[Federal Register Volume 67, Number 61 (Friday, March 29, 2002)]
[Notices]
[Pages 15263-15268]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-7609]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-45630; File No. SR-CBOE-2002-03]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Chicago Board Options Exchange, Incorporated Relating to
Customer Portfolio and Cross-Margining Requirements
March 22, 2002.
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 January 15, 2002, the Chicago Board Options Exchange, Inc. (``CBOE''
or ``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 amend its rules, for certain customer
accounts, to allow member organizations to margin listed, broad-based,
market index options, index warrants and related exchange-traded funds
according to a portfolio margin methodology as an alternative to the
current strategy-based margin methodology. The proposed rule change
will also provide for cross-margining by allowing broad-based index
futures and options on such futures to be included with listed, broad-
based index options, index warrants and related exchange-traded funds
for portfolio margin treatment.
The text of the proposed rule change is available at the Office of
the Secretary, CBOE, at the Commission, and on the Commission's
website.
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
[[Page 15264]]
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, the Proposed Rule Change
1. Purpose
a. Introduction
The CBOE proposes to expand its margin rules by providing a
portfolio margin methodology for listed, broad-based market index
options, index warrants and related exchange-traded funds that clearing
member organizations may extend to eligible customers as an alternative
to the current strategy-based option margin requirements. The proposed
rule change would also allow broad-based index futures and options on
such futures to be included in a portfolio margin account, thus
providing a cross-margin capability. The CBOE seeks to introduce the
proposed new rule as a two-year pilot program that would be made
available to member organizations on a voluntary basis.
The proposed rule change would permit self-clearing member
organizations to apply a prescribed portfolio margin methodology to an
account\3\ of an affiliate, another broker-dealer, and an account of a
member of a national futures exchange who is a futures floor trader.
Any other customers of the clearing member would be required to have
account equity of at least $5 million to be eligible for portfolio
margin treatment. This circumscribes the number of accounts able to
participate and adds safety in that such accounts are more likely to be
of significant financial means and investment sophistication. Further,
portfolio margining is most effective when applied to larger accounts
with diverse option positions and related securities, and any related
futures contracts. It is expected that institutional customers will be
the primary participants. Whether the account equity requirement should
be lowered to allow participation of more customers will be assessed at
the end of the pilot program period. Application of portfolio margin,
including cross-margin, to an IRA account would be prohibited under the
proposed rule change.
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\3\ An account dedicated to portfolio margining.
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The proposed portfolio margin and cross-margin rules have been
developed by the CBOE in cooperation with The Options Clearing
Corporation (``The OCC''), the New York Stock Exchange, Inc.
(``NYSE''), the American Stock Exchange, LLC (``AMEX''), the Board of
Trade of the City of Chicago, Inc. (``CBOT''), and the Chicago
Mercantile Exchange, Inc. (``CME''). The CBOE intends to provide a
written overview describing the operational details of the portfolio
margin and cross-margin pilot program to potential member organization
participants to introduce and explain the pilot program.
A committee of representatives from the member organizations
identified as potential participants, and staff of the sponsoring
exchanges and The OCC (the ``Portfolio Margin Committee'') was formed
and met several times in 1999 and 2000 to refine the portfolio margin
and cross-margin pilot program. This group has recommended adoption of
the portfolio margin and cross-margin pilot program, as finalized by
the group, and the related rule proposals. In addition, the portfolio
margin and cross-margin pilot program has been presented to the NYSE's
Rule 431 Committee \4\ on two occasions, with draft rules included on
the second occasion, and has received the NYSE's Rule 431 Committee's
support.
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\4\ The NYSE Rule 431 Committee is comprised of securities
industry representatives, primarily representatives of NYSE member
organizations. NYSE Rule 431 contains the NYSE's margin rules. The
function of the NYSE Rule 431 Committee is to assess the adequacy of
NYSE Rule 431 on an ongoing basis, review proposals for changes to
NYSE Rule 431, and recommend changes that are deemed appropriate.
