[Federal Register Volume 70, Number 175 (Monday, September 12, 2005)]
[Notices]
[Pages 53816-53825]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-4949]



[[Page 53816]]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52381; File No. SR-CFE-2005-02]


Self-Regulatory Organizations; CBOE Futures Exchange, LLC; Notice 
of Filing and Order Granting Accelerated Approval of Proposed Rule 
Change Relating to Customer Margin Requirements for Security Futures

September 2, 2005.
    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 July 26, 2005, the CBOE Futures Exchange, LLC (``CFE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by CFE. The 
Commission is publishing this notice to solicit comments on the 
proposed rule change from interested persons and to grant accelerated 
approval to the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    CFE is proposing margin requirements for security futures traded on 
CFE and other related new rules. Specifically, the proposed rule change 
sets the minimum initial and maintenance customer margin rates for such 
security futures and provides for lower margin levels for permitted 
strategy-based offset positions. The proposed rules exclude certain 
financial relations to which the SEC's margin rules do not apply. The 
proposed rule change also establishes standards under which CFE Trading 
Privilege Holders (``TPHs'') may qualify as security futures dealers 
and therefore be excluded from CFE's margin rules. Lastly, the proposed 
rule change sets forth a security futures market maker program. The 
text of the proposed rule change is provided below. New text is 
italicized.
* * * * *

CBOE Futures Exchange, LLC

    517. Customer Margin Requirements for Contracts that are Security 
Futures
    (a) Scope of Rule. This Rule 517 shall apply to positions resulting 
from transactions in Security Futures, traded on the Exchange or 
subject to the Rules of the Exchange to the extent that such positions 
are held by Clearing Members or, if applicable, Trading Privilege 
Holders on behalf of Customers in futures accounts (as such term is 
defined in Commission Regulation Sec.  1.3(vv) and Exchange Act 
Regulation 15c3-3(a)), with paragraph (n) of this Rule 517 also 
applying to such positions held in securities accounts (as such term is 
defined in Commission Regulation 1.3(ww) and Exchange Act Regulation 
15c3-3(a)). As used in this Rule 517, the term ``Customer'' does not 
include (i) any exempted person (as such term is defined in Commission 
Regulation Sec.  41.43(a)(9) and Exchange Act Regulation 401(a)(9)) and 
(ii) any Market Maker (as such term is defined in paragraph (n) below). 
Nothing in this Rule 517 shall alter the obligation of each Clearing 
Member and, if applicable, Trading Privilege Holder to comply with 
Applicable Law relating to customer margin for transactions in Security 
Futures, including without limitation Commission Regulations 41.42 
through 41.49 or Rules 400 through 406 under the Exchange Act, as 
applicable (including in each case any successor regulations or rules).
    (b) Margin System. The Standard Portfolio Analysis of Risk 
(SPAN[reg]* is the margin system adopted by the Exchange. 
SPAN[reg] generated margin requirements shall constitute 
Exchange margin requirements. All references to margin in the Rules of 
the Exchange shall be to margin computed on the basis of 
SPAN[reg]. Margin systems other than SPAN[reg] 
may be used to meet Exchange margin requirements if the relevant 
Clearing Member or, if applicable, Trading Privilege Holder can 
demonstrate that its margin system will result in margin requirements 
that are in all cases equal to or greater than the corresponding 
requirements determined on the basis of SPAN[reg].
    (c) Margin Rate. The Exchange will set and publish the initial and 
maintenance margin rates to be used in determining Exchange margin 
requirements; provided that in no case shall the required margin for 
any long or short position held by a Clearing Member or, if applicable, 
Trading Privilege Holder on behalf of a Customer be less than the rate 
from time to time determined by the Commission and the Securities and 
Exchange Commission for purposes of Commission Regulation 41.45(b)(1) 
and Rule 403(b)(1) under the Exchange Act unless a lower margin level 
is available for such position pursuant to paragraph (m) below.
    (d) Acceptable Margin Deposits.
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    *``SPAN'' is a registered trademark of Chicago Mercantile 
Exchange Inc., used herein under license. Chicago Mercantile 
Exchange Inc. assumes no liability in connection with the use of 
SPAN by any person or entity.
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    (i) Clearing Members and, if applicable, Trading Privilege Holders 
may accept from their Customers as margin 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 margin deficiency in a 
securities margin account, and any combination of the foregoing, each 
as valued in accordance with Commission Regulation 41.46(c) and (e) or 
Rule 404(c) and (e) under the Exchange Act, as applicable. Shares of a 
money market mutual fund that meet the requirements of Commission 
Regulations 1.25 and 41.46(b)(2) and Rule 404(b)(2) under the Exchange 
Act, as applicable, may be accepted as a margin deposit from a Customer 
for purposes of this Rule 517.
    (ii) A Clearing Member or, if applicable, Trading Privilege Holder 
shall not accept as margin from any Customer securities that have been 
issued by such Customer or an Affiliate of such Customer unless such 
Clearing Member or Trading Privilege Holder files a petition with and 
receives permission from the Exchange for such purpose.
    (iii) All assets deposited by a Customer to meet margin 
requirements must be and remain unencumbered by third party claims 
against the depositing Customer.
    (iv) Except to the extent prescribed otherwise by the Exchange, 
cash margin deposits shall be valued at market value and all other 
margin deposits shall be valued at an amount not to exceed that set 
forth in Commission Regulation 41.46(c) and (e) or Rule 404(c) and (e) 
under the Exchange Act, as applicable (including in each case any 
successor regulations or rules).
    (e) Acceptance of Orders. Clearing Members and, if applicable, 
Trading Privilege Holders may accept Orders for a particular Customer 
account only if sufficient margin is on deposit in such account or is 
forthcoming within a reasonable period of time (which shall be no more 
than five Business Days, although the relevant Clearing Member or, if 
applicable, Trading Privilege Holder may deem one hour to be a 
reasonable period of time). For a Customer account that has been 
subject to calls for margin for an unreasonable period of time, 
Clearing Members and, if applicable, Trading Privilege Holders may only 
accept Orders that, when executed, will reduce the margin requirements 
resulting from the existing positions in such account. Clearing

