[Federal Register Volume 62, Number 76 (Monday, April 21, 1997)]
[Notices]
[Pages 19363-19364]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-10160]



[[Page 19363]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38502; File No. SR-CBOE-97-18]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Board Options Exchange, Incorporated Relating to 
Changes to its Margin Rules

April 14, 1997.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on March 21, 1997, the Chicago Board Options Exchange, Incorporated 
(``CBOE'' or the ``Exchange'') filed with the Securities and Exchange 
Commission (``SEC'' or ``Commission'') the proposed rule change as 
described in Items I, II and III below, which Items have been prepared 
by the CBOE. The Commission is publishing this notice to solicit 
comments on the proposed rule change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The CBOE proposes to make revisions to its rules governing margin 
that will: (i) Permit a market-maker to receive market-maker margin 
treatment on transactions in options and other securities and (ii) 
allow certain defined strategies involving options to be carried in a 
cash account. The text of the proposed rule change is available at the 
Office of the Secretary, CBOE and at the Commission.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the CBOE included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The CBOE has prepared summaries, set forth in sections 
A, B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, Proposed Rule Change

    The purpose of the proposed rule change is to make revisions to the 
Exchange's rules governing margin that will: (i) Permit a market-maker 
to receive market-maker margin treatment on transactions in options and 
other securities,\3\ and (ii) allow certain defined strategies 
involving options to be carried in a cash account. The Exchange is also 
submitting concurrently separate changes to its margin rules in a 
separate rule filing. That other filing proposes to make significant 
changes to the CBOE's margin rules in order to: (i) Establish CBOE 
rules to govern areas of margin regulation that will no longer be 
addressed by Regulation T (``Regulation T'') of the Board of Governors 
of the Federal Reserve System (``Federal Reserve Board'' or ``Board''), 
and (ii) conform certain CBOE margin provisions to those of the New 
York Stock Exchange. That other filing will be referred to herein as 
the ``First Margin Filing.'' See SR-CBOE-97-17. The present filing will 
be referred to as the ``Second Margin Filing.''
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    \3\ Market-maker margin treatment provides that the member 
carrying a market-maker's account (``Clearing Firm'') may extend 
credit to a market-maker on specified market-maker and permitted 
offset transactions on a basis that is mutually satisfactory.
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    CBOE Rule 24.11A currently permits a debit put spread to be carried 
in a cash account.\4\ The Exchange is proposing to allow also (as more 
fully described below) credit put spreads and both debit and credit 
call spreads in European, cash settled options to be carried in a cash 
account because such strategies are substantially similar to the 
presently permitted debit put spread and fully meet the criteria 
established by Regulation T. The Federal Reserve Board decided to defer 
to the options exchanges' determination of the allowable specific 
options related strategies to be effected in the cash account, provided 
that the risk of the strategy is defined and the account contains the 
securities and/or cash required to fully cover the exposure.\5\ The 
proposed provision would permit a customer to hold short European-style 
options offset by long European-style options on the same underlying 
component or index in a cash account. In order to qualify for the cash 
account, the long position would have to be held in the account, or be 
purchased for the account on the same day as the short position is 
established. In addition, the option premium would have to be held in 
the account until full cash payment for the long option is received; 
the long option must expire with the short option, and the account must 
hold cash or cash equivalents of not less than any amount by which the 
aggregate exercise price of a long call (short put) exceeds the 
aggregate exercise price of a short call (long put). In the near 
future, the CBOE intends to propose inclusion in the cash account of 
other strategies meeting the criteria established by the Federal 
Reserve Board.
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    \4\ The Commission notes that CBOE Rule 24.11A relates to debit 
put spreads in cash account transactions, and not Rule 24.11 as 
inadvertently referred to in the rule filing.
    \5\ See 61 FR 20386 (May 6, 1996).
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    The Exchange is proposing to add these new provisions to Rule 12.3. 
Although most of the provisions governing the margin of index options 
are contained in Rule 24.11, the Exchange intends ultimately to move 
most of the margin provisions to Chapter 12 of its rules and so is 
proposing to add the index option cash account provision to Rule 12.3.
Market Maker and Specialist Accounts
    The CBOE rules and the rules of the other regulatory bodies have 
always distinguished the margin treatment for market-makers and 
specialists from that applicable to customers and other broker-dealers 
because of the unique position of market-makers and specialists in 
maintaining liquid markets. The rules recognize that options market-
makers and specialists must engage in various hedging transactions to 
manage the risk involved in fulfilling their role. Specific provisions 
governing permitted offset treatment for market-makers and specialists 
are being deleted from Regulation T, which as a result will defer to 
the rules of the self-regulatory-organizations (``SROs'').
    The First Margin Filing proposes to allow various permitted offset 
positions, which may be cleared and carried by a member on behalf of 
one or more registered specialists, registered market-makers, or 
Designated Primary Market-Makers (hereinafter referred to generically 
as ``market-makers''), to be carried upon a margin basis satisfactory 
to the concerned parties. A permitted offset position is defined to 
mean, in the case of an option in which a market-maker makes a market, 
a position in the underlying instrument or other related instrument, 
and in the case of other securities in which a market-maker makes a 
market, a position in options overlying the securities in which a 
market-maker makes a market, if the account holds the following 
positions: (i) A long position in the underlying instrument offset by a 
short position which is ``in- or at-the-money;'' (ii) a short position 
in the underlying instrument offset by a long option position which is 
``in- or at-the-money;'' (iii) a stock position resulting from the 
assignment of a market-maker short

