[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
----------------------------------------------------------------------------------------------------------------
                                       Security underlying the       Initial margin         Maintenance margin
        Description of offset              security future            requirement              requirement
----------------------------------------------------------------------------------------------------------------
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).
----------------------------------------------------------------------------------------------------------------
\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\
---------------------------------------------------------------------------

    \4\ 15 U.S.C. 78g(c)(2)(B).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \5\ 15 U.S.C. 78o(b).
    \6\ 15 U.S.C. 78g(c)(3).
    \7\ 15 U.S.C. 78g(c)(2)(B).
---------------------------------------------------------------------------

    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:
---------------------------------------------------------------------------

    \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
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78f(a).
---------------------------------------------------------------------------

    (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.
---------------------------------------------------------------------------

    \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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \12\ 15 U.S.C. 78g(c)(2)(B).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \13\ See Securities Exchange Act Release No. 46292 (August 1, 
2002), 67 FR 53146 (August 14, 2002).
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \14\ 15 U.S.C. 78f(a).
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \15\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-26721 Filed 10-18-02; 8:45 am]
BILLING CODE 8010-01-P