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95-82 SEC Approves NASD Rules Concerning Index, Currency, And Currency Index Warrants

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Executive Summary

On September 28, 1995, the Securities and Exchange Commission (SEC) approved proposed changes to NASD® rules governing index, currency, and currency index warrants. The amended rules:

  • revise the listing criteria for stock index warrants;

  • specify the customer margin requirements for the purchase and short sale of stock index and currency warrants; and

  • create a new Schedule J to the NASD By-Laws that consolidates all of the regulatory requirements applicable to the conduct of accounts, the execution of transactions, and the handling of orders in index warrants listed on Nasdaq® and exchange-listed stock index warrants, currency index warrants, and currency warrants by members that are not members of the exchange on which the warrant is listed or traded.

The full text of the rule changes concerning index, currency, and currency index warrants is at the end of this Notice.

All currency and index warrants traded on a national securities exchange before the SEC's approval of the new rules are grandfathered.

Summary Of The Rule Changes

Account Approval, Trading, And Advertising Rules

New Schedule J to the By-Laws sets out various customer protection rules applicable to stock index, currency index, and currency warrants. Specifically, Schedule J makes existing options customer protection rules in Article III, Section 33 of the NASD Rules of Fair Practice applicable to stock index, currency, and currency index warrants. Where the options sales practice rules are made applicable by Schedule J to such warrants, the term "option" includes a stock index, currency index, or currency warrant.

Section 3 of Schedule J states that no member may accept an order from a customer to purchase or sell a stock index, currency index, or currency warrant unless the customer's account has been approved for options trading pursuant to Article III, Section 33(b)(16) of the Rules of Fair Practice.

Sections 4 through 7 and 9 of Schedule J apply the options rules for suitability (Section 33(b)(9)), discretionary accounts (Section 33(b)(18)), supervision of accounts (Sections 33(b)(17)(B) and (20)), and customer complaints (Section 33(b)(17)(A)) to stock index and currency warrants.

Section 8 of Schedule J generally applies the standards applicable to written communications regarding listed options (Section 35A) to stock index and currency warrants. The provisions of Section 35A as applied to stock index and currency warrants require that all advertisements, sales literature, and educational material issued by a member pertaining to stock index and currency warrants be approved by a Compliance Registered Options Principal, and all advertisements and educational materials pertaining to stock index warrants be approved by the NASD or by another self-regulatory organization.

The NASD cautions its members that any time they provide information to a customer regarding stock index warrants, they should provide the customer with information regarding the unique characteristics and risks of these instruments. In addition, any written communications to customers regarding stock index and currency warrants should state that these warrants share many of the risks of standardized options, but, unlike standardized options, they are backed only by the credit of the issuer (not The Options Clearing Corporation (OCC)) and each issue of warrants contains its own terms and conditions that may differ from those of other warrants, even other warrants on the same underlying index or issued by the same issuer.

Position And Exercise Limits And Reporting Requirements

Section 10 of Schedule J provides that position limits for stock index warrants on the same index with original issue prices of $10 or less will be 15 million warrants, except that for warrants on the Standard & Poor's MidCap 400 Index with an original issue price of $10 or less, the position limit will be 7.5 million warrants. The position limits are consolidated position limits, meaning that index warrants on the same index on the same side of the market must be aggregated for position-limit purposes.

The position limit rule also contains a provision that equalizes positions in index warrants that initially were priced above $10 with those that were priced at or below $10. In particular, positions will be equalized by dividing the original issue price of the index warrants priced above $10 by 10 and multiplying this number by the size of the index warrant position. For example, if an investor held 100,000 Nasdaq 100 Index® warrants priced initially at $20, the size of this position for position-limit purposes would be 200,000, or 100,000 times 20 divided by 10.

Section 11 of Schedule J sets forth the exercise limits applicable to index warrants. Specifically, the exercise limits provide that no investor or group of investors acting in concert may, within five consecutive business days, exercise more index warrants on the same index on the same side of the market than the applicable index warrant position limit.

Section 12 of Schedule J provides that positions of 100,000 or more index warrants on the same index on the same side of the market must be reported to the NASD.

