[Federal Register Volume 68, Number 131 (Wednesday, July 9, 2003)]
[Notices]
[Pages 41027-41030]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-17274]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48115; File No. SR-CBOE-2003-24]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change and Amendment No. 1 Thereto by the Chicago Board Options 
Exchange, Incorporated to Interpret Rules Relating to Margin 
Requirements for Certain Complex Options Spreads on a Pilot Basis

July 1, 2003.
    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 June 8, 2003, the Chicago Board Options Exchange, Incorporated 
(``CBOE'' or ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by the 
Exchange. On June 26, 2003, the CBOE filed 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\ Amendment No. 1 provides that the Regulatory Circular will 
be in effect as a one-year pilot from the date of approval of the 
proposed rule change.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The CBOE proposes to issue a Regulatory Circular to its membership 
setting forth a clarifying interpretation to CBOE Rule 12.3, Margin 
Requirements, relating to margin requirements for certain complex 
option spreads. Below is the text of the proposed Regulatory Circular. 
Additions are italicized.
* * * * *
To: Member Organizations
From: Division of Regulatory Services
Date: --------, 2003
Subject: Margin Requirements for Certain Complex Spreads
Exchange: James Adams (312) 786-7718
Contacts: Richard Lewandowski (312) 786-7183

KEY POINTS

    [sbull] Certain complex option spreads (specified below) are the 
equivalent of combining two or more spreads that are currently 
recognized in the margin rules of the Chicago Board Options Exchange 
(the ``Exchange'' or ``CBOE'').
    [sbull] Because these complex spreads can be shown to equate to 
aggregations of two or more currently recognized spreads, current 
margin rules are deemed to provide a margin requirement for each 
complex spread in that the rules provide a margin requirement for each 
spread in the equivalent aggregation.
    [sbull] Member organizations may require margin for these complex 
spreads of not less than the sum of the margin required on each spread 
in the equivalent aggregation.
    [sbull] The margin requirements set forth in this Regulatory 
Circular will be in effect as a pilot until (Insert date that is one 
(1) year from the date of approval of the Regulatory Circular by the 
Commission).

Discussion

    It is known that certain complex spread configurations are the net 
result of combining two or more spread strategies that are currently 
recognized in the Exchange's margin rules. Specific complex spread 
configurations are listed below, along with the currently recognized 
spreads to which they can be traced. The expiration months, exercise 
prices, interval between exercise prices, and option premiums used in 
each configuration are for illustration only. However, as illustrated, 
the expiration months and sequence of the exercise prices must fit the 
same pattern, and the intervals between the exercise prices must be 
equal. Note that netting of contracts in option series common to each 
of the currently recognized spreads in an aggregation reduces it to the 
complex spread.

--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                 Feb 45    Feb 50    Feb 55    Feb 45    Feb 50    Feb 55    Feb 60    Feb 65    Apr 60
                                                                  @ .5       @ 1       @ 2     @ 16.5     @ 12       @ 8       @ 6       @ 5       @ 7
--------------------------------------------------------------------------------------------------------------------------------------------------------
Long Butterfly................................................  ........  ........  ........  ........         1        -2         1  ........  ........
Long Butterfly................................................  ........  ........  ........  ........  ........         1        -2         1  ........
                                                                                                       ----------------------------------------
Net--Configuration I..........................................  ........  ........  ........  ........         1        -1        -1         1  ........
 

[[Page 41028]]

 
Long Butterfly................................................  ........  ........  ........  ........         1        -2         1  ........  ........
Short Box.....................................................  ........         1        -1  ........        -1         1  ........  ........  ........
                                                                         --------------------          ------------------------------
Net--Configuration II.........................................  ........         1        -1  ........  ........        -1         1  ........  ........
 
Long Butterfly................................................  ........  ........  ........  ........         1        -2         1  ........  ........
Long Butterfly................................................  ........  ........  ........  ........  ........         1        -2         1  ........
Short Box.....................................................  ........         1        -1  ........        -1         1  ........  ........  ........
                                                                         --------------------          ----------------------------------------
Net--Configuration III........................................  ........         1        -1  ........  ........  ........        -1         1  ........
 
