
(iii) Three years but less than five years to maturity, 3 percent
(iv) Five years but less than ten years to maturity, 4 percent
(v) Ten years but less than twenty years to maturity, 5 percent
(vi) Twenty years or more to maturity, 6 percent
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 percent 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, 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 irrevocable instructions to redeem the maturing obligation.
(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 15 percent of the current market value or 7 percent of the principal amount of such obligation, whichever amount is greater.
(C) Non-Convertible Corporate Debt Securities — On any positions in non-convertible corporate debt securities, which are listed or traded on a registered national securities exchange or qualify as an "OTC margin bond," as defined in Section 220.2(t) of Regulation T of the Board of Governors of the Federal Reserve System, the margin to be maintained shall be 20 percent of the current market value or 7 percent of the principal amount, whichever amount is greater, except on mortgage related securities as defined in Section 3(a)(41) of the Securities Exchange Act of 1934; the margin to be maintained for an exempt account shall be 5 percent of the current market value.

For purposes of this paragraph 3(e)(2)(C), an exempt account shall be defined as a member, non-member broker/dealer, "designated account" or any person having net tangible assets of at least sixteen million dollars.
(D) Baskets — Notwithstanding the other provisions of this Section, a member may clear and carry basket transactions of one or more members 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 when computing net capital under SEC Rule 15c3-1.
(E) Special Provisions —Notwithstanding the foregoing in this Subsection 3(e)(2);
(i) A member may, at its discretion, permit the use of accrued interest as an offset to the maintenance margin required to be maintained; and
(ii) The Association upon written application, may permit lower margin requirements on a case-by-case basis.
(F) Cash Transactions With Customers — When a customer purchases an issued exempted security from or through a member in a cash account, full payment shall be made promptly. If, however, delivery or payment therefore is not made promptly after the trade date, a deposit shall be required as if it were a margin transaction, unless it is a transaction with a "designated account."
On any position resulting from a transaction in issued exempted securities made for a member, or a non-member broker/dealer, or made for or with a "designated account," no margin need be required and such position need not be marked to the market. However, where such position is not marked to the market, an amount equal to the loss at the market in such position shall be charged against the member's net capital as provided in SEC Rule 15c3-1.
(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 in which such member, or any partner, or stockholder (other than a holder of freely transferable stock only) of such member participates with others, each participant other than the carrying member shall maintain an equity with respect to such interest pursuant to the margin provisions of the Section as if such interest were in a separate account.

The Association will consider requests for exemption from the provisions of this Subsection 3(e)(3), provided
(A) the account is confined exclusively to transactions and positions in exempted securities; or
(B) the account is maintained as a Market Functions Account conforming to the conditions of Section 220.12(e) (Odd-lot dealers) of Regulation T of the Board of Governors of the Federal Reserve System; or
(C) the account is maintained as a Market Functions Account conforming to the conditions of Section 220.12(c) (Underwritings and Distributions) of Regulation T of the Board of Governors of the Federal Reserve System and each other participant margins his share of such account on such basis as the Association may prescribe.
(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 Section. The amount of any deficiency between the equity in such an account and the margin required by the other provisions of this Section shall be charged against the member's net capital when computing net capital under SEC Rule 15c3-1.
(5) Specialists' and Market Makers' Accounts —
(A) A member may carry the account of an "approved specialist or market maker," which account is limited to specialist or market making transactions, upon a margin basis which is satisfactory to both parties. The amount of any deficiency between the equity in the account and the margin required by the other provisions of this Section shall be charged against the member's net capital when computing net capital under SEC Rule 15c3-1.