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b. Overview--Portfolio Margin Computation
(1) Portfolio Margin
Under a portfolio margin system, margin is required based on the
greatest loss that would be incurred in a portfolio if the value of
components (underlying instruments in the case of options) move up or
down by a predetermined amount (e.g., +/-5%). Under the Exchange's
proposed portfolio margin rule, listed index options and underlying
instruments (also related instruments \5\ in the case of a cross-margin
account) would be grouped by class \6\ (e.g., S&P 500, S&P 100, etc),
each class group being a portfolio.\7\ The gain or loss on each
position in a portfolio would be calculated at each of 10 equidistant
points (``valuation points'') set at and between the upper and lower
market range points. A theoretical options pricing model would be used
to derive position values \8\ at each valuation point for the purpose
of determining the gain or loss. Gains and losses would then be netted
for positions within the class or portfolio at each valuation point.
The greatest net loss among the 10 valuation points would be the margin
required on the portfolio or class. The margin for all other portfolios
within an account would be calculated in a similar manner. Broad-based
index classes (portfolios) that are highly correlated would be allowed
offsets such that, at the same valuation point, for example, 90% of a
gain in one class may reduce or offset a loss in another class. The
amount of offset allowed between portfolios would be the same amount
that is permitted under the risk-based haircut methodology set forth in
Appendix A of the Commission's net capital rule.\9\ A per contract
minimum would be established and would override if a lesser requirement
is rendered by the portfolio margin computation.\10\
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\5\ Under the proposed rule change, the term ``related
instrument'' would mean, with respect to an options class or product
group, futures contracts and options on futures contracts covering
the same underlying instrument.
\6\ Under the proposed rule change, the term ``options class''
would refer to all options contracts covering the same underlying
instrument.
\7\ CBOE's pilot program would permit an exchange-traded fund
structured to replicate the composition of the index to be included;
however, stock baskets would not be permitted at this time.
\8\ Position values would represent the difference between the
position closing price and the theoretical value at each valuation
point.
\9\ Rule 15c3-1a under the Act, 17 CFR 240.15c3-1a.
\10\ The proposed rules set a per contract minimum of $37.50.
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Member organizations would not be permitted to use any theoretical
pricing model to generate the prices used to calculate theoretical
profits and losses. Under the proposed rule change, the theoretical
prices used for computing profits and losses must come from a
theoretical pricing model that, pursuant to the Commission's net
capital rule,\11\ qualifies for purposes of determining the amount to
be deducted in computing net capital under a portfolio-based
methodology. CBOE believes that delineating acceptable theoretical
pricing models is best achieved by applying the Commission's net
capital rule by reference. In this way, consistency with the
Commission's net capital rule is maintained. In addition, since
theoretical pricing models must be approved by a Designated Examining
Authority (``DEA'') and reviewed by the Commission to qualify,
uniformity across models can be assured. As a result, portfolio margin
and cross-margin requirements will not vary materially from firm to
firm. Currently, the theoretical model used by The OCC is the only
model qualified pursuant to the Commission's net capital rule.
[[Page 15265]]
Consequently, all member organizations participating in the pilot
program would, at least for the foreseeable future, obtain their
theoretical values from The OCC.
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\11\ See Rule 15c3-1a(b)(1)(i)(B) under the Act, 17 CFR
240.15c3-1a(b)(1)(i)(B).
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The Exchange's proposed rule would propose a market range of +/-10%
for computing theoretical gains and losses in broad-based, non-high
capitalization index portfolios. A market range of +6%/-8% is proposed
for broad-based, high capitalization index portfolios.\12\ These are
the same ranges currently applied to options market makers for the
purpose of computing portfolio or risk-based haircuts. On a historical
basis, these ranges cover one day moves at a very high level of
confidence, and would be competitive with the market range coverage
applied for performance bond (margin) purposes in the futures industry
on comparable index futures. The proposed rule change requires that a
separate securities margin account (or subaccount of a securities
margin account) be used for portfolio margining.
