[Federal Register Volume 67, Number 190 (Tuesday, October 1, 2002)]
[Notices]
[Pages 61707-61715]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-24906]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46555; File No. SR-OC-2002-01]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by OneChicago, LLC Relating to Customer Margin Requirements for 
Security Futures

September 26, 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 August 30, 2002, OneChicago, LLC, (``OneChicago'') filed with the 
Securities and Exchange Commission (``Commission'') the proposed rule 
change as described in Items I, II, and III below, which Items have 
been prepared by OneChicago. On September 25, 2002, OneChicago 
submitted Amendment No. 1 to the proposed rule change.\3\ On September 
25, 2002, OneChicago submitted Amendment No. 2 to the proposed rule 
change.\4\ The Commission is publishing this notice to solicit comments 
on the proposed rule change, as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Kieran P. Hennigan, Sullivan & Cromwell, to 
Assistant Director for Security Futures Products, Division of Market 
Regulation (``Division''), Commission, dated September 24, 2002, 
(``Amendment No. 1''). In Amendment No. 1, OneChicago replaced the 
Form 19b-4 originally filed on August 30, 2002 in its entirety. The 
changes made by Amendment No. 1 have been incorporated into this 
notice.
    \4\ See letter from Frank Ochsenfeld, Sullivan & Cromwell, 
attention to T.R. Lazo, Senior Special Counsel, Division, 
Commission, dated September 24, 2002, (``Amendment No. 2''). In 
Amendment No. 2, OneChicago made a technical correction to the rule 
text. The changes made by Amendment No. 2 have been incorporated 
into this notice.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    OneChicago is proposing to adopt new Rule 515, including Schedule A 
thereto (the ``Proposed Rule''), to (i) establish general requirements 
and procedures relating to customer margining by security futures 
intermediaries (the ``General Margin Rules''), (ii) set initial or 
maintenance margin levels for offsetting positions involving security 
futures and related positions at levels lower than the levels that 
would be required if those positions were margined separately (the 
``Margin Offset Rule'') and (iii) exclude proprietary trades of 
qualifying security futures dealers from the margin requirements set 
forth in the Proposed

[[Page 61708]]

Rule and the related regulatory requirements (the ``Market Maker 
Exclusion'').\5\ The General Margin Rules, which are contained in 
paragraphs (a) through (l) of the Proposed Rule, are detailed below. 
The Margin Offset Rule consists of paragraph (m) of the Proposed Rule 
and the table of offsets attached thereto as Schedule A, which 
describes in detail the margin offsets available with respect to 
particular combinations of security futures and related positions.
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    \5\ Terms used in this filing that are defined in the Act, or 
the Rules thereunder, have the meanings assigned to them in the Act 
or Rules thereunder.
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    Below is the text of the proposed rule change. Proposed new 
language is italicized.
* * * * *

