Self-Regulatory Organizations; CBOE Futures Exchange, LLC; Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Change Relating to Customer Margin Requirements for Security Futures, 53816-53825 [E5-4949]
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Federal Register / Vol. 70, No. 175 / Monday, September 12, 2005 / Notices
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–52381; File No. SR–CFE–
2005–02]
Self-Regulatory Organizations; CBOE
Futures Exchange, LLC; Notice of
Filing and Order Granting Accelerated
Approval of Proposed Rule Change
Relating to Customer Margin
Requirements for Security Futures
September 2, 2005.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on July 26,
2005, the CBOE Futures Exchange, LLC
(‘‘CFE’’ or ‘‘Exchange’’) filed with the
Securities and Exchange Commission
(‘‘SEC’’ or ‘‘Commission’’) the proposed
rule change as described in Items I, II,
and III below, which Items have been
prepared by CFE. The Commission is
publishing this notice to solicit
comments on the proposed rule change
from interested persons and to grant
accelerated approval to the proposed
rule change.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
CFE is proposing margin requirements
for security futures traded on CFE and
other related new rules. Specifically, the
proposed rule change sets the minimum
initial and maintenance customer
margin rates for such security futures
and provides for lower margin levels for
permitted strategy-based offset
positions. The proposed rules exclude
certain financial relations to which the
SEC’s margin rules do not apply. The
proposed rule change also establishes
standards under which CFE Trading
Privilege Holders (‘‘TPHs’’) may qualify
as security futures dealers and therefore
be excluded from CFE’s margin rules.
Lastly, the proposed rule change sets
forth a security futures market maker
program. The text of the proposed rule
change is provided below. New text is
italicized.
*
*
*
*
*
CBOE Futures Exchange, LLC
517. Customer Margin Requirements
for Contracts that are Security Futures
(a) Scope of Rule. This Rule 517 shall
apply to positions resulting from
transactions in Security Futures, traded
on the Exchange or subject to the Rules
of the Exchange to the extent that such
positions are held by Clearing Members
or, if applicable, Trading Privilege
1 15
2 17
U.S.C. 78s(b)(1).
CFR 240.19b–4.
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Holders on behalf of Customers in
futures accounts (as such term is
defined in Commission Regulation
§ 1.3(vv) and Exchange Act Regulation
15c3–3(a)), with paragraph (n) of this
Rule 517 also applying to such positions
held in securities accounts (as such term
is defined in Commission Regulation
1.3(ww) and Exchange Act Regulation
15c3–3(a)). As used in this Rule 517, the
term ‘‘Customer’’ does not include (i)
any exempted person (as such term is
defined in Commission Regulation
§ 41.43(a)(9) and Exchange Act
Regulation 401(a)(9)) and (ii) any
Market Maker (as such term is defined
in paragraph (n) below). Nothing in this
Rule 517 shall alter the obligation of
each Clearing Member and, if
applicable, Trading Privilege Holder to
comply with Applicable Law relating to
customer margin for transactions in
Security Futures, including without
limitation Commission Regulations
41.42 through 41.49 or Rules 400
through 406 under the Exchange Act, as
applicable (including in each case any
successor regulations or rules).
(b) Margin System. The Standard
Portfolio Analysis of Risk (SPAN* is
the margin system adopted by the
Exchange. SPAN generated margin
requirements shall constitute Exchange
margin requirements. All references to
margin in the Rules of the Exchange
shall be to margin computed on the
basis of SPAN. Margin systems other
than SPAN may be used to meet
Exchange margin requirements if the
relevant Clearing Member or, if
applicable, Trading Privilege Holder can
demonstrate that its margin system will
result in margin requirements that are in
all cases equal to or greater than the
corresponding requirements determined
on the basis of SPAN.
(c) Margin Rate. The Exchange will set
and publish the initial and maintenance
margin rates to be used in determining
Exchange margin requirements;
provided that in no case shall the
required margin for any long or short
position held by a Clearing Member or,
if applicable, Trading Privilege Holder
on behalf of a Customer be less than the
rate from time to time determined by the
Commission and the Securities and
Exchange Commission for purposes of
Commission Regulation 41.45(b)(1) and
Rule 403(b)(1) under the Exchange Act
unless a lower margin level is available
for such position pursuant to paragraph
(m) below.
*‘‘SPAN’’ is a registered trademark of Chicago
Mercantile Exchange Inc., used herein under
license. Chicago Mercantile Exchange Inc. assumes
no liability in connection with the use of SPAN by
any person or entity.
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(d) Acceptable Margin Deposits.
(i) Clearing Members and, if
applicable, Trading Privilege Holders
may accept from their Customers as
margin deposits of cash, margin
securities (subject to the limitations set
forth in the following sentence),
exempted securities, any other assets
permitted under Regulation T of the
Board of Governors of the Federal
Reserve System (as in effect from time
to time) to satisfy a margin deficiency in
a securities margin account, and any
combination of the foregoing, each as
valued in accordance with Commission
Regulation 41.46(c) and (e) or Rule
404(c) and (e) under the Exchange Act,
as applicable. Shares of a money market
mutual fund that meet the requirements
of Commission Regulations 1.25 and
41.46(b)(2) and Rule 404(b)(2) under the
Exchange Act, as applicable, may be
accepted as a margin deposit from a
Customer for purposes of this Rule 517.
(ii) A Clearing Member or, if
applicable, Trading Privilege Holder
shall not accept as margin from any
Customer securities that have been
issued by such Customer or an Affiliate
of such Customer unless such Clearing
Member or Trading Privilege Holder
files a petition with and receives
permission from the Exchange for such
purpose.
(iii) All assets deposited by a
Customer to meet margin requirements
must be and remain unencumbered by
third party claims against the depositing
Customer.
(iv) Except to the extent prescribed
otherwise by the Exchange, cash margin
deposits shall be valued at market value
and all other margin deposits shall be
valued at an amount not to exceed that
set forth in Commission Regulation
41.46(c) and (e) or Rule 404(c) and (e)
under the Exchange Act, as applicable
(including in each case any successor
regulations or rules).
(e) Acceptance of Orders. Clearing
Members and, if applicable, Trading
Privilege Holders may accept Orders for
a particular Customer account only if
sufficient margin is on deposit in such
account or is forthcoming within a
reasonable period of time (which shall
be no more than five Business Days,
although the relevant Clearing Member
or, if applicable, Trading Privilege
Holder may deem one hour to be a
reasonable period of time). For a
Customer account that has been subject
to calls for margin for an unreasonable
period of time, Clearing Members and,
if applicable, Trading Privilege Holders
may only accept Orders that, when
executed, will reduce the margin
requirements resulting from the existing
positions in such account. Clearing
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Federal Register / Vol. 70, No. 175 / Monday, September 12, 2005 / Notices
Members and, if applicable, Trading
Privilege Holders may not accept Orders
for a Customer account that would
liquidate to a deficit or that has a debit
balance.
(f) Margin Calls. Clearing Members
and, if applicable, Trading Privilege
Holders must call for margin from a
particular Customer:
(i) when the margin equity on deposit
in such Customer’s account falls below
the applicable maintenance margin
requirement; or
(ii) subsequently, when the margin
equity on deposit in such Customer’s
account, together with any outstanding
margin calls, is less than the applicable
maintenance margin requirement.
Any such call must be made within
one Business Day after the occurrence of
the event giving rise to such call.
Clearing Members and, if applicable,
Trading Privilege Holders may call for
additional margin at their discretion.
Clearing Members and, if applicable,
Trading Privilege Holders shall reduce
any call for margin only to the extent
that margin deposits permitted under
paragraph (d) above are received in the
relevant account. Clearing Members
and, if applicable, Trading Privilege
Holders may delete any call for margin
only if (i) margin deposits permitted
under paragraph (d) above equal to or
in excess of the deposits called are
received in the relevant account or (ii)
inter-day favorable market movements
or the liquidation of positions result in
the margin on deposit in the relevant
account being equal to or greater than
the applicable initial margin
requirement. In the event of any such
reduction or deletion, the oldest
outstanding margin call shall be
reduced or deleted first.
