[Federal Register Volume 67, Number 241 (Monday, December 16, 2002)]
[Notices]
[Pages 77108-77114]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-31590]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46971; File No. SR-CBOE-2002-67]


Self-Regulatory Organizations; Notice of Filing of a Proposed 
Rule Change and Amendment No. 1 Thereto by the Chicago Board Options 
Exchange, Inc. Amending the Margin Rule 12.3 to Incorporate Security 
Futures

December 9, 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 November 1, 2002, the Chicago Board Options Exchange, Inc. (``CBOE'' 
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 CBOE. 
On November 21, 2002, the CBOE filed an

[[Page 77109]]

amendment 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 Madge M. Hamilton, Senior Attorney, CBOE, to 
Theodore R. Lazo, Senior Special Counsel, Division of Market 
Regulation (``Division''), Commission, dated November 20, 2002 
(''Amendment No. 1''). Amendment No. 1 makes technical changes to 
the proposed rule text.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend its margin rules under CBOE Rule 
12.3 to incorporate security futures. Below is the text of the proposed 
rule change, as amended. Proposed new language is italicized; proposed 
deletions are bracketed.
* * * * *

Chicago Board Options Exchange, Incorporated

Rules
* * * * *

Chapter XII

Margins
Rule 12.1 No change
Rule 12.2 Time Margin Must Be Obtained
    (a) Securities Other Than Security Futures Contracts. The amount of 
initial margin, or payment in respect of cash account transactions, 
required by this Rule shall be obtained as promptly as possible and in 
any event within one payment period as defined in Section 220.2 of 
Regulation T of the Board of Governors of the Federal Reserve System. 
The amount of maintenance margin required by this Rule shall be 
obtained as promptly as possible and in any event within 15 business 
days.
Rule 12.3 Margin Requirements
    (a) No change
    (b) Customer Margin Accounts--General Rule. Subject to the 
exceptions set forth in parts (c) and (k) hereof, the minimum amount of 
margin which must be maintained in margin accounts of customers having 
positions in securities shall be as follows:
    (1) No change
    (2) No change
    (c)-(e) No Change
    (f) Market maker and specialist accounts.
    (1) Definitions. For purposes of this section (f), the following 
terms shall have the meanings specified below.
    (A) The term ``related instrument'' within an option class or 
product group means any related derivative product, including security 
futures contracts, that meets the offset level requirements for product 
groups under Rule 15c3-1 of the Exchange Act, or any applicable SEC 
staff interpretations or no-action positions (hereinafter referred to 
as SEC Rule 15c3-1).
    (B) The term ``product group'' means two or more option classes, 
related instruments, and qualified stock baskets for which it has been 
determined that a percentage of offsetting profits may be applied to 
losses in the determination of net capital as set forth in SEC Rule 
15c3-1.
    (C) The term ``option class'' refers to all option contracts 
covering the same underlying instrument.
    (D) The term ``underlying instrument'' refers to long and short 
positions covering the same security, or a security which is 
exchangeable for or convertible into the underlying security within a 
period of 90 days. The term underlying instrument shall not be deemed 
to include securities options, futures contracts, options on futures 
contracts, security futures contracts, qualified stock baskets, or 
unlisted instruments.
    (E) The term ``qualified stock basket'' shall have the meaning as 
defined in SEC Rule 15c3-1.
    (F) The term ``net liquidating equity'' shall mean the sum of 
positive cash balances and long securities positions less negative cash 
balances and short securities positions held in the accounts.
    (2) The following positions of members may be carried upon a margin 
basis that is satisfactory to the member and the carrying broker or 
dealer:
    (A) positions in which the member makes a market and permitted 
offset transactions as defined below[.] and
    (B) positions in security futures contracts that qualify for 
exclusion from the margin requirements of SEC and Commodity Futures 
Trading Commission (``CFTC'') regulations pursuant to SEC Rule 
400(c)(2)(v) under the Exchange Act and CFTC Rule 41.42(c)(2)(v), and 
any permitted offset transactions designated by the exchange or 
association upon which the member trades the security futures contract.

