Current through Register Vol. 47, No. 38, September 22, 2023
as used in this Section apply unless the context otherwise requires.
1) "Call" means an option which gives the
holder the right to purchase a financial instrument at a price and on or before
the expiration date specified in the option contract.
2) "Deliverable Instrument" means a financial
instrument whose terms satisfy the requirements for fulfilling delivery
obligations of an option.
"Effective Exercise Price" means the yield equivalent price of an instrument
whose coupon rate differs from the standard instrument specified in the
4) "Financial Options
Contract" means an agreement (other than an optional delivery forward
commitment contract to purchase and sell mortgages or mortgage-backed
securities when used as part of the mortgage loan origination process) to make
or take delivery of a financial instrument upon demand by the holder of the
contract at any time before the expiration date specified in the agreement,
under terms established either by:
A) a board
of trade designated as a contract market for the trading of option contracts by
the CFTC or a national securities exchange registered with the Securities
Exchange Commission (SEC); or
the savings bank and a "permissible counterparty," as defined in subsection
(a)(10), that are counterparties in an over-the-counter option transaction
(other than an over-the-counter commodity optional transaction subject to the
jurisdiction of the CFTC that is not otherwise authorized under the Commodity
Exchange Act (
1 ) and the regulations under that
Options Transaction" means the purchase or sale of a financial options
6) "Immediate Exercise
Value" means the market value gained by exercising an option with the lowest
cost deliverable instrument at its effective exercise price compared to
purchasing (or selling) an identical instrument with the same coupon rate in
the cash market.
7) "Long Position"
means the holding of a financial options contract with the option to make or
take delivery of a financial instrument.
8) "Option Commitment Fee" means the option
premium minus the immediate exercise value of the option.
9) "Option Premium" means the price paid or
received for establishing an option position.
10) "Permissible Counterparty" means any
entity that is:
A) a primary dealer as
defined in subsection (a)(11) of this Section;
B) a bank subject to the regulation and
supervision of the Comptroller of the Currency, the Federal Deposit Insurance
Corporation, or the Board of Governors of the Federal Reserve System and that
is in compliance with applicable regulatory capital requirements;
C) a savings bank that is subject to the
regulation and supervision of the Division and is in compliance with applicable
regulatory capital requirements or subject to the regulation and supervision of
D) a broker or dealer
registered with the Securities and Exchange Commission (SEC) and subject to
regulation and supervision by a Registered Securities Association (registered
pursuant to section 15A of the Securities and Exchange Act of 1934 ( 15 USC
78(o) ) (Exchange Act) or a National Securities Exchange (registered pursuant
to sections 6 and 19(a) of the Exchange Act) and that is in compliance with
applicable capital requirements;
a government securities broker or dealer registered with the SEC that is
subject to examination and supervision by a Registered Securities Association
(registered pursuant to section 15A of the Exchange Act) or National Securities
Exchange (registered pursuant to sections 6 and 19(a) of the Exchange Act) and
that is in compliance with applicable capital requirements;
F) a futures commission merchant registered
with the CFTC and that is in compliance with applicable capital
G) the Federal Home
H) the Federal Home
Loan Mortgage Corporation, the Federal National Mortgage Association, or the
Government National Mortgage Association or the Government National Mortgage
I) any other entity
that the Director , upon application, determines to be adequately regulated,
capitalized, and audited or examined such that acting as a counterparty in an
over-the-counter options transaction with a savings bank would not entail
substantial credit risks for the savings bank.
11) "Primary Dealer in Government Securities"
means any member of the Association of Primary Dealers in United States
Government Securities and any parent, subsidiary, or affiliated entity of such
primary dealer: provided, that the member guarantees (to the satisfaction of
the Division) the over-the-counter financial options transactions between its
parent, subsidiary, or affiliated entity with a savings bank, and provided
further that the parent, subsidiary, or affiliated entity is substantially
engaged in similar activities.
"Put" means an option that gives the holder the right to sell a financial
instrument at a price on or before the expiration date specified in the
financial options contract.
"Short Position" means a commitment through a financial options contract to
stand ready during the term of the contract to make or take delivery of a
Permitted Transactions - to the extent that it has legal power to do so, a
savings bank may engage in financial options transactions as follows:
1) Long Positions - a savings bank may enter
into long positions without numerical limit.
2) Short Positions - a savings bank may enter
into short call positions without numerical limit. If a savings bank meets its
capital requirement, it may enter into short put options to the extent that the
aggregate amount of its short put options and forward commitments to purchase
securities does not exceed 15% of total assets. If capital requirements are not
met, the savings bank may enter into short put options only with prior written
approval from the Director. Permission shall be granted if the Director finds
the investment is not for speculative purposes and that the investment is made
in accordance with a well-defined hedging program adopted by the savings bank
board of directors.
Authorized Contracts - a savings bank may engage in financial options
transactions using any financial options contracts either:
1) designated by the CFTC or approved by the
2) entered into with a
"permissible counter-party", as defined in subsection (a)(10), and based upon a
financial instrument that the savings bank has authority to invest in or to
d) Board of
Directors' Authorization - before engaging in financial options transactions, a
savings bank's board of directors must authorize such activity. In authorizing
options, the board of directors shall consider any plan to engage in writing or
purchasing financial options contracts, shall endorse specific written
policies, and shall require the establishment of internal control procedures.