Long Time Spread..............................................  ........  ........  ........  ........  ........  ........        -1  ........  ........
Long Butterfly................................................  ........  ........  ........  ........         1        -2         1  ........  ........
                                                                                                       -----------
Net--Configuration IV.........................................  ........  ........  ........  ........         1        -2  ........  ........         1
 
Long Time Spread..............................................  ........  ........  ........  ........  ........  ........        -1  ........         1
Long Butterfly................................................  ........  ........  ........  ........         1        -2         1  ........  ........
Long Butterfly................................................  ........  ........  ........         1        -2         1  ........  ........  ........
                                                                                             -----------
Net--Configuration V..........................................  ........  ........  ........         1        -1        -1  ........  ........         1
 
Long Time Spread..............................................  ........  ........  ........  ........  ........  ........        -1  ........         1
Long Butterfly................................................  ........  ........  ........  ........         1        -2         1  ........  ........
Short Box.....................................................  ........         1        -1  ........        -1         1  ........  ........  ........
                                                                         -----------
Net--Configuration VI.........................................  ........         1        -1  ........  ........        -1  ........  ........         1
 
Long Time Spread..............................................  ........  ........  ........  ........  ........  ........        -1  ........         1
Long Butterfly................................................  ........  ........  ........  ........         1        -2         1  ........  ........
Long Butterfly................................................  ........  ........  ........         1        -2         1  ........  ........  ........
Short Box.....................................................         1        -1  ........        -1         1  ........  ........  ........  ........
                                                               --------------------          -----------
Net--Configuration VII........................................         1        -1  ........  ........  ........        -1  ........  ........         1
--------------------------------------------------------------------------------------------------------------------------------------------------------

    As illustrated above, the complex spread configurations equate to 
aggregations of currently recognized spreads. Therefore, for complex 
spreads fitting the above configurations, whether established outright 
or through netting, member firms must require initial and maintenance 
margin of not less than the sum of the margin required on each of the 
currently recognized spreads in the applicable aggregation subject to 
the following limitations:
    [sbull] the complex spread must be carried in a margin account,
    [sbull] European style options are not permitted for the 
configurations involving time spreads (IV through VII),
    [sbull] the intervals between exercise prices must be equal, and
    [sbull] each complex spread must comprise four option series, 
except for Configuration IV, which must comprise three option series.
Summing the margin required on each currently recognized spread in each 
of the applicable aggregations renders a margin requirement for the 
subject complex spread configurations as follows:

------------------------------------------------------------------------
               Configuration                     Margin Requirement
------------------------------------------------------------------------
I.........................................  Pay for the net debit in
                                             full.
II........................................  Exercise price interval
                                             (aggregate), net credit may
                                             be applied.
III.......................................  Exercise price interval
                                             (aggregate), net credit may
                                             be applied.
IV........................................  Pay for the net debit in
                                             full.
V.........................................  Pay for the net debit in
                                             full.
VI........................................  Exercise price interval
                                             (aggregate), net credit may
                                             be applied.
VII.......................................  Exercise price interval
                                             (aggregate), net credit may
                                             be applied.
------------------------------------------------------------------------

    Using Configuration III as an example, the margin requirement and 
SMA debit or margin call would be as follows:

----------------------------------------------------------------------------------------------------------------
                                                             PUTS                          CALLS
                                                     -----------------------------------------------------------
                                                       Feb 50    Feb 55    Feb 50    Feb 55    Feb 60    Feb 65
                                                         @1        @2        @12       @8        @6        @5
----------------------------------------------------------------------------------------------------------------
Long Butterfly #1...................................  ........  ........         1        -2         1  ........
Long Butterfly #2...................................  ........  ........  ........         1        -2         1
Short Box #1........................................         1        -1        -1         1  ........  ........
                                                     -----------
Net--Configuration III..............................         1        -1  ........  ........        -1         1
----------------------------------------------------------------------------------------------------------------


[[Page 41029]]

Margin Calculation: $5.00 x 1 contract x 100 shares =$500.00
Margin Requirement: $500.00
    SMA Debit or Margin Call: $500.00-$200.00 = $300.00

    Explanation: The initial and maintenance margin requirement is the 
exercise price interval (aggregate). Establishing this complex spread 
results in a net credit of $200.00 that may be applied to the margin 
requirement.
    As shown in the table below, the same margin requirement, and SMA 
debit or margin call, would result by taking the sum of the margin 
required on each spread in the equivalent aggregation.