Section 14 of Schedule J provides that the NASD may halt or suspend trading in an index warrant if it concludes that such action is appropriate in the interests of a fair and orderly market and the protection of investors. Among the factors that may be considered by the NASD are:

  • trading has been halted or suspended in underlying stocks whose weighted value represents 20 percent or more of the index value;

  • the current calculation of the index derived from the current market prices of the stocks is not available; or

  • other unusual conditions or circumstances detrimental to the maintenance of a fair and orderly market are present.

Margin

New Section 3(f)(10) of Article III, Section 30 of the Rules of Fair Practice states the margin requirements applicable to index, currency, and currency index warrants.

For long warrant positions, the new requirements provide that the initial and maintenance requirements for long positions in index, currency, and currency index warrants will be 100 percent of the full purchase price of the warrants.

For short positions in index warrants, the margin requirement is 100 percent of the current market value of the warrant plus 15 percent of the current value of the underlying index. The margin requirements for short positions can be decreased to the extent that they are out-of-the-money, however, the minimum requirement for each such warrant cannot be less than the current value of the warrant plus 10 percent of the current index value.

For short positions in currency warrants, the margin requirements follow the margin requirements presently applicable to standardized currency options. Specifically, short sales of warrants on the German mark, French franc, Swiss franc, Japanese yen, British pound, Australian dollar, and European Currency Unit will each be subject to a margin level of 100 percent of the current market value of each such warrant plus a four percent "add on." Warrants on the Canadian dollar would be subject to a one percent "add on." The "add on" required on any other foreign currency would be such other percentage as specified by the national securities exchange listing the warrant and approved by the SEC on a case-by-case basis. The required margin can be decreased to the extent that the warrant is out-of-the-money, however, the minimum requirement for each such warrant must not be less than the current value of the warrant plus .75 percent (.0075) of the value of the underlying currency (or such other percentage as specified by the national securities exchange listing the warrant and approved by the SEC).

The margin required on currency index warrants would be an amount as determined by the national securities exchange listing the warrant and approved by the SEC.

Index, currency warrant, and currency index warrant margin requirements also receive offset treatment for spread and straddle positions. Specifically, stock index, currency, and currency index warrants may be offset with either warrants or OCC-issued options on the same stock index, currency, or currency index, respectively, in the same manner that standardized index and currency options may be offset with other standardized index and currency options. The rules governing the margin treatment for spreads and straddles involving stock index, currency, and currency index warrants are being implemented on a one-year pilot basis. The NASD also will allow market participants to use escrow receipts to cover a short-call position in broad-based stock index warrants.

Listing Standards

The NASD has substantially revised the listing standards applicable to stock index warrants. Under the revised standards, issuers must have a minimum tangible net worth exceeding $250 million or have a minimum tangible net worth exceeding $150 million, provided the issuer has not issued warrants such that the aggregate original issue price of all of the issuer's stock index, currency, and currency index warrant offerings (combined with offerings by its affiliates) listed on Nasdaq or a national securities exchange exceeds 25 percent of the issuer's net worth.

The term of the index warrants must provide that unexercised in-the-money warrants will be automatically exercised on the delisting date (if the issue is not listed on a national securities exchange) or upon expiration.

For warrant offerings where U.S. stocks constitute 25 percent or more of the index value, issuers must use the opening prices (a.m. settlement) of the U.S. stocks to determine the final index warrant settlement value and the index warrant settlement value on the two business days preceding the day on which the final index warrant settlement value is to be determined.

In instances where the stock index underlying a warrant is comprised of, in whole or in part, securities traded outside the United States, the foreign country securities or American Depositary Receipts (ADRs) that are not subject to a comprehensive surveillance agreement and have less than 50 percent of their global trading volume in dollar value within the United States, cannot, in the aggregate, represent more than 20 percent of the weight of the index, unless such index is otherwise approved for warrant or option trading.

Reporting Changes In The Number Of Warrants Outstanding

To assist in the surveillance of index warrant trading, as a condition of listing on Nasdaq, issuers would be required to notify (or make arrangements for the warrant transfer agent to notify) the NASD of any early warrant exercises by 4:30 p.m., Eastern Time, on the day the settlement value for the warrants is determined. Such notice must be filed in such form and manner as may be prescribed by the NASD from time to time.