For options positions that will be matched with cash or forward market
positions, policy objectives must be specific enough to outline permissible
options contract strategies, taking into account price and yield correlations
between assets or liabilities and the financial options contracts; the
relationship of the strategies to the savings bank's operations; the rationale
for the ratio of the value of options positions to the value of the matched
cash market positions; and how the options strategy reduces the savings bank's
interest rate risk exposure. For unmatched option positions, policy objectives
must specify the relationship of the strategy to the savings bank's operations.
Prudent business judgment shall be exercised by participating savings banks
engaging in financial options transactions to maintain a safe and sound
financial position. Internal control procedures shall include, at a minimum,
periodic reports to management, segregation of duties and internal review
procedures. In addition, the minutes of the meeting of the board of directors
shall set forth limits applicable to financial options transactions, identify
personnel authorized to engage in financial options transactions, and set forth
the duties, responsibilities and limits of authority of such personnel. The
board of directors shall review the position limit, all outstanding options
contract positions, and the unrealized gains or losses on those positions at
each regular meeting of the board.
e) Notification, Reporting, and Approval
1) A savings bank shall notify the Director
immediately following authorization of its board of directors to engage in
financial options transactions. The savings bank shall report its outstanding
positions, together with the total unrealized gain or loss from those positions
to the Director monthly.
savings bank shall not engage in over-the-counter financial option transactions
with any permissible counterparty unless the counterparty agrees to notify the
Director. A savings bank shall not continue to engage in over-the-counter
financial option transactions with any permissible counterparty that has failed
to so notify the Director with respect to previous over-the-counter financial
option transactions with that savings bank. Notwithstanding the foregoing, no
savings bank shall engage in a long over-the-counter financial option
transaction with a specific permissible counterparty, without obtaining the
prior approval of the Director, whenever the aggregate exercise value of all
long over-the-counter financial option positions with the counterparty exceeds
the limitations contained in Section 6013 of the Act. The Director may approve
any financial option transaction whenever it determines that such transaction
does not subject the savings bank to undue risk. In making such determinations,
the Director shall consider:
A) the credit
worthiness of the specific counterparty;
B) the savings bank's experience with the
counterparty and with transacting in financial option and futures contracts
C) the nature of the
subject contracts (e.g., matched or unmatched); and
D) any other circumstances considered
relevant by the Director. An application to enter into a financial option
transaction under this Section shall be considered approved if the Director
does not deny the application within 10 calendar days from the date the
application was filed.
f) Record Keeping Requirements - a savings
bank engaging in financial options transactions shall maintain records of those
transactions in accordance with the following requirements.
1) Contract Register - the savings bank shall
maintain a contract register adequate to identify and control all financial
options contracts and sufficient to indicate at any time the amounts of
financial options contracts required to be reported on its monthly report. At a
minimum, the register shall list the type, amount, expiration date and the cost
of income from each contract.
Other Documentation - the savings bank shall maintain as part of the
documentation of its financial options strategy a schedule of any cash market
or forward commitment position with which the option is matched and the purpose
of each contract.
3) Maintenance of
Records - the records designated in this Section shall be maintained for all
financial options closed out during the preceding 2 years.
1) Purchase or Sale - upon initial purchase
or sale of a financial options contract, a memorandum entry of the information
specified in this Section shall be made and appropriate margin accounts shall
A) The option commitment fee
paid for a long position or received from the sale of a short put option shall
be amortized to income or expense over the term of the option, except as
provided in this Section.
option commitment fee received from the sale of a matched short call option
shall be deferred until the option position is terminated. The option
commitment fee received from the sale of an unmatched short call option shall
be amortized to income over the term of the option.
3) Options Contracts
A) Gains or losses on options contracts that
are matched with assets or liabilities carried at the lower of cost or market
value, or carried at market value shall be considered in determining the market
value of the asset or liability.
Options positions that are matched with assets or liabilities carried at cost
or to be carried at cost shall be accounted for as follows.
i) If a commitment fee will be or has been
received with respect to the matched asset, the option commitment fee shall be
treated as an adjustment of such fee. The adjusted commitment fee shall then be
treated as a fee paid or received in connection with the matched
ii) If a commitment fee has
not been received with respect to a matched asset, the option commitment fee
(except if received for the sale of a short call option) shall be amortized to
income or expense over the commitment period by the straight line
iii) Any resulting gain or
loss from an option position (except from a short call option) shall be treated
as a discount or premium on the matched asset or liability.
iv) Any resulting gain or loss from a short
call option position shall be recognized as income or expense upon termination
of the option position.
v) If an
option position is not matched with a cash-market or forward-commitment
position or the cash-market or forward-commitment position with which an option
is matched is sold or will not occur, the option shall be marked to
C) The immediate
exercise value of short puts and other unmatched option positions shall be
carried at their current market value.
Amended at 30 Ill. Reg. 19068, effective December 1,