Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Relating to Margin Treatment of Over-the-Counter Options Contracts Cleared by The Options Clearing Corporation, 62995-62998 [2014-24957]

Download as PDF Federal Register / Vol. 79, No. 203 / Tuesday, October 21, 2014 / Notices prevent the execution or display of a short sale order at a price at or below the current NBB under certain circumstances. The Exchange represents that its short sale price sliding will continue to operate the same for Users that select Price Adjust as it does for Users that select the display-price sliding process currently offered by the Exchange.36 For the reasons noted above, the Commission finds that the proposed rule change is consistent with the Act, including Section 6(b)(5) of the Act,37 which requires, among other things, that the rules of an exchange be designed to promote just and equitable principles of trade, remove impediments to, and perfect the mechanism of, a free and open market and a national market system, and, in general, protect investors and the public. V. Conclusion It is therefore ordered, pursuant to Section 19(b)(2) of the Act,38 that the proposed rule change, SR–BYX–2014– 019, be, and hereby is, approved. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.39 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2014–24952 Filed 10–20–14; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–73355; File No. SR–CBOE– 2014–073] Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing and Immediate Effectiveness of a Proposed Rule Change Relating to Margin Treatment of Over-the-Counter Options Contracts Cleared by The Options Clearing Corporation mstockstill on DSK4VPTVN1PROD with NOTICES October 15, 2014. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (the ‘‘Act’’),1 and Rule 19b–4 thereunder,2 notice is hereby given that on October 1, 2014, Chicago Board Options Exchange, Incorporated (the ‘‘Exchange’’ or ‘‘CBOE’’) filed with the Securities and Exchange Commission (the ‘‘Commission’’) the proposed rule change as described in Items I, and II, 36 See Notice, supra, note 3 at 52783. U.S.C. 78f(b)(5). 38 15 U.S.C. 78s(b)(2). 39 17 CFR 200.30–3(a)(12). 1 15 U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 37 15 VerDate Sep<11>2014 18:05 Oct 20, 2014 Jkt 235001 62995 below, which Items have been prepared by the Exchange. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. Corporation [and is issued and guaranteed by the carrying brokerdealer]. (b)–(n) No change. * * * * * I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange proposes to amend its rules regarding the margin treatment of over-the-counter (‘‘OTC’’) options cleared by The Options Clearing Corporation (‘‘OCC’’). The text of the proposed rule change is provided below. (additions are italicized; deletions are [bracketed]) * * * * * Rule 12.4—Portfolio Margin Chicago Board Options Exchange, Incorporated Rules * * * * * Rule 1.1. When used in these Rules, unless the context otherwise requires: (a)–(l) No change. Option Contract (m) Except as otherwise provided, [T]the term ‘‘option contract’’ means a put or call issued, or subject to issuance, by the Clearing Corporation pursuant to the Rules of the Clearing Corporation. (n)–(ooo) No change. OCC Cleared OTC Option Contract (ppp) The term ‘‘OCC cleared OTC option contract’’ means an over-thecounter option contract that is issued and guaranteed by the Clearing Corporation. Except as otherwise provided, an OCC cleared OTC option contract is not an ‘‘options contract’’ as defined in the Rules. . . . Interpretations and Policies: .01–.05 No change. * * * * * Rule 12.3. Margin Requirements (a) Definitions. For purposes of this Rule, the following terms shall have the meanings specified below. (1)–(8) No change. (9) The term ‘‘listed’’ for purposes of this Chapter 12 means a security traded on a registered national securities exchange or automated facility of a registered national securities association or issued and guaranteed by the Clearing Corporation and shall include OCC cleared OTC options contracts. (10)–(13) No change. (14) The term ‘‘OTC option’’ as used with reference to a call or a put option contract in this Chapter 12 means an over-the-counter option contract that is issued and guaranteed by the carrying broker-dealer and not traded on a national securities exchange or issued and guaranteed by the Clearing PO 00000 Frm 00056 Fmt 4703 Sfmt 4703 Rule 12.4. As an alternative to the transaction/position specific margin requirements set forth in Rule 12.3 of this Chapter 12, a TPH organization may require margin for all margin equity securities (as defined in Section 220.2 of Regulation T), listed options, unlisted derivatives, security futures products, and index warrants in accordance with the portfolio margin requirements contained