Clearing Members and, if applicable,
Trading Privilege Holders, shall
maintain written records of any and all
margin calls issued, reduced or deleted
by them.
(g) Disbursements of Excess Margin.
Clearing Members and, if applicable,
Trading Privilege Holders may release to
Customers margin on deposit in any
account only to the extent that such
margin is in excess of the applicable
initial margin requirement under this
Rule 517 and any other applicable
margin requirement.
(h) Loans to Customers. Clearing
Members and, if applicable, Trading
Privilege Holders may not extend loans
to Customers for margin purposes
unless such loans are secured within the
meaning of Commission Regulation
1.17(c)(3). The proceeds of any such
loan must be treated in accordance with
Commission Regulation 1.30.
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(i) Aggregation of Accounts and
Positions. For purposes of determining
margin requirements under this Rule
517, Clearing Members and, if
applicable, Trading Privilege Holders
shall aggregate accounts under identical
ownership if such accounts fall within
the same classifications of customer
segregated, customer secured, special
reserve account for the exclusive benefit
of customers and non-segregated for
margin purposes. Clearing Members
and, if applicable, Trading Privilege
Holders may compute margin
requirements for identically owned
concurrent long and short positions on
a net basis.
(j) Omnibus Accounts. Clearing
Members and, if applicable, Trading
Privilege Holders shall collect margin on
a gross basis for positions held in
domestic and foreign omnibus accounts.
For omnibus accounts, initial margin
requirements shall equal the
corresponding maintenance margin
requirements. Clearing Members and, if
applicable, Trading Privilege Holders
shall obtain and maintain written
instructions from domestic and foreign
omnibus accounts for positions that are
eligible for offsets pursuant to
paragraph (m) below.
(k) Liquidation of Positions. If a
Customer fails to comply with a margin
call required by Commission
Regulations 41.42 through 41.49 or
Rules 400 through 406 under the
Exchange Act, as applicable, within a
reasonable period of time (which shall
be no more than five Business Days,
although the relevant Clearing Member
or, if applicable, Trading Privilege
Holder may deem one hour to be a
reasonable period of time), the relevant
Clearing Member or, if applicable,
Trading Privilege Holder may liquidate
positions in such Customer’s account to
ensure compliance with the applicable
margin requirements.
(l) Failure To Maintain Required
Margin. If a Clearing Member or, if
applicable, Trading Privilege Holder
fails to maintain sufficient margin for
any Customer account in accordance
with this Rule 517, the Exchange may
direct such Clearing Member or Trading
Privilege Holder to immediately
liquidate all or any part of the positions
in such account to eliminate the
deficiency.
(m) Offsetting Positions. For purposes
of Commission Regulation § 41.45(b)(2)
and Rule 403(b)(2) under the Exchange
Act, the initial and maintenance margin
requirements for offsetting positions
involving Security Futures, on the one
hand, and related positions, on the
other hand, are set at the levels
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53817
specified in Schedule A to this Chapter
5.
(n) Exclusion for Market Makers.
(i) A Person shall be a ‘‘Market
Maker’’ for purposes of this Rule 517,
and shall be excluded from the
requirements set forth in Commission
Regulations 41.42 through 41.49 and
Rules 400 through 406 under the
Exchange Act, as applicable, in
accordance with Commission
Regulation 41.42(c)(2)(v) and Rule
400(c)(2)(v) under the Exchange Act
with respect to all trading in Security
Futures for its own account, if such
Person is a Trading Privilege Holder or
Authorized Trader that is registered
with the Exchange as a dealer (as such
term is defined in Section 3(a)(5) of the
Exchange Act) in Security Futures.
(ii) Each Market Maker shall:
(A) be registered as a floor trader or
a floor broker with the Commission
under Section 4f(a)(1) of the CEA or as
a dealer with the Securities and
Exchange Commission (or any successor
agency or authority) under Section 15(b)
of the Exchange Act;
(B) maintain records sufficient to
prove compliance with the requirements
set forth in this paragraph (n) and
Commission Regulation 41.42(c)(2)(v) or
Rule 400(c)(2)(v) under the Exchange
Act, as applicable, including without
limitation trading account statements
and other financial records sufficient to
detail activity; and
(C) hold itself out as being willing to
buy and sell Security Futures for its own
account on a regular or continuous
basis.
A Market Maker satisfies condition (C)
above if:
(1) such Market Maker: (x) provides
continuous two-sided quotations
throughout the trading day for all
delivery months of Security Futures
representing a meaningful proportion of
the total trading volume on the
Exchange from Security Futures in
which that Market Maker is designated
as a Market Maker, subject to relaxation
during unusual market conditions as
determined by the Exchange (such as a
fast market in either a Security Future
or a security underlying such Security
Future) at which times such Market
Maker must use its best efforts to quote
continuously and competitively; and (y)
when providing quotations, quotes with
a maximum bid/ask spread of no more
than the greater of $0.20 or 150% of the
bid/ask spread in the primary market
for the security underlying each Security
Future; or
(2) such Market Maker: (x) responds
to at least 75% of the requests for
quotation for all delivery months of
Security Futures representing a
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Federal Register / Vol. 70, No. 175 / Monday, September 12, 2005 / Notices
meaningful proportion of the total
trading volume on the Exchange from
Security Futures in which that Market
Maker is designated as a Market Maker,
subject to relaxation during unusual
market conditions as determined by the
Exchange (such as a fast market in
either a Security Future or a security
underlying such Security Future) at
which times such Market Maker must
use its best efforts to quote
competitively; and (y) when responding
to requests for quotation, quotes within
five seconds with a maximum bid/ask
spread of no more than the greater of
$0.20 or 150% of the bid/ask spread in
the primary market for the security
underlying each Security Future.
For purposes of clauses (1) and (2)
above, beginning on the 181st calendar
day after the commencement of trading
of Security Futures, a ‘‘meaningful
proportion of the total trading volume
on the Exchange from Security Futures
in which that Market Maker is
designated as a Market Maker’’ shall
mean a minimum of 20% of such
trading volume.
(iii) Any Market Maker that fails to
comply with the Rules of the Exchange,
Commission Regulations 41.42 through
41.49 or Rules 400 through 406 under
the Exchange Act, as applicable, shall
be subject to disciplinary action in
accordance with Chapter 7. Appropriate
sanctions in the case of any such failure
shall include, without limitation, a
revocation of such Market Maker’s
registration as a dealer in Security
Futures pursuant to clause (i) above.
*
*
*
*
*
Schedule A to CFE Chapter 5
Margin Levels for Offsetting Positions
Security underlying the
security future
Description of offset
Initial margin requirement
Maintenance margin
requirement
The lower of: (1) 10% of the
aggregate exercise price 3
of the put plus the aggregate put out-of-the-money 4
amount, if any; or (2) 20%
of the current market value
of the long security future.
20% of the current market
value of the short security
future, plus the aggregate
put in-the-money amount, if
any.5
1. Long security future (or basket of security
futures representing each component of a
narrow-based securities index 1) and long
put option 2 on the same underlying security
(or index).
Individual stock or narrowbased security index.
20% of the current market
value of the long security
future, plus pay for the long
put in full.
2. Short security future (or basket of security
futures representing each component of a
narrow-based securities index) and short put
option on the same underlying security (or
index).
Individual stock or narrowbased security index.
3. Long security future and short position in
the same security (or securities basket) underlying the security future.
Individual stock or narrowbased security index.
20% of the current market
value of the short security
future, plus the aggregate
put in-the-money amount, if
any. Proceeds from the put
sale may be applied.
The initial margin required
under Regulation T for the
short stock or stocks.
4. Long security future (or basket of security
futures representing each component of a
narrow-based securities index) and short
call option on the same underlying security
(or index).
Individual stock or narrowbased security index.
5. Long a basket of narrow-based security fu- Narrow-based security index ..
tures that together tracks a broad-based
index and short a broad-based security
index call option contract on the same index.
6. Short a basket of narrow-based security futures that together tracks a broad-based security index and short a broad-based security index put option contract on the same
index.
