[Federal Register Volume 59, Number 54 (Monday, March 21, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-6413]


[[Page Unknown]]

[Federal Register: March 21, 1994]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-33761; File No. S7-7-94]
RIN 3235-AG14

 

Capital Requirements for Brokers or Dealers Under the Securities 
Exchange Act of 1934

AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Proposed rule amendments.

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SUMMARY: The Commission is proposing for comment amendments that would 
allow broker-dealers to use a theoretical pricing model when 
calculating capital charges for listed options and related positions. 
Haircuts for options and related positions, when computed using this 
model, would more accurately reflect the risk inherent in broker-
dealers' option positions. The proposed amendments are intended to 
provide capital charges that better protect broker-dealers against 
market risk.

DATES: The requested written data, views, arguments or comments must be 
received on or before May 16, 1994.

ADDRESSES: People wishing to submit written data, views, arguments, or 
comments should file three copies with Jonathan G. Katz, Secretary, 
Securities and Exchange Commission, 450 Fifth Street, NW., Stop 6-9, 
Washington, DC 20549. All written data, views, arguments, or comments 
should refer to File No. S7-7-94. All comments received will be 
available for public inspection and copying in the Commission's Public 
Reference Room, 450 Fifth Street, NW., Washington, DC 20549.

FOR FURTHER INFORMATION CONTACT: Michael A. Macchiaroli, Associate 
Director, (202) 272-2904; Roger G. Coffin, Branch Chief, (202) 272-
7375; Timothy H. Thompson, Branch Chief, (202) 272-2372; or Bradley W. 
Paulson, Staff Attorney (202) 272-2396; Office of Capital Markets and 
Financial Responsibility, Division of Market Regulation, Securities and 
Exchange Commission.

SUPPLEMENTARY INFORMATION:

I. Introduction

    In May 1993, the Commission issued a concept release soliciting 
public comment on issues relating to the standards imposed on 
derivative products by the net capital rule (``Concept 
Release'').1 The Concept Release noted that, at the time, the 
Commission's staff was studying a recommendation to adopt a theoretical 
pricing model developed by The Options Clearing Corporation (``OCC'') 
to determine haircuts for broker-dealers' option positions under the 
net capital rule. The Concept Release specifically asked questions on 
the use of theoretical pricing formulas to determine haircuts for over-
the-counter (``OTC'') options. The Commission is now proposing for 
comment amendments to the net capital rule, that would allow broker-
dealers to use data derived from OCC's theoretical pricing model to 
determine haircuts for listed options and related positions.2
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    \1\Securities Exchange Act Rel. No. 32256 (May 4, 1993), 58 FR 
27486 (May 10, 1993).
    \2\Simultaneous with this release, the Division of Market 
Regulation (``Division'') is issuing a letter stating that it will 
recommend no enforcement action to the Commission if, pursuant to 
the terms of that letter, broker-dealers use theoretical pricing 
data provided by OCC to calculate haircuts for listed options and 
related positions.
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    The proposed amendments will not change the current strategy-based 
haircut methodology for OTC options. As noted in the Concept Release, 
before adequate charges for OTC options can be determined, it will be 
necessary to ascertain the manner in which the credit risk associated 
with these positions can be adequately measured. The Commission, 
however, continues to be interested in studying the applicability of 
the proposed theoretical pricing haircut methodology to assess the 
market risk for OTC options and currently is evaluating, among other 
things, the comment letters addressing the questions for comment set 
forth in the Concept Release.

II. Historical and Technical Background

A. Current Net Capital Treatment of Options

    The Commission's net capital rule requires that every registered 
broker-dealer maintain sufficient liquid assets to enable those firms 
that fall below the minimum net capital requirements to liquidate in an 
orderly fashion without the need for a formal proceeding. Generally, 
net capital, as defined by Rule 15c3-1, is a broker-dealer's net worth 
plus liabilities subordinated in accordance with Appendix D of the net 
capital rule, minus assets not readily convertible into cash and 
certain percentages, or haircuts, of a firm's proprietary securities 
positions, including option positions.
    Currently, the net capital rule provides two basic capital 
treatments for option positions held by broker-dealers. The first 
approach, which is set forth in Appendix A to Rule 15c3-1, assumes that 
the option will be exercised or held to expiration. The second 
approach, a premium-based approach, assumes that options are used as 
trading positions. This approach is contained in paragraph (c)(2)(x) of 
Rule 15c3-1. Both methodologies of computing charges provide for lower 
haircuts for certain risk offsetting positions held by broker-dealers, 
although the premium-based approach recognizes more types of offset 
positions. The provisions of Appendix A were designed for firms 
clearing their proprietary listed option and related positions.3 
While market-makers on the floors of the option exchanges are exempt 
from the net capital rule,4 a clearing firm endorsing or 
guaranteeing the listed option positions of non-clearing market-makers 
is required to charge the premium-based haircuts to its capital. The 
premium-based approach also can be used by a clearing firm if its 
business is limited almost exclusively to effecting (either directly or 
as agent) and clearing market-making transactions in listed 
options.5
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    \3\In a letter dated October 23, 1985, the Commission's staff 
issued no-action relief allowing broker-dealers clearing their 
proprietary listed option and related positions to apply a premium-
based haircut methodology. Letter from Michael A. Macchiaroli, 
Assistant Director, to Michael Minikes, Chairman, Capital Committee, 
Securities Industry Association, (October 23, 1985).
    \4\17 CFR 240.15c3-1(b)(1).
    \5\17 CFR 240.15c3-1(a)(7).
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    As currently drafted, paragraph (c)(2)(x)(F) of Rule 15c3-1 
provides that, if the haircuts for a particular market-maker's account 
exceed the equity in the account, the carrying broker-dealer may not 
extend further credit to the market-maker unless the carrying broker-
dealer requires the additional deposit of sufficient equity to 
eliminate the net capital charge. However, the Division, in an 
interpretive letter approved by the Commission, has allowed the 
carrying broker-dealer to forego this requirement if it takes a charge 
against its capital to the extent that the equity in the market-maker's 
account is insufficient to cover the haircuts.6
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    \6\Letter from Lee A. Pickard, Director, Division, Commission, 
to Joseph W. Sullivan, President, Chicago Board Options Exchange 
(April 8, 1977).
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B. Development of Option Pricing Models