in this Rule 12.4. In addition, a TPH organization, provided it is a Futures Commission Merchant (‘‘FCM’’) and is either a clearing member of a futures clearing organization or has an affiliate that is a clearing member of a futures clearing organization, is permitted under this Rule 12.4 to combine a customer’s related instruments (as defined below), listed index options, unlisted derivatives, options on exchange traded funds, index warrants, and underlying instruments and compute a margin requirement for such combined products on a portfolio margin basis. Application of the portfolio margin provisions of this Rule 12.4 to IRA accounts is prohibited. (a) Definitions. (1) The term ‘‘listed option’’ for purposes of this Rule shall mean any equity (or equity index-based) option traded on a registered national securities exchange or automated facility of a registered national securities association or issued and guaranteed by the Clearing Corporation and shall include OCC cleared OTC options contracts. (2)–(3) No change. (4) The term ‘‘unlisted derivative’’ for purposes of this Rule means any equitybased (or equity index-based) unlisted option, forward contract or swap that can be valued by a theoretical pricing model approved by the Securities and Exchange Commission and does not include OCC cleared OTC options contracts. (5)–(11) No change. (b)–(j) No change. * * * * * The text of the proposed rule change is also available on the Exchange’s Web site (https://www.cboe.com/AboutCBOE/ CBOELegalRegulatoryHome.aspx), at the Exchange’s Office of the Secretary, and at the Commission’s Public Reference Room. E:\FR\FM\21OCN1.SGM 21OCN1 62996 Federal Register / Vol. 79, No. 203 / Tuesday, October 21, 2014 / Notices 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 IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose mstockstill on DSK4VPTVN1PROD with NOTICES The Exchange proposes to amend its margin requirements rules to treat OTC options contracts that are issued and guaranteed by the OCC (‘‘OCC cleared OTC option contracts’’) consistent with FINRA Rule 4210 (Margin Requirements).3 Specifically, the Exchange proposes a definition of OCC cleared OTC option contract in Rule 1.1(ppp) and, for margin purposes, proposes to amend the definitions of the terms ‘‘listed’’ in Rule 12.3(a)(9) and ‘‘listed option’’ in Rule 12.4(a)(1) to include OCC cleared OTC option contracts. The Exchange also proposes, for margin purposes, to amend the definitions of the terms ‘‘OTC’’ in Rule 12.3(a)(14) and ‘‘unlisted derivative’’ in Rule 12.4(a)(4) to exclude OCC cleared OTC option contracts. The Exchange’s proposal is materially based on, and substantially similar to, changes made by FINRA to its margin requirements rules under FINRA Rule 4210.4 The Exchange believes that a consistent margin treatment regime with respect to OCC cleared OTC option contracts will make margin requirements rules easier for market participants to understand and that the proposal is in the best interest of investors. On April 25, 2014, the OCC launched central clearing services for bilaterally negotiated OTC equity index options contracts on the S&P 500 Index. Under OCC By-laws, the OCC may, under limited circumstances, clear OTC 3 See FINRA Rule 4210(f)(2)(A)(xxiv); see also FINRA Rules 2360(a)(9), (19), (32), (33) and 4210(g)(2)(A). 4 See Securities Exchange Act Release No. 70619 (October 7, 2013), 78 FR 62722 (October 22, 2013) (Order Granting Approval of Proposed Rule Change Relating to Amendments to FINRA Rules 2360 and 4210 in Connection with OCC Cleared Over-theCounter Options) (SR–FINRA–2013–027) (‘‘Order’’). VerDate Sep<11>2014 18:05 Oct 20, 2014 Jkt 235001 options on the S&P 500 Index. Such contracts must be of a term between four months and five years and have minimum notional values of either 500,000 or 100,000 times the value of the S&P 500 Index. In clearing these options, the OCC becomes both the issuer and guarantor of the OTC contract. In response to rules adopted by the OCC permitting the OCC to issue and guarantee these particular OTC option contracts and responsive rules adopted by FINRA regarding OCC cleared OTC option contracts, the Exchange proposes to adopt a definition of OCC cleared OTC option contract and make certain changes to its margin rules. The Exchange proposes to define the term OCC cleared OTC option contract to carve-out OCC cleared OTC option contracts from the definition of ‘‘option contract’’ reflecting the fact that the Rules are intended to control transactions in options contracts traded at the Exchange. Specifically, the Exchange proposes changes to Rule 1.1(m) defining ‘‘option contract’’ and the adoption of Rule 1.1(ppp) to define the term ‘‘OCC cleared OTC option contract’’ in the Rules. Under Rule 1.1(m), an ‘‘option contract’’ is defined as ‘‘a put or a call issued, or subject to issuance, by the [Options] Clearing Corporation pursuant to the rules of the [Options] Clearing Corporation.’’ OCC cleared OTC option contracts are option contracts that are subject to issuance by the OCC. Accordingly, the Exchange proposes to amend Rule 1.1(m) to exclude OCC cleared OTC option contracts. Proposed Rule 1.1(ppp) would define OCC cleared OTC option contracts as over-thecounter option contracts that are issued and guaranteed by the Clearing Corporation. The proposed definition would also provide that except as otherwise indicated in the Rules, OCC cleared OTC option contracts are not ‘‘options contracts’’ under the Rules. Thus, consistent with the proposed changes to Rule 1.1(m), proposed Rule 1.1(ppp) would make clear that OCC cleared OTC option contracts are not Exchange-traded products and that the Rules, unless otherwise indicated, are not intended to extend to OCC cleared OTC options contracts. The Exchange also proposes changes to its margin treatment rules with respect to OCC cleared OTC options contracts. In general, the margin requirements for options listed on an exchange (and cleared and guaranteed by the OCC) are lower than the margin requirement for OTC options (not cleared or guaranteed by the OCC). This is because the clearing and guaranteeing PO 00000 Frm 00057 Fmt 4703 Sfmt 4703 functions performed by the OCC greatly reduce the counterparty risk present on exchange-traded option contracts. Thus, for margin requirements and securities setoff purposes, the Exchange requires less initial and maintenance margin for listed options positions than for OTC options positions.5 The reasons underlying the more favorable margin treatment for listed (and OCC cleared and guaranteed) options, however, apply with equal force to OCC cleared OTC options contracts. The clearing and guaranteeing functions performed by the OCC reduce the counterparty credit risk associated with these contracts to levels more commonly associated with listed options contacts. In light of the clearing and guaranteeing functions performed by the OCC, the Exchange proposes to treat OCC cleared OTC options as it treats other cleared and guaranteed options by defining OCC cleared OTC option contracts as ‘‘listed’’ option contracts for margin purposes only. Notably, the Exchange proposes to treat OCC cleared OTC options as listed options only after such contracts have been accepted for clearing and guaranteed by the OCC. Exchange Rules 12.3 (Margin Requirements) and 12.4 (Portfolio Margin) describe minimum transaction or position-specific and portfolio margin requirements that Trading Permit Holders (‘‘TPHs’’) must require and securities offsets that may be applied for margin requirements purposes. For margin purposes only, the Exchange proposes to modify the definition of the term ‘‘listed’’ in Rule 12.3(a)(9) to include OCC cleared OTC options. Similarly, the Exchange proposes changes to Rule 12.4(a)(1) to define the term ‘‘listed option’’ to include OCC cleared OTC option contracts for portfolio margin purposes only. These rule changes would allow the Exchange to treat OCC cleared OTC options in the same manner as Exchange-listed options for margin purposes, but make clear that the Rules are not intended to extend to or control transactions involving unlisted option contracts or OTC options contracts. The Exchange also proposes to change the definitions of the terms ‘‘OTC’’ in Rule 12.3(a)(14) 6 and 5 See generally CBOE Rule 12.3 (Margin Requirements). 6 The Exchange is also proposing to add the word ‘‘option’’ to its definition of ‘‘OTC’’ in Rule 12.3(a)(14) to make clear that OTC as used in Chapter 12 would refer to an options contract. Since the current definition already states that that ‘‘OTC’’ ‘‘as used with reference to a call or a put option contract means an over-the-counter option contract . . .’’, the Exchange believes that the addition of the word ‘‘option’’ would simply clarify the language in the Rule without any substantive change to the Rule. E:\FR\FM\21OCN1.SGM 21OCN1 Federal Register / Vol. 79, No. 203 / Tuesday, October 21, 2014 / Notices ‘‘unlisted derivative’’ in Rule 12.4(a)(4) to exclude OCC cleared OTC option contracts for margin purposes. These proposed changes are substantially similar in all material respects to FINRA Rule 4210(f)(2)(A)(xxiv), which the Commission recently approved.7 Notably, the Exchange is not proposing changes to Chapter IX of the Rules, particularly Rules 9.7 (Opening of Accounts) or 9.15 (Delivery of Current Options Disclosure Documents) therein. Under Rule 9.7, TPHs are required to furnish the options disclosure documents described in Rule 9.15 to customers at or prior to approving a customer’s account for options trading. Because Rules 9.7 and 9.15 relate to disclosures that must be made before a customer’s account may be approved for trading in options at the Exchange, no rule changes are needed to accommodate OCC cleared OTC option contracts, which are not Exchangetraded products. In addition, the Exchange echoes FINRA’s comments that such delivery requirements are unnecessary because the counterparties to OCC cleared OTC options must be ‘‘eligible contract participants’’ as defined in the Act,8 and thus, are more sophisticated investors who are likely to be aware of the risks associated with trading OTC options. 