[[Page 19364]]

option position; (iv) a stock position resulting from the exercise of a 
market-maker long position; (v) a net long position in a security 
(other than an option) in which a market-maker; or (vii) an offset 
position as defined in Appendix A of SEC Rule 15c3-1.
    In addition to the changes described above which were proposed in 
the First Margin Filing, the Exchange is also proposing to permit a 
market-maker to receive market-maker margin treatment on transactions 
in options or other derivative securities effected on an exchange of 
which he is not a member and on which he is not registered as a market-
maker if the options or other derivative securities are dually listed 
on the exchange on which he is a registered market-maker, or if the 
transactions are recognized offsets as defined by Rule 15c3-1.
    These transactions may be maintained by a carrying broker-dealer on 
a margin basis mutually satisfactory to the concerned parties, provided 
that the member, in the same calendar quarter, executes 80% of his 
total volume in the options class, product group or other SEC 
recognized offset group on the exchange where he is registered as a 
market-maker, and provided that such transactions are effected for the 
purpose of hedging, reducing the risk of, rebalancing, liquidating open 
positions of the market-maker, or for the purpose of effecting 
transactions pursuant to the ``trade or fade'' rules of any options 
exchange.\6\ This requirement will ensure that transactions effected by 
order in markets where the member is not registered as a market-maker 
are in fact reasonably related to his or her market-making function and 
are not effected for the purpose of speculation on a margin basis which 
is applicable only to market-makers and specialists.
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    \6\ CBOE Rule 8.51(b) sets forth the trade or fade requirements 
applicable to CBOE market-makers.
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    A change is also being made to allow facsimile notice of a deficit 
condition in an account. This change is consistent with the 
Commission's Rule 15c3-1.
Interpretation to Rule 12.3
    Interpretation .04 addresses the manner in which the carrying firm 
may comply with its responsibility to extend credit properly to market-
maker permitted offset transactions effected on an exchange where the 
market-maker is not registered. If a market-maker fails to specify to 
which account such an order should be placed and the resulting 
transaction clears in a market-maker account, and not a customer 
account, it will be presumed that the market-maker elected market-maker 
margin treatment for the position effected on an exchange of which he 
is not a member. The clearing firm may rely on this in good faith 
unless the clearing firm knows, or has reason to know, that the market-
maker is not or will not be in compliance with the requirement to 
effect 80% of his transactions in a particular class or product offset 
group on the exchange where he is registered as a market-maker. 
Clearing firms are, however, responsible for implementing adequate 
procedures to ensure that such orders are recorded accurately and 
cleared into the appropriate accounts.
2. Statutory Basis
    The basis under the Act for this proposed rule change is the 
requirement under Section 6(b)(5) that an exchange have rules that are 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged in regulating, clearing, 
settling, processing information with respect to, and facilitating 
transactions in securities, to remove impediments to protect and 
perfect the mechanism of a free and open market and a national market 
system, and in general, to protect investors and the public interest.
    The proposed rule change: (1) Permits a market-maker to receive 
market-maker margin treatment on transactions in options and other 
securities and (ii) allows certain defined strategies involving options 
to be carried in a cash account. The Exchange believes that the 
proposed rule change is consistent with, and furthers, the objectives 
of Section 6(b) (5) of the Act, in that it is designed to perfect the 
mechanisms of a free and open market and to protect investors and the 
public interest.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The CBOE does not believe that the proposed rule change will impose 
any burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants or Others

    No written comments were solicited or received with respect to the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period: (i) As the Commission 
may designate up to 90 days of such date if it finds such longer period 
to be appropriate and publishes its reasons for so finding or (ii) as 
to which the self-regulatory organization consents, the Commission 
will:
    (A) by order approve such proposed rule change, or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission and any person, other than those 
that may be withheld from the public in accordance with the provisions 
of 5 U.S.C. 552, will be available for inspection and copying in the 
Commission's Public Reference Room. Copies of all such filing will also 
be available for inspection and copying at the principal office of 
CBOE. All submissions should refer to file number SR-CB0E-97-18 and 
should be committed by May 12, 1997.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority. \7\
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    \1\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-10160 Filed 4-18-97; 8:45 am]
BILLING CODE 8010-01-M