[Federal Register Volume 67, Number 203 (Monday, October 21, 2002)]
[Notices]
[Pages 64672-64679]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-26721]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-46637; File No. SR-CME-2002-01]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change and Amendment No. 1 Thereto by the Chicago Mercantile Exchange,
Inc. Relating to Customer Margin Requirements for Security Futures
October 10, 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 September 27, 2002, Chicago Mercantile Exchange, Inc. (``CME'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'' or ``SEC'') the proposed rule change as described in
Items I, II, and III below, which Items have been prepared by the CME.
On October 7, 2002, the CME submitted Amendment No. 1 to the proposed
rule change.\3\ 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 Phupinder S. Gill, Managing Director and
President, Clearing House Division, CME, to Office of Market
Supervision, Division of Market Regulation, Commission, dated
October 4, 2002 (``Amendment No. 1''). In Amendment No. 1, the
Exchange replaced in its entirety the Form 19b-4 filed on September
27, 2002.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The CME proposes to amend its Rules as they pertain to customer
performance bonds (or ``margins'') for Security Futures as detailed
below. Below is the text of the proposed rule change. Proposed new
language is italicized; deletions are bracketed.
* * * * *
833. Customer Performance Bonds for Security Futures Held in Futures
Accounts
Performance bond (or ``margin'') requirements associated with
Security Futures, as defined by Section 1a(31) of the Commodity
Exchange Act (CEA), on behalf of Customers, as defined in Rule
930.B.2.b., whether effected on the Exchange or on a Marketplace apart
from Exchange but cleared by the Clearing House per Chapter 8B, and
held in a futures account (with any exceptions noted in the Rules),
shall be determined and administered per the Rules of the Exchange;
and, in compliance with CFTC Regulation Sections 41.42 through 41.49;
and, SEC Regulation 242.400 through 242.406, including any successor
Regulations. If Exchange Rules should be found to be inconsistent with
CFTC Regulation Sections 41.42 through 41.49; and, SEC Regulation
242.400 through 242.406, including any successor Regulations, the CFTC
and SEC Regulations shall prevail.
930. Performance Bond Requirements: Account Holder Level
930.A. Performance Bond System
The Standard Portfolio Analysis of Risk (SPAN[reg]) Performance
Bond System is the performance bond system adopted by the Exchange.
SPAN generated performance bond requirements shall constitute Exchange
performance bond requirements. All references to performance bond
within the rules of the Exchange shall relate to those computed by the
SPAN system.
Performance bond systems other than the SPAN system may be used to
meet Exchange performance bond
[[Page 64673]]
requirements if the clearing member can demonstrate that its system
will always produce a performance bond requirement equal to or greater
than the SPAN performance bond requirements.
930.B. Performance Bond Rates
1. Non-Security Futures
Exchange staff shall determine initial and maintenance performance
bond rates used in determining Exchange performance bond requirements.
The Board reserves the right to change or modify any performance bond
levels determined by Exchange staff.
2. Security Futures
a. Initial and maintenance performance bond (or ``margin'') rates
used in determining Exchange performance bond requirements applied to
Security Futures on behalf of Customers, whether effected on the
Exchange or on a Marketplace apart from Exchange but cleared by the
Clearing House per Chapter 8B, and held in a futures account, shall be
established at levels no lower than those prescribed by CFTC Regulation
Section 41.45; and, SEC Regulation 242.403, including any successor
Regulations.
b. As used in this Rule, the term ``Customer'' does not include (a)
an ``exempted person'' as defined in CFTC Regulation 41.43(a)(9) and
SEC Regulation 242.401(a)(9); or (b) Market Makers as defined below.
A Person shall be a ``Market Maker'' for purposes of this Rule, and
shall be excluded from the requirements set forth in CFTC Regulations
41.42 through 41.49; and, SEC Regulations 242.400 through 242.406 in
accordance with CFTC Regulation 41.42(c)(2)(v) and SEC Regulation
242.400(c)(2)(v), with respect to all trading in Security Futures for
its own account, if such Person is an Exchange Member that is
registered with the Exchange as a ``Security Futures Dealer.''