Narrow-based security index ..
7. Long a basket of narrow-based security futures that together tracks a broad-based security index and long a broad-based security
index put option contract on the same index.
Narrow-based security index ..
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20% of the current market
value of the long security
future, plus the aggregate
call in-the-money amount, if
any. Proceeds from the call
sale may be applied.
20% of the current market
value of the long basket of
narrow-based security futures, plus the aggregate
call in-the-money amount, if
any. Proceeds from the call
sale may be applied.
20% of the current market
value of the short basket of
narrow-based security futures, plus the aggregate
put in-the-money amount, if
any. Proceeds from the put
sale may be applied.
20% of the current market
value of the long basket of
narrow-based security futures, plus pay for the long
put in full.
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5% of the current market
value as defined in Regulation T of the stock or stocks
underlying the security future.
20% of the current market
value of the long security
future, plus the aggregate
call in-the-money amount, if
any.
20% of the current market
value of the long basket of
narrow-based security futures, plus the aggregate
call in-the-money amount, if
any.
20% of the current market
value of the short basket of
narrow-based security futures, plus the aggregate
put in-the-money amount, if
any.
The lower of: (1) 10% of the
aggregate exercise price of
the put, plus the aggregate
put out-of-the-money
amount, if any; or (2) 20%
of the current market value
of the long basket of security futures.
Federal Register / Vol. 70, No. 175 / Monday, September 12, 2005 / Notices
53819
Margin Levels for Offsetting Positions—Continued
Security underlying the
security future
Initial margin requirement
Maintenance margin
requirement
8. Short a basket of narrow-based security fu- Narrow-based security index ..
tures that together tracks a broad-based security index and long a broad-based security
index call option contract on the same index.
20% of the current market
value of the short basket of
narrow-based security futures, plus pay for the long
call in full.
9. Long security future and short security future on the same underlying security (or
index).
Individual stock or narrowbased security index.
10. Long security future, long put option and
short call option. The long security future,
long put and short call must be on the same
underlying security and the put and call
must have the same exercise price. (Conversion).
Individual stock or narrowbased security index.
11. Long security future, long put option and
short call option. The long security future,
long put and short call must be on the same
underlying security and the put exercise
price must be below the call exercise price
(Collar).
Individual stock or narrowbased security index.
The greater of: 5% of the current market value of the
long security future; or (2)
5% of the current market
value of the short security
future.
20% of the current market
value of the long security
future, plus the aggregate
call in-the-money amount, if
any, plus pay for the put in
full. Proceeds from the call
sale may be applied.
20% of the current market
value of the long security
future, plus the aggregate
call in-the-money amount, if
any, plus pay for the put in
full. Proceeds from call sale
may be applied.
The lower of: (1) 10% of the
aggregate exercise price of
the call, plus the aggregate
call out-of-the-money
amount, if any; or (2) 20%
of the current market value
of the short basket of security futures.
The greater of: 5% of the current market value of the
long security future; or (2)
5% of the current market
value of the short security
future.
10% of the aggregate exercise price, plus the aggregate call in-the-money
amount, if any.
12. Short security future and long position in
the same security (or securities basket) underlying the security future.
Individual stock or narrowbased security index.
The initial margin required
under Regulation T for the
long stock or stocks.
13. Short security future and long position in a
security immediately convertible into the
same security underlying the security future,
without restriction, including the payment of
money.
14. Short security future (or basket of security
futures representing each component of a
narrow-based securities index) and long call
option or warrant on the same underlying
security (or index).
Individual stock or narrowbased security index.
The initial margin required
under Regulation T for the
long security.
Individual stock or narrowbased security index.
20% of the current market
value of the short security
future, plus pay for the call
in full.
15. Short security future, Short put option and
long call option. The short security future,
short put and long call must be on the same
underlying security and the put and call
must have the same exercise price. (Reverse Conversion).
Individual stock or narrowbased security index.
16. Long (short) a basket of security futures,
each based on a narrow-based security
index that together tracks the broad-based
index and short (long) a broad-based index
future.
17. Long (short) a basket of security futures
that together tracks a narrow-based index
and short (long) a narrow-based index future.
Narrow-based security index ..
20% of the current market
value of the short security
future, plus the aggregate
put in-the-money amount, if
any, plus pay for the call in
full. Proceeds from put sale
may be applied.
5% of the current market
value for the long (short)
basket of security futures.
Description of offset
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Individual stock and narrowbased security index.
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The greater of: (1) 5% of the
current market value of the
long security future(s); or
(2) 5% of the current market value of the short security future(s).
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12SEN1
The lower of: (1) 10% of the
aggregate exercise price of
the put plus the aggregate
put out-of-the money
amount, if any; or (2) 20%
of the aggregate exercise
price of the call, plus the
aggregate call in-the-money
amount, if any.
5% of the current market
value, as defined in Regulation T, of the long stock or
stocks.
10% of the current market
value, as defined in Regulation T, of the long security.
The lower of: (1) 10% of the
aggregate exercise price of
the call, plus the aggregate
call out-of-the-money
amount, if any; or (2) 20%
of the current market value
of the short security future.
10% of the aggregate exercise price, plus the aggregate put in-the-money
amount, if any.
5% of the current market
value of the long (short)
basket of security futures.
The greater of: (1) 5% of the
current market value of the
long security future(s); or
(2) 5% of the current market value of the short security future(s).
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Margin Levels for Offsetting Positions—Continued
Security underlying the
security future
Description of offset
18. Long (short) a security future and short
(long) an identical security future traded on
a different market.6.
Individual stock and narrowbased security index.
Initial margin requirement
Maintenance margin
requirement
The greater of: (1) 3% of the
current market value of the
long security future(s); or
(2) 3% of the current market value of the short security future(s).
The greater of: (1) 3% of the
current market value of the
long security future(s); or
(2) 3% of the current market value of the short security future(s).
1 Baskets
of securities or security futures contracts must replicate the securities that comprise the index, and in the same proportion.
for the purposes of these rules, unless otherwise specified, stock index warrants shall be treated as if they were index options.
3 ‘‘Aggregate exercise price,’’ with respect to an option or warrant based on an underlying security, means the exercise price of an option or
warrant contract multiplied by the numbers of units of the underlying security covered by the option contract or warrant. ‘‘Aggregate exercise
price’’ with respect to an index option, means the exercise price multiplied by the index multiplier. See, e.g., Amex Rules 900 and 900C; CBOE
Rule 12.3; and NASD Rule 2522.
4 ‘‘Out-of-the-money’’ amounts shall be determined as follows:
(1) for stock call options and warrants, any excess of the aggregate exercise price of the option or warrant over its current market value (as
determined in accordance with Regulation T of the Board of Governors of the Federal Reserve System);
(2) for stock put options or warrants, any excess of the current market value (as determined in accordance with Regulation T of the Board of
Governors of the Federal Reserve System) of the option or warrant over its aggregate exercise price;
(3) for stock index call options and warrants, any excess of the aggregate exercise price of the option or warrant over the product of the current index value and the applicable index multiplier; and
(4) for stock index put options and warrants, any excess of the product of the current index value and the applicable index multiplier over the
aggregate exercise price of the option or warrant. See, e.g., NYSE Rule 431 (Exchange Act Release No. 42011 (October 14, 1999), 64 FR
57172 (October 22, 1999) (order approving SR–NYSE–99–03)); Amex Rule 462 (Exchange Act Release No. 43582 (November 17, 2000), 65 FR
71151 (November 29, 2000) (order approving SR–Amex–99–27)); CBOE Rule 12.3 (Exchange Act Release No. 41658 (July 27, 1999), 64 FR
42736 (August 5, 1999) (order approving SR–CBOE–97–67)); or NASD Rule 2520 (Exchange Act Release No. 43581 (November 17, 2000), 65
FR 70854 (November 28, 2000) (order approving SR–NASD–00–15)).
