Self-Regulatory Organizations; Notice of Filing of Proposed Rule Change and Amendment Nos. 1, 2 and 3 Thereto by the New York Stock Exchange, Inc. Relating to Customer Portfolio and Cross-Margining Requirements, 22953-22962 [05-8774]
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Federal Register / Vol. 70, No. 84 / Tuesday, May 3, 2005 / Notices
requirements. Representatives of the
NASD and SEC have recently asked the
MSRB to revise certain language in Rule
G–41 to assist in enforcement of the
rule. The basic requirements of the rule
remain unchanged.
2. Statutory Basis
The MSRB has adopted the proposed
rule change, as amended, pursuant to
Section 15B(b)(2)(C) of the Act,6 which
authorizes the MSRB to adopt rules that
shall:
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 municipal
securities, to remove impediments to and
perfect the mechanism of a free and open
market in municipal securities, and, in
general, to protect investors and the public
interest.
The Board believes that the proposed
rule change will facilitate dealer
compliance with anti-money laundering
compliance program regulation. These
programs are designed to help identify
and prevent money laundering abuses
that can affect the integrity of the U.S.
capital markets.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The MSRB does not believe that the
proposed rule change, as amended, will
result in any burden on competition
among dealers not necessary or
appropriate in furtherance of the
purposes of the Act because it applies
equally to all dealers in municipal
securities.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants or Others
Written comments were neither
solicited nor received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The MSRB has designated this
proposed rule change as constituting a
stated policy, practice or interpretation
with respect to the meaning,
administration or enforcement of an
existing MSRB rule under Section
19(b)(3)(A)(i) of the Act,7 and Rule 19b–
4(f)(1) thereunder,8 which renders the
proposed rule change effective upon
filing with the Commission.
6 15
U.S.C. 78o–4(b)(2)(C).
U.S.C. 78s(b)(3)(A)(i).
8 17 CFR 240.19b–4(f)(1).
7 15
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At any time within 60 days of this
filing, the Commission may summarily
abrogate this proposal 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.9
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposal 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 e-mail to rulecomments@sec.gov. Please include File
Number SR–MSRB–2005–03 on the
subject line.
Paper Comments
• Send paper comments in triplicate
to Jonathan G. Katz, Secretary,
Securities and Exchange Commission,
450 Fifth Street, NW., Washington, DC
20549–0609.
All submissions should refer to File
Number SR–MSRB–2005–03. 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 (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
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for inspection and copying in
the Commission’s Public Reference
Room. Copies of such filing also will be
available for inspection and copying at
the office of the MSRB. 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
9 See 15 U.S.C. 78s(b)(3)(C). For purposes of
calculating the 60-day abrogation period, the
Commission considers the period to commence on
April 25, 2005, the date that the MSRB filed
Amendment No. 1.
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available publicly. All submissions
should refer to File Number SR–MSRB–
2005–03 and should be submitted on or
before May 24, 2005.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.10
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. E5–2105 Filed 5–2–05; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–51615; File No. SR–NYSE–
2002–19]
Self-Regulatory Organizations; Notice
of Filing of Proposed Rule Change and
Amendment Nos. 1, 2 and 3 Thereto by
the New York Stock Exchange, Inc.
Relating to Customer Portfolio and
Cross-Margining Requirements
April 26, 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 March 18,
2005, the New York Stock Exchange,
Inc. (‘‘NYSE’’ or ‘‘Exchange’’) filed with
the Securities and Exchange
Commission (‘‘Commission’’ or ‘‘SEC’’)
Amendment No. 3 3 to the proposed rule
change as described in Items I, II, and
III below, which Items have been
prepared by the Exchange. The NYSE
submitted this partial amendment,
constituting Amendment No. 3,
pursuant to the request of Commission
staff. Specifically, the NYSE proposes to
amend new Section (g)(4) under Rule
431 to remove current paragraph
(g)(4)(B) under which any affiliate of a
self-clearing member organization can
participate in portfolio margining,
without being subject to the $5 million
equity requirement.4
The NYSE submitted the original
proposed rule change to the
Commission on May 13, 2002 (‘‘Original
Proposal’’). On August 21, 2002, the
NYSE filed Amendment No. 1 to the
proposed rule change.5 The proposed
10 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 See Partial Amendment No. 3 (‘‘Amendment No.
3’’).
4 This partial amendment would not exclude
these affiliates from participating in portfolio
margining; rather, it would subject them to the $5
million equity requirement in proposed paragraph
(g)(4)(C) of Rule 431 in Amendment No. 3.
5 See letter from Mary Yeager, Assistant Secretary,
NYSE, to T.R. Lazo, Senior Special Counsel,
Division of Market Regulation, Commission, dated
August 20, 2002 (‘‘Amendment No. 1’’). In
1 15
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Federal Register / Vol. 70, No. 84 / Tuesday, May 3, 2005 / Notices
rule change and Amendment No. 1 were
published in the Federal Register on
October 8, 2002.6 The Commission
received three comment letters in
response to the October 8, 2002 Federal
Register notice.7 On June 21, 2004, the
Exchange filed Amendment No. 2 to the
proposed rule change.8 The proposed
rule change and Amendment Nos. 1 and
2 were published in the Federal
Register on December 27, 2004.9 The
Commission received ten comment
letters in response to the December 27,
2004 Federal Register notice.10 The
Amendment No. 1, the NYSE made technical
corrections to its proposed rule language to
eliminate any inconsistencies between its proposal
and the CBOE proposal pursuant to the Rule 431
Committee’s (‘‘Committee’’) recommendations. See
Securities Exchange Act Release No. 45630 (March
22, 2002), 67 FR 15263 (March 29, 2002) (File No.
SR–CBOE–2002–03).
6 See Securities Exchange Act Release No. 46576
(October 1, 2002), 67 FR 62843 (October 8, 2002).
7 See letter from R. Allan Martin, President, Auric
Trading Enterprises, Inc., to Secretary, Commission,
dated October 9, 2002 (‘‘Martin Auric Letter’’);
Phupinder S. Gill, Managing Director and President,
Chicago Mercantile Exchange Inc., to Jonathan G.
Katz, Secretary, Commission, dated October 21,
2002 (‘‘Gill CBOE Letter’’); and E-mail from Mike
Ianni, Private Investor to rule-comments@sec.gov,
dated November 7, 2002 (‘‘Ianni E-mail’’).
8 See letter from Darla C. Stuckey, Corporate
Secretary, NYSE, to Michael A. Macchiaroli,
Associate Director, Division of Market Regulation
(‘‘Division’’), Commission, dated June 17, 2004
(‘‘Amendment No. 2’’). The NYSE filed Amendment
No. 2 for the purpose of eliminating inconsistencies
between the proposed NYSE and CBOE rules, and
to incorporate certain substantive amendments
requested by Commission staff.
9 See Securities Exchange Act Release No. 50885
(December 20, 2004), 69 FR 77287 (December 27,
2004); see also Securities Exchange Act Release No.
50886 (December 20, 2004), 69 FR 77275 (December
27, 2004).
10 These written comments (letters and e-mails)
responded jointly to the NYSE and CBOE proposed
rule changes. See letter from Barbara Wierzynski,
Executive Vice President and General Counsel,
Futures Industry Association, and Gerard J. Quinn,
Vice President and Associate General Counsel,
Securities Industry Association, to Jonathan G.
Katz, Secretary, Commission, dated January 14,
2005 (‘‘Wierzynski/Quinn Letter’’); letter from Craig
S. Donohue, Chief Executive Officer, Chicago
Mercantile Exchange, to Jonathan G. Katz,
Secretary, Commission, dated January 18, 2005
(‘‘Donohue Letter’’); letter from Robert C. Sheehan,
Chairman, Electronic Brokerages Systems, LLC, to
Jonathan G. Katz, Secretary, Commission, dated
January 19, 2005 (‘‘Sheehan Letter’’); letter from
William O. Melvin, Jr., President, Acorn Derivatives
Management, to Jonathan G. Katz, Secretary,
Commission, dated January 19, 2005 (‘‘Melvin
Letter’’); letter from Margaret Wiermanski, Chief
Operating & Compliance Officer, Chicago Trading
Company, to Jonathan G. Katz, Secretary,
Commission, dated January 20, 2005 (‘‘Wiermanski
Letter’’); email from Jeffrey T. Kaufmann, Lakeshore
Securities, L.P., to Jonathan G. Katz, Secretary,
Commission, dated January 24, 2005 (‘‘Kaufmann
Letter’’); letter from J. Todd Weingart, Director of
Floor Operations, Mann Securities, to Jonathan G.
Katz, Secretary, Commission, dated January 25,
2005 (‘‘Weingart Letter’’); letter from Charles
Greiner III, LDB Consulting, Inc., to Jonathan G.
Katz, Secretary, Commission, dated January 26,
2005 (‘‘Greiner Letter’’); letter from Jack L. Hansen,
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Commission is publishing this notice to
solicit comments on the proposed rule
change, as amended, from interested
persons.11
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend
NYSE Rule 431 to permit self-clearing
members and member organizations to
margin listed, broad-based, market
index options, index warrants and
related exchange-traded funds according
to a prescribed portfolio margin
methodology relating to a portfolio
margin account of a registered brokerdealer, certain qualified members of a
national futures exchange, and any
other person or entity that maintains
account equity of at least $5 million.
The Exchange further proposes to
amend NYSE Rule 726 to require that a
disclosure statement and written
acknowledgement for use with the
proposed portfolio margining and crossmargining changes be furnished to
customers. The text of the proposed rule
change is below. Additions are in
italics.
*
*
*
*
*
Margin Requirements
Rule 431. (a) through (f) unchanged.
Portfolio Margin and Cross-Margin for
Index Options
(g) As an alternative to the ‘‘strategy’’
based margin requirements set forth in
paragraphs (a) through (f) of this Rule,
member organizations may elect margin
for listed, broad-based U.S. index
options, index warrants and underlying
instruments (as defined below) in
accordance with the portfolio margin
requirements set forth in this Rule.
In addition, member organizations,
provided they are a Futures Commission
Merchant (‘‘FCM’’) and are either a
clearing member of a futures clearing
organization or have an affiliate that is
a clearing member of a futures clearing
organization, are permitted under this
section to combine a customer’s related
instruments (as defined below) and
listed, broad-based U.S. index options,
index warrants and underlying
Chief Investment Officer and Principal, The Clifton
Group, to Jonathan G. Katz, Secretary, Commission,
dated February 1, 2005 (‘‘Hansen Letter’’); See letter
from Barbara Wierzynski, Executive Vice President
and General Counsel, Futures Industry Association,
and Ira D. Hammerman, Senior Vice President and
General Counsel, Securities Industry Association, to
Jonathan G. Katz, Secretary, Commission, dated
March 2, 2005 (‘‘Wierzynski/Hammerman Letter’’).
11 This release (Release No. 34–51615) seeks
comment on the proposed rule change, as amended,
by Amendment Nos. 1, 2 and 3. Therefore, the
language of the proposed rule change, as amended,
is set forth in the release in its entirety.
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instruments and compute a margin
requirement (‘‘cross margin’’) on a
portfolio margin basis. Member
organizations must confine crossmargin positions to a portfolio margin
account dedicated exclusively to crossmargining.
The portfolio margin and crossmargining provisions of this Rule shall
not apply to Individual Retirement
Accounts (‘‘IRAs’’).
(1) Member organizations will be
expected to monitor the risk of portfolio
margin accounts and maintain a written
risk analysis methodology for assessing
the potential risk to the member
organization’s capital over a specified
range of possible market movements of
positions maintained in such accounts.
The risk analysis methodology shall
specify the computations to be made,
the frequency of computations, the
records to be reviewed and maintained,
and the position(s) within the
organization responsible for the risk
function. This risk analysis
methodology shall be made available to
the Exchange upon request. In
performing the risk analysis of portfolio
margin accounts required by this Rule,
each member organization shall include
the following in the written risk analysis
methodology:
(A) Procedures and guidelines for the
determination, review and approval of
credit limits to each customer, and
across all customers, utilizing a
portfolio margin account.
(B) Procedures and guidelines for
monitoring credit risk exposure to the
member organization, including intraday credit risk, related to portfolio
margin accounts.
(C) Procedures and guidelines for the
use of stress testing of portfolio margin
accounts in order to monitor market risk
exposure from individual accounts and
in the aggregate.
(D) Procedures providing for the
regular review and testing of these risk
analysis procedures by an independent
unit such as internal audit or other
comparable group.
(2) Definitions.—For purposes of this
paragraph (g), the following terms shall
have the meanings specified below:
(A) The term ‘‘listed option’’ shall
mean any option traded on a registered
national securities exchange or
automated facility of a registered
national securities association.
(B) The term ‘‘options class’’ refers to
all options contracts covering the same
underlying instrument.
(C) The term ‘‘portfolio’’ means
options of the same options class
grouped with their underlying
instruments and related instruments.
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(D) The term ‘‘option series’’ relates to
listed options and means all option
contracts of the same type (either a call
or a put) and exercise style, covering the
same underlying instrument with the
same exercise price, expiration date,
and number of underlying units.
(E) The term ‘‘related instrument’’
within an option class or product group
means futures contracts and options on
futures contracts covering the same
underlying instrument.
(F) The term ‘‘underlying instrument’’
means long and short positions in an
exchange traded fund or other fund
product registered under the Investment
Company Act of 1940, that holds the
same securities, and in the same
proportion, as contained in a broadbased index on which options are listed.