[[Page 53817]]

Members and, if applicable, Trading Privilege Holders may not accept 
Orders for a Customer account that would liquidate to a deficit or that 
has a debit balance.
    (f) Margin Calls. Clearing Members and, if applicable, Trading 
Privilege Holders must call for margin from a particular Customer:
    (i) when the margin equity on deposit in such Customer's account 
falls below the applicable maintenance margin requirement; or
    (ii) subsequently, when the margin equity on deposit in such 
Customer's account, together with any outstanding margin calls, is less 
than the applicable maintenance margin requirement.
    Any such call must be made within one Business Day after the 
occurrence of the event giving rise to such call. Clearing Members and, 
if applicable, Trading Privilege Holders may call for additional margin 
at their discretion.
    Clearing Members and, if applicable, Trading Privilege Holders 
shall reduce any call for margin only to the extent that margin 
deposits permitted under paragraph (d) above are received in the 
relevant account. Clearing Members and, if applicable, Trading 
Privilege Holders may delete any call for margin only if (i) margin 
deposits permitted under paragraph (d) above equal to or in excess of 
the deposits called are received in the relevant account or (ii) inter-
day favorable market movements or the liquidation of positions result 
in the margin on deposit in the relevant account being equal to or 
greater than the applicable initial margin requirement. In the event of 
any such reduction or deletion, the oldest outstanding margin call 
shall be reduced or deleted first.
    Clearing Members and, if applicable, Trading Privilege Holders, 
shall maintain written records of any and all margin calls issued, 
reduced or deleted by them.
    (g) Disbursements of Excess Margin. Clearing Members and, if 
applicable, Trading Privilege Holders may release to Customers margin 
on deposit in any account only to the extent that such margin is in 
excess of the applicable initial margin requirement under this Rule 517 
and any other applicable margin requirement.
    (h) Loans to Customers. Clearing Members and, if applicable, 
Trading Privilege Holders may not extend loans to Customers for margin 
purposes unless such loans are secured within the meaning of Commission 
Regulation 1.17(c)(3). The proceeds of any such loan must be treated in 
accordance with Commission Regulation 1.30.
    (i) Aggregation of Accounts and Positions. For purposes of 
determining margin requirements under this Rule 517, Clearing Members 
and, if applicable, Trading Privilege Holders shall aggregate accounts 
under identical ownership if such accounts fall within the same 
classifications of customer segregated, customer secured, special 
reserve account for the exclusive benefit of customers and non-
segregated for margin purposes. Clearing Members and, if applicable, 
Trading Privilege Holders may compute margin requirements for 
identically owned concurrent long and short positions on a net basis.
    (j) Omnibus Accounts. Clearing Members and, if applicable, Trading 
Privilege Holders shall collect margin on a gross basis for positions 
held in domestic and foreign omnibus accounts. For omnibus accounts, 
initial margin requirements shall equal the corresponding maintenance 
margin requirements. Clearing Members and, if applicable, Trading 
Privilege Holders shall obtain and maintain written instructions from 
domestic and foreign omnibus accounts for positions that are eligible 
for offsets pursuant to paragraph (m) below.
    (k) Liquidation of Positions. If a Customer fails to comply with a 
margin call required by Commission Regulations 41.42 through 41.49 or 
Rules 400 through 406 under the Exchange Act, as applicable, within a 
reasonable period of time (which shall be no more than five Business 
Days, although the relevant Clearing Member or, if applicable, Trading 
Privilege Holder may deem one hour to be a reasonable period of time), 
the relevant Clearing Member or, if applicable, Trading Privilege 
Holder may liquidate positions in such Customer's account to ensure 
compliance with the applicable margin requirements.
    (l) Failure To Maintain Required Margin. If a Clearing Member or, 
if applicable, Trading Privilege Holder fails to maintain sufficient 
margin for any Customer account in accordance with this Rule 517, the 
Exchange may direct such Clearing Member or Trading Privilege Holder to 
immediately liquidate all or any part of the positions in such account 
to eliminate the deficiency.
    (m) Offsetting Positions. For purposes of Commission Regulation 
Sec.  41.45(b)(2) and Rule 403(b)(2) under the Exchange Act, the 
initial and maintenance margin requirements for offsetting positions 
involving Security Futures, on the one hand, and related positions, on 
the other hand, are set at the levels specified in Schedule A to this 
Chapter 5.
    (n) Exclusion for Market Makers.
    (i) A Person shall be a ``Market Maker'' for purposes of this Rule 
517, and shall be excluded from the requirements set forth in 
Commission Regulations 41.42 through 41.49 and Rules 400 through 406 
under the Exchange Act, as applicable, in accordance with Commission 
Regulation 41.42(c)(2)(v) and Rule 400(c)(2)(v) under the Exchange Act 
with respect to all trading in Security Futures for its own account, if 
such Person is a Trading Privilege Holder or Authorized Trader that is 
registered with the Exchange as a dealer (as such term is defined in 
Section 3(a)(5) of the Exchange Act) in Security Futures.
    (ii) Each Market Maker shall:
    (A) be registered as a floor trader or a floor broker with the 
Commission under Section 4f(a)(1) of the CEA or as a dealer with the 
Securities and Exchange Commission (or any successor agency or 
authority) under Section 15(b) of the Exchange Act;
    (B) maintain records sufficient to prove compliance with the 
requirements set forth in this paragraph (n) and Commission Regulation 
41.42(c)(2)(v) or Rule 400(c)(2)(v) under the Exchange Act, as 
applicable, including without limitation trading account statements and 
other financial records sufficient to detail activity; and
    (C) hold itself out as being willing to buy and sell Security 
Futures for its own account on a regular or continuous basis.
    A Market Maker satisfies condition (C) above if:
    (1) such Market Maker: (x) provides continuous two-sided quotations 
throughout the trading day for all delivery months of Security Futures 
representing a meaningful proportion of the total trading volume on the 
Exchange from Security Futures in which that Market Maker is designated 
as a Market Maker, subject to relaxation during unusual market 
conditions as determined by the Exchange (such as a fast market in 
either a Security Future or a security underlying such Security Future) 
at which times such Market Maker must use its best efforts to quote 
continuously and competitively; and (y) when providing quotations, 
quotes with a maximum bid/ask spread of no more than the greater of 
$0.20 or 150% of the bid/ask spread in the primary market for the 
security underlying each Security Future; or
    (2) such Market Maker: (x) responds to at least 75% of the requests 
for quotation for all delivery months of Security Futures representing 
a