Customer Margin Requirements

515. General Requirements; Offsetting Positions; Exclusion for Market 
Makers

    (a) Scope of Rule. This Rule 515 shall apply to positions resulting 
from transactions in Contracts traded on the Exchange or subject to the 
Rules of the Exchange to the extent that such positions are held by 
Clearing Members or, if applicable, Exchange Members on behalf of 
Customers in futures accounts (as such term is defined in Commission 
Regulation Sec.  1.3(vv) and Exchange Act Regulation 15c3-3(a)), with 
paragraph (n) of this Rule 515 also applying to such positions held in 
securities accounts (as such term is defined in Commission Regulation 
Sec.  1.3(ww) and Exchange Act Regulation 15c3-3(a)). As used in this 
Rule 515, the term ``Customer'' does not include (i) any exempted 
person (as such term is defined in Commission Regulation Sec.  
41.43(a)(9) and Exchange Act Regulation 401(a)(9)) and (ii) any Market 
Maker (as such term is defined in paragraph (n) below). Nothing in this 
Rule 515 shall alter the obligation of each Clearing Member and, if 
applicable, Exchange Member to comply with Applicable Law relating to 
customer margin for transactions in Single Stock Futures and Stock 
Index Futures, including without limitation Commission Regulations 
Sec. Sec.  41.42 through 41.49 or Rules 400 through 406 under the 
Exchange Act, as applicable (including in each case any successor 
regulations or rules).
    (b) Margin System. The Standard Portfolio Analysis of Risk 
(SPAN[reg]) is the margin system adopted by the Exchange. SPAN[reg] 
generated margin requirements shall constitute Exchange margin 
requirements. All references to margin in the Rules of the Exchange 
shall be to margin computed on the basis of SPAN[reg]. Margin systems 
other than SPAN[reg] may be used to meet Exchange margin requirements 
if the relevant Clearing Member or, if applicable, Exchange Member can 
demonstrate that its margin system will result in margin requirements 
that are in all cases equal to or greater than the corresponding 
requirements determined on the basis of SPAN[reg].
    (c) Margin Rate. The Exchange will set and publish the initial and 
maintenance margin rates to be used in determining Exchange margin 
requirements; provided that in no case shall the required margin for 
any long or short position held by a Clearing Member or, if applicable, 
Exchange Member on behalf of a Customer be less than 20% of the current 
market value of the relevant Contract (or such other rate from time to 
time determined by the Commission and the Securities and Exchange 
Commission for purposes of Commission Regulation Sec.  41.45(b)(1) and 
Rule 403(b)(1) under the Exchange Act) unless a lower margin level is 
available for such position pursuant to paragraph (m) below.
    (d) Acceptable Margin Deposits.
    (i) Clearing Members and, if applicable, Exchange Members may 
accept from their Customers as margin deposits of cash, margin 
securities (subject to the limitations set forth in the following 
sentence), exempted securities, any other assets permitted under 
Regulation T of the Board of Governors of the Federal Reserve System 
(as in effect from time to time) to satisfy a margin deficiency in a 
securities margin account, and any combination of the foregoing, each 
as valued in accordance with Commission Regulation Sec.  41.46(c) and 
(e) or Rule 404(c) under the Exchange Act, as applicable. Shares of a 
money market mutual fund that meet the requirements of Commission 
Regulation Sec.  1.25 may be accepted as a margin deposit from a 
Customer for purposes of this Rule 515.
    (ii) A Clearing Member or, if applicable, Exchange Member shall not 
accept as margin from any Customer securities that have been issued by 
such Customer or an Affiliate of such Customer unless such Clearing 
Member or Exchange Member files a petition with and receives permission 
from the Exchange for such purpose.
    (iii) All assets deposited by a Customer to meet margin 
requirements must be and remain unencumbered by third party claims 
against the depositing Customer.
    (iv) Except to the extent prescribed otherwise by the Exchange, 
cash margin deposits shall be valued at market value and all other 
margin deposits shall be valued at an amount not to exceed that set 
forth in Commission Regulations Sec. Sec.  41.42 through 41.49 or Rules 
400 through 406 under the Exchange Act, as applicable (including in 
each case any successor regulations or rules).
    (e) Acceptance of Orders. Clearing Members and, if applicable, 
Exchange Members may accept Orders for a particular Customer account 
only if sufficient margin is on deposit in such account or is 
forthcoming within a reasonable period of time (which shall be no more 
than five Business Days, although the relevant Clearing Member or, if 
applicable, Exchange Member may deem one hour to be a reasonable period 
of time). For a Customer account that has been subject to calls for 
margin for an unreasonable period of time, Clearing Members and, if 
applicable, Exchange Members may only accept Orders that, when 
executed, will reduce the margin requirements resulting from the 
existing positions in such account. Clearing Members and, if 
applicable, Exchange Members may not accept Orders for a Customer 
account that would liquidate to a deficit or that has a debit balance.
    (f) Margin Calls. Clearing Members and, if applicable, Exchange 
Members must call for margin from a particular Customer:
    (i) when the margin equity on deposit in such Customer's account 
falls below the applicable maintenance margin requirement; or
    (ii) subsequently, when the margin equity on deposit in such 
Customer's account, together with any outstanding margin calls, is less 
than the applicable maintenance margin requirement.
    Any such call must be made within one Business Day after the 
occurrence of the event giving rise to such call. Clearing Members and, 
if applicable, Exchange Members may call for additional margin at their 
discretion.
    Clearing Members and, if applicable, Exchange Members shall reduce 
any call for margin only to the extent that margin deposits permitted 
under paragraph (d) above are received in the relevant account. 
Clearing Members and, if applicable, Exchange Members may delete any 
call for margin only if (i) margin deposits permitted under paragraph 
(d) above equal to or in excess of the deposits called are received in 
the relevant account or (ii) inter-day favorable market movements or 
the liquidation of positions result in the margin on deposit in the 
relevant account being equal to or greater than the applicable initial 
margin requirement. In the event of any such reduction or deletion, the 
oldest

[[Page 61709]]