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\12\ CBOE believes that it is imperative that these market move
ranges be competitive with the range used in the futures industry
for computing margin (performance bond) on broad-based index
futures. The proposed ranges accomplish this goal. Customer
performance bond in the futures industry is computed using a
portfolio margining system known as the Standard Portfolio Analysis
of Risk (``SPAN''). The terms ``high capitalization'' and ``non-high
capitalization'' have the same meaning as they do for the purposes
of risk-based haircuts (Rule 15c3-1 under the Act, 17 CFR 240.15c3-
1).
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(2) Cross-Margining
Related index futures and options on such futures would be allowed
to be carried in the portfolio margin account, thus affording a cross-
margin capability. Alternatively, the proposed rule change permits a
clearing member to establish a separate portfolio margin account
(securities margin account) exclusively for cross-margining. In a
portfolio margin account, including one that is used exclusively for
cross-margining, constituent portfolios may be formed containing index
options, index warrants and exchange-traded funds structured to
replicate the composition of the index underlying a particular
portfolio, as well as related index futures and options on such
futures. Cross-margining would operate similar to the cross-margin
program that was approved by the Commission and the Commodity Futures
Trading Commission (``CFTC'') for listed options market-makers and
proprietary accounts of clearing member organizations. There is one
major difference in that a securities account would be used instead of
a futures account and, therefore, SEC customer protection rules and
insurance coverage by the Securities Investor Protection Corporation
(``SIPC'') would apply instead of CFTC rules concerning customer
protection and liquidation proceedings. For determining theoretical
gains and losses, and resultant margin requirements, the same portfolio
margin computation program will be applied to portfolio margin accounts
that contain a cross-margin element, to portfolio margin accounts that
do not contain a cross-margin element, and to portfolio margin accounts
used exclusively for cross-margining.
c. Margin or Minimum Equity Deficiency
Under proposed CBOE Rule 12.4(h), positions in a portfolio margin
account would be valued at current market prices, as currently defined
in the Exchange's margin rules. Under the proposed rule change, account
equity would be calculated and maintained separately for each portfolio
margin account. For purposes of the $5 million minimum account equity
requirement, all accounts owned by an individual or entity may be
combined. Proposed CBOE Rule 12.4(i) requires that additional margin
must be obtained with one business day (T+1) whenever equity is below
the margin required, regardless of whether the deficiency is caused by
the addition of new positions, the effect of unfavorable market
movement on existing positions, or a combination of both. The portfolio
margin requirement, therefore, would be both the initial and
maintenance margin requirement, and no differentiation would be
necessary. In addition, proposed CBOE Rule 12.4(g) would require that,
in the event account equity falls below the $5 million minimum,
additional equity must be deposited within 3 business days (T+3). If
the deficiency were not resolved within 3 business days, the carrying
member organization would be prohibited under the proposed rule change
from accepting any new opening orders beginning on T+4, with the
exception of opening orders that hedge existing positions. This
prohibition would remain in effect until a $5 million equity was
established.
d. Risk Disclosure Statement and Acknowledgement
In addition, the Exchange proposes that member organizations
provide every portfolio margin customer with a written risk disclosure
statement at or prior to the initial opening of a portfolio margin
account.\13\ This disclosure statement highlights the risks and
operation of portfolio margin accounts, including cross-margining, and
the differences between portfolio margin and strategy-based margin
requirements. The disclosure statement is divided into two sections,
one dealing with portfolio margining and the other with cross-
margining. The disclosure statement clearly notes that additional
leverage is possible in an account margined on a portfolio basis in
relation to strategy-based margin. Among other things, the disclosure
statement covers who is eligible to open a portfolio margin account,
the instruments that are allowed, and when deposits to meet margin and
minimum equity are due. The fact that long option positions held in a
portfolio margin account are not segregated, as they generally would be
in the case of a regular margin account under the Commission's customer
protection rules, is explained. Also included within the portfolio
margin section is a summary list of the special risks of portfolio
margin accounts, such as: increased leverage; shorter time for meeting
margin; involuntary liquidation if margin not received; inability to
calculate future margin requirements because of the data and
calculations required; and that long positions are subject to a lien.