The term underlying instrument shall
not be deemed to include, futures
contracts, options on futures contracts,
underlying stock baskets, or unlisted
instruments.
(G) The term ‘‘product group’’ means
two or more portfolios of the same type
(see sub-paragraph (g)(2)(H) below) for
which it has been determined by Rule
15c3–1a under the Securities Exchange
Act of 1934 that a percentage of
offsetting profits may be applied to
losses at the same valuation point.
(H) The term ‘‘theoretical gains and
losses’’ means the gain and loss in the
value of individual option series and
related instruments at 10 equidistant
intervals (valuation points) ranging from
an assumed movement (both up and
down) in the current market value of the
underlying instrument. The magnitude
of the valuation point range shall be as
follows:
Portfolio type
Non-High Capitalization,
Broad-based U.S. Market
Index Option 12 ..................
High Capitalization, Broadbased U.S. Market Index
Option 13 ............................
Up / down market move (high
& low valuation points)
+ / ¥10%
+6% / ¥8%
(3) Approved Theoretical Pricing
Models.—Theoretical pricing models
must be approved by a Designated
Examining Authority and reviewed by
the Securities and Exchange
Commission (‘‘The Commission’’) in
order to qualify. Currently, the
theoretical model utilized by The
Options Clearing Corporation (‘‘The
12 In accordance with sub-paragraph (b)(1)(i)(B) of
Rule 15c3–1a (Appendix A to Rule 15c3–1) under
the Securities Exchange Act of 1934, 17 CFR
240.15c3–1a(b)(1)(i)(B).
13 See footnote above.
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OCC’’) is the only model qualified
pursuant to The Commission’s Net
Capital Rule. All member organizations
participating in the pilot program shall
obtain their theoretical values from The
OCC.
(4) Eligible Participants.—The
application of the portfolio margin
provisions of this paragraph (g),
including cross-margining, is limited to
the following:
(A) any broker or dealer registered
pursuant to Section 15 of the Securities
Exchange Act of 1934;
(B) any member of a national futures
exchange to the extent that listed index
options hedge the member’s index
futures; and
(C) any other person or entity not
included in (4)(A) through (4)(B) above
that has or establishes, and maintains,
equity of at least 5 million dollars. For
purposes of this equity requirement, all
securities and futures accounts carried
by the member organization for the
same customer may be combined
provided ownership across the accounts
is identical. A guarantee pursuant to
paragraph (f)(4) of this Rule is not
permitted for purposes of the minimum
equity requirement.
(5) Opening of Accounts.
(A) Only customers that have been
approved for options transactions and
approved to engage in uncovered short
option contracts pursuant to Exchange
Rule 721, are permitted to utilize a
portfolio margin account.
(B) On or before the date of the initial
transaction in a portfolio margin
account, a member organization shall:
(i) furnish the customer with a special
written disclosure statement describing
the nature and risks of portfolio
margining and cross-margining which
includes an acknowledgement for all
portfolio margin account owners to sign,
and an additional acknowledgement for
owners that also engage in crossmargining to sign, attesting that they
have read and understood the
disclosure statement, and agree to the
terms under which a portfolio margin
account and the cross-margin account
respectively, are provided (see Exchange
Rule 726(d)), and
(ii) obtain the signed
acknowledgement(s) noted above from
the customer (both of which are
required for cross-margining customers)
and record the date of receipt.
(6) Establishing Account and Eligible
Positions.
(1) Portfolio Margin Account. For
purposes of applying the portfolio
margin requirements provided in this
paragraph (g), member organizations
are to establish and utilize a specific
securities margin account, or sub-
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account of a margin account, clearly
identified as a portfolio margin account
that is separate from any other
securities account carried for a
customer.
(2) Cross-Margin Account. For
purposes of combining related
instruments and listed, broad-based
U.S. index options, index warrants and
underlying instruments and applying
the portfolio margin requirements
members are to establish and utilize a
portfolio margin account, clearly
identified as a cross-margin account,
that is separate from any other
securities account or portfolio margin
account carried for a customer.
A margin deficit in either the portfolio
margin account or the cross-margin
account of a customer may not be
considered as satisfied by excess equity
in the other account. Funds and/or
securities must be transferred to the
deficient account and a written record
created and maintained.
(A) Portfolio Margin Account—
Eligible Positions
(i) A transaction in, or transfer of, a
listed, broad-based U.S. index option or
index warrant may be effected in the
portfolio margin account.
(ii) A transaction in, or transfer of, an
underlying instrument may be effected
in the portfolio margin account
provided a position in an offsetting
listed, broad-based U.S. index option or
index warrant is in the account or is
established in the account on the same
day.
(iii) If, in the portfolio margin
account, the listed, broad-based U.S.
index option or index warrant position
offsetting an underlying instrument
position ceases to exist and is not
replaced within ten business days, the
underlying instrument position must be
transferred to a regular margin account,
subject to initial Regulation T margin
and margined according to the other
provisions of this Rule. Member
organizations will be expected to
monitor portfolio margin accounts for
possible abuse of this provision.
(iv) In the event that fully paid for
long options and /or index warrants are
the only positions contained within a
portfolio margin account, such long
positions must be transferred to a
securities account other than a portfolio
margin account or cross-margin account
within 10 business days, subject to the
margin required, unless the status of the
account changes such that it is no
longer composed solely of fully paid for
long options and/or index warrants.
(B) Cross-Margin Account—Eligible
Positions
(i) A transaction in, or transfer of, a
related instrument may be effected in
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the cross-margin account provided a
position in an offsetting listed, U.S.
broad-based index option, index
warrant or underlying instrument is in
the account or is established in the
account on the same day.
(ii) If the listed, U.S. broad-based
index option, index warrant or
underlying instrument position
offsetting a related instrument ceases to
exist and is not replaced within ten
business days, the related instrument
position must be transferred to a futures
account and margined accordingly.
Member organizations will be expected
to monitor cross-margin accounts for
possible abuse of this provision.
(iii) In the event that fully paid for
long options and/or index warrants
(securities) are the only positions
contained within a cross-margin
account, such long positions must be
transferred to a securities account other
than a portfolio margin account or cross
margin account within 10 business
days, subject to the margin required,
unless the status of the account changes
such that it is no longer composed solely
of fully paid for long options and/or
index warrants.
(7) Initial and Maintenance Margin
Required.—The amount of margin
required under this paragraph (g) for
each portfolio shall be the greater of:
(A) The amount for any of the 10
equidistant valuation points
representing the largest theoretical loss
as calculated pursuant to paragraph
(g)(8) below, or
(B) $.375 for each listed index option
and related instrument multiplied by
the contract’s or instrument’s multiplier,
not to exceed the market value in the
case of long positions in listed options
and options on futures contracts.
(C) Account guarantees pursuant to
paragraph (f)(4) of this Rule are not
permitted for purposes of meeting initial
and maintenance margin requirements.
(8) Method of Calculation.
(A) Long and short positions in listed
options, underlying instruments and
related instruments are to be grouped by
option class; each option class group
being a ‘‘portfolio’’. Each portfolio is
categorized as one of the portfolio types
specified in sub-paragraph (g)(2)(H)
above.
(B) For each portfolio, theoretical
gains and losses are calculated for each
position as specified in sub-paragraph
(g)(2)(H) above. For purposes of
determining the theoretical gains and
losses at each valuation point, member
organizations shall obtain and utilize
the theoretical value of a listed index
option, underlying instrument or related
instrument rendered by a theoretical
pricing model that, in accordance with
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sub-paragraph (b)(1)(i)(B) of Rule 15c3–
1a under the Securities Exchange Act of
1934, qualifies for purposes of
determining the amount to be deducted
in computing net capital under a
portfolio based methodology.
(C) Offsets. Within each portfolio,
theoretical gains and losses may be
netted fully at each valuation point.
Offsets between portfolios within the
High Capitalization, Broad-based Index
Option product group and the Non-High
Capitalization, Broad-based Index
Option product group may then be
applied as permitted by Rule 15c3–1a
under the Securities Exchange Act of
1934.
(D) After applying the Offsets above,
the sum of the greatest loss from each
portfolio is computed to arrive at the
total margin required for the account
(subject to the per contract minimum).
(9) Equity Deficiency.—If, at any time,
equity declines below the 5 million
dollar minimum required under subparagraph (4)(D) of this paragraph (g)
and is not restored to at least 5 million
dollars within three (3) business days
(T+3) by a deposit of funds and/or
securities; member organizations are
prohibited from accepting opening
orders starting on T+4, except that
opening orders entered for the purpose
of hedging existing positions may be
accepted if the result would be to lower
margin requirements. This prohibition
shall remain in effect until equity of 5
million dollars is established.
(10) Determination of Value for
Margin Purposes.—For the purposes of
this paragraph (g), all listed index
options and related instrument
positions shall be valued at current
market prices. Account equity for the
purposes of this paragraph (g) shall be
calculated separately for each portfolio
margin account by adding the current
market value of all long positions,
subtracting the current market value of
all short positions, and adding the
credit (or subtracting the debit) balance
in the account.
(11) Additional Margin.—If at any
time, the equity in any portfolio margin
account is less than the margin
required, the customer may deposit
additional margin or establish a hedge
to meet the margin requirement within
one business day (T+1). In the event a
customer fails to hedge existing
positions or deposit additional margin
within one business day, the member
organization must liquidate positions in
an amount sufficient to, at a minimum,
lower the total margin required to an
amount less than or equal to account
equity. Paragraph (f)(7) of this Rule—
Practice of Meeting Regulation T Margin
Calls by Liquidation Prohibited shall not
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apply to portfolio margin accounts.
However, member organizations will be
expected to monitor portfolio margin
and cross-margin accounts for possible
abuse of this provision.
(12) Net Capital Treatment of
Portfolio Margin and Cross Margin
Accounts.
(A) No member organization that
requires margin in any customer
account pursuant to paragraph (g) of
this Rule shall permit gross customer
portfolio margin requirements to exceed
1,000 percent of its net capital for any
period exceeding three business days.
The member organization shall,
beginning on the fourth business day,
cease opening new portfolio margin
accounts until compliance is achieved.
(B) If, at any time, a member
organization’s gross customer portfolio
margin requirements exceed 1,000
percent of its net capital, the member
organization shall immediately transmit
telegraphic or facsimile notice of such
deficiency to the Securities and
Exchange Commission, 450 Fifth Street
NW., Washington, DC 20549; to the
district or regional office of the
Securities and Exchange Commission
for the district or region in which the
member organization maintains its
principal place of business; and to its
Designated Examining Authority.
(13) Day Trading Requirements.—The
requirements of sub-paragraph (f)(8)(B)
of this Rule—Day-Trading shall not
apply to portfolio margin accounts
including cross margin accounts.
(14) Cross Margin Accounts—
Requirements to Liquidate
(A) A member is required immediately
either to liquidate, or transfer to another
broker-dealer eligible to carry crossmargin accounts, all customer crossmargin accounts that contain positions
in futures and/or options on futures if
the member is:
(i) insolvent as defined in section 101
of title 11 of the United States Code, or
is unable to meet its obligations as they
mature;
(ii) the subject of a proceeding
pending in any court or before any
agency of the United States or any State
in which a receiver, trustee, or
liquidator for such debtor has been
appointed;
(iii) not in compliance with applicable
requirements under the Securities
Exchange Act of 1934 or rules of the
Securities and Exchange Commission or
any self-regulatory organization with
respect to financial responsibility or
hypothecation of customer’s securities;
or
(iv) unable to make such
computations as may be necessary to
establish compliance with such
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financial responsibility or
hypothecation rules.
(B) Nothing in this paragraph (14)
shall be construed as limiting or
restricting in any way the exercise of
any right of a registered clearing agency
to liquidate or cause the liquidation of
positions in accordance with its by-laws
and rules.
*
*
*
*
*
Delivery of Options Disclosure
Document and Prospectus
Rule 726 (a) through (c) unchanged.
Portfolio Margining and CrossMargining Disclosure Statement and
Acknowledgement
(d) The special written disclosure
statement describing the nature and
risks of portfolio margining and crossmargining, and acknowledgement for
customer signature, required by Rule
431(g)(5)(B) shall be in a format
prescribed by the Exchange or in a
format developed by the member
organization, provided it contains
substantially similar information as in
the prescribed Exchange format and has
received the prior written approval of
the Exchange.
Sample Portfolio Margining and CrossMargining Risk Disclosure Statement to
Satisfy Requirements of Exchange Rule
431(g)
OVERVIEW OF PORTFOLIO
MARGINING
1. Portfolio margining is a margin
methodology that sets margin
requirements for an account based on
the greatest projected net loss of all
positions in a ‘‘product class’’ or
‘‘product group’’ as determined by an
options pricing model using multiple
pricing scenarios. These pricing
scenarios are designed to measure the
theoretical loss of the positions given
changes in both the underlying price
and implied volatility inputs to the
model. Portfolio margining is currently
limited to product classes and groups of
index products relating to broad-based
market indexes.
2. The goal of portfolio margining is
to set levels of margin that more
precisely reflects actual net risk. The
customer benefits from portfolio
margining in that margin requirements
calculated on net risk are generally
lower than alternative ‘‘position’’ or
‘‘strategy’’ based methodologies for
determining margin requirements.
Lower margin requirements allow the
customer more leverage in an account.