[[Page 53818]]

meaningful proportion of the total trading volume on the Exchange from 
Security Futures in which that Market Maker is designated as a Market 
Maker, subject to relaxation during unusual market conditions as 
determined by the Exchange (such as a fast market in either a Security 
Future or a security underlying such Security Future) at which times 
such Market Maker must use its best efforts to quote competitively; and 
(y) when responding to requests for quotation, quotes within five 
seconds with a maximum bid/ask spread of no more than the greater of 
$0.20 or 150% of the bid/ask spread in the primary market for the 
security underlying each Security Future.
    For purposes of clauses (1) and (2) above, beginning on the 181st 
calendar day after the commencement of trading of Security Futures, a 
``meaningful proportion of the total trading volume on the Exchange 
from Security Futures in which that Market Maker is designated as a 
Market Maker'' shall mean a minimum of 20% of such trading volume.
    (iii) Any Market Maker that fails to comply with the Rules of the 
Exchange, Commission Regulations 41.42 through 41.49 or Rules 400 
through 406 under the Exchange Act, as applicable, shall be subject to 
disciplinary action in accordance with Chapter 7. Appropriate sanctions 
in the case of any such failure shall include, without limitation, a 
revocation of such Market Maker's registration as a dealer in Security 
Futures pursuant to clause (i) above.
* * * * *

Schedule A to CFE Chapter 5

                                     Margin Levels 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.
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 put 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.

[[Page 53819]]

 
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       index.                   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.
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 and     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).

[[Page 53820]]

 
18. Long (short) a security future     Individual stock and     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. See, e.g., Amex Rules 900 and 900C; CBOE
  Rule 12.3; and NASD Rule 2522.
\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.

* * * * *

CFE Policy and Procedure VII. Security Futures Market Maker 
Registration Policy and Procedures

A. Security Futures Market Maker Program

    Pursuant to Exchange Rule 514, the Exchange has adopted a market 
maker program under which one or more Trading Privilege Holders or 
Authorized Traders may be designated as market makers in respect of one 
or more Security Futures to provide liquidity and orderliness in the 
market for such Security Futures. To be designated as an Exchange 
market marker in Security Futures, a Trading Privilege Holder or 
Authorized Trader must complete and file with the Exchange a Market 
Maker Registration Form. By signing the registration form the Trading 
Privilege Holder or Authorized Trader will confirm that it meets and 
will continue to meet the qualifications to act as market maker in 
Security Futures in accordance with Exchange Rules. The member will be 
required to identify all Security Futures for which it seeks to be 
designated as a market maker and elect which of the two alternative 
sets of market maker obligations specified in Exchange Rule 517(n) it 
intends to undertake.

B. Market Maker Exclusion from Customer Margin Requirements

    To qualify for the market maker exclusion in Exchange Rule 517(n) 
for purposes of the Exchange's customer margin rules relating to 
Security Futures, a person must:
    (1) be a Trading Privilege Holder or Authorized Trader that is 
registered with the Exchange as a dealer in Security Futures as defined 
in Section 3(a)(5) of the Exchange Act;
    (2) be registered as a floor trader or a floor broker under Section 
4f(a)(1) of the CEA or as a dealer with the Securities and Exchange 
Commission (``SEC'') under Section 15(b) of the Exchange Act;
    (3) maintain records sufficient to prove compliance with the 
requirements of Exchange Rule 517(n) and Commission Rule 41.42(c)(2)(v) 
and SEC Rule 400(c)(2)(v) under the Exchange Act as applicable, 
including without limitation trading account statements and other 
financial records sufficient to detail activity; and
    (4) hold itself out as being willing to buy and sell Security 
Futures for its own account on regular or continuous basis.
    In addition, the market maker exclusion provides that any market 
maker that fails to comply with the rules of the Exchange or the margin 
rules adopted by the SEC and the Commission shall be subject to 
disciplinary action in accordance with Chapter 7 of the Exchange's 
rules, and that appropriate sanctions in the case of any such failure 
shall include, without limitation, a revocation of such market maker's 
registration as a dealer in Security Futures.

