Interpretations of Rule 4210 - October 27, 2021

/01 Customer Includes

The term “customer” includes a broker or dealer, member and their partners, officers or associated persons whenever the carrying member extends, arranges or maintains any credit on their behalf.

(Regulatory Notice 10-45)

/01 Bank

The term “bank” means a domestic bank as defined under Section 3(a)(6) of the Exchange Act.

(Regulatory Notice 10-45)

/02 Savings and Loan Associations

Savings and loan associations are not “banks” as defined in Section (3)(a)(6) of the Exchange Act and, therefore, are not included in the term “designated account.” Savings and loan associations are deemed to be other lenders subject to Regulation U of the Board of Governors of the Federal Reserve System.

(Regulatory Notice 10-45)

/01 Investment Trust

The term “investment trust” means any investment company registered with the SEC under the Investment Company Act.

(Regulatory Notice 10-45)

/01 Foreign Institutions

Foreign institutions do not qualify as “designated accounts” as they are not regulated under the laws of the United States or of a state or political subdivision thereof. The term “foreign institutions” includes, but is not limited to, such foreign organizations as banks, brokers, dealers, insurance companies and government agencies.

(Regulatory Notice 10-45)

/01 STRIPS and Similar Securities

STRIPS (Separate Trading of Registered Interest and Principal Securities) and similar securities may be treated as “exempted securities” subject to the same requirements as any other U.S. government security.

(Regulatory Notice 10-45)

/01 Compliance with Regulation T

Members must adhere to the requirements of this Rule or Regulation T, whichever is greater. Where Regulation T requires “good faith” margin or has no requirements (e.g., exempted securities or portfolio margin accounts), then the equity required by this Rule will govern.

(Regulatory Notice 10-45)

/02 Minimum Equity - (Rescinded)

(Regulatory Notice 21-24)

/021 Minimum Equity

1. Each new transaction in a customer margin account, including those instances where more than one margin account is permitted under Regulation T, is subject to the $2,000 minimum equity requirement except that:
   1. Full cash payment for any security purchased will satisfy this requirement with respect to such purchase, even if the resulting equity is less than $2,000;
   2. Full cash payment for any option purchased will satisfy this requirement with respect to such purchase, even if the resulting equity is less than $2,000 (the purchase or sale of securities upon the exercise of an option, however, will constitute a new commitment for purposes of this requirement);
   3. The purchase of exempted securities;
   4. Securities transactions resulting in positions covered by Rule 4210(e)(2)(F), (G) or (H) or other provisions of Rule 4210 that allow the member to take a capital charge in lieu of collecting margin are not subject to this requirement;
   5. Even if the resulting equity is less than $2,000, the minimum equity requirement with respect to the sale of an option in the account would be satisfied by the deposit into the account or under an escrow agreement (as defined in Rule 4210(f)(2)(A)(xiv)) of:
      1. cash sufficient to satisfy the customer’s payment obligation upon the assignment of the options if it is a put; or
      2. fully paid securities sufficient to satisfy the customer’s delivery obligation upon the assignment of the option if it is a call;
2. Except for transactions described in (a)(4) and (a)(5) above, every short sale is subject to the $2,000 minimum equity requirement regardless of the amount involved.

(Regulatory Notice 21-24)

/022 Effect of Market Value Decline Below $2,000

If the equity in a margin account falls below $2,000 because of a decline in the market value of the security positions in the account and no new commitments are made, no deposit or liquidation is necessary. For the purpose of this Rule, a same-day substitution constitutes a new commitment.

(Regulatory Notice 21-24)

/023 Withdrawals Below $2,000 Equity

No withdrawal may be made from a margin account that would leave less than $2,000 equity in the account after the withdrawal if the account has a debit balance, short position or other commitment.  Withdrawals of cash or securities may be made from any account, even if after such withdrawal the equity in the account is less than $2,000, provided that:

1. The account does not have a debit balance, short position or commitment after giving effect to the withdrawal;
2. The withdrawal is in compliance with Regulation T and Rules 400 through 406 of SEC Customer Margin Requirements for Security Futures and Rules 41.42 through 41.49 under the CEA; and
3. The account is not a pattern day trader (in which case the $25,000 minimum applies).

(Regulatory Notice 21-24)

/024 Minimum Equity – Cash Account

The $2,000 minimum equity requirement of paragraph (b)(4) does not apply to transactions in a cash account, including transactions in when issued or when distributed securities in a cash account, even though Rule 4210(f)(3)(B) generally subjects cash account positions in such securities to the same maintenance margin requirements as in a margin account.

(Regulatory Notice 21-24)

/025 Minimum Equity – Pattern Day Trader

Pattern day traders are subject to a $25,000 minimum equity requirement under Rule 4210(f)(8)(B)(iv)a.

(Regulatory Notice 21-24)

/03 Accounts Subject to Minimum Equity

In accordance with the designation of types of accounts or transactions permitted under Regulation T, such accounts or transactions will be subject to a minimum equity requirement as follows:

All other accounts or transactions not listed here are exempt from a minimum equity requirement except where specified elsewhere in this Rule.

*Full, real-time intraday monitoring capability means the ability to calculate an account at the time an order is entered, using real-time pricing, and having the ability to prevent the order from being executed if an account has insufficient maintenance excess.

** Partial, real-time intraday monitoring capability means that a broker-dealer's intraday monitoring process does not meet the definition of full, real-time intraday monitoring capability as stated above.

(Regulatory Notice 10-45)

/04 Additional Minimum Equity

Pursuant to FINRA Rule 2360(b)(16)(E)(iv), members are required to establish minimum net equity requirements for customer accounts that establish and maintain uncovered short option positions. Due to the inherent risks associated with uncovered option positions, members should consider establishing account minimum net equity requirements that are higher than what is required under this Rule.

(Regulatory Notice 10-45)

/05 Profitable Options

A customer that holds profitable options may either sell them or exercise them and simultaneously liquidate the resulting security position without meeting the margin requirement of this paragraph of the Rule. A profitable option is defined as an option to buy or sell a security at a price which is more favorable to the option holder than the current market price of the security on which the option is written.

This same treatment is permitted on bona fide spread positions when, on the same day, a short call is exercised against the customer and the customer exercises a long call to close out the short security position created.

(Regulatory Notice 10-45)

/06 Federal National Mortgage Association (FNMA)

The initial margin required on purchases of FNMA common stock or FNMA convertible debentures will be the same as that required by Regulation T for a margin security at that time. Short sales, which must be made in the margin account, require initial margin equal to the amount required by Regulation T for short sales.

(Regulatory Notice 10-45)

/01 Profitable Options

Transactions in profitable options are exempt from maintenance margin requirements as outlined under Rule 4210(b)/03.

(Regulatory Notice 10-45)

/02 Partners’ Accounts

Partners of a member organized as a partnership should be guided by the following principles in determining margin requirements of partners’ accounts:

• The net combined deficit, if any, in a partners’ capital account, drawing account, other personal accounts and his or her share of the partnership’s undistributed profits and losses, must be deducted in determining the equity in his or her individual securities account(s).
• Any securities carried in capital accounts must be fully paid for after considering any deficits in individual accounts as described above.
• Any purchase in partners’ individual accounts must meet Regulation T initial margin requirements.

(Regulatory Notice 10-45)

/03 Stockholders’ Accounts

The requirements described in Rule 4210(c)/02 above could apply to a member organized as a corporation carrying its stockholder accounts. For maintenance margin purposes, when a stockholder has a securities account and is indebted to the member corporation as a result of some other transaction, such indebtedness should be offset against the stockholder’s securities account to determine the value of securities that may be carried in the securities account.

(Regulatory Notice 10-45)

/04 Securities Value

Listed and unlisted securities, other than options with less than 9 months to expiration, may be given value in the computation of maintenance margin requirements.

(Regulatory Notice 10-45)

/05 Sales of Stock Covered by Due Bills

When a customer sells stock, in any type of account, which carries a due bill representing additional shares of the same stock or another stock, and the certificate covering the sale is not registered in the name of a member or its nominee, the carrying member shall retain out of the proceeds of the sale a sum at least equal to the market value of the shares represented by the due bill until the shares covered thereby are received. If the market value of the shares represented by the due bill increases, the member must obtain from the customer additional funds or securities to satisfy the mark to market.

Only excess funds or securities held against these due bill requirements are to be given consideration in determining the status of a customer’s account as it relates to maintenance margin for other purposes.

(Regulatory Notice 10-45)

/06 Sinking Fund Transactions

Certain sinking fund transactions fail to qualify for non-purpose credit and credit under an employee stock ownership plan under Interpretations of Regulation T (see Section 220.6/02) because:

• Retirement of the security is deferred;
• Delivery is delayed beyond the next sinking fund retirement date; or
• The transaction is made with an affiliate of the issuer rather than directly with the issuer.

When a sinking fund transaction that may not be non-purpose credit and credit under an employee stock ownership plan for one or more of the above reasons, it qualifies for the margin account under Regulation T, Section 220.4. The margin treatment afforded such transaction may be as follows:

• If 30 calendar days or less to delivery, the transaction may be exempt from margin requirements, but any marked to the market loss which is not obtained must be deducted in computing net capital (See SEA Rule 15c3-1(c)(2)(xii)); or
• If over 30 calendar days to delivery, the transaction may be exempt from the margin requirements of this Rule, and instead treated as an open proprietary contractual commitment subject to the requirements of SEA Rule 15c3-1 subparagraphs (c)(2)(vi) and (c)(2)(viii). Such treatment, however, should not result in a duplication of deductions under the capital rule (SEA Rule 15c3-1). See also Rule 4210(e)(7)/01 and Interpretations of Regulation T, Section 220.06/02.

(Regulatory Notice 10-45)

/07 Option Premiums

Although premiums received from writing an option may be withdrawn or used as an offset against requirements on other transactions on the same day, such usage may result in the loss of equity to an account. An “in the money” call option could be sold against a long position in the underlying security, resulting in the underlying security being valued at the call’s exercise value, which is below the current market value (also referred to as pegging). In this case, any withdrawal will result in a loss of equity in the account and could result in violation of this Rule. See Interpretations of Regulation T, Section 220.4(e)/06.

(Regulatory Notice 10-45)

/08 Marginable Foreign Securities

The purchase or short-sale of a marginable foreign security in a margin account or a sub-account, as allowed in Regulation T, will be subject to Rule 4210(c) and 4210(f)(1), “Determination of Value for Margin Purposes” for those securities not traded on a recognized foreign securities market.

(Regulatory Notice 10-45)

/01 Credit Extended

This Rule requires that members determine the total dollar amount of credit to be extended to any one customer or on any one security to limit the potential loss or exposure to the member. It is important that specific limits be established to prevent any one customer or group of customers from endangering the member’s capital.

(Regulatory Notice 10-45)

/02 Credit Committee

It is suggested that members appoint a credit committee with full authority to formulate credit policies and set limits as to the amount of credit that may be extended. It is recommended that the committee include the finance officer, credit officer and/or margin manager.

(Regulatory Notice 10-45)

/01 Exceptions

The exceptions referred to in this paragraph apply only to the Special Initial Margin Requirements (Rule 4210(f)(8)) and the Maintenance Margin Requirements (Rule 4210(c)). They do not apply to the $2,000 minimum equity requirement of Rule 4210(b)(4).

