Wow, Ken. Glad you've come onto our thread, you are very knowledgeable about this. Thought I'd reproduce it for our thread (warning: IT'S LONG AND DETAILED)
The significant changes are summarized below:
ú The types of option strategies eligible for cash accounts have been expanded, provided sufficient funds are deposited to cover the maximum potential exposure.
ú The amendments establish reduced maintenance margin requirements for certain hedged option strategies commensurate with the economic risk associated with such positions. These strategies are Hedged Puts and Calls, Conversions, Reverse Conversions and Collars.
ú The amendments also allow for loan value on long-term options ("LEAPS") with remaining time to expiration exceeding nine months. Where the expiration of the option is nine months or less, there is no loan value.
ú The minimum margin requirement on short, uncovered puts will now be based on the exercise price of the option.
ú Additionally, new definitions of butterfly spreads and box spreads have been added to the Rule.
I. Cash Account Transactions
Transactions permitted in a cash account have been expanded to include limited risk spread strategies. To qualify for the cash account, the option components must all: 1) be cash-settled, 2) have European-style exercise2, 3) have the same time and date of expiration and 4) must be structured in accordance with the requirements contained in the definition section (See Rule 431(f)(2)(c)).
The limited risk spread strategies are as follows:
1) Long Call or Put Spreads
2) Long (Call or Put) Butterfly Spreads
3) Long Box Spreads
Requirement:
Full cash payment of the net debit created by establishing the position must be held in the account at the time the strategy is established, or deposited promptly thereafter.
4) Short Call or Put Spreads
5) Short Box Spreads
Requirement:
Cash or cash equivalents equal to or greater than the exercise price differential must be held in the account at the time the strategy is established, or deposited promptly thereafter.
6) Short Call Butterfly Spreads
Requirement:
Cash or cash equivalents equal to or greater than the differential between the two lowest exercise prices must be held in the account at the time the strategy is established or deposited promptly thereafter. Credits received may be applied.
7) Short Put Butterfly Spreads
Requirement:
Cash or cash equivalents equal to or greater than the differential between the two highest exercise prices must be held in the account at the time the strategy is established or deposited promptly thereafter. Credits received may be applied.
ú Escrow agreements in conformity with Exchange standards can be used in lieu of the cash or cash equivalents required to be held in the cash account.
II. Margin Account Transactions
The amendments lower maintenance margin requirements on certain stock/option strategies that are "American Style"3 because the individual strategy is treated as a combined position with lower risk. Members and Member organizations are reminded that these are NYSE minimum requirements and should establish whether higher requirements are appropriate for certain options, option strategies or customers. The specific hedge strategies and maintenance margin requirements approved under the amendments are as follows:
1. Hedged Put (Long stock/Long put)
Requirement: The lower of: 1) 10% of the put exercise price plus 100% of any "out-of-the-money" amount, or 2) 25% of the current long stock market value.
2. Hedged Call (Long call/Short stock)
Requirement: The lower of: 1) 10% of the call exercise price plus 100% of any "out-of-the-money" amount, or 2) 30% of the current short stock market value.
3. * Conversion (Long stock position held in conjunction with a long put and short call)
Requirement: 10% of the exercise price. The put and call must have the same expiration date and exercise price.
4. Reverse Conversion (Short stock position held in conjunction with a long call and short put)
Requirement: 10% of the exercise price. The put and call must have the same expiration date and exercise price.
5. * Collar (Long stock position held in conjunction with a long put and short call)
Requirement: The lower of: 1) 10% of the put exercise price plus 100% of any "out-of-the money" amount on the put, or 2) 25% of the call exercise price. The put and call must have the same expiration date.
* The difference between a collar and a conversion is that the exercise price of the put is lower than the exercise price of the call in the collar strategy.
New provisions concerning initial and maintenance requirements
Long (Debit) Butterfly Spreads. The net debit incurred by establishing a long butterfly spread (the max. risk) must be paid for in full. The butterfly spread must be structured as defined in the rule.
Short (Credit) Butterfly Spreads. For short call butterfly spreads, margin required is the difference between the two lowest exercise prices; and for short put butterfly spreads margin required is the difference between the two highest exercise prices. Net credit received may be applied. The butterfly spread must be structured as defined in the rule.
Long (Debit) Box Spreads. The net debit incurred by establishing a long box spread (the max. risk) must be paid for in full. The box spread must be structured as defined in the rule.
Short (Credit) Box Spread. The difference in the exercise price. Net credit received may be applied. The box spread must be structured as defined in the rule.