C. Market Maker Categories

    Exchange Rule 517(n) specifies two alternative ways for a Trading 
Privilege Holder or Authorized Trader to satisfy the requirement that a 
market maker hold itself out as being willing to buy and sell Security 
Futures for its own account on a regular or continuous basis. Each 
Trading Privilege Holder or Authorized Trader seeking market maker 
designation must register for one of the following two market maker 
categories and will undertake to perform all of the obligations set 
forth in the elected category:

[[Page 53821]]

    Category 1. The market maker will provide continuous two-sided 
quotations throughout the trading day for all delivery months of 
Security Futures representing a meaningful proportion of the total 
trading volume on the Exchange from Security Futures in which that 
market maker is designated as a market maker, subject to relaxation 
during unusual market conditions as determined by the Exchange (such as 
a fast market in either a Security Future or a security underlying such 
Security Future) at which times such market maker must use its best 
efforts to quote continuously and competitively; and when providing 
quotations, quotes for a minimum of one contract with a maximum bid/ask 
spread of no more than the greater of $0.20 or 150 percent of the bid/
ask spread in the primary market for the security underlying each 
Security Future; or
    Category 2. The market maker will respond to at least 75 percent of 
the requests for quotations for all delivery months of Security Futures 
representing a meaningful proportion of the total trading volume on the 
Exchange from Security Futures in which that market maker is designated 
as a market maker, subject to relaxation during unusual market 
conditions as determined by the Exchange (such as a fast market in 
either a Security Future or a security underlying such Security Future) 
at which times such market maker must use its best efforts to quote 
competitively; and when responding to requests for quotation, quotes 
within five seconds for a minimum of one contract with a maximum bid/
ask spread of no more than the greater of $0.20 or 150 percent of the 
bid/ask spread in the primary market for the security underlying each 
Security Future.
    For purposes of Categories (1) and (2) above, beginning on the 
181st calendar day after the commencement of trading of Security 
Futures, a ``meaningful proportion of the total trading volume on the 
Exchange from Security Futures in which that market maker is designated 
as a market maker'' shall mean a minimum of 20 percent of such trading 
volume.

D. Qualification for ``60/40'' Tax Treatment

    To qualify as a ``dealer'' in security futures contracts within the 
meaning of Section 1256(g)(9) of the Internal Revenue Code of 1986, as 
amended (the ``Code''), a Trading Privilege Holder or Authorized Trader 
is required (i) to register as a market maker for purposes of the 
Exchange's margin rules under Category 1 or Category 2 above; (ii) to 
undertake in its registration form to provide quotations for all 
products specified for the market maker exclusion from the Exchange 
margin rules; and (iii) to quote a minimum size of
    (A) ten (10) contracts for each product not covered by (B) or (C) 
below;
    (B) five (5) contracts for each product specified by the member to 
the extent such quotations are provided for delivery months other than 
the next two delivery months then trading; and
    (C) one (1) contract for any single stock futures contract where 
the average market price for the underlying stock was $100 or higher 
for the preceding calendar month or for any futures contract on a 
narrow-based security index, as defined by Section 1a(25) of the CEA.

E. Products

    As noted above in completing the Market Maker Registration Form, a 
member must specify all Security Futures for which it intends to act as 
a market maker. The Exchange will assign to the Trading Privilege 
Holder or Authorized Trader all of the Security Futures listed on its 
registration form, unless the Exchange provides written notice to the 
Trading Privilege Holder or Authorized Trader identifying any Security 
Futures for which such assignment is withheld. A Trading Privilege 
Holder or Authorized Trader may change the list of Security Futures for 
which it undertakes to act as market maker for any calendar quarter by 
filing a revised Market Maker Registration Form with the Exchange on 
any business day prior to the last trading day of such quarter, and 
such change shall be effective retroactive to the first trading day of 
such quarter. Each market maker shall be responsible for maintaining 
books and records that confirm that it has fulfilled its quarterly 
obligations under the market maker category elected on its Market Maker 
Registration Form in respect of all Security Futures designated for 
that calendar quarter.

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 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 III below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant parts of such 
statements.

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

    CFE is proposing to adopt new CFE Rule 517, including Schedule A 
thereto (the ``Proposed Rule'') to (i) establish general requirements 
and procedures relating to customer margining by security futures 
intermediaries (``General Margin Rules''), (ii) set initial and 
maintenance margin levels for offsetting positions involving security 
futures and related positions at levels lower than the levels that 
would be required if those positions were margined separately (``Margin 
Offset Rule''), and (iii) exclude proprietary trades of qualifying 
security futures dealers from the margin requirements set forth in the 
Proposed Rule and the related regulatory requirements (``Market Maker 
Exclusion''). The General Margin Rules, which are contained in 
paragraphs (a) through (l) of the Proposed Rule, are detailed below. 
The Margin Offset Rule consists of paragraph (m) of the Proposed Rule 
and a table of offsets contained in proposed Schedule A to Chapter 5 of 
CFE's Rules, which describes in detail the margin offsets available 
with respect to particular combinations of security futures and related 
positions. Lastly, the proposed rule change sets forth a security 
futures market maker program in proposed CFE Policy and Procedure VII, 
which is being adopted pursuant to CFE Rule 514.
    (a) General Margin Rules
    The General Margin Rules, which are identical to the rules of 
OneChicago, LLC (``OneChicago'') that relate to customer margining by 
security futures intermediaries, are designed to complement the 
customer margin rules set forth in Rules 400 through 406 under the Act 
(``Exchange Act Rules'').\3\ The Exchange Act Rules contain detailed 
requirements with respect to the margin to be collected from customers 
in connection with security futures and related positions held by 
security futures intermediaries on behalf of such customers. While the 
General Margin Rules are based on the standardized margin procedures 
developed by the U.S. futures exchanges' Joint Audit Committee and 
similar rules in effect for other contract markets designated under the 
Commodity Exchange Act, as