The risks and operation of a cross-margin feature are outlined in the
cross-margin section of the disclosure statement, and a summary list of
the special risks associated with cross-margining is included.
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\13\ Even a customer that engages exclusively in cross-margining
is a portfolio margin customer, as the proposed rule change permits
cross-margining to be conducted only by applying the portfolio
margin methodology.
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Further, at or prior to the time a portfolio margin account is
initially opened, member organizations would be required to obtain a
signed acknowledgement concerning portfolio margining in general from
the customer. In addition, prior to accommodating cross-margining,
member organizations would be required to obtain a second signed
acknowledgement within the same time frame that pertains to cross-
margin.
By signing the general acknowledgement required of all customers,
the customer would attest to having read the disclosure statement and
being aware of the fact that long option positions in a portfolio
margin account (which includes cross-margin accounts) are not subject
to the segregation requirements under the customer protection rules of
the Commission, and would be subject to a lien by The OCC. In signing
the
[[Page 15266]]
additional acknowledgement applicable to cross-margining, the customer
would attest to having read the disclosure statement and being aware of
the fact that futures positions are being carried in a securities
account, are subject to the Commission's customer protection rules,\14\
and fall under the authority of the SIPC in the event the carrying
broker-dealer becomes financially insolvent. Within Chapter 9 of the
Exchange's rules (``Doing Business with the Public''), the Exchange
would prescribe the format of the written disclosure statement and
acknowledgements in proposed Exchange Rule 9.15(d)--Delivery of Current
Options Disclosure Documents and Prospectus. Like a current Exchange
rule that prescribes the format for a Special Statement for Uncovered
Options Writers (CBOE Rule 9.15(c)), proposed Exchange Rule 9.15(d)
would allow member organizations to develop their own format, provided
it contains substantially similar information and it is approved in
advance by the Exchange.
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\14\ As disclosed in the general acknowledgement form (required
of any portfolio or cross-margin customer), portfolio margin and
cross-margin accounts operate pursuant to an exception to the
customer protection rules in that fully paid long positions will not
be segregated.
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e. Net Capital
The Exchange also proposes to add a new requirement in CBOE Rule
13.5 to mandate that the gross customer portfolio margin requirements
of a broker-dealer may at no time exceed 1,000 percent of a carrying
broker-dealer's net capital (a 10:1 ratio). This requirement is
intended to place a ceiling on the amount of margin a broker-dealer can
extend to its customers in relation to its net capital.
f. Internal Risk Monitoring Procedures
The Exchange further proposes a separate, related rule that would
require member organizations that carry portfolio margin or cross-
margin accounts to establish and maintain written procedures for
assessing and monitoring the potential risks to their capital.
Specifically, proposed CBOE Rule 15.8A (Risk Analysis of Portfolio
Margin and Cross-Margin Accounts) would require that the member
organization file and maintain its current procedures with its DEA, and
provide the DEA with such information as the DEA may reasonably require
regarding the member organization's risk analysis of any and all
portfolio margin and cross-margin accounts carried for customers.
Proposed CBOE Rule 15.8A would incorporate current Exchange Rule 15.8--
Risk Analysis of Market-Maker Accounts--by reference to require that
the risk analysis be conducted in the same manner as prescribed in
Exchange Rule 15.8. Additionally, proposed CBOE Rule 15.8A would set
forth certain undertakings that must be included in the written
procedures (e.g., review and approval of credit limits for each
customer and across all accounts).