(Regulatory Notice 10-45)

/01 Highly Rated Foreign Sovereign Debt Securities

The use of a maturing obligation, other than United States Treasury bills, to reduce the margin requirement of a new obligation also applies to highly rated foreign sovereign debt securities.

(Regulatory Notice 10-45)

/02 Net Positions

The terms net “long” or net “short” positions mean positions in the same issue of the same security.

(Regulatory Notice 10-45)

/03 Time to Maturity

Requirements under paragraph (e)(2)(A) are based on the remaining life of the bond until maturity, not on the bond’s nominal life from issuance date to maturity date. Thus, a thirty year bond with only eight (8) years to maturity would require margin of 4%.

(Regulatory Notice 10-45)

/04 International Bank for Reconstruction and Development

Obligations of the International Bank for Reconstruction and Development are treated as obligations of the United States Government. Customer positions in these obligations may be margined in accordance with the requirements of paragraph (e)(2).

(Regulatory Notice 10-45)

/05 Federal National Mortgage Association (FNMA)

All securities issued by FNMA are deemed to be exempted securities. See Rule 4210(b)/04 for special initial margin requirements on FNMA common stock and convertible debentures.

(Regulatory Notice 10-45)

/06 U.S. Government Bond Dealers

Recognized U.S. Government bond dealers may extend credit, under this Rule, to any customer on a mutually agreed upon basis on U.S. Government securities, provided that, if the margin requirements are lower than the proprietary haircut deductions under the uniform net capital rule (SEA Rule 15c3-1, paragraph (c)(2)(vi)(A), Securities Haircuts, Government Securities) a deduction in computing net capital will be made to the extent that the equity in a customer’s account is less than such haircuts.

Recognized dealers are those U.S. Government Securities dealers reporting to the Market Reports Division of the Federal Reserve Bank of New York.

(Regulatory Notice 10-45)

/01 Reverse Repurchase Agreements

Reverse repurchase agreements in exempted securities shall be maintained in a special account subject to the provisions of paragraphs (e)(2)(A) and (e)(2)(B) of this Rule.

(Regulatory Notice 10-45)

/02 Mortgage-Related Securities

For the purpose of this Rule, cash transactions and reverse- repurchase transactions in mortgage-related securities as defined in Section 3(a)(41) of the Exchange Act may be afforded the same treatment as exempted securities under paragraphs (e)(2)(A) or (e)(2)(B) of this Rule.

(Regulatory Notice 10-45)

/01 Non-Marginable Bonds

Non-convertible corporate debt securities that are not listed or traded on a registered national securities exchange or do not qualify as other marginable non-equity securities as defined in Rule 4210(a)(16) are deemed non-marginable securities and not eligible for the lower margin requirements permitted in this paragraph of the Rule. These bonds must be margined in accordance with Rule 4210(c).

(Regulatory Notice 10-45)

/01 Accrued Interest

Members may only use accrued interest to reduce or eliminate a maintenance call that has been created pursuant to this Rule. Accrued interest may not be considered as part of the price of a bond nor used in determining or computing equity in an account.

(Regulatory Notice 10-45)

/01 Government National Mortgage Association (GNMA)

All GNMA cash transactions for customers and non-customers are subject to the provisions of this paragraph of the Rule. Cash transactions in GNMAs may include transactions in TBAs (to be announced) and standbys. TBAs are delayed delivery and “when issued” type transactions in GNMAs. Generally, GNMA pool numbers are not announced or assigned to these transactions on trade date.

Standby commitments represent the equivalent of a short put position in a customer account, which gives the member the right to deliver to the customer against payment a specific amount of GNMAs on a specified date.

Unrealized profits in one GNMA transaction may offset any loss from another GNMA transaction in the same customer account and the amount of net unrealized profits may be used to reduce requirements. Only profits (in-the-money amounts), if any, on long standbys are recognized.

(Regulatory Notice 10-45)

/02 Exempt Accounts for GNMAs

Exempt accounts in addition to those provided in this paragraph of the Rule and those established under Interpretation /01 above may include (a) all independently audited entities with both more than $1.5 million of net current assets (which may include in the case of mortgage bankers a 3/4 of 1% maximum allowance on loan servicing portfolios) and with more than $1.5 million of net worth and (b) GNMA brokers that act only as agents where the members independently confirm, at least monthly, that such GNMA brokers are acting for accounts qualified above or which are otherwise exempt accounts. In evaluating loan servicing portfolios, the generalized 3/4 of 1% allowance is not necessarily appropriate. It is suggested that consideration be given to such factors as: the loan balance, servicing fee, remaining life of the loan, probability of loan survival, delinquency rate, geographic relationships, cost of foreclosure and servicing costs.

(Regulatory Notice 10-45)

/03 Establishing Risk Limits for GNMAs

In lieu of deducting from original capital 100% of any marked to the market losses in exempt accounts and having to obtain margin as well as any marked to the market losses from non-exempt mortgage bankers’ accounts, members may make a determination in writing of a risk limit for each such exempt account and non-exempt mortgage banker’s account.

The limit amount for any one account or a group of commonly controlled accounts cannot exceed 5% of the member’s tentative net capital. The risk limit determination shall be made by a qualified credit/risk executive or credit/risk committee of executives, taking into consideration the member’s excess net capital and each customer’s net current or tangible assets. The member shall establish various levels of credit limits which are to be authorized in writing by appropriate management credit/risk executives or credit/risk committees depending upon credit levels. Supervisory personnel shall review the activity and status of accounts of customers, as frequently as circumstances warrant but in any event at least quarterly. Members shall also (1) assure themselves that persons entering orders and issuing instructions with respect to customer accounts are authorized to do so and (2) institute procedures to obtain prompt written confirmation of trades.

(Regulatory Notice 10-45)

/04 Exempt Account Requirements for GNMA Transactions

Exempt accounts shall not be required to put up margin or any marked to the market losses on their exempt GNMA transactions, i.e., those within their established risk limits. However, a member shall charge its capital for any marked to the market losses not collected as follows:

See Interpretation /07 below for possible additional capital charges relating to concentration.

Any transactions in excess of the established risk limit shall be treated as though they were carried for non-exempt accounts subject to the requirements of Interpretation /05 below except that cash margin deficiencies need not be collected.

See Exhibit I below.

* The TBA category 0 to 120 days may include all transactions which provide for a settlement date no later than the last day of the calendar month in which the 120th day after trade date falls.

(Regulatory Notice 10-45)

/05 GNMAs --- Non-Exempt Accounts Other Than Mortgage Bankers

In non-exempt accounts of other than mortgage bankers, TBA or standby transactions are subject to a 5% margin requirement and any marked to the market loss, which must be obtained. Any cash margin deficiencies based upon such requirements are to be deducted in the computation of net capital after five (5) business days from the date they arise, until collected. However, on those TBA transactions with delivery dates or contract maturity dates 120 days* or less from trade date, no margin or marked to the market losses need be obtained, provided 100% of any marked to the market losses are deducted by the member in computing net capital.

See Exhibit I below.

*The TBA category 0 to 120 days may include all transactions which provide for a settlement date no later than the last day of the calendar month in which the 120th day after trade date falls.

(Regulatory Notice 10-45)

/06 GNMAs --- Non Exempt Mortgage Bankers’ Accounts

Non-exempt mortgage bankers’ accounts shall not be required to put up margin or marks-to-market on their GNMA transactions, within their established risk limits. However, members shall charge their capital for any marked to the market losses deficits not collected as follows:

*The TBA category 0 to 120 days may include all transactions which provide for a settlement date no later than the last day of the calendar month in which the 120th day after trade date falls.

See Interpretation /07 below for possible additional capital charges relating to concentration.

Any transactions in excess of the established risk limit shall be treated as though they were being carried for non exempt accounts subject to the requirements of Interpretation /05 above except that cash margin deficiencies need not be collected. See Exhibit I below.

(Regulatory Notice 10-45)

/07 GNMAs --- Concentration Risk Provision

With respect to transactions up to the risk limit, a marked to the market loss in any one account or combined group of commonly controlled exempt accounts or non-exempt mortgage banker’s account shall be charged to capital to the extent it exceeds 5% of the member’s tentative net capital, although the total deduction shall not exceed 100% of the loss. In addition, if the total marked to the market losses in all accounts, less the amount of such losses deducted in computing net capital exceeds tentative net capital, then 50% of such excess shall be deducted in computing net capital.

(Regulatory Notice 10-45)

/08 GNMAs --- Conversion or Exercise of Standbys

In computing the capital charges under these Interpretations /01 through /08, the trade date and capital charge percentage for TBAs which have been sold to a customer under the terms of a standby agreement shall be the same as the original trade date and capital charge percentage for the standby contract in the account of the writer. As an example, if an exempt account entered into a thirteen (13) month standby contract to purchase GNMAs and the holder of the standby contract exercises his or her option to sell after twelve (12) months has elapsed, thus selling to the exempt account TBAs with less than 120 days to maturity, the member must still charge its capital (for uncollected marked to the market losses) on the basis of the original standby contract (25%) and not on the basis of a “new” TBA transaction (10%).

(Regulatory Notice 10-45)

/EXHIBIT I G.N.M.A

Treatment of Customers’ Transactions

Under Rule 4210(e)(2)(F)

CODES TO EXHIBIT I

1. The category 0 to 120 days may include all transactions which provide for a settlement date no later than the last day of the calendar month in which the 120th day after trade date falls.

On GNMA transactions only, exempt accounts may include all independently audited entities with both more than $1.5 million of net current assets (which may include in the case of mortgage bankers a 3/4 of 1% maximum allowance on loan servicing portfolios) and with more than $1.5 million of net worth. In addition, GNMA transactions with GNMA brokers that act only as agents may be treated as “exempt account” transactions if the member independently confirms at least monthly that such GNMA brokers are acting for accounts qualified as “exempt accounts.”

2. The term “exempt account” means an account as defined under paragraph (a)(13) of this Rule.

The member must deduct from net capital any marked-to-the-market loss, plus the margin on those transactions that exceed the established risk limit for an account or a group of commonly controlled accounts. In addition, if the total marked-to-the-market losses in all accounts, less the amount of such losses deducted in computing net capital, exceeds tentative net capital, then 50% of such excess shall be deducted in computing net capital.

3. Marked-to-the-market losses need not be collected. However, the member must deduct from net capital the amount by which 10% of the loss, plus the amount of the losses in each account or accounts controlled by such persons, exceeds 5% of tentative net capital.
4. Same as (3) above, except substitute 25% for 10%.
5. These marked-to-the-market losses need not be collected. However, the member must deduct from net capital an amount equal to 100% of the loss.
6. Same as (3) above, except substitute 15% for 10%.
7. Margin and marked-to-the-market losses must be collected. In addition, such margin and marked-to-the-market losses are to be deducted in computing net capital by the member under the SEC’s and FINRA’s capital requirements, after five (5) business days from the date they arise, until collected.
8. Same as (3) above, except substitute 50% for 10%.

(Regulatory Notice 10-45)

/01 Associated Person Participation

(a) Sharing in Profits

If any associated person as part of his or her compensation is participating in only the profits in a member account, such an account would be deemed a proprietary account. FINRA has no objection to such arrangements, provided the associated person’s participation is recorded as a salary or bonus incentive or in another similar manner. FINRA permission is not required for such arrangements.