outstanding margin call shall be reduced or deleted first.
    Clearing Members and, if applicable, Exchange Members, shall 
maintain written records of any and all margin calls issued, reduced or 
deleted by them.
    (g) Disbursements of Excess Margin. Clearing Members and, if 
applicable, Exchange Members may release to Customers margin on deposit 
in any account only to the extent that such margin is in excess of the 
applicable initial margin requirement under this Rule 515 and any other 
applicable margin requirement.
    (h) Loans to Customers. Clearing Members and, if applicable, 
Exchange Members may not extend loans to Customers for margin purposes 
unless such loans are secured within the meaning of Commission 
Regulation Sec.  1.17(c)(3). The proceeds of any such loan must be 
treated in accordance with Commission Regulation Sec.  1.30.
    (i) Aggregation of Accounts and Positions. For purposes of 
determining margin requirements under this Rule 515, Clearing Members 
and, if applicable, Exchange Members shall aggregate accounts under 
identical ownership if such accounts fall within the same 
classifications of customer segregated, customer secured, special 
reserve account for the exclusive benefit of customers and non-
segregated for margin purposes. Clearing Members and, if applicable, 
Exchange Members may compute margin requirements for identically owned 
concurrent long and short positions on a net basis.
    (j) Omnibus Accounts. Clearing Members and, if applicable, Exchange 
Members shall collect margin on a gross basis for positions held in 
domestic and foreign omnibus accounts. For omnibus accounts, initial 
margin requirements shall equal the corresponding maintenance margin 
requirements. Clearing Members and, if applicable, Exchange Members 
shall obtain and maintain written instructions from domestic and 
foreign omnibus accounts for positions that are eligible for offsets 
pursuant to paragraph (m) below.
    (k) Liquidation of Positions. If a Customer fails to comply with a 
margin call required by Commission Regulations Sec. Sec.  41.42 through 
41.49 or Rules 400 through 406 under the Exchange Act, as applicable, 
within a reasonable period of time (which shall be no more than five 
Business Days, although the relevant Clearing Member or, if applicable, 
Exchange Member may deem one hour to be a reasonable period of time), 
the relevant Clearing Member or, if applicable, Exchange Member may 
liquidate positions in such Customer's account to ensure compliance 
with the applicable margin requirements.
    (l) Failure to Maintain Required Margin. If a Clearing Member or, 
if applicable, Exchange Member fails to maintain sufficient margin for 
any Customer account in accordance with this Rule 515, the Exchange may 
direct such Clearing Member or Exchange Member to immediately liquidate 
all or any part of the positions in such account to eliminate the 
deficiency.
    (m) Offsetting Positions. For purposes of Commission Regulation 
Sec.  41.45(b)(2) and Rule 403(b)(2) under the Exchange Act, the 
initial and maintenance margin requirements for offsetting positions 
involving Single Stock Futures and Stock Index Futures, on the one 
hand, and related positions, on the other hand, are set at the levels 
specified in Schedule A to this Chapter 5.
    (n) Exclusion for Market Makers.
    (i) A Person shall be a ``Market Maker'' for purposes of this Rule 
515, and shall be excluded from the requirements set forth in 
Commission Regulations Sec. Sec.  41.42 through 41.49 or Rules 400 
through 406 under the Exchange Act, as applicable, in accordance with 
Commission Regulation Sec.  41.42(c)(2)(v) or Rule 400(c)(2)(v) under 
the Exchange Act with respect to all trading in security futures (as 
such term is defined in Section 1a(31) of the CEA) for its own account, 
if such Person is an Exchange Member that is registered with the 
Exchange as a dealer (as such term is defined in Section 3(a)(5) of the 
Exchange Act) in security futures.
    (ii) Each Market Maker shall:
    (A) be registered as a floor trader or a floor broker with the 
Commission under Section 4f(a)(1) of the CEA or as a dealer with the 
Securities and Exchange Commission (or any successor agency or 
authority) under Section 15(b) of the Exchange Act;
    (B) maintain records sufficient to prove compliance with the 
requirements set forth in this paragraph (n) and Commission Regulation 
Sec.  41.42(c)(2)(v) or Rule 400(c)(2)(v) under the Exchange Act, as 
applicable; and
    (C) hold itself out as being willing to buy and sell security 
futures for its own account on a regular or continuous basis.
    A Market Maker satisfies condition (C) above if: (x) at least 
seventy-five percent (75%) of its gross revenue on an annual basis is 
derived from business activities or occupations from trading listed 
financial derivatives and the instruments underlying those derivatives, 
including security futures, stock index futures and options, stock and 
index options, stocks, foreign currency futures and options, foreign 
currencies, interest rate futures and options, fixed income instruments 
and commodity futures and options; or (y) except for unusual 
circumstances, at least fifty percent (50%) of its trading activity in 
Contracts on the Exchange in any calendar quarter (measured in terms of 
contract volume) is in the contracts to which it is assigned under a 
market making program adopted by the Exchange pursuant to Rule 514.\6\
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    \6\ OneChicago has represented that it will amend this paragraph 
prior to approval of the proposed rule change to specify the types 
of records security futures intermediaries will be required to 
maintain to demonstrate compliance with the Market Maker Exclusion.
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    (iii) Any Market Maker that fails to comply with the Rules of the 
Exchange, Commission Regulations Sec. Sec.  41.42 through 41.49 or 
Rules 400 through 406 under the Exchange Act, as applicable, shall be 
subject to disciplinary action in accordance with Chapter 7. 
Appropriate sanctions in the case of any such failure shall include, 
without limitation, a revocation of such Market Maker's registration as 
a dealer in security futures pursuant to clause (i) above.

[[Page 61710]]



                        Schedule A to Chapter 5.--Margin Levels for Offsetting Positions
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                                    Security underlying the         Initial margin          Maintenance margin
      Description of offset             security future               requirement              requirement
----------------------------------------------------------------------------------------------------------------
1. Long security future (or       Individual stock or narrow-  20% of the current        The lower of: (1) 10%
 basket of security futures        based security index.        market value of the       of the aggregate
 representing each component of                                 long security future,     exercise price \9\ of
 a narrow-based securities index                                plus play for the long    the put plus the
 \7\) and long put option \8\ on                                put in full.              aggregate put out-of-
 the same underlying security                                                             the-money \10\ amount,
 (or index).                                                                              if any; or (2) 20% of
                                                                                          the current market
                                                                                          value of the long
                                                                                          security future.
---------------------------------
2. Short security future (or      Individual stock or narrow-  20% of the current        20% of the current
 basket of security futures        based security index.        market value of the       market value of the
 representing each component of                                 short security future,    short security future,
 a narrow-based securities                                      plus the aggregate put    plus the aggregate put
 index) and short put option on                                 in-the-money, if any.     in-the-money, if
 the same underlying security                                   Proceeds from the put     any.\11\
 (or index).                                                    sale may be applied.
---------------------------------
3. Long security future and       Individual stock or narrow-  The initial margin        5% of the current
 short position 20% in the same    based security index.        required under            market value as
 security (or securities basket)                                Regulation T for the      defined in Regulation
 underlying the security future.                                short stock or stocks.    T of the stock or
                                                                                          stocks underlying the
                                                                                          security future.
---------------------------------
4. Long security future basket    Individual stock or narrow-  20% of the current        20% of the current
 of long security futures          based security index.        market value of the       market value of the
 representing each component of                                 long security future,     long security future,
 a narrow-based securities                                      plus the aggregate call   plus the aggregate
 index) and short call option on                                in-the-money amount, if   call in-the-money
 the same underlying security                                   any. Proceeds from the    amount, if any.
 (or index).                                                    call sale may be
                                                                applied.
---------------------------------
5. Long a basket of narrow-based  Narrow-based security index  20% of the current        20% of the current
 security futures that together                                 market value of the       market value of the
 tracks a broad-based index and                                 long basket of narrow-    long basket of narrow-
 short a broad-based security                                   based security futures,   based security
 index call option contract on                                  plus the aggregate call   futures, plus
 the same index.                                                in-the-money amount, if   aggregate call in-the-
                                                                any. Proceeds from the    money amount, if any.
                                                                call sale may be
                                                                applied.
---------------------------------
6. Short a basket of narrow-      Narrow-based security index  20% of the current        20% of the current
 based security futures that                                    market value of the       market value of the
 together tracks a broad-based                                  short basket of narrow-   short basket of narrow-
 security index and short a                                     based security futures,   based security
 broad-based security index put                                 plus the aggregate put    futures, plus
 option contract on the same                                    in-the-money amount, if   aggregate put in-the-
 index.                                                         any. Proceeds from the    money amount, if any.
                                                                put sale may be applied.
---------------------------------
7. Long a basket of narrow-based  Narrow-based security index  20% of the current        The lower of: (1) 10%
 security futures that together                                 market value of the       of the aggregate
 tracks a broad-based security                                  long basket of narrow-    exercise price of the
 index and long a broad-based                                   based security futures,   put, plus the
 security index put option                                      plus pay the long put     aggregate put out-of-
 contract on the same index.                                    in full.                  the-money amount, if
                                                                                          any; or (2) 20% of the
                                                                                          current market value
                                                                                          of the long basket of
                                                                                          security futures.
---------------------------------
8. Long a basket of narrow-based  Narrow-based security index  20% of the current        The lower of: (1) 10%
 security futures that together                                 market value of the       of the aggregate
 tracks a broad-based security                                  short basket of narrow-   exercise price of the
 index and long a broad-based                                   based security futures,   call, plus the
 security index call option                                     plus pay the long call    aggregate call out-of-
 contract on the same index.                                    in full.                  the-money amount, if
                                                                                          any; or (2) 20% of the
                                                                                          current market value
                                                                                          of the short basket of
                                                                                          security futures.
---------------------------------
9. Long security future and       Individual stock or narrow-  The greater of: 5% of     The greater of: 5% of
 short security future on the      based security index.        the current market        the current market
 same underlying security (or                                   value of the long         value of the long
 index).                                                        security future; or (2)   security future; or
                                                                5% of the current         (2) 5% of the current
                                                                market value of the       market value of the
                                                                short security future.    short security future.
---------------------------------
10. Long security future, long    Individual stock or narrow-  20% of the current        10% of the aggregate
 put option and short call         based security index.        market value of the       exercise price, plus
 option. The long security                                      long security futures,    the aggregate call in-
 future, long put and short call                                plus the aggregate call   the-money amount, if
 must be on the same underlying                                 in-the-money amount, if   any.
 security and the put and call                                  any, plus pay for the
 must have the same exercise                                    put in full. Proceeds
 price. (Conversion).                                           from the put sale may
                                                                be applied.
---------------------------------