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orders, with the exception of opening
orders that hedge existing positions,
beginning on the fourth business day
3. To be eligible for portfolio
and continuing until such time as the
margining, customers (other than
minimum equity requirement is
broker-dealers) must meet the basic
satisfied.
standards for having an options account
8. A position in an exchange traded
that is approved for uncovered writing
index fund or other eligible fund
and must have and maintain at all times product may not be established in a
account net equity of not less than $5
portfolio margin account unless there
million, aggregated across all accounts
exists, or there is established on the
under identical ownership at the
same day, an offsetting position in
clearing broker. The identical ownership securities options, or other eligible
requirement excludes accounts held by
securities. Exchange traded index funds
the same customer in different
and/or other eligible funds will be
capacities (e.g., as a trustee and as an
transferred out of the portfolio margin
individual) and accounts where
account and into a regular securities
ownership is overlapping but not
account subject to initial Regulation T
identical (e.g., individual accounts and
and NYSE Rule 431 margin if the
joint accounts).
offsetting securities options, other
eligible securities and/or related
POSITIONS ELIGIBLE FOR A
instruments no longer remain in the
PORTFOLIO MARGIN ACCOUNT
account for ten business days.
4. All positions in broad-based U.S.
9. When a broker-dealer carries a
market index options and index
regular cash account or margin account
warrants listed on a national securities
for a customer, the broker-dealer is
exchange, and exchange traded funds
limited by rules of the Securities and
and other products registered under the Exchange Commission and of The
Investment Company Act of 1940 that
Options Clearing Corporation (‘‘OCC’’)
are managed to track the same index
to the extent to which the broker-dealer
that underlies permitted index options,
may permit OCC to have a lien against
are eligible for a portfolio margin
long option positions in those accounts.
account.
In contrast, OCC will have a lien against
all long option positions that are carried
SPECIAL RULES FOR PORTFOLIO
by a broker-dealer in a portfolio margin
MARGIN ACCOUNTS
account, and this could, under certain
5. A portfolio margin account may be
circumstances, result in greater losses to
either a separate account or a suba customer having long option positions
account of a customer’s regular margin
in such an account in the event of the
account. In the case of a sub-account,
insolvency of the customer’s broker.
equity in the regular account will be
Accordingly, to the extent that a
available to satisfy any margin
customer does not borrow against long
requirement in the portfolio margin sub- option positions in a portfolio margin
account without transfer to the subaccount or have margin requirements in
account.
the account against which the long
6. A portfolio margin account or suboption can be credited, there is no
account will be subject to a minimum
advantage to carrying the long options
margin requirement of $.375 multiplied
in a portfolio margin account and the
by the index multiplier for every option
customer should consider carrying them
contract or index warrant carried long
in an account other than a portfolio
or short in the account. No minimum
margin account.
margin is required in the case of eligible
SPECIAL RISKS OF PORTFOLIO
exchange traded funds or other eligible
MARGIN ACCOUNTS
fund products.
7. Margin calls in the portfolio margin
10. Portfolio margining generally
account or sub-account, regardless of
permits greater leverage in an account,
whether due to new commitments or the and greater leverage creates greater
effect of adverse market moves on
losses in the event of adverse market
existing positions, must be met within
movements.
one business day. Any shortfall in
11. Because the time limit for meeting
aggregate net equity across accounts
margin calls is shorter than in a regular
must be met within three business days. margin account, there is increased risk
Failure to meet a margin call when due
that a customer’s portfolio margin
will result in immediate liquidation of
account will be liquidated involuntarily,
positions to the extent necessary to
possibly causing losses to the customer.
12. Because portfolio margin
reduce the margin requirement. Failure
requirements are determined using
to meet an equity call prior to the end
sophisticated mathematical calculations
of the third business day will result in
and theoretical values that must be
a prohibition on entering any opening
CUSTOMERS ELIGIBLE FOR
PORTFOLIO MARGINING
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calculated from market data, it may be
more difficult for customers to predict
the size of future margin calls in a
portfolio margin account. This is
particularly true in the case of
customers who do not have access to
specialized software necessary to make
such calculations or who do not receive
theoretical values calculated and
distributed periodically by The Options
Clearing Corporation.
13. For the reasons noted above, a
customer that carries long options
positions in a portfolio margin account
could, under certain circumstances, be
less likely to recover the full value of
those positions in the event of the
insolvency of the carrying broker.
14. Trading of securities index
products in a portfolio margin account
is generally subject to all the risks of
trading those same products in a regular
securities margin account. Customers
should be thoroughly familiar with the
risk disclosure materials applicable to
those products, including the booklet
entitled Characteristics and Risks of
Standardized Options.
15. Customers should consult with
their tax advisers to be certain that they
are familiar with the tax treatment of
transactions in securities index
products.
16. The descriptions in this disclosure
statement relating to eligibility
requirements for portfolio margin
accounts, and minimum equity and
margin requirements for those accounts,
are minimums imposed under Exchange
rules. Time frames within which margin
and equity calls must be met are
maximums imposed under Exchange
rules. Broker-dealers may impose their
own more stringent requirements.
OVERVIEW OF CROSS-MARGINING
17. With cross-margining, index
futures and options on index futures are
combined with offsetting positions in
securities index options and underlying
instruments, for the purpose of
computing a margin requirement based
on the net risk. This generally produces
lower margin requirements than if the
related instruments 14 and securities
products are viewed separately, thus
providing more leverage in the account.
18. Cross-margining must be done in
a portfolio margin account type. A
separate portfolio margin account must
be established exclusively for crossmargining.
19. When index futures and options
on futures are combined with offsetting
14 For purposes of this Rule, the term ‘‘related
instruments,’’ within an option class or product
means futures contracts, and options on futures
contracts covering the same underlying instrument.
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positions in index options and
underlying instruments in a dedicated
account, and a portfolio margining
methodology is applied to them, crossmargining is achieved.
CUSTOMERS ELIGIBLE FOR CROSSMARGINING
20. The eligibility requirements for
cross-margining are generally the same
as for portfolio margining, and any
customer eligible for portfolio margining
is eligible for cross-margining.
21. Members of futures exchanges on
which cross-margining eligible index
contracts are traded are also permitted
to carry positions in cross-margin
accounts without regard to the
minimum aggregate account equity.
POSITIONS ELIGIBLE FOR CROSSMARGINING
22. All securities products eligible for
portfolio margining are also eligible for
cross-margining.
23. All broad-based U.S. listed market
index futures and options on index
futures traded on a designated contract
market subject to the jurisdiction of the
Commodity Futures Trading
Commission (‘‘CFTC’’) are eligible for
cross-margining.
SPECIAL RULES FOR CROSSMARGINING
24. Cross-margining must be
conducted in a portfolio margin account
type. A separate portfolio margin
account must be established exclusively
for cross-margining. A cross margin
account is a securities account, and
must be maintained separate from all
other securities account.
25. Cross-margining is automatically
accomplished with the portfolio
margining methodology. Cross-margin
positions are subject to the same
minimum margin requirement for every
contract, including futures contracts.
26. Margin calls arising in crossmargin account, and any shortfall in
aggregate net equity across accounts,
must be satisfied within the same
timeframe, and subject to the same
consequences, as in a portfolio margin
account.
27. A position in a futures product
may not be established in a crossmargin account unless there exists, or
there is established on the same day, an
offsetting position in securities options
and/or other eligible securities. Related
instruments will be transferred out of
the cross margin account and into a
futures account if, for more than ten
business days and for any reason, the
offsetting securities options and/or other
eligible securities no longer remain in
the account. If the transfer of related
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instruments to a futures account causes
the futures account to be
undermargined, a margin call will be
issued or positions will be liquidated to
the extent necessary to eliminate the
deficit.
28. Customers participating in crossmargining will be required to sign an
agreement acknowledging that their
positions and property in the crossmargin account will be subject to the
customer protection provisions of Rule
15c3–3 under the Securities Exchange
Act of 1934 and the Securities Investor
Protection Act, and will not be subject
to the provisions of the Commodity
Exchange Act, including segregation of
funds.
29. According to the rules of the
exchanges, a broker dealer is required to
immediately liquidate, or, if feasible,
transfer to another broker-dealer eligible
to carry cross-margin accounts, all
customer cross-margin accounts that
contain positions in futures and/or
options on futures in the event that the
carrying broker-dealer becomes
insolvent.
30. In signing the agreement referred
to in paragraph 28 above, a customer
also acknowledges that a cross-margin
account that contains positions in
futures and /or options on futures will
be immediately liquidated, or, if
feasible, transferred to another brokerdealer eligible to carry cross-margin
accounts, in the event that the carrying
broker-dealer becomes insolvent.
SPECIAL RISKS OF CROSSMARGINING
31. Cross-margining must be
conducted in a portfolio margin account
type. Generally, cross-margining and the
portfolio margining methodology both
contribute to provide greater leverage
than a regular margin account, and
greater leverage creates greater losses in
the event of adverse market movements.
32. Since cross-margining must be
conducted in a portfolio margin account
type, the time required for meeting
margin calls is shorter than in a regular
securities margin account and may be
shorter than the time ordinarily required
by a futures commission merchant for
meeting margin calls in a futures
account. Consequently, there is
increased risk that a customer’s crossmargin positions will be liquidated
involuntarily, causing possible loss to
the customer.
33. As noted above, cross margin
accounts are securities accounts and are
subject to the customer protections set
forth in Rule 15c3–3 under the
Securities Exchange Act of 1934 and the
Securities Investor Protection Act.
Cross-margin positions are not subject
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to the customer protection rules under
the segregation provisions of the
Commodity Exchange Act and the rules
of the CFTC adopted pursuant to the
Commodity Exchange Act.
34. Trading of index options and
futures contracts in a cross-margin
account is generally subject to all the
risks of trading those same products in
a futures account or a regular securities
margin account. Customers should be
thoroughly familiar with the risk
disclosure materials applicable to those
products, including the booklet entitled
Characteristics and Risks of
Standardized Options and the risk
disclosure document required by the
CFTC to be delivered to futures
customers. Because this disclosure
statement does not disclose the risks
and other significant aspects of trading
in futures and options, customers
should review those materials carefully
before trading in a cross-margin
account.
35. Customers should bear in mind
that the discrepancies in the cash flow
characteristics of futures and certain
options are still present even when those
products are carried together in a cross
margin account. Both futures and
options contracts are generally marked
to the market at least once each
business day, but the marks may take
place with different frequency and at
different times within the day. When a
futures contract is marked to the
market, the gain or loss is immediately
credited to or debited from, respectively,
the customer’s account in cash. While
an increase in the value of a long option
contract may increase the equity in the
account, the gain is not realized until
the option is sold or exercised.
Accordingly, a customer may be
required to deposit cash in the account
in order to meet a variation payment on
a futures contract even though the
customer is in a hedged position and
has experienced a corresponding (but
yet unrealized) gain on a long option.
Alternatively, a customer who is in a
hedged position and would otherwise be
entitled to receive a variation payment
on a futures contract may find that the
cash is required to be held in the
account as margin collateral on an
offsetting option position.
36. Customers should consult with
their tax advisers to be certain that they
are familiar with the tax treatment of
transactions in index products,
including tax consequences of trading
strategies involving both futures and
option contracts.
37. The descriptions in this disclosure
statement relating to eligibility
requirements for cross-margining, and
minimum equity and margin
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requirements for cross margin accounts,
are minimums imposed under Exchange
rules. Time frames within which margin
and equity calls must be met are
maximums imposed under Exchange
rules. The broker-dealer carrying a
customer’s portfolio margin account,
including any cross-margin account,
may impose its own more stringent
requirements.
*
*
*
*
*
Sample Portfolio Margining and CrossMargining Acknowledgements
ACKNOWLEDGEMENT FOR
CUSTOMERS UTILIZING A
PORTFOLIO MARGIN ACCOUNT
CROSS-MARGINING AND NONCROSS-MARGINING—
Rule 15c3–3 under the Securities
Exchange Act of 1934 requires that a
broker or dealer promptly obtain and
maintain physical possession or control
of all fully-paid securities and excess
margin securities of a customer. Fullypaid securities are securities carried in
a cash account and margin equity
securities carried in a margin or special
account (other than a cash account) that
have been fully paid for. Excess margin
securities are a customer’s margin
securities having a market value in
excess of 140% of the total of the debit
balances in the customer’s non-cash
accounts. For the purposes of Rule
15c3–3, securities held subject to a lien
to secure obligations of the brokerdealer are not within the broker-dealer’s
physical possession or control. The
Commission staff has taken the position
that all long option positions in a
customer’s portfolio-margining account
(including any cross-margin account)
may be subject to such a lien by OCC
and will not be deemed fully-paid or
excess margin securities under Rule
15c3–3.
The hypothecation rules under the
Securities Exchange Act of 1934 (Rules
8c–1 and 15c2–1), prohibit brokerdealers from permitting the
hypothecation of customer securities in
a manner that allows those securities to
be subject to any lien or liens in an
amount that exceeds the customer’s
aggregate indebtedness. However, all
long option positions in a portfoliomargining account (including any crossmargining account) will be subject to
OCC’s lien, including any positions that
exceed the customer’s aggregate
indebtedness. The Commission staff has
taken a position that would to allow
customers to carry positions in
portfolio-margining accounts, (including
any cross-margining account) even
when those positions exceed the
customer’s aggregate indebtedness.
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Accordingly, within a portfolio margin
account or cross-margin account, to the
extent that you have long option
positions that do not operate to offset
your aggregate indebtedness and
thereby reduce your margin requirement
you receive no benefit from carrying
those positions in your portfolio-margin
account or cross-margin account and
incur the additional risk of OCC’s lien
on your long option position(s).