(b) Sharing in Losses

FINRA does not prohibit an associated person from sharing in the losses of member accounts. However, it should be understood that in such instances the member is extending or maintaining credit on the associated person’s behalf. Thus, such an account would represent a “joint venture” between the associated person and the member. Therefore the percentage of the account in which the associated person is a participant is considered a customer account, and shall be margined accordingly under this Rule. This also applies to general partners personal accounts. The remaining percentage of the account will still be considered a proprietary account.

(c) Compliance with Rule 2150

A member should be aware of its obligations under Rule 2150 when sharing in accounts with associated persons of the member who are also customers of the member.

(Regulatory Notice 10-45)

/01 Underwritings – Over Allotments

Short sale transactions made by an approved specialist or approved market maker in accordance with a guaranteed over-allotment from an underwriting may be treated as a specialist or market making transaction.

(Regulatory Notice 10-45)

/01 Margin Basis

A member may carry the proprietary account of another broker-dealer upon a margin basis which is satisfactory to both parties, provided the requirements are not less than that which is required pursuant to SEA Rule 15c3-1.

(Regulatory Notice 10-45)

/01 Sinking Fund Transactions

When a member purchases a security for its own account and sells it on a delayed delivery basis to the issuer for sinking fund requirement purposes and such transaction qualifies under Regulation T for non-purpose credit and credit under an employee stock ownership plan, the margin treatment afforded such sinking fund transaction may be as follows:

• If 30 calendar days or less to delivery, the transaction may be exempt from margin requirements but any marked to the market loss which is not obtained must be deducted in computing net capital. (See SEA Rule 15c3-1(c)(2)(xii)).
• If over 30 calendar days to delivery, the transaction may be exempt from margin requirements of this Rule and instead treated as an open proprietary contractual commitment subject to the requirements of SEA Rule 15c3-1 subparagraphs (c)(2)(vi) and (c)(2)(viii). Such treatment, however, should not result in a duplication of deductions under the capital requirements rule.

For sinking fund transactions that do not qualify for this type of treatment, see Rule 4210(c)/06.

(Regulatory Notice 10-45)

/02 Unsecured Loans

Unsecured loans are to be charged to net capital in their entirety.

(Regulatory Notice 10-45)

/03 Nonpurpose Loans Collateralized by Certificates of Deposit

Nonpurpose loans collateralized by negotiable certificates of deposit need not be charged to net capital in their entirety if certain conditions are satisfied. (See Interpretations to SEA Rule 15c3-1(c)(2)(iv)(B)/10).

(Regulatory Notice 10-45)

/01 Adherence to Securities Act Rules 144 and 145(d)

Members are cautioned to take appropriate steps to ensure that the provisions and conditions of Securities Act Rules 144 and 145(d) have been and are adhered to before extending credit on shelf-registered, and other control and restricted securities.

It should be noted that Securities Act Rule 145(d) is not entirely independent, and is partially dependent upon many of the provisions of Securities Act Rule 144 (e.g., subparagraphs (c), (d), (e), (f) and (g)). Securities Rule 144 seeks to set forth objective standards intended to confirm that a securities transaction should not be treated as involving a “distribution,” including by:

• Ensuring the availability of adequate current public information about the issuer and distinguishing between regularly reporting and non- reporting companies [See Securities Act Rule 144(c)];
• Placing the unconditional economic risk of the investment upon the purchaser (and preventing conduit sales on behalf of the issuer) by requiring that “restricted securities” be fully paid (from the perspective of the issuer) and held by the purchaser for a minimum holding period [See Securities Act Rule 144(d)];
• Predetermining the market impact of the transaction (in order to avert distributions) by limiting the amount of securities which may be sold by affiliates of the issuer (based upon such predicates as trading volume and number of shares outstanding.) [See Securities Act Rule 144(e)], by generally proscribing solicited buy orders and the payment of special compensation [See Securities Act Rule 144(f)] and by mandating that the sale be effected as an ordinary unsolicited brokerage or riskless principal transaction or directly with a “market maker” [See Securities Act Rule 144(f) and (g)]; and
• Building into the rule certain safeguards such as imposing upon the selling broker steps of “reasonable inquiry” [See Securities Act Rule 144(g)] and by generally requiring the filing of a notice of proposed sale [See Securities Act Rule 144(h)].

Members are advised to pay particular attention to the varying resale limitations (e.g., trading volume), whether the issuer’s filings are current, the tacking and aggregation provisions (including the concepts of “person” and “acting in concert”) and to consider requesting a letter containing an irrevocable power to sign Form 144 in the name of and on behalf of the customer or obtaining a Form 144 signed in blank. In either event, it would be necessary to establish a means by which the information required by Form 144 would be continuously updated by the customer. Special inquiry may be advisable where a number of pledgers of the same security (“x”) all use the proceeds of their loans to purchase another security (“y”).

Failure to take appropriate precautions and institute relevant procedures may result in violations of both the Securities Act, as well as Rule 4210.

(Regulatory Notice 10-45)

/02 Securities Act Rule 144

Generally, Securities Act Rule 144 provides that any affiliate of the issuer or other person who sells restricted securities of an issuer for his or her account, or any person who sells restricted or any other securities for the account of an affiliate of the issuer, is not deemed to be engaged in a distribution of the securities, and therefore is not an underwriter as defined in Section 2(a)(11) of the Securities Act, if the securities are sold in accordance with all the terms and conditions of Securities Act Rule 144.

(Regulatory Notice 10-45)

/03 Securities Act Rule 145

Securities Act Rule 145(a) provides that exchange of securities in connection with reclassifications, mergers, consolidations or transfers of assets subject to shareholder vote or consent constitute sales of those securities.

(Regulatory Notice 10-45)

/04 Securities Act Rule 145 (Continued)

Securities Act Rule 145 provides that where a party to a Securities Act Rule 145(a) transaction, other than the issuer, is a shell company (other than a business combination related shell company, as those terms are defined in Securities Act Rule 405), the party and its affiliates will be deemed to be underwriters, but generally will not be deemed to be engaged in a distribution to the extent certain resale requirements of Securities Act Rule 144 are satisfied.

(Regulatory Notice 10-45)

/05 Application of Securities Act Rule 144

Whenever credit is extended under Rule 4210 for control or restricted securities, this Rule presupposes that the member has recourse to the customer upon default pursuant to the signed margin agreement; that credit has been granted to the public customer in the bona fide expectation of repayment on the basis of such customer’s general credit worthiness; and that such securities are sold only upon default of the margin loan.

(Regulatory Notice 10-45)

/01 Shelf-Registered Securities

Shelf-registered securities are securities registered for continuous or delayed offering pursuant to Securities Act Rule 415.

(Regulatory Notice 10-45)

/02 Mortgage Related Securities

Mortgage related securities as defined in Section 3(a)(41) of the Exchange Act that are subject to a continuous or delayed offering, may be carried on a margin basis subject to paragraphs (e)(2)(C), (e)(2)(F), or (e)(2)(G) of this Rule.

Therefore, this paragraph (e)(8)(A) does not apply.

(Regulatory Notice 10-45)

/03 Net Capital Charges

Shelf-registered securities that meet all of the conditions prescribed in paragraph (e)(8)(A) need not be included in the calculation of excess net capital and net capital deductions required by paragraphs (e)(8)(C) and (D).

(Regulatory Notice 10-45)

/04 Example – Net Capital Charge

A new customer deposits shelf-registered securities with a market value of $100,000 and in accordance with Regulation T (50% loan value) makes a $50,000 withdrawal. All of the conditions in Rule 4210(e)(8)(A) are met. If at a future date, the market value of the securities depreciated to $60,000, additional margin required from the customer would be $5,000, computed as follows:

Assuming no change in value, the $5,000 cash margin deficiency is a deduction in computing net capital under the SEC’s and FINRA’s capital requirements, five (5) business days after the date it arises, until collected. (See SEA Rule 15c3-1(c)(2)(xii))

(Regulatory Notice 10-45)

/01 “Saleable” — (Rescinded)

(Regulatory Notice 20-22)

/011 “Saleable”

The term “saleable,” as used in this paragraph (e)(8)(B)(i) and in paragraphs (e)(8)(D)(i) and (ii), refers to those specified and quantifiable securities where all the terms and conditions of Securities Act Rule 144 have been completely satisfied, including any applicable holding period, and thus are immediately saleable pursuant to Securities Act Rules 144 and 145(d) by the member without restriction in the event the customer fails to meet a margin call or otherwise defaults.

(Regulatory Notice 20-22)

/01 Reduction of Marginable Shares for Margin and Capital Charge Computations

Members may wish to consider, where practicable, a requirement that customers deposit with them all control or restricted securities of the class on which credit is being extended. Absent this arrangement, members must receive a written statement from customers attesting to the total amount of control or restricted shares that are owned and the amount of shares, if any, that are held away, including the aggregate number of shares held by persons acting in concert. To the extent that members can determine the amount of shares that are held away, the amount of shares considered saleable for the capital charge computation must be reduced by the amount of shares that are held away. If a written statement is not provided, members must consider all the shares held in their possession as not saleable. Members should consider any capital charge implications and imposing higher maintenance requirements pursuant to paragraph (f)(1) of this Rule, before extending credit.

Example:

Customer’s total restricted shares: 1,000,000
Amount of shares saleable: 600,000
Shares held at broker-dealer A: 700,000
Shares held at broker-dealer B: 300,000

The customer has provided written statements to broker- dealers A and B.

Reduction Calculation:

Broker-dealer A
Total shares that can be margined: 700,000
Total amount of saleable shares for capital charge computation: 700,000 - 300,000 = 400,000

Broker-dealer B
Total shares that can be margined: 300,000
Total amount of saleable shares for capital charge computation:
300,000 - 700,000 = -400,000 or 0 shares

(Regulatory Notice 10-45)

/02 Example of Computations

A customer deposits shares of a restricted security with a broker-dealer with a current market value of $1,000,000 and, in accordance with Regulation T (50% loan value), makes a $500,000 withdrawal. If the saleable amount of such securities, under Securities Act Rule 144, has a current market value of $600,000 and no concentration exists pursuant to paragraph (e)(8)(C)(iv), the “customer margin computation” and “capital charge computation” would be as follows:

“Customer margin computation”

The account meets the Rule 4210(e)(8)(B) “customer margin computation” requirement.

“Capital charge computation”

If at a future date, the current market value of the restricted security depreciated to $800,000, additional margin of $20,000 would be required from the customer and the “customer margin computation” would be as follows:

“Customer margin computation”

In addition, if on that date the saleable amount of such security under Securities Act Rule 144 had a current market value of only $400,000, the “capital charge computation” would be as follows:

“Capital charge computation”

(Regulatory Notice 10-45)

/03 Mortgage Related Securities

Mortgage related securities as defined in Section 3(a)(41) of the Exchange Act that are “restricted securities” may be carried on a margin basis subject to paragraphs (e)(2)(C), (e)(2)(F), or (e)(2)(G) of this Rule. Therefore, this paragraph (e)(8)(B) does not apply.

(Regulatory Notice 10-45)

/01 Reporting Requirements

Members are required to report on the monthly FOCUS report when the credit extended on shelf-registered, and other control and restricted securities, exceeds 10% of excess net capital.