    Over the last 30 years, several models have been developed to 
determine the value of an option.7 Initially, these models were 
applied to warrants, because, at the time, that market was more 
active.8 Option pricing formulas have been refined and are now 
widely used to calculate option prices by assigning pre-determined 
values to the factors that are known to affect their prices.
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    \7\An option gives the holder the right to buy (i.e., a call) or 
sell (i.e., a put) a particular underlying instrument at a certain 
price for a limited period of time. An option's price, or 
``premium,'' has two components, the option's intrinsic value and 
the ``time value.'' An option's intrinsic value is the difference 
between the price of the underlying instrument and the strike price. 
The time value is the amount by which the premium exceeds the 
option's intrinsic value.
    \8\Fischer Black, ``How We Came Up With the Formula'' in The 
Financial Derivatives Reader 176 (Kolb ed. 1992).
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    In 1973, Fischer Black and Myron Scholes introduced a formula to 
calculate European call option prices.9 The primary factors 
affecting the price of an option are: The value of the underlying 
asset, the exercise price of the option, the price volatility of the 
underlying asset, the risk-free rate of interest and the remaining time 
to expiration. The payment of dividends on the stock, as well as the 
exercise timing of the option (i.e., American or European), also can be 
factors in the pricing of an option.
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    \9\Fischer Black & Myron Scholes, The Pricing of Options and 
Corporate Liabilities 3 J. Polit. Econ. 637 (May-June 1973).
    A European option can be exercised only on the expiration date, 
while an American option can be exercised at any time prior to 
expiration date.
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    Subsequent to the development of the Black-Scholes formula, John 
Cox, Stephen Ross and Mark Rubinstein developed a binomial pricing 
model to determine the value of options.10 Unlike the Black-
Scholes formula, which employs ``mathematical tools * * * [that] are 
quite advanced'' to determine the probable value of the underlying 
instrument at the time of expiration, the Cox-Ross Rubinstein model 
replicates periodical upward and downward movements in the value of an 
option until the option's expiration date.11 By determining 
different probable option values at various periods during the life of 
an option, the Cox-Ross-Rubinstein model is able to incorporate 
dividend yields, and American option prices can be determined.
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    \1\0John Cox, Mark Rubinstein & Stephen Ross, Option Pricing: A 
Simplified Approach 7 J. Fin. Econ. 229 (1979).
    \1\1Id. at 230.
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    Based on the Cox-Ross-Rubinstein model, OCC has developed the 
Theoretical Intermarket Margining System (``TIMS'') to measure the 
market risk associated with participants' positions and establish 
clearing house margin requirements.12 Likewise, for the last 
several years, option pricing models, including the Cox-Ross-Rubinstein 
model, have been commonly used by market professionals to develop 
trading strategies and to manage market risk. In light of such 
industry-wide usage, recommendations have been made urging the 
Commission to adopt option pricing models to set capital charges.
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    \1\2Securities Exchange Act Rel. No. 23167 (April 22, 1986), 51 
FR 16127 (April 30, 1986).
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    The proposed amendments to Rule 15c3-1 would establish a haircut 
methodology based on the Cox-Ross-Rubinstein binomial model. This model 
would be used to determine an option's theoretical gains and losses 
after re-pricing the option in relation to assumed changes in the value 
of the underlying instrument. At least initially, OCC would run the 
model as explained below and deliver to interested broker-dealers the 
gains and losses from each option positions which would be downloaded 
by the broker-dealer into a spreadsheet provided by OCC. The 
spreadsheet would contain all of the broker-dealer's relevant 
positions.

III. Description of the Proposed Rule Amendment

    With respect to each option series13 it clears, OCC would 
collect the following information on a daily basis:

    \1\3An option series includes option contracts of the same type 
(either a call or a put) and exercise style covering the same 
underlying instrument with the same exercise price, expiration date 
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and number of underlying units.

    (i) The dividend streams for the underlying securities,
    (ii) Interest rates (either the current call rate or the 
Eurodollar rate for the maturity date which approximates the 
expiration date of the option),
    (iii) Days to expiration, and
    (iv) Closing underlying security and option prices from various 
vendors.

Using these values and the binomial model, OCC would measure the 
implied volatility for each option series.
    OCC then would input to the model the resulting implied volatility 
for each option series and other data, except the underlying value, 
used in the calculation of the implied volatility. For each option 
series, the model would calculate theoretical prices at ten equidistant 
valuation points within a range consisting of an increase or a decrease 
of the following percentages of the daily market price of the 
underlying instrument:

    (i) +(-)15% for equity securities with a ready market, narrow-
based indexes, and non-high-cap, broad- based indexes,
    (ii) +(-)6% for major market currencies,14 and
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    \1\4Deutsche Mark, British Pound, Swiss Franc, French Franc, 
Canadian Dollar, Japanese Yen and European Currency Unit.
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    (iii) +(-)10% for high-cap, broad-based indexes.

    On a daily basis, OCC would use the model to determine the 
theoretical gains/losses between the option's closing price and the 
theoretical price at each one of the ten equidistant valuation points. 
OCC would provide daily these theoretical gain/loss amounts to broker-
dealers.
    Upon receipt of the theoretical gain/loss amounts, the broker-
dealer would download the information to a theoretical pricing haircut 
spreadsheet. The broker-dealer must add to the spreadsheet all 
proprietary or market-maker positions to be haircut. The spreadsheet 
generates a profit/loss amount at each valuation point for each option 
series and related positions covering the same underlying asset. The 
greatest loss at any of the valuation points becomes the haircut for 
those positions. The spreadsheet has been programmed to compute a 
minimum haircut charge and identify the greater of the computed or 
minimum charge as the haircut.
    For example, assume a portfolio consisting of IBM common stock and 
various puts and calls on IBM common stock with different strikes and 
expiration dates. OCC would re-price each option position assuming that 
the price of the IBM common stock had moved up or down by a maximum of 
15%, at ten valuation points (i.e., -15%, -12%, -9%, -6%, -3%, +3%, 
+6%, +9%, +12%, +15%). The single, maximum net loss amount at any one 
of the ten valuation points would become the haircut for the portfolio.
    Within any portfolio type involving the same underlying stock, 
index or currency, 100% of a position's gain at any one valuation point 
will be allowed to offset another position's loss at the same valuation 
point. Between qualified stock baskets (provided that the stock basket 
represents no less than 90% of a high-cap, broad-based index's 
capitalization or 100% of the capitalization of a narrow-based 
index)15 offset by index options, or futures or futures options on 
the same underlying index, 95% of gains would offset losses at the same 
valuation point. Among high-cap, broad-based index options, futures and 
futures options, 90% of the gain on one high-cap, broad-based index 
position in the same market group, e.g. U.S. or Japan, would offset the 
loss on a position on a different high-cap, broad-based index at the 
same valuation point. Among non-high-cap, broad-based index options, 
futures and futures options, 75% of the gain on one non-high-cap, 
broad-based index position shall offset the loss on a position on a 
different non-high-cap, broad-based index at the same valuation point. 
The difference in offsets are designed to take into account liquidity 
and execution risk in different markets.
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    \1\5The proposed amendments would not recognize stock basket 
offsets for non-high-cap, broad-based indexes.
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IV. Discussion of Issues Pertaining to the Proposed Theoretical Pricing 
Haircut Methodology