Each Market Maker shall (a) be registered as a floor trader or a
floor broker with the CFTC under Section 4f(a)(1) of the CEA or as a
dealer with the SEC under Section 15(b) of the Exchange Act; (b)
maintain records sufficient to prove compliance with the requirements
set forth in this Rule and CFTC Regulation 41.42(c)(2)(v) and SEC
Regulation 242.400(c)(2)(v), including without limitation, trading
account statements and other financial records sufficient to detail
activity and verify conformance with the standards set forth herein;
and (c) hold itself out as being willing to buy and sell Security
Futures for its own account on a regular or continuous basis.
Market Makers satisfy condition (c) above if (a) at least 75% of
their gross revenues, 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 (b) except for unusual circumstances,
at least 50% of their security futures trading activity on the Exchange
in any calendar quarter, measured in terms of contract volume, is in
security futures contracts to which the Market Maker is assigned as a
Security Futures Dealer by the Exchange.
Any Market Maker that fails to comply with the applicable Rules of
the Exchange, CFTC Regulations 41.41 through 41.49 and SEC Regulations
242.400 through 242.406 shall be subject to disciplinary action in
accordance with Chapter 4. Appropriate sanctions in the case of any
such failure shall include, without limitation, a revocation of such
Market Maker's registration as a Security Futures Dealer.
This Rule 930.B.2.b shall apply regardless whether the position(s)
in Exchange security futures are held in a futures account, or held in
a securities account.
c. The Exchange shall establish initial and maintenance performance
bond requirements applicable to Security Futures and held in a futures
account, provided that the performance bond requirement for any long or
short position held by a clearing member on behalf of a Customer shall
not be less than 20% of the current market value of the relevant
Contract; or, such other requirement as may be established by the CFTC
and SEC for purposes of CFTC Regulation 41.45(b)(1) and SEC Regulation
242.403(b)(1) except as provided below.
d. Initial and maintenance performance bond requirements for
offsetting positions involving Security Futures and related positions
are provided in the schedule below, for purposes of CFTC Regulation
41.45(b)(2) and SEC Regulation 242.403(b)(2).
Performance Bond (or ``Margin'') Requirements for Offsetting Positions
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Security underlying the Initial margin Maintenance margin
Description of offset security future requirement requirement
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1. Long security future (or basket of Individual stock or 20% of the current The lower of: (1) 10%
security futures representing each narrow-based security market value of the of the aggregate
component of a narrow-based index. long security future, exercise price \3\ of
securities index \1\) and long put plus pay for the long the put plus the
option \2\ on the same underlying put in full. aggregate put out-of-
security (or index). the-money \4\ amount,
if any; or (2) 20% of
the current market
value of the long
security future.
2. Short security future (or basket Individual stock or 20% of the current 20% of the current
of security futures representing narrow-based security market value of the market value of the
each component of a narrow-based index. short security future, short security future,
securities index) and short put plus the aggregate put plus the aggregate put
option on the same underlying in-the-money amount, in-the-money amount,
security (or index). if any. Proceeds from if any.\5\
the put sale may be
applied.
3. Long security future and short Individual stock or The initial margin 5% of the current
position in the same security (or narrow-based security required under market value as
securities basket) underlying the index. Regulation T for the defined in Regulation
security future. short stock or stocks. T of the stock or
stocks underlying the
security future.
[[Page 64674]]
4. Long security future (or basket of Individual stock or 20% of the current 20% of the current
security futures representing each narrow-based security market value of the market value of the
component of a narrow-based index. long security future, long security future,
securities index) and short call plus the aggregate plus the aggregate
option on the same underlying call in-the-money call in-the-money
security (or index). amount, if any. amount, if any.
Proceeds from the call
sale may be applied.
5. Long a basket of narrow-based Narrow-based security 20% of the current 20% of the current
security futures that together index. market value of the market value of the
tracks a broad-based index and short long basket of narrow- long basket of narrow-
a broad-based security index call based security based security
option contract on the same index. futures, plus the futures, plus the
aggregate call in-the- aggregate call in-the-
money amount, if any. money amount, if any.
Proceeds from the call
sale may be applied.
6. Short a basket of narrow-based Narrow-based security 20% of the current 20% of the current
security futures that together index. market value of the market value of the
tracks a broad-based security index short basket of narrow- short basket of narrow-
and short a broad-based security based security based security
index put option contract on the futures, plus the futures, plus the
same index. aggregate call in-the- aggregate put in-the-
money amount, if any. money amount, if any.
Proceeds from the put
sale may be applied.