For the purpose of this paragraph 3(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
(ii) an OTC market maker or third market maker, who meets the requirements of Section 220.12(d) of Regulation T of the Board of Governors of the Federal Reserve System.
(B) In the case of a joint account carried by a member in accordance with paragraph 3(e)(5)(A) above in which the member 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 margin required by the other provisions of this Section shall be charged against the member's net capital when computing net capital under SEC Rule 15c3-1.
(6) Broker/Dealer Accounts — A member 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 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 margin required by the other provisions of this Section shall be charged against the member's net capital when computing net capital under SEC Rule 15c3-1.
(7) Non purpose Credit — In a non-securities credit account, a member may extend and maintain non purpose 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 anyway for the purpose of evading or circumventing any regulation of the Association or of the Board of Governors of the Federal Reserve System; and
(C) the amount of any deficiency between the equity in the account and the margin required by the other provisions of this Section shall be charged against the member's net capital as provided in SEC Rule 15c3-1.
The term "non purpose credit" means an extension of credit other than "purpose credit" as defined in Section 220.2(u) of Regulation T of the Board of Governors of the Federal Reserve System.
(8) Shelf-Registered, Control and Restricted Securities
(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 Subsection 3(c) of this Section, provided the member:
(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 Section. (Also see paragraph 3(e)(8)(C).)
(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) under the Securities Act of 1933, shall be 40 percent of the current market value of such securities "long" in the account, provided the member:
(i) in computing net capital, deducts any margin deficiencies in customers' accounts based upon a margin requirement as specified in subparagraph 3(C)(ii) of this Subsection 3(e)(8) for such securities and values only that amount of such securities which are then saleable under Rule 144 or 145(d) under 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) under the Securities Act of 1933 on a weekly basis or at such frequency as the member and/or the Association may deem appropriate under the circumstances. (Also see paragraph 3(e)(8)(C).)
(C) Additional Requirements on Shelf-Registered Securities and Control and Restricted Securities — A member 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 Association may at any time require reports from members 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.
(ii) Concentration Reduction — A concentration exists whenever the aggregate position in control and restricted securities of any one issue exceeds (1) 10 percent of the outstanding shares or (2) 100 percent of the average weekly volume during the preceding three-month period. Where a concentration exists, for purposes of computing subparagraph (B)(i) of this Subsection 3(e)(8), the margin requirement on such securities shall be, based on the greater of (1) or (2) above, as specified below: Percent of Outstanding Shares
  • Up to 10 percent

  • Over 10 percent and under15 percent

  • 15 percent and under 20 percent

  • 20 percent and under 25 percent

  • 25 percent and under 30 percent

  • 30 percent and above
Percent of Average Weekly Volume
  • Up to 100 percent

  • Over 100 percent and under200 percent

  • 200 percent and under 300percent

  • 300 percent and under 400percent

  • 400 percent and under 500percent

  • 500 percent and above
Margin Requirement
  • 25 percent

  • 30 percent

  • 45 percent

  • 60 percent

  • 75 percent

  • 100 percent
(D) Restricted Securities —Securities either:
(i) held by non-affiliates of the issuer which are then saleable by the non-affiliate pursuant to the terms and conditions of Rule 144(k) under the Securities Act of 1933, or
(ii) which have been acquired by non-affiliates of the issuer in connection with a Rule 145(a) transaction under the Securities Act of 1933 which are then saleable by such non-affiliate 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 Subsection 3(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.
Other Provisions
(f)
(1) Determination of Value for Margin Purposes — Active securities dealt in on a national securities exchange or OTC marginable securities listed on Nasdaq 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 Nasdaq or on a national securities exchange, or where the amount carried is such that the position(s) cannot be liquidated promptly.
(2) Puts, Calls and Other Options
(A) Except as provided below, no put or call 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 or a call shall be considered a security transaction subject to Section (b) of this Section.
(C) For purposes of this Subsection3(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 timely payment of principal and interest by the Government National Mortgage Association shall be referred to as GNMA obligations. The terms "current market value" or "current market price" of an option shall mean the total cost or net proceeds of the option contract on the day the option was purchased or sold and at any other time shall be the preceding business day's closing price of that option (times the appropriate unit of trading or multiplier) as shown by any regularly published reporting or quotation service. 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).
(D) The margin required on any put or call 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 percent of the current market value of the option plus the percentage of the current market value of the underlying security or index specified in column II of this paragraph (D)(i) below.

Notwithstanding the margin required below, the minimum 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 this paragraph (D)(i) below), but shall not be less than 100 percent of the current market value of the option plus the percentage of the current market value of the underlying security or index specified in column III of this paragraph (D)(i) below.
 

I

II

III

IV

Security or Index

Initial and/or Maintenance Margin Required

Minimum Margin Required

Underlying Component Value

(1)

Stock

20 percent

10 percent

The equivalent number of shares at current market prices

(2)

Industry index stock group

20 percent

10 percent

The product of the current index group value and the applicable index multiplier

(3)

Broad index stock group

15 percent

10 percent

The product of the current index group value and the applicable index multiplier

(4)

U.S. Treasury bills 95 days or less to maturity

.35 percent

1/20 percent

The underlying principal amount

(5)

U.S. Treasury notes

3 percent

1/2 percent

The underlying principal amount

(6)

U.S. Treasury bonds

3.5 percent

1/2 percent

The underlying principal amount

(7)

Foreign Currencies

4 percent

3/4 percent

The product of units per foreign currency contract and the closing spot price

For purposes of this subsection (D)(i), "out-of-the-money amounts" are determined as follows:

Option 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

Any excess of the current market value of the underlying principal amount over the aggregate exercise price of the option. principal amount.