A. Pilot Program

    At the request of the Commission's staff, The Chicago Board Options 
Exchange, Inc. (``CBOE'') and OCC established a pilot program to 
compare the results achieved under the current haircut methodology and 
the theoretical pricing approach. The pilot study was conducted from 
April 22, 1992, through July 31, 1992, and included twelve firms 
clearing either independent or proprietary market-maker accounts. The 
pilot program included approximately 1,400 market-maker accounts.
    The study employed the methodology that is now being proposed to 
replace the current treatment for options and related positions set 
forth in the net capital rule. As part of the pilot study, a minimum 
charge of \1/8\ of a point per option contract was applied when the 
theoretical pricing haircut for the class or product group reflected 
little or no market exposure. This minimum charge (raised to \1/4\ of a 
point in the current proposal), was assessed to account for liquidation 
risk.
    During the pilot study period, the proposed haircut methodology 
resulted in an average haircut level reduction of 38% for self-clearing 
market-maker firms. This average remained generally constant throughout 
the pilot study period. This reduction in haircut levels seemed to have 
resulted from the fact that, while these firms take large positions, 
they tend to be more active in covering their market risk.
    The results of the pilot study revealed that haircut charges for 
non-clearing market-maker firms increased by an average of 3%. Of the 
non-clearing market-maker accounts, 70% reflected a haircut change of 
less than +(-) $50,000. At the same time, however, total deductions for 
those firms (reflecting an increase in haircuts above the equity levels 
kept in the market-maker accounts) increased by an average of 59%. The 
decrease or minor increase in haircut levels, accompanied by a 
substantial increase in deductions, seemed to have been the result of a 
redistribution of haircuts to accounts containing positions with 
greater market exposure but with less equity to cover the haircut 
increase.
    This conclusion appeared to be further confirmed by the fact that, 
under the proposed methodology, haircut charges for accounts with short 
positions appeared to increase.16 During the pilot study, CBOE and 
OCC selected ten accounts that reflected significant differences 
between the current haircut methodology and theoretical pricing 
haircuts. Five of these accounts consisted of index option positions, 
while the rest consisted of equity options. As a general rule, when 
using theoretical prices to calculate haircuts, excess short positions 
resulted in a substantial haircut increase. This also was true in the 
case of index option accounts, where, assuming a +(-) 10% underlying 
movement, accounts with excess short positions endured an increase in 
haircut levels, unless the risk associated with the short positions was 
offset by the profit in another position.
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    \1\6Past market experiences have shown that short option 
positions tend to be particularly risky. In relation to the Market 
Break of 1987, the Division noted the link between substantial 
market-maker losses and short option positions. At the time, the 
Division concluded that ``* * * the present net capital treatment 
accorded to short options positions is inadequate to insure against 
the risks of major market movements.'' Division, The October 1987 
Market Break 5-46 (February 1988).
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    To further test the level of market protection provided by the 
proposed underlying price movement assumptions, the Commission's staff 
required CBOE and OCC to compare haircuts under the proposed 
theoretical price-based methodology and under the current methodology, 
assuming a 22% daily downward market move for two days. In addition, 
given the magnitude of this market move, implied volatilities were 
assumed to double in size. The results of this test seemed to be 
consistent with the general conclusions of the pilot study.

B. Underlying Price Movement Assumption for Certain Index and Currency 
Options

    One of the principal variables affecting the value of an option is 
the price of the underlying instrument. The Commission, therefore, 
believes that underlying price movement assumptions for the proposed 
theoretical pricing model should be consistent with the volatility 
assumptions currently incorporated in the net capital rule. These 
assumptions are: 6% for major market foreign currencies, 15% for 
equities with a ready market, narrow-based indexes and 10% for high-
cap, broad-based indexes and non-high-cap broad-based indexes. These 
underlying price movement assumptions reflect the risk stemming from 
major movements in the value of the option's underlying instrument.
    While CBOE and OCC agree with the Commission with regard to the 
underlying price movement assumptions for equities with a ready 
market,17 they believe that, with respect to high-cap, broad-based 
index options, a +(-)10% underlying price movement assumption for all 
broker-dealers may be too large. Similarly, the Philadelphia Stock 
Exchange (``Phlx'') believes that an underlying price movement 
assumption of +(-)6% for major market foreign currency options may be 
too large for non-clearing market-makers. CBOE, OCC and Phlx, 
therefore, have recommended the following underlying price movement 
assumptions: (i) +6%, (-)8% for high-cap, broad-based index positions 
of non-clearing option market-makers and a +(-)10% underlying 
volatility assumption for all other broker-dealers, and (ii) +(-)4\1/
2\% for the major market foreign currency positions of non-clearing 
option market-makers and a +(-)6% for all other broker-dealers.
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    \1\7Letter from Mary L. Bender, First Vice President, CBOE & 
John C. Hiatt, Executive Vice President, OCC to Michael A. 
Macchiaroli, Associate Director, Division, Commission (May 7, 1993) 
at 7.
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    CBOE and OCC note that during the pilot study, haircuts for non-
clearing index market-makers increased by an average of approximately 
27% and deductions increased by 121%. The data, however, provides very 
little information indicating whether this percentage is entirely due 
to the application of a +(-)10%, rather than if the proposed +6%, (-)8% 
underlying price movement assumption, or whether the increase was the 
result of account positions reflecting a larger market exposure. The 
data provided, however, shows that during the course of the study there 
were days when the application of a +(-)10% underlying price movement 
assumption resulted in haircut reductions. Moreover, in one case for 
which detailed account information was provided, the data showed that, 
in the absence of excess naked short positions, theoretical pricing 
haircuts assuming a +(-)10% underlying price movement resulted in an 
81% reduction in haircut levels.
    In light of the concerns raised and the lack of sufficient data, 
the Commission is requesting comments on the recommendation set forth 
by CBOE, OCC and Phlx. In particular, the Commission would like to 
receive information on the impact upon traders, their clearing firms 
and the pricing and liquidity of the index and currency markets 
resulting from the implementation of a +(-)10% underlying volatility 
assumption for high-cap, broad-based index options and a +(-)6% for 
major market currency options and related positions. The Commission 
also would welcome information regarding the cost of keeping the 
underlying price movement assumptions at the proposed levels, rather 
than at the levels recommended by CBOE, OCC and Phlx.18 In this 
regard, the Commission invites commentators to discuss the extent to 
which foregoing the added protection afforded by a +(-)10% underlying 
price movement for high-cap, broad-based index options and a +(-)6% for 
major market currency options and related positions is justified in 
light of the possibility of sudden market movements such as those 
experienced in 1987 and 1989.
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    \1\8In this regard, the Commission encourages commentators to 
consider, in particular, the impact that the marginal cost of 
capital will have on the proposed rule amendment.
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C. Series Specific Volatilities and Constant Short-term Interest Rates