5 ‘‘In-the-money’’ amounts must be determined as follows:
(1) for stock call options and warrants, any excess of the current market value (as determined in accordance with Regulation T of the Board of
Governors of the Federal Reserve System) of the option or warrant over its aggregate exercise price;
(2) for stock put options or warrants, any excess of the aggregate exercise price of the option or warrant over its current market value (as determined in accordance with Regulation T of the Board of Governors of the Federal Reserve System);
(3) for stock index call options and warrants, any excess of the product of the current index value and the applicable index multiplier over the
aggregate exercise price of the option or warrant; and
(4) for stock index put options and warrants, any excess of the aggregate exercise price of the option or warrant over the product of the current index value and the applicable index multiplier.
6 Two security futures will be considered ‘‘identical’’ for this purpose if they are issued by the same clearing agency or cleared and guaranteed
by the same derivatives clearing organization, have identical contract specifications, and would offset each other at the clearing level.
2 Generally,
*
*
*
*
*
CFE Policy and Procedure VII. Security
Futures Market Maker Registration
Policy and Procedures
A. Security Futures Market Maker
Program
Pursuant to Exchange Rule 514, the
Exchange has adopted a market maker
program under which one or more
Trading Privilege Holders or Authorized
Traders may be designated as market
makers in respect of one or more
Security Futures to provide liquidity
and orderliness in the market for such
Security Futures. To be designated as an
Exchange market marker in Security
Futures, a Trading Privilege Holder or
Authorized Trader must complete and
file with the Exchange a Market Maker
Registration Form. By signing the
registration form the Trading Privilege
Holder or Authorized Trader will
confirm that it meets and will continue
to meet the qualifications to act as
market maker in Security Futures in
accordance with Exchange Rules. The
member will be required to identify all
Security Futures for which it seeks to be
designated as a market maker and elect
which of the two alternative sets of
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market maker obligations specified in
Exchange Rule 517(n) it intends to
undertake.
B. Market Maker Exclusion from
Customer Margin Requirements
To qualify for the market maker
exclusion in Exchange Rule 517(n) for
purposes of the Exchange’s customer
margin rules relating to Security
Futures, a person must:
(1) be a Trading Privilege Holder or
Authorized Trader that is registered
with the Exchange as a dealer in
Security Futures as defined in Section
3(a)(5) of the Exchange Act;
(2) be registered as a floor trader or a
floor broker under Section 4f(a)(1) of the
CEA or as a dealer with the Securities
and Exchange Commission (‘‘SEC’’)
under Section 15(b) of the Exchange
Act;
(3) maintain records sufficient to
prove compliance with the requirements
of Exchange Rule 517(n) and
Commission Rule 41.42(c)(2)(v) and SEC
Rule 400(c)(2)(v) under the Exchange
Act as applicable, including without
limitation trading account statements
and other financial records sufficient to
detail activity; and
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(4) hold itself out as being willing to
buy and sell Security Futures for its own
account on regular or continuous basis.
In addition, the market maker
exclusion provides that any market
maker that fails to comply with the rules
of the Exchange or the margin rules
adopted by the SEC and the
Commission shall be subject to
disciplinary action in accordance with
Chapter 7 of the Exchange’s rules, and
that appropriate sanctions in the case of
any such failure shall include, without
limitation, a revocation of such market
maker’s registration as a dealer in
Security Futures.
C. Market Maker Categories
Exchange Rule 517(n) specifies two
alternative ways for a Trading Privilege
Holder or Authorized Trader to satisfy
the requirement that a market maker
hold itself out as being willing to buy
and sell Security Futures for its own
account on a regular or continuous
basis. Each Trading Privilege Holder or
Authorized Trader seeking market
maker designation must register for one
of the following two market maker
categories and will undertake to perform
all of the obligations set forth in the
elected category:
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Category 1. The market maker will
provide continuous two-sided
quotations throughout the trading day
for all delivery months of Security
Futures representing a meaningful
proportion of the total trading volume
on the Exchange from Security Futures
in which that market maker is
designated as a market maker, subject
to relaxation during unusual market
conditions as determined by the
Exchange (such as a fast market in
either a Security Future or a security
underlying such Security Future) at
which times such market maker must
use its best efforts to quote continuously
and competitively; and when providing
quotations, quotes for a minimum of
one contract with a maximum bid/ask
spread of no more than the greater of
$0.20 or 150 percent of the bid/ask
spread in the primary market for the
security underlying each Security
Future; or
Category 2. The market maker will
respond to at least 75 percent of the
requests for quotations for all delivery
months of Security Futures representing
a meaningful proportion of the total
trading volume on the Exchange from
Security Futures in which that market
maker is designated as a market maker,
subject to relaxation during unusual
market conditions as determined by the
Exchange (such as a fast market in
either a Security Future or a security
underlying such Security Future) at
which times such market maker must
use its best efforts to quote
competitively; and when responding to
requests for quotation, quotes within
five seconds for a minimum of one
contract with a maximum bid/ask
spread of no more than the greater of
$0.20 or 150 percent of the bid/ask
spread in the primary market for the
security underlying each Security
Future.
For purposes of Categories (1) and (2)
above, beginning on the 181st calendar
day after the commencement of trading
of Security Futures, a ‘‘meaningful
proportion of the total trading volume
on the Exchange from Security Futures
in which that market maker is
designated as a market maker’’ shall
mean a minimum of 20 percent of such
trading volume.
D. Qualification for ‘‘60/40’’ Tax
Treatment
To qualify as a ‘‘dealer’’ in security
futures contracts within the meaning of
Section 1256(g)(9) of the Internal
Revenue Code of 1986, as amended (the
‘‘Code’’), a Trading Privilege Holder or
Authorized Trader is required (i) to
register as a market maker for purposes
of the Exchange’s margin rules under
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Category 1 or Category 2 above; (ii) to
undertake in its registration form to
provide quotations for all products
specified for the market maker
exclusion from the Exchange margin
rules; and (iii) to quote a minimum size
of
(A) ten (10) contracts for each product
not covered by (B) or (C) below;
(B) five (5) contracts for each product
specified by the member to the extent
such quotations are provided for
delivery months other than the next two
delivery months then trading; and
(C) one (1) contract for any single
stock futures contract where the average
market price for the underlying stock
was $100 or higher for the preceding
calendar month or for any futures
contract on a narrow-based security
index, as defined by Section 1a(25) of
the CEA.
E. Products
As noted above in completing the
Market Maker Registration Form, a
member must specify all Security
Futures for which it intends to act as a
market maker. The Exchange will assign
to the Trading Privilege Holder or
Authorized Trader all of the Security
Futures listed on its registration form,
unless the Exchange provides written
notice to the Trading Privilege Holder or
Authorized Trader identifying any
Security Futures for which such
assignment is withheld. A Trading
Privilege Holder or Authorized Trader
may change the list of Security Futures
for which it undertakes to act as market
maker for any calendar quarter by filing
a revised Market Maker Registration
Form with the Exchange on any
business day prior to the last trading
day of such quarter, and such change
shall be effective retroactive to the first
trading day of such quarter. Each
market maker shall be responsible for
maintaining books and records that
confirm that it has fulfilled its quarterly
obligations under the market maker
category elected on its Market Maker
Registration Form in respect of all
Security Futures designated for that
calendar quarter.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item III below. The
Exchange has prepared summaries, set
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53821
forth in sections A, B, and C below, of
the most significant parts of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
CFE is proposing to adopt new CFE
Rule 517, including Schedule A thereto
(the ‘‘Proposed Rule’’) to (i) establish
general requirements and procedures
relating to customer margining by
security futures intermediaries
(‘‘General Margin Rules’’), (ii) set initial
and maintenance margin levels for
offsetting positions involving security
futures and related positions at levels
lower than the levels that would be
required if those positions were
margined separately (‘‘Margin Offset
Rule’’), and (iii) exclude proprietary
trades of qualifying security futures
dealers from the margin requirements
set forth in the Proposed Rule and the
related regulatory requirements
(‘‘Market Maker Exclusion’’). The
General Margin Rules, which are
contained in paragraphs (a) through (l)
of the Proposed Rule, are detailed
below. The Margin Offset Rule consists
of paragraph (m) of the Proposed Rule
and a table of offsets contained in
proposed Schedule A to Chapter 5 of
CFE’s Rules, which describes in detail
the margin offsets available with respect
to particular combinations of security
futures and related positions. Lastly, the
proposed rule change sets forth a
security futures market maker program
in proposed CFE Policy and Procedure
VII, which is being adopted pursuant to
CFE Rule 514.