[[Page 61711]]

 
11. Long security future, long    Individual stock or narrow-  20% of the current        The lower of: (1) 10%
 put option and short call         based security index.        market value of the       of the aggregate
 option. The long security                                      long security futures,    exercise price of the
 future, long put and short call                                plus the aggregate call   put plus the aggregate
 must be on the same underlying                                 in-the-money amount, if   call out-of-the money
 security and the put exercise                                  any, plus pay for the     amount, if any; or (2)
 price must be below the call                                   put in full. Proceeds     20% of the aggregate
 exercise price. (Collar).                                      from the call sale may    exercise price of the
                                                                be applied.               call, plus the
                                                                                          aggregate call in-the-
                                                                                          money amount, if any.
---------------------------------
12. Short security future and     Individual stock or narrow-  The initial margin        5% of the current
 long position in the same         based security index.        required under            market value, as
 security (or securities basket)                                Regulation T for the      defined in Regulation
 underlying the security future.                                long stock or stocks.     T, of the long stock
                                                                                          or stocks.
---------------------------------
13. Short security future and     Individual stock or narrow-  The initial margin        10% of the current
 long position in a security       based security index.        required under            market value, as
 immediately convertible into                                   Regulation T for the      defined in Regulation
 the same security underlying                                   long security.            T, of the long
 the security future, without                                                             security.
 restriction, including the
 payment of money.
---------------------------------
14. Short security future (or     Individual stock or narrow-  20% of the current        The lower of: (1) 10%
 basket of security futures        based security index.        market value of the       of the aggregate
 representing each component of                                 short security future,    exercise price of the
 a narrow-based securities                                      plus pay for the call     call, plus the
 index) and long call option or                                 in full.                  aggregate call out-of-
 warrant on the same underlying                                                           the-money amount, if
 security (or index).                                                                     any; or (2) 20% of the
                                                                                          current market value
                                                                                          of the short security
                                                                                          future.
---------------------------------
15. Short security future, Short  Individual stock or narrow-  20% of the current        10% of the aggregate
 put option and long call          based security index.        market value of the       exercise price, plus
 option. The short security                                     short security futures,   the aggregate put in-
 future, short put and long call                                plus the aggregate call   the-money amount, if
 must be on the same underlying                                 in-the-money amount, if   any.
 security and the put and call                                  any, plus pay for the
 must have the same exercise                                    call in full. Proceeds
 price. (Reverse Conversion).                                   from the put sale may
                                                                be applied.
---------------------------------
16. Long (short) a basket of      Narrow-based security index  5% of the current market  5% of the current
 security futures, each based on                                value for the long        market value of the
 a narrow-based security index                                  (short) basket of         long (short) basket of
 that together tracks the broad-                                security futures.         security futures.
 based index and short (long) a
 broad-based index future.
---------------------------------
17. Long (short) a basket of      Individual stock or narrow-  The greater of: (1) 5%    The greater of: (1) 5%
 security futures that together    based security index.        of the current market     of the current market
 tracks a broad-based and short                                 value of the long         value of the long
 (long) a narrow-based index                                    security future(s); or    security future(s); or
 future.                                                        (2) 5% of the current     (2) 5% of the current
                                                                market value of the       market value of the
                                                                short security            short security
                                                                future(s).                future(s).
---------------------------------
18. Long (short) a security       Individual stock or narrow-  The greater of: (1) 3%    The greater of: (1) 3%
 future and short (long) an        based security index.        of the current market     of the current market
 identical security future                                      value of the long         value of the long
 traded on a different                                          security future(s); or    security future(s); or
 market.\12\.                                                   (2) 3% of the current     (2) 3% of the current
                                                                market value of the       market value of the
                                                                short security            short security
                                                                future(s).                future(s).
----------------------------------------------------------------------------------------------------------------
* * * * * * *
\7\ Baskets of securities or security futures contracts must replicate the securities that comprise the index,
  and in the same proportion.
\8\ Generally, for the purposes of these rules, unless otherwise specified, stock index warrants shall be
  treated as if they were index options.
\9\ ``Aggregate exercise price,'' with respect to an option or warrant based on an underlying security, means
  the exercise price of an option or warrant contract multiplied by the numbers of units of the underlying
  security covered by the option contract or warrant. ``Aggregate exercise price'' with respect to an index
  option, means the exercise price multiplied by the index multiplier. See, e.g., Amex Rules 900 and 900C; CBOE
  Rule 12.3; and NASD Rule 2522.
\10\ ``Out-of-the-money'' amounts shall be determined as follows:
(1) for stock call options and warrants, and excess of the aggregate exercise price of the option or warrant
  over its current market value (as determined in accordance with Regulation T of the Broad of Governors of the
  Federal Reserve System);
(2) for stock put options or warrants, any excess of the current market value (as determined in accordance with
  Regulation T of the Board of Governors of the Federal Reserve System) of the option or warrant over its
  aggregate exercise price;
(3) for stock index call options and warrants, any excess of the aggregate exercise price of the option or
  warrant over the product of the current index value and the applicable index multiplier; and
(4) for stock index put options and warrants, any excess of the product of the current index value and the
  applicable index multiplier over the aggregate exercise price of the option or warrant. (See, e.g., NYSE Rule
  431 (Exchange Act Release No. 42011 (October 14, 1999), 64 FR 57172 (October 22, 1999) (order approving SR-
  NYSE-99-03)); Amex Rule 462 (Exchange Act Release No. 43582 (November 17, 2000), 65 FR 71151 (November 29,
  2000) (order approving SR-Amex-99-27)); CBOE Rule 12.3 (Exchange Act Release No. 41658 (July 27, 1999), 64 FR
  42736 (August 5, 1999) (order approving SR-CBOE-97-67)); or NASD Rule 2520 (Exchange Act Release No. 43581
  (November 17, 2000), 65 FR 70854 (November 28, 2000) (order approving SR-NASD-00-15)).
\11\ ``In-the-money'' amounts must be determined as follows:
(1) for stock call options and warrants, any excess of the current market value (as determined in accordance
  with Regulation T of the Board of Governors of the Federal Reserve System) of the option or warrant over its
  aggregate exercise price;