(Regulatory Notice 10-45)

/01 Limit on Credit Extended

There is no limit to the total amount of credit which may be extended to all customers on control and restricted securities of any one issue. However, if the total credit actually extended or agreed to be extended on any one issue exceeds 10% of excess net capital, then the amount in excess of 10% shall be deducted from net capital in determining the member’s status under Rule 4120. For example:

A member’s excess net capital is $10,000,000. A customer deposits $3,000,000 (current market value) of XYZ securities on which the member agrees to lend $1,500,000 (Regulation T 50%). The customer withdraws only $1,000,000. The member must deduct $500,000 from net capital to determine its status under Rule 4120, computed as follows:

(Regulatory Notice 10-45)

/02 Time of Calculation

Calculations necessary to determine compliance with paragraph (e)(8)(C)(ii) must be made at the time that credit is agreed to be extended in writing or is actually extended and must include all credit which had previously been extended or agreed to be extended. Each extension of credit impacts the Rule 4120 calculations which could require business reduction.

(Regulatory Notice 10-45)

/01 Aggregate Credit Extended

The aggregate credit extended to each customer for purposes of paragraph (e)(8)(C)(iii) only, shall be determined by the adjusted debit balance, if any, in the customer’s account. The adjusted debit balance is determined by subtracting all of the long security positions in the customer’s account, other than long control or restricted securities, at their current market values (debit balance minus market value of long securities), and any credit balance, and adding all of the short security positions, at their current market values (debit balance plus market value of short securities), except that no long option positions carried for the customer shall be considered to have any value and the short cover value of any short option positions traded in the over-the-counter market shall be considered as an increase (debit) to the adjusted debit balance for their in-the-money amounts, if any. The short cover value of any short listed option positions shall be their market value. In addition, such adjusted debit balance shall include any marked to the market losses on positions in “when issued” and “when distributed” securities.

Example of Computations – Aggregate Credit Extended

A customer deposits 5,000 shares of XYZ, a restricted security, with a market value of $100,000 ($20 per share). On the same day, in accordance with Regulation T (50% loan value) the customer sells short 1,000 shares of ABC for $40,000 and writes (sells) ten listed call options on DEF at $40 (strike price) at $500 per option (total premium $5,000). No funds are withdrawn from the account.

At a later date, the market values have appreciated to $25 per share for XYZ, $50 per share for ABC and $700 per option for DEF. Based on these prices, the total amount of credit extended on the restricted security is $12,000, which must be included solely for purposes of calculating the amount to be deducted from net capital under paragraph (e)(8)(C)(iii) for purposes of determining the member’s status under Rule 4120. The above amount is calculated as follows:

(Regulatory Notice 10-45)

/02 Limit on Credit Extended

There is no limit to the amount of credit that may be extended to all customers on control and restricted securities of all issuers combined. However, the total credit actually extended (not the amounts agreed to but actually extended) will result in a deduction to net capital in determining the member’s status under Rule 4120 based on the formula in paragraph (e)(8)(C)(iii).

Example of FINRA Rule 4120 Deduction

For example, if a member’s excess net capital is $2,000,000 and aggregate credit extended to all customers on control and restricted securities totals $1,000,000. The charge to net capital for determining the member’s status under Rule 4120 would be $250,000, computed as follows:

If in the above example, the member’s excess net capital was $1,600,000, the charge to net capital under Rule 4120 would be $400,000, computed as follows:

(Regulatory Notice 10-45)

/01 Securities Subject to Concentration Formula

Only control and restricted securities are to be considered in determining when a concentration exists. Shelf-registered securities are not subject to the concentration formula. Other securities of the same issuer, or securities of other issuers held in the customer’s account, are not subject to the concentration formula.

(Regulatory Notice 10-45)

/02 Example of Concentration Computation

For example, if the customer’s position in the example under paragraph (e)(8)(B)(ii)/02 above represented 11% of the outstanding shares, thereby subjecting the position to a concentration reduction. The “customer’s margin computation” would be unchanged, but the “capital charge computation” would be as follows:

At the time the control securities were deposited with a current market value of $1,000,000:

“Capital charge computation”

When the restricted securities depreciated in value to $800,000:

“Capital charge computation”

(Regulatory Notice 10-45)

/01 Non-Affiliate Exemption — (Rescinded)

(Regulatory Notice 20-22)

/011 Scope of Exemption

Paragraph (e)(8)(D) exempts from Rule 4210(e)(8) all securities that the member could sell immediately without restriction in the event the customer fails to meet a margin call or otherwise defaults, regardless of whether the customer is an affiliate or non-affiliate. For example, SEC Division of Corporate Finance’s Compliance and Disclosure Interpretation (CD&I) 532.01 provides:

To rely on CD&I 532.01 to treat non-restricted securities deposited in a margin account by an affiliate of their issuer as exempt from Rule 4210(e)(8)(B), a member must determine that each of the conditions of CD&I 532.01 (including that the securities are the subject of a bona fide pledge) are satisfied and document its basis for that determination.

(Regulatory Notice 20-22)

/02 Continuing Requirement for Non-Affiliate Exemption — (Rescinded)

(Regulatory Notice 20-22)

/03 Optional Member Procedures

The provisions of Rule 4210(e)(8)(D) do not restrict members from imposing such higher maintenance requirements as they may deem appropriate. Moreover, members may wish to establish special supervisory procedures to consider the desirability of and to monitor loan transactions entered into pursuant to Rule 4210.

(Regulatory Notice 10-45)

/04 Concentration Evaluation

Any member extending or maintaining credit on any securities exempted from Rule 4210(e)(8) under paragraph (e)(8)(D) is still required by paragraph (f)(1) to require “substantial additional margin” if there is a concentration in those securities (whether in the particular customer’s account, or in all margin accounts carried by the firm) that may not be liquidated promptly due to its size.

(Regulatory Notice 20-22)

/01 Concentration or Volatile Securities

Substantial additional margin must be required:

• When there are concentrations in single securities (either in particular accounts or in all margin accounts carried) which, due to their size, may not be liquidated promptly; and
• For accounts with positions in volatile securities subject to unusually rapid or violent changes in value.

Accordingly, steps should be taken to:

• Increase margin requirements when it appears that accumulated positions will be difficult to liquidate promptly; and
• Prevent such positions from being acquired.

(Regulatory Notice 10-45)

/02 Suspended Securities

Securities suspended by the SEC (not those whose trading has been halted or suspended by a self-regulatory organization) that are held in customer’s accounts are valued and margined as follows:

1. Long positions have no value.
2. Short positions are valued at the last known sale price prior to suspension and regular maintenance margin requirements are applied.
3. Long and short positions of the same security are paired-off and only the excess position is margined in accordance with (a) or (b) above.
4. Long stock versus short warrants representing the same security are treated the same as (c) above.
5. Long exchangeable or convertible securities versus equivalent shorts of the underlying security position are treated as follows:
   1. there is no maintenance requirement, if there is no conversion cost or other restrictions, or
   2. if there is a conversion cost but no other restriction, the requirement is the conversion cost or the regular maintenance requirement on the short position, whichever is less, or
   3. if there is a restriction to the conversion other than a conversion cost, the positions are margined in accordance with (a) and (b) above.

(Regulatory Notice 10-45)

/01 Condor Spreads

The long condor, short iron condor, long calendar condor and short calendar iron condor spread strategies described in paragraph (f)(2)(A) of this Rule can be structured whereby the interval between the two middle exercise prices is not equal to the interval between the 1st & 2nd and 3rd & 4th exercise prices. However, the interval between the 1st & 2nd and 3rd & 4th exercise prices must always be equal to each other.

The interval between the two middle exercise prices may be any amount greater than zero, and the call exercise price may not be below the put exercise price in the case of the Short Iron Condor and Short Calendar Iron Condor spreads.

Examples of the above strategies as currently defined, along with examples of the variation strategies that would now be eligible for the same margin requirement are as follows:

(Regulatory Notice 10-45)

/01 Mergers and acquisitions

When an options exchange ceases trading in a listed option of a specific company because the “underlying asset” (as defined in Regulation T, Section 220.2) no longer trades due to a merger or acquisition and the registered clearing agency has formerly announced that all outstanding options will settle for cash in an amount equal to the difference between a fixed dollar amount and the strike price of the option, the margin required on such options may, at the member’s discretion, be computed as follows:

The difference between the amount of margin previously required pursuant to Rule 4210(f)(2)(E)(i)) and the above requirements, if any, may be released to the customer on the effective date as established by the registered clearing agency.

FRB letter to CBOE dated April 12, 1990

(Regulatory Notice 10-45)

/01 Control or Restricted Securities Covering Options Sold

The sale (writing) of listed call options against securities subject to Securities Act Rules 144 and 145 is permissible. However, any sale of securities subject to Securities Act Rules 144 or 145, through the sale of options, will require that all conditions of such rules must be satisfied both at the time of sale of the option and at the time that the underlying security is delivered pursuant to an exercise notice.

SEC Release No. 33-5890 Dated December 20, 1977

(Regulatory Notice 10-45)

/02 Cash accounts

Calls may be sold against fully paid securities, provided that Securities Act Rules 144 and 145 are adhered to. There are no FINRA requirements on such positions in cash accounts, as they are deemed covered calls.

(Regulatory Notice 10-45)

/03 Margin accounts

Margin accounts are treated the same as cash accounts except that any credit extended on securities subjects the account to paragraph (e)(8) of this Rule.

(Regulatory Notice 10-45)

/01 Convertible Bond Hedge

Convertible bonds carried long in margin or cash accounts may be considered as a hedge for short call options sold in margin or cash accounts for an equivalent amount of common stock into which the bonds are convertible.

(Regulatory Notice 10-45)

/01 Net Positions

In the case of convertible hedge positions (i.e., where a security carried in a long position is exchangeable or convertible within a reasonable time, without restriction, other than the payment of money, into a security carried in a short position) or “short against the box” positions in a customer’s account, neither the long nor the short position is available to offset the margin required on any option position carried for such customer.

(Regulatory Notice 10-45)

/01 OTC Government Options

Regulation T, Section 220.12(b) states that the margin on exempted securities is that required by the creditor in “good faith” or the percentage set by the regulatory authority where the trade occurs, whichever is greater. Under SEA Rule 3a12- 7, OTC options on government securities which represent obligations of $250,000 or more are designated as exempt securities. Therefore, an escrow agreement for an OTC government option where the underlying value is $250,000 or more may be collateralized by cash.

An escrow agreement for an OTC government option where the underlying value is less than $250,000 requires that the underlying security be held as collateral for the agreement.

FRB Letter to CBOE Dated December 12, 1986

(Regulatory Notice 10-45)

/02 Use of Government Security Under Escrow Agreement

It is not permissible for the underlying security backing an escrow agreement that is collateralizing an OTC government option to be sold under a repurchase agreement. Further, the underlying security may not be used to secure another obligation.

FRB Letter to CBOE Dated December 12, 1986

(Regulatory Notice 10-45)

/03 Indices Escrow Agreement – Under Collateralized

If a member is notified by the issuing bank or trust company (pursuant to the terms of the escrow agreement) that the value of the deposit has fallen below 50% of the current aggregate position value, the escrow agreement will cease to be acceptable in lieu of margin unless the member promptly obtains additional collateral.

(Regulatory Notice 10-45)

/04 Escrow Agreement

The privilege of using escrow agreements may be extended to any customer of a member provided such agreement is issued by a third party custodian bank or trust company.

