TO: All NASD Members and Other Interested Persons
The Securities and Exchange Commission has recently approved amendments to Section 4 of Appendix A, Article III, Section 30 of the Association's Rules of Fair Practice that relates to minimum margin requirements for option contracts on a market or industry index. These amendments which became effective on April 13, 1984 establish minimum margin requirements for stock index options that are listed or traded on a registered national securities exchange, or displayed in the NASDAQ System, and extends these requirements to members for whom the Association is the designated examining authority who deal in index options on an access basis.
The text of the rule change, a copy of which is attached hereto, should be closely reviewed for a complete understanding of present margin requirements. Any questions concerning this notice may be directed to I. William Fishkind, Assistant Director, Surveillance Department at (202) 728-8405 or your local District Office.
Sincerely,
John E. Pinto, Jr.
Senior Vice President
Compliance
Attachment
1. Text of Rule Change
The following is the full text of the amendments to Section 4 of Appendix A, Article III, Section 30 of the Association's Rules of Fair Practice.
Sections 1 through 4(a)(4)(iii) unchanged.
Sec. 4.
Minimum Margin-Option Contracts on a Market Index
(iv) in the case of puts and calls listed or traded on a registered national securities exchange or displayed in the NASDAQ System and representing options on a market index carried in a short position in an account, 100% of the current market value of the option contract plus 10% of the product of the current index value and the index multiplier applicable to the option contract. In each case, the amount shall be decreased by any excess of the aggregate exercise price of the option over the product of the current index group value and the applicable index multiplier in the case of a call, or any excess of the product of the current index value and the applicable index multiplier over the aggregate exercise price of the option in the case of a put; provided, however, that the minimum margin required on each such option contract shall not be less than 100% of the current market value of the option contract plus 2% of the product of the current index group value, and the applicable index multiplier;
Option Contracts on an Industry Index
(v) for each put or call option contract on an industry index carried in a short position in the account, margin must be deposited and maintained equal to at least 30% of the product of the current index value times the index multiplier, increased by any unrealized loss or reduced by any excess of the aggregate exercise price of the option over the product of the current index value times the index multiplier in the case of a call, or any excess of the product of the current index value times the index multiplier over the aggregate exercise price of the option in the case of a put; provided, however, that the margin shall not be less than $250 per option contract.
The requirements set forth in paragraphs (iv) and (v) hereof are subject to the following exceptions, which in each case may be applied at the discretion of the member organization with which the account is maintained.
(1) In the case of long call index options (or long put index options) which are offset by positions in short call index options (or short put index options) for the same underlying index with the same index multiplier, provided that the expiration date of the long calls (or long puts) is the same as or subsequent to the expiration date of the offsetting short calls (or short puts), the treatment shall be as follows:
(A) When the exercise price of the long call index option (or short put index option) is less than or equal to the exercise price of the offsetting short call index option (or long put index option), no margin is required.
(B) When the exercise price of the long call index option (or short put index option) is greater than the exercise price of the offsetting short call index option (or long put index option) margin is required equal to the difference in aggregate exercise prices.
(2) In the case of accounts carrying positions in short put index options which are offset by positions in short call index options for the same underlying index with the same index multiplier, the margin required shall be the margin required for the short put option contract or the margin required for the short call option contract (pursuant to subparagraphs (iv) and (v) of this Rule), whichever is greater, as determined by (iv) and (v) above, increased by the amount of any unrealized loss on the other option contract.