[[Page 53822]]

amended (``CEA''), \4\ those precedents have been modified in certain 
respects to conform to the requirements of the Exchange Act Rules. The 
following paragraphs contain a brief explanation of each paragraph of 
the General Margin Rules:
---------------------------------------------------------------------------

    \3\ 17 CFR 242.400-406.
    \4\ 7 U.S.C. 1 et seq.
---------------------------------------------------------------------------

    Paragraph (a) of the Proposed Rule defines the scope of application 
of the Proposed Rule in two important respects. First, it provides that 
the Proposed Rule only applies to transactions in contracts traded on 
or subject to the rules of CFE. 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 
margin requirements established by such other exchanges. Second, 
paragraph (a) clarifies that the requirements set forth in the Proposed 
Rule generally only apply to security futures intermediaries that carry 
security futures products in futures accounts (with the exception of 
paragraph (n), which also applies to positions held in securities 
accounts). As provided in Rule 402(a) under the Act,\5\ security 
futures intermediaries that carry security futures in securities 
accounts are subject to the Exchange Act Rules, Regulation T \6\ of the 
Board of Governors of the Federal Reserve System, and the margin 
requirements of the self-regulatory organizations of which they are a 
member. In addition, paragraph (a) tracks the exemption for ``exempted 
persons'' pursuant to Rule 401(a)(9) under the Act.\7\
---------------------------------------------------------------------------

    \5\ 17 CFR 242.402(a).
    \6\ 12 CFR 220.1 et seq.
    \7\ 17 CFR 242.401(a)(9).
---------------------------------------------------------------------------

    Paragraph (b) of the Proposed Rule adopts the Standard Portfolio 
Analysis of Risk (SPAN[supreg]) as the margining system for CFE. 
SPAN[supreg] was developed by the Chicago Mercantile Exchange Inc. and 
has also been adopted by OneChicago. SPAN[supreg] evaluates the risk of 
the futures and options portfolio in each account and assesses a margin 
requirement based on such risk by establishing reasonable movements in 
futures prices over a one day period. Security futures intermediaries 
entering into transactions on CFE can receive risk arrays based on 
SPAN[supreg] to calculate margins for each of their accounts, so that 
they can calculate minimum margin requirements for such accounts on a 
daily basis. However, until such time as portfolio margining is 
approved and implemented for security futures without a required 
minimum margin level, SPAN[supreg] must be programmed to generate a 
margin level for each long or short position in a security future at a 
level not less than the required margin level for such security future.
    Paragraph (c) of the Proposed Rule sets the required minimum margin 
level for each long or short position in a security future at 20 
percent of the current market value of such security future, as 
required by Rule 403(b) under the Act.\8\ The only exception from this 
general requirement contemplated by the Proposed Rule is the Margin 
Offset Rule, which is described in greater detail under section (b) 
below.
---------------------------------------------------------------------------

    \8\ 17 CFR 242.403(b).
---------------------------------------------------------------------------

    Paragraph (d) of the Proposed Rule specifies the types of margin 
that a security futures intermediary may accept from a customer. 
Consistent with Rule 404(b) under the Act,\9\ acceptable types of 
margin are limited to deposits of cash, margin securities (subject to 
specified restrictions), exempted securities, any other assets 
permitted under Regulation T \10\ of the Board of Governors of the 
Federal Reserve System to satisfy a margin deficiency in a securities 
margin account, and any combination of the foregoing. Paragraph (d) of 
the Proposed Rule further provides that the different types of eligible 
margin are to be valued in accordance with the applicable principles 
set forth in Rule 404 under the Act.\11\
---------------------------------------------------------------------------

    \9\ 17 CFR 242.404(b).
    \10\ 12 CFR 220.1 et seq.
    \11\ 17 CFR 242.404.
---------------------------------------------------------------------------

    Paragraph (e) of the Proposed Rule provides that security futures 
intermediaries may accept orders for a particular account only if (i) 
sufficient margin is on deposit in such account or is forthcoming 
within a reasonable time, or (ii) in the event that the conditions set 
forth in (i) are not satisfied, such orders reduce the margin 
requirements resulting from the existing positions in such account. 
This provision is designed to prevent account holders from exacerbating 
any already existing margin deficiency by entering into further 
transactions.
    Paragraph (f) of the Proposed Rule establishes the general 
principle that a security futures intermediary must call for initial or 
maintenance margin equity whenever the minimum margin requirements 
determined in accordance with paragraph (c) of the Proposed Rule 
(taking into account any relief available under the Margin Offset Rule) 
is not satisfied. Any such margin call must be made within one business 
day after the occurrence of the event giving rise to the call. 
Paragraph (f) also clarifies that security futures intermediaries may 
call for margin in excess of CFE's minimum requirements. Finally, 
paragraph (f) provides that a margin call may only be reduced or 
deleted if and to the extent that (i) qualifying margin deposits are 
received or (ii) inter-day favorable market movements or the 
liquidation of positions have offset the previously existing margin 
deficiency. In each case, the oldest margin call outstanding at any 
time is to be reduced or deleted first. These provisions address 
necessary technical aspects of customer margining and are consistent 
with similar provisions contained in the precedents referred to above.
    Paragraph (g) of the Proposed Rule limits the ability of customers 
to obtain disbursements of excess margin to any amounts in excess of 
the applicable initial margin requirement under the Proposed Rule and 
any other applicable margin requirement. This limitation is consistent 
with Rule 405(a) under the Act.\12\
---------------------------------------------------------------------------