Reporting The Execution Of Hedging Transactions Due To Early Exercise

The NASD will require any issuer of a stock index warrant (for which 25 percent or more of the value of the underlying index is represented by securities traded primarily in the United States) to file a report with the NASD concerning certain trades the issuer effects as a result of the early exercise of a stock index warrant to adjust a hedge that the issuer has established in connection with the issuance of such warrants. The threshold reporting level for issuer hedge transactions in stock will be set at the reporting level of the New York Stock Exchange's Daily Program Trading Report (DPTR), which is a program trade involving at least 15 stocks of $1 million or more in value. Any issuer hedge transaction effected in another market (such as options market, futures market, OTC derivatives market) must be reported regardless of its size.

These reports will be submitted to the NASD by the close of business on the second business day following the trade date of the transaction subject to the report. All such reports must be filed as required by the NASD from time to time and must include the following information with respect to each reportable trade:

  • order-entry time;

  • product type (stock, stock option, futures contract, futures option);

  • order type (market maker on close, limit);

  • market action (buy/open, buy/close, sell/option);

  • account identifier;

  • size (total number of shares or contracts);

  • total dollar value of trade;

  • market where executed; and

  • the warrant issue hedged.

Questions regarding the new rules applicable to stock index, currency, and currency index warrants may be directed to Thomas R. Gira, Assistant General Counsel, at (202) 728–8957; questions concerning the sales practice and margin rules applicable to index warrants may be directed to the NASD Compliance Department, at (202) 728–8221; questions regarding the listing standards applicable to Nasdaq-listed index warrants may be directed to David Irwin, Assistant Director, Policy and Practices, Nasdaq Issuer Services, at (202) 728–8102; and questions concerning the position and exercise limits and reporting requirements applicable to index warrants may be directed to NASD Market Surveillance, at (800) 925–8156.

Text Of New Schedule To The By-Laws And Amendments To The By-Laws And Rules Of Fair Practice

Below is the text of new Schedule J to the NASD By-Laws and the amendments to: Schedule D to the NASD By-Laws; Section 30 of the NASD Rules of Fair Practice; and the NASD Board's Policy issued under Section 2 of the NASD Rules of Fair Practice concerning Fair Dealing with Customers with Regard to Derivative Products or New Financial Products.

(Note: New text is underlined; deletions are bracketed.)

SCHEDULE J

TRADING IN INDEX WARRANTS, CURRENCY INDEX WARRANTS, AND CURRENCY WARRANTS

Sec. 1. General

(a) Applicability—The rules in this Schedule J shall be applicable: (1) to the conduct of accounts, the execution of transactions, and the handling of orders in index warrants listed on the Nasdaq Stock Market ("Nasdaq'"): and (2) to the extent appropriate unless otherwise stated herein, to the conduct of accounts, the execution of transactions, and the handling of orders in exchange-listed stock index warrants, currency index warrants, and currency warrants by members who are not members of the exchange on which the warrant is listed or traded.
(b) Except to the extent that specific provisions in this Schedule govern, or unless the context otherwise requires, the provisions of the By-Laws and Rules of Fair Practice and all other interpretations and policies of the Board of Governors shall also be applicable to transactions in index warrants, currency index warrants, and currency warrants.
(c) The rules in this Schedule are not applicable to stock index warrants, currency index warrants, and currency warrants listed on national securities exchanges prior to September 28. 1995.

Sec. 2. Definitions

(a) The term "stock index group" means a group of stocks each of whose inclusion and relative representation in the group is determined by its inclusion and relative representation in a stock index.
(b) The term "index warrants" means instruments that are direct obligations of the issuing company, either exercisable throughout their life (i.e.. American style") or exercisable only on their expiration date (i.e.. European style), entitling the holder there of to a cash settlement in U.S. dollars to the extent that the value of the underlying stock index group has declined below (in the case of a put warrant) or increased above (in the case of a call warrant) the pre-stated cash settlement value of the underlying stock index group.
(c) The term "currency warrants" shall mean instruments that are direct obligations of the issuing company, either exercisable throughout their life (i.e.. American style) or exercisable only on their expiration date (i.e., European style), entitling the holder thereof to a cash settlement in U.S. dollars to the extent that the value of the underlying foreign currency has declined below (in the case of a put warrant) or increased above (in the case of a call warrant) the pre-stated cash settlement value of the underlying foreign currency. The term "foreign currency warrants" shall also include cross-rate currency warrants.
(d) The term "currency index" means a group of currencies each of whose inclusion and relative representation in the group is determined by its inclusion and relative representation in a currency index.
(e) The term "currency index warrants" shall mean instruments that are direct obligations of the issuing company, either exercisable throughout their life (i.e.. American style) or exercisable only on their expiration date (i.e.. European style), entitling the holder thereof to a cash settlement in U.S. dollars to the extent that the value of the underlying currency index has declined below (in the case of a put warrant) or increased above (in the case of a call warrant) the prestated cash settlement value of the underlying currency index.
(f) The term "control" shall have the same meaning as the term "control" as set forth in Article III. Section 33(b)(2)(ZZ) of the Rules of Fair Practice.