III. Loan Value on LEAPS
The initial and maintenance margin required on long listed options4 with remaining time to expiration exceeding nine months is 75% of the current market value. Therefore, the loan value is 25% of the current market value. This includes equity and index warrants.
The initial and maintenance margin required on long OTC options5 with remaining time to expiration exceeding nine months is 75% of the "in-the-money" amount (including equity and index warrants) provided:
1) The options are American-Style, and
2) The contract is guaranteed by a broker/dealer.
Although 75% of the option's "in-the-money" amount6 is required, in addition, 100% of any amount by which the current market value exceeds the intrinsic value is also required for initial margin.
Credit may be extended on long box spreads provided the spread is composed entirely of European-style options. The requirement is 50% of the aggregate difference in the two exercise prices (buy and sell). This is both the initial and maintenance margin requirement. A long box
position is allowed market value for margin equity purposes not to exceed 100% of the aggregate exercise price differential.
IV. Minimum Margin Required on Short, Uncovered Put Options
The minimum margin requirement on short, uncovered puts is now based on a percentage of the put option's exercise price rather than on a percentage of the current market value of the underlying instrument.
Inquiries regarding these amendments should be directed to Albert Lucks (212) 656-5782, Olga Davis (212) 656-7227 or Pat Neil (212) 656-5227.
Salvatore Pallante
Senior Vice President
Attachments
_______________________________________
1 See Securities Exchange Act Release No. 34-42011, dated October 14, 1999.
2 A European-style exercise is an option contract that can only be exercised on the expiration date.
3 An American-style option is an option contract that can be exercised at any time between the date of purchase and the expiration date.
4 Long listed options are those issued by the Options Clearing Corporation.
5 Long OTC options are those not issued by the Options Clearing Coprporation.
6 The intrinsic value of the option.
Additions underscored Exhibit A
Deletions [bracketed]
Proposed Amendments to Rule 431 ("Margin Requirements")
Rule 431(a) through(f)(1) unchanged
(f)(2) Puts, Calls, Other Options, Currency Warrants, Currency Index Warrants and Stock Index Warrants.
(A) Except as provided below, and in the case of a put, call, index stock group option, or stock index warrant with a remaining period to expiration exceeding 9 months, no put, call, currency warrant, currency index warrant or stock index warrant carried for a customer shall be considered of any value for the purpose of computing the margin to be maintained in the account of such customer.
(B) Unchanged
(C) For purposes of this sub-section (f)(2), obligations issued by the United States Government shall be referred to as United States Government obligations. Mortgage pass-through obligations guaranteed as to 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, currency warrant, currency index warrant or stock index warrant [shall mean the total cost or net proceeds of the option contract or warrant on the day it was purchased or sold and at any other time shall be the preceding business day's closing price of that option or warrant (times the appropriate unit of trading or multiplier) as shown by any regularly published reporting or quotation service.] are as defined in Section 220.2 of Regulation T of the Board of Governors of the Federal Reserve System.
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).
The term "stock option (contract)" shall mean an option contract on a single stock. The term "index stock group option (contract)" shall mean an option contract on an index stock group.
The terms "currency warrant", "currency index warrant", "index currency group", "stock index warrant" and, in respect of stock index warrants, "industry index stock group" shall have the meanings that paragraph (a) of Rule 414 (Index and Currency Warrants) assigns to them.
The terms "call" and "put" as used in connection with currency, currency index or stock index warrant mean a warrant structured as a "call" or "put" (as appropriate) on the underlying currency, index currency group or index stock group (as the case may be).
Except where the context otherwise requires, the definitions contained in section (b) of Rule 700, "Applicability, Definitions and References", shall apply to the terms used in this sub-section (f)(2).
When used in respect of a currency index warrant or a stock index warrant, the term "index group value" shall mean $1.00 (1) multiplied by the numerical value reported for the index that is derived from the market prices of the currencies in the index currency group or the stocks in the index stock group and (2) divided by the applicable divisor stated in the prospectus (if any).
A "registered clearing agency" shall mean a clearing agency as defined in Section 3(a)(23) of the Securities Exchange Act of 1934 that is registered with the Securities and Exchange Commission pursuant to Section 17A(b)(2) of the Act.