[[Page 61712]]

 
(2) for stock put options or warrants, any excess of the aggregate exercise price of the option or warrant over
  its current market value (as determined in accordance with Regulation T of the Broad of Governors of the
  Federal Reserve System);
(3) for stock index call options and warrants, any excess of the products of the current index value and the
  applicable index multiplier over the aggregate exercise price of the option or warrant; and
(4) for stock index put options and warrants, any excess of the aggregate exercise price of the option or
  warrant over the product of the current index value and the applicable index multiplier.
\12\ Two security futures will be considered ``identical'' for this purpose if they are issued by the same
  clearing agency or cleared and guaranteed by the same derivatives clearing organization, have identical
  contract specifications, and would offset each other at the clearing level.

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

    In its filing with the Commission, OneChicago 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. OneChicago 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, the Proposed Rule Change

1. Purpose
    (a) General Margin Rules. The General Margin Rules are designed to 
complement the customer margin rules set forth in Rules 400 through 406 
under the Act (the ``Exchange Act Rules'').\13\ The Exchange Act Rules 
contain detailed requirements with respect to the margin to be 
collected from customers in connection with security futures and 
related positions held by security futures intermediaries on behalf of 
such customers. While the General Margin Rules are based on the 
standardized margin procedures developed by the U.S. futures exchanges' 
Joint Audit Committee and similar rules in effect for other contract 
markets \14\ designated under the Commodity Exchange Act, as amended 
(the ``Commodity Exchange Act''), those precedents have been modified 
in certain respects to conform to the requirements of the Exchange Act 
Rules. The following paragraphs contain a brief explanation of each 
paragraph of the General Margin Rules:
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    \13\ 17 CFR 242.400-242.406.
    \14\ Specifically, OneChicago modeled the General Margin Rules 
after Rule 930 of the Chicago Mercantile Exchange, Inc.
---------------------------------------------------------------------------