7. Long a basket of narrow-based Narrow-based security 20% of the current The lower of: (1) 10%
security futures that together index. market value of the of the aggregate
tracks a broad-based security index long basket of narrow- exercise price of the
and long a broad-based security based security put, plus the
index put option contract on the futures, plus pay for aggregate put out-of-
same index. the long put in full. the-money amount, if
any; or (2) 20% of the
current market value
of the long basket of
security futures.
8. Short a basket of narrow-based Narrow-based security 20% of the current The lower of: (1) 10%
security futures that together index. market value of the of the aggregate
tracks a broad-based security index short basket of narrow- exercise price of the
and long a broad-based security based security call, plus the
index call option contract on the futures, plus pay for aggregate call out-of-
same index. the long call 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 short Individual stock or The greater of: 5% of The greater of: 5% of
security future on the same narrow-based security the current market the current market
underlying security (or index). index. value of the long value of the long
security future; or security future; or
(2) 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 put Individual stock or 20% of the current 10% of the aggregate
option and short call option. The narrow-based security market value of the exercise price, plus
long security future, long put and index. long security future, the aggregate call in-
short call must be on the same plus the aggregate the-money amount, if
underlying security and the put and call in-the-money any.
call must have the same exercise amount, if any, plus
price. (Conversion). pay for the put in
full. Proceeds from
the call sale may be
applied.
11. Long security future, long put Individual stock or 20% of the current The lower of: (1) 10%
option and short call option. The narrow-based security market value of the of the aggregate
long security future, long put and index. long security future, exercise price of the
short call must be on the same plus the aggregate put plus the aggregate
underlying security and the put call in-the-money put out-of-the money
exercise price must be below the amount, if any, plus amount, if any; or (2)
call exercise price (Collar). pay for the put in 20% of the aggregate
full. Proceeds from exercise price of the
call sale may be call, plus the
applied. aggregate call in-the-
money amount, if any.
12. Short security future and long Individual stock or The initial margin 5% of the current
position in the same security (or narrow-based security required under market value, as
securities basket) underlying the index. Regulation T for the defined in Regulation
security future. long stock or stocks. T, of the long stock
or stocks.
13. Short security future and long Individual stock or The initial margin 10% of the current
position in a security immediately narrow-based security required under market value, as
convertible into the same security index. Regulation T for the defined in Regulation
underlying the security future, long security. T, of the long
without restriction, including the security.
payment of money.
14. Short security future (or basket Individual stock or 20% of the current The lower of: (1) 10%
of security futures representing narrow-based security. market value of the of the aggregate
each component of a narrow-based short security future, exercise price of the
securities index) and long call plus pay for the call call, plus the
option or warrant on the same in full. aggregate call out-of-
underlying security (or index). the-money amount, if
any; or (2) 20% of the
current market value
of the short security
future.
[[Page 64675]]
15. Short security future, Short put Individual stock or 20% of the current 10% of the aggregate
option and long call option. The narrow-based security market value of the exercise price, plus
short security future, short put and index. short security future, the aggregate put in-
long call must be on the same plus the aggregate put the-money amount, if
underlying security and the put and in-the-money amount, any.
call must have the same exercise if any, plus pay for
price. (Reverse Conversion). the call in full.
Proceeds from put sale
may be applied.
16. Long (short) a basket of security Narrow-based security 5% of the current 5% of the current
futures, each based on a narrow- index. market value for the market value of the
based security index that together long (short) basket of long (short) basket of
tracks the broad-based index and security futures. security futures.
short (long) a broad-based index
future.
17. Long (short) a basket of security Individual stock or The greater of: (1) 5% The greater of: (1) 5%
futures that together tracks a narrow-based security of the current market of the current market
narrow-based index and short (long) index. value of the long value of the long
a narrow-based index future. security future(s); or security future(s); or
(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 future Individual stock or The greater of: (1) 3% The greater of: (1) 3%
and short (long) an identical narrow-based security of the current market of the current market
security future traded on a index. value of the long value of the long
different market.\6\ security future(s); or security future(s); or
(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).
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\1\ Baskets of securities or security futures contracts must replicate the securities that comprise the index,
and in the same proportion.
\2\ Generally, for the purposes of these rules, unless otherwise specified, stock index warrants shall be
treated as if they were index options.
\3\ ``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.
\4\ ``Out-of-the-money'' amounts shall be determined as follows:
(1) for stock call options and 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 Board 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)).