Sec. 3. Account Approval

No member or person associated with a member shall accept an order from a customer to purchase or sell an index warrant, currency index warrant, or currency warrant unless the customer's account has been approved for options trading pursuant to Article III. Section 33(b)(16) of the Rules of Fair Practice.

Sec. 4. Suitability

The provisions of Article III. Section 33(b)(19) of the Rules of Fair Practice shall apply to recommendations by members and persons associated with members regarding the purchase or sale of index warrants, currency index warrants, or currency warrants. The term "option" as used therein shall be deemed to include such warrants for purposes of this Section.

Sec. 5. Discretionary Accounts

Insofar as a member or person associated with a member exercises discretion to trade in index warrants, currency index warrants, or currency warrants in a customer's account, such account shall be subject to the provisions of Article III. Section 33(b)( 18) of the Rules of Fair Practice. The term "option" as used therein shall be deemed to include such warrants for purposes of this Section.

Sec. 6. Supervision of Accounts

The provisions of Article III. Section 33(b)(20) of the Rules of Fair Practice shall apply to all customer accounts of a member in which transactions in index warrants, currency index warrants, or currency warrants are effected. The term "option" as used therein shall be deemed to include such warrants for purposes of this Section.

Sec. 7. Customer Complaints

The record-keeping requirements of Article III. Section 33(b)(17)(A) of the Rules of Fair Practice concerning the receipt and handling of customer complaints relating to options shall also apply to customer complaints relating to index warrants, currency index warrants, or currency warrants and the required records of such complaints shall be maintained together with the records pertaining to options related complaints, provided that complaints related to index warrants, currency index warrants, or currency warrants shall be clearly identified as such. The term "option" as used therein shall be deemed to include such warrants for purposes of this Section.

Sec. 8. Communications with the Public and Customers Concerning Index Warrants. Currency Index Warrants, and Currency Warrants

The provisions of Article III. Section 35 A of the Rules of Fair Practice shall be applicable to communications to customers regarding index warrants, currency index warrants, or currency warrants. The term "option" as used therein shall be deemed to include such warrants for purposes of this Section and the term "The Options Clearing Corporation" shall be deemed to mean the issuer of such warrants. Sections 35A(c)(5) and (d)(2XC)(v) shall also not be applicable to communications with the public regarding index warrants, currency index warrants, or currency warrants.

Sec. 9. Maintenance of Records

The record-keeping provisions of Article HI. Section 33(b)(17)(B) shall be applicable to customer accounts approved to trade index warrants, currency index warrants, or currency warrants. The term "option" as used therein shall be deemed to include such warrants for purposes of this

Sec. 10. Position Limits

Except with the prior written approval of the Corporation in each instance, no member shall effect for any account in which such member has an interest, or for the account of any partner, office, director or employee thereof, or for the account of any customer, a purchase or sale transaction in an index warrant listed on Nasdaq or on a national securities exchange if the member has reason to believe that as a result of such transaction the member, or partner, officer, director or employee thereof, or customer would, acting alone or in concert with others, directly or indirectly, hold or control an aggregate position in an index warrant issue on the same side of the market, combining such index warrant position with positions in index warrants overlying the same index on the same side of the market, in excess of the position limits established by the Corporation, in the case of Nasdaq-listed index warrants, or the exchange on which the index warrant is listed.