BY SIGNING BELOW THE
CUSTOMER AFFIRMS THAT THE
CUSTOMER HAS READ AND
UNDERSTOOD THE FOREGOING
DISCLOSURE STATEMENT AND
ACKNOWLEDGES AND AGREES THAT
LONG OPTION POSITIONS IN
PORTFOLIO-MARGINING ACCOUNTS,
AND CROSS-MARGINING ACCOUNTS,
WILL BE EXEMPTED FROM CERTAIN
CUSTOMER PROTECTION RULES OF
THE SECURITIES AND EXCHANGE
COMMISSION AS DESCRIBED ABOVE
AND WILL BE SUBJECT TO A LIEN BY
THE OPTIONS CLEARING
CORPORATION WITHOUT REGARD
TO SUCH RULES.
CUSTOMER NAME: lllllllll
BY: llllllllllllllll
(Signature/title)
DATE: lllllllllllllll
ACKNOWLEDGEMENT FOR
CUSTOMERS ENGAGED IN CROSSMARGINING
As disclosed above, futures contracts
and other property carried in customer
accounts with Futures Commission
Merchants (‘‘FCM’’) are normally subject
to special protection afforded under the
customer segregation provisions of the
Commodity Exchange Act (‘‘CEA’’) and
the rules of the Commodity Futures
Trading Commission adopted pursuant
to the CEA. These rules require that
customer funds be segregated from the
accounts of financial intermediaries and
be accounted for separately. However,
they do not provide for, and regular
futures accounts do not enjoy the
benefit of, insurance protecting
customer accounts against loss in the
event of the insolvency of the
intermediary carrying the accounts.
As discussed above, cross-margining
must be conducted in a portfolio margin
account, dedicated exclusively to cross
margining and cross margin accounts
are not treated as a futures account with
an FCM. Instead, cross margin accounts
are treated as securities accounts
carried with broker-dealers. As such,
cross margin accounts are covered by
Rule 15c3–3 under the Securities
Exchange Act of 1934, which protects
customer accounts. Rule 15c3–3, among
other things, requires a broker-dealer to
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maintain physical possession or control
of all fully-paid and excess margin
securities and maintain a special
reserve account for the benefit of their
customers. However, with regard to
cross margin accounts, there is an
exception to the possession or control
requirement of Rule 15c3–3 that permits
The Options Clearing Corporation to
have a lien on long positions. This
exception is outlined in a separate
acknowledgement form that must be
signed prior to or concurrent with this
form. Additionally, the Securities
Investor Protection Corporation
(‘‘SIPC’’) insures customer accounts
against the financial insolvency of a
broker-dealer in the amount of up to
$500,000 to protect against the loss of
registered securities and cash
maintained in the account for
purchasing securities or as proceeds
from selling securities (although the
limit on cash claims is $100,000).
According to the rules of the exchanges,
a broker-dealer is required to
immediately liquidate, or, if feasible,
transfer to another broker-dealer eligible
to carry cross-margin accounts, all
customer cross margin accounts that
contain positions in futures and/or
options on futures in the event that the
carrying broker-dealer becomes
insolvent.
BY SIGNING BELOW THE
CUSTOMER AFFIRMS THAT THE
CUSTOMER HAS READ AND
UNDERSTOOD THE FOREGOING
DISCLOSURE STATEMENT AND
ACKNOWLEDGES AND AGREES THAT:
(1) POSITIONS AND PROPERTY IN
CROSS-MARGINING ACCOUNTS, WILL
NOT BE SUBJECT TO THE CUSTOMER
PROTECTION RULES UNDER THE
CUSTOMER SEGREGATION
PROVISIONS OF THE COMMODITY
EXCHANGE ACT AND THE RULES OF
THE COMMODITY FUTURES
TRADING COMMISSION ADOPTED
PURSUANT TO THE CEA AND (2)
CROSS-MARGINING ACCOUNTS
THAT CONTAIN POSITIONS IN
FUTURES AND/OR OPTIONS ON
FUTURES WILL BE IMMEDIATELY
LIQUIDATED, OR IF FEASIBLE,
TRANSFERRED TO ANOTHER
BROKER-DEALER ELIBIBLE TO CARRY
CROSS-MARGIN ACCOUNTS IN THE
EVENT THAT THE CARRYING
BROKER-DEALER BECOMES
INSOLVENT.
CUSTOMER NAME: lllllllll
BY: llllllllllllllll
(Signature/title)
DATE: lllllllllllllll
*
*
*
*
*
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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
a. Background
NYSE Rule 431 generally prescribes
minimum maintenance margin
requirements for customer accounts
held at members and member
organizations. In April 1996, the
Exchange established the Committee to
assess the adequacy of NYSE Rule 431
on an ongoing basis, review margin
requirements, and make
recommendations for change. A number
of proposed amendments resulting from
the Committee’s recommendations have
been approved by the Exchange’s Board
of Directors since the Committee was
established. Similarly, the proposed
amendments discussed below have been
recommended by the Committee and
have been adopted by the Exchange in
this proposal, as amended.15 The
Exchange represents that the proposed
portfolio margin and cross-margin rules
have been developed in conjunction
with the CBOE, The Options Clearing
Corporation, the American Stock
Exchange LLC, the Board of Trade of the
City of Chicago, Inc., the Chicago
Mercantile Exchange Inc., and the
National Association of Securities
Dealers, Inc.
b. Portfolio Margin
The Exchange proposes to amend
NYSE Rule 431 to expand the scope of
its margin rule by providing a portfolio
margin methodology for listed, broadbased market index options, index
warrants and related exchange-traded
funds. The Exchange believes that the
proposed amendments would allow
clearing members and member
15 Many aspects of the proposed rule change are
similar to the CBOE’s proposed rule change to
permit customer portfolio margining and crossmargining. See supra notes 5 and 9.
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organizations to extend a portfolio
margin methodology to eligible
customers as an alternative to the
current strategy-based margin
requirements. The Exchange further
believes that the proposed rule also
would allow broad-based market index
futures and options on such futures to
be included in a portfolio margin
account, thus providing a cross-margin
capability. The Exchange proposes to
introduce the amendments as a two-year
pilot program that would be available
on a voluntary basis to member
organizations.
The NYSE is proposing this partial
amendment, constituting Amendment
No. 3, for the purpose of removing the
proposed language ‘‘any affiliate of a
self-clearing organization,’’ in proposed
new Section (g)(4)(B) under Rule 431, as
requested by Commission staff. As
previously proposed,16 Section (g)(4)(B)
would have allowed any affiliate of a
self-clearing member organization to be
an ‘‘Eligible Participant’’ permitted to
utilize portfolio margining as an
alternative to ‘‘strategy-based’’
margining, regardless of the member
organization’s equity. By deleting
Section (g)(4)(B) from the proposed
amendments to Rule 431, affiliates of
self-clearing member organizations who
wish to utilize portfolio margining as an
alternative to ‘‘strategy-based’’
margining will be subject to an equity
requirement of at least five million
dollars.
The elimination of Section (g)(4)(B)
necessitates the renumbering of
proposed Sections (g)(4)(C) and (g)(4)(D)
of Rule 431 to Sections (g)(4)(B) and
(g)(4)(C), respectively. In relation to the
change noted above, the NYSE also
proposes in Amendment No. 3 to revise
paragraph number 3 of the Sample
Portfolio Margining and CrossMargining Risk Disclosure Statement to
Satisfy Requirements of Exchange Rule
431(g) to remove the words ‘‘and certain
non-broker-dealer affiliates of the
carrying broker-dealer’’ in the first
sentence. This change to the notice
would reflect that non-broker-dealer
affiliates would be subject to the $5
million equity requirement. With the
exception of these changes, the rest of
the proposed rule changes, as contained
in the Original Proposal, as amended by
Amendment Nos. 1 and 2, remain
unchanged.
Portfolio margining is a margin
methodology that sets margin
requirements for an account based on
the greatest projected net loss of all
positions in a product class or group as
determined by the Commission16 See
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approved options pricing model using
multiple pricing scenarios. These
scenarios are designed to measure the
theoretical loss of the positions given
changes in both the underlying price
and implied volatility inputs to the
model. Accordingly, the margin
required is based on the greatest loss
that would be incurred in a portfolio if
the value of its components move up or
down by a predetermined amount.
The Exchange represents that the
purpose and benefit of portfolio
margining is to efficiently set levels of
margin that more precisely reflect actual
net risk of all positions in the account.
A customer benefits from portfolio
margining in that margin requirements
calculated on net position risk are
generally lower than strategy-based
margin methodologies currently in
place. In permitting margin computation
based on actual net risk, members and
member organizations will no longer be
required to compute a margin
requirement for each individual
position or strategy in a customer’s
account.
However, as a pre-condition to
permitting portfolio margining, the
member or member organization would
be required to establish procedures and
guidelines to monitor credit risk to the
member or member organization’s
capital, including intra-day credit risk,
and stress testing of portfolio margin
accounts. Further, members and
member organizations would have to
establish procedures for regular review
and testing of these required risk
analysis procedures.
c. Cross-Margining Capability
The proposed rule change requires a
clearing member or member
organization to establish a separate
portfolio margin account (securities
margin account) exclusively for crossmargining.17 In this regard, related
index futures and options on such
futures would be carried in a separate
cross-margin account, thus affording a
cross-margin capability. In a portfolio
margin account that is used exclusively
for cross-margining, separate portfolios
may be established containing index
options, index warrants and exchangetraded funds structured to replicate the
composition of the index underlying a
particular portfolio, as well as related
index futures and options on such
futures.
To determine theoretical gains and
losses, and resulting margin
17 The Original Proposal and Amendment No. 1
permitted cross-margin positions to either be
combined in the same account with other portfolio
margin positions, or carried in a separate crossmargin account.
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15:43 May 02, 2005
Jkt 205001
requirements, the same portfolio margin
computation procedure will be applied
to a portfolio margin account that is
identified as a cross-margin account.
The liquidation/transfer requirement
set forth in the proposed rule
necessitates that cross-margin positions
be carried in a separate account,
whereas the Original Proposal and
Amendment No. 1 permitted crossmargin positions to either be combined
in the same account with other portfolio
margin positions, or carried in a
separate cross-margin account.
Amendment No. 2 to the proposed
rule also incorporates a provision, as
requested by Commission staff, that
requires liquidation or transfer of crossmargin accounts in the event that a
carrying broker-dealer becomes
insolvent. This requirement would
provide for Securities Investor
Protection Corporation (‘‘SIPC’’)
coverage of futures and options on
futures in a securities account because
such instruments would be viewed as
converted to cash in the event of a firm
insolvency.
d. Disclosure Document and Customer
Attestation
Exchange Rule 726 prescribes
requirements for the delivery of options
disclosure documents concerning the
opening of customer accounts. As
proposed by the Exchange, members
and member organizations would be
required to provide every portfolio
margin customer with a written risk
disclosure statement at or prior to the
initial opening of a portfolio margin
account. The disclosure statement is
divided into two sections, one dealing
with portfolio margining, and the other
with cross-margining.
The statement would disclose the risk
and operation of portfolio margin
accounts, including cross-margining,
and the differences between portfolio
margin and strategy-based margin
requirements. The disclosure statement
would also address who is eligible to
open a portfolio margin account, the
instruments that are allowed, and when
deposits to meet margin and minimum
equity are required.
Included within the portfolio margin
section of the disclosure statement
would be a list of certain of the risks
unique to portfolio margin accounts,
such as: Increased leverage; shorter time
for meeting margin; involuntary
liquidation if margin not received;
inability to calculate future margin
requirements because of the data and
calculations required; and that long
positions are subject to a lien. The risks
and operation of a cross-margin feature
are delineated in the cross-margin
PO 00000
Frm 00121
Fmt 4703
Sfmt 4703
22961
section of the disclosure statement, and
a list of certain of the risks associated
with cross-margining will be included
as well.
In addition, at or prior to the time a
portfolio margin account is initially
opened, members and member
organizations would be required to
obtain a signed acknowledgement
regarding certain implications of
portfolio margining (e.g., treatment
under SEC Rules 8c–1, 15c2–1 and
15c3–3 under the Act) from the
customer. Further, prior to providing
cross-margining, members and member
organizations would be required to
obtain a second signed customer
acknowledgement relative to the
segregation treatment for futures
contracts and SIPC coverage.
Amendment No. 2 reflects changes to
the risk disclosure statement and
acknowledgement forms to reflect
proposed amendments to the rule
language concerning separation of crossmargining from all other portfolio
margining. The acknowledgement form
in Amendment No. 2 will require that
by signing the cross-margin agreement,
the signer acknowledges that all
positions carried in a cross-margin
account will be immediately liquidated
or transferred to another broker-dealer
eligible to carry cross-margin accounts
in the event that the carrying brokerdealer becomes insolvent.
2. Statutory Basis
The Exchange believes the proposed
rule change, as amended, is consistent
with Section 6(b) of the Act 18 in
general, and furthers the objectives of
Section 6(b)(5) of the Act 19 in
particular, because it is designed to
prevent fraudulent and manipulative
acts and practices, to promote just and
equitable principles of trade, 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. In addition, the
Exchange believes that Section 6(b)(5) of
the Act 20 requires that the rules of an
exchange foster cooperation and
coordination with persons engaged in
regulating transactions in securities.
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 the
furtherance of the purposes of the Act.