Notwithstanding the other provisions of this paragraph (f), a member 
organization may clear and carry the market-maker permitted offset 
positions of one or more registered specialists, registered market-
makers, or Designated Primary Market-Makers pursuant to the rules of a 
national securities exchange (all of which are deemed specialists for 
all purposes under the [Securities] Exchange Act [of 1934]) 
(hereinafter referred to as ``market-maker(s)'') upon a margin basis 
satisfactory to the concerned parties. The amount of any deficiency 
between the equity maintained by the market-maker and the haircuts 
specified in SEC Rule 15c3-1 shall be considered as a deduction from 
net worth in the net capital computation of the carrying broker or 
dealer.
    (3) Permitted Offset Transactions.
    (A) For purposes of this subparagraph (f)(3), a permitted offset 
position means, in the case of an option in which a market-maker makes 
a market, a position in the underlying instrument or other related 
instrument, and in the case of other securities in which a market-maker 
makes a market, a position in options overlying the securities in which 
a market-maker makes a market, if the account holds the following 
permitted offset positions:
    (i) A long position in the underlying instrument or security 
futures contract offset by a short option position which is ``in or at 
the money'';
    (ii) A short position in the underlying instrument or security 
futures contracts offset by a long option position which is ``in or at 
the money'';
    (iii) A stock position resulting from the assignment of a market-
maker short option position or delivery in respect of a short security 
futures contract;
    (iv) A stock position resulting from the exercise of a market-maker 
long option position or taking delivery in respect of a long security 
futures contract;
    (v) A net long position in a security (other than an option) in 
which a market-maker makes a market;
    (vi) A net short position in a security (other than an option) in 
which the market-maker makes a market; or
    (vii) An offset position as defined in SEC Rule 15c3-1, including 
its appendices, or any applicable SEC staff interpretation or no-action 
position
    Permitted offset transactions must be effected for market-making 
purposes such as hedging, risk reduction, rebalancing of positions, 
liquidation, or accommodation of customer orders, or other similar 
market-maker purpose.
    For purposes of this subparagraph (f)(3), the term ``in- or at-the-
money'' means the current market price of the underlying security is 
not more than two standard exercise intervals below (with respect to a 
call option) or above (with respect to a put option) the exercise price 
of the option; the term ``in the money'' means the current market price 
of the underlying instrument or index is not below (with respect to a 
call option) or above (with respect to a put option) the exercise price 
of the option; and, the term ``overlying option'' means

[[Page 77110]]