The term "underlying component" shall mean in the case of stock, the equivalent number of shares; industry and broad index stock groups, the current index group value and the applicable index multiplier; U.S. Treasury bills, notes and bonds, the underlying principal amount; foreign currencies, the units per foreign currency contract; and interest rate contracts, the interest rate measure based on the yield of U.S. Treasury bills, notes or bonds and the applicable multiplier. The term "interest rate measure" represents, in the case of short term U.S. Treasury bills, the annualized discount yield of a specific issue multiplied by ten or, in the case of long term U.S. Treasury notes and bonds, the average of the yield to maturity of the specific issues multiplied by ten.
The term "butterfly spread" means an aggregation of positions in three series of either puts or calls all having the same underlying component or index, and time of expiration, and based on the same aggregate current underlying value, where the interval between the exercise price of each series is equal, which positions are structured as either: (A) a "long butterfly spread" in which two short options in the same series are offset by one long option with a higher exercise price and one long option with a lower exercise price or (B) a "short butterfly spread" in which two long options in the same series offset one short option with a higher exercise price and one short option with a lower exercise price.
The term "box spread" means an aggregation of positions in a long call and short put with the same exercise price ("buy side") coupled with a long put and short call with the same exercise price ("sell side") all of which have the same underlying component or index and time of expiration, and are based on the same aggregate current underlying value, and are structured as: (A) a "long box spread" in which the sell side exercise price exceeds the buy side exercise price or, (B) a "short box spread" in which the buy side exercise price exceeds the sell side exercise price.
The term "escrow agreement", when used in connection with cash settled calls, puts, currency warrants, currency index warrants or stock index warrants, carried short, means any agreement issued in a form acceptable to the Exchange under which a bank holding cash, cash equivalents, one or more qualified equity securities or a combination thereof in the case of a call or warrants or cash, cash equivalents or a combination thereof in the case of a put or warrant is obligated (in the case of an option) to pay the creditor the exercise settlement amount in the event an option is assigned an exercise notice or, (in the case of a warrant) the funds sufficient to purchase a warrant sold short in the event of a buy-in.
In the case of any put, call, currency warrant, currency index warrant, or stock index warrant carried "long" in a customer's account which expires in 9 months or less, initial margin must be deposited and maintained equal to at least 100% of the purchase price of the option or warrant.
Long Listed Option or Warrant With An Expiration Exceeding 9 Months. In the case of a put, call, index stock group option, or stock index warrant that is issued by a registered clearing agency, margin must be deposited and maintained equal to at least 75% of the current market value of the option or warrant; provided the option or warrant has a remaining period to expiration exceeding 9 months.
Long OTC Option or Warrant With An Expiration Exceeding 9 Months. In the case of a put, call, index stock group option, or stock index warrant carried long that is not issued by a registered clearing agency, margin must be deposited and maintained equal to at least 75% of the option's or warrant's "in-the-money" amount plus 100% of the amount, if any, by which the current market value of the option or warrant exceeds its "in-the-money" amount provided the option or warrant:
(1) is guaranteed by the carrying broker-dealer,
(2) has an American style exercise provision, and
(3) has a remaining period to expiration exceeding 9 months.
(D) The margin required on any put, call, currency warrant, currency index warrant, or stock index warrant issued, guaranteed or carried "short" in a customer's account shall be:
(i) In the case of puts and calls issued by a registered clearing agency, 100% of the current market value of the option plus the percentage of the current value of the underlying component specified in column II of this subsection (D)(i) below. In the case of currency warrants, currency index warrants and stock index warrants, 100% of the current market value of each such warrant plus the percentage of the warrant's current "underlying component value" (as column IV of this subsection (D)(i) describes) specified in column II of this subsection (D)(i) below.
[Notwithstanding the margin required below] The [minimum] margin on any put, call, currency warrant, currency index warrant or stock index warrant issued, guaranteed or carried "short" in a customer's account may be reduced by any "out-of-the-money amount" (as defined in this subsection (D)(i) below), but shall not be less than 100% of the current value of the option or warrant plus the percentage of the current value of the underlying component specified in column III of this subsection (D)(i) below, except in the case of any put issued, guaranteed or carried "short" in a customer's account. Margin on such put option contract shall not be less than the current value of the put option plus the percentage of the put option's exercise price as specified in column III of this subsection (D)(i).
[Current tables unchanged]
(ii) Unchanged
(iii) In the case of puts and calls not issued by a registered clearing agency the percentage of the current value of the underlying component and the applicable multiplier if any, specified in column II of this subsection (f)(2)(D)(iii) below, plus any "in-the-money amount" (as defined in this subsection (f)(2)(D)(iii)).