18 15
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
20 15 U.S.C. 78f(b)(5).
19 15
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22962
Federal Register / Vol. 70, No. 84 / Tuesday, May 3, 2005 / Notices
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
No written comments were either
solicited or received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of
publication of this notice in the Federal
Register or within such longer period (i)
as the Commission may designate up to
90 days of such date if it finds such
longer period to be appropriate and
publishes its reasons for so finding or
(ii) as to which the Exchange consents,
the Commission will:
(A) By order approve such proposed
rule change, as amended, or
(B) Institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change, as amended, is consistent with
the Act. 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 e-mail to rulecomments@sec.gov. Please include File
Number SR–NYSE–2002–19 on the
subject line.
Paper Comments
• Send paper comments in triplicate
to Jonathan G. Katz, Secretary,
Securities and Exchange Commission,
Exemption
No.
Docket No.
450 Fifth Street, NW., Washington, DC
20549–0609.
All submissions should refer to File
Number SR–NYSE–2002–19. 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 (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
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for inspection and copying in
the Commission’s Public Reference
Section, 450 Fifth Street, NW.,
Washington, DC 20549. Copies of such
filing also will be available for
inspection and copying at the principal
office of the NYSE. 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–NYSE–2002–19 and should
be submitted on or before May 24, 2005.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.21
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 05–8774 Filed 5–2–05; 8:45 am]
DEPARTMENT OF TRANSPORTATION
Pipeline and Hazardous Materials
Safety Administration
Office of Hazardous Materials Safety;
Actions on Exemption Applications
Pipeline and Hazardous
Materials Safety Administration, DOT.
AGENCY:
Notice of actions on exemption
applications.
ACTION:
SUMMARY: In accordance with the
procedures governing the application
for, and the processing of, exemptions
from the Department of Transportation’s
Hazardous Material Regulations (49 CFR
part 107, subpart B), notice is hereby
given of the actions on exemption
applications in October 2003 to
December 2004. The mode of
transportation involved are identified by
a number in the ‘‘Nature of
Application’’ portion of the table below
as follows: 1–Motor vehicle, 2–Rail
freight, 3–Cargo vessel, 4–Cargo aircraft
only, 5–Passenger-carrying aircraft.
Application numbers prefixed by the
letters EE represent applications for
Emergency Exemptions. It should be
noted that some of the sections cited
were those in effect at the time certain
exemptions were issued.
Issued in Washington, DC, on April 25,
2005.
R. Ryan Posten,
Exemptions Program Officer, Office of
Hazardous Materials Safety Exemptions &
Approvals.
BILLING CODE 8010–01–P
Applicant
Regulation(s)
Nature of exemption thereof
MODIFICATION EXEMPTION GRANTED
13133–M ......
..................................
U.S. Department of Energy, Albuquerque,
NM.
49 CFR 172.320;
173.54(a); 173.56(b);
173.57; 173.58;
173.62.
11650–M ......
..................................
Autoliv ASP, Inc.,
Ogden, UT.
49 CFR 178.65–9 ..........
8131–M ........
..................................
12104–M ......
RSPA–98–4039 .......
National Aeronautics and
Space Administration
(NASA), Houston, TX.
Mitsubishi Polyester
Film, Greer, SC.
49 CFR 173.302(d);
173.34(d); 173.301(d);
175.3.
49 CFR 174.67(i) ...........
21 17
To reissue the exemption originally issued on an
emergency basis for the transportation of up to
25 grams of unapproved explosives, classed as
Division 1.4E, when shipped in a special shipping container.
To modify the exemption to authorize a newly designed airbag inflator device with a maximum
service pressure of 8500 PSIG for use as a
component of a automobile vehicle safety system.
To modify the exemption to add additional serial
numbers of authorized cylinders.
To modify the exemption to upgrade loading procedures and drawings for the DOT Specification
tank cars transporting Class 9 materials.
CFR 200.30–3(a)(12).
VerDate jul<14>2003
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]]>Agencies
[Federal Register Volume 70, Number 84 (Tuesday, May 3, 2005)]
[Notices]
[Pages 22953-22962]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 05-8774]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-51615; File No. SR-NYSE-2002-19]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change and Amendment Nos. 1, 2 and 3 Thereto by the New York Stock
Exchange, Inc. Relating to Customer Portfolio and Cross-Margining
Requirements
April 26, 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 March 18, 2005, the New York Stock Exchange, Inc. (``NYSE'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'' or ``SEC'') Amendment No. 3 \3\ to the proposed rule
change as described in Items I, II, and III below, which Items have
been prepared by the Exchange. The NYSE submitted this partial
amendment, constituting Amendment No. 3, pursuant to the request of
Commission staff. Specifically, the NYSE proposes to amend new Section
(g)(4) under Rule 431 to remove current paragraph (g)(4)(B) under which
any affiliate of a self-clearing member organization can participate in
portfolio margining, without being subject to the $5 million equity
requirement.\4\
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Partial Amendment No. 3 (``Amendment No. 3'').
\4\ This partial amendment would not exclude these affiliates
from participating in portfolio margining; rather, it would subject
them to the $5 million equity requirement in proposed paragraph
(g)(4)(C) of Rule 431 in Amendment No. 3.
---------------------------------------------------------------------------
The NYSE submitted the original proposed rule change to the
Commission on May 13, 2002 (``Original Proposal''). On August 21, 2002,
the NYSE filed Amendment No. 1 to the proposed rule change.\5\ The
proposed
[[Page 22954]]
rule change and Amendment No. 1 were published in the Federal Register
on October 8, 2002.\6\ The Commission received three comment letters in
response to the October 8, 2002 Federal Register notice.\7\ On June 21,
2004, the Exchange filed Amendment No. 2 to the proposed rule
change.\8\ The proposed rule change and Amendment Nos. 1 and 2 were
published in the Federal Register on December 27, 2004.\9\ The
Commission received ten comment letters in response to the December 27,
2004 Federal Register notice.\10\ The Commission is publishing this
notice to solicit comments on the proposed rule change, as amended,
from interested persons.\11\
---------------------------------------------------------------------------
\5\ See letter from Mary Yeager, Assistant Secretary, NYSE, to
T.R. Lazo, Senior Special Counsel, Division of Market Regulation,
Commission, dated August 20, 2002 (``Amendment No. 1''). In
Amendment No. 1, the NYSE made technical corrections to its proposed
rule language to eliminate any inconsistencies between its proposal
and the CBOE proposal pursuant to the Rule 431 Committee's
(``Committee'') recommendations. See Securities Exchange Act Release
No. 45630 (March 22, 2002), 67 FR 15263 (March 29, 2002) (File No.
SR-CBOE-2002-03).
\6\ See Securities Exchange Act Release No. 46576 (October 1,
2002), 67 FR 62843 (October 8, 2002).
\7\ See letter from R. Allan Martin, President, Auric Trading
Enterprises, Inc., to Secretary, Commission, dated October 9, 2002
(``Martin Auric Letter''); Phupinder S. Gill, Managing Director and
President, Chicago Mercantile Exchange Inc., to Jonathan G. Katz,
Secretary, Commission, dated October 21, 2002 (``Gill CBOE
Letter''); and E-mail from Mike Ianni, Private Investor to rule-
comments@sec.gov, dated November 7, 2002 (``Ianni E-mail'').
\8\ See letter from Darla C. Stuckey, Corporate Secretary, NYSE,
to Michael A. Macchiaroli, Associate Director, Division of Market
Regulation (``Division''), Commission, dated June 17, 2004
(``Amendment No. 2''). The NYSE filed Amendment No. 2 for the
purpose of eliminating inconsistencies between the proposed NYSE and
CBOE rules, and to incorporate certain substantive amendments
requested by Commission staff.
\9\ See Securities Exchange Act Release No. 50885 (December 20,
2004), 69 FR 77287 (December 27, 2004); see also Securities Exchange
Act Release No. 50886 (December 20, 2004), 69 FR 77275 (December 27,
2004).
\10\ These written comments (letters and e-mails) responded
jointly to the NYSE and CBOE proposed rule changes. See letter from
Barbara Wierzynski, Executive Vice President and General Counsel,
Futures Industry Association, and Gerard J. Quinn, Vice President
and Associate General Counsel, Securities Industry Association, to
Jonathan G. Katz, Secretary, Commission, dated January 14, 2005
(``Wierzynski/Quinn Letter''); letter from Craig S. Donohue, Chief
Executive Officer, Chicago Mercantile Exchange, to Jonathan G. Katz,
Secretary, Commission, dated January 18, 2005 (``Donohue Letter'');
letter from Robert C. Sheehan, Chairman, Electronic Brokerages
Systems, LLC, to Jonathan G. Katz, Secretary, Commission, dated
January 19, 2005 (``Sheehan Letter''); letter from William O.
Melvin, Jr., President, Acorn Derivatives Management, to Jonathan G.
Katz, Secretary, Commission, dated January 19, 2005 (``Melvin
Letter''); letter from Margaret Wiermanski, Chief Operating &
Compliance Officer, Chicago Trading Company, to Jonathan G. Katz,
Secretary, Commission, dated January 20, 2005 (``Wiermanski
Letter''); email from Jeffrey T. Kaufmann, Lakeshore Securities,
L.P., to Jonathan G. Katz, Secretary, Commission, dated January 24,
2005 (``Kaufmann Letter''); letter from J. Todd Weingart, Director
of Floor Operations, Mann Securities, to Jonathan G. Katz,
Secretary, Commission, dated January 25, 2005 (``Weingart Letter'');
letter from Charles Greiner III, LDB Consulting, Inc., to Jonathan
G. Katz, Secretary, Commission, dated January 26, 2005 (``Greiner
Letter''); letter from Jack L. Hansen, Chief Investment Officer and
Principal, The Clifton Group, to Jonathan G. Katz, Secretary,
Commission, dated February 1, 2005 (``Hansen Letter''); See letter
from Barbara Wierzynski, Executive Vice President and General
Counsel, Futures Industry Association, and Ira D. Hammerman, Senior
Vice President and General Counsel, Securities Industry Association,
to Jonathan G. Katz, Secretary, Commission, dated March 2, 2005
(``Wierzynski/Hammerman Letter'').
\11\ This release (Release No. 34-51615) seeks comment on the
proposed rule change, as amended, by Amendment Nos. 1, 2 and 3.
Therefore, the language of the proposed rule change, as amended, is
set forth in the release in its entirety.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange proposes to amend NYSE Rule 431 to permit self-
clearing members and member organizations to margin listed, broad-
based, market index options, index warrants and related exchange-traded
funds according to a prescribed portfolio margin methodology relating
to a portfolio margin account of a registered broker-dealer, certain
qualified members of a national futures exchange, and any other person
or entity that maintains account equity of at least $5 million.
The Exchange further proposes to amend NYSE Rule 726 to require
that a disclosure statement and written acknowledgement for use with
the proposed portfolio margining and cross-margining changes be
furnished to customers. The text of the proposed rule change is below.
Additions are in italics.
* * * * *
Margin Requirements
Rule 431. (a) through (f) unchanged.
Portfolio Margin and Cross-Margin for Index Options
(g) As an alternative to the ``strategy'' based margin requirements
set forth in paragraphs (a) through (f) of this Rule, member
organizations may elect margin for listed, broad-based U.S. index
options, index warrants and underlying instruments (as defined below)
in accordance with the portfolio margin requirements set forth in this
Rule.
In addition, member organizations, provided they are a Futures
Commission Merchant (``FCM'') and are either a clearing member of a
futures clearing organization or have an affiliate that is a clearing
member of a futures clearing organization, are permitted under this
section to combine a customer's related instruments (as defined below)
and listed, broad-based U.S. index options, index warrants and
underlying instruments and compute a margin requirement (``cross
margin'') on a portfolio margin basis. Member organizations must
confine cross-margin positions to a portfolio margin account dedicated
exclusively to cross-margining.
The portfolio margin and cross-margining provisions of this Rule
shall not apply to Individual Retirement Accounts (``IRAs'').
(1) Member organizations will be expected to monitor the risk of
portfolio margin accounts and maintain a written risk analysis
methodology for assessing the potential risk to the member
organization's capital over a specified range of possible market
movements of positions maintained in such accounts. The risk analysis
methodology shall specify the computations to be made, the frequency of
computations, the records to be reviewed and maintained, and the
position(s) within the organization responsible for the risk function.
This risk analysis methodology shall be made available to the Exchange
upon request. In performing the risk analysis of portfolio margin
accounts required by this Rule, each member organization shall include
the following in the written risk analysis methodology:
(A) Procedures and guidelines for the determination, review and
approval of credit limits to each customer, and across all customers,
utilizing a portfolio margin account.
(B) Procedures and guidelines for monitoring credit risk exposure
to the member organization, including intra-day credit risk, related to
portfolio margin accounts.
(C) Procedures and guidelines for the use of stress testing of
portfolio margin accounts in order to monitor market risk exposure from
individual accounts and in the aggregate.
(D) Procedures providing for the regular review and testing of
these risk analysis procedures by an independent unit such as internal
audit or other comparable group.
(2) Definitions.--For purposes of this paragraph (g), the following
terms shall have the meanings specified below:
(A) The term ``listed option'' shall mean any option traded on a
registered national securities exchange or automated facility of a
registered national securities association.
(B) The term ``options class'' refers to all options contracts
covering the same underlying instrument.
(C) The term ``portfolio'' means options of the same options class
grouped with their underlying instruments and related instruments.