a put option purchased or a call option written against a long position 
in an underlying instrument, or a call option purchased or a put option 
written against a short position in an underlying instrument.
    (B) Reserved
    (C)(1) Reserved
    (2) For any member which acts as a Market-Maker on the Exchange, 
the carrying member organization may combine all Market-Maker accounts 
in which the Market-Maker or its nominee(s) participates, with the 
exception of joint accounts in which the Market-Maker or its nominee 
are not the sole participants, for purpose of computing its 
requirements as prescribed by SEC Rule 15c3-1.
    (3) On any business day on which positive net liquidating equity is 
not maintained in the account(s), the carrying member organization must 
make a call to the member for additional equity at least equal to the 
deficit and must notify the Exchange's Department of Financial 
Compliance of the deficit. The carrying member organization may extend 
no further credit in the account(s) until the account(s) maintains a 
positive net liquidating equity and, if the member organization's call 
for additional equity is not met, steps should be taken promptly to 
liquidate the positions in the account(s). If the deficit is not 
resolved by noon of the following business day the carrying member 
organization must send telegraphic notice to the Exchange as well as 
the regional and national offices of the Securities and Exchange 
Commission. However, nothing in this subparagraph (C) shall prohibit 
the carrying firm from effecting hedging transactions in the deficit 
account with the prior written approval of the carrying firm's SEC 
designated examining authority.
    (4) In the case of a joint account carried by a member organization 
for a Market-Maker or specialist in which the Member Organization 
participates, the margin deposited by the other participants may be in 
any amount which is mutually satisfactory.
    (g)(i) Broker-Dealer Account. A member organization may carry the 
proprietary account of another broker-dealer, which is registered with 
the SEC, upon a margin basis which is satisfactory to both parties, 
provided the requirements of Regulation T of the Board of Governors of 
the Federal Reserve System and, in respect of security futures 
contracts, SEC Rules 400 through 406 under the Exchange Act and CFTC 
Rules 41.42 through 41.48 are adhered to and the account is not carried 
in a deficit equity condition. The amount of any deficiency between the 
equity maintained in the account and the margin required by the other 
provisions of this Rule shall be deducted in computing the Net Capital 
of the member organization under Rule 15c3-1 of the Exchange Act.
    (ii) Requirements for Joint Back Office Participants. A member 
organization may carry the accounts of joint back office (``JBO'') 
participants upon a margin basis which is satisfactory to both parties, 
provided the requirements of Regulation T Section 220.7 and CBOE Rule 
13.4 are adhered to and the account has a minimum equity of not less 
than $1,000,000. If equity is below $1,000,000 the carrying 
organization must issue a call for additional funds or securities which 
shall be obtained within five business days.
    (h) Notwithstanding any provisions of paragraphs (b) through (g) 
and (k) hereof, the Exchange may at any time impose higher margin 
requirements in respect of positions in any security (including any 
series of options dealt in on an exchange) when it deems such higher 
margin requirements to be advisable in light of the price of the 
security or in light of existing market conditions pertaining generally 
or with respect to such security.
    (i) For the purpose of effecting new securities transactions and 
commitments, the customer shall be required to deposit margin or have 
equity in cash and/or securities in the account which shall be at least 
the greater of:
    (1) The amount specified in Regulation T of the Board of Governors 
of the Federal Reserve System[,] and, in respect of security futures 
contracts, SEC Rules 400 through 406 under the Exchange Act and CFTC 
Rules 41.42 through 41.48, or
    (2) The amount specified in paragraphs (b), [and] (c) and (k) of 
this Rule, or
    (3) Such greater amount as the Exchange may from time to time 
require for specific securities, or
    (4) Equity of at least $2,000 except that cash need not be 
deposited in excess of the cost of any security purchased (this equity 
and cost of purchase provision shall not apply to ``when distributed'' 
securities in a cash account).

Withdrawals of cash or securities may be made from any account which 
has a debit balance, ``short'' position or commitments, provided the 
account is in compliance with Regulation T of the Board of Governors of 
the Federal Reserve System and the security futures contract margin 
requirements pursuant to SEC Rules 400 through 406 under the Exchange 
Act and CFTC Rules 41.42 through 41.48, and after such withdrawal the 
equity in the account is at least the greater of $2,000 or an amount 
sufficient to meet the maintenance margin requirements of this Rule.
    (j) Reserved
    (k) Security Futures Contracts. Nothing in this paragraph (k) or 
other rules of this Chapter XII shall be applicable to security futures 
contract transactions and positions in a futures account.
    (1) General Rule. In relation to security futures contracts, no 
member organization may effect a transaction or carry an account for a 
customer, whether a member or nonmember of the Exchange, without proper 
and adequate margin in accordance with this Chapter XII, all other 
applicable rules of the Exchange, SEC Rules 400 through 406 under the 
Exchange Act and CFTC Rules 41.42 through 41.48. No transaction in a 
security futures contract may be effected, nor may a position in a 
security futures contract be carried, in a securities cash account.
    (2) Time Allowed for Obtaining Margin. If initial or maintenance 
margin owed is not obtained prior to the day on which the account is 
deemed undermargined for purposes of SEC Rule 15c3-1(c)(2)(xii), member 
organizations must comply with the provisions of paragraph (k)(3) 
below. Extensions of time shall be unavailable.
    (3) Net Capital. In computing its net capital, a member 
organization shall deduct any initial or maintenance margin deficiency 
attributable to security futures contracts in accordance with the 
undermargined account provision of SEC Rule 15c3-1(c)(2)(xii).
    (4) Day Trading. Day trading rules shall not be applicable to 
security futures contracts.
    (5) Definitions. For the purposes of this paragraph (k), the 
following terms shall have the meanings specified below.
    (A) The term ``security futures contract'' means a ``security 
future'' as defined in Section 3(a)(55) of Exchange Act.
    (B) The term ``current market value'', with respect to security 
futures contracts, means ``current market value'' as defined in SEC 
Rule 401(4)(i)(A) or (4)(i)(B), whichever is applicable, under the 
Exchange Act and CFTC Rule 41.43(4)(i)(A) or (4)(i)(B), whichever is 
applicable.
    (C) The term ``underlying security'' means, in the case of 
physically settled security futures contracts, the security that is 
delivered upon expiration of the