    \12\ 17 CFR 242.405(a).
---------------------------------------------------------------------------

    Paragraph (h) of the Proposed Rule prohibits security futures 
intermediaries from extending loans to customers for margin purposes 
unless such loans are secured within the meaning of Commodity Futures 
Trading Commission (``CFTC'') Regulation 1.17(c)(3).\13\ This 
prohibition corresponds to similar restrictions currently in effect on 
other contract markets.
---------------------------------------------------------------------------

    \13\ 17 CFR 1.17(c)(3).
---------------------------------------------------------------------------

    Paragraph (i) of the Proposed Rule provides that accounts under 
identical ownership are to be aggregated for purposes of determining 
the applicable margining requirements on a net basis if such accounts 
fall within the same general classification (customer segregated, 
customer secured, special reserve account for the exclusive benefit of 
customers and nonsegregated). This aggregation approach is consistent 
with universal practice in the futures industry and reflects the fact 
that several accounts under identical ownership may become subject to 
liquidation of positions in the event of a failure to satisfy margin 
calls with respect to any one of such accounts.
    Paragraph (j) of the Proposed Rule establishes particular rules for 
omnibus accounts of security futures intermediaries, namely that (i) 
margin for positions held in such accounts is to be collected on a 
gross basis, (ii) initial and maintenance margin requirements are 
identical, and (iii) security futures intermediaries are to obtain and 
maintain written instructions from such accounts with respect to 
positions which are eligible for offsets pursuant to the Margin Offset 
Rule.

[[Page 53823]]

    Paragraph (k) of the Proposed Rule enables a security futures 
intermediary to liquidate positions in the account of any customer that 
fails to comply with a required margin call within a reasonable period 
of time. This provision complements the requirements set forth in Rule 
406(a) and (b) under the Act.\14\
---------------------------------------------------------------------------

    \14\ 17 CFR 242.406(a) and (b).
---------------------------------------------------------------------------

    Paragraph (1) of the Proposed Rule authorizes CFE to direct any 
security futures intermediaries that fail to maintain margin 
requirements for any account in accordance with the Proposed Rule, to 
immediately liquidate any or all of the positions in such account to 
eliminate the resulting deficit. This provision is designed to ensure 
compliance by security futures intermediaries with their obligations 
under paragraph (k) and is an important function of CFE's oversight 
over such intermediaries.
    The Exchange Act Rules and related provisions of the Act (such as, 
among others, Sections 6(g)(4)(B)(ii) \15\ and 6(h)(3)(L) \16\ of the 
Act) are premised on each self-regulatory organization adopting margin 
requirements that are functionally equivalent to those contained in the 
General Margin Rules. Accordingly, the General Margin Rules represent a 
corollary of, and are designed to give effect to, the Exchange Act 
Rules and related provisions of the Act.
---------------------------------------------------------------------------

    \15\ 15 U.S.C. 78f(g)(4)(B)(ii).
    \16\ 15 U.S.C. 78f(h)(3)(L).
---------------------------------------------------------------------------

    (b) Margin Offset Rule
    Security futures intermediaries entering into transactions on CFE 
will be subject to, among other things, Rule 403(b)(1) under the 
Act,\17\ which provides that the margin for each long or short position 
in a security future will generally be 20 percent of the current market 
value of such security future. As discussed above, this requirement is 
reflected in paragraph (c) of the General Margin Rules. Pursuant to 
Rule 403(b)(2) under the Act,\18\ however, a self-regulatory authority 
may set the required initial or maintenance margin level for offsetting 
positions involving security futures and related positions at a level 
lower than the level that would apply if such positions were margined 
separately based on the aforementioned 20 percent requirement, provided 
the rules establishing such lower margin levels meet the criteria set 
forth in Section 7(c)(2)(B) of the Act.\19\ That Section requires, in 
relevant part, that:
---------------------------------------------------------------------------

    \17\ 17 CFR 242.403(b)(1).
    \18\ 17 CFR 242.403(b)(2).
    \19\ 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]; and
    (II) Initial and maintenance margin levels for a security future 
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], other than 
an option on a security future.''
    CFE is proposing the Margin Offset Rule pursuant to, and in 
reliance on, Rule 403(b)(2) under the Act.\20\ At the core of the 
Margin Offset Rule will be the table of offsets contained in proposed 
Schedule A to Chapter 5 of CFE's Rules, which describes in detail the 
margin offsets available with respect to particular combinations of 
security futures and related positions. Such Schedule A is 
substantively identical to the table of offsets included in the release 
by the CFTC and the Commission on Customer Margin Rules Relating to 
Security Futures (the ``Customer Margin Release''). While the table 
differs in certain specified respects from similar tables in effect for 
exchange-traded options, the CFTC and Commission acknowledged in the 
Customer Margin Release that these limited differences are warranted by 
different characteristics of the instruments to which they relate. For 
the reasons set forth above, CFE believes that the Margin Offset Rule 
is consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to CFE.
---------------------------------------------------------------------------

    \20\ 17 CFR 242.403(b)(2).
---------------------------------------------------------------------------