    Paragraph (a) of the Proposed Rule defines the scope of application 
of the Proposed Rule in two important respects. First, it provides that 
the Proposed Rule only applies to transactions in contracts traded on 
or subject to the rules of OneChicago. To the extent that security 
futures intermediaries engage in security futures transactions on or 
through other exchanges as well, they will need to comply with the 
respective margin requirements established by such other exchanges. 
Second, paragraph (a) clarifies that the requirements set forth in the 
Proposed Rule generally only apply to security futures intermediaries 
that carry security futures products in futures accounts (with the 
exception of paragraph (n), which also applies to positions held in 
securities accounts). As provided in Rule 402(a) under the Act,\15\ 
security futures intermediaries that carry security futures in 
securities accounts are subject to the Exchange Act Rules, Regulation T 
of the Board of Governors of the Federal Reserve System,\16\ and the 
margin requirements of the self-regulatory organizations of which they 
are a member. In addition, paragraph (a) tracks the exemption for 
``exempted persons'' pursuant to Rule 401(a)(9) under the Act.\17\
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    \15\ 17 CFR 242.402(a).
    \16\ 12 CFR 220 et seq.
    \17\ 17 CFR 242.401(a)(9).
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    Paragraph (b) of the Proposed Rule adopts the Standard Portfolio 
Analysis of Risk (SPAN[reg]) as the margining system for 
OneChicago. Developed by the Chicago Mercantile Exchange Inc. in 1988, 
SPAN[reg] has become the futures industry standard for 
margining. SPAN[reg] evaluates the risk of the futures and 
options portfolio in each account and assesses a margin requirement 
based on such risk by establishing reasonable movements in futures 
prices over a one day period. Security futures intermediaries entering 
into transactions on OneChicago can receive risk arrays based on 
SPAN[reg] to calculate margins for each of their accounts, 
so that they can calculate minimum margin requirements for such 
accounts on a daily basis.
    Paragraph (c) of the Proposed Rule sets the required margin level 
for each long or short position in a security future at 20 percent of 
the current market value of such security future, as required by Rule 
403(b) under the Act.\18\ The only exception from this general 
requirement contemplated by the Proposed Rule is the Margin Offset 
Rule, which is described in greater detail under (b) below.
---------------------------------------------------------------------------

    \18\ 17 CFR 242.403(b).
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    Paragraph (d) of the Proposed Rule specifies the types of margin 
that a security futures intermediary may accept from a customer. 
Consistent with Rule 404(b) under the Act,\19\ acceptable types of 
margin are limited to deposits of cash, margin securities (subject to 
specified restrictions), exempted securities, any other assets 
permitted under Regulation T \20\ of the Board of Governors of the 
Federal Reserve System to satisfy a margin deficiency in a securities 
margin account, and any combination of the foregoing. Paragraph (d) of 
the Proposed Rule further provides that the different types of eligible 
margin are to be valued in accordance with the applicable principles 
set forth in Rule 404 under the Act.\21\
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    \19\ 17 CFR 242.404(b).
    \20\ 12 CFR 220 et seq.
    \21\ 17 CFR 242.404.
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    Paragraph (e) of the Proposed Rule provides that security futures 
intermediaries may accept orders for a particular account only if (i) 
sufficient margin is on deposit in such account or is forthcoming 
within a reasonable time, or (ii) in the event that the conditions set 
forth in (i) are not satisfied, such orders reduce the margin 
requirements resulting from the existing positions in such account. 
This provision is designed to prevent account holders from exacerbating 
any already existing margin deficiency by entering into further 
transactions.
    Paragraph (f) of the Proposed Rule establishes the general 
principle that a security futures intermediary must call for initial or 
maintenance margin equity whenever the minimum margin requirements 
determined in accordance with paragraph (c) of the Proposed Rule 
(taking into account any relief available under the Margin Offset Rule) 
is not satisfied. Any such margin call must be made within one business 
day after the occurrence of the event giving rise to the call. 
Paragraph (f) also clarifies that security futures intermediaries may 
call for margin in excess of OneChicago's minimum requirements. 
Finally, paragraph (f) provides that a margin call may only be reduced 
or deleted if and to the extent that (i) qualifying margin deposits are 
received or (ii) inter-day

[[Page 61713]]

favorable market movements or the liquidation of positions have offset 
the previously existing margin deficiency. In each case, the oldest 
margin call outstanding at any time is to be reduced or deleted first. 
These provisions address necessary technical aspects of customer 
margining and are consistent with similar provisions contained in the 
precedents referred to above.
    Paragraph (g) of the Proposed Rule limits the ability of customers 
to obtain disbursements of excess margin to any amounts in excess of 
the applicable initial margin requirement under the Proposed Rule and 
any other applicable margin requirement. This limitation is consistent 
with Rule 405(a) under the Act.\22\
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    \22\ 17 CFR 242.405(a).
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    Paragraph (h) of the Proposed Rule prohibits security futures 
intermediaries from extending loans to Customers for margin purposes 
unless such loans are secured within the meaning of Commission 
Regulation 1.17(c)(3).\23\ This prohibition corresponds to similar 
restrictions currently in effect on other contract markets.
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    \23\ 17 CFR 1.17(c)(3).
---------------------------------------------------------------------------

    Paragraph (i) of the Proposed Rule provides that accounts under 
identical ownership are to be aggregated for purposes of determining 
the applicable margining requirements on a net basis if such accounts 
fall within the same general classification (customer segregated, 
customer secured, special reserve account for the exclusive benefit of 
customers and non-segregated). This aggregation approach is consistent 
with universal practice in the futures industry and reflects the fact 
that several accounts under identical ownership may become subject to 
liquidation of positions in the event of a failure to satisfy margin 
calls with respect to any one of such accounts.
    Paragraph (j) of the Proposed Rule establishes particular rules for 
omnibus accounts of security futures intermediaries, namely that (i) 
margin for positions held in such accounts is to be collected on a 
gross basis, (ii) initial and maintenance margin requirements are 
identical and (iii) security futures intermediaries are to obtain and 
maintain written instructions from such accounts with respect to 
positions which are eligible for offsets pursuant to the Margin Offset 
Rule.
    Paragraph (k) of the Proposed Rule enables a security futures 
intermediary to liquidate positions in the account of any customer that 
fails to comply with a required margin call within a reasonable period 
of time. This provision complements the requirements set forth in Rule 
406(a) and (b) under the Act.\24\
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    \24\ 17 CFR 242.406(a) and (b).
---------------------------------------------------------------------------