[[Page 77111]]

contract, and, in the case of cash settled security futures contracts, 
the security or securities index the price or level of which determines 
the final settlement price for the security futures contract upon its 
expiration. The term ``underlying security'' also means, in the case of 
a securities index, an underlying stock basket, or equivalent units of 
a registered investment company meeting the criteria set forth in CBOE 
Rule 5.3 and the Interpretations and Policies there under.
    (D) The term ``underlying basket'' means, in the case of a 
securities index, a group of securities futures contracts where the 
underlying securities as defined in paragraph (C) above include each of 
the component securities of the applicable index and which meets the 
following conditions (i) the quantity of each underlying security is 
proportional to its representation in the index, (ii) the total market 
value of the underlying securities is equal to the aggregate value of 
the applicable index, (iii) the basket cannot be used to offset more 
than the number of contracts or warrants represented by its total 
market value, and (iv) the security futures contracts shall be 
unavailable to support any other contract or warrant transaction in the 
account.
    (6) Exceptions. For the offsetting positions specified in the table 
below, member organizations may apply the corresponding initial and 
maintenance margin requirement minimums, notwithstanding the margin 
required on a security futures contract pursuant to paragraph (k)(1) 
above, or on other securities pursuant to paragraphs (b) and (c) of 
this Rule.
    All options referred to mean options on the underlying security, 
not the security futures contract.
    All requirements that are expressed in terms of an option's 
exercise price, in-the-money amount, and out-of-the-money amount mean 
the aggregate amount (i.e., multiply by number of shares per contract 
or the contract multiplier).

----------------------------------------------------------------------------------------------------------------
                                   Security futures contract   Margin account initial        Margin account
                                              type                   requirement         maintenance requirement
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Long and Short Security Futures    Single Stock, Narrow-      5% of the current market  Same as initial.
 Contract.                          Based Index.               value of the long or
same underlying..................                              short security futures
different expiration months......                              contract, whichever is
same or different market(s)......                              greater.
                                   Single Stocks vs. Narrow-  5% of the current market  Same as initial.
                                    Based Index 1.             value of the long or
                                                               short security futures
                                                               contract(s), whichever
                                                               is greater.
Long and Short Security Futures    Single Stock Narrow-Based  3% of the current market  Same as initial.
 Contract.                          Index.                     value of the long or
same underlying..................                              short security futures
same expiration month............                              contract, whichever is
different markets 2..............                              greater.
Long Security Futures Contract     Single Stock.............  None required on long     None required on long
 and Short Underlying.                                         security futures          security futures
same underlying..................                              contract. Short sale      contract. Short stock
                                                               proceeds plus 50%         requirement is 105% of
                                                               requirement on short      stock market value.
                                                               stock position.
                                   Narrow-Based Index.......  None required on long     None required on long
                                                               security futures          security futures
                                                               contract. Short sale      contract. Short stock
                                                               proceeds plus 50%         basket requirement is
                                                               requirement on short      105% of basket market
                                                               stock basket.3.           value.
Long Security Futures Contract     Single Stock, Narrow-      20% of the current        20% of the current
 and Short Call.                    Based Index.               market value of the       market value of the
same underlying..................                              long security futures     long security futures
                                                               contract plus any call    contract plus any call
                                                               in-the-money amount.      in-the money amount.
                                                               None required on short
                                                               call. Proceeds from the
                                                               call sale may be
                                                               applied.
                                   Single Stocks 4 vs.        20% of the current        20% of the current
                                    Narrow-Based Index Call    market value of the       market value of the
                                    Option.                    long basket of security   long basket of security
                                   Narrow-Based Indices 4      futures contracts plus    futures contracts plus
                                    vs. Broad-Based Index      any call in-the-money     any call in-the-money
                                    Call Option.               amount. None required     amount.
                                                               on short index call.
                                                               Proceeds from the call
                                                               sale may be applied.
Long Security Futures Contract     Single Stock, Narrow-      20% of the current        10% of the put exercise
 and Long Put.                      Based index.               market value of the       price plus any put out-
same underlying..................                              long security futures     of-the-money amount or
                                                               contract Pay for long     20% of the current
                                                               put in full.              market value of the
                                                                                         long security futures
                                                                                         contract, whichever is
                                                                                         lower.
                                   Single Stocks 4 vs.        20% of the current        10% of the index put
                                    Narrow-Based Index Call    market value of the       exercise price plus any
                                    Option.                    long basket of security   put out-of-the-money
                                   Narrow-Based Indices 4      futures contracts. Pay    amount or 20% of the
                                    vs. Broad-Based Index      for long index put in     current market value of
                                    Put Option.                full.                     the long basket of
                                                                                         security futures
                                                                                         contracts, whichever is
                                                                                         lower.
Short Security Futures Contract    Single Stock.............  None required on the      5% of the current market
 and Long Underlying.                                          short security futures    value of the long stock
same underlying..................                              contract. 50%             position.
                                                               requirement on long
                                                               stock position.