In determining compliance with this Section, the position limits for Nasdaq-listed index warrants are as follows:

(i) Fifteen million warrants with respect to warrants on the same stock index (other than the Standard & Poor's MidCap 400 Index) with an original issue price of ten dollars or less.
(ii) Seven million five hundred thousand warrants, with respect to warrants on the Standard & Poor's MidCap 400 Index with an original issue price of ten dollars or less.
(iii) For stock index warrants with an original issue price greater than ten dollars, positions in these warrants must be converted to the equivalent-of warrants on the same index priced initially at ten dollars by dividing the original issue price of the index warrants priced above ten dollars by ten and multiplying this number by the size of such index warrant position. After recalculating a warrant position pursuant to this paragraph (in"), such recalculated warrant position shall be aggregated with other warrant positions on the same underlying index on the same side of the market and subjected to the applicable position limit set forth in paragraph (i) or (ii) above. For example, if an investor held 100.000 Nasdaq 100 Index warrants offered originally at $20 per warrant, the size of this position for the purpose of calculating position limits would be 200.000. or 100.000 times 20/10.

Sec. 11. Exercise Limits

Except with the prior written approval of the Corporation, in each instance, no member or person associated with a member shall exercise, for any account in which such member or person associated with such member has an interest, or for the account of any partner, officer, director or employee thereof, or for the account of any customer, a long position in any index warrant if as a result thereof such member or partner, officer, director or employee thereof or customer, acting alone or in concert with others, directly or indirectly: (1) has or will have exercised within any five (5) consecutive business days a number of index warrants overlying the same index in excess of the limits for index warrant positions contained in Section 10 of this Schedule J: or (21 has or will have exceeded the applicable exercise limit fixed from time to time by an exchange for an index warrant not dealt in on Nasdaq. The Corporation may institute other limitations concerning the exercise of index warrants from time to time by action of the Corporation. Reasonable notice shall be given of each new limitation fixed by the Corporation. These exercise limitations are separate and distinct from any other exercise limitations imposed by the issuers of index warrants.

Sec. 12. Reporting Requirements

(a) Each member shall file with the Corporation a report with respect to each account in which the member has an interest, each account of a partner, officer, director or employee of such member, and each customer account of the member, which has established an aggregate position of 100.000 index warrants on the same side of the market in an index warrant issue listed on Nasdaq, combining such index warrant position with positions in index warrants overlying the same index on the same side of the market traded on Nasdaq or a national securities exchange.
(b) Such report shall identify the person or persons having an interest in such account and shall identify separately the total number of each type of index warrant that comprises the reportable position in such account. The report shall be in such form as may be prescribed by the Corporation and shall be filed no later than the close of business on the next business day following the day on which the transaction or transactions necessitating the filing of such report occurred. Whenever a report shall be required to be filed with respect to an account pursuant to this subsection, the member filing such report shall file with the Corporation such additional periodic reports with respect to such account as the Corporation may from time to time prescribe.

Sec. 13. Liquidation of Index Warrant Positions

Whenever the Corporation determines that a person or group of persons acting in concert holds or controls an aggregate position (whether short or long) in index warrants overlying the same index in excess of the position limitations established by Section 10 of this Schedule J. it may, when deemed necessary or appropriate in the public interest and for the protection of investors, direct any member or all members carrying a position in index warrants overlying such index for such person or persons to liquidate such position or positions, or portions thereof, as expeditiously as possible and consistent with the maintenance of an orderly market, so as to bring such person or persons into compliance with the position limitations contained in Section 10.

Whenever such a directive is issued by the Corporation no member receiving notice thereof shall accept and/or execute for any person or persons named in such directive any order to purchase or sell short any index warrants based on the same index, unless in each instance express approval therefore is given by the Corporation, or the directive is

Sec. 14. Trading Halts or Suspensions

(a) The trading in an index warrant on Nasdaq shall be halted whenever the Senior Vice President for Market Surveillance, or its designee. shall conclude that such action is appropriate in the interests of a fair and orderly market and to protect investors. Among the factors that may be considered are the following:
(i) trading has been halted or suspended in underlying stocks whose weighted value represents 20% or more of the index value:
(ii) the current calculation of the index derived from the current market prices of the stocks is not available:
(iii) other unusual conditions or circumstances detrimental to the maintenance of a fair and orderly market are present.
(b) Trading in index warrants that has been the subject of a trading halt or suspension may resume if the Senior Vice President for Market Surveillance, or its designee. determines that the conditions which led to the halt or suspension are no longer present or that the interests of a fair and orderly market are served by a resumption of trading. In either event, the reopening may not occur until the Corporation has determined that trading in underlying stocks whose weighted value represents more than 50% of the index is occurring.