[Notwithstanding the margin required by this subsection] In the case of options not issued by a registered clearing agency, 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 subsection (f)(2)(D)(i)), but shall not be less than the percentage of the current value of the underlying component and the applicable multiplier if any, specified in column III of this subsection (f)(2)(D)(iii) below, except in the case of any put issued, guaranteed or carried "short" in a customer's account. Margin on such put option contract shall not be less than the percentage of the put option's exercise price as specified in column III of this subsection (f)(2)(D)(iii) below.
(D) (iv) through (G) (iv) Unchanged
(G)(v) The following requirements set forth the minimum amount of margin which must be maintained in margin accounts of customers having positions in components underlying options, and stock index warrants, when such components are held in conjunction with certain positions in the overlying option or warrant. The option or warrant must be issued by a registered clearing agency or guaranteed by the carrying broker-dealer. In the case of a call or warrant carried in a short position, a related long position in the underlying component shall be valued at no more than the call/warrant exercise price for margin equity purposes.
Long Option or Warrant Offset: When a component underlying an option or warrant is carried long (short) in an account in which there is also carried a long put (call) or warrant specifying equivalent units of the underlying component, the minimum amount of margin which must be maintained on the underlying component is 10% of the option/warrant exercise price plus the "out-of-the-money" amount, not to exceed the minimum maintenance required pursuant to paragraph (c) of this Rule.
Conversions: When a call or warrant carried in a short position is covered by a long position in equivalent units of the underlying component and there is also carried with a long put or warrant specifying equivalent units of the same underlying component and having the same exercise price and expiration date as the short call or warrant, the minimum amount of margin which must be maintained for the underlying component shall be 10% of the exercise price.
Reverse Conversions: When a put or warrant carried in a short position is covered by a short position in equivalent units of the underlying component and is also carried with a long call or warrant specifying equivalent units of the same underlying component and having the same exercise price and expiration date as the short put or warrant, the minimum amount of margin which must be maintained for the underlying component shall be 10% of the exercise price plus the amount by which the exercise price of the put exceeds the current market value of the underlying, if any.
Collars: When a call or warrant carried in a short position is covered by a long position in equivalent units of the underlying component and is also carried with a long put or warrant specifying equivalent units of the same underlying component and having a lower exercise price and the same expiration date as the short call/warrant, the minimum amount of margin which must be maintained for the underlying component shall be the lesser of 10% of the exercise price of the put plus the put "out-of-the-money" amount or 25% of the call exercise price.
Butterfly Spread: This subparagraph applies to a butterfly spread as defined in subparagraph (f)(2)(C) of this Rule where all option positions are issued by a registered clearing agency or guaranteed by the carrying broker-dealer.
(1) With respect to a long butterfly spread as defined in subparagraph f(2)(C) of this Rule, the net debit must be paid in full.
(2) With respect to a short butterfly spread as defined in subparagraph f(2)(C) of this Rule, margin must be deposited and maintained equal to at least the amount of the aggregate difference between the two lowest exercise prices with respect to short butterfly spreads comprised of calls or the aggregate difference between the two highest exercise prices with respect to short butterfly spreads, comprised of puts. The net proceeds from the sale of short option components may be applied to the requirement.
Box Spread: This subparagraph applies to box spreads as defined in subparagraph f(2)(C) of this Rule, where all option positions are issued by a registered clearing agency or guaranteed by the carrying broker-dealer.
(1) With respect to a long box spread as defined in subparagraph f(2)(C) of this Rule, the net debit must be paid in full.
(2) With respect to a short box spread as defined in subparagraph f(2)(C) of this Rule, margin must be deposited and maintained equal, at least the amount of the aggregate difference between the exercise prices. The net proceeds from the sale of short option components may be applied to the requirement.
Long Box Spread in European Style Options: With respect to a long box spread as defined in subparagraph f(2)(C) of this Rule, in which all component options have a European style exercise provision and are issued by a registered clearing agency or guaranteed by the carrying broker-dealer, margin must be deposited and maintained equal to at least 50% of the aggregate difference in the exercise prices. The net proceeds from the sale of short option components may be applied to the requirement. For margin purposes, the long box spread may be valued at an amount not to exceed 100% of the aggregate difference in the exercise prices.
(H) through (f)(2)(L) unchanged.