2. Statutory Basis The Exchange believes the proposed rule change is consistent with the Act and the rules and regulations thereunder applicable to the Exchange and, in particular, the requirements of Section 6(b) of the Act.9 Specifically, the Exchange believes the proposed rule change is consistent with the Section 6(b)(5) 10 requirements that the rules of an exchange be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to foster cooperation and coordination with persons engaged in regulating, clearing, settling, processing information with respect to, and facilitating transactions in securities, to remove impediments to and perfect the mechanism of a free and open market and a national market system, and, in general, to protect investors and the public interest. Additionally, the Exchange believes the mstockstill on DSK4VPTVN1PROD with NOTICES 7 See Order, supra note 4. 15 U.S.C. 78c(a)(65) which states that an ‘‘eligible contract participant has the same meaning as in section 1a of the Commodity Exchange Act.’’ The Commodity Exchange Act details the requirements for eligibility as an ‘‘eligible contract participant’’ which generally require a sufficient regulated status or a specified minimum amount of assets; see also 7 U.S.C. 1(a)(18). 9 15 U.S.C. 78f(b). 10 15 U.S.C. 78f(b)(5). 8 See VerDate Sep<11>2014 18:05 Oct 20, 2014 Jkt 235001 62997 proposed rule change is consistent with the Section 6(b)(5) 11 requirement that the rules of an exchange not be designed to permit unfair discrimination between customers, issuers, brokers, or dealers. In particular, the Exchange believes that the proposed rule change will add consistency to the margin treatment rules and make them easier for investors to understand. For purposes of margin treatment, the Exchange believes that the clearing and guaranteeing functions performed by the OCC support a determination to treat OCC cleared OTC option contracts in the same manner as other option contracts that are cleared and guaranteed by the OCC. The Exchange believes that treating OCC cleared OTC option contracts as ‘‘listed’’ options for margin purposes is consistent with FINRA rules and the treatment of option contracts cleared and guaranteed by the OCC generally. The Exchange believes that treating OCC cleared OTC option contracts in this manner would protect investors’ interests and support a rational regulatory framework, which is in the best interest of investors. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Because the foregoing proposed rule change does not: A. significantly affect the protection of investors or the public interest; B. impose any significant burden on competition; and C. become operative for 30 days from the date on which it was filed, or such shorter time as the Commission may designate, it has become effective pursuant to Section 19(b)(3)(A) of the Act 12 and Rule 19b–4(f)(6) 13 thereunder. At any time within 60 days of the filing of the proposed rule change, the Commission summarily may temporarily suspend such rule change if it appears to the Commission that such action is necessary or appropriate in the public interest, for the protection of investors, or otherwise in furtherance of the purposes of the Act. If the Commission takes such action, the Commission will institute proceedings to determine whether the proposed rule change should be approved or disapproved. B. Self-Regulatory Organization’s Statement on Burden on Competition IV. 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: The Exchange does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. The Exchange believes that the proposed margin requirements rule changes are consistent with substantially similar rule changes made by FINRA. The Exchange believes that consistency across markets with respect to margin requirements will make it easier for investors to trade options and is in the interests of all investors. Moreover, the Exchange believes that the proposed rule changes are necessary in order to not disadvantage its TPHs who would otherwise be required to maintain additional margin in their accounts, placing TPHs at the Exchange at a competitive disadvantage in the market. Furthermore, because the proposed margin rules would be applied equally to all TPHs, no TPH would be placed at a competitive disadvantage at the Exchange. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others The Exchange neither solicited nor received comments on the proposed rule change. Electronic Comments • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rule-comments@ sec.gov. Please include File Number SR– CBOE–2014–073 on the subject line. Paper Comments • Send paper comments in triplicate to Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–CBOE-2014–073. This file number should be included on the subject line if email 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 (https://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 12 15 11 Id. PO 00000 Frm 00058 13 17 Fmt 4703 Sfmt 4703 E:\FR\FM\21OCN1.SGM U.S.C. 78s(b)(3)(A). CFR 240.19b–4(f)(6). 21OCN1 62998 Federal Register / Vol. 79, No. 203 / Tuesday, October 21, 2014 / Notices 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 Web site viewing and printing in the Commission’s Public Reference Room, 100 F Street NE., Washington, DC 20549 on official business days between the hours of 10 a.m. and 3 p.m. Copies of the filing also will be available for inspection and copying at the principal office of the Exchange. 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–CBOE– 2014–073 and should be submitted on or before November 12, 2014. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.14 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2014–24957 Filed 10–20–14; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION comments on the proposed rule change from interested persons. [Release No. 34–73365; File No. SR–CME– 2014–40] I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change Self-Regulatory Organizations; Chicago Mercantile Exchange Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Regarding Its Collateral Acceptance Practices for Its Base Guaranty Fund October 15, 2014. 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 October 3, 2014, Chicago Mercantile Exchange Inc. (‘‘CME’’) 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 primarily by CME. CME filed the proposal pursuant to Section 19(b)(3)(A) of the Act,3 and Rule 19b–4(f)(4)(ii)4 thereunder, so that the proposal was effective upon filing with the Commission. The Commission is publishing this notice to solicit New CME proposes to make certain changes to its collateral acceptance practices. The proposed changes would not impact CME’s collateral acceptance practices relating to its CDS Guaranty Fund; the changes would only affect CME’s Base Fund. More specifically, CME is introducing a new and limited exemption from CME limits on the value of letters of credit clearing members are eligible to deposit on behalf of qualifying customers in satisfaction of the clearing members’ core performance bond requirements with respect to CME’s Base Fund (the ‘‘Exemption’’). The text of the proposed rule change is immediately below. Italicized text indicates additions; bracketed text indicates deletions. * * * * * Collateral Types Accepted for Futures, Options, Forwards, OTC FX & Commodity Swaps (available at https:// www.cmegroup.com/clearing/financialand-collateral-management/) * * * * * Category 3 & 4 Capped at $7bn Per Firm Category 1 Category 2 Category 3* Category 4** Cash U.S. Treasuries IEF5 (Interest Bearing Cash) Letters of Credit.* U.S. Government Agencies Strips TIPS (capped at $1bn per firm). Select MBS. IEF2† (Money Market Mutual Funds). Gold (capped at $500mm per firm). Stocks (capped at $1bn per firm). IEF4 (corporate bonds). Foreign Sovereign Debt (capped at $1bn per firm). * LOCs are capped at the lesser of 25% of core requirement per currency requirement or $500M per firm. Clearing members that wish to post additional LOCs on behalf of qualifying commercial end users may be eligible for a limited exemption from this cap.# LOCs are not permitted to meet house performance bond requirements for financial affiliated clearing members. * Capped at 40% of core requirement per currency requirement per firm. ** Capped at 40% of core requirement per currency requirement per firm or $5 billion per firm, the lesser of the two. †Not included in the 40% requirement. mstockstill on DSK4VPTVN1PROD with NOTICES * * * * * # Please contact the clearing house at CreditRisk@cmegroup.com if you would like to learn more about this exemption. * * * * * CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). CME Group Acceptable Performance Bond Collateral for Futures, Options, Forwards, OTC FX, and Commodity Swaps (available at https:// www.cmegroup.com/clearing/files/ acceptable-collateral-futures-optionsselect-forwards.pdf) 14 17 2 17 1 15 3 15 VerDate Sep<11>2014 19:38 Oct 20, 2014 Jkt 235001 PO 00000 CFR 240.19b–4. U.S.C. 78s(b)(3)(A). Frm 00059 Fmt 4703 4 17 Sfmt 4703 E:\FR\FM\21OCN1.SGM CFR 240.19b–4(f)(4)(ii). 21OCN1