[[Page 22955]]
(D) The term ``option series'' relates to listed options and means
all option contracts of the same type (either a call or a put) and
exercise style, covering the same underlying instrument with the same
exercise price, expiration date, and number of underlying units.
(E) The term ``related instrument'' within an option class or
product group means futures contracts and options on futures contracts
covering the same underlying instrument.
(F) The term ``underlying instrument'' means long and short
positions in an exchange traded fund or other fund product registered
under the Investment Company Act of 1940, that holds the same
securities, and in the same proportion, as contained in a broad-based
index on which options are listed. The term underlying instrument shall
not be deemed to include, futures contracts, options on futures
contracts, underlying stock baskets, or unlisted instruments.
(G) The term ``product group'' means two or more portfolios of the
same type (see sub-paragraph (g)(2)(H) below) for which it has been
determined by Rule 15c3-1a under the Securities Exchange Act of 1934
that a percentage of offsetting profits may be applied to losses at the
same valuation point.
(H) The term ``theoretical gains and losses'' means the gain and
loss in the value of individual option series and related instruments
at 10 equidistant intervals (valuation points) ranging from an assumed
movement (both up and down) in the current market value of the
underlying instrument. The magnitude of the valuation point range shall
be as follows:
---------------------------------------------------------------------------
\12\ In accordance with sub-paragraph (b)(1)(i)(B) of Rule 15c3-
1a (Appendix A to Rule 15c3-1) under the Securities Exchange Act of
1934, 17 CFR 240.15c3-1a(b)(1)(i)(B).
\13\ See footnote above.
------------------------------------------------------------------------
Up / down
market move
Portfolio type (high & low
valuation
points)
------------------------------------------------------------------------
Non-High Capitalization, Broad-based U.S. Market Index + / -10%
Option \12\............................................
High Capitalization, Broad-based U.S. Market Index +6% / -8%
Option \13\............................................
------------------------------------------------------------------------
(3) Approved Theoretical Pricing Models.--Theoretical pricing
models must be approved by a Designated Examining Authority and
reviewed by the Securities and Exchange Commission (``The Commission'')
in order to qualify. Currently, the theoretical model utilized by The
Options Clearing Corporation (``The OCC'') is the only model qualified
pursuant to The Commission's Net Capital Rule. All member organizations
participating in the pilot program shall obtain their theoretical
values from The OCC.
(4) Eligible Participants.--The application of the portfolio margin
provisions of this paragraph (g), including cross-margining, is limited
to the following:
(A) any broker or dealer registered pursuant to Section 15 of the
Securities Exchange Act of 1934;
(B) any member of a national futures exchange to the extent that
listed index options hedge the member's index futures; and
(C) any other person or entity not included in (4)(A) through
(4)(B) above that has or establishes, and maintains, equity of at least
5 million dollars. For purposes of this equity requirement, all
securities and futures accounts carried by the member organization for
the same customer may be combined provided ownership across the
accounts is identical. A guarantee pursuant to paragraph (f)(4) of this
Rule is not permitted for purposes of the minimum equity requirement.
(5) Opening of Accounts.
(A) Only customers that have been approved for options transactions
and approved to engage in uncovered short option contracts pursuant to
Exchange Rule 721, are permitted to utilize a portfolio margin account.
(B) On or before the date of the initial transaction in a portfolio
margin account, a member organization shall:
(i) furnish the customer with a special written disclosure
statement describing the nature and risks of portfolio margining and
cross-margining which includes an acknowledgement for all portfolio
margin account owners to sign, and an additional acknowledgement for
owners that also engage in cross-margining to sign, attesting that they
have read and understood the disclosure statement, and agree to the
terms under which a portfolio margin account and the cross-margin
account respectively, are provided (see Exchange Rule 726(d)), and
(ii) obtain the signed acknowledgement(s) noted above from the
customer (both of which are required for cross-margining customers) and
record the date of receipt.
(6) Establishing Account and Eligible Positions.
(1) Portfolio Margin Account. For purposes of applying the
portfolio margin requirements provided in this paragraph (g), member
organizations are to establish and utilize a specific securities margin
account, or sub-account of a margin account, clearly identified as a
portfolio margin account that is separate from any other securities
account carried for a customer.
(2) Cross-Margin Account. For purposes of combining related
instruments and listed, broad-based U.S. index options, index warrants
and underlying instruments and applying the portfolio margin
requirements members are to establish and utilize a portfolio margin
account, clearly identified as a cross-margin account, that is separate
from any other securities account or portfolio margin account carried
for a customer.
A margin deficit in either the portfolio margin account or the
cross-margin account of a customer may not be considered as satisfied
by excess equity in the other account. Funds and/or securities must be
transferred to the deficient account and a written record created and
maintained.
(A) Portfolio Margin Account--Eligible Positions
(i) A transaction in, or transfer of, a listed, broad-based U.S.
index option or index warrant may be effected in the portfolio margin
account.
(ii) A transaction in, or transfer of, an underlying instrument may
be effected in the portfolio margin account provided a position in an
offsetting listed, broad-based U.S. index option or index warrant is in
the account or is established in the account on the same day.
(iii) If, in the portfolio margin account, the listed, broad-based
U.S. index option or index warrant position offsetting an underlying
instrument position ceases to exist and is not replaced within ten
business days, the underlying instrument position must be transferred
to a regular margin account, subject to initial Regulation T margin and
margined according to the other provisions of this Rule. Member
organizations will be expected to monitor portfolio margin accounts for
possible abuse of this provision.
(iv) In the event that fully paid for long options and /or index
warrants are the only positions contained within a portfolio margin
account, such long positions must be transferred to a securities
account other than a portfolio margin account or cross-margin account
within 10 business days, subject to the margin required, unless the
status of the account changes such that it is no longer composed solely
of fully paid for long options and/or index warrants.
(B) Cross-Margin Account--Eligible Positions
(i) A transaction in, or transfer of, a related instrument may be
effected in
[[Page 22956]]
the cross-margin account provided a position in an offsetting listed,
U.S. broad-based index option, index warrant or underlying instrument
is in the account or is established in the account on the same day.
(ii) If the listed, U.S. broad-based index option, index warrant or
underlying instrument position offsetting a related instrument ceases
to exist and is not replaced within ten business days, the related
instrument position must be transferred to a futures account and
margined accordingly. Member organizations will be expected to monitor
cross-margin accounts for possible abuse of this provision.
(iii) In the event that fully paid for long options and/or index
warrants (securities) are the only positions contained within a cross-
margin account, such long positions must be transferred to a securities
account other than a portfolio margin account or cross margin account
within 10 business days, subject to the margin required, unless the
status of the account changes such that it is no longer composed solely
of fully paid for long options and/or index warrants.
(7) Initial and Maintenance Margin Required.--The amount of margin
required under this paragraph (g) for each portfolio shall be the
greater of:
(A) The amount for any of the 10 equidistant valuation points
representing the largest theoretical loss as calculated pursuant to
paragraph (g)(8) below, or
(B) $.375 for each listed index option and related instrument
multiplied by the contract's or instrument's multiplier, not to exceed
the market value in the case of long positions in listed options and
options on futures contracts.
(C) Account guarantees pursuant to paragraph (f)(4) of this Rule
are not permitted for purposes of meeting initial and maintenance
margin requirements.
(8) Method of Calculation.
(A) Long and short positions in listed options, underlying
instruments and related instruments are to be grouped by option class;
each option class group being a ``portfolio''. Each portfolio is
categorized as one of the portfolio types specified in sub-paragraph
(g)(2)(H) above.
(B) For each portfolio, theoretical gains and losses are calculated
for each position as specified in sub-paragraph (g)(2)(H) above. For
purposes of determining the theoretical gains and losses at each
valuation point, member organizations shall obtain and utilize the
theoretical value of a listed index option, underlying instrument or
related instrument rendered by a theoretical pricing model that, in
accordance with sub-paragraph (b)(1)(i)(B) of Rule 15c3-1a under the
Securities Exchange Act of 1934, qualifies for purposes of determining
the amount to be deducted in computing net capital under a portfolio
based methodology.
(C) Offsets. Within each portfolio, theoretical gains and losses
may be netted fully at each valuation point.
Offsets between portfolios within the High Capitalization, Broad-
based Index Option product group and the Non-High Capitalization,
Broad-based Index Option product group may then be applied as permitted
by Rule 15c3-1a under the Securities Exchange Act of 1934.
(D) After applying the Offsets above, the sum of the greatest loss
from each portfolio is computed to arrive at the total margin required
for the account (subject to the per contract minimum).
(9) Equity Deficiency.--If, at any time, equity declines below the
5 million dollar minimum required under sub-paragraph (4)(D) of this
paragraph (g) and is not restored to at least 5 million dollars within
three (3) business days (T+3) by a deposit of funds and/or securities;
member organizations are prohibited from accepting opening orders
starting on T+4, except that opening orders entered for the purpose of
hedging existing positions may be accepted if the result would be to
lower margin requirements. This prohibition shall remain in effect
until equity of 5 million dollars is established.
(10) Determination of Value for Margin Purposes.--For the purposes
of this paragraph (g), all listed index options and related instrument
positions shall be valued at current market prices. Account equity for
the purposes of this paragraph (g) shall be calculated separately for
each portfolio margin account by adding the current market value of all
long positions, subtracting the current market value of all short
positions, and adding the credit (or subtracting the debit) balance in
the account.
(11) Additional Margin.--If at any time, the equity in any
portfolio margin account is less than the margin required, the customer
may deposit additional margin or establish a hedge to meet the margin
requirement within one business day (T+1). In the event a customer
fails to hedge existing positions or deposit additional margin within
one business day, the member organization must liquidate positions in
an amount sufficient to, at a minimum, lower the total margin required
to an amount less than or equal to account equity. Paragraph (f)(7) of
this Rule--Practice of Meeting Regulation T Margin Calls by Liquidation
Prohibited shall not apply to portfolio margin accounts. However,
member organizations will be expected to monitor portfolio margin and
cross-margin accounts for possible abuse of this provision.
(12) Net Capital Treatment of Portfolio Margin and Cross Margin
Accounts.
(A) No member organization that requires margin in any customer
account pursuant to paragraph (g) of this Rule shall permit gross
customer portfolio margin requirements to exceed 1,000 percent of its
net capital for any period exceeding three business days. The member
organization shall, beginning on the fourth business day, cease opening
new portfolio margin accounts until compliance is achieved.
(B) If, at any time, a member organization's gross customer
portfolio margin requirements exceed 1,000 percent of its net capital,
the member organization shall immediately transmit telegraphic or
facsimile notice of such deficiency to the Securities and Exchange
Commission, 450 Fifth Street NW., Washington, DC 20549; to the district
or regional office of the Securities and Exchange Commission for the
district or region in which the member organization maintains its
principal place of business; and to its Designated Examining Authority.
(13) Day Trading Requirements.--The requirements of sub-paragraph
(f)(8)(B) of this Rule--Day-Trading shall not apply to portfolio margin
accounts including cross margin accounts.
(14) Cross Margin Accounts--Requirements to Liquidate
(A) A member is required immediately either to liquidate, or
transfer to another broker-dealer eligible to carry cross-margin
accounts, all customer cross-margin accounts that contain positions in
futures and/or options on futures if the member is:
(i) insolvent as defined in section 101 of title 11 of the United
States Code, or is unable to meet its obligations as they mature;
(ii) the subject of a proceeding pending in any court or before any
agency of the United States or any State in which a receiver, trustee,
or liquidator for such debtor has been appointed;
(iii) not in compliance with applicable requirements under the
Securities Exchange Act of 1934 or rules of the Securities and Exchange
Commission or any self-regulatory organization with respect to
financial responsibility or hypothecation of customer's securities; or
(iv) unable to make such computations as may be necessary to
establish compliance with such
[[Page 22957]]
financial responsibility or hypothecation rules.
(B) Nothing in this paragraph (14) shall be construed as limiting
or restricting in any way the exercise of any right of a registered
clearing agency to liquidate or cause the liquidation of positions in
accordance with its by-laws and rules.
* * * * *
Delivery of Options Disclosure Document and Prospectus
Rule 726 (a) through (c) unchanged.
Portfolio Margining and Cross-Margining Disclosure Statement and
Acknowledgement
(d) The special written disclosure statement describing the nature
and risks of portfolio margining and cross-margining, and
acknowledgement for customer signature, required by Rule 431(g)(5)(B)
shall be in a format prescribed by the Exchange or in a format
developed by the member organization, provided it contains
substantially similar information as in the prescribed Exchange format
and has received the prior written approval of the Exchange.
Sample Portfolio Margining and Cross-Margining Risk Disclosure
Statement to Satisfy Requirements of Exchange Rule 431(g)
OVERVIEW OF PORTFOLIO MARGINING
1. Portfolio margining is a margin methodology that sets margin
requirements for an account based on the greatest projected net loss of
all positions in a ``product class'' or ``product group'' as determined
by an options pricing model using multiple pricing scenarios. These
pricing scenarios are designed to measure the theoretical loss of the
positions given changes in both the underlying price and implied
volatility inputs to the model. Portfolio margining is currently
limited to product classes and groups of index products relating to
broad-based market indexes.
2. The goal of portfolio margining is to set levels of margin that
more precisely reflects actual net risk. The customer benefits from
portfolio margining in that margin requirements calculated on net risk
are generally lower than alternative ``position'' or ``strategy'' based
methodologies for determining margin requirements. Lower margin
requirements allow the customer more leverage in an account.