    Prices derived from theoretical pricing models are a function of 
the variables inputted. In computing the theoretical price of an 
option, the Cox-Ross-Rubinstein model, like the Black-Scholes formula, 
assumes that the implied volatility will remain constant over the life 
of the option. Accordingly, the underlying instrument's price is 
expected to change smoothly, never reflecting a sudden large movement. 
Likewise, in computing theoretical prices it is assumed that the short-
term interest rate never changes.
(1) Series Specific Volatilities
    Failure to take into account abrupt changes in an option's implied 
volatility could result in unrealistic theoretical prices and less than 
adequate capital requirements.19 The proposed rule amendment 
requires the use of daily calculated series specific implied 
volatilities. It has been suggested, however, that implied volatility 
inputs should be allowed to fluctuate within chosen parameters.
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    \1\9See generally Fischer Black, ``How to use the Holes in Black 
Scholes'' in The Financial Derivatives Reader 198 (Kolb ed. 1992).
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    There seems to be, however, little market consensus as to the 
manner in which such adjustment can be implemented. Although it appears 
that the underlying price movement assumptions embodied in the proposed 
rule amendment are sufficiently large to adequately address any 
concerns raised by the use of a constant implied volatility measure, 
the Commission solicits comments on this issue.
(2) Constant Short-Term Interest Rates
    Some commentators have suggested that interest rate variables 
should be allowed to fluctuate within chosen parameters when computing 
theoretical pricing haircuts. Aside from the computational burden 
associated with allowing interest rates to fluctuate within chosen 
parameters,20 it is generally believed that option prices are not 
so sensitive to changes in interest rates so as to warrant changes in 
the model's interest rate factor. Moreover, as previously noted, it 
would seem that the substantial proposed underlying price movement 
assumptions should compensate for any pricing problem associated with a 
constant interest rate input.
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    \2\0Altering the interest rate assumption would result in a 
substantial increase in the number of computer calculations 
necessary to determine theoretical pricing haircuts.
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D. Minimum Charges

    During the pilot program, a minimum haircut of \1/8\ of a point per 
option contract was applied. Pursuant to a recommendation by OCC and 
CBOE, the proposed amendments would increase the minimum charge to \1/
4\ of a point per contract. The Commission believes that this increase 
is appropriate to account for liquidation and decay risk in the prices 
of long and short options in those instances in which application of 
the theoretical pricing haircut methodology results in little or no 
charge.
    The proposed minimum charge presumes that a basic equity option 
contract covers 100 shares. To the extent that an option or futures 
contract exceeds the size of a basic option contract the minimum charge 
would have to be increased by the additional percentage amount of 
underlying units. For example, if an IBM option contract covered 500 
shares instead of the usual 100, the minimum charge would be $125 
((i.e., 5  x  25).

E. Distribution of Theoretical Pricing Data

    The theoretical pricing haircut methodology set forth in the 
proposed rule amendment seems to provide appropriate capital levels for 
broker-dealers. While the securities industry generally supports the 
proposal and its immediate implementation, the Commission believes that 
there are several details in the proposed rule that should be observed 
closely, and continued to be discussed in light of the public comment 
received in response to this proposal.
    In this regard, particular concerns have been raised respecting the 
use of proprietary versions of option pricing models to calculate 
haircuts. During the pilot study, OCC calculated the theoretical value 
for each option series. Accordingly, the values inputted to determine 
the theoretical pricing haircuts and, consequently, the resulting 
haircuts were consistent among broker-dealers with the same positions. 
In order to secure reliable results during the pilot study, moreover, 
OCC applied editing procedures to ensure the accuracy of the resulting 
values.21
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    \2\1Prices for options and underlying assets were supplied by at 
least two sources, private vendors and the exchanges where the 
products were traded. OCC would perform a direct comparison of the 
supplied price data. Subsequently, OCC would subject option prices 
to a reasonableness check by calculating theoretical prices for 
every option series. Ranges based on the option's theoretical price 
were then set. An option's price was verified if a market price fell 
outside its designated range. OCC would use a theoretical price in 
place of a market price that fell outside its designated range.
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    In light of the reliance on the choices made concerning the model's 
variables, the use of proprietary models could result in significantly 
different theoretical prices given the same assumed underlying price 
movement. The Commission believes, therefore that there is a need for a 
controlled environment that ensures the integrity of the haircut 
results for all broker-dealers using the proposed methodology. Allowing 
broker-dealers to employ any proprietary model and/or failing to 
control the sources of the various values inputted to the model would 
substantially hinder the ability to examine the accuracy of option 
haircuts and their effectiveness as a way of ensuring adequate capital 
levels. For this reason, the proposed amendments to Rule 15c3-1 would 
require broker-dealers to use exclusively the theoretical pricing 
values produced and distributed nightly by OCC (or such other entity as 
the Commission may designate).
    While the proposed amendments provide authority for the Commission 
to designate other providers of theoretical option prices, OCC is 
designated in the rule as a provider because it is presently in a 
unique position with respect to the listed securities option positions 
in that it is the issuer of the options, the clearing agent of the 
options, and the entity that currently sets margin requirements for its 
clearing members by use of a theoretical pricing model. The Commission 
also considers it critical that OCC is subject to Commission inspection 
and regulation.
    The Commission solicits comment on whether it is preferable to 
continue to use a single theoretical pricing model or whether, and 
subject to what conditions, the Commission should consider allowing the 
use of alternative models. The Commission also requests comments on 
whether limitations should be imposed on fees charged by entities 
providing theoretical prices.