[[Page 77112]]

 
                                   Narrow-Based Index.......  None required on the      5% of the current market
                                                               short narrow-based        value of the long stock
                                                               security futures          basket 4
                                                               contract. 50%
                                                               requirement on long
                                                               stock basket.4.
Short Security Futures Contract    Single Stock.............  None required on the      10% of the current
 and Long Marginable Convertible                               short security futures    market value of the
 5.                                                            contract. 50%             long convertible
same underlying..................                              requirement on long       security.
                                                               convertible security.
Short Security Futures Contract    Single Stock.............  20% of the current        10% of the call exercise
 and Long Call 6.                                              market value of the       price plus any call out-
same underlying..................                              short security futures    of-the-money amount or
                                                               contract. Pay for long    20% of the current
                                                               call in full.             market value of the
                                                                                         short security futures
                                                                                         contract, whichever is
                                                                                         lower.
                                   Single Stocks 4 vs.        20% of the current        10% of the index call
                                    Narrow-Based Index Call    market value of the       exercise price plus any
                                    Option.                    short basket of           call out-of-the-money
                                   Narrow-Based Indices 4      security futures          amount or 20% of the
                                    vs. Broad-Based Index      contracts. Pay for long   current market value of
                                    Call Option..              index call in full.       the short basket of
                                                                                         security futures
                                                                                         contracts, whichever is
                                                                                         lower.
Short Security Futures Contract    Single Stock.............  20% of the current        20% of the current
 and Short Put.                                                market value of the       market value of the
same underlying..................                              short security futures    short security futures
                                                               contract plus any put     contract plus any put
                                                               in-the-money amount.      in-the-money amount.
                                                               None required on short
                                                               put. Proceeds from the
                                                               put sale may be applied.
                                   Single Stocks 4 vs.        20% of the current        20% of the current
                                    Narrow-Based Index Put     market value of the       market value of the
                                    Option.                    short basket of           short basket of
                                   Narrow-Based Indices 4      security futures          security futures
                                    vs. Broad-Based Index      contracts plus any put    contracts plus any put
                                    Put Option..               in-the-money amount.      in-the-money amount.
                                                               None required on short
                                                               index put. Proceeds
                                                               from the index put sale
                                                               may be applied.
Long Security Futures Contract,    Single Stock.............  20% of the current        10% of the exercise
 Short Call and Long Put.          Narrow Based Index.......   market value of the       price plus any call in-
same underlying..................  Single Stocks 4 vs.         long security futures     the-money amount.
put and call must have same         Narrow-Based Index         contract(s) plus any
 exercise price.                    Options..                  call in-the-money
                                   Narrow-Based Indices 4      amount. Pay for long
                                    vs. Broad-Based Index      put in full. None
                                    Options..                  required on short call.
                                                               Proceeds from call sale
                                                               may be applied.
Long Security Futures Contract,    Single Stock.............  20% of the current        10% of the put exercise
 Short Call and Long Put.          Narrow Based Index.......   market value of the       price plus any put out-
same underlying..................  Single Stocks 4 vs.         long security futures     of-the-money amount, or
put exercise price must be below    Narrow-Based Index         contract(s) plus any      20% of the call
 call exercise price.               Options..                  call in-the-money         exercise price plus any
                                   Narrow-Based Indices 4      amount. Pay for long      call in-the-money
                                    vs. Broad-Based Index      put in full. None         amount, whichever is
                                    Options..                  required on short call.   lower.
                                                               Proceeds from call sale
                                                               may be applied.
Short Security Futures Contract,   Single Stock.............  20% of the current        10% of the exercise
 Long Call and Short Put.          Narrow Based Index.......   market value of the       price plus any put in-
same underlying..................  Single Stocks 4 vs.         short security futures    the-money amount.
put and call must have same         Narrow-Based Index         contract(s) plus any
 exercise price.                    Options..                  call in-the-money
                                   Narrow-Based Indices 4      amount. Pay for long
                                    vs. Broad-Based Index      put in full. None
                                    Options..                  required on short put.
                                                               Proceeds from put sale
                                                               may be applied.
----------------------------------------------------------------------------------------------------------------