SCHEDULE D

PART I – DEFINITIONS

(1) through (18) No change.
(19) "Nasdaq National Market System security" or "NNM security" means any authorized security which (i) satisfies all applicable requirements of Part II and substantially meets the criteria set forth in Part III, Sections 2 and 5 of this Schedule D and is subject therefore to a transaction reporting plan approved by the Securities and Exchange Commission; (ii) is a right to purchase such security; [or] (iii) is a warrant to subscribe to such security; or (iv) is an index warrant which substantially meets the criteria set forth in Part III, Section 2 of this Schedule D, and has been designated therefore as a national market system security pursuant to SEC Rule 11 Aa2–1.

PART II No change.

PART III

Introduction No change.

DESIGNATION OF NASDAQ NATIONAL MARKET SECURITIES

Sec. 1. No change.

Sec. 2. Quantitative Designation Criteria

(a) and (b) No change,
(c) Warrants
(1) No change.
(2) An index warrant may be designated for inclusion if it substantially meets the following criteria:
(A) The minimum public distribution shall be at least 1 million warrants.
(B) The minimum number of public holders shall be at least 400.
(C) The aggregate market value of the outstanding index warrants shall be at least $4 million.
(D) The issuer of the index warrants must have [assets in excess of $100 million] a minimum tangible net worth in excess of $150 million.
(E) The term of the index warrant shall be for a period from one to five years. Any index warrant designated pursuant to this paragraph shall not be required to meet the requirements of Sections 3,4 or 5 of this Part. The Association may apply additional or more stringent criteria as necessary to protect investors and the public interest.
(F) Limitations on Issuance—Where an issuer has a minimum tangible net worth in excess of $150 million but less than $250 million. Nasdaq will not list stock index warrants of the issuer if the value of such warrants plus the aggregate value, based upon the original issuing price, of all out standing stock index, currency index and currency warrants of the issuer and its affiliates combined that are listed for trading on Nasdaq or a national securities exchange exceeds 25% of the issuer's net worth.
(G) A.M. Settlement—The terms of stock index warrants for which 25% or more of the value of the underlying index is represented by securities that are traded primarily in the United States must provide that the opening prices of the stocks comprising the index will be used to determine (i) the final settlement value (i.e.. the settlement value for warrants that are exercised at expiration) and (ii) the settlement value for such warrants that are valued on either of the two business days preceding the day on which the final settlement value is to be determined.
(H) Automatic Exercise—All stock index warrants and any other cash-settled warrants must include in their terms provisions specifying (i) the time by which all exercise notices must be submitted and (ii) that all unexercised warrants that are in the money (or that are in the money by a stated amount will be automatically exercised on their expiration date or on or promptly following the date on which such warrants are delisted by Nasdaq (if such warrant issue has not been listed on a national securities exchange).
(I) Foreign Country Securities—In instances where the stock index underlying a warrant is comprised in whole or in part with securities traded outside the United States, the foreign country securities or American Depositary Receipts ("ADRs") thereon that (i) are not subject to a comprehensive surveillance agreement, and (ii) have less than 50% of their global trading volume in dollar value within the United States, shall not, in the aggregate represent more than 20% of the weight of the index, unless such index is otherwise approved for warrant or option trading.
(J) Changes in Number of Warrants Outstanding—Issuers of stock index warrants either will make arrangements with warrant transfer agents to advise the NASD immediately of any change in the number of warrants outstanding due to the early exercise of such warrants or will provide this information themselves. With respect to stock index warrants for which 25% or more of the value of the underlying index is represented by securities traded primarily in the United States, such notice shall be filed with the NASD no later than 4:30 p.m. Eastern Standard Time, on the date when the settlement value for such warrants is determined. Such notice shall be filed in such form and manner as may be prescribed by the NASD from time to time.
(K) Only eligible broad-based indexes can underlie index warrants. For purposes of this subsection, eligible broad-based indexes shall include those indexes approved by the Securities and Exchange Commission to underlie index warrants or index options traded on Nasdaq or a national securities exchange.

SECTION 30 OF THE RULES OF FAIR PRACTICE

Sec. 1. and Sec. 2. No change.

Sec. 3(a) through (f)(9) No change.