(M) Cash account transactions.-A member organization may make option transactions in a customer's cash account, providing:
(i) The transaction is permissible under Section 220.8 of Regulation T of the Board of Governors of the Federal Reserve System; or
(ii) [The transaction is a debit put spread in listed broad-based index options with European-style exercise comprised of a long put(s) coupled with a short put(s) overlying the same broad-based index with an equivalent underlying aggregate index value and the short put(s) and long put(s) expire simultaneously, and the strike price of the long put(s) exceed the strike price of the short put(s).] Spreads. A European style cash-settled index stock group option or stock index warrant carried in a short position is deemed a covered position, and eligible for the cash account, provided a long position in a European style cash-settled stock group index option, or stock index warrant having the same underlying component or index that is based on the same aggregate current underlying value, is held in or purchased for the account on the same day provided:
(A) the long position and the short position expire concurrently,
(B) the long position is paid in full, and
(C) there is held in the account at the time the positions are established, or received into the account promptly thereafter:
(1) cash or cash equivalents of not less than any amount by which the aggregate exercise price of the long call or call warrant (short put or put warrant) exceeds the aggregate exercise price of the short call or call warrant (long put or put warrant), to which requirement of net proceeds from the sale of the short position may be applied, or
(2) an escrow agreement.
The escrow agreement must certify that the bank holds for the account of the customer as security for the agreement 1) cash, 2) cash equivalents, or 3) a combination thereof having an aggregate market value at the time the positions are established of not less than any amount by which the aggregate exercise price of a long call or call warrant (short put or put warrant) exceeds the aggregate exercise price of a short call or call warrant (long put or put warrant) and that the bank will promptly pay the member organization such amount in the event the account is assigned an exercise notice or that the bank will promptly pay the member organization funds sufficient to purchase a warrant sold short in the event of a buy-in.
(D) A long warrant may offset a short option contract and a long option contract may offset a short warrant provided they have the same underlying component or index and equivalent aggregate current underlying value.
(iii) Butterfly Spreads. Put or call options carried in a short position are deemed covered positions and eligible for the cash account provided the account contains long positions of the same type which in conjunction with the short options, constitute a butterfly spread as defined in subparagraph f(2)(C) of this Rule and provided:
all component options are listed, or guaranteed by the carrying broker-dealer,
all component options are European style,
all component options are cash settled,
the long options are held in, or purchased for the account on the same day,
with respect to a long butterfly spread as defined in subparagraph f(2)(C) of this Rule, the net debit is paid in full, and
with respect to a short butterfly spread as defined in subparagraph f(2)(C) of this Rule, are held in the account at the time the positions are established or received into the account promptly thereafter:
(1) cash or cash equivalents of not less than the amount of the aggregate difference between the two lowest exercise prices with respect to short butterfly spreads comprised of call options or the aggregate difference between the two highest exercise prices with respect to short butterfly spreads comprised of put options, to which requirement the net proceeds from the sale of short option components may be applied, or
(2) an escrow agreement.
The escrow agreement must certify that the bank holds for the account of the customer as security for the agreement 1) cash, 2) cash equivalents or 3) a combination thereof having an aggregate market value at the time the positions are established of not less than the amount of the aggregate difference between the two lowest exercise prices with respect to short butterfly spreads comprised of calls or the aggregate difference between the two highest exercise prices with respect to short butterfly spreads comprised of puts and that the bank will promptly pay the member organization such amount in the event the account is assigned an exercise notice on the call (put) with the lowest (highest) exercise price.
(iv) Box Spreads. Puts and calls carried in a short position are deemed covered positions and eligible for the cash account provided the account contains long positions which in conjunction with the short options constitute a box spread as defined in subparagraph f(2)(C) of this Rule provided:
all component options are listed, or guaranteed by the carrying broker-dealer,
all component options are European style,
all component options are cash settled,
the long options are held in, or purchased for the account on the same day,
with respect to a long box spread as defined in subparagraph f(2)(C) of this Rule, the net debit is paid in full, and
with respect to a short box spread as defined in subparagraph f(2)(C) of this Rule, there is held in the account at the time the positions are established, or received into the account promptly thereafter:
(1) cash or cash equivalents of not less than the amount of the aggregate difference between the exercise prices, which requirement of the net proceeds from the sale of short option components may be applied, or
(2) an escrow agreement.
The escrow agreement must certify that the bank holds for the account of the customer as security for the agreement 1) cash, 2) cash equivalents or 3) a combination thereof having an aggregate market value at the time the positions are established of not less than the amount of the aggregate difference between the exercise prices and that the bank will promptly pay the member organization such amount in the event the account is assigned an exercise notice on either short option.
(f)(3) through(f)(9) unchanged
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