    1 A long (short) basket of security futures contracts on individual 
equities offset with a short (long) security futures contract on a 
narrow-based index. A basket of security futures contracts must qualify 
as an ``underlying basket'' in accordance with CBOE Rule 12.3(k)(5)(D).
    2 Contract specifications must be substantively identical.
    3 The stock basket must qualify as an ``underlying stock basket'' 
in accordance with CBOE Rule 12.3(a)(7).
    4 A basket of security futures contracts must qualify as an 
``underlying basket'' in accordance with CBOE Rule 12.3(k)(5)(D).
    5 The convertible security must be immediately exchangeable for or 
convertible into, without restriction (including the payment of money), 
the security underlying the single stock future.
    6 A long warrant (issued by the issuer of the underlying security) 
is also permitted (single stock futures only). The long warrant must be 
paid for in full and shall have no value for margin purposes.
    * * * Interpretations and Policies:

.01-.15 No change
Rule 12.4 No change
Rule 12.5. Determination of Value for Margin Purposes

    Positions in active securities, except security futures contracts, 
dealt in on a recognized exchange (including option contracts) shall, 
for margin purposes, be valued at current market value prices; provided 
that, whether or not dealt in on an exchange, only those options

[[Page 77113]]

contracts on a stock or stock index, or a stock index warrant, having 
an expiration that exceeds 9 months and which are listed or guaranteed 
by the carrying broker-dealer, may be deemed to have market value for 
the purposes of Rule 12.3(c). Security futures contracts shall have no 
value for margin purposes. Positions in other securities shall be 
valued conservatively in the light of current market prices and the 
amount of anticipated realization upon a liquidation of the entire 
position. Substantial additional margin must be required in all cases 
where the securities carried are subject to unusually rapid or violent 
changes in value, or where the amount carried is such that they cannot 
be liquidated promptly.

12.6 No change
12.7 No change
12.8 No change

Rule 12.9. Meeting Margin Calls by Liquidation Prohibited

    No Member Organization shall permit a customer to make a practice 
of effecting transactions requiring initial or additional margin or 
full cash payment and then furnishing such margin or making such full 
cash payment by liquidation of the same or other commitments. The 
provisions of this Rule shall not apply to margin calls attributable to 
security futures contract transactions nor to any account maintained 
for another broker or dealer, exclusive of the partners, officers and 
directors of such other broker or dealer, provided such other broker or 
dealer is a Member Organization of the Exchange or has agreed in good 
faith with the Member Organization carrying the account that he will 
maintain a record equivalent to that referred to in Rule 12.12 of these 
Rules.
* * * * *

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

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

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

1. Purpose
    CBOE is proposing to amend its margin rules, in a manner consistent 
with the joint margin regulations of the Commission and the Commodity 
Futures Trading Commission (``CFTC'')\4\ to incorporate security 
futures. Specifically, CBOE is proposing to add a new provision (k) to 
CBOE Rule 12.3 to address margin for security futures contracts. The 
proposed amendments would: (1) Require the initial and maintenance 
margin for security futures contracts to be 20 percent unless an offset 
provision provides for a different margin requirement or the positions 
are excluded from CBOE Rule 12.3(k); (2) allow for good faith margin of 
certain positions in security futures contracts; (3) clarify that 
security futures contracts have no value for margin purposes; (4) make 
necessary conforming changes to other CBOE margin provisions; and (5) 
make some non-substantive changes to CBOE margin rules for consistency 
purposes.
---------------------------------------------------------------------------