    Paragraph (l) of the Proposed Rule authorizes OneChicago to direct 
any security futures intermediaries that fail to maintain margin 
requirements for any account in accordance with the Proposed Rule, to 
immediately liquidate any or all of the positions in such account to 
eliminate the resulting deficit. This provision is designed to ensure 
compliance by security futures intermediaries with their obligations 
under paragraph (k) and is an important function of OneChicago's 
oversight over such intermediaries.
    The Exchange Act Rules and related provisions of the Act (such as, 
among others, sections 6(g)(4)(B)(ii) \25\ and 6(h)(3)(L) \26\ of the 
Act) are premised on each self-regulatory organization adopting margin 
requirements that are functionally equivalent to those contained in the 
General Margin Rules. Accordingly, the General Margin Rules represent a 
corollary of, and are designed to give effect to, the Exchange Act 
Rules and related provisions of the Exchange Act. As discussed in the 
preceding paragraphs, the General Margin Rules as proposed comply with 
the applicable requirements set forth in the Exchange Act Rules. 
OneChicago therefore believes that the General Margin Rules are 
consistent with the requirements of the Exchange Act and the rules and 
regulations thereunder applicable to OneChicago.
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    \25\ 15 U.S.C. 78f(g)(4)(B)(ii).
    \26\ 15 U.S.C. 78f(h)(3)(L).
---------------------------------------------------------------------------

    (b) Margin Offset Rule. Security futures intermediaries entering 
into transactions on OneChicago will be subject, among other things, to 
Rule 403(b)(1) under the Act,\27\ which provides that the margin for 
each long or short position in a security future will generally be 20 
percent of the current market value of such security future. As 
discussed above, this requirement is reflected in paragraph (c) of the 
General Margin Rules. Pursuant to Rule 403(b)(2) under the Act,\28\ 
however, a self-regulatory authority may set the required initial or 
maintenance margin level for offsetting positions involving security 
futures and related positions at a level lower than the level that 
would apply if such positions were margined separately based on the 
aforementioned 20 percent requirement, provided the rules establishing 
such lower margin levels meet the criteria set forth in section 
7(c)(2)(B) of the Act.\29\ That Section requires, in relevant part, 
that:

    \27\ 17 CFR 242.403(b)(1).
    \28\ 17 CFR 242.403(b)(2).
    \29\ 15 U.S.C. 78(c)(2)(b).
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    ``(I) The margin requirements for a security futures product be 
consistent with the margin requirements for comparable option 
contracts traded on any exchange registered pursuant to section 6(a) 
of (the Exchange Act); and
    (II) Initial and maintenance margin levels for a security 
futures product not be lower than the lowest level of margin, 
exclusive of premium, required for any comparable option contract 
traded on any exchange registered pursuant to section 6(a) of (the 
Exchange Act), other than an option on a security future.'' \30\

    \30\ Id.
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    OneChicago is proposing the Margin Offset Rule pursuant to, and in 
reliance on, Rule 403(b)(2) under the Act.\31\ Without the margin 
relief afforded by the Margin Offset Rule, security futures 
intermediaries would be required to collect margin from their customers 
equal to 20 percent of the current market value of the security futures 
held on behalf of such customers, irrespective of whether such security 
futures positions are hedged or unhedged. With respect to option 
contracts traded on securities exchanges, the Commission has recognized 
that it is ``appropriate for the SROs to recognize the hedged nature of 
certain combined options strategies and prescribe margin requirements 
that better reflect the risk of those strategies.'' \32\ OneChicago 
believes that the same considerations apply in connection with the 
determination of margin levels for offsetting positions involving 
security futures and related positions. If margin offsets were not 
available with respect to security futures, the customer margin 
requirements applicable to such instruments would effectively be 
inconsistent with, and more onerous than, the margin requirements for 
comparable option contracts traded on securities exchanges. This would 
be contrary to the statutory objectives reflected in section 7(c)(2)(B) 
of the Act.
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    \31\ 17 CFR 242.403(b)(2).
    \32\ See Securities Exchange Act Release Nos. 41658 (July 27, 
1999), 64 FR 42736 (August 5, 1999) (order approving SR-CBOE-97-67 
amending CBOE Rule 12.3); 42011 (October 14, 1999), 64 FR 57172 
(October 22, 1999) (order approving SR-NYSE-99-03 amending NYSE Rule 
431); 43581 (November 17, 2000), 65 FR 70854 (November 28, 2000) 
(order approving SR-NASD-2000-15 amending NASD Rule 2520); and 43582 
(November 17, 2000), 65 FR 71151 (November 29, 2000) (order 
approving SR-Amex-99-27 amending Amex Rule 462).
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    At the core of the Margin Offset Rule will be the table of offsets 
attached to the Proposed Rule as Schedule A, which describes in detail 
the margin offsets available with respect to particular combinations of 
security futures and related positions. Such Schedule A is

[[Page 61714]]

substantively identical to the table of offsets included in the 
Commission's release on Customer Margin Rules Relating to Security 
Futures (the ``Customer Margin Release'').\33\ While the table differs 
in certain specified respects from similar tables in effect for 
exchange-traded options, the Commission acknowledged in the Customer 
Margin Release that these limited differences are warranted by 
different characteristics of the instruments to which they relate. For 
the reasons set forth above, OneChicago believes that the Margin Offset 
Rule is consistent with the requirements of the Exchange Act and the 
rules and regulations thereunder applicable to OneChicago.
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    \33\ Securities Exchange Act Release No. 46292 (August 1, 2002), 
67 FR 53146 (August 14, 2002).
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    (c) Market Maker Exclusion. Rule 400(c)(2)(v) under the Act \34\ 
permits a national securities exchange to adopt rules containing 
specified requirements for security futures dealers, on the basis of 
which the financial relations between security futures intermediaries, 
on the one hand, and qualifying security futures dealers, on the other 
hand, are excluded from the margin requirements contained in the 
Exchange Act Rules. Any rules so adopted by an exchange must meet the 
criteria set forth in section 7(c)(2)(B) of the Act, which is 
reproduced in relevant part under (b) above.
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    \34\ 17 CFR 242.400(c)(2)(v).
---------------------------------------------------------------------------