\5\ ``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;
(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 Board of Governors of the
Federal Reserve System);
(3) for stock index call 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; 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.
\6\ 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.
930.C. Acceptable Performance Bond Deposits
1. Non-Security Futures
Clearing members may accept from their account holders as
performance bond cash currencies of any denomination, readily
marketable securities (as defined by SEC Rule 15c3-1(c)(11) and
applicable SEC interpretations), money market mutual funds allowable
under CFTC Regulation 1.25, and bank-issued letters of credit.
Clearing members shall not accept as performance bond from an
account holder securities that have been issued by the account holder
or an affiliate of the account holder unless the clearing member files
a petition with and receives permission from Exchange staff.
Bank-issued letters of credit must be in a form acceptable to the
Exchange. Such letters of credit must be drawable in the United States.
Clearing members shall not accept as performance bond from an account
holder letters of credit issued by the account holder, an affiliate of
the account holder, the clearing member, or an affiliate of the
clearing member.
All assets deposited by account holders to meet performance bond
requirements must be and remain unencumbered by third party claims
against the depositing account holder.
Except to the extent that Exchange staff shall prescribe otherwise,
cash currency performance bond deposits shall be valued at market
value. All other performance bond deposits other than letters of credit
shall be valued at an amount not to exceed market value less applicable
haircuts as set forth in SEC Rule 240.15c3-1.
[[Page 64676]]
2. Security Futures
a. Clearing Members may accept from their Customers as performance
bond (or ``margin'') for Security Futures held in a futures account,
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
performance bond deficiency in a securities margin account, and any
combination of the foregoing, each as valued in accordance with CFTC
Regulations 41.46(c) and 41.46(e); and, SEC Regulations 242.404(c) and
242.404(e). Shares of a money market mutual fund that meet the
requirements of CFTC Regulation 1.25 may be accepted as a performance
bond deposit from a Customer for purposes of this Rule.
b. A Clearing Member shall not accept as performance bond from any
Customer securities that have been issued by such Customer or an
Affiliate of such Customer unless such Clearing Member files a petition
with and receives permission from the Exchange for such purpose.
c. All assets deposited by a Customer to meet performance bond
requirements must be and remain unencumbered by third party claims
against the depositing Customer.
930.D. Acceptance of Orders
Clearing members may accept orders for an account provided
sufficient performance bond is on deposit in the account or is
forthcoming within a reasonable time. For an account which has been
subject to calls for performance bond for an unreasonable time,
clearing members may only accept orders that reduce the performance
bond requirements of existing positions in the account. Clearing
members may not accept orders for an account that has been in debit an
unreasonable time.
930.E. Calls for Performance Bond
1. Clearing members must issue calls for performance bond that
would bring an account up to the initial performance bond requirement:
a. when performance bond equity in an account initially falls below the
maintenance performance bond requirement; and b. subsequently, when
performance bond equity plus existing performance bond calls in an
account is less than the maintenance performance bond requirement.
Such calls must be made within one business day after the
occurrence of the event giving rise to the call. Clearing members may
call for additional performance bond at their discretion.
Notwithstanding the foregoing, a clearing member is not required to
call for or collect performance bond for day trades.
2. Clearing members shall only reduce a call for performance bond
through the receipt of performance bond deposits permitted under
subsection C. of this rule. Clearing members may delete a call for
performance bond through: a. the receipt of performance bond deposits
permitted under subsection C. of this rule only if such deposits equal
or exceed the amount of the total performance bond call; or b. inter-
day favorable market movements and/or the liquidation of positions only
if performance bond equity in the account is equal to or greater than
the initial performance bond requirement. Clearing members shall reduce
an account holder's oldest outstanding performance bond call first.
3. Clearing members must maintain written records of all
performance bond calls issued, reduced, and deleted.
930.F. Disbursements of Excess Performance Bond
Clearing members may only release performance bond deposits from an
account if such deposits are in excess of initial performance bond
requirements.
930.G. Loans to Account Holders
Clearing members may not extend loans to account holders for
performance bond purposes unless such loans are secured as defined in
CFTC Regulation 1.17(c)(3). The proceeds of such loans must be treated
in accordance with CFTC Regulation 1.30.