Index Stock Group Options

Any excess of the aggregate exercise price of the option 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.

Foreign Currency Options

Any excess of the aggregate exercise price of the option over the product of units per foreign currency contract and the closing spot prices.

The product of units per foreign currency contract and the closing spot prices over the aggregate price of the option.

If the option 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 Section, shall be made in such a manner as to result in the highest margin requirement on the short option 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 percent 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 and representing stock options or index stock group options, 100 percent of the option premium received plus 45 percent of the current market value of the equivalent number of shares of the underlying security or the product of the current index group value of the underlying index stock group and the applicable index multiplier, reduced by any excess of the exercise price over the current market value of the underlying security or the product of the current index group value of the underlying index stock group and the applicable multiplier, in the case of a call, or any excess of the current market value of the underlying security or the product of the current index group value of the underlying index stock group and the applicable multiplier, over the exercise price, in the case of a put. In either case, the minimum margin shall not be less than 100 percent of the option premium received plus 10 percent of the current market value of the equivalent number of shares of the underlying security or the product of the current index group value of the underlying index stock group and the applicable index multiplier.
(E)
(i) Each put or call shall be margined separately and any difference between the current market value of the underlying security, underlying foreign currency or the current index group value of the underlying index stock group 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 usually 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) If both a put and call specifying the same number of shares of the same underlying security, the same principal amount of the same United States Government obligation, the same number of units of the same underlying foreign currency or the same index multiplier for the same index stock group 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 paragraph (D)(i) above, plus the current market value on the other option. The minimum margin requirement, however, shall not apply to the other option.
(ii) 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 paragraph (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 number of shares of the same underlying security, the same principal amount of the same United States Government obligation, the same number of units of the same underlying foreign currency of the same index multiplier for the same index stock group, the margin required on the "short" call shall be the lower of (1) the margin required pursuant to paragraph (D)(i) above, in the case of stock options, United States Government obligations, foreign currency options or index stock group options 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 number of shares of the same underlying security, the same principal amount of the same United States Government obligation, the same number of units of the same underlying foreign currency or the same index multiplier for the same index stock group, the margin required on the "short" put shall be the lower of (1) the margin required pursuant to paragraph (D)(i) above, in the case of stock options, United States Government obligations, foreign currency options or index stock group options 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 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 subparagraph (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 subparagraph (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 subparagraph (f)(2)(G)(ii), 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 national securities association on or through which the option is listed or traded. If the then current highest qualifying rate is less than 8 percent, the multiplier factor shall be 1; if the then current highest qualifying rate is greater than or equal to 8 percent but less than 10 percent, the multiplier factor shall be 1.2; if the then current highest qualifying rate is greater than or equal to 10 percent but less than 12 percent, the multiplier factor shall be 1.4; if the then current highest qualifying rate is greater than or equal to 12 percent but less than 14 percent, the multiplier factor shall be 1.5; if the then current highest qualifying rate is greater than or equal to 14 percent but less than 16 percent, the multiplier factor shall be 1.6; and if the then current highest qualifying rate is greater than or equal to 16 percent but less than or equal to 18 percent, the multiplier factor shall be 1.7. The multiplier factor or factors for higher qualifying rates shall be established by the Association as required.
(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 Section 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 Section.
(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 Section 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 Section.
(iii) In determining net "long" and net "short" positions, for purposes of subparagraphs (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 subsection 3(e)(1) of this Section, 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.
(iv) Where a put or call is carried "short" in the account of a customer against a letter of guarantee in a form satisfactory to the Association and issued by a third party custodian bank or trust company (the "guarantor"), which letter of guarantee is held in the account at the time the put or call is written, or is received in the account promptly thereafter, no margin need be required on the put or call.
In the case of a call on a broad index stock group, the letter of guarantee must certify that the guarantor 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 percent of the aggregate current index value computed as at the same time and that the guarantor will promptly pay the member the exercise settlement amount in the event the account is assigned an exercise notice. The letter of guarantee 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 traded on any national securities exchange, or (2) any equity security, other than a warrant, listed in the current list of Over-the-Counter Margin Stocks as published by the Board of Governors of the Federal Reserve System.

In the case of a call on any other option contract, the letter of guarantee must certify that the guarantor 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 guarantor will promptly deliver to the member the underlying security or foreign currency in the event the account is assigned an exercise notice.