CUSTOMERS ELIGIBLE FOR PORTFOLIO MARGINING
3. To be eligible for portfolio margining, customers (other than
broker-dealers) must meet the basic standards for having an options
account that is approved for uncovered writing and must have and
maintain at all times account net equity of not less than $5 million,
aggregated across all accounts under identical ownership at the
clearing broker. The identical ownership requirement excludes accounts
held by the same customer in different capacities (e.g., as a trustee
and as an individual) and accounts where ownership is overlapping but
not identical (e.g., individual accounts and joint accounts).
POSITIONS ELIGIBLE FOR A PORTFOLIO MARGIN ACCOUNT
4. All positions in broad-based U.S. market index options and index
warrants listed on a national securities exchange, and exchange traded
funds and other products registered under the Investment Company Act of
1940 that are managed to track the same index that underlies permitted
index options, are eligible for a portfolio margin account.
SPECIAL RULES FOR PORTFOLIO MARGIN ACCOUNTS
5. A portfolio margin account may be either a separate account or a
sub-account of a customer's regular margin account. In the case of a
sub-account, equity in the regular account will be available to satisfy
any margin requirement in the portfolio margin sub-account without
transfer to the sub-account.
6. A portfolio margin account or sub-account will be subject to a
minimum margin requirement of $.375 multiplied by the index multiplier
for every option contract or index warrant carried long or short in the
account. No minimum margin is required in the case of eligible exchange
traded funds or other eligible fund products.
7. Margin calls in the portfolio margin account or sub-account,
regardless of whether due to new commitments or the effect of adverse
market moves on existing positions, must be met within one business
day. Any shortfall in aggregate net equity across accounts must be met
within three business days. Failure to meet a margin call when due will
result in immediate liquidation of positions to the extent necessary to
reduce the margin requirement. Failure to meet an equity call prior to
the end of the third business day will result in a prohibition on
entering any opening orders, with the exception of opening orders that
hedge existing positions, beginning on the fourth business day and
continuing until such time as the minimum equity requirement is
satisfied.
8. A position in an exchange traded index fund or other eligible
fund product may not be established in a portfolio margin account
unless there exists, or there is established on the same day, an
offsetting position in securities options, or other eligible
securities. Exchange traded index funds and/or other eligible funds
will be transferred out of the portfolio margin account and into a
regular securities account subject to initial Regulation T and NYSE
Rule 431 margin if the offsetting securities options, other eligible
securities and/or related instruments no longer remain in the account
for ten business days.
9. When a broker-dealer carries a regular cash account or margin
account for a customer, the broker-dealer is limited by rules of the
Securities and Exchange Commission and of The Options Clearing
Corporation (``OCC'') to the extent to which the broker-dealer may
permit OCC to have a lien against long option positions in those
accounts. In contrast, OCC will have a lien against all long option
positions that are carried by a broker-dealer in a portfolio margin
account, and this could, under certain circumstances, result in greater
losses to a customer having long option positions in such an account in
the event of the insolvency of the customer's broker. Accordingly, to
the extent that a customer does not borrow against long option
positions in a portfolio margin account or have margin requirements in
the account against which the long option can be credited, there is no
advantage to carrying the long options in a portfolio margin account
and the customer should consider carrying them in an account other than
a portfolio margin account.
SPECIAL RISKS OF PORTFOLIO MARGIN ACCOUNTS
10. Portfolio margining generally permits greater leverage in an
account, and greater leverage creates greater losses in the event of
adverse market movements.
11. Because the time limit for meeting margin calls is shorter than
in a regular margin account, there is increased risk that a customer's
portfolio margin account will be liquidated involuntarily, possibly
causing losses to the customer.
12. Because portfolio margin requirements are determined using
sophisticated mathematical calculations and theoretical values that
must be
[[Page 22958]]
calculated from market data, it may be more difficult for customers to
predict the size of future margin calls in a portfolio margin account.
This is particularly true in the case of customers who do not have
access to specialized software necessary to make such calculations or
who do not receive theoretical values calculated and distributed
periodically by The Options Clearing Corporation.
13. For the reasons noted above, a customer that carries long
options positions in a portfolio margin account could, under certain
circumstances, be less likely to recover the full value of those
positions in the event of the insolvency of the carrying broker.
14. Trading of securities index products in a portfolio margin
account is generally subject to all the risks of trading those same
products in a regular securities margin account. Customers should be
thoroughly familiar with the risk disclosure materials applicable to
those products, including the booklet entitled Characteristics and
Risks of Standardized Options.
15. Customers should consult with their tax advisers to be certain
that they are familiar with the tax treatment of transactions in
securities index products.
16. The descriptions in this disclosure statement relating to
eligibility requirements for portfolio margin accounts, and minimum
equity and margin requirements for those accounts, are minimums imposed
under Exchange rules. Time frames within which margin and equity calls
must be met are maximums imposed under Exchange rules. Broker-dealers
may impose their own more stringent requirements.
OVERVIEW OF CROSS-MARGINING
17. With cross-margining, index futures and options on index
futures are combined with offsetting positions in securities index
options and underlying instruments, for the purpose of computing a
margin requirement based on the net risk. This generally produces lower
margin requirements than if the related instruments \14\ and securities
products are viewed separately, thus providing more leverage in the
account.
---------------------------------------------------------------------------
\14\ For purposes of this Rule, the term ``related
instruments,'' within an option class or product means futures
contracts, and options on futures contracts covering the same
underlying instrument.
---------------------------------------------------------------------------
18. Cross-margining must be done in a portfolio margin account
type. A separate portfolio margin account must be established
exclusively for cross-margining.
19. When index futures and options on futures are combined with
offsetting positions in index options and underlying instruments in a
dedicated account, and a portfolio margining methodology is applied to
them, cross-margining is achieved.
CUSTOMERS ELIGIBLE FOR CROSS-MARGINING
20. The eligibility requirements for cross-margining are generally
the same as for portfolio margining, and any customer eligible for
portfolio margining is eligible for cross-margining.
21. Members of futures exchanges on which cross-margining eligible
index contracts are traded are also permitted to carry positions in
cross-margin accounts without regard to the minimum aggregate account
equity.
POSITIONS ELIGIBLE FOR CROSS-MARGINING
22. All securities products eligible for portfolio margining are
also eligible for cross-margining.
23. All broad-based U.S. listed market index futures and options on
index futures traded on a designated contract market subject to the
jurisdiction of the Commodity Futures Trading Commission (``CFTC'') are
eligible for cross-margining.
SPECIAL RULES FOR CROSS-MARGINING
24. Cross-margining must be conducted in a portfolio margin account
type. A separate portfolio margin account must be established
exclusively for cross-margining. A cross margin account is a securities
account, and must be maintained separate from all other securities
account.
25. Cross-margining is automatically accomplished with the
portfolio margining methodology. Cross-margin positions are subject to
the same minimum margin requirement for every contract, including
futures contracts.
26. Margin calls arising in cross-margin account, and any shortfall
in aggregate net equity across accounts, must be satisfied within the
same timeframe, and subject to the same consequences, as in a portfolio
margin account.
27. A position in a futures product may not be established in a
cross-margin account unless there exists, or there is established on
the same day, an offsetting position in securities options and/or other
eligible securities. Related instruments will be transferred out of the
cross margin account and into a futures account if, for more than ten
business days and for any reason, the offsetting securities options
and/or other eligible securities no longer remain in the account. If
the transfer of related instruments to a futures account causes the
futures account to be undermargined, a margin call will be issued or
positions will be liquidated to the extent necessary to eliminate the
deficit.
28. Customers participating in cross-margining will be required to
sign an agreement acknowledging that their positions and property in
the cross-margin account will be subject to the customer protection
provisions of Rule 15c3-3 under the Securities Exchange Act of 1934 and
the Securities Investor Protection Act, and will not be subject to the
provisions of the Commodity Exchange Act, including segregation of
funds.
29. According to the rules of the exchanges, a broker dealer is
required to immediately liquidate, or, if feasible, transfer to another
broker-dealer eligible to carry cross-margin accounts, all customer
cross-margin accounts that contain positions in futures and/or options
on futures in the event that the carrying broker-dealer becomes
insolvent.
30. In signing the agreement referred to in paragraph 28 above, a
customer also acknowledges that a cross-margin account that contains
positions in futures and /or options on futures will be immediately
liquidated, or, if feasible, transferred to another broker-dealer
eligible to carry cross-margin accounts, in the event that the carrying
broker-dealer becomes insolvent.
SPECIAL RISKS OF CROSS-MARGINING
31. Cross-margining must be conducted in a portfolio margin account
type. Generally, cross-margining and the portfolio margining
methodology both contribute to provide greater leverage than a regular
margin account, and greater leverage creates greater losses in the
event of adverse market movements.
32. Since cross-margining must be conducted in a portfolio margin
account type, the time required for meeting margin calls is shorter
than in a regular securities margin account and may be shorter than the
time ordinarily required by a futures commission merchant for meeting
margin calls in a futures account. Consequently, there is increased
risk that a customer's cross-margin positions will be liquidated
involuntarily, causing possible loss to the customer.
33. As noted above, cross margin accounts are securities accounts
and are subject to the customer protections set forth in Rule 15c3-3
under the Securities Exchange Act of 1934 and the Securities Investor
Protection Act. Cross-margin positions are not subject
[[Page 22959]]
to the customer protection rules under the segregation provisions of
the Commodity Exchange Act and the rules of the CFTC adopted pursuant
to the Commodity Exchange Act.
34. Trading of index options and futures contracts in a cross-
margin account is generally subject to all the risks of trading those
same products in a futures account or a regular securities margin
account. Customers should be thoroughly familiar with the risk
disclosure materials applicable to those products, including the
booklet entitled Characteristics and Risks of Standardized Options and
the risk disclosure document required by the CFTC to be delivered to
futures customers. Because this disclosure statement does not disclose
the risks and other significant aspects of trading in futures and
options, customers should review those materials carefully before
trading in a cross-margin account.
35. Customers should bear in mind that the discrepancies in the
cash flow characteristics of futures and certain options are still
present even when those products are carried together in a cross margin
account. Both futures and options contracts are generally marked to the
market at least once each business day, but the marks may take place
with different frequency and at different times within the day. When a
futures contract is marked to the market, the gain or loss is
immediately credited to or debited from, respectively, the customer's
account in cash. While an increase in the value of a long option
contract may increase the equity in the account, the gain is not
realized until the option is sold or exercised. Accordingly, a customer
may be required to deposit cash in the account in order to meet a
variation payment on a futures contract even though the customer is in
a hedged position and has experienced a corresponding (but yet
unrealized) gain on a long option. Alternatively, a customer who is in
a hedged position and would otherwise be entitled to receive a
variation payment on a futures contract may find that the cash is
required to be held in the account as margin collateral on an
offsetting option position.
36. Customers should consult with their tax advisers to be certain
that they are familiar with the tax treatment of transactions in index
products, including tax consequences of trading strategies involving
both futures and option contracts.
37. The descriptions in this disclosure statement relating to
eligibility requirements for cross-margining, and minimum equity and
margin requirements for cross margin accounts, are minimums imposed
under Exchange rules. Time frames within which margin and equity calls
must be met are maximums imposed under Exchange rules. The broker-
dealer carrying a customer's portfolio margin account, including any
cross-margin account, may impose its own more stringent requirements.
* * * * *
Sample Portfolio Margining and Cross-Margining Acknowledgements
ACKNOWLEDGEMENT FOR CUSTOMERS UTILIZING A PORTFOLIO MARGIN ACCOUNT
CROSS-MARGINING AND NON-CROSS-MARGINING--
Rule 15c3-3 under the Securities Exchange Act of 1934 requires that
a broker or dealer promptly obtain and maintain physical possession or
control of all fully-paid securities and excess margin securities of a
customer. Fully-paid securities are securities carried in a cash
account and margin equity securities carried in a margin or special
account (other than a cash account) that have been fully paid for.
Excess margin securities are a customer's margin securities having a
market value in excess of 140% of the total of the debit balances in
the customer's non-cash accounts. For the purposes of Rule 15c3-3,
securities held subject to a lien to secure obligations of the broker-
dealer are not within the broker-dealer's physical possession or
control. The Commission staff has taken the position that all long
option positions in a customer's portfolio-margining account (including
any cross-margin account) may be subject to such a lien by OCC and will
not be deemed fully-paid or excess margin securities under Rule 15c3-3.
The hypothecation rules under the Securities Exchange Act of 1934
(Rules 8c-1 and 15c2-1), prohibit broker-dealers from permitting the
hypothecation of customer securities in a manner that allows those
securities to be subject to any lien or liens in an amount that exceeds
the customer's aggregate indebtedness. However, all long option
positions in a portfolio-margining account (including any cross-
margining account) will be subject to OCC's lien, including any
positions that exceed the customer's aggregate indebtedness. The
Commission staff has taken a position that would to allow customers to
carry positions in portfolio-margining accounts, (including any cross-
margining account) even when those positions exceed the customer's
aggregate indebtedness. Accordingly, within a portfolio margin account
or cross-margin account, to the extent that you have long option
positions that do not operate to offset your aggregate indebtedness and
thereby reduce your margin requirement you receive no benefit from
carrying those positions in your portfolio-margin account or cross-
margin account and incur the additional risk of OCC's lien on your long
option position(s).