    (c) Market Maker Exclusion
    Rule 400(c)(2)(v) under the Act \21\ permits a national securities 
exchange 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, on the other hand, are excluded from the 
margin requirements contained in the Exchange Act Rules. Any rules so 
adopted by an exchange must meet the criteria set forth in Section 
7(c)(2)(B) of the Act,\22\ which is reproduced in relevant part under 
section (b) above.
---------------------------------------------------------------------------

    \21\ 17 CFR 242.400(c)(2)(v).
    \22\ 15 U.S.C. 78g(c)(2)(B).
---------------------------------------------------------------------------

    CFE is proposing the Market Maker Exclusion pursuant to, and in 
reliance on, Rule 400(c)(2)(v) under the Act.\23\ CFE may select 
certain of its TPHs or Authorized Traders to serve as market makers 
with respect to security futures contracts in accordance with proposed 
CFE Policy and Procedure VII. From time to time, CFE may adopt other 
programs pursuant to CFE Rule 514 under which TPHs or Authorized 
Traders may be designated as market makers with respect to one or more 
security futures contracts in order to provide liquidity and 
orderliness in the relevant market or markets.
---------------------------------------------------------------------------

    \23\ 17 CFR 242.400(c)(2)(v).
---------------------------------------------------------------------------

    The Market Maker Exclusion as proposed reflects all of the criteria 
and limitations set forth in Rule 400(c)(2)(v) under the Act.\24\ 
Specifically, as contemplated by the Customer Margin Release, the 
Market Maker Exclusion specifies the circumstances under which a Market 
Maker will be considered to ``hold itself out as being willing to buy 
and sell security futures for its own account on a regular or 
continuous basis.'' Under the Market Maker Exclusion, a Market Maker 
satisfies this condition if such Market Maker either:
---------------------------------------------------------------------------

    \24\ 17 CFR 242.400(c)(2)(v).
---------------------------------------------------------------------------

    (i) provides continuous two-sided quotations throughout the trading 
day for all delivery months of security futures representing a 
meaningful proportion of the total trading volume on the CFE from 
security futures in which that Market Maker is designated as a Market 
Maker, subject to relaxation during unusual market conditions as 
determined by the CFE (such as a fast market in either a security 
future or a security underlying such security future) at which times 
such Market Maker must use its best efforts to quote continuously and 
competitively; and when providing quotations, quotes with a maximum 
bid/ask spread of no more than the greater of $0.20 or 150% of the bid/
ask spread in the primary market for the security underlying each 
security future; or
    (ii) responds to at least 75% of the requests for quotation for all 
delivery months of security futures representing a meaningful 
proportion of the total trading volume on CFE from security futures in 
which that Market Maker is designated as a Market Maker, subject to 
relaxation during unusual market conditions as determined by CFE (such 
as a fast market in either a security future or a security underlying 
such security future) at which times such Market Maker must use its 
best efforts to quote competitively; and when responding to requests 
for quotation, quotes within five seconds with a

[[Page 53824]]

maximum bid/ask spread of no more than the greater of $0.20 or 150% of 
the bid/ask spread in the primary market for the security underlying 
each security future.
    These two alternative standards proposed by CFE generally follow 
examples given in the Customer Margin Release. These standards are also 
identical to OneChicago Rules 515(n)(ii)(C)(1) and (2), except that the 
CFE standards relate only to security futures contracts and are 
specifically identified as such in the CFE standards. Although 
OneChicago Rules 515(n)(ii)(C)(1) and (2) refer generally to 
``contracts'' (and not security futures contracts) because OneChicago 
only trades security futures, the effect of the both exchanges' rules 
are identical since what is being measured is the trading volume of 
security futures contracts.
    (d) Security Futures Market Maker Program
    Pursuant to CFE Rule 514, CFE is proposing to adopt a market maker 
program in which TPHs or Authorized Traders may be designated as market 
makers in respect to one or more CFE security futures contracts. The 
proposed rule change sets forth the procedures necessary for members to 
be designated as market makers and the policies in relation to such 
designation.
    The proposed rule change reiterates the qualifications that TPHs 
and Authorized Traders must meet pursuant to proposed CFE Rule 517(n) 
to qualify for the market maker exclusion from customer margin for 
security futures contracts. In addition, the proposed rule change makes 
clear that under Chapter 7 of the CFE rules, failure to comply with CFE 
rules or the margin rules adopted by the Commission and the CFTC are 
subject to disciplinary action. The appropriate sanctions for any such 
failure shall include, without limitation, a revocation of such market 
maker's registration as a dealer in security futures.
    Under the proposed rule change, a TPH or Authorized Trader seeking 
a market maker designation for one or more security futures contracts 
must submit a Market Maker Registration Form to CFE. By signing the 
registration form, such person confirms that it meets and will continue 
to meet the qualifications to act as a market maker in security futures 
contracts in accordance with CFE rules. The registration form requires 
the listing of all the security futures contracts in which such person 
will act as market makers. The registration form also requires the 
identification of the qualifying market maker category under CFE Rule 
517(n).
    The proposed rule change establishes that CFE will assign to the 
TPH or Authorized Trader all security futures contracts listed by such 
person on its registration form, unless CFE provides written notice to 
such person identifying any security futures contracts for which such 
assignment is withheld. Under the proposed rule change, for any 
calendar quarter, a market maker may change the list of security 
futures contracts for which it is designated by filing a revised 
registration form prior to the last trading day in such calendar 
quarter. Such change in security futures contract designation will be 
effective retroactive to the first trading day of such quarter. The 
proposed rule change also makes clear that each market maker is 
responsible for maintaining books and records that confirm that it has 
fulfilled its quarterly obligations under the market maker category as 
elected on its registration form for all designated security futures 
contracts for that quarter. Under the proposal, each market maker would 
also be required to maintain such books and records for every security 
futures contract and for each calendar quarter in which its designation 
as market maker in security futures contracts is maintained.
    In addition, the proposed rule change sets forth the requirements 
that must be met to qualify as a ``dealer'' in security futures 
contracts within the meaning of Section 1256(g)(9) of the Internal 
Revenue Code of 1986, as amended (the ``Code'').\25\ Under the proposed 
rule change, to qualify as a dealer within the meaning of the Code a 
TPH or Authorized Trader is required (i) to register as a market maker 
for purposes of CFE's margin rules under Category 1 or 2 (CFE Rule 
517(n)(ii)(C)(1) or (2)); (ii) to undertake in its registration form to 
provide quotations for all products specified for the market maker 
exclusion from the CFE margin rules; and (iii) for each delivery month 
to quote a minimum size of:
---------------------------------------------------------------------------