(a) General Margin Rules
The General Margin Rules, which are
identical to the rules of OneChicago,
LLC (‘‘OneChicago’’) that relate to
customer margining by security futures
intermediaries, are designed to
complement the customer margin rules
set forth in Rules 400 through 406 under
the Act (‘‘Exchange Act Rules’’).3 The
Exchange Act Rules contain detailed
requirements with respect to the margin
to be collected from customers in
connection with security futures and
related positions held by security
futures intermediaries on behalf of such
customers. While the General Margin
Rules are based on the standardized
margin procedures developed by the
U.S. futures exchanges’ Joint Audit
Committee and similar rules in effect for
other contract markets designated under
the Commodity Exchange Act, as
3 17
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CFR 242.400–406.
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amended (‘‘CEA’’), 4 those precedents
have been modified in certain respects
to conform to the requirements of the
Exchange Act Rules. The following
paragraphs contain a brief explanation
of each paragraph of the General Margin
Rules:
Paragraph (a) of the Proposed Rule
defines the scope of application of the
Proposed Rule in two important
respects. First, it provides that the
Proposed Rule only applies to
transactions in contracts traded on or
subject to the rules of CFE. To the extent
that security futures intermediaries
engage in security futures transactions
on or through other exchanges as well,
they will need to comply with the
respective margin requirements
established by such other exchanges.
Second, paragraph (a) clarifies that the
requirements set forth in the Proposed
Rule generally only apply to security
futures intermediaries that carry
security futures products in futures
accounts (with the exception of
paragraph (n), which also applies to
positions held in securities accounts).
As provided in Rule 402(a) under the
Act,5 security futures intermediaries
that carry security futures in securities
accounts are subject to the Exchange Act
Rules, Regulation T 6 of the Board of
Governors of the Federal Reserve
System, and the margin requirements of
the self-regulatory organizations of
which they are a member. In addition,
paragraph (a) tracks the exemption for
‘‘exempted persons’’ pursuant to Rule
401(a)(9) under the Act.7
Paragraph (b) of the Proposed Rule
adopts the Standard Portfolio Analysis
of Risk (SPAN) as the margining
system for CFE. SPAN was developed
by the Chicago Mercantile Exchange Inc.
and has also been adopted by
OneChicago. SPAN evaluates the risk
of the futures and options portfolio in
each account and assesses a margin
requirement based on such risk by
establishing reasonable movements in
futures prices over a one day period.
Security futures intermediaries entering
into transactions on CFE can receive
risk arrays based on SPAN to calculate
margins for each of their accounts, so
that they can calculate minimum margin
requirements for such accounts on a
daily basis. However, until such time as
portfolio margining is approved and
implemented for security futures
without a required minimum margin
level, SPAN must be programmed to
generate a margin level for each long or
U.S.C. 1 et seq.
CFR 242.402(a).
6 12 CFR 220.1 et seq.
7 17 CFR 242.401(a)(9).
short position in a security future at a
level not less than the required margin
level for such security future.
Paragraph (c) of the Proposed Rule
sets the required minimum margin level
for each long or short position in a
security future at 20 percent of the
current market value of such security
future, as required by Rule 403(b) under
the Act.8 The only exception from this
general requirement contemplated by
the Proposed Rule is the Margin Offset
Rule, which is described in greater
detail under section (b) below.
Paragraph (d) of the Proposed Rule
specifies the types of margin that a
security futures intermediary may
accept from a customer. Consistent with
Rule 404(b) under the Act,9 acceptable
types of margin are limited to deposits
of cash, margin securities (subject to
specified restrictions), exempted
securities, any other assets permitted
under Regulation T 10 of the Board of
Governors of the Federal Reserve
System to satisfy a margin deficiency in
a securities margin account, and any
combination of the foregoing. Paragraph
(d) of the Proposed Rule further
provides that the different types of
eligible margin are to be valued in
accordance with the applicable
principles set forth in Rule 404 under
the Act.11
Paragraph (e) of the Proposed Rule
provides that security futures
intermediaries may accept orders for a
particular account only if (i) sufficient
margin is on deposit in such account or
is forthcoming within a reasonable time,
or (ii) in the event that the conditions
set forth in (i) are not satisfied, such
orders reduce the margin requirements
resulting from the existing positions in
such account. This provision is
designed to prevent account holders
from exacerbating any already existing
margin deficiency by entering into
further transactions.
Paragraph (f) of the Proposed Rule
establishes the general principle that a
security futures intermediary must call
for initial or maintenance margin equity
whenever the minimum margin
requirements determined in accordance
with paragraph (c) of the Proposed Rule
(taking into account any relief available
under the Margin Offset Rule) is not
satisfied. Any such margin call must be
made within one business day after the
occurrence of the event giving rise to the
call. Paragraph (f) also clarifies that
security futures intermediaries may call
for margin in excess of CFE’s minimum
47
8 17
5 17
9 17
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15:25 Sep 09, 2005
CFR 242.403(b).
CFR 242.404(b).
10 12 CFR 220.1 et seq.
11 17 CFR 242.404.
requirements. Finally, paragraph (f)
provides that a margin call may only be
reduced or deleted if and to the extent
that (i) qualifying margin deposits are
received or (ii) inter-day favorable
market movements or the liquidation of
positions have offset the previously
existing margin deficiency. In each case,
the oldest margin call outstanding at
any time is to be reduced or deleted
first. These provisions address
necessary technical aspects of customer
margining and are consistent with
similar provisions contained in the
precedents referred to above.
Paragraph (g) of the Proposed Rule
limits the ability of customers to obtain
disbursements of excess margin to any
amounts in excess of the applicable
initial margin requirement under the
Proposed Rule and any other applicable
margin requirement. This limitation is
consistent with Rule 405(a) under the
Act.12
Paragraph (h) of the Proposed Rule
prohibits security futures intermediaries
from extending loans to customers for
margin purposes unless such loans are
secured within the meaning of
Commodity Futures Trading
Commission (‘‘CFTC’’) Regulation
1.17(c)(3).13 This prohibition
corresponds to similar restrictions
currently in effect on other contract
markets.
Paragraph (i) of the Proposed Rule
provides that accounts under identical
ownership are to be aggregated for
purposes of determining the applicable
margining requirements on a net basis if
such accounts fall within the same
general classification (customer
segregated, customer secured, special
reserve account for the exclusive benefit
of customers and nonsegregated). This
aggregation approach is consistent with
universal practice in the futures
industry and reflects the fact that
several accounts under identical
ownership may become subject to
liquidation of positions in the event of
a failure to satisfy margin calls with
respect to any one of such accounts.
Paragraph (j) of the Proposed Rule
establishes particular rules for omnibus
accounts of security futures
intermediaries, namely that (i) margin
for positions held in such accounts is to
be collected on a gross basis, (ii) initial
and maintenance margin requirements
are identical, and (iii) security futures
intermediaries are to obtain and
maintain written instructions from such
accounts with respect to positions
which are eligible for offsets pursuant to
the Margin Offset Rule.
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12 17
13 17
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CFR 242.405(a).
CFR 1.17(c)(3).
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Paragraph (k) of the Proposed Rule
enables a security futures intermediary
to liquidate positions in the account of
any customer that fails to comply with
a required margin call within a
reasonable period of time. This
provision complements the
requirements set forth in Rule 406(a)
and (b) under the Act.14
Paragraph (1) of the Proposed Rule
authorizes CFE to direct any security
futures intermediaries that fail to
maintain margin requirements for any
account in accordance with the
Proposed Rule, to immediately liquidate
any or all of the positions in such
account to eliminate the resulting
deficit. This provision is designed to
ensure compliance by security futures
intermediaries with their obligations
under paragraph (k) and is an important
function of CFE’s oversight over such
intermediaries.