In this regard:

• FINRA’s prescribed forms of escrow agreements for puts and calls on equity securities or U.S. Government securities and for puts on indices are the only forms that may be accepted by members. Any other form of escrow agreement is not acceptable for purposes of Rule 4210 absent prior written approval of FINRA.
• Members must comply with Rule 2360 (Options) as it relates to the customer trading the options and to the bank or trust company issuing the escrow agreement.
• Escrow agreements may not be accepted unless the securities or cash held by the bank or trust company are free of all liens or encumbrances.
• Members should set a limit on the number of customers from whom escrow agreements will be accepted, or the number of escrow agreements to be accepted on behalf of any one customer.
• Escrow agreements should be recorded on the member’s books and records.
• Members should establish a limit on the total dollar amount of all outstanding escrow agreements accepted from any one bank or trust company and a total dollar amount of all escrow agreements accepted in relation to the member’s net worth.
• If the security against which an option is written is being carried in a member account, the security position must be maintained at the member.
• Banks acting as fiduciaries for trust clients may issue escrow agreements for their trust accounts.

Exhibits I and II are FINRA’s prescribed forms of escrow agreements for puts and calls, respectively, on equity securities or U.S. Government securities. Exhibits III and IV are FINRA’s prescribed forms of escrow agreements for puts and calls, respectively, on indices.

(Regulatory Notice 10-45)

/EXHIBIT I EQUITY/TREASURY ESCROW AGREEMENT (PUT)

[Bank Letterhead] 

____________________________

(Date)

To: ____________________________ (Broker-Dealer Name)

The undersigned (the "Bank") having an office located at________________________ hereby certifies and warrants that:

1. it is a bank or trust company, doing business in corporate form, organized under the laws of United States or any State thereof and is supervised and examined by State or Federal authorities having supervision over banks or trust companies; 
2. as escrow agent, it has on deposit in the United States for the account of ___________________ (the "Customer"), cash or cash equivalents meeting the requirements of Sec.220.8(a)(4)(i) of Regulation T of the Board of Governors of the Federal Reserve System (the “Deposit”) having an aggregate market value not less than $__________ (valuing cash equivalents at face value), which amount equals the product obtained by multiplying (a) the "aggregate exercise price," as that term is defined in the pertinent By-Laws of The Options Clearing Corporation (the "OCC"), of each option contract referred to below by (b) the number of such contracts referred to below; and 
3. the Bank has received specific authorization from the Customer to issue this escrow agreement and to hold the Deposit pursuant to the provisions hereof, in respect of the Customer's position (the "short position") as a writer of the following option contract(s):

The Bank represents and covenants that, in consideration of your carrying the above described option contract(s) "short" in the account of the Customer on your books, it will maintain the Deposit for your benefit in an account segregated on its books, separate and apart from all other accounts held by it, and will not subject nor consent to the Customer subjecting the Deposit or any portion thereof to any lien or encumbrance, or cause or permit the Deposit or any portion thereof to be applied to or used in satisfaction of any claim by the Bank (in any capacity whatsoever) against the Customer or any other person or entity or used by the Bank as an offset in whole or in part in any manner whatsoever. The Bank will use its best efforts to promptly notify you if any notice of lien, levy, court order, or other process that may or purports to affect the Deposit or any portion thereof is served upon it. 

The Customer shall have the right from time to time to deposit with the Bank, as escrow agent to be held by the Bank hereunder and subject to all of the provisions hereof, cash or cash equivalents and thereupon to withdraw from the Deposit cash or cash equivalents which have in aggregate market value of the cash or cash equivalents so deposited (valuing cash equivalents at face value), provided, however, that the aggregate market value of the Deposit immediately after such deposit and withdrawal shall not be less than the aggregate market value of the Deposit immediately prior to such events.

The Bank agrees that it will hold the Deposit in accordance with the terms hereof until this escrow agreement is released or the Bank is directed to make payment as hereinafter provided. Upon presentation of this escrow agreement to the Bank at the address shown above, with the Endorsement of Release below that, in the Bank's reasonable belief, has been duly executed on your behalf, the Bank may release the Deposit held pursuant to this escrow agreement to the Customer.

Upon (a) presentation of this escrow agreement to the Bank at the address shown above, with the Payment Order below that, in the Bank's reasonable belief, has been duly executed on your behalf, and (b) delivery to the Bank for the account of the Customer of the securities underlying the above-described option contract(s), which securities shall be in form to constitute good delivery under the rules of the OCC, the Bank will pay you, out of the Deposit or the proceeds thereof; the exercise settlement amount as to each of the option contracts described above, plus all applicable commission and other charges due you.

In the event of any cash or stock dividend, interest payment, stock distribution, stock split, rights offering, distribution, reorganization, recapitalization or reclassification, or other similar event, affecting the securities underlying the above-described option contract(s), the amount to be paid by the Bank to you and/or the securities or other property to be delivered by you to the Bank shall be adjusted as may be required by the OCC. 

The Bank has been authorized by the Customer to confirm the Customer's understanding that if the short position described above is closed out, it is the Customer's responsibility to ensure that this escrow agreement is released by you, and until this escrow agreement is so released, you shall retain the right to demand payment upon the assignment of an exercise notice to any short position in a series of options identified above carried in the Customer's account.

If the Customer is the Bank acting in a fiduciary or similar capacity, or is a trust, custodial, or similar account maintained with the Bank, it is nonetheless understood that in issuing this escrow agreement and functioning as escrowee and bailee of the Deposit, the Bank is acting in its general capacity. Nothing herein shall be deemed to require the Bank to make payment in contravention of any court order or judgment binding on the Bank in its capacity as escrowee and bailee hereunder, which on its face affects the Deposit or the proceeds thereof. 

Bank______________________________________________________ 

ENDORSEMENT OF RELEASE (to be completed by the Broker-Dealer) 
The undersigned hereby releases all rights of the undersigned with respect to this Escrow Agreement. 

PAYMENT ORDER (to be completed by the Broker-Dealer)

The undersigned hereby (1) certifies to the above-named Bank that an exercise notice filed with The Options Clearing Corporation has been assigned to the short position of the undersigned which includes the option contract(s) described above, (2) delivers to the Bank the securities underlying the above-described option contract(s), and (3) demands payment that will settle such assignment, plus applicable commissions and other charges, in the amount of $_________.

(Regulatory Notice 10-45)

/EXHIBIT II EQUITY/TREASURY ESCROW AGREEMENT (CALL)

[Bank Letterhead] 

____________________________

(Date)

To: ____________________________

(Broker-Dealer Name)

The undersigned (the "Bank") having an office located at________________________ hereby certifies and warrants that:

1. it is a bank or trust company, doing business in corporate form, organized under the laws of the United States or any State thereof and is supervised and examined by State or Federal authorities having supervision over banks or trust companies;
2. as escrow agent, it has on deposit in the United States for the account of ________________________ (the "Customer"), in form to constitute good delivery under the rules of The Options Clearing Corporation (the "OCC"), the securities that underlie the option contract(s) described below or other securities which are immediately convertible into or exchangeable for such securities without the payment of money (which right to convert or exchange does not expire on or before the expiration date of the option contract(s) described below), such deposited securities being hereinafter referred to as the Deposited Securities; and
3. the Bank has received specific authorization from the Customer to issue this escrow agreement and to hold the Deposited Securities pursuant to the provisions hereof, in respect of the Customer's position (the "short position") as a writer of the following option contract(s):

The Bank represents and covenants that, in consideration of your carrying the above described option contract(s) "short" in the account of the Customer on your books, it will maintain the Deposited Securities (or other securities satisfying the definition of Deposited Securities set forth above, which other securities, upon deposit with the Bank, shall be included within the term Deposited Securities as hereinafter referred to) for your benefit in an account segregated on its books, separate and apart from all other accounts held by it, and will not subject nor consent to the Customer subjecting the Deposited Securities or any portion thereof to any lien or encumbrance, or cause or permit the Deposited Securities or any portion thereof to be applied to or used in satisfaction of any claim by the Bank (in any capacity whatsoever) against the Customer or any other person or entity or used by the Bank as an offset in whole or in part in any manner whatsoever. The Bank will use its best efforts to promptly notify you if any notice of lien, levy, court order, or other process that may or purports to affect the Deposited Securities or any portion thereof is served upon it. 

The Bank agrees that it will hold the Deposited Securities in accordance with the terms hereof until this escrow agreement is released or the Bank is directed to make delivery as hereinafter provided. 
Upon the presentation of this escrow agreement to the Bank at the address shown above, with the Endorsement of Release below that, in the Bank’s reasonable belief has been duly executed on your behalf, the Bank may release the Deposited Securities held pursuant to this escrow agreement to the Customer. 

Upon presentation of this escrow agreement to the Bank at the address shown above, with the Payment Order below that, in the Bank's reasonable belief has been duly executed on your behalf, and delivery to the Bank of an amount equal to the product of (a) the aggregate exercise price per contract described above, times (b) the number of option contracts described above, minus all applicable commissions and other charges due you, the Bank will deliver the Deposited Securities to you for the account of the Customer. 

In the event of any cash or stock dividend, interest payment, stock distribution, stock split, rights offering, distribution, reorganization, recapitalization or reclassification, or other similar event affecting the securities underlying the above-described option contract(s), the amount to be paid by you to the Bank and/or the securities or other property to be delivered by the Bank to you shall be adjusted as may be required by the OCC. 

The Bank has been authorized by the Customer to confirm the Customer's understanding that if the short position described above is closed out, it is the Customer's responsibility to ensure that this escrow agreement is released by you, and until this escrow agreement is so released, you shall retain the right to demand delivery of the Deposited Securities as herein provided upon the assignment of an exercise notice to any short position in a series of options identified above carried in the Customer's account. 

If the Customer is the Bank acting in a fiduciary or similar capacity, or is a trust, custodial, or similar account maintained with the Bank, it is nonetheless understood that in issuing this escrow agreement and functioning as escrowee and bailee of the Deposited Securities, the Bank is acting in its general capacity. Nothing herein shall be deemed to require the Bank to make delivery in contravention of any court order or judgment binding on the Bank in its capacity as escrowee and bailee hereunder, which on its face affects the Deposited Securities or the proceeds thereof.

Bank______________________________________________________ 

ENDORSEMENT OF RELEASE (to be completed by the Broker-Dealer) 

The undersigned hereby releases all rights of the undersigned with respect to this Escrow Agreement. 

PAYMENT ORDER (to be completed by the Broker-Dealer)

The undersigned hereby (1) certifies to the above-named Bank that an exercise notice filed with The Options Clearing Corporation has been assigned to the short position of the undersigned which includes the option contract(s) described above, (2) delivers to the Bank an amount equal to the product of (a) the aggregate exercise price per contract described above, times (b) the number of option contracts described above, minus all applicable commissions and other charges due the undersigned, and (3) demands delivery of the Deposited Securities sufficient to permit the undersigned to settle such assignment. 

