[Federal Register Volume 68, Number 58 (Wednesday, March 26, 2003)]
[Notices]
[Pages 14725-14727]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-7228]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47541; File No. SR-CBOE-2002-67]


Self-Regulatory Organizations; Order Approving a Proposed Rule 
Change and Amendment No. 1 Thereto by the Chicago Board Options 
Exchange, Inc. Amending its Margin Rule 12.3 To Incorporate Security 
Futures

March 20, 2003.
    On November 1, 2002, the Chicago Board Options Exchange, Inc. 
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'' or ``SEC''), pursuant to section 19(b)(1) of 
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change amending CBOE Rule 12.3 (``Margin 
Requirements'') to incorporate security futures. On November 21, 2002, 
the CBOE filed an amendment to the proposed rule change.\3\ The 
proposed rule change was published for comment in the Federal Register 
on December 16, 2002.\4\ The Commission received no comments on the 
proposed rule change. This order approves the proposed rule change, as 
amended.
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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'').
    \4\ Securities and Exchange Act Release No. 46971 (December 9, 
2002), 67 FR 77108.

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[[Page 14726]]

I. Description of the Proposed Rule Change

    CBOE has proposed to amend its margin rules, in a manner consistent 
with the joint margin regulations of the Commission and the Commodity 
Futures Trading Commission (``CFTC'') \5\ to incorporate security 
futures. Specifically, the proposed rule change adds a new provision 
(k) to CBOE Rule 12.3 to address margin for security futures contracts. 
Proposed Rule 12.3(k) 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.
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    \5\ See Securities Exchange Act Release No. 46292 (August 1, 
2002), 67 FR 53146 (August 14, 2002).
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    CBOE's proposed margin requirement for security futures contracts 
would adopt the applicable provisions of the Joint Regulations of the 
SEC and CFTC (``Joint Regulations'').\6\ In particular, CBOE Rule 
12.3(k) 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 Federal Reserve Board. 
Accordingly, 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.\7\
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    \6\ 17 CFR 242.400 through 242.406 and 17 CFR 41.42 through 
41.49.
    \7\ The current market value of the contract would be calculated 
on a market-to-market basis at the conclusion of each trading day. 
Based on the market-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.
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    Proposed CBOE Rules 12.3(k)(2) and 12.3(k)(3) would set a time 
limit for obtaining required margin by incorporating by reference 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. 
As a result, if a customer did not satisfy an initial or maintenance 
margin call on a security futures contract for five days, the proposed 
rule change would require 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 has noted that the 
Joint Regulations do not include a day trading margin requirement.
    The proposed rule change includes lower margin requirements for a 
security futures contract held in conjunction with an offsetting 
position in another security futures contract, an underlying security, 
or an option on an underlying security.\9\ Specifically, the proposed 
rule change would incorporate the offsets identified in the Federal 
Register release announcing the adoption of the Joint Regulations, 
except for the offset involving a broad-based index future (No. 17) 
because a broad-based index future may not be carried in a securities 
account. In addition, the proposed rule change includes a definition of 
the term ``underlying basket'' as pertains to security futures 
contracts,\10\ which would require that the composition of the basket 
match the composition of the index being offset.
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    \9\ In some cases only lower maintenance margin levels are 
proposed.
    \10\ See proposed CBOE Rule 12.3(k)(5)(D).
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    The proposed rule change also would amend CBOE Rule 12.3(f) 
(``Market-Maker and Specialist Accounts'') to permit options market-
makers to receive good faith margin treatment from a CBOE member for 
certain transactions in security futures contracts that are based on 
the same underlying security as the options in which they make markets. 
In addition, the proposed rule change provides that security futures 
contracts that qualify for the ``security futures dealer'' exclusion 
from margin under the Joint Regulations \11\ would be subject to margin 
that is satisfactory to the member and the carrying broker or dealer.
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    \11\ SEC Rule 400(c)(2)(v); CFTC Rule 41.42(c)(2)(v).
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    Proposed changes to CBOE Rule 12.5 (``Determination of Value for 
Margin Purposes'') 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 would 
also make necessary conforming changes to other margin provisions,\12\ 
and other changes for consistency purposes.
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    \12\ 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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II. Discussion

    After careful review, the Commission finds that the proposed rule 
change, as amended, is consistent with the requirements of the Act and 
the rules and regulations thereunder applicable to a national 
securities exchange.\13\ In particular, the Commission believes that 
the proposed rule change is consistent with the requirements of section 
6(b)(5) of the Act,\14\ which requires, among other things, that the 
rules of the Exchange be designed to promote just and equitable 
principles of trade and, in general, to protect investors and the 
public interest.\15\ In addition, the Commission believes that the 
proposed rule change is consistent with section 7(c)(2)(B) of the 
Act,\16\ which provides, among other things, that the margin 
requirements for security futures must preserve the financial integrity 
of markets trading security futures, prevent systemic risk, be 
consistent with the margin requirements for comparable exchange-traded 
options, and provides that the margin levels for security futures may 
be no lower than the lowest level of margin, exclusive of premium, 
required for any comparable exchange-traded option.
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    \13\ 15 U.S.C. 78s(b)(2).
    \14\ 15 U.S.C. 78f(b)(5).
    \15\ In approving the proposed rule, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \16\ 15 U.S.C. 78g(c)(2)(B).
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    The Commission believes that the rule change is generally 
consistent with the customer margin rules for security futures adopted 
by the Commission and the CFTC. In particular, the Commission notes 
that, CBOE's proposed rule change provides that, with respect to 
security futures contracts, its members must collect proper and 
adequate margin in accordance with the Joint Regulations. As a result, 
the proposed rule change requires a minimum margin level of 20% of 
current market value for positions in security futures, which the 
Commission believes is the minimum margin level necessary to satisfy 
the

[[Page 14727]]

requirements of section 7(c)(2)(B) of the Act.
    In addition, Rule 403 under the Act \17\ provides that a national 
securities exchange may set margin levels lower than 20% of the current 
market value of the security future for an offsetting position 
involving security futures and related positions, provided that an 
exchange's margin levels for offsetting positions meet the criteria set 
forth in Section 7(c)(2)(B) of the Act. The offsets proposed by CBOE 
are consistent with the strategy-based offsets permitted for comparable 
offset positions involving exchange-traded options and therefore 
consistent with section 7(c)(2)(B) of the Act.
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    \17\ 17 CFR 240.403(b)(2).
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    Finally, the Commission believes it is consistent with the Act for 
the CBOE to exclude from its margin requirements positions in security 
futures contracts carried in a futures account. The Commission believes 
that by choosing to exclude such positions from the scope of its rules, 
the CBOE has made compliance by members that are subject to regulatory 
requirements of several SROs easier.

III. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\18\ that the proposed rule change (SR-CBOE-2002-67), as amended, 
is approved.
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    \18\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-7228 Filed 3-25-03; 8:45 am]
BILLING CODE 8010-01-P