The Exchange Act Rules and related
provisions of the Act (such as, among
others, Sections 6(g)(4)(B)(ii) 15 and
6(h)(3)(L) 16 of the Act) are premised on
each self-regulatory organization
adopting margin requirements that are
functionally equivalent to those
contained in the General Margin Rules.
Accordingly, the General Margin Rules
represent a corollary of, and are
designed to give effect to, the Exchange
Act Rules and related provisions of the
Act.
(b) Margin Offset Rule
Security futures intermediaries
entering into transactions on CFE will
be subject to, among other things, Rule
403(b)(1) under the Act,17 which
provides that the margin for each long
or short position in a security future
will generally be 20 percent of the
current market value of such security
future. As discussed above, this
requirement is reflected in paragraph (c)
of the General Margin Rules. Pursuant to
Rule 403(b)(2) under the Act,18
however, a self-regulatory authority may
set the required initial or maintenance
margin level for offsetting positions
involving security futures and related
positions at a level lower than the level
that would apply if such positions were
margined separately based on the
aforementioned 20 percent requirement,
provided the rules establishing such
lower margin levels meet the criteria set
forth in Section 7(c)(2)(B) of the Act.19
14 17
CFR 242.406(a) and (b).
U.S.C. 78f(g)(4)(B)(ii).
16 15 U.S.C. 78f(h)(3)(L).
17 17 CFR 242.403(b)(1).
18 17 CFR 242.403(b)(2).
19 15 U.S.C. 78g(c)(2)(B).
15 15
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15:25 Sep 09, 2005
That Section requires, in relevant part,
that:
‘‘(I) The margin requirements for a
security futures product be consistent
with the margin requirements for
comparable option contracts traded on
any exchange registered pursuant to
section 6(a) of the [Act]; and
(II) Initial and maintenance margin
levels for a security future product not
be lower than the lowest level of
margin, exclusive of premium, required
for any comparable option contract
traded on any exchange registered
pursuant to section 6(a) of the [Act],
other than an option on a security
future.’’
CFE is proposing the Margin Offset
Rule pursuant to, and in reliance on,
Rule 403(b)(2) under the Act.20 At the
core of the Margin Offset Rule will be
the table of offsets contained in
proposed Schedule A to Chapter 5 of
CFE’s Rules, which describes in detail
the margin offsets available with respect
to particular combinations of security
futures and related positions. Such
Schedule A is substantively identical to
the table of offsets included in the
release by the CFTC and the
Commission on Customer Margin Rules
Relating to Security Futures (the
‘‘Customer Margin Release’’). While the
table differs in certain specified respects
from similar tables in effect for
exchange-traded options, the CFTC and
Commission acknowledged in the
Customer Margin Release that these
limited differences are warranted by
different characteristics of the
instruments to which they relate. For
the reasons set forth above, CFE believes
that the Margin Offset Rule is consistent
with the requirements of the Act and the
rules and regulations thereunder
applicable to CFE.
(c) Market Maker Exclusion
Rule 400(c)(2)(v) under the Act 21
permits a national securities exchange
to adopt rules containing specified
requirements for security futures
dealers, on the basis of which the
financial relations between security
futures intermediaries, on the one hand,
and qualifying security futures dealers,
on the other hand, are excluded from
the margin requirements contained in
the Exchange Act Rules. Any rules so
adopted by an exchange must meet the
criteria set forth in Section 7(c)(2)(B) of
the Act,22 which is reproduced in
relevant part under section (b) above.
CFE is proposing the Market Maker
Exclusion pursuant to, and in reliance
CFR 242.403(b)(2).
CFR 242.400(c)(2)(v).
22 15 U.S.C. 78g(c)(2)(B).
on, Rule 400(c)(2)(v) under the Act.23
CFE may select certain of its TPHs or
Authorized Traders to serve as market
makers with respect to security futures
contracts in accordance with proposed
CFE Policy and Procedure VII. From
time to time, CFE may adopt other
programs pursuant to CFE Rule 514
under which TPHs or Authorized
Traders may be designated as market
makers with respect to one or more
security futures contracts in order to
provide liquidity and orderliness in the
relevant market or markets.
The Market Maker Exclusion as
proposed reflects all of the criteria and
limitations set forth in Rule 400(c)(2)(v)
under the Act.24 Specifically, as
contemplated by the Customer Margin
Release, the Market Maker Exclusion
specifies the circumstances under
which a Market Maker will be
considered to ‘‘hold itself out as being
willing to buy and sell security futures
for its own account on a regular or
continuous basis.’’ Under the Market
Maker Exclusion, a Market Maker
satisfies this condition if such Market
Maker either:
(i) provides continuous two-sided
quotations throughout the trading day
for all delivery months of security
futures representing a meaningful
proportion of the total trading volume
on the CFE from security futures in
which that Market Maker is designated
as a Market Maker, subject to relaxation
during unusual market conditions as
determined by the CFE (such as a fast
market in either a security future or a
security underlying such security
future) at which times such Market
Maker must use its best efforts to quote
continuously and competitively; and
when providing quotations, quotes with
a maximum bid/ask spread of no more
than the greater of $0.20 or 150% of the
bid/ask spread in the primary market for
the security underlying each security
future; or
(ii) responds to at least 75% of the
requests for quotation for all delivery
months of security futures representing
a meaningful proportion of the total
trading volume on CFE from security
futures in which that Market Maker is
designated as a Market Maker, subject to
relaxation during unusual market
conditions as determined by CFE (such
as a fast market in either a security
future or a security underlying such
security future) at which times such
Market Maker must use its best efforts
to quote competitively; and when
responding to requests for quotation,
quotes within five seconds with a
20 17
21 17
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23 17
24 17
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CFR 242.400(c)(2)(v).
CFR 242.400(c)(2)(v).
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maximum bid/ask spread of no more
than the greater of $0.20 or 150% of the
bid/ask spread in the primary market for
the security underlying each security
future.
These two alternative standards
proposed by CFE generally follow
examples given in the Customer Margin
Release. These standards are also
identical to OneChicago Rules
515(n)(ii)(C)(1) and (2), except that the
CFE standards relate only to security
futures contracts and are specifically
identified as such in the CFE standards.
Although OneChicago Rules
515(n)(ii)(C)(1) and (2) refer generally to
‘‘contracts’’ (and not security futures
contracts) because OneChicago only
trades security futures, the effect of the
both exchanges’ rules are identical since
what is being measured is the trading
volume of security futures contracts.
(d) Security Futures Market Maker
Program
Pursuant to CFE Rule 514, CFE is
proposing to adopt a market maker
program in which TPHs or Authorized
Traders may be designated as market
makers in respect to one or more CFE
security futures contracts. The proposed
rule change sets forth the procedures
necessary for members to be designated
as market makers and the policies in
relation to such designation.
The proposed rule change reiterates
the qualifications that TPHs and
Authorized Traders must meet pursuant
to proposed CFE Rule 517(n) to qualify
for the market maker exclusion from
customer margin for security futures
contracts. In addition, the proposed rule
change makes clear that under Chapter
7 of the CFE rules, failure to comply
with CFE rules or the margin rules
adopted by the Commission and the
CFTC are subject to disciplinary action.
The appropriate sanctions for any such
failure shall include, without limitation,
a revocation of such market maker’s
registration as a dealer in security
futures.
Under the proposed rule change, a
TPH or Authorized Trader seeking a
market maker designation for one or
more security futures contracts must
submit a Market Maker Registration
Form to CFE. By signing the registration
form, such person confirms that it meets
and will continue to meet the
qualifications to act as a market maker
in security futures contracts in
accordance with CFE rules. The
registration form requires the listing of
all the security futures contracts in
which such person will act as market
makers. The registration form also
requires the identification of the
qualifying market maker category under
CFE Rule 517(n).