930.H. Aggregation of Accounts and Positions
Clearing members may aggregate accounts under identical ownership
within the same classifications of customer segregated, customer
secured, special reserve account for the exclusive benefit of
customers, and nonsegregated for performance bond purposes. Clearing
members may compute performance bond requirements on identically owned
concurrent long and short positions on a net basis.
930.I. Hedge Positions
Clearing members shall have reasonable support for bona-fide hedge
and risk management positions, as defined by Rule 543, that are
afforded hedge performance bond rates.
930.J. Omnibus Accounts
1. Clearing members shall collect performance bond on a gross basis
for positions held in domestic and foreign omnibus accounts.
2. For omnibus accounts, initial performance bond requirements
shall equal maintenance performance bond requirements.
3. Clearing members shall obtain and maintain written instructions
from domestic and foreign omnibus accounts for positions which are
entitled to spread or hedge performance bond rates.
930.K. Liquidation of Accounts
1. Non-Security Futures
If an account holder fails to comply with a performance bond call
within a reasonable time (the clearing member may deem one hour to be a
reasonable time), the clearing member may close out the account
holder's trades or sufficient contracts thereof to restore the account
holder's account to required performance bond status. Clearing members
shall maintain full discretion to determine when and under what
circumstances positions in any account shall be liquidated.
2. Security Futures
If a Customer fails to comply with a performance bond (or
``margin'') call within a reasonable period of time (the clearing
member may deem one hour to be a reasonable period of time), the
relevant clearing member shall take the deduction required with respect
to an undermargined account in computing its net capital under
applicable CFTC Regulations and SEC Regulations.
If at any time there is a liquidating deficit in an account in
which security futures are held, the clearing member shall take steps
to liquidate positions in the account promptly and in an orderly
manner.
930.L. Failure To Maintain Performance Bond Requirements
If a clearing member fails to maintain performance bond
requirements for an account in accordance with this rule, the Exchange
may direct such clearing member to immediately liquidate all or part of
the account's positions to eliminate the deficiency.
930.M. Violation
Violation of this rule may constitute a major offense.
* * * * *
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 Exchange included statements
concerning the purpose of, and basis for,
[[Page 64677]]
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 Exchange 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
The proposed rule amendments are intended to establish procedures
relating to the determination and administration of customer
performance bonds (or ``margins''). Further, these amendments define
the applicability of these requirements, specifically excluding
qualifying security futures dealers from customer security futures
performance bond requirements and related regulatory requirements.
Proposed Rule 833 generally establishes that the determination and
administration of customer performance bonds shall be consistent with
prevailing practices on the Exchange, except to the extent that
Exchange practices may be inconsistent with Commodity Futures Trading
Commission (``CFTC'') Regulations 41.42 through 41.49 and SEC
Regulations 242.400 through 242.406.
General Applicability--Proposed Rule 833 delineates the scope of
application of the proposed rule amendments in two important respects:
(1) It provides that the proposed rule amendments apply only with
respect to security futures transactions executed on CME; or, to those
executed on a marketplace apart from CME but cleared through CME
facilities. 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 performance bond
requirements established by such other venues; (2) proposed Rule 833
establishes that the proposed rule amendments apply only to customers
as defined in proposed Rule 930.B.2.b.; and (3) the proposed rule
amendments are applicable only to security futures held in futures
accounts. While security futures may be held in a securities account as
well, the administration of securities accounts shall be governed, in
addition to all applicable Regulations, by Rules adopted by other
relevant self-regulatory organizations.
Proposed Rule 930.B.2.b. identifies ``exempted persons'' and
``market makers'' as non-customers for purposes of the proposed rule
amendments and, therefore, exempt from the application of such
provisions. Exempted persons are specifically identified by reference
to applicable CFTC and SEC Regulations.
Market Maker Exclusion--CFTC Regulation 41.42(c)(2)(v) and SEC
Regulation 242.400(c)(2)(v) permit exchanges 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, are excluded
from the customer performance bond requirements for security futures.
Any rules so adopted by an exchange must meet the criteria set forth in
Section 7(c)(2)(B) of the Act.\4\
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\4\ 15 U.S.C. 78g(c)(2)(B).
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CME proposes a market maker exclusion in its proposed Rule
930.B.2.b. that relies on CFTC Regulation 41.42(c)(2)(v) and SEC
Regulation 242.400(c)(2)(v). In particular, Exchange members who meet
certain qualifications will be permitted to register with the Exchange
as security futures dealers. As such, their accounts would not be
subject to customer security futures performance bond (or ``margin'')
requirements.