(Regulatory Notice 10-45)

/EXHIBIT III MARKET INDEX ESCROW AGREEMENT (PUT)

[Bank Letterhead] 

____________________________

(Date)

To: ____________________________

(Broker-Dealer Name)

The undersigned (the "Bank") having an office located at________________________ hereby certifies and warrants that:

1. it is a bank or trust company, doing business in corporate form, organized under the laws of the United States or any State thereof and is supervised and examined by State or Federal authorities having supervision over banks or trust companies;
2. as escrow agent, it has on deposit in the United States for the account of _________________________(the "Customer"), cash or cash equivalents meeting the requirements of Section 220.8(a)(4)(i) of Regulation T of the Board of Governors of the Federal Reserve System (the "Deposit") having an aggregate market value not less than $____________(valuing cash equivalents at face value), which amount equals the product obtained by multiplying (a) the "aggregate exercise price," as that term is hereinafter defined, of each market index option contract referred to below by (b) the number of such contracts referred to below; and
3. the Bank has received specific authorization from the Customer to issue this escrow agreement and to hold the Deposit pursuant to the provisions hereof, in respect of the Customer's position (the "short position") as a writer of the following market index option contract(s):

The Bank represents and covenants that, in consideration of your carrying the above described market index option contract(s) "short" in the account of the Customer on your books, it will maintain the Deposit for your benefit in an account segregated on its books, separate and apart from all other accounts held by it, and will not subject nor consent to the Customer subjecting the Deposit or any portion thereof to any lien or encumbrance, or cause or permit the Deposit or any portion thereof to be applied to or used in satisfaction of any claim by the Bank (in any capacity whatsoever) against the Customer or any other person or entity or used by the Bank as an offset in whole or in part in any manner whatsoever. The Bank will use its best efforts to promptly notify you if any notice of lien, levy, court order, or other process that may or purports to affect the Deposit or any portion thereof is served upon it. 

The Customer shall have the right from time to time to deposit with the Bank, as escrow agent to be held by the Bank hereunder and subject to all of the provisions hereof, cash or cash equivalents and thereupon to withdraw from the Deposit cash or cash equivalents which have an aggregate market value of the cash or cash equivalents so deposited (valuing cash equivalents at face value), provided, however, that the aggregate market value of the Deposit immediately after such deposit and withdrawal shall not be less than the aggregate market value of the Deposit immediately prior to such events. 
The Bank agrees that it will hold the Deposit in accordance with the terms hereof until this escrow agreement is released or the Bank is directed to make payment as hereinafter provided. 
Upon presentation of this escrow agreement to the Bank at the address shown above, with the Endorsement of Release below that, in the Bank's reasonable belief, has been duly executed on your behalf, the Bank may release the Deposit held pursuant to this escrow agreement to the Customer. 

Upon presentation of this escrow agreement to the Bank at the address shown above, with the Payment Order below that, in the Bank's reasonable belief, has been duly executed on your behalf, the Bank will pay you, out of the Deposit or the proceeds thereof, the exercise settlement amount as to each of the market index option contracts described above, which, as to each such contract, shall be the amount by which the "aggregate exercise price" of such contract is greater than the "aggregate current index value" of the underlying index (as those quoted terms are defined in the pertinent By-Laws of The Options Clearing Corporation), plus all applicable commissions and other charges due you. 

The Bank has been authorized by the Customer to confirm the Customer's understanding that if the short position described above is closed out, it is the Customer's responsibility to ensure that this escrow agreement is released by you, and until this escrow agreement is so released, you shall retain the right to demand payment upon the assignment of an exercise notice to any short position in a series of options identified above carried in the Customer's account. 

If the Customer is the Bank acting in a fiduciary or similar capacity, or is a trust, custodial, or similar account maintained with the Bank, it is nonetheless understood that in issuing this escrow agreement and functioning as escrowee and bailee of the Deposit, the Bank is acting in its general capacity. Nothing herein shall be deemed to require the Bank to make payment in contravention of any court order or judgment binding on the Bank in its capacity as escrowee and bailee hereunder, which on its face affects the Deposit or the proceeds thereof.

Bank______________________________________________________ 

ENDORSEMENT OF RELEASE (to be completed by the Broker-Dealer) 
The undersigned hereby releases all rights of the undersigned with respect to this Market Index Escrow Agreement. 

PAYMENT ORDER (to be completed by the Broker-Dealer)

The undersigned hereby (1) certifies to the above-named Bank that an exercise notice filed with The Options Clearing Corporation has been assigned to the short portion of the undersigned which includes the option market index contract(s) described above and (2) demands payment that will settle such assignment, plus applicable commissions and other charges due, in the amount of $ _____________.

(Regulatory Notice 10-45)

/EXHIBIT IV MARKET INDEX ESCROW AGREEMENT (CALL)

[Bank Letterhead] 

____________________________

(Date)

To: ____________________________

(Broker-Dealer Name)

The undersigned (the "Bank") having an office located at________________________ hereby certifies and warrants that:

1. it is a bank or trust company, doing business in corporate form, organized under the laws of the United States or any State thereof and is supervised and examined by State or Federal authorities having supervision over banks or trust companies;
2. as escrow agent, it has on deposit in the United States for the account of _____________________________________________________(the “Customer”), (a) cash, (b) cash equivalents meeting the requirements of Regulation T of the Board of Governors of the Federal Reserve System, (c) one or more qualified securities as defined in FINRA Rule 4210(f)(2)(I)(iv), or (d) any combination thereof (the “Deposit”);
3. the aggregate market value of the Deposit, computed as of the close of business on the trade date referred to below (valuing cash equivalents at face value and qualified securities at their last sale price, as reported on such trade date pursuant to an effective transaction reporting plan as defined in Rule 600 of SEC Regulation NMS or their last bid price, if not subject to last sale reporting) was not less than the aggregate current index value set forth in the table below;
4. to the extent the Deposit includes securities such securities are in good deliverable form or the Bank has the unrestricted power to put such securities into good deliverable form, in accordance with the requirements of the primary market for such securities and the Customer has duly authorized the Bank to liquidate such securities to the extent necessary to perform the Bank’s obligations thereunder; and
5. the Bank has received written affirmation from the Customer that all index call options covered by this escrow agreement are written against a diversified stock portfolio and has also received specific authorization from the Customer to issue this escrow agreement and to hold the Deposit pursuant to the provisions hereof, in respect of the Customer’s position (the “short position”) as a writer of the over-the-counter call option contract on the underlying index referred to below

The Bank represents and covenants that, in consideration of Broker-Dealer carrying the above described index option contract(s) ‘short’ in the account of the Customer on Broker-Dealer’s books, it will maintain the Deposit for Broker-Dealer’s benefit in an account segregated on its books, separate and apart from all other accounts held by it, and will not subject nor consent to the Customer subjecting the Deposit or any portion thereof to any lien or encumbrance, or cause or permit the Deposit in any portion thereof to be applied to or used in satisfaction of any claim by the Bank (in any capacity whatsoever) against the Customer or any other person or entity or used by the Bank as an offset in whole or part in any manner whatsoever. The Bank will use its best efforts to promptly notify Broker-Dealer if any notice of lien, levy, court order, or other process that may or purports to affect the Deposit or any portion thereof is served upon it. 

The Customer shall have the right from time to time to deposit with the Bank, as escrow agent to be held by the Bank hereunder the subject to all the provisions hereof, cash, cash equivalents, or qualified securities as described in clause (ii) above and thereupon to withdraw from the Deposit cash, cash equivalents, or qualified securities which have an aggregate market value not exceeding the market value of the cash, cash equivalents, or qualified securities so deposited, with the result that the aggregate market value of the Deposit immediately after such deposit and withdrawal shall not be less than the aggregate market value of the Deposit immediately prior to such events. For purposes of this paragraph, aggregate market value shall be determined in the manner indicated in clause (iii) above, except that qualified securities shall be valued as of the close of business on the preceding business day of the date of such deposit and withdrawal.

Upon the request of the Broker-Dealer, the Bank will promptly provide the Broker-Dealer with a written listing of the cash, cash equivalents, and/or qualified securities included in the Deposit. If at any time the current aggregate market value of the Deposit shall be less than the greater of either (a) 55% of the product of (A) the number of contracts indicated above and (B) the aggregate current index value of the underlying index determined on the immediately preceding business day (such product being the “Current Index Amount”) or (b) 130% of the aggregate Exercise Settlement Amount (as defined in FINRA Rule 4210(f)(2)(A)) of option contracts referred to herein, the Bank shall promptly notify the Broker-Dealer and the Customer in writing of such fact and request that the Customer supplement the Deposit. As used herein, the term “aggregate current index value” means the “current index value” as such term is defined by the By-Laws of The Options Clearing Corp., multiplied by the “Index Multiplier” in the above table.

If at any time the current aggregate market value of the Deposit shall at any time be less than the greater of either (x) 50% of the Current Index Amount or (y) 120% of the Exercise Settlement Amount of option contracts referred to herein, whether or not a request to the Customer for supplementation is then pending, the Bank will immediately advise the Broker-Dealer in writing thereof. For purposes of determining the market value of the Deposit, qualified securities shall be valued as the close of business on the preceding business day.

If any cash equivalent or qualified security shall cease to meet the requirements of clause (ii) above, such cash equivalents or qualified security shall be assigned no value for purposes of determining current aggregate market value pursuant to this paragraph.

The Bank agrees that it will hold the Deposit in accordance with the terms hereof until this escrow agreement is released or the Bank is directed to make delivery as hereinafter provided. Upon presentation of this escrow agreement to the Bank at the address shown above, with the Endorsement of Release below that, in the Bank’s reasonable belief, has been duly executed on Broker-Dealer’s behalf, the Bank may release the Deposit held pursuant to this escrow agreement to the Customer.

Upon presentation of this escrow agreement to the Bank at the address shown above, with the Payment Order below that, in the Bank’s reasonable belief, has been duly executed on BrokerDealer’s behalf, the Bank will pay Broker-Dealer, out of the Deposit or the proceeds thereof, the Exercise Settlement Amount as to each of the market index option contracts described above, plus all applicable commissions and other charges due Broker-Dealer.

The Bank has been authorized by the Customer to confirm the Customer’s understanding that if the short position described above is closed out, it is the Customer’s responsibility to ensure that this escrow agreement is released by the Broker-Dealer, and until this escrow agreement is so released, the Broker-Dealer shall retain the right to demand payment upon the assignment of any Exercise Notice to any short position in a series of options identified above carried in the Customer’s account.

If the Customer is the Bank acting in a fiduciary or similar capacity, or is a trust, custodial, or similar account maintained with the Bank, it is nonetheless understood that in issuing this escrow agreement and functioning as escrowee and bailee of the Deposit, the Bank is acting in its general capacity. Nothing herein shall be deemed to require the Bank to make delivery in contravention of any count order or judgment binding on the Bank in its capacity as escrowee and bailee hereunder, which on its face affects the Deposit or the proceeds thereof.

Bank______________________________________________________ 

ENDORSEMENT OF RELEASE (to be completed by the Broker-Dealer) 

The undersigned hereby releases all rights of the undersigned with respect to this Market Index Escrow Agreement.

PAYMENT ORDER (to be completed by the Broker-Dealer)

The undersigned hereby (1) certifies to the above-named Bank that it has, as holder, exercised the call option contracts referred to above and (2) demands payment that will settle such exercise, plus applicable commissions and other charges due, in the amount of $__________________.