F. Alternative Strategy-Based Methodology

    As a practical matter, to be able to implement the proposed haircut 
methodology, broker-dealers will be required to have a computerized 
interface with OCC's system.22 This linkage would allow broker-
dealers to receive timely the theoretical gain/loss amounts provided by 
OCC. In addition, the computer system would enable broker-dealers to 
make the multiple calculations that are necessary in order to apply 
such data to their option positions.
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    \2\2For broker-dealers requiring theoretical gains/losses data, 
OCC is considering a menu approach to select the classes of options 
for which values are needed. This approach is intended to reduce the 
expense and transmission time of providing values which are not 
needed.
    For broker-dealers who are not participants, OCC is considering 
the possibility of establishing a dial-up facility to provide 
theoretical gain/loss amounts. The particular characteristics of 
this facility would be determined in conjunction with the potential 
users.
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    The Commission realizes that broker-dealers with limited option 
positions might find it not cost effective to implement a computerized 
interface with OCC. In order to address this concern, the proposed 
amendments contain an alternative strategy-based haircut methodology. 
This alternative methodology generally follows the conservative 
approach currently embodied in Appendix A to the net capital rule.
    Broker-dealers employing the proposed strategy-based methodology 
would be required to eliminate from net worth the time value associated 
with long or short option positions. In addition, this alternative 
haircut methodology will allow only certain basic strategies used by 
broker-dealers to offset market risk. In particular, broker-dealers 
would be allowed to take a reduced charge for hedged positions 
consisting of a long underlying position and an offsetting short call, 
a short underlying position and an offsetting long call, and a long 
underlying position and an offsetting long put. The Commission believes 
that these strategies will allow broker-dealers who do not want to use 
the theoretical price-based methodology to maintain lower haircut 
requirements that are consistent with the market risk associated with 
their option positions.

V. Discussion of Related Issues

    In connection with the adoption of a theoretical pricing haircut 
methodology, the Commission believes it is necessary to make the 
following changes to the net capital rule:

A. Deletion of Paragraph (a)(7) of the Net Capital Rule

    As previously stated, the net capital rule contains two haircut 
methodologies, the premium-based approach and the approach embodied in 
Appendix A to Rule 15c3-1. Currently, pursuant to the provisions of 
paragraph (a)(7) of the net capital rule, the premium-based approach is 
available to a clearing firm, if its business is limited almost 
exclusively to effecting (either directly or as agent) and clearing 
market-making transactions in listed options.
    The proposed amendments would delete paragraph (a)(7) of the net 
capital rule. The Commission believes that this provision is no longer 
necessary, because the proposed amendments would eliminate the 
distinction between the premium-based approach and the approach set 
forth in Appendix A.

B. Steps To Be Taken by a Broker-Dealer Carrying the Account of an 
Option Market-Maker, When Equity in That Account Is Insufficient To 
Cover Haircuts

    Pursuant to the provisions of a 1977 interpretive letter, carrying 
broker-dealers are not required to refrain from extending credit in a 
market-maker account when haircuts for that account exceed the equity 
in the account.23 This interpretation is conditioned on the 
carrying broker-dealer taking a charge against capital to the extent 
that the equity is insufficient to cover the haircuts. The proposed 
amendments would incorporate this interpretation into the net capital 
rule.
---------------------------------------------------------------------------

    \2\3Supra note 7.
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VI. Request for Comments

    The Commission invites interested persons to submit written data, 
views, arguments and/or comments on the proposed amendments. The 
Commission is particularly interested in receiving comments from 
broker-dealers on how these proposed rule amendments would affect their 
required capital levels. Also, the Commission is interested in analyses 
from broker-dealers on the ability of the theoretical pricing models to 
accurately predict the risks in trading these instruments.

VII. Effects on Competition and Summary of Initial Regulatory 
Flexibility Analysis

    Section 23(a) of the Exchange Act, 15 U.S.C. 78w(a)(2), requires 
the Commission, in adopting rules under the Exchange Act, to consider 
the anti-competitive effect of the rule, if any, and to balance any 
impact against the regulatory benefits to be gained. The Commission has 
considered the proposed amendments in light of this standard and 
believes, preliminarily, that if adopted they would not likely impose 
any significant burden on competition that is not necessary or 
appropriate in furtherance of the Exchange Act. The Commission solicits 
comment on this preliminary view.
    In accordance with 5 U.S.C. 603, the Commission has prepared an 
Initial Regulatory Flexibility Analysis (``IRFA'') concerning the 
proposed amendments. The analysis notes that the proposed amendments 
would implement a haircut methodology that employs a mathematical 
formula to determine the theoretical value of options. The purpose of 
these amendments is to make haircuts reflect more accurately the risks 
associated with option positions.
    Because of the complexity of the formula used to compute 
theoretical prices, and in order to ensure the integrity of the 
resulting haircuts, the Commission is proposing that only the OCC 
theoretical pricing haircut program be utilized. Accordingly, to be 
able to use this system it will be necessary for a broker-dealer to 
have an automate interface with OCC's computer system. This would 
enable broker-dealers to receive reliable, nightly data necessary to 
calculate haircuts.
    The proposed amendments will impact ``small business[es]'' or 
``small organization[s],'' as those terms are defined in 17 CFR 240.0-
10(c), subject to Rule 15c3-1, insofar as they would be required to 
implement a computer interface with OCC to be able to comply with the 
requirements of the proposed rule amendment. In order to reduce the 
impact on these broker-dealers, the proposed amendments set forth an 
alternative haircut methodology that is based on the basic option 
strategies used by broker-dealers.
    A copy of the IRFA may be obtained by contacting Timothy H. 
Thompson, Division of Market Regulation, Securities and Exchange 
Commission, 450 Fifth Street NW., Washington, DC 20549, tel: (202) 272-
2372.

VIII. Statutory Analysis

    The amendments are proposed pursuant to the authority conferred on 
the Commission by section 15(c)(3) of the Act.

List of Subjects in 17 CFR Part 240

    Brokers, Reporting and recordkeeping requirements, Securities.