These members will be floor traders or floor brokers registered
with the CFTC under Section 4f(a)(1) of the Commodity Exchange Act, as
amended, or dealers registered with the SEC under Section 15(b) of the
Act.\5\ As such, they may not qualify as exempted persons within the
meaning of Regulation 242.401(a)(9) under the Act. Absent the
provisions of proposed Rule 930.B.2.b., they arguably would have to be
treated as customers for purposes of determining performance bond
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,\6\ and therefore would be contrary to the statutory objectives
reflected in Section 7(c)(2)(B) of the Act.\7\
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\5\ 15 U.S.C. 78o(b).
\6\ 15 U.S.C. 78g(c)(3).
\7\ 15 U.S.C. 78g(c)(2)(B).
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The market maker exclusion as proposed contains all of the criteria
and limitations set forth in CFTC Regulation 41.42(c)(2)(v) and SEC
Regulation 242.400(c)(2)(v). In particular, the Exchange intends to
test a security futures dealer's willingness to hold itself out to buy
and sell on a regular or continuous basis by application of a revenue
test. Note that the Commissions' release regarding security futures
customer margins identified three alternate means by which to
demonstrate such willingness:
1. An exchange may require members to effect a certain percentage
of its security futures trades with persons other than those registered
as market makers;
2. Exchange members could be subject to rules that impose an
affirmative obligation to quote on a regular or continuous basis;
3. An exchange may require that a ``large majority'' of an exchange
member's revenue is derived from trading listed financial based
derivatives including futures and options on stocks, stock indexes,
foreign currencies, interest rate instruments.
CME proposes the application of the 3rd standard listed above.
Specifically, CME proposes that market makers must derive at least 75%
of their gross revenues, on an annual basis, from business activities
or occupations from trading listed financial-based derivatives or the
instruments underlying those derivatives, including security futures;
stock index futures; 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.
We believe that it is appropriate to extend the enumeration of
derivatives to include the underlying instruments as closely related to
the business activities or occupations specifically referenced in the
Commissions' release.
Alternatively, a market maker may satisfy this standard if, except
for unusual circumstances, at least 50% of its security futures trading
activity in any calendar quarter is in security futures to which it is
assigned by the Exchange to act as a ``Security Futures Dealer.''
Market makers are required to maintain books and records including
trading statements and other financial records that would evidence
compliance with these standards. This recordkeeping requirement
includes, without limitation, such trading statements and other
financial records as may be necessary specifically to verify
compliance. Failure on the part of a market maker to comply with these
standards may result in revocation of security futures dealer status or
other sanctions provided under CME Rules.
The parameters of this market maker exclusion shall apply to
position(s) in Exchange security futures contracts regardless of
whether such position(s)
[[Page 64678]]
are held in a futures account, or held in a securities account.
CME believes proposed Rule 930.B.2.b. to be consistent with the
requirements of the Act and with the explanations accompanying the
publication of those requirements.
Performance Bond Rates--Proposed Rule 930.B.2.a. addresses the
issue of customer performance bond rates by requiring that such rates
shall be established at levels no lower than those prescribed by CFTC
Regulation 41.45 and SEC Regulation 242.403. Proposed Rule 930.B.2.c.
elaborates by establishing the requisite performance bond level for
each long or short position in a security future at 20% of the current
market value of such security future, as required by SEC Regulation
242.403(b) and CFTC Regulation 41.45(b).
Exceptions to that 20% requirement are established per proposed
Rule 930.B.2.d. These exceptions rely upon SEC Regulation 242.403(b)(2)
and CFTC Regulation 41.45(b)(2), which establish that a self-regulatory
authority may set the required initial or maintenance performance bond
level for offsetting positions involving security futures and related
positions at a level lower than the level that would apply if
performance bond requirements for such positions were calculated
separately based on the aforementioned 20% requirement, provided the
rules establishing such lower performance bond levels meet the criteria
set forth in Section 7(c)(2)(B) of the Act.\8\ That Section requires
that:
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\8\ 15 U.S.C. 78g(c)(2)(B).
(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 Act]; \9\ and
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\9\ 15 U.S.C. 78f(a).
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(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
Act],\10\ other than an option on a security future.
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\10\ Id.