(Regulatory Notice 10-45)

/01 Specialists’ or Market Makers’ Option Hedging

Transactions in options effected by a specialist or a market maker are deemed “market maker transactions”, and shall be subject to the margin requirements of this paragraph (f)(2)(K). Therefore, the amount of margin which the specialist or market maker must maintain with the clearing firm may be determined by mutual agreement between the clearing firm and the specialist or market maker. However, such an account may not be carried in a “deficit equity” position. The margin treatment under paragraph (f)(2)(K) may be applied when the clearing firm does not carry the equity position(s) of the specialist or market maker.

(Regulatory Notice 10-45)

/01 Offsetting Position

When an account has a short position in a “when issued” security and the underlying security is held in a margin account, no margin need be required on the short position.

(Regulatory Notice 10-45)

/02 Marked- to-the-Market Gains and Losses

When calculating Regulation T or maintenance excess, any marked- to–the-market loss on a “when issued” position shall be added to the “when issued” requirement and any marked-to-the-market gain shall be subtracted. Any marked-to-the-market gain on a “when issued” position cannot be applied towards the margin requirement of any other unrelated security position. However, any marked-to-the- market gain can be applied to the margin requirement of any other open “when issued” position of the same issue.

(Regulatory Notice 10-45)

/03 Market Value

“When issued” positions have no market value for Regulation T and maintenance purposes.

(Regulatory Notice 10-45)

/01 Offsetting Position

No margin need be obtained for contracts to sell “when issued” securities when the underlying security is held in a cash account or the member has been informed that the customer owns the underlying securities. Any sale based on ownership by the customer of the underlying security must be made in reliance upon an agreement accepted by the member in good faith that the customer will not dispose of the underlying security while the contract of sale remains outstanding and that upon consummation of the plan, the underlying security will be promptly deposited in the account and exchanged for the new security. Since the “when issued” sale may remain outstanding for a relatively long period of time, the member’s files should contain a written memorandum regarding the customer’s agreement.

(Regulatory Notice 10-45)

/01 Foreign Currency Sub-Accounts

FINRA will permit the consolidation of margin accounts and sub-accounts for maintenance purposes without requiring conversion of the foreign currency or foreign denominated security into U.S. dollars. Members must recognize the possibility that fluctuations between foreign currencies and the U.S. dollar may have an adverse effect on the total equity in a margin account. Additional margin should generally be required to compensate for potential losses in equity that may occur due to such currency fluctuations.

(Regulatory Notice 10-45)

/02 Separate Margin Accounts

Separate margin accounts may be carried for the same customer only as provided in Section 220.4(a)(2) of Regulation T. If 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, the margin to be maintained under this Rule may be determined on the net position of said accounts even though they are separate margin accounts for purposes of Regulation T.

This limitation does not apply to sub-accounts of a single margin account. See Interpretation /03 below.

(Regulatory Notice 20-22)

/021 Portfolio Margin Accounts

Section 220.1(b)(3)(i) of Regulation T excludes portfolio margin accounts maintained in accordance with paragraph (g) of this Rule from the scope of Regulation T. Accordingly, a portfolio margin account may be maintained as a separate margin account without regard to the limitation on separate margin accounts under Section 220.4(a)(2) of Regulation T. The consolidation of portfolio margin accounts is addressed by Rule 4210(g)(6).

(Regulatory Notice 20-22)

/03 Margin Sub-Accounts

Although Regulation T limits the circumstances in which members may carry multiple margin accounts for the same customer (see Interpretation /02 above), a member may maintain separate sub-accounts of a single customer margin account, provided that:

• the customer has consented that the money and securities in each of such sub-accounts may be used to carry or pay any deficit in all such sub- accounts; and
• the member complies with the margin regulations (Regulation T and Rule 4210) as applied to the single margin account (i.e., to the combination of the separate sub-accounts).

A member that maintains multiple sub-accounts of a single customer margin account must implement procedures to combine positions and transactions in all of the sub-accounts where necessary to ensure compliance with Regulation T and Rule 4210, including, without limitation, in connection with:

• the determination of whether substantial additional margin must be required under Rule 4210(f)(1) and FINRA Interpretation /01 thereunder when the account contains a concentrated position in a security that, due to its size, may not be liquidated promptly; and
• the determination of whether a customer is a “pattern day trader” under Rule 4210(f)(8)(B)(ii) and the application of the other provisions of Rule 4210(f) (8)(B) in the event the customer is so classified.

(Regulatory Notice 20-22)

/01 Fifteen Day Period

The fifteen day period begins on the first business day that follows the date on which the margin deficiency occurred, not the day the member may have so notified the customer nor the fifth business day when net capital charges were required.

(Regulatory Notice 10-45)

/02 FINRA-Approved Additional Time

FINRA will only grant additional time upon written request, which must fully explain the reason for the request, description of the security and total positions involved.

In general, FINRA will only consider those situations involving concentrations of a security which is difficult to liquidate, large volatile positions that would affect the market or price of the security and other similar conditions as the basis for approving a request for additional time.

(Regulatory Notice 10-45)

/03 FINRA Oversight

As part of FINRA’s regular examination process, every carrying member will be monitored to determine compliance with the fifteen (15) business day limit.

(Regulatory Notice 10-45)

/01 Liquidation

Members should have a complete understanding of how the customer intends to finance a margin transaction prior to execution of the transaction. If funds are not available in the account, margin is to be furnished by the deposit of cash or securities. If the customer intends to liquidate other securities to finance the transaction, that sale should take place at or before the time of the new commitment.

(Regulatory Notice 10-45)

/01 Special Initial Requirements

Any special initial margin requirements imposed by FINRA shall, without regard to the other provisions of this Rule, be imposed only on the day of a new transaction. Thereafter, the maintenance requirement will be applicable.

Equity in the margin account which is in excess of FINRA maintenance requirements may be used to satisfy special initial margin requirements. However, the credit balance in a customer’s Special Memorandum Account may not be used toward the margin required.

The required margin for any margin purchase or any short sale of special requirement securities must be in the account before any new order is accepted. It is not necessary to deposit more than the initial margin required on any new transaction or group of transactions on a given day.

(Regulatory Notice 10-45)

/02 Exemptions

The special initial margin requirements will not apply to:

• purchases of stocks to cover existing short positions;
• accounts long that sell short against the box;
• puts, calls and other options held in accounts prior to the establishment of special margin requirements on the underlying security in accordance with this Rule (Note: Such options issued after the establishment of special margin requirements must be margined as though the potential security positions were established at that time.);
• transactions in cash accounts; and
• transactions in U.S. Government and Municipal obligations.

(Regulatory Notice 10-45)

/03 Profitable Options

Transactions in profitable options as outlined under Rule 4210(b)/03 are exempt from special initial margin requirements.

(Regulatory Notice 10-45)

/01 Multiple Purchases and Sales

If a customer enters an order to purchase a security and sells the same security within the same day, but for reasons beyond the customer’s control e.g., price, the purchase was executed in smaller blocks, it will be considered as one day trade. However, the member must be able to demonstrate that it was the customer’s intent to execute one day trade. This will also apply to when a customer enters a sale order and buys the same security within the same day. In addition, the trades would have to have been executed in sequential order.

One purchase and several subsequent sale transactions of the same security, where the sales were executed in sequential order within the same day, shall constitute one day trade. One sale and several subsequent purchases of the same security, where the purchases were executed in sequential order within the same day, shall also constitute one day trade.

(Regulatory Notice 10-45)

/02 Multiple Purchases and Sales – Alternative Method

Rather than counting day trades based on the number of transactions a customer executes to establish or increase a position that is liquidated on the same day (as set out in Interpretation /01 above) a firm may instead count day trades based on the number of times during the day that the day trading customer changes its trading direction (i.e., changes from buying a particular security to selling it, or changes from selling a particular security to buying it).

Example A:
09:30 Buy 250 ABC
09:31 Buy 250 ABC
13:00 Sell 500 ABC
The customer has executed one day trade.

Example B:
09:30 Buy 100 ABC
09:31 Sell 100 ABC
09:32 Buy 100 ABC
13:00 Sell 100 ABC
The customer has executed two day trades.

Example C:
09:30 Buy 500 ABC
13:00 Sell 100 ABC
13:01 Sell 100 ABC
13:03 Sell 300 ABC
The customer has executed one day trade.

Example D:
09:30 Buy 250 ABC
09:31 Buy 300 ABC
13:01 Buy 100 ABC
13:02 Sell 150 ABC
13:03 Sell 175 ABC
The customer has executed one day trade.

Example E:
09:30 Buy 199 ABC
09:31 Buy 142 ABC
13:00 Sell 1 ABC
13:01 Buy 45 ABC
13:02 Sell 100 ABC
13:03 Sell 200 ABC
The customer has executed two day trades.

Example F:
09:30 Buy 200 ABC
09:30 Buy 100 XYZ
13:00 Sell 100 ABC
13:00 Sell 100 XYZ
The customer has executed two day trades

(Regulatory Notice 21-13)

/03 Terminating Pattern Day Trader Status

A customer that has been classified as a pattern day trader under paragraph (f)(8)(B)(ii) of this Rule is presumed to remain a pattern day trader. However, if a customer seeks to terminate its pattern day trader classification, a member may so accommodate such request after the member determines in good faith, as defined in Section 220.2 of Regulation T, that the customer will no longer engage in pattern day trading.

A member may, for example, base its good faith determination on providing the definition of pattern day trader to the customer and receiving a written certification from the customer that (1) the customer understands the definition of pattern day trading and (2) the customer will not engage in future pattern day trading.

As an alternative, a good faith determination that a customer will not engage in future pattern day trading may be based on the member’s application of technological restrictions on such customer’s trading activity that effectively prevent the customer from engaging in pattern day trading.

If, after a termination of pattern day trader status, a customer again engages in pattern day trading, such customer’s pattern day trader status may not be terminated absent extraordinary circumstances.

(Regulatory Notice 21-13)

/01 Day-Trading Buying Power

For a proprietary account of a registered broker-dealer subject to SEA Rule 15c3-1, “day-trading buying power” means the equity in the account at the close of business of the previous day, less any haircut requirement as prescribed in SEA Rule 15c3-1, multiplied by six, for equity securities.

(Regulatory Notice 10-45)

/02 Option Day Trade

Option day trades are subject to this paragraph (f)(8)(B). For day trades executed in accounts of customers not deemed pattern day traders, the margin requirement is 100% of the premium received on the “long” or “short” transaction, whichever occurred first.

If a customer is a pattern day trader, the day-trading transactions are treated as having created a naked short option position and, therefore, subject to the margin requirements as prescribed in paragraph (f)(2)(E) of this Rule. However, if the member can substantiate that the purchase side of the day trade took place prior to the sell side of the day trade, the margin required will be 100% of the premium on the “long” option. A written record of the time of each executed option transaction must be maintained to demonstrate that the purchase was prior to the sale. In addition, in a margin account that is not a portfolio margin account, if the option that was day traded was part of an intra-day hedge strategy currently recognized under Rule 4210(f), then the margin required will be 100% of the premium of the option transaction that was executed first. A written record of the time of each executed transaction must be maintained to demonstrate that an intra-day hedge strategy was created first.

When the equity in a customer's account, after giving consideration to the other provisions of this Rule, is not sufficient to meet the day trading requirements of this paragraph, additional cash or securities must be received into the account to meet any deficiency within five business days of the trade date.