    For the reasons set forth in the preamble, Title 17 Chapter II of 
the Code of Federal Regulation is proposed to be amended as follows:

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

    1. The authority citation for part 240 continues to read in part as 
follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77eee, 77ggg, 
77nnn, 77sss, 77ttt, 78c, 78d, 78i, 78j, 78l, 78m, 78n, 78o, 78p, 
78s, 78w, 78x, 78ll(d), 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-37, 
80b-3, 80b-4 and 80b-11, unless otherwise noted.
* * * * *


Sec. 240.15c3-1  [Amended]

    2. Section 240.15c3-1 is amended by removing and reserving 
paragraph (a)(7).
    3. Section 240.15c3-1 is amended by adding an undesignated center 
heading before paragraph (c)(2)(x) and revising paragraph (c)(2)(x) to 
read as follows:


Sec. 240.15c3-1  Net capital requirements for brokers or dealers.

* * * * *
    (c) * * *
    (2) * * *

Brokers or Dealers Carrying Accounts of Listed Options Specialists

    (x)(A) With respect to any transaction in listed options for which 
a broker or dealer acts as a guarantor, endorser or carrying broker or 
dealer for listed options purchased or written by a specialist that is 
either not otherwise subject to the provisions of this section or is 
described in paragraph (c)(2)(vi)(N) of this section, such broker or 
dealer shall adjust its net worth by deducting as of noon of the next 
business day the amounts computed as of the prior business day pursuant 
to Sec. 240.15c3-1a. The required deductions may be reduced by any 
liquidating equity that exists in such specialist's market maker 
account as of the close of the prior business day or by the deposit of 
additional funds or securities in the account by noon of the next 
business day, and shall be increased to the extent of any liquidating 
deficit in such account. In no event shall excess equity in the 
specialist's market maker account result in an increase of the net 
capital of any such guarantor, endorser, or carrying broker or dealer.
    (B) Definitions. (1) The term listed option shall mean a 
standardized option as defined in Sec. 240.9b-1 that is traded on a 
registered national securities exchange or the automated facilities of 
a registered national securities association and is subject to the 
transaction reporting requirements of the registered entity where it 
trades.
    (2) For purposes of this provision, the equity in an individual 
specialist's market maker account shall be computed by:
    (i) Marking all securities positions long or short in the account 
to their respective current market values;
    (ii) Adding (deducting in the case of a debit balance) the credit 
balance carried in such specialist's market maker account; and
    (iii) Adding (deducting in the case of short positions) the market 
value of positions long in such account.
    (C) No guarantor, endorser or carrying broker or dealer shall 
permit the sum of the deductions required pursuant to Sec. 240.15c3-1 
in respect of all transactions in specialists' market maker accounts 
guaranteed, endorsed or carried by such broker or dealer to exceed 
1,000 percent of such broker's or dealer's net capital as defined in 
Sec. 240.15c3-1(c)(2) for any period exceeding three business days. If 
at any time such sum exceeds 1,000 percent of such broker's or dealer's 
net capital, then the broker or dealer shall:
    (1) Immediately transmit telegraphic or telephone facsimile notice 
of such event to the Division of Market Regulation in the headquarter's 
office of the Commission in Washington, DC, to the district or regional 
office of the Commission for the district or region in which the broker 
or dealer maintains its principal place of business and to its 
examining authority designated pursuant to section 17(d) of the 
Securities Exchange Act of 1934 Act (``Designated Examining 
Authority''); and
    (2) Be subject to the prohibitions against withdrawal of equity 
capital set forth in Sec. 240.15c3-1(e), and to the prohibitions 
against reduction, prepayment and repayment of subordination agreements 
set forth in paragraph (b)(11) of Sec. 240.15c3-1d, as if such broker 
or dealer's net capital were below the minimum standards specified by 
each of those paragraphs.
    (D) If at any time there is a liquidating deficit in a specialist's 
market maker account, then the broker or dealer guaranteeing, endorsing 
or carrying listed options transactions in such specialist's market 
maker account may not extend any further credit in that account, and 
shall take steps to liquidate promptly existing positions in the 
account. The broker or dealer also shall transmit by the close of 
business of the following business day telegraphic or telephone 
facsimile notice to its Designated Examining Authority and the 
Designated Examining Authority of the specialist, if different from its 
own.
* * * * *
    4. Section 240.15c3-1a is revised to read as follows:


Sec. 240.15c3-1a  Options (Appendix A to 17 CFR 240.15c3-1).

    (a) Definitions. (1) The term unlisted option shall mean any option 
not included in the definition of listed option provided in paragraph 
(c)(2)(x) of Sec. 240.15c3-1.
    (2) For purposes of this section, the term option series includes 
listed option contracts of the same type (either a call or a put) and 
exercise style, covering the same underlying security with the same 
exercise price, expiration date, and number of underlying units.
    (3) For purposes of this Appendix A to Sec. 240.15c3-1, the term 
related instrument within an option class or product group includes 
futures contracts and options on futures contracts covering the same 
underlying instrument. In relation to options on major market foreign 
currencies a related instrument within an option class also shall 
include forward contracts on the same underlying currency.
    (4) For purposes of this Appendix A to Sec. 240.15c3-1, the term 
underlying instrument includes long and short positions, as 
appropriate, covering the same major market foreign currency, the same 
security, other than an option contract (underlying security), or a 
security which is exchangeable for or convertible into the underlying 
security within a period of 90 days. If the conversion or exchange 
requires the payment of money or results in a loss upon conversion at 
the time when the security is deemed an underlying instrument for 
purposes of this Appendix A to Sec. 240.15c3-1, the broker or dealer 
will deduct from net worth the full amount of the conversion loss or 
the amount required for the conversion or exchange. The term underlying 
security shall not be deemed to include futures contracts, options on 
futures contracts or unlisted products.
    (5) For the purposes of this Appendix A to Sec. 240.15c3-1, the 
term product group is two or more option classes, related instruments 
and underlying instruments in the same portfolio type for which it has 
determined a percentage of offsetting profits may be applied to losses 
at the same valuation point.
    (b) Every broker or dealer shall deduct from net worth, in 
calculating net capital, the amount resulting from the computation 
required under the provisions of paragraph (b)(1) of this section, 
unless it elects to calculate the required deductions in accordance 
with the provisions of paragraph (b)(2) of this section.