Absent the performance bond relief afforded by the proposed Rule
930.B.2.d., security futures intermediaries would be required to
collect performance bond from their customers equal to 20% 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.'' \11\
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\11\ 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); 43582 (November 17, 2000), 65 FR 71151 (November 29, 2000)
(order approving SR-Amex-99-27 amending Amex Rule 462); and 43581
(November 17, 2000), 65 FR 70854 (November 28, 2000) (order
approving SR-NASD-00-15 amending NASD Rule 2520).
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CME believes that the same considerations apply in connection with
the determination of performance bond levels for offsetting positions
involving security futures and related positions. If performance bond
offsets were not available with respect to security futures, the
customer performance bond requirements applicable to such instruments
would effectively be inconsistent with, and more onerous than, the
performance bond 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.\12\
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\12\ 15 U.S.C. 78g(c)(2)(B).
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Proposed Rule 930.B.2.d. is accompanied by a schedule which
describes in detail the performance bond offsets available with respect
to particular combinations of security futures and related positions.
Such schedule is 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'').\13\ While the
table differs in certain respects from similar tables in effect for
exchange-traded options, the Commission acknowledged in its Customer
Margin Release that these limited differences are warranted by
different characteristics of the instruments to which they relate.
Accordingly, CME believes that the Proposed Margin Offset Rule is
consistent with the requirements of the Act and the rules and
regulations thereunder.
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\13\ See Securities Exchange Act Release No. 46292 (August 1,
2002), 67 FR 53146 (August 14, 2002).
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Performance Bond Administration--Proposed Rule 930.C.2.a identifies
the types of performance bonds that a security futures intermediary may
accept from a Customer. Consistent with SEC Regulation 242.404(b) and
CFTC Regulation 41.46(b), acceptable types of performance bond are
limited to: deposits of cash, margin securities (subject to specified
restrictions), exempted securities, any other assets permitted under
Regulation T of the Board of Governors of the Federal Reserve System to
satisfy a performance bond deficiency in a securities margin account,
and any combination of the foregoing. Proposed Rule 930.C.2.b. further
provides that the different types of eligible performance bond are to
be valued in accordance with the applicable principles set forth in SEC
Regulations 242.404(c) and 242.404(e) and CFTC Regulations 41.46(c) and
41.46(e).
Proposed Rule 930.K.2 requires a security futures intermediary to
take the deduction required with respect to an underfunded account in
computing its net capital under applicable CFTC and SEC Regulations if
the customer has failed to comply with a required performance bond call
within a reasonable period of time. This requirement is consistent with
SEC Regulation 242.406(a) and CFTC Regulation 41.48(a). Further,
Proposed Rule 930.K.2 requires the liquidation of an account where
there is a liquidating deficit, in accordance with SEC Regulation
242.406(b) and CFTC Regulation 41.48(a).
2. Statutory Basis
The Act Regulations and related provisions of the Act are premised
on each self-regulatory organization adopting performance bond
requirements that are functionally equivalent to the proposed
amendments to CME Rule 930. Accordingly, CME Rule 930, as amended per
this proposal, represents a corollary of, and is designed to give
effect to, the Act Regulations and related provisions of the Act.
B. Self-Regulatory Organization's Statement on Burden on Competition
CME does not believe that the proposed rule amendments will have an
impact on competition because, as described above, (1) the Exchange's
general approach to the question of customer performance bonds for
security futures is based on its long standing practices, consistent
with standards adopted by the U.S. futures exchanges' Joint Audit
Committee and similar rules in effect for other contract markets, (2)
customer performance bond for security futures will be consistent with
rules in effect for options traded on exchanges registered pursuant to
Section 6(a) of the Act; \14\ and (3) CME's
[[Page 64679]]
proposed Market Maker Exception ensures that qualifying security
futures dealers on CME are subject to performance bond requirements
that are comparable to those traditionally applicable to security
futures dealers on securities exchanges. In addition, it is expected
that other self-regulatory organizations listing Security Futures will
adopt rules that are substantially similar to the proposed rule
amendments.
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\14\ 15 U.S.C. 78f(a).
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C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Comments on the proposed rule amendments have not been solicited by
the Exchange nor have any such comments been received to date.
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.
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-CME-2002-01 and should be
submitted by November 12, 2002.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\15\
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\15\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-26721 Filed 10-18-02; 8:45 am]
BILLING CODE 8010-01-P