In the case of a put on an option contract (including a put on a broad index stock group), the letter of guarantee must certify that the guarantor 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 percent of the aggregate exercise price of the put and that the guarantor will promptly pay the member 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 those instruments referred to in 220.8(a)(3)(ii) of Regulation T of the Board of Governors of the Federal Reserve System.
(I) When a member issues or guarantees an option to receive or deliver securities or foreign currencies for a customer, such option shall be margined as if it were a put or call.
(J) Notwithstanding the other provisions of this subsection 3(f)(2), a member may clear and carry the listed option transactions of one or more registered specialists, registered market makers, or 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), upon a margin basis satisfactory to the concerned parties, provided that 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 as a charge when computing net capital.

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 member's net capital and its overall exposure to material loss.
(K) The Association may at anytime impose higher margin requirements with respect to any option position(s) when it deems such higher margin requirements are appropriate.
(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 Section be adjusted for any unrealized loss in such "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, 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 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 charged against the member's net capital as provided in SEC Rule 15c3-1.

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 Association as involving a primary distribution.
The term "when issued" as used herein also means "when distributed."
(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 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 member, or any stockholder (other than a holder of freely transferable stock only) in the organization carrying such account or (b) a member, 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, 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 percent of the member's excess net capital, the amount of the margin deficiency being guaranteed in excess of 10 percent of excess net capital shall be charged against the member's net capital when computing net capital under SEC Rule 15c3-1.
(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.
(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 Section shall be obtained as promptly as possible and in any event within fifteen business days from the date such deficiency occurred, unless the Association has specifically granted the member additional time.
(7) Practice of Meeting Regulation T Margin Calls by Liquidation Prohibited — When a "margin call," as defined in Section 220.2(1) of Regulation T of the Board of Governors of the Federal Reserve System, is required in a customer's account, no member 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 Section.
(8) Special Initial and Maintenance Margin Requirements —
(A) Notwithstanding the other pro-visions of this Section, the Association 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,
(ii) higher maintenance margin requirements for accounts of customers with respect to any securities, and
(iii) such other terms and conditions as the Association shall deem appropriate relating to initial and/or maintenance margin requirements for accounts of customers with respect to any securities.
(B) Day-Trading — The term "day-trading" means the purchasing and selling of the same security on the same day. A "day-trader" is any customer whose trading shows a pattern of day-trading.

Whenever day-trading occurs in a customer's margin account the margin to be maintained shall be the margin on the "long" or "short" transaction, whichever occurred first, as required pursuant to the other provisions of this Section. When day-trading occurs in the account of a "day-trader" the margin to be maintained shall be the margin on the "long" or "short" transaction, whichever occurred first, as required by Regulation T of the Board of Governors of the Federal Reserve System or as required pursuant to the other provisions of this Section, whichever amount is greater.
(C) When the equity in a customer's account, after giving consideration to the other provisions of this Section, 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 seven business days of the trade date.
(9) Free Riding in Cash Accounts Prohibited — No member 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 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 transferring an account which is subject to a Regulation T 90-day freeze to another member firm shall inform the receiving member 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. Members may apply to the Association in writing for waiver of a 90-day freeze not exempted by Regulation T.

© National Association of Securities Dealers, Inc. (NASD), April 1993. All rights reserved. NASD, Nasdaq, Nasdaq National Market, and OTC Bulletin Board are registered service marks of NASD. The Nasdaq SmallCap Market and Small Order Execution System (SOES) are service marks of NASD. NASD Notices to Members is published monthly by the NASD Communication Services Department, Thomas Mathers, Editor, Sharon Lippincott, Associate Editor. NASD Communication Services, 1735 K Street, NW, Washington, DC 200061500, (202) 728-6900. No portion of this publication may be copied, photocopied, or duplicated in any form or by any means, except as described below, without prior written consent of the NASD. Members of the NASD are authorized to photocopy or otherwise duplicate any part of this publication without charge only for internal use by the member and its associated persons. Nonmembers of the NASD may obtain permission to photocopy for internal use through the Copyright Clearance Center (CCC) for a $3-per-page fee to be paid directly to CCC, 27 Congress Street, Salem, MA 01970. Annual subscriptions cost $225; single issues cost $25. Send a check or money order (payable to the National Association of Securities Dealers, Inc.) to NASD MediaSource,SM P.O. Box 9403, Gaithersburg, MD 20898-9403, or phone in an order using American Express, MasterCard, or Visa charge, call (301) 5906578, Monday to Friday, 9 a.m. to 5 p.m., Eastern Time.


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