    OneChicago is proposing the Market Maker Exclusion pursuant to, and 
in reliance on, Rule 400(c)(2)(v) under the Act.\35\ OneChicago intends 
to select certain of its members to serve as lead market makers in 
accordance with Item VI. of its Policies and Procedures as in effect on 
the date hereof. From time to time, OneChicago may adopt other programs 
pursuant to Rule 514 of its Rulebook under which members may be 
designated as market makers with respect to one or more security 
futures products in order to provide liquidity and orderliness in the 
relevant market or markets. A significant number of those members will 
likely be floor traders or floor brokers registered with the Commodity 
Futures Trading Commission under section 4f(a)(1) of the Commodity 
Exchange Act, as amended, or dealers registered with the Commission 
under section 15(b) of the Act.\36\ As such, they will not qualify as 
exempted persons within the meaning of Rule 401(a)(9) under the Act. 
\37\ Without the Market Maker Exclusion, they arguably would have to be 
treated as customers for purposes of determining margin requirements, 
even with respect to their proprietary market making activities. This 
would be different from the treatment of security futures dealers on 
securities exchanges under section 7(c)(3) of the Act,\38\ and, 
therefore, would be contrary to the statutory objectives reflected in 
section 7(c)(2)(B) of the Act.\39\
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    \35\ 17 CFR 242.400(c)(2)(v).
    \36\ 15 U.S.C. 78o.
    \37\ 17 CFR 242.401(a)(9).
    \38\ 15 U.S.C. 78g(c)(3).
    \39\ 15 U.S.C. 78g(c)(2)(B).
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    The Market Maker Exclusion as proposed reflects all of the criteria 
and limitations set forth in Rule 400(c)(2)(v) under the Exchange 
Act.\40\ Specifically, as contemplated by the Customer Margin Release, 
the Market Maker Exclusion specifies the circumstances under which a 
Market Maker will be considered to ``hold itself out as being willing 
to buy and sell security futures for its own account on a regular or 
continuous basis.'' \41\ Under the Market Maker Exclusion, a Market 
Maker satisfies this condition if either (i) at least seventy-five 
percent (75%) of its gross revenue on an annual basis is derived from 
business activities or occupations from trading listed financial 
derivatives and the instruments underlying those derivatives, including 
security futures, stock index futures and options, stock and index 
options, stocks, foreign currency futures and options, foreign 
currencies, interest rate futures and options, fixed income instruments 
and commodity futures and options or (ii) except for unusual 
circumstances, at least fifty percent (50%) of its trading activity on 
OneChicago in any calendar quarter is in classes of security futures 
products to which it is assigned under a market making program adopted 
by OneChicago pursuant to Rule 514 of its Rulebook.
---------------------------------------------------------------------------

    \40\ 17 CFR 242.400(c)(2)(v).
    \41\ Cf. 17 CFR 242.400(c)(2)(v)(B)(3).
---------------------------------------------------------------------------

    These alternative standards proposed by OneChicago generally follow 
examples given in the Customer Margin Release. With respect to the 
standard described in (i) above, the Customer Margin Release provides 
that the rules of the self-regulatory organization may ``require that a 
large majority of [the Market Maker's] revenue is derived from business 
activities or occupations from trading listed financial-based 
derivatives.''\42\ Given the composition of the pool of exchange 
members from which OneChicago will select Market Makers, the standard 
proposed by OneChicago clarifies that such members' trading activities 
related to the cash instruments underlying listed financial derivatives 
are taken into account in determining gross revenue. The standard 
described in (ii) above corresponds to similar requirements for market 
makers on several U.S. options markets.\43\ Based on the foregoing, 
OneChicago believes that the Market Maker Exclusion is consistent with 
the requirements of the Exchange Act and the rules and regulations 
thereunder applicable to OneChicago.
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    \42\ See Securities Exchange Act Release No. 46292 (August 1, 
2002), 67 FR 53146 (August 14, 2002).
    \43\ See note 91 in the Customer Margin Release and the several 
options exchange rules referenced therein.
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B. Self-Regulatory Organization's Statement on Burden on Competition

    OneChicago does not believe that the Proposed Rule will have an 
impact on competition because, as described under 3 above, (i) the 
General Margin Rules are based on the standardized margin procedures 
developed by the U.S. futures exchanges' Joint Audit Committee and 
similar rules in effect for other contract markets, (ii) the Margin 
Offset Rule will be consistent with similar rules in effect for option 
contracts traded on exchanges registered pursuant to section 6(a) of 
the Act \44\ and (iii) the Market Maker Exclusion ensures that 
qualifying security futures dealers on OneChicago are subject to margin 
requirements that are comparable to those traditionally applicable to 
security futures dealers on securities exchanges. In addition, it can 
be expected that other self-regulatory organizations that will list 
security futures products will adopt rules that are substantially 
similar to the Proposed Rule.
---------------------------------------------------------------------------

    \44\ 15 U.S.C. 78f.
---------------------------------------------------------------------------

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

    Comments on the Proposed Rule have not been solicited.

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, as amended; or
    (B) institute proceedings to determine whether the proposed rule 
change should be disapproved.

[[Page 61715]]

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, 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, as 
amended, 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 the filing will also be available for 
inspection and copying at the principal offices of the Exchange. All 
submissions should refer to File No. SR-OC-2002-01 and should be 
submitted by October 22, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\45\
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    \45\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-24906 Filed 9-30-02; 8:45 am]
BILLING CODE 8010-01-P