Theoretical Pricing Charges

    (1)(i) Definitions. (A) The terms theoretical gains and losses 
shall mean the gain and loss in the value of individual option series 
and the value of related instruments within that option's class, at ten 
equidistant intervals (valuation points) ranging from an assumed 
movement (both up and down) in the current market value of the 
underlying instrument equal to the percentage corresponding to the 
deductions otherwise required under Sec. 240.15c3-1 for the underlying 
instrument. Theoretical gains and losses shall be calculated by The 
Options Clearing Corporation, or such other entity as the Commission 
may designate, using an approved theoretical options pricing model.
    (B) The term approved theoretical options pricing model shall mean 
a mathematical model, previously provided in writing to the Commission, 
which is used by The Options Clearing Corporation to calculate 
theoretical gains and losses.
    (C) The term major market foreign currency shall mean the currency 
of a sovereign nation whose short-term debt is rated in the highest 
category by at least two nationally recognized statistical rating 
organizations for which there is a substantial inter-bank forward 
currency market. For purposes of this section, the European Currency 
Unit (ECU) shall be deemed a major market foreign currency.
    (D) The term qualified stock basket shall mean a set or basket of 
stock positions with an aggregate market value at least equal to the 
aggregate underlying value of a particular index option and related 
instrument within that index option's class, provided that the set or 
basket of stock represents no less than 90% of the capitalization for a 
high-cap or non-high-cap broad-based market index, or, in the case of a 
narrow-based index, no less than 100% of the capitalization for such 
narrow-based index.
    (ii) With respect to positions involving listed options in a single 
specialist's market maker account, and, separately, with respect to 
positions involving listed option positions in its proprietary or other 
account, the broker or dealer shall group long and short positions into 
the following portfolio types:
    (A) Equity options on the same underlying instrument and positions 
in that underlying instrument;
    (B) Options on the same major market foreign currency, positions in 
that major market foreign currency and related instruments within those 
options' class;
    (C) High-cap broad-based market index options, related instruments 
within an option class and qualified stock baskets on the same index;
    (D) All other high-cap broad-based market index options and related 
instruments within the index option's class or product group;
    (E) Non-high-cap broad based index options on the same index and 
related instruments within that index option's class and qualified 
stock baskets in the same index;
    (F) All other non-high-cap broad-based market index options and 
related instruments within that index option's class or product group, 
and
    (G) Narrow-based index options, related instruments within the 
index option's class and qualified stock baskets on the same index.
    (iii) Before making the computation, each broker or dealer shall 
obtain from The Options Clearing Corporation the theoretical gains and 
losses for each options series and for the related instruments within 
those options' class in each specialist's market maker account 
guaranteed, endorsed or carried by a broker or dealer, or in the 
proprietary or other accounts of that broker or dealer.
    (A) Upon receipt of the theoretical gains and losses, for each one 
of the portfolio types described above, the broker or dealer shall 
multiply the corresponding theoretical gains and losses at each of the 
ten equidistant valuation points by the number of positions held in a 
particular options series, the related instruments within those options 
class and the positions in the same underlying instrument.
    (B) In determining the aggregate profit or loss for each portfolio 
type, the broker or dealer will be allowed the following offsets:
    (1) Between options on the same underlying instrument, positions 
covering the same underlying instrument and related instruments within 
the options' class, 100% of a position's gain shall offset another 
position's loss at the same valuation point;
    (2) Between high-cap broad-based market index options or related 
instruments within the option class and qualified stock baskets on the 
same index, 95% of gains shall offset losses at the same valuation 
point;
    (3) Between narrow-based market index options or related 
instruments within the option class and qualified stock baskets on the 
same index, 95% of gains shall offset losses at the same valuation 
point;
    (4) Among positions involving options series covering different 
high-cap broad-based index options within the same product group, 90% 
of the gain in a high-cap broad-based market index option and related 
instruments within that index option's class shall offset the loss at 
the same valuation point in a different high-cap broad-based market 
index option and related instruments within that index option's class;
    (5) Among positions involving options series covering different 
non-high-cap broad-based index options within the same product group, 
75% of the gain in a non-high-cap broad-based market index option and 
related instruments within that index option's class shall offset the 
loss at the same valuation point in another non-high-cap broad-based 
market index option and related instruments within that index option's 
class or product group; and
    (6) Between non-high-cap broad-based market index options or 
related instruments within the same options class and qualified stock 
baskets on the same index, 95% of the gains shall offset losses at the 
same valuation point.
    (C) For each portfolio type, the total deduction shall be the 
larger of:
    (1) The amount for any of the ten equidistant valuation points 
representing the largest theoretical loss after applying the offsets 
provided above; or
    (2) A minimum charge equal to one quarter (\1/4\) point times the 
multiplier for each equity and index option contract and each related 
instrument within the option's class or product group, or $25 for each 
option on a major market foreign currency with the minimum charge for 
futures contracts and options on futures contracts adjusted for 
contract size differentials, not to exceed market value in the case of 
long positions in options and options on futures contracts; or
    (3) In the case of portfolio types involving index options and 
related instruments offset by a qualified stock basket, there will be a 
minimum charge of 5% of the market value of the qualified stock basket 
for high-cap broad-based and narrow-based indexes; or
    (4) In the case of portfolio types involving index options and 
related instruments offset by a qualified stock basket, there will be a 
minimum charge of 10% of the market value of the qualified stock basket 
for non-high-cap broad-based indexes.

Alternative Strategy Based Charges

    (2) A broker or dealer may elect not to apply the method described 
in paragraph (b)(1) of this section and, instead, calculate adjustments 
to net worth in accordance with the provisions of this paragraph 
(b)(2).
    (i) Definitions. (A) The term intrinsic value or in-the-money 
amount shall mean the amount by which the exercise value, in the case 
of a call, is less than the current market value of the underlying 
instrument, and, in the case of a put, is greater than the current 
market value of the underlying instrument.
    (B) The term out-of-the-money amount shall mean the amount by which 
the exercise value, in the case of a call, is greater than the current 
market value of the underlying instrument, and, in the case of a put, 
is less than the current market value of the underlying instrument.
    (C) The term time value shall mean the current market value of an 
option contract that is in excess of its intrinsic value.
    (ii) Every broker or dealer electing to calculate adjustments to 
net worth in accordance with the provisions of this paragraph (b)(2) 
must make the following adjustments to net worth:
    (A) Add the time value of a short position in a listed option; and
    (B) Deduct the time value of a long position in a listed option, 
which relates to a position in the same underlying instrument or in a 
related instrument within the option class or product group as 
recognized in the strategies enumerated in paragraph (b)(2)(iii)(D) of 
this section.
    (iii) In computing net capital after the adjustments provided for 
in paragraph (b)(2)(ii) of this section, every broker or dealer shall 
deduct the percentages specified in this paragraph (b)(2)(iii) for all 
listed option positions, positions covering the same underlying 
instrument and related instruments within the options' class or product 
group. However, where computing the deductions required for commodity 
or securities positions, other than a listed option position, if said 
positions have no related listed option position the broker or dealer 
shall compute the required deductions for such commodity or securities 
positions separately.