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 79, Number 203 (Tuesday, October 21, 2014)]
[Notices]
[Pages 62995-62998]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2014-24957]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73355; File No. SR-CBOE-2014-073]

Self-Regulatory Organizations; Chicago Board Options Exchange,
Incorporated; Notice of Filing and Immediate Effectiveness of a
Proposed Rule Change Relating to Margin Treatment of Over-the-Counter
Options Contracts Cleared by The Options Clearing Corporation

October 15, 2014.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on October 1, 2014, Chicago Board Options Exchange, Incorporated
(the ``Exchange'' or ``CBOE'') filed with the Securities and Exchange
Commission (the ``Commission'') the proposed rule change as described
in Items I, and II, below, which Items have been prepared by the
Exchange. The Commission is publishing this notice to solicit comments
on the proposed rule change from interested persons.
---------------------------------------------------------------------------

\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change

The Exchange proposes to amend its rules regarding the margin
treatment of over-the-counter (``OTC'') options cleared by The Options
Clearing Corporation (``OCC''). The text of the proposed rule change is
provided below. (additions are italicized; deletions are [bracketed])
* * * * *
Chicago Board Options Exchange, Incorporated Rules
* * * * *
Rule 1.1. When used in these Rules, unless the context otherwise
requires:
(a)-(l) No change.
Option Contract
(m) Except as otherwise provided, [T]the term ``option contract''
means a put or call issued, or subject to issuance, by the Clearing
Corporation pursuant to the Rules of the Clearing Corporation.
(n)-(ooo) No change.
OCC Cleared OTC Option Contract
(ppp) The term ``OCC cleared OTC option contract'' means an over-
the-counter option contract that is issued and guaranteed by the
Clearing Corporation. Except as otherwise provided, an OCC cleared OTC
option contract is not an ``options contract'' as defined in the Rules.
. . . Interpretations and Policies:
.01-.05 No change.
* * * * *
Rule 12.3. Margin Requirements
(a) Definitions. For purposes of this Rule, the following terms
shall have the meanings specified below.
(1)-(8) No change.
(9) The term ``listed'' for purposes of this Chapter 12 means a
security traded on a registered national securities exchange or
automated facility of a registered national securities association or
issued and guaranteed by the Clearing Corporation and shall include OCC
cleared OTC options contracts.
(10)-(13) No change.
(14) The term ``OTC option'' as used with reference to a call or a
put option contract in this Chapter 12 means an over-the-counter option
contract that is issued and guaranteed by the carrying broker-dealer
and not traded on a national securities exchange or issued and
guaranteed by the Clearing Corporation [and is issued and guaranteed by
the carrying broker-dealer].
(b)-(n) No change.
* * * * *
Rule 12.4--Portfolio Margin
Rule 12.4. As an alternative to the transaction/position specific
margin requirements set forth in Rule 12.3 of this Chapter 12, a TPH
organization may require margin for all margin equity securities (as
defined in Section 220.2 of Regulation T), listed options, unlisted
derivatives, security futures products, and index warrants in
accordance with the portfolio margin requirements contained in this
Rule 12.4.
In addition, a TPH organization, provided it is a Futures
Commission Merchant (``FCM'') and is either a clearing member of a
futures clearing organization or has an affiliate that is a clearing
member of a futures clearing organization, is permitted under this Rule
12.4 to combine a customer's related instruments (as defined below),
listed index options, unlisted derivatives, options on exchange traded
funds, index warrants, and underlying instruments and compute a margin
requirement for such combined products on a portfolio margin basis.
Application of the portfolio margin provisions of this Rule 12.4 to
IRA accounts is prohibited.
(a) Definitions.
(1) The term ``listed option'' for purposes of this Rule shall mean
any equity (or equity index-based) option traded on a registered
national securities exchange or automated facility of a registered
national securities association or issued and guaranteed by the
Clearing Corporation and shall include OCC cleared OTC options
contracts.
(2)-(3) No change.
(4) The term ``unlisted derivative'' for purposes of this Rule
means any equity-based (or equity index-based) unlisted option, forward
contract or swap that can be valued by a theoretical pricing model
approved by the Securities and Exchange Commission and does not include
OCC cleared OTC options contracts.
(5)-(11) No change.
(b)-(j) No change.
* * * * *
The text of the proposed rule change is also available on the
Exchange's Web site (https://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the
Secretary, and at the Commission's Public Reference Room.

[[Page 62996]]