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The proposed rule change establishes
that CFE will assign to the TPH or
Authorized Trader all security futures
contracts listed by such person on its
registration form, unless CFE provides
written notice to such person
identifying any security futures
contracts for which such assignment is
withheld. Under the proposed rule
change, for any calendar quarter, a
market maker may change the list of
security futures contracts for which it is
designated by filing a revised
registration form prior to the last trading
day in such calendar quarter. Such
change in security futures contract
designation will be effective retroactive
to the first trading day of such quarter.
The proposed rule change also makes
clear that each market maker is
responsible for maintaining books and
records that confirm that it has fulfilled
its quarterly obligations under the
market maker category as elected on its
registration form for all designated
security futures contracts for that
quarter. Under the proposal, each
market maker would also be required to
maintain such books and records for
every security futures contract and for
each calendar quarter in which its
designation as market maker in security
futures contracts is maintained.
In addition, the proposed rule change
sets forth the requirements that must be
met to qualify as a ‘‘dealer’’ in security
futures contracts within the meaning of
Section 1256(g)(9) of the Internal
Revenue Code of 1986, as amended (the
‘‘Code’’).25 Under the proposed rule
change, to qualify as a dealer within the
meaning of the Code a TPH or
Authorized Trader is required (i) to
register as a market maker for purposes
of CFE’s margin rules under Category 1
or 2 (CFE Rule 517(n)(ii)(C)(1) or (2));
(ii) to undertake in its registration form
to provide quotations for all products
specified for the market maker
exclusion from the CFE margin rules;
and (iii) for each delivery month to
quote a minimum size of:
(A) Ten contracts of a product not
covered by (B) or (C) below;
(B) Five contracts of a product
specified by the market maker for
delivery months other than the next two
delivery months trading at the time the
quotations are made; and
(C) One contract of any single stock
futures product where the average
market price for the underlying stock
was $100 or higher for the preceding
calendar month or for each delivery
month of any futures contract on a
narrow-based security index, as defined
by Section 1a(25) of the CEA.
CFE believes that the General Margin,
Margin Offset, and Market Maker
Exclusion Rules are consistent with
Commission and CFTC rules and
regulations, except in those instances
explained above pursuant to which CFE
rules are consistent with parallel rules
of OneChicago. CFE also believes the
proposed security futures market maker
program will provide liquidity and
orderliness in the market for CFE
security futures contracts. Accordingly,
CFE believes the proposed rule change
is consistent with the Act and the rules
and regulations under the Act
applicable to a national securities
exchange and, in particular, the
requirements of Section 6(b) of the
Act.26 Specifically, CFE believes the
proposed rule change is consistent with
the Section 6(b)(5)27 requirements that
the rules of an exchange be designed to
promote just and equitable principles of
trade, to prevent fraudulent and
manipulative acts and, in general, to
protect investors and the public interest.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
CFE does not believe that the
proposed rule change will impose any
burden on competition not necessary or
appropriate in furtherance of the
purposes of the Act.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange neither received nor
solicited written comments on the
proposal.
III. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number SR–CFE–2005–02 on the
subject line.
Paper Comments
• Send paper comments in triplicate
to Jonathan G. Katz, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–9309.
26 15
25 26
PO 00000
U.S.C. 1256(g)(9).
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27 15
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U.S.C. 78f(b).
U.S.C. 78f(b)(5).
12SEN1
53825
Federal Register / Vol. 70, No. 175 / Monday, September 12, 2005 / Notices
All submissions should refer to File
Number SR–CFE–2005–02. This file
number should be included on the
subject line if e-mail is used. To help the
Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (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, 100 F Street, NE., Washington,
DC 20549. Copies of such filing also will
be available for inspection and copying
at the principal office of the CBOE. All
comments received will be posted
without change; the Commission does
not edit personal identifying
information from submissions. You
should submit only information that
you wish to make available publicly. All
submissions should refer to File
Number SR–CFE–2005–02 and should
be submitted on or before October 3,
2005.
IV. Commission Findings and Order
Granting Accelerated Approval of a
Proposed Rule Change
The Commission finds that the
proposed rule change is consistent with
the requirements of the Act and the
rules and regulations thereunder
applicable to a national securities
exchange.28 In particular, the
Commission finds that the proposed
rule change is consistent with the
requirements of Section 6(b)(5) of the
Act,29 which requires, among other
things, that the rules of the Exchange be
designed to promote just and equitable
principles of trade and, in general, to
protect investors and the public interest.
In addition, the Commission believes
that the proposed rule change is
consistent with Section 7(c)(2)(B) of the
Act,30 which provides, among other
things, that the margin requirements for
security futures must preserve the
financial integrity of markets trading
security futures and prevent systemic
28 In approving this proposal, the Commission has
considered its impact on efficiency, competition,
and capital formation. 15 U.S.C. 78c(f).
29 15 U.S.C. 78f(b)(5).
30 15 U.S.C. 78g(c)(2)(B).
VerDate Aug<18>2005
15:25 Sep 09, 2005
Jkt 205001
risk. The Commission also believes that
the proposed rule change is consistent
with the customer margin rules set forth
in Rules 400 through 406 under the
Act.31
The Exchange has requested that the
Commission approve this proposed rule
change prior to the thirtieth day after
publication of notice of the filing in the
Federal Register. The Commission
believes that nothing in this proposed
rule change raises any new, unique, or
substantive issues from those previously
raised in SR–OC–2002–01, as amended,
which rule filing sets forth
OneChicago’s margin requirements for
security futures, and in SR–OC–2004–
01, which rule filing sets forth
OneChicago’s market maker program.
The Exchange’s proposed rules set forth
herein are identical to the OneChicago’s
rules approved by the Commission in
SR–OC–2002–01, as amended, and SR–
OC–2004–01, with the exception of one
market maker exemption from the
margin rules which the CFE excluded
because it did not correspond to its
current practices. Further, the Exchange
is ready to begin trading subject to the
approval of this proposed rule change
and the Exchange’s opening would
enhance competition in the
marketplace. Accordingly, the
Commission finds good cause for
approving this proposed rule change
prior to the thirtieth day after the date
of publication of notice thereof in the
Federal Register. Specifically, the
Commission believes that it is
consistent with Section 19(b)(2) of the
Act 32 to approve CFE’s proposed rule
change prior to the thirtieth day after
publication of the notice of filing thereof
in the Federal Register.
V. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,33 that the
proposed rule change (File No. SR–
CFE–2005–02) is approved on an
accelerated basis.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.34
Jonathan G. Katz,
Secretary.
[FR Doc. E5–4949 Filed 9–9–05; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–52379; File No. SR–CHX–
2005–23]
Self-Regulatory Organizations;
Chicago Stock Exchange, Inc.; Notice
of Filing and Order Granting
Accelerated Approval to Proposed
Rule Change Relating to the
Assignment of Securities to
Specialists
September 2, 2005.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that on August
25, 2005, the Chicago Stock Exchange,
Inc. (the ‘‘CHX’’ or the ‘‘Exchange’’)
filed with the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change as described in
Items I and II below, which Items have
been prepared by the CHX. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons, and is
approving the proposal on an
accelerated basis.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange proposes to amend
Rule 1 of Article XXX relating to
Registration and Appointment to permit
its Committee on Specialist Assignment
and Evaluation (‘‘CSAE’’) to, in special
circumstances, assign securities 3 to a
specialist firm without the firm first
identifying a particular co-specialist to
trade the securities, so long as the
specialist firm promptly provides the
CSAE with the name of the co-specialist
that would trade the issues, and the
CSAE concludes that the co-specialist is
qualified to trade the issues. Below is
the text of the proposed rule change, as
amended. Proposed new language is
italicized; proposed deletions are in
[brackets].
ARTICLE XXX
Specialists
Registration and Appointment
Rule 1. No change.
* * * Interpretations and Policies:
.01 Committee on Specialist
Assignment and Evaluation
*
31 17
CFR 242.400–406.
32 15 U.S.C. 78s(b)(2).
33 15 U.S.C. 78s(b)(2).
34 17 CFR 200.30–3(a)(12).