Sec. 3(f)(10)

(a) This Section sets forth the minimum amount of margin which must be deposited and maintained in margin accounts of customers having positions in index warrants, currency index warrants or currency warrants dealt in on Nasdaq or a national securities exchange. The Corporation may at any time impose higher margin requirements in respect of such positions when it deems such higher margin requirements to be advisable. The initial deposit of margin required under this Section must be made within five full business days after the date on which a transaction giving rise to a margin requirement is effected. The margin requirements set forth in this Section are applicable only to index warrants, currency index warrants and currency warrants listed for trading on Nasdaq or a national securities exchange on or after September 28. 1995.
(b) Definitions

The following definitions shall apply to transactions in index warrants, currency index warrants, and currency
(1) The terms "stock index group," "index warrants," "currency war ants," currency index," and "currency index warrants" when used in reference to an index warrant, currency index warrant, or currency warrant shall have the same meanings as set forth in Section 2 of Schedule J to the By-Laws.
(2) The term "current market value" of an index warrant, currency index warrant or currency warrant shall mean the total cost or net proceeds of the transaction on the day the warrant was purchased or sold and at any other time shall mean the most recent closing price of that issue of warrants on Nasdaq, in the case of a Nasdaq-listed index warrants, or the exchange on which it is listed on any day with respect to which a determination of current market value is made.
(3) The term "index group value" in respect of an index warrant means the numerical index value of a particular stock index multiplied by $1.00 U.S. or other applicable index multiplier.
(4) The term "index group value" in respect to a currency index warrant means the numerical index value of particular currency index multiplied by SI.00 U.S. or the applicable index multiplier.
(5) The term "strike price" in respect of an index warrant, currency index warrant or currency warrant means the price at which the warrant may be exercised in accordance with its terms.
(6) The term "spot price" in respect of a currency warrant on a particular business day means the noon buying rate in U.S. dollars on such day in New York City for cable transfers of the particular underlying currency as certified for customs purposes by the Federal Reserve Bank of New York.
(7) The term "index call warrant" means a warrant structured as a call on the underlying stock index group. The term "index put warrant" means a warrant structured as a put on the underlying stock index group.
(8) The term "currency index call warrant" means a warrant structured as a call on the underlying currency-index. The term "currency index put warrant" means a warrant structured as a put on the underlying currency index.
(9) The term "currency call warrant" means a warrant structured as a call on the underlying currency. The term "currency put warrant" means a warrant structured as a put on the underlying currency.
(10) The term "reporting authority" in respect of an index warrant means the institution or reporting service specified in the prospectus for the warrant as the official source for calculating and reporting the levels of such stock index.
(11) The term "numerical index value" in respect of an index warrant means the level of a particular stock index as reported by the reporting authority for the index.
(12) The term "reporting authority" in respect of a currency index warrant means the institution or reporting service specified in the prospectus for the warrant as the official source for calculating and reporting the levels of such currency index.
(13) The term "numerical index value" in respect of a currency index warrant means the level of a particular currency index as reported by the reporting authority for the index.
(14) The term "unit of underlying currency" in respect of a currency warrant means a single unit of the currency covered by the warrant.
(c) Except as provided in this Section, no index warrant, currency index warrant or currency warrant carried for a customer shall be considered of any value for the purpose of computing the margin required in the account of such customer. Subject to the exceptions set forth in sub-paragraph (e) of this Section, the minimum margin on any currency warrant, currency index warrant or index warrant issued, guaranteed or carried "short" in a customer's account shall be:
(1) In the case of an index put or call warrant. 100% of the current market value of each such warrant plus 15% of the current index group value. Such amount shall be decreased by the excess of the strike price of the warrant over the current index group value in the case of an index call warrant, or the excess of the current index group value over the strike price of the warrant in the case of an index put warrant: or
(2) In the case of a currency put or call warrant, 100% of the current market value of each such warrant plus 4% (or such other percentage, as specified by the national securities exchange listing the warrant and approved by the Commission on a case-by-case basis) of the product of the units of underlying currency per warrant and the spot price for such currency. The add-on percentage with respect to warrants on the German Mark, French Franc, Swiss Franc, Japanese Yen, British Pound, Australian Dollar, U.S. and European Currency Unit ("ECU") shall be four percent (4%). and for the Canadian Dollar the "add-on" percentage shall be one percent (1%). Such amount shall be decreased by the excess of the strike price of the warrant over the product of the units of underlying currency per warrant and the spot price of the currency in the case of a currency call warrant, or any excess of the product of the units of underlying currency per warrant and the spot price over the strike price of the warrant in the case of a currency put warrant: or
(3) In the case of the currency index put or call warrants. 100% of the current market value of each such warrant plus a percentage, as specified by the national securities exchange listing the warrant and approved by the Commission on a case-by-case basis. of the current index group value. Such amount shall be decreased by the excess of the strike price of the warrant over the current index group value in the case of a currency index call warrant, or any excess of the current index group value over the strike price of the warrant in the case of a currency index put warrant.