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

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

1. Purpose
The Exchange proposes to amend its margin requirements rules to
treat OTC options contracts that are issued and guaranteed by the OCC
(``OCC cleared OTC option contracts'') consistent with FINRA Rule 4210
(Margin Requirements).\3\ Specifically, the Exchange proposes a
definition of OCC cleared OTC option contract in Rule 1.1(ppp) and, for
margin purposes, proposes to amend the definitions of the terms
``listed'' in Rule 12.3(a)(9) and ``listed option'' in Rule 12.4(a)(1)
to include OCC cleared OTC option contracts. The Exchange also
proposes, for margin purposes, to amend the definitions of the terms
``OTC'' in Rule 12.3(a)(14) and ``unlisted derivative'' in Rule
12.4(a)(4) to exclude OCC cleared OTC option contracts. The Exchange's
proposal is materially based on, and substantially similar to, changes
made by FINRA to its margin requirements rules under FINRA Rule
4210.\4\ The Exchange believes that a consistent margin treatment
regime with respect to OCC cleared OTC option contracts will make
margin requirements rules easier for market participants to understand
and that the proposal is in the best interest of investors.
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\3\ See FINRA Rule 4210(f)(2)(A)(xxiv); see also FINRA Rules
2360(a)(9), (19), (32), (33) and 4210(g)(2)(A).
\4\ See Securities Exchange Act Release No. 70619 (October 7,
2013), 78 FR 62722 (October 22, 2013) (Order Granting Approval of
Proposed Rule Change Relating to Amendments to FINRA Rules 2360 and
4210 in Connection with OCC Cleared Over-the-Counter Options) (SR-
FINRA-2013-027) (``Order'').
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On April 25, 2014, the OCC launched central clearing services for
bilaterally negotiated OTC equity index options contracts on the S&P
500 Index. Under OCC By-laws, the OCC may, under limited circumstances,
clear OTC options on the S&P 500 Index. Such contracts must be of a
term between four months and five years and have minimum notional
values of either 500,000 or 100,000 times the value of the S&P 500
Index. In clearing these options, the OCC becomes both the issuer and
guarantor of the OTC contract.
In response to rules adopted by the OCC permitting the OCC to issue
and guarantee these particular OTC option contracts and responsive
rules adopted by FINRA regarding OCC cleared OTC option contracts, the
Exchange proposes to adopt a definition of OCC cleared OTC option
contract and make certain changes to its margin rules. The Exchange
proposes to define the term OCC cleared OTC option contract to carve-
out OCC cleared OTC option contracts from the definition of ``option
contract'' reflecting the fact that the Rules are intended to control
transactions in options contracts traded at the Exchange. Specifically,
the Exchange proposes changes to Rule 1.1(m) defining ``option
contract'' and the adoption of Rule 1.1(ppp) to define the term ``OCC
cleared OTC option contract'' in the Rules.
Under Rule 1.1(m), an ``option contract'' is defined as ``a put or
a call issued, or subject to issuance, by the [Options] Clearing
Corporation pursuant to the rules of the [Options] Clearing
Corporation.'' OCC cleared OTC option contracts are option contracts
that are subject to issuance by the OCC. Accordingly, the Exchange
proposes to amend Rule 1.1(m) to exclude OCC cleared OTC option
contracts. Proposed Rule 1.1(ppp) would define OCC cleared OTC option
contracts as over-the-counter option contracts that are issued and
guaranteed by the Clearing Corporation. The proposed definition would
also provide that except as otherwise indicated in the Rules, OCC
cleared OTC option contracts are not ``options contracts'' under the
Rules. Thus, consistent with the proposed changes to Rule 1.1(m),
proposed Rule 1.1(ppp) would make clear that OCC cleared OTC option
contracts are not Exchange-traded products and that the Rules, unless
otherwise indicated, are not intended to extend to OCC cleared OTC
options contracts.
The Exchange also proposes changes to its margin treatment rules
with respect to OCC cleared OTC options contracts. In general, the
margin requirements for options listed on an exchange (and cleared and
guaranteed by the OCC) are lower than the margin requirement for OTC
options (not cleared or guaranteed by the OCC). This is because the
clearing and guaranteeing functions performed by the OCC greatly reduce
the counterparty risk present on exchange-traded option contracts.
Thus, for margin requirements and securities setoff purposes, the
Exchange requires less initial and maintenance margin for listed
options positions than for OTC options positions.\5\ The reasons
underlying the more favorable margin treatment for listed (and OCC
cleared and guaranteed) options, however, apply with equal force to OCC
cleared OTC options contracts. The clearing and guaranteeing functions
performed by the OCC reduce the counterparty credit risk associated
with these contracts to levels more commonly associated with listed
options contacts. In light of the clearing and guaranteeing functions
performed by the OCC, the Exchange proposes to treat OCC cleared OTC
options as it treats other cleared and guaranteed options by defining
OCC cleared OTC option contracts as ``listed'' option contracts for
margin purposes only. Notably, the Exchange proposes to treat OCC
cleared OTC options as listed options only after such contracts have
been accepted for clearing and guaranteed by the OCC.
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\5\ See generally CBOE Rule 12.3 (Margin Requirements).
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Exchange Rules 12.3 (Margin Requirements) and 12.4 (Portfolio
Margin) describe minimum transaction or position-specific and portfolio
margin requirements that Trading Permit Holders (``TPHs'') must require
and securities offsets that may be applied for margin requirements
purposes. For margin purposes only, the Exchange proposes to modify the
definition of the term ``listed'' in Rule 12.3(a)(9) to include OCC
cleared OTC options. Similarly, the Exchange proposes changes to Rule
12.4(a)(1) to define the term ``listed option'' to include OCC cleared
OTC option contracts for portfolio margin purposes only. These rule
changes would allow the Exchange to treat OCC cleared OTC options in
the same manner as Exchange-listed options for margin purposes, but
make clear that the Rules are not intended to extend to or control
transactions involving unlisted option contracts or OTC options
contracts. The Exchange also proposes to change the definitions of the
terms ``OTC'' in Rule 12.3(a)(14) \6\ and

[[Page 62997]]