(Regulatory Notice 10-45)

/04 Multiple Day-Trade Calls

When a customer of a member has multiple day-trade calls outstanding and the due date of the first day-trade call is still within the five business days, then the customer can meet the highest day-trade call amount. This will satisfy the remaining day-trade calls that are outstanding. However, once a call is aged past the 5th business day, the customer will be required to satisfy that call separately.

Members should not allow customers to make a practice of meeting multiple day- trade calls in this manner.

(Regulatory Notice 10-45)

/05 Liquidation to Meet a Day-Trade Call

A customer may liquidate securities to satisfy a day-trade call, but only the maintenance margin requirement of the liquidated securities will be released. However, FINRA discourages such practice because the member should consider the customer’s ability to meet its commitments.

(Regulatory Notice 10-45)

/01 Minimum Equity Requirement

Members may use any settled and available funds, or any available market value from fully paid for securities, including option market value, money market mutual funds, held long in the customer’s cash account to satisfy the $25,000 minimum equity requirement, without moving the funds or securities to the margin account. The member must have adequate procedures in place in order to prevent the funds in the cash account from being used for other withdrawal purposes such as debit card and check withdrawals. Any funds, securities or money market mutual funds held in the cash account cannot be used for the calculation of day-trading buying power unless they have been moved to the margin account one business day prior to calculating the day-trading buying power. In the event money market mutual funds are to be moved to the margin account, members must adhere to Exchange Act Section 11(d)(1). In addition, for both minimum equity and day-trading buying power, members may use money market mutual funds provided the member has custody of the fund shares and the exclusive ability to liquidate the fund shares. Members shall not allow a pattern day trader to day trade until the minimum equity of $25,000 has been satisfied. When a pattern day trader’s account falls below the $25,000 minimum equity requirement, based on the previous business day’s close, the member must have procedures in place in order to prevent the pattern day trader from day trading. In addition, the $25,000 must be in the margin account or cash account one business day prior to resuming any day trading.

(Regulatory Notice 10-45)

/01 Cash Available

Cash available means 100% of the maintenance excess (equity after maintenance margin is met). No “time and tick” calculations will be allowed for accounts on a 90-day day trading restriction.

(Regulatory Notice 10-45)

/01 Deposit of Funds

Members may look to funds in a customer’s cash account to satisfy a day-trade call without moving the funds to the margin account.

This exception will only be permitted if the member has adequate procedures in place to prevent the circumvention of the two (2) day hold requirement on funds deposited into or held in that account i.e., the customer must be prohibited from using the funds for other withdrawal purposes such as debit card and check withdrawals relative to this balance while it is being used to satisfy the day- trade margin call. Funds deposited into the cash account within two business days prior to the creation of a daytrade call, which the member can utilize to satisfy the day-trade call, are subject to the two day holding period following the close of business on the day of deposit.

(Regulatory Notice 10-45)

/01 90-Day Freeze

Customers that purchase securities in a cash account and sells them before payment is received, are to be placed on a restricted status for a period of 90 calendar days following the trade date or the payment period (as defined in Regulation T, Section 220.2) of the purchase. Unless funds sufficient to pay for a new purchase in full are in the account during this 90-day freeze, no security may be purchased for or sold to that customer in its cash account. When a member believes a restriction should be lifted, it may apply in writing for relief to the Credit Regulation Department at FINRA. Each application for a waiver of the 90-day freeze should be signed by an authorized person of the member and should contain the following information:

• the full name and address of the customer;
• the name and description of the security or securities involved, purchase and sale prices, and the respective dates of purchase and sale;
• a statement describing the circumstances upon which the request is made; and
• the date on which full payment for the purchase was received.

(Regulatory Notice 10-45)

/01 Intra-Day Monitoring

Although an introducing broker-dealer may have the capability to monitor accounts intra-day, the clearing broker-dealer is ultimately responsible for monitoring the accounts of the introducing broker-dealer and cannot rely on the introducing broker-dealer's intra-day monitoring.

(Regulatory Notice 10-45)

/01 Schedule of Audit

Members that are approved for portfolio margin must conduct an audit review of all of their portfolio margin policies and procedures within the first year of approval. A member’s regular audit schedule can be resumed thereafter.

(Regulatory Notice 10-45)

/01 Concentrated Positions

Members must have procedures that describe the identification and monitoring of concentrated positions within individual portfolio margin accounts and across all portfolio margin accounts, including what department is responsible for the daily monitoring of such positions, what the escalation procedures are, and a detailed description of what additional margin requirements, if any, are applied to concentrated positions.

(Regulatory Notice 10-45)

/01 Omnibus Accounts

Portfolio margin can be applied to omnibus accounts, provided the omnibus credit is extended in accordance with Section 220.7(f) of Regulation T. In this case, if the introducing broker-dealer introduces business on behalf of its customers, then both the clearing broker-dealer and the carrying broker-dealer that maintains the omnibus account must be approved for portfolio margin. Both broker-dealers would have to submit an application to FINRA, subject to FINRA’s review and approval process. Customers of the omnibus broker-dealer would be subject to the provisions of Rule 4210(g).

If a broker-dealer introduces business on an omnibus basis only for its proprietary business, then it is not required to apply to FINRA for approval, provided the introducing broker-dealer agrees in writing that it will not offer portfolio margin to its end customers, and will limit its portfolio margin business to its proprietary account only. The clearing broker-dealer should ensure that it receives such an attestation prior to executing any transactions in the account, and such documentation should be readily available. The clearing broker-dealer should also have procedures in place to monitor such an arrangement.

(Regulatory Notice 10-45)

/01 Uncovered Option Approval

To qualify for portfolio margin, the account of a registered broker-dealer or futures commission merchant does not need to be approved for uncovered short options. In addition, customers that cannot trade options because they are not legally permitted to do so need not be approved for uncovered options. However, FINRA expects members to continue to exercise due diligence when reviewing these customers to ensure that they possess a sufficient level of trading experience and sophistication. Members must submit to FINRA, in writing, a request to exempt customers from the options approval requirement, except members that have already documented these customers in their portfolio margin applications.

(Regulatory Notice 10-45)

/02 Minimum Equity

Customers may not use collateral held at a foreign affiliate for minimum equity purposes. A customer can only use collateral held at an affiliate that is governed by the SEC or the CFTC. For example, an account held at a bank affiliate cannot be considered for the purposes of meeting the minimum equity requirement.

(Regulatory Notice 10-45)

/01 Non-Marginable Equity Security

A customer is not permitted to obtain a risk-based margin value for a non-margin equity security in a portfolio margin account. However, a non-margin equity security, whether held in a portfolio margin account, cash account, or strategy-based margin account, must have a 100 percent regulatory maintenance requirement applied on a daily basis if the broker-dealer is combining the maintenance excess figures. However, if the broker-dealer keeps the portfolio margin excess figures separate and independent from any other excess figures, then this requirement does not apply

(Regulatory Notice 10-45)

/02 Equity Security

Generally, a security that is eligible for portfolio margin under FINRA rules can still be considered eligible even if the OCC’s TIMS model does not recognize it. However, the broker-dealer should first contact the OCC to determine why the security is not recognized by TIMS. Depending on the outcome, the broker-dealer can also contact FINRA's Credit Regulation Department to discuss the details of the security in question.

(Regulatory Notice 10-45)

/01 Unlisted Derivative

An unlisted derivative that has a non-margin equity security as its underlier is not eligible for portfolio margin.

(Regulatory Notice 10-45)

/01 Satisfaction of Portfolio Margin Deficiency

If a customer has a strategy-based margin account and a portfolio margin account with the same legal name and tax ID, collateral does not have to be transferred from the strategy-based margin account to satisfy a margin deficiency in the portfolio margin account. As long as the strategy-based margin account has sufficient maintenance excess, the margin deficiency in the portfolio margin account can be considered satisfied. However, the Special Memorandum Account (SMA) in the strategy-based margin account must be reduced by the amount of the portfolio margin deficiency in order to prevent a customer from utilizing the available excess for additional transactions in the strategy-based margin account. In the event a customer has an account directly with a clearing and carrying firm, and another account with an introducing broker-dealer that clears through the same carrying and clearing firm, then funds and/or securities must be transferred between the two accounts.

(Regulatory Notice 10-45)

/01 Adverse Market Movements

Members that cannot distinguish between adverse market movements and new transactions should take a conservative view and consider all margin deficiencies as resulting from the account holder's trading activities.

(Regulatory Notice 10-45)

/02 Practice of Liquidating

If a customer has three liquidations within a rolling twelve-month period, FINRA expects the member to restrict the account to funds on hand for 90 calendar days. However, if upon internal review the member does not restrict an account after the third liquidation, then a waiver of the restriction must be granted, in writing, by two officers of the firm and maintained for audit purposes. Members should also be aware that granting waivers as a practice may be regarded as a circumvention of FINRA rules.

(Regulatory Notice 10-45)

/03 Intra-Day Liquidation

If a member captures a margin deficiency intra-day, and the customer executes a risk-reducing transaction and eliminates the deficiency intra- day, the risk-reducing transaction is not considered a liquidation.

(Regulatory Notice 10-45)

/01 Equity Less than $5 Million

If a portfolio margin account has less than $5 million in equity, day trading can still occur, provided the member has the ability to apply the appropriate day trading requirements promulgated under Rule 4210(f)(8). If the securities subject to day trading are a part of a hedge strategy, then FINRA does not consider the collective transactions as day trades and therefore it would not subject the customer to the day trading requirements. A hedge strategy for the purpose of FINRA rules means a transaction or series of transactions that reduce or offset a material portion of the risk in a portfolio.

(Regulatory Notice 10-45)

/02 Day Trading

For equity securities, the day trading requirement is 15 percent of the market value, calculated using the same methodology as in strategy-based margin accounts. The option day trade requirement for non-pattern day traders is 100 percent of the premium on the long or short transaction, whichever occurred first. For pattern day traders, if the member can substantiate that the purchase transaction took place prior to the sell transaction, then the day trade requirement is also 100 percent of the premium of the purchase transaction. Otherwise, members should apply the highest TIMS valuation point that is applicable to the short option involved in the day trade as the requirement. The highest valuation point shall be 8 percent of the underlying market value for high capitalization, broad-based market index options, 10 percent of the underlying market value for non-high capitalization, broad-based market index options, and 15 percent for equity options and narrow-based index options. However, the requirement shall not be less than the $37.50 per standard contract minimum.

In addition, when a portfolio margin customer, who is a pattern day trader, incurs a day trading call, its account is subject to the limitations imposed by Rule 4210(f)(8)(B)(iv)(2)(b). This action results in equal treatment for both strategy-based and portfolio margin pattern day trading customers who exceed their day-trading buying power. That is, a pattern day trading portfolio margin customer who has incurred a day trading call will have its buying power reduced to two times regulatory maintenance excess for equity securities and the customer will lose the ability to rely on time and tick. In addition, both pattern and non-pattern day trading customers should not make a practice of incurring day trading margin calls. FINRA staff has interpreted FINRA rules such that customers with more than three day trading calls within a rolling 12-month period should be restricted from exceeding their day-trading buying power for 90 days.

(Regulatory Notice 10-45)

/03 Intra-Day Maintenance Excess

A member can use intraday maintenance excess to calculate day trading requirements provided the member has the intraday capability to re-price and recalculate the account to determine if there is sufficient excess equity in the account at the time an order is received, and to automatically block the order if there is insufficient excess equity.

(Regulatory Notice 10-45)