Because member organizations would be required under the proposed
rule change to have risk monitoring procedures, proposed CBOE Rule
12.4(i) states that the current CBOE Rule 12.9--Meeting Margin Calls by
Liquidation Prohibited--prohibiting excessive liquidations to meet
margin requirements will not apply to portfolio margin and cross-margin
accounts. Furthermore, given the proposed risk monitoring procedures,
CBOE proposes that day trading margin requirements would not apply to
portfolio margin and cross-margin accounts.\15\ Through these risk-
monitoring procedures, member organizations will be expected to oversee
portfolio margin and cross-margin accounts for excessive liquidations
and day trading and take appropriate action according to their
procedures.
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\15\ The CBOE currently does not have a day-trading margin rule.
Accordingly, the proposal to make day trading margin requirements
inapplicable to portfolio margin and cross-margin accounts would not
apply until CBOE has filed, and the Commission has approved, a
proposed rule change relating to day trading margin. Telephone
conversation between Richard Lewandowski, Vice President, Division
of Regulatory Services, CBOE, and Hong-Anh Tran, Special Counsel,
Division of Market Regulation (``Division''), Commission, on
February 12, 2002. The NYSE and the National Association of
Securities Dealers, Inc. (``NASD'') have day trading margin rules
and the CBOE does review its member organizations as necessary for
compliance with day trading rules when the member is also a NYSE
member or a NASD member.
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It should be noted that the disclosure statement delivery
requirement, the $5 million minimum equity requirement, and the next
day deposit condition for additionally required margin were all added
by the Portfolio Margin Committee. The Portfolio Margin Committee
deemed these requirements prudent given that less margin is generally
required under a portfolio margining approach than under the current
strategy-based methodology, and these measures made the plan entirely
acceptable to the member firm representatives.
g. Margin at the Clearing House Level \16\
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\16\ The Commission anticipates that the clearing arrangements
described in this section will be the subject of a separate proposed
rule change filed by The OCC.
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The Exchange proposes that all customer portfolio margin account
transactions not involving a futures transaction (e.g., cross-margin)
be cleared in one special omnibus account for the clearing firm at The
OCC. In addition, the Exchange proposes that all transactions involving
cross-margining, both the security and futures product, be cleared in
one of two additional special omnibus accounts for cross-margining,
depending on the entity that clears the futures product being cross-
margined. One cross-margin omnibus account corresponds to a cross-
margining agreement between The OCC, the CME and the New York Clearing
Corporation. The other omnibus account corresponds to a cross-margining
agreement between The OCC and the Board of Trade Clearing Corporation.
The OCC will compute margin for the special omnibus accounts using the
same portfolio margin methodology applied at the customer level. The
OCC will continue to require full payment from the clearing firm for
all long option positions. However, as previously noted, long positions
will not be segregated like they are in the firm's regular customer
range account at The OCC. This is necessary and preferred with a
portfolio margining methodology because all long positions must be
available for margin offset. Margin relief is based on a dollar offset
basis as opposed to identifying specific contract to contract offsets
under a strategy-based methodology. This may result in situations where
the long positions of a given customer could serve to offset the risk
in another customer's short position. Long positions would, therefore,
be subject to The OCC lien. An OCC clearing member currently has the
ability to unsegregate a long position in order to pair it with a short
position (contract to contract basis) and form a qualified spread.