``unlisted derivative'' in Rule 12.4(a)(4) to exclude OCC cleared OTC
option contracts for margin purposes. These proposed changes are
substantially similar in all material respects to FINRA Rule
4210(f)(2)(A)(xxiv), which the Commission recently approved.\7\
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\6\ The Exchange is also proposing to add the word ``option'' to
its definition of ``OTC'' in Rule 12.3(a)(14) to make clear that OTC
as used in Chapter 12 would refer to an options contract. Since the
current definition already states that that ``OTC'' ``as used with
reference to a call or a put option contract means an over-the-
counter option contract . . .'', the Exchange believes that the
addition of the word ``option'' would simply clarify the language in
the Rule without any substantive change to the Rule.
\7\ See Order, supra note 4.
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Notably, the Exchange is not proposing changes to Chapter IX of the
Rules, particularly Rules 9.7 (Opening of Accounts) or 9.15 (Delivery
of Current Options Disclosure Documents) therein. Under Rule 9.7, TPHs
are required to furnish the options disclosure documents described in
Rule 9.15 to customers at or prior to approving a customer's account
for options trading. Because Rules 9.7 and 9.15 relate to disclosures
that must be made before a customer's account may be approved for
trading in options at the Exchange, no rule changes are needed to
accommodate OCC cleared OTC option contracts, which are not Exchange-
traded products. In addition, the Exchange echoes FINRA's comments that
such delivery requirements are unnecessary because the counterparties
to OCC cleared OTC options must be ``eligible contract participants''
as defined in the Act,\8\ and thus, are more sophisticated investors
who are likely to be aware of the risks associated with trading OTC
options.
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\8\ See 15 U.S.C. 78c(a)(65) which states that an ``eligible
contract participant has the same meaning as in section 1a of the
Commodity Exchange Act.'' The Commodity Exchange Act details the
requirements for eligibility as an ``eligible contract participant''
which generally require a sufficient regulated status or a specified
minimum amount of assets; see also 7 U.S.C. 1(a)(18).
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2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Act and the rules and regulations thereunder applicable to the
Exchange and, in particular, the requirements of Section 6(b) of the
Act.\9\ Specifically, the Exchange believes the proposed rule change is
consistent with the Section 6(b)(5) \10\ requirements that the rules of
an exchange be designed to prevent fraudulent and manipulative acts and
practices, to promote just and equitable principles of trade, to foster
cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities, to remove impediments to and
perfect the mechanism of a free and open market and a national market
system, and, in general, to protect investors and the public interest.
Additionally, the Exchange believes the proposed rule change is
consistent with the Section 6(b)(5) \11\ requirement that the rules of
an exchange not be designed to permit unfair discrimination between
customers, issuers, brokers, or dealers.
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\9\ 15 U.S.C. 78f(b).
\10\ 15 U.S.C. 78f(b)(5).
\11\ Id.
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In particular, the Exchange believes that the proposed rule change
will add consistency to the margin treatment rules and make them easier
for investors to understand. For purposes of margin treatment, the
Exchange believes that the clearing and guaranteeing functions
performed by the OCC support a determination to treat OCC cleared OTC
option contracts in the same manner as other option contracts that are
cleared and guaranteed by the OCC. The Exchange believes that treating
OCC cleared OTC option contracts as ``listed'' options for margin
purposes is consistent with FINRA rules and the treatment of option
contracts cleared and guaranteed by the OCC generally. The Exchange
believes that treating OCC cleared OTC option contracts in this manner
would protect investors' interests and support a rational regulatory
framework, which is in the best interest of investors.

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

The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. The Exchange believes that
the proposed margin requirements rule changes are consistent with
substantially similar rule changes made by FINRA. The Exchange believes
that consistency across markets with respect to margin requirements
will make it easier for investors to trade options and is in the
interests of all investors. Moreover, the Exchange believes that the
proposed rule changes are necessary in order to not disadvantage its
TPHs who would otherwise be required to maintain additional margin in
their accounts, placing TPHs at the Exchange at a competitive
disadvantage in the market. Furthermore, because the proposed margin
rules would be applied equally to all TPHs, no TPH would be placed at a
competitive disadvantage at the Exchange.

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

The Exchange neither solicited nor received comments on the
proposed rule change.

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

Because the foregoing proposed rule change does not:
A. significantly affect the protection of investors or the public
interest;
B. impose any significant burden on competition; and
C. become operative for 30 days from the date on which it was
filed, or such shorter time as the Commission may designate, it has
become effective pursuant to Section 19(b)(3)(A) of the Act \12\ and
Rule 19b-4(f)(6) \13\ thereunder. At any time within 60 days of the
filing of the proposed rule change, the Commission summarily may
temporarily suspend such rule change if it appears to the Commission
that such action is necessary or appropriate in the public interest,
for the protection of investors, or otherwise in furtherance of the
purposes of the Act. If the Commission takes such action, the
Commission will institute proceedings to determine whether the proposed
rule change should be approved or disapproved.
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\12\ 15 U.S.C. 78s(b)(3)(A).
\13\ 17 CFR 240.19b-4(f)(6).
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IV. 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 (https://www.sec.gov/rules/sro.shtml); or
Send an email to rule-comments@sec.gov. Please include
File Number SR-CBOE-2014-073 on the subject line.

Paper Comments

Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-CBOE-2014-073. This file
number should be included on the subject line if email 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 (https://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

[[Page 62998]]

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 Web site viewing and printing in
the Commission's Public Reference Room, 100 F Street NE., Washington,
DC 20549 on official business days between the hours of 10 a.m. and 3
p.m. Copies of the filing also will be available for inspection and
copying at the principal office of the Exchange. 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-CBOE-2014-073 and should be submitted on
or before November 12, 2014.

For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\14\
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\14\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-24957 Filed 10-20-14; 8:45 am]
BILLING CODE 8011-01-P

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