    \4\ See Securities Exchange Act Release No. 46292 (August 1, 
2002), 67 FR 53146 (August 14, 2002).
---------------------------------------------------------------------------

    The passage of the Commodity Futures Modernization Act of 2000 (the 
``CFMA'') \5\ in December of 2000 enabled futures contracts on 
individual stocks and narrow-based indexes to be traded in the United 
States for the first time. The CFMA conferred upon the Board of 
Governors of the Federal Reserve System (the ``FRB'') authority to set 
margin requirements for security futures contracts. The FRB delegated 
this authority to the SEC and the CFTC jointly, as permitted by the 
CFMA. The SEC and the CFTC have jointly issued rules and 
regulations.\6\
---------------------------------------------------------------------------

    \5\ Appendix E of the Pub. L. 106-554, 114 Stat. 2763 (2000).
    \6\ See note 4, supra.
---------------------------------------------------------------------------

    CBOE's proposed margin requirements for security futures contracts 
would adopt the provisions of the joint regulations of the SEC and CFTC 
(''Joint Regulations'').\7\ Proposed new provision (k) to CBOE Rule 
12.3 would require compliance with the security futures contract margin 
requirements of the SEC and CFTC, in addition to the Exchange margin 
rules and Regulation T of the FRB. Therefore, under proposed CBOE Rule 
12.3(k)(1), the initial and maintenance margin requirement for a 
security futures contract would be 20 percent of the current market 
value of the contract unless an offset provision enumerated in 12.3(k) 
or another rule provided for a different margin requirement.
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    \7\ 17 CFR 242.400 through 242.406 and 17 CFR 41.42 through 
41.49.
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    The current market value of the contract would be calculated on a 
mark-to-market basis at the conclusion of each trading day. Based on 
the mark-to-market value of a security futures contract, a variation 
settlement amount could be debited from or credited to a customer's 
account balance at the conclusion of the trading day. These variation 
settlement entries represent actual cash withdrawals from, or deposits 
to, the account that will change its cash balance in the same way as 
would any other routine cash withdrawal or deposit. When account equity 
is computed, variation settlement amounts are automatically accounted 
for in that they can be viewed as integrated into the cash balance, 
which is a component of the formula for computing equity. Proposed CBOE 
Rule 12.3(k)(2) would set a time limit for obtaining required margin by 
incorporating by reference under CBOE Rule 12.3(k)(3) the same time 
frame that the SEC's Net Capital Rule \8\ permits maintenance margin 
calls to remain unsatisfied before the member organization must deduct 
the maintenance margin deficiency in computing its net capital. In 
other words, under the SEC's rules, if a customer did not satisfy an 
initial or maintenance margin call on a security futures contract for 
five days, the broker or dealer carrying that customer's security 
futures positions would be required to take a deduction for the 
undermargined customer account when computing its own net capital.
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    \8\ 17 CFR 240.15c3-1(c)(2)(xii).
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    CBOE Rule 12.3(k)(4) would expressly state that day trading rules 
do not apply to security futures contracts. CBOE believes that a level 
playing field should be maintained between the securities and futures 
industries. Securities accounts would be at a competitive disadvantage 
to futures accounts if CBOE, or any other securities self-regulatory 
organization, were to impose day trading (i.e., intra-day) margin 
requirements on security futures contract transactions in securities 
accounts, because futures accounts are not subject to day trading 
margin requirements. Moreover, the Joint Regulations do not implement a 
day trading (i.e., intra-day) margin requirement.
    Consistent with the Joint Regulations, the Exchange is proposing 
lower margin requirements for a security futures contract held in 
conjunction with an offsetting position in another security