------------------------------------------------------------------------
                                          Net  dr or   Margin
                                              er        Req.     Deposit
------------------------------------------------------------------------
Long Butterfly..........................  $200 dr...         0      $200
Long Butterfly..........................  $100 dr...         0       100
Short Box #1............................  $500 cr...      $500         0
                                         -------------
    Total...............................  $200 cr...       500       300
------------------------------------------------------------------------

    The margin requirements set forth in this Regulatory Circular will 
be in effect as a pilot until {insert date one (1) year from the date 
of approval of the Regulatory Circular by the Commission{time} .
    Questions regarding margin requirements should be directed to James 
Adams at (312) 786-7718 or Richard Lewandowski at (312) 786-7183.
* * * * *

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 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
    The Exchange proposes to adopt an interpretation to CBOE Rule 
12.3--Margin Requirements--to clarify that margin requirements for 
certain complex option spreads are provided for under CBOE Rule 12.3. 
The Exchange proposes to implement this interpretation through a 
Regulatory Circular that will set forth the margin requirements for 
such complex spreads. The Exchange believes that the complex spreads in 
question are simply another way of expressing a collection of two or 
more basic option spreads (i.e., the butterfly spread, the box spread, 
and the time spread) already covered under the margin rules. Therefore, 
the Exchange believes that the complex spread margin requirements are 
reasonably implied by, and are a logical extension of, the current 
margin rules. The proposed Regulatory Circular is intended to be a 
temporary measure and will operate as a pilot for one year from the 
date of approval of the Regulatory Circular by the Commission.
    The proposed Regulatory Circular identifies seven complex spread 
configurations, each of which can be shown to equate, on a risk/reward 
basis, to a package of two or more basic spread strategies that are 
already identified and ascribed a margin requirement under the 
Exchange's current margin rules. According to the Exchange, netting the 
common option series between the basic spreads in the package 
corresponding to a complex spread actually results in the complex 
spread. Therefore, the Exchange believes that a complex spread can be 
viewed as the sum of two or more basic spreads. The Exchange believes 
further that for each complex spread configuration identified in the 
proposed Regulatory Circular, the sum of the margin required on the 
basic spreads in an equivalent package covers the maximum risk of the 
complex spread, and is an appropriate minimum requirement.
    The proposed Regulatory Circular holds that a margin requirement 
for each of the seven complex spread configurations identified is, in 
effect, provided for under current CBOE margin rules because they 
equate to basic spread strategies for which margin requirements are 
already specified. Therefore, according to the Exchange, the proposed 
Regulatory Circular will allow member organizations to require margin 
for the subject complex spreads, whether established outright or 
through netting, of not less than the sum of the margin required on 
each basic spread in its corresponding package.
    To be eligible for the margin requirements set forth in the 
proposed Regulatory Circular, a complex spread must match one of the 
seven patterns specified in the proposed Regulatory Circular. 
Furthermore, the proposed Regulatory Circular mandates that: (1) 
Complex spreads must be carried in a margin account; (2) European-style 
options are prohibited for complex spread configurations having a long 
option series that expires after the other option series (i.e., 
involves a time spread); (3) the intervals between exercise prices of 
each option series must be equal; and (4) each complex spread must 
comprise four option series, with the exception of one configuration, 
which must comprise three option series. In view of these limitations, 
the Exchange believes the complex spread margin requirements are non-
controversial.
2. Statutory Basis
    The Exchange believes that the proposed Regulatory Circular 
clarifies that the Exchange's current margin rules extend to complex 
option spreads, thereby, allowing investors to more efficiently 
implement these strategies. As such, the Exchange believes that the 
proposed Regulatory Circular interpretation of CBOE Rule 12.3 is 
consistent with and furthers the objectives of Section 6(b)(5) of the 
Act,\4\ 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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    \4\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The CBOE does not believe that the proposed Regulatory Circular 
interpretation of CBOE Rule12.3 will impose any burden on competition 
that is not necessary or appropriate in furtherance of the purposes of 
the Act.

[[Page 41030]]

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 Regulatory Circular interpretation of CBOE Rule 12.3.

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; 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 Room. Copies of such 
filing will also be available for inspection and copying at the 
principal office of the Exchange. All submissions should refer to file 
number SR-CBOE-2003-24 and should be submitted by July 30, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\5\
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    \5\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-17274 Filed 7-8-03; 8:45 am]
BILLING CODE 8010-01-P