    \25\ 26 U.S.C. 1256(g)(9).
---------------------------------------------------------------------------

    (A) Ten contracts of a product not covered by (B) or (C) below;
    (B) Five contracts of a product specified by the market maker for 
delivery months other than the next two delivery months trading at the 
time the quotations are made; and
    (C) One contract of any single stock futures product where the 
average market price for the underlying stock was $100 or higher for 
the preceding calendar month or for each delivery month of any futures 
contract on a narrow-based security index, as defined by Section 1a(25) 
of the CEA.
    CFE believes that the General Margin, Margin Offset, and Market 
Maker Exclusion Rules are consistent with Commission and CFTC rules and 
regulations, except in those instances explained above pursuant to 
which CFE rules are consistent with parallel rules of OneChicago. CFE 
also believes the proposed security futures market maker program will 
provide liquidity and orderliness in the market for CFE security 
futures contracts. Accordingly, CFE believes the proposed rule change 
is consistent with the Act and the rules and regulations under the Act 
applicable to a national securities exchange and, in particular, the 
requirements of Section 6(b) of the Act.\26\ Specifically, CFE believes 
the proposed rule change is consistent with the Section 6(b)(5)\27\ 
requirements that the rules of an exchange be designed to promote just 
and equitable principles of trade, to prevent fraudulent and 
manipulative acts and, in general, to protect investors and the public 
interest.
---------------------------------------------------------------------------

    \26\ 15 U.S.C. 78f(b).
    \27\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    CFE does not believe that the proposed rule change will impose any 
burden on competition 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

    The Exchange neither received nor solicited written comments on the 
proposal.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to [email protected]. Please include 
File Number SR-CFE-2005-02 on the subject line.

Paper Comments

     Send paper comments in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-9309.

[[Page 53825]]

    All submissions should refer to File Number SR-CFE-2005-02. This 
file number should be included on the subject line if e-mail is used. 
To help the Commission process and review your comments more 
efficiently, please use only one method. The Commission will post all 
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). 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, 100 F Street, 
NE., Washington, DC 20549. Copies of such filing also will be available 
for inspection and copying at the principal office of the CBOE. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-CFE-2005-02 and should be 
submitted on or before October 3, 2005.

IV. Commission Findings and Order Granting Accelerated Approval of a 
Proposed Rule Change

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange.\28\ In 
particular, the Commission finds that the proposed rule change is 
consistent with the requirements of Section 6(b)(5) of the Act,\29\ 
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. In addition, the 
Commission believes that the proposed rule change is consistent with 
Section 7(c)(2)(B) of the Act,\30\ which provides, among other things, 
that the margin requirements for security futures must preserve the 
financial integrity of markets trading security futures and prevent 
systemic risk. The Commission also believes that the proposed rule 
change is consistent with the customer margin rules set forth in Rules 
400 through 406 under the Act.\31\
---------------------------------------------------------------------------

    \28\ In approving this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
    \29\ 15 U.S.C. 78f(b)(5).
    \30\ 15 U.S.C. 78g(c)(2)(B).
    \31\ 17 CFR 242.400-406.
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    The Exchange has requested that the Commission approve this 
proposed rule change prior to the thirtieth day after publication of 
notice of the filing in the Federal Register. The Commission believes 
that nothing in this proposed rule change raises any new, unique, or 
substantive issues from those previously raised in SR-OC-2002-01, as 
amended, which rule filing sets forth OneChicago's margin requirements 
for security futures, and in SR-OC-2004-01, which rule filing sets 
forth OneChicago's market maker program. The Exchange's proposed rules 
set forth herein are identical to the OneChicago's rules approved by 
the Commission in SR-OC-2002-01, as amended, and SR-OC-2004-01, with 
the exception of one market maker exemption from the margin rules which 
the CFE excluded because it did not correspond to its current 
practices. Further, the Exchange is ready to begin trading subject to 
the approval of this proposed rule change and the Exchange's opening 
would enhance competition in the marketplace. Accordingly, the 
Commission finds good cause for approving this proposed rule change 
prior to the thirtieth day after the date of publication of notice 
thereof in the Federal Register. Specifically, the Commission believes 
that it is consistent with Section 19(b)(2) of the Act \32\ to approve 
CFE's proposed rule change prior to the thirtieth day after publication 
of the notice of filing thereof in the Federal Register.
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    \32\ 15 U.S.C. 78s(b)(2).
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V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\33\ that the proposed rule change (File No. SR-CFE-2005-02) is 
approved on an accelerated basis.
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    \33\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\34\
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    \34\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. E5-4949 Filed 9-9-05; 8:45 am]
BILLING CODE 8010-01-P