Under the proposed treatment of long positions in a portfolio margin
omnibus account at The OCC, all long positions would be unsegregated,
freeing The OCC clearing member from the task of determining which long
positions offset risk and from specifying each position to be
unsegregated.
h. Rationale for Portfolio Margin
Portfolio margining brings a modern approach to quantifying risk
and offers a number of efficiencies. It eliminates the task of
analyzing the portfolio and sorting it according to currently
recognized strategies (e.g., spreads), and computing a margin
requirement for each individual position or strategy. This process
becomes quite cumbersome in an account with
[[Page 15267]]
multiple positions and complex strategies. More importantly, for a
given market move, up or down, in a diverse portfolio there will be
listed option positions that appreciate and other option positions that
will depreciate. Under a portfolio margin system, offsets are fully
realized, whereas, under the current strategy-based system, positions
and/or a group of positions comprising a single strategy are margined
independent of each other and offsets between them do not figure into
the total margin requirement as efficiently. In addition, under a
portfolio margin system, the volatility of an individual listed option
series is used in the theoretical pricing model that renders the price
used to compute a gain/loss on that option position at each valuation
point. This links the margin required to the risk in each particular
position in contrast to the strategy-based margin. Strategy-based
margin applies a universal percentage requirement (of the underlying
index value) to all short option positions in the same category (e.g.,
broad-based), irrespective of the fact that all options prices do not
change equally (in percentage terms) with a change in the price or
level of the underlying instrument.
Theoretical options pricing models have become widely accepted and
utilized since Fischer Black and Myron Scholes first introduced a
formula for calculating the value of a European style option in
1973.\17\ Other formulas, such as the Cox-Ross-Rubinstein model have
since been developed. Option pricing formulas are now used routinely by
option market participants to analyze and manage risk and have proven
to be highly effective and preferred. In addition, essentially the same
portfolio methodology described above has been used successfully by
broker-dealers since 1994 to calculate haircuts on option positions for
net capital purposes.\18\
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\17\ In 1997, Fischer Black and Myron Scholes were awarded a
Nobel Prize for the development of an options pricing formula.
\18\ On March 15, 1994, the Commission issued a no-action letter
allowing the implementation of a risk-based haircut pilot program.
See letter from Brandon Becker, Director, Division, Commission, to
Mary Bender, First Vice President, Division of Regulatory Services,
CBOE, and Timothy Hinkes, Vice President, The OCC, dated March 15,
1994. The risk-based haircut program took full effect on September
1, 1997. See ``Net Capital Rule,'' Securities Exchange Act Release
No. 38248 (February 6, 1997), 62 FR 6474 (February 12, 1997).
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The Board of Governors of the Federal Reserve System (the ``Federal
Reserve Board'' or ``FRB'') in its amendments to Regulation T in 1998
permitted SROs to implement portfolio margin rules, provided they are
approved by the Commission.\19\ A portfolio margin system recognizes
the offsetting gains from positions that react favorably in market
declines, while market rises are tempered by offsetting losses from
positions that react negatively. A portfolio margin approach can thus
have a neutralizing effect on option portfolio volatility. In times of
market stress, the current strategy-based margin can result in margin
calls and forced liquidations, thus contributing to the selling
pressure in the market. The offset ability of portfolio margining can
alleviate the need for liquidations, slowing acceleration of volatility
in a crisis.
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\19\ See Federal Reserve System, ``Securities Credit
Transactions; Borrowing by Brokers and Dealers''; Regulations G, T,
U and X; Docket Nos. R-0905, R-0923 and R-0944, 63 FR 2806 (January
16, 1998).
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More recently, the FRB encouraged the development of a portfolio
margin approach in a letter to the Commission and the CFTC delegating
authority to the agencies to jointly prescribe margin regulations for
security futures products.\20\ In that letter, the FRB wrote that it
``has encouraged the development of [portfolio margin approaches] by,
for example, amending its Regulation T so that portfolio margining
systems approved by the Commission can be used in lieu of the strategy-
based system embodied in the Board's regulation.'' The FRB concluded
that letter by writing ``The Board anticipates that the creation of
security future products will provide another opportunity to develop
more risk sensitive, portfolio-based approaches for all securities,
including security options and security futures products.''
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\20\ See letter from the FRB to James E. Newsome, Acting
Chairman, CFTC, and Laura S. Unger, Acting Chairman, Commission,
dated March 6, 2001.