Notwithstanding the foregoing:

(d) The minimum margin on each currency put or call warrant, currency index put or call warrant or index put or call warrant issued, guaranteed or carried "short" in a customer's account shall be not less than 100% of the current market value of such warrant plus: (i) 10% of the current index group value in the case of an index warrant: (ii) .75% (.0075) (or such other percentage as specified by the national securities exchange listing the warrant and approved by the Commission) of the product of the units of underlying currency per warrant and the spot price of such currency, in the case of a currency warrant: or (iii) in the case of currency index warrants, a percentage of the current index group value as specified by the national securities exchange listing the warrant and approved by the Commission.
(e)
(1) When a "short" position in an index call warrant, currency index call warrant or currency call warrant is offset by a "short" position of equivalent underlying value in a put warrant or a put option issued by The Options Clearing Corporation on the same index or currency, or a "short" position in an index put warrant, currency index put warrant or currency put warrant is offset by a "short" position of equivalent underlying value in a call warrant or a call option issued by The Options Clearing Corporation on the same index or currency, the margin required shall be the margin on the put position or the call position, whichever is greater, plus the current market value of the other position.
(2) When a "long" position in an index call warrant, currency index call warrant or currency call warrant is offset by a "short" position of equivalent underlying value in a call warrant or a call option issued by The Options Clearing Corporation on the same index or currency, then, provided that the "long" position expires no earlier than the "short" position, the margin required shall be the amount, if any, by which the strike price of the "long" position exceeds the strike price of the "short"
(3) When a "long" position in an index put warrant, currency index put warrant or currency put warrant is offset with a "short" position of equivalent underlying value in a put warrant or a put option issued by The Option Clearing Corporation on the same index or currency, then, provided that the "long" position expires no earlier than the "short" position, the margin required shall be the amount, if any, by which the strike price of the "short" position exceeds the strike price of the "long" position.
(4) The margin treatment for spread positions pursuant to subparagraphs (1), (2), and (3) above is subject to a one-year pilot program scheduled to begin September 28. 1995.
(5) No margin is required in respect of a "short" position in an index call warrant where the customer has delivered, promptly after the warrant has been sold short, to the Member with which such position is maintained, a Market Index Warrant Escrow Receipt in a form satisfactory to the Corporation, issued by a bank or trust company pursuant to specific authorization from the customer which certifies that the issuer of the agreement holds for the account of the customer (1) cash. (21 cash equivalents. (3) one or more qualified equity securities, or (4) a combination thereof: that such deposit has an aggregate market value, at the time the warrant is sold short, of not less than 100% of the aggregate current index value: and that the issuer will promptly pay the Member sufficient funds to purchase the warrant sold short in the event of a buy-in.

RULES OF FAIR PRACTICE

Sec. 1. No change.

Sec. 2. Recommendations To Customers

Policy of the Board of Governors—Fair Dealing with Customers with Regard to Derivative Products or New Financial Products

The Board emphasizes members' obligations for fair dealing with customers when making recommendations or accepting orders for new financial products. As new products are introduced from time to time, it is important that members make every effort to familiarize themselves with each customer's financial situation, trading experience, and ability to meet the risks involved with such products and to make every effort to make customers aware of the pertinent information regarding the products. Members must follow specific guidelines, set forth below, for qualifying the accounts to trade the products and for supervising the accounts thereafter.

(1) For index warrants—members are obliged to comply with the [following rules, regulations and procedures applicable to options trading. In transactions with customers, members may effect transactions in index warrants only with customers whose accounts have been approved for options trading, pursuant to the standards contained in Section 33 and Appendix E of the Rules of Fair Practice. Members shall also be obliged to comply with standards in Appendix E for Discretionary Accounts (Section 18), Suitability (19), and Supervision of Accounts (Section 20) for customers that desire to trade index warrants and that have been approved for options trading] rules, regulations, and procedures applicable to index warrants and foreign currency warrants contained in Schedule J to the By-Laws.

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