[[Page 77114]]

futures contract, an underlying security, or an option on an underlying 
security. Such lower margin requirements are appropriate for these 
offsetting positions since the risk of the combined positions is lower 
than the risk of the positions viewed separately.\9\ Therefore, the 
Exchange proposes to incorporate all of the offsets identified in the 
Supplementary Information section of the Federal Register release 
announcing the final Joint Regulations, except for the offset involving 
a broad-based index future (No. 17), as a broad-based index future 
cannot be carried in a securities account.\10\ Under the enumerated 
offsets, a person could have a margin requirement for a position in 
security futures contracts that was lower than 20 percent. For example, 
a person holding a long and a short securities futures contract in the 
same underlying security, but having different expiration months, would 
have a margin requirement of five percent of the current market value 
of the long or short contract, whichever is greater. Under another 
offset provision, a person holding long and short security futures 
contracts in the same underlying security, with the same expiration 
month, but listed and traded on different markets, would have a three 
percent margin requirement. The offsets would be listed in table format 
under proposed CBOE Rule 12.3(k)(6).
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    \9\ In some cases only lower maintenance margin levels are 
proposed.
    \10\ See note 4, supra.
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    A number of offsets involve a basket of security futures contracts. 
For example, a basket of security futures contracts on individuals 
stocks may serve as an offset to a security futures contract on a 
narrow-based index or option on a narrow-based index. Also, a basket of 
narrow-based security futures contracts may serve as an offset to an 
option on a broad-based index. A definition of ``underlying basket'' as 
pertains to security futures contracts is proposed.\11\ The primary 
purpose of the definition of ``underlying basket'' is to require that 
the composition of the basket match the composition of the index being 
offset.
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    \11\ See proposed CBOE Rule 12.3(k)(5)(D).
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    The Exchange proposes to amend CBOE Rule 12.3(f) (Market-Maker and 
Specialist Accounts) to permit options market-makers to receive good 
faith margin treatment for hedging transactions in security futures 
contracts that are based on the same underlying security as the options 
in which they make markets. In addition, security futures contracts 
that qualify for the exclusion from margin under the Joint Regulations 
\12\ would be subject to margin that is satisfactory to the member and 
the carrying broker or dealer.
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    \12\ SEC Rule 400(c)(2)(v); CFTC Rule 41.42(c)(2)(v).
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    CBOE proposes other amendments to the margin rules. Proposed 
changes to CBOE Rule 12.5 would clarify that security futures contracts 
have no value for margin purposes. Proposed amendments to CBOE Rule 
12.2, Time Margin Must Be Obtained, and CBOE Rule 12.9, Meeting Margin 
Calls by Liquidation Prohibited, would clarify that these rules do not 
apply to security futures contracts. The proposed rule change also 
makes necessary conforming changes to other margin provisions,\13\ and 
other non-substantive changes being proposed for consistency purposes.
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    \13\ See Proposed CBOE Rules 12.3(b), (f)(1)(A) and (D), (2)(A), 
(3)(A)(i), (A)(ii), (A)(iii) and (A)(iv), (g)(i), (h), and (i)(2).
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2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
section 6(b) of the Exchange Act \14\ in general and furthers the 
objectives of section 6(b)(5) of the Exchange Act \15\ in particular in 
that it should promote just and equitable principles of trade, serve to 
remove impediments to and perfect the mechanism of a free and open 
market and a national market system, and protect investors and the 
public interest. CBOE notes that the proposed rules are intended to 
implement the margin requirements for security futures contracts in the 
Joint Regulations. CBOE believes that the proposed rule change would 
remove impediments to trading security future contracts and promote 
just and equitable principles of trade by incorporating security 
futures and appropriate offsets into CBOE's margin rules in a manner 
that will promote competition and permit people to utilize security 
futures contracts for hedging purposes. As such, the proposed rule 
change is consistent with and furthers the objectives of Section 
6(b)(5) of the Act, in that it is designed to perfect the mechanisms of 
a free and open market and to protect investors and the public 
interest.
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    \14\ 15 U.S.C. 78f(b).
    \15\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    This proposed rule change does not impose any burden on competition 
that is not necessary or appropriate in furtherance of the purposes of 
the Act.

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

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

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

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

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, 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 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 Section, 450 Fifth Street, 
NW., Washington, DC 20549. Copies of such filing will also be available 
for inspection and copying at the principal office of CBOE. All 
submissions should refer to the File No. SR-CBOE-2002-67 and should be 
submitted by January 6, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
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    \16\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-31590 Filed 12-13-02; 8:45 am]
BILLING CODE 8010-01-P