BY SIGNING BELOW THE CUSTOMER AFFIRMS THAT THE CUSTOMER HAS READ
AND UNDERSTOOD THE FOREGOING DISCLOSURE STATEMENT AND ACKNOWLEDGES AND
AGREES THAT LONG OPTION POSITIONS IN PORTFOLIO-MARGINING ACCOUNTS, AND
CROSS-MARGINING ACCOUNTS, WILL BE EXEMPTED FROM CERTAIN CUSTOMER
PROTECTION RULES OF THE SECURITIES AND EXCHANGE COMMISSION AS DESCRIBED
ABOVE AND WILL BE SUBJECT TO A LIEN BY THE OPTIONS CLEARING CORPORATION
WITHOUT REGARD TO SUCH RULES.
CUSTOMER NAME:---------------------------------------------------------
BY:--------------------------------------------------------------------
(Signature/title)
DATE:------------------------------------------------------------------
ACKNOWLEDGEMENT FOR CUSTOMERS ENGAGED IN CROSS-MARGINING
As disclosed above, futures contracts and other property carried in
customer accounts with Futures Commission Merchants (``FCM'') are
normally subject to special protection afforded under the customer
segregation provisions of the Commodity Exchange Act (``CEA'') and the
rules of the Commodity Futures Trading Commission adopted pursuant to
the CEA. These rules require that customer funds be segregated from the
accounts of financial intermediaries and be accounted for separately.
However, they do not provide for, and regular futures accounts do not
enjoy the benefit of, insurance protecting customer accounts against
loss in the event of the insolvency of the intermediary carrying the
accounts.
As discussed above, cross-margining must be conducted in a
portfolio margin account, dedicated exclusively to cross margining and
cross margin accounts are not treated as a futures account with an FCM.
Instead, cross margin accounts are treated as securities accounts
carried with broker-dealers. As such, cross margin accounts are covered
by Rule 15c3-3 under the Securities Exchange Act of 1934, which
protects customer accounts. Rule 15c3-3, among other things, requires a
broker-dealer to
[[Page 22960]]
maintain physical possession or control of all fully-paid and excess
margin securities and maintain a special reserve account for the
benefit of their customers. However, with regard to cross margin
accounts, there is an exception to the possession or control
requirement of Rule 15c3-3 that permits The Options Clearing
Corporation to have a lien on long positions. This exception is
outlined in a separate acknowledgement form that must be signed prior
to or concurrent with this form. Additionally, the Securities Investor
Protection Corporation (``SIPC'') insures customer accounts against the
financial insolvency of a broker-dealer in the amount of up to $500,000
to protect against the loss of registered securities and cash
maintained in the account for purchasing securities or as proceeds from
selling securities (although the limit on cash claims is $100,000).
According to the rules of the exchanges, a broker-dealer is required to
immediately liquidate, or, if feasible, transfer to another broker-
dealer eligible to carry cross-margin accounts, all customer cross
margin accounts that contain positions in futures and/or options on
futures in the event that the carrying broker-dealer becomes insolvent.
BY SIGNING BELOW THE CUSTOMER AFFIRMS THAT THE CUSTOMER HAS READ
AND UNDERSTOOD THE FOREGOING DISCLOSURE STATEMENT AND ACKNOWLEDGES AND
AGREES THAT: (1) POSITIONS AND PROPERTY IN CROSS-MARGINING ACCOUNTS,
WILL NOT BE SUBJECT TO THE CUSTOMER PROTECTION RULES UNDER THE CUSTOMER
SEGREGATION PROVISIONS OF THE COMMODITY EXCHANGE ACT AND THE RULES OF
THE COMMODITY FUTURES TRADING COMMISSION ADOPTED PURSUANT TO THE CEA
AND (2) CROSS-MARGINING ACCOUNTS THAT CONTAIN POSITIONS IN FUTURES AND/
OR OPTIONS ON FUTURES WILL BE IMMEDIATELY LIQUIDATED, OR IF FEASIBLE,
TRANSFERRED TO ANOTHER BROKER-DEALER ELIBIBLE TO CARRY CROSS-MARGIN
ACCOUNTS IN THE EVENT THAT THE CARRYING BROKER-DEALER BECOMES
INSOLVENT.
CUSTOMER NAME:---------------------------------------------------------
BY:--------------------------------------------------------------------
(Signature/title)
DATE:------------------------------------------------------------------
* * * * *
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
a. Background
NYSE Rule 431 generally prescribes minimum maintenance margin
requirements for customer accounts held at members and member
organizations. In April 1996, the Exchange established the Committee to
assess the adequacy of NYSE Rule 431 on an ongoing basis, review margin
requirements, and make recommendations for change. A number of proposed
amendments resulting from the Committee's recommendations have been
approved by the Exchange's Board of Directors since the Committee was
established. Similarly, the proposed amendments discussed below have
been recommended by the Committee and have been adopted by the Exchange
in this proposal, as amended.\15\ The Exchange represents that the
proposed portfolio margin and cross-margin rules have been developed in
conjunction with the CBOE, The Options Clearing Corporation, the
American Stock Exchange LLC, the Board of Trade of the City of Chicago,
Inc., the Chicago Mercantile Exchange Inc., and the National
Association of Securities Dealers, Inc.
---------------------------------------------------------------------------
\15\ Many aspects of the proposed rule change are similar to the
CBOE's proposed rule change to permit customer portfolio margining
and cross-margining. See supra notes 5 and 9.
---------------------------------------------------------------------------
b. Portfolio Margin
The Exchange proposes to amend NYSE Rule 431 to expand the scope of
its margin rule by providing a portfolio margin methodology for listed,
broad-based market index options, index warrants and related exchange-
traded funds. The Exchange believes that the proposed amendments would
allow clearing members and member organizations to extend a portfolio
margin methodology to eligible customers as an alternative to the
current strategy-based margin requirements. The Exchange further
believes that the proposed rule also would allow broad-based market
index futures and options on such futures to be included in a portfolio
margin account, thus providing a cross-margin capability. The Exchange
proposes to introduce the amendments as a two-year pilot program that
would be available on a voluntary basis to member organizations.
The NYSE is proposing this partial amendment, constituting
Amendment No. 3, for the purpose of removing the proposed language
``any affiliate of a self-clearing organization,'' in proposed new
Section (g)(4)(B) under Rule 431, as requested by Commission staff. As
previously proposed,\16\ Section (g)(4)(B) would have allowed any
affiliate of a self-clearing member organization to be an ``Eligible
Participant'' permitted to utilize portfolio margining as an
alternative to ``strategy-based'' margining, regardless of the member
organization's equity. By deleting Section (g)(4)(B) from the proposed
amendments to Rule 431, affiliates of self-clearing member
organizations who wish to utilize portfolio margining as an alternative
to ``strategy-based'' margining will be subject to an equity
requirement of at least five million dollars.
---------------------------------------------------------------------------
\16\ See supra note 9.
---------------------------------------------------------------------------
The elimination of Section (g)(4)(B) necessitates the renumbering
of proposed Sections (g)(4)(C) and (g)(4)(D) of Rule 431 to Sections
(g)(4)(B) and (g)(4)(C), respectively. In relation to the change noted
above, the NYSE also proposes in Amendment No. 3 to revise paragraph
number 3 of the Sample Portfolio Margining and Cross-Margining Risk
Disclosure Statement to Satisfy Requirements of Exchange Rule 431(g) to
remove the words ``and certain non-broker-dealer affiliates of the
carrying broker-dealer'' in the first sentence. This change to the
notice would reflect that non-broker-dealer affiliates would be subject
to the $5 million equity requirement. With the exception of these
changes, the rest of the proposed rule changes, as contained in the
Original Proposal, as amended by Amendment Nos. 1 and 2, remain
unchanged.
Portfolio margining is a margin methodology that sets margin
requirements for an account based on the greatest projected net loss of
all positions in a product class or group as determined by the
Commission-
[[Page 22961]]
approved options pricing model using multiple pricing scenarios. These
scenarios are designed to measure the theoretical loss of the positions
given changes in both the underlying price and implied volatility
inputs to the model. Accordingly, the margin required is based on the
greatest loss that would be incurred in a portfolio if the value of its
components move up or down by a predetermined amount.
The Exchange represents that the purpose and benefit of portfolio
margining is to efficiently set levels of margin that more precisely
reflect actual net risk of all positions in the account. A customer
benefits from portfolio margining in that margin requirements
calculated on net position risk are generally lower than strategy-based
margin methodologies currently in place. In permitting margin
computation based on actual net risk, members and member organizations
will no longer be required to compute a margin requirement for each
individual position or strategy in a customer's account.
However, as a pre-condition to permitting portfolio margining, the
member or member organization would be required to establish procedures
and guidelines to monitor credit risk to the member or member
organization's capital, including intra-day credit risk, and stress
testing of portfolio margin accounts. Further, members and member
organizations would have to establish procedures for regular review and
testing of these required risk analysis procedures.
c. Cross-Margining Capability
The proposed rule change requires a clearing member or member
organization to establish a separate portfolio margin account
(securities margin account) exclusively for cross-margining.\17\ In
this regard, related index futures and options on such futures would be
carried in a separate cross-margin account, thus affording a cross-
margin capability. In a portfolio margin account that is used
exclusively for cross-margining, separate portfolios may be established
containing index options, index warrants and exchange-traded funds
structured to replicate the composition of the index underlying a
particular portfolio, as well as related index futures and options on
such futures.
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\17\ The Original Proposal and Amendment No. 1 permitted cross-
margin positions to either be combined in the same account with
other portfolio margin positions, or carried in a separate cross-
margin account.
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To determine theoretical gains and losses, and resulting margin
requirements, the same portfolio margin computation procedure will be
applied to a portfolio margin account that is identified as a cross-
margin account.
The liquidation/transfer requirement set forth in the proposed rule
necessitates that cross-margin positions be carried in a separate
account, whereas the Original Proposal and Amendment No. 1 permitted
cross-margin positions to either be combined in the same account with
other portfolio margin positions, or carried in a separate cross-margin
account.
Amendment No. 2 to the proposed rule also incorporates a provision,
as requested by Commission staff, that requires liquidation or transfer
of cross-margin accounts in the event that a carrying broker-dealer
becomes insolvent. This requirement would provide for Securities
Investor Protection Corporation (``SIPC'') coverage of futures and
options on futures in a securities account because such instruments
would be viewed as converted to cash in the event of a firm insolvency.
d. Disclosure Document and Customer Attestation
Exchange Rule 726 prescribes requirements for the delivery of
options disclosure documents concerning the opening of customer
accounts. As proposed by the Exchange, members and member organizations
would be required to provide every portfolio margin customer with a
written risk disclosure statement at or prior to the initial opening of
a portfolio margin account. The disclosure statement is divided into
two sections, one dealing with portfolio margining, and the other with
cross-margining.
The statement would disclose the risk and operation of portfolio
margin accounts, including cross-margining, and the differences between
portfolio margin and strategy-based margin requirements. The disclosure
statement would also address who is eligible to open a portfolio margin
account, the instruments that are allowed, and when deposits to meet
margin and minimum equity are required.
Included within the portfolio margin section of the disclosure
statement would be a list of certain of the risks unique to portfolio
margin accounts, such as: Increased leverage; shorter time for meeting
margin; involuntary liquidation if margin not received; inability to
calculate future margin requirements because of the data and
calculations required; and that long positions are subject to a lien.
The risks and operation of a cross-margin feature are delineated in the
cross-margin section of the disclosure statement, and a list of certain
of the risks associated with cross-margining will be included as well.
In addition, at or prior to the time a portfolio margin account is
initially opened, members and member organizations would be required to
obtain a signed acknowledgement regarding certain implications of
portfolio margining (e.g., treatment under SEC Rules 8c-1, 15c2-1 and
15c3-3 under the Act) from the customer. Further, prior to providing
cross-margining, members and member organizations would be required to
obtain a second signed customer acknowledgement relative to the
segregation treatment for futures contracts and SIPC coverage.
Amendment No. 2 reflects changes to the risk disclosure statement
and acknowledgement forms to reflect proposed amendments to the rule
language concerning separation of cross-margining from all other
portfolio margining. The acknowledgement form in Amendment No. 2 will
require that by signing the cross-margin agreement, the signer
acknowledges that all positions carried in a cross-margin account will
be immediately liquidated or transferred to another broker-dealer
eligible to carry cross-margin accounts in the event that the carrying
broker-dealer becomes insolvent.
2. Statutory Basis
The Exchange believes the proposed rule change, as amended, is
consistent with Section 6(b) of the Act \18\ in general, and furthers
the objectives of Section 6(b)(5) of the Act \19\ in particular,
because it is designed to prevent fraudulent and manipulative acts and
practices, to promote just and equitable principles of trade, 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. In addition, the Exchange believes that Section
6(b)(5) of the Act \20\ requires that the rules of an exchange foster
cooperation and coordination with persons engaged in regulating
transactions in securities.
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\18\ 15 U.S.C. 78f(b).
\19\ 15 U.S.C. 78f(b)(5).
\20\ 15 U.S.C. 78f(b)(5).
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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 the furtherance of the purposes of the Act.
[[Page 22962]]
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
No written comments were either solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission will:
(A) By order approve such proposed rule change, as amended, or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change, as amended, is consistent with the Act. 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 e-mail to rule-comments@sec.gov. Please include
File Number SR-NYSE-2002-19 on the subject line.
Paper Comments
Send paper comments in triplicate to Jonathan G. Katz,
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW.,
Washington, DC 20549-0609.
All submissions should refer to File Number SR-NYSE-2002-19. 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 (