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An ability to cross-margin listed index options with index futures,
and options on such futures, is critical because many professional
investors hedge their listed index options with futures. Although
haircuts assessed on broker-dealers with respect to computing their net
capital requirement recognize offsets between securities index options
and index futures, current margin practice does not allow these
offsets. Cross-margin benefits the financial markets and clearing
system in general, not just individual investors. Cross-margin would
reduce the number of forced liquidations. Currently, an option
(securities) account and futures account of the same customer are
viewed as separate and unrelated. In addition, currently an option
account must be liquidated if the risk in the positions has increased
dramatically or margin calls cannot be met, even if gains in the
customer's futures account offset the losses in the options account. If
the accounts can be combined (i.e., cross-margin), there is little or
no net change in risk and unnecessary liquidation can be avoided. The
severity of a period of high volatility in the market is lessened if
the number of liquidations is reduced because, for example, liquidating
into a declining market exacerbates the decline. A capability to cross-
margin listed index options and index futures would further alleviate
excessive margin calls, improve cash flows and liquidity, and reduce
volatility, particularly in times of market downturns. Various
government agencies and task groups have previously advocated
implementation of a cross-margin system. Those groups include the
Presidential Task Force on Market Mechanics (also known as the Brady
Commission) \21\ and the Commission.\22\
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\21\ See ``The Brady Report,'' Report of the Presidential Task
Force on Market Mechanisms, January 1988, p. 59 and pp. 65-66.
\22\ See ``The October 1987 Market Break: Report by the
Division,'' Commission, February 1988, pp. 10-57. See also the
interim report of the ``Working Group on Financial Markets,''
(Department of the Treasury, CFTC, Commission and FRB), May 1988,
Appendix D III A.
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Listed index options are now at a disadvantage to economically
equivalent derivative products traded on futures exchanges in terms of
margin requirements. Since 1988, index futures and options have been
margined under a portfolio margin system known as SPAN. While the risks
of listed index options are no greater than an equivalent position in
an index future or option on the future, margin required on listed
securities index options is significantly higher in many cases.
Currently, listed index options margin (excluding the option premium)
for a short at-the-money contract approximates 15% of the underlying
index value while SPAN margin on a comparable futures index option
contract is approximately 6% of the index value. When faced with such a
disparity, investment managers discerningly choose futures products
over listed index options for their hedging to reduce their costs. A
portfolio style margin application for listed index options will reduce
disparities between securities index options and futures products, thus
making listed index products more competitive and more effective tools
for investors.
Relief provided by a portfolio margin system is also needed so that
listed index options can compete with over-the-counter derivatives,
which can be
[[Page 15268]]
margined on a good faith basis if hedged with a listed option.\23\
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\23\ See ``OTC Derivatives Dealers,'' Securities Exchange Act
Release No. 40594, (October 23, 1998), 63 FR 59362 (November 3,
1998).
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2. Statutory Basis
The Exchange believes that the proposed rule change described above
is consistent with the provisions of section 6(b) of the Act,\24\ in
general, and specifically furthers the objectives of section 6(b)(5) of
the Act,\25\ in that it is designed to perfect the mechanisms of a free
and open market and to protect investors and the public interest. The
proposed portfolio margin rule change is intended to promote greater
reasonableness, accuracy and efficiency in respect of Exchange margin
requirements for complex, multiple position listed index option
strategies, and to offer a cross-margin capability with related index
futures positions in eligible accounts.
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\24\ 15 U.S.C. 78f(b).
\25\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
CBOE does not believe that the proposed rule change will impose any
burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act.
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 Exchange 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, including whether the proposed rule
change is consistent with the Act. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609.
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 such filing will also be
available for inspection and copying at the principal office of the
CBOE. All submissions should refer to File No. SR-CBOE-2002-03 and
should be submitted by April 19, 2002.
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\26\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\26\
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-7609 Filed 3-28-02; 8:45 am]
BILLING CODE 8010-01-P