Uncovered Short Calls

    (A) Where a broker or dealer is short a call, deducting the 
percentage required by paragraphs (c)(2)(vi) (A) through (K) of 
Sec. 240.15c3-1 of the current market value of the underlying 
instrument for such option reduced by the out-of-the-money amount, to 
the extent that such reduction does not operate to increase net 
capital. In no event shall this deduction be less than the greater of 
$250 for each short call option contract for 100 shares or 50% of the 
aforementioned percentage.

Uncovered Short Puts

    (B) Where a broker or dealer is short a put, deducting the 
percentage required by paragraphs (c)(2)(vi) (A) through (K) of 
Sec. 240.15c3-1 of the current market value of the underlying 
instrument for such option reduced by the out-of-the-money amount, to 
the extent that such reduction does not operate to increase net 
capital. In no event shall the deduction provided by this paragraph be 
less than the greater of $250 for each short put option contract for 
100 shares or 50% of the aforementioned percentage.

Long Positions

    (C) Where a broker or dealer is long puts or calls, deducting 50 
percent of the market value of the net long put and call positions in 
the same options series.

Certain Security Positions With Offsetting Options

    (D)(1) Where a broker or dealer is long a put for which it has an 
offsetting long position in the same number of units of the same 
underlying instrument, or in a related instrument within the option 
class or product group covering the same number of units of the same 
underlying instrument, deducting the percentage required by paragraphs 
(c)(2)(vi) (A) through (K) of Sec. 240.15c3-1 of the current market 
value of the underlying instrument for the long offsetting position, 
not to exceed the out-of-the money amount. In no event shall the 
deduction provided by this paragraph be less than $25 for each option 
contract for 100 shares, provided that the minimum charge need not 
exceed the intrinsic value of the option.
    (2) Where a broker or dealer is long a call for which it has an 
offsetting short position in the same number of units of the same 
underlying instrument, or in a related instrument within the option 
class or product group covering the same number of units of the same 
underlying instrument, deducting the percentage required by paragraphs 
(c)(2)(vi) (A) through (K) of Sec. 240.15c3-1 of the current market 
value of the underlying instrument for the short offsetting position, 
not to exceed the out-of-the-money amount. In no event shall the 
deduction provided by this paragraph be less than $25 for each option 
contract for 100 shares, provided that the minimum charge need not 
exceed the intrinsic value of the option.
    (3) Where a broker or dealer is short a call for which it has an 
offsetting long position in the same number of units of the same 
underlying instrument, or in a related instrument within the option 
class or product group covering the same number of units of the same 
underlying instrument, deducting, the percentage required by paragraphs 
(c)(2)(vi) (A) through (K) of Sec. 240.15c3-1 of the current market 
value of the underlying instrument for the offsetting long position 
reduced by the short call's intrinsic value. In no event shall the 
deduction provided by this paragraph be less than $25 for each option 
contract for 100 shares.
    (c) With respect to transactions involving unlisted options, every 
broker or dealer shall determine the value of unlisted option positions 
in accordance with the provision of paragraph (c)(2)(i) of 
Sec. 240.15c3-1, and shall deduct the percentages of all securities 
positions or unlisted options in the proprietary or other accounts of 
the broker or dealer specified in this paragraph (c). However, where 
computing the deduction required for a security position as if the 
security position had no related unlisted option position and positions 
in unlisted options as if uncovered would result in a lesser deduction 
from net worth, the broker or dealer may compute such deductions 
separately.

Uncovered Calls

    (1) Where a broker or dealer is short a call, deducting, 15 percent 
(or such other percentage required by paragraphs (c)(2)(vi) (A) through 
(K) of Sec. 240.15c3-1) of the current market value of the security 
underlying such option reduced by any excess of the exercise value of 
the call over the current market value of the underlying security. In 
no event shall the deduction provided by this paragraph be less than 
$250 for each option contract for 100 shares.

Uncovered Puts

    (2) Where a broker or dealer is short a put, deducting 15 percent 
(or such other percentage required by paragraphs (c)(2)(vi) (A) through 
(K) of Sec. 240.15c3-1) of the current market value of the security 
underlying the option reduced by any excess of the market value of the 
underlying security over the exercise value of the put. In no event 
shall the deduction provided by this paragraph be less than $250 for 
each option contract for 100 shares.

Covered Calls

    (3) Where a broker or dealer is short a call and long equivalent 
units of the underlying security, deducting 15 percent (or such other 
percentage required by paragraphs (c)(2)(vi) (A) through (K) of 
Sec. 240.15c3-1) of the current market value of the underlying security 
reduced by any excess of the current market value of the underlying 
security over the exercise value of the call. No reduction under this 
paragraph shall have the effect of increasing net capital.

Covered Puts

    (4) Where a broker or dealer is short a put and short equivalent 
units of the underlying security, deducting 15 percent (or such other 
percentage required by paragraphs (c)(2)(vi) (A) through (K) of 
Sec. 240.15c3-1) of the current market value of the underlying security 
reduced by any excess of the exercise value of the put over the market 
value of the underlying security. No such reduction shall have the 
effect of increasing net capital.

Conversion Accounts

    (5) Where a broker or dealer is long equivalent units of the 
underlying security, long a put written or endorsed by a broker or 
dealer and short a call in its proprietary or other accounts, deducting 
5 percent (or 50 percent of such other percentage required by 
paragraphs (c)(2)(vi) (A) through (K) of Sec. 240.15c3-1) of the 
current market value of the underlying security.
    (6) Where a broker or dealer is short equivalent units of the 
underlying security, long a call written or endorsed by a broker or 
dealer and short a put in his proprietary or other accounts, deducting 
5 percent (or 50 percent of such other percentage required by 
paragraphs (c)(2)(vi) (A) through (K) of Sec. 240.15c3-1) of the market 
value of the underlying security.

Long Options

    (7) Where a broker or dealer is long a put or call endorsed or 
written by a broker or dealer, deducting 15 percent (or such other 
percentage required by paragraphs (c)(2)(vi) (A) through (K) of 
Sec. 240.15c3-1) of the market value of the underlying security, not to 
exceed any value attributed to such option in paragraph (c)(2)(i) of 
Sec. 240.15c3-1.

    Dated: March 15, 1994.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-6413 Filed 3-18-94; 8:45 am]
BILLING CODE 8010-01-P