PO 00000
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*
*
1 15
*
*
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 The Commission notes that the Exchange uses
the terms ‘‘security(ies), stock(s) and issue(s)’’
interchangeably.
2 17
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]]>Agencies
[Federal Register Volume 70, Number 175 (Monday, September 12, 2005)]
[Notices]
[Pages 53816-53825]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E5-4949]
[[Page 53816]]
=======================================================================
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-52381; File No. SR-CFE-2005-02]
Self-Regulatory Organizations; CBOE Futures Exchange, LLC; Notice
of Filing and Order Granting Accelerated Approval of Proposed Rule
Change Relating to Customer Margin Requirements for Security Futures
September 2, 2005.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on July 26, 2005, the CBOE Futures Exchange, LLC (``CFE'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I, II, and III below, which Items have been prepared by CFE. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons and to grant accelerated
approval to the proposed rule change.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
CFE is proposing margin requirements for security futures traded on
CFE and other related new rules. Specifically, the proposed rule change
sets the minimum initial and maintenance customer margin rates for such
security futures and provides for lower margin levels for permitted
strategy-based offset positions. The proposed rules exclude certain
financial relations to which the SEC's margin rules do not apply. The
proposed rule change also establishes standards under which CFE Trading
Privilege Holders (``TPHs'') may qualify as security futures dealers
and therefore be excluded from CFE's margin rules. Lastly, the proposed
rule change sets forth a security futures market maker program. The
text of the proposed rule change is provided below. New text is
italicized.
* * * * *
CBOE Futures Exchange, LLC
517. Customer Margin Requirements for Contracts that are Security
Futures
(a) Scope of Rule. This Rule 517 shall apply to positions resulting
from transactions in Security Futures, traded on the Exchange or
subject to the Rules of the Exchange to the extent that such positions
are held by Clearing Members or, if applicable, Trading Privilege
Holders on behalf of Customers in futures accounts (as such term is
defined in Commission Regulation Sec. 1.3(vv) and Exchange Act
Regulation 15c3-3(a)), with paragraph (n) of this Rule 517 also
applying to such positions held in securities accounts (as such term is
defined in Commission Regulation 1.3(ww) and Exchange Act Regulation
15c3-3(a)). As used in this Rule 517, the term ``Customer'' does not
include (i) any exempted person (as such term is defined in Commission
Regulation Sec. 41.43(a)(9) and Exchange Act Regulation 401(a)(9)) and
(ii) any Market Maker (as such term is defined in paragraph (n) below).
Nothing in this Rule 517 shall alter the obligation of each Clearing
Member and, if applicable, Trading Privilege Holder to comply with
Applicable Law relating to customer margin for transactions in Security
Futures, including without limitation Commission Regulations 41.42
through 41.49 or Rules 400 through 406 under the Exchange Act, as
applicable (including in each case any successor regulations or rules).
(b) Margin System. The Standard Portfolio Analysis of Risk
(SPAN[reg]* is the margin system adopted by the Exchange.
SPAN[reg] generated margin requirements shall constitute
Exchange margin requirements. All references to margin in the Rules of
the Exchange shall be to margin computed on the basis of
SPAN[reg]. Margin systems other than SPAN[reg]
may be used to meet Exchange margin requirements if the relevant
Clearing Member or, if applicable, Trading Privilege Holder can
demonstrate that its margin system will result in margin requirements
that are in all cases equal to or greater than the corresponding
requirements determined on the basis of SPAN[reg].
(c) Margin Rate. The Exchange will set and publish the initial and
maintenance margin rates to be used in determining Exchange margin
requirements; provided that in no case shall the required margin for
any long or short position held by a Clearing Member or, if applicable,
Trading Privilege Holder on behalf of a Customer be less than the rate
from time to time determined by the Commission and the Securities and
Exchange Commission for purposes of Commission Regulation 41.45(b)(1)
and Rule 403(b)(1) under the Exchange Act unless a lower margin level
is available for such position pursuant to paragraph (m) below.
(d) Acceptable Margin Deposits.
---------------------------------------------------------------------------
*``SPAN'' is a registered trademark of Chicago Mercantile
Exchange Inc., used herein under license. Chicago Mercantile
Exchange Inc. assumes no liability in connection with the use of
SPAN by any person or entity.
---------------------------------------------------------------------------
(i) Clearing Members and, if applicable, Trading Privilege Holders
may accept from their Customers as margin deposits of cash, margin
securities (subject to the limitations set forth in the following
sentence), exempted securities, any other assets permitted under
Regulation T of the Board of Governors of the Federal Reserve System
(as in effect from time to time) to satisfy a margin deficiency in a
securities margin account, and any combination of the foregoing, each
as valued in accordance with Commission Regulation 41.46(c) and (e) or
Rule 404(c) and (e) under the Exchange Act, as applicable. Shares of a
money market mutual fund that meet the requirements of Commission
Regulations 1.25 and 41.46(b)(2) and Rule 404(b)(2) under the Exchange
Act, as applicable, may be accepted as a margin deposit from a Customer
for purposes of this Rule 517.
(ii) A Clearing Member or, if applicable, Trading Privilege Holder
shall not accept as margin from any Customer securities that have been
issued by such Customer or an Affiliate of such Customer unless such
Clearing Member or Trading Privilege Holder files a petition with and
receives permission from the Exchange for such purpose.
(iii) All assets deposited by a Customer to meet margin
requirements must be and remain unencumbered by third party claims
against the depositing Customer.
(iv) Except to the extent prescribed otherwise by the Exchange,
cash margin deposits shall be valued at market value and all other
margin deposits shall be valued at an amount not to exceed that set
forth in Commission Regulation 41.46(c) and (e) or Rule 404(c) and (e)
under the Exchange Act, as applicable (including in each case any
successor regulations or rules).
(e) Acceptance of Orders. Clearing Members and, if applicable,
Trading Privilege Holders may accept Orders for a particular Customer
account only if sufficient margin is on deposit in such account or is
forthcoming within a reasonable period of time (which shall be no more
than five Business Days, although the relevant Clearing Member or, if
applicable, Trading Privilege Holder may deem one hour to be a
reasonable period of time). For a Customer account that has been
subject to calls for margin for an unreasonable period of time,
Clearing Members and, if applicable, Trading Privilege Holders may only
accept Orders that, when executed, will reduce the margin requirements
resulting from the existing positions in such account. Clearing
[[Page 53817]]
Members and, if applicable, Trading Privilege Holders may not accept
Orders for a Customer account that would liquidate to a deficit or that
has a debit balance.
(f) Margin Calls. Clearing Members and, if applicable, Trading
Privilege Holders must call for margin from a particular Customer:
(i) when the margin equity on deposit in such Customer's account
falls below the applicable maintenance margin requirement; or
(ii) subsequently, when the margin equity on deposit in such
Customer's account, together with any outstanding margin calls, is less
than the applicable maintenance margin requirement.
Any such call must be made within one Business Day after the
occurrence of the event giving rise to such call. Clearing Members and,
if applicable, Trading Privilege Holders may call for additional margin
at their discretion.
Clearing Members and, if applicable, Trading Privilege Holders
shall reduce any call for margin only to the extent that margin
deposits permitted under paragraph (d) above are received in the
relevant account. Clearing Members and, if applicable, Trading
Privilege Holders may delete any call for margin only if (i) margin
deposits permitted under paragraph (d) above equal to or in excess of
the deposits called are received in the relevant account or (ii) inter-
day favorable market movements or the liquidation of positions result
in the margin on deposit in the relevant account being equal to or
greater than the applicable initial margin requirement. In the event of
any such reduction or deletion, the oldest outstanding margin call
shall be reduced or deleted first.
Clearing Members and, if applicable, Trading Privilege Holders,
shall maintain written records of any and all margin calls issued,
reduced or deleted by them.
(g) Disbursements of Excess Margin. Clearing Members and, if
applicable, Trading Privilege Holders may release to Customers margin
on deposit in any account only to the extent that such margin is in
excess of the applicable initial margin requirement under this Rule 517
and any other applicable margin requirement.
(h) Loans to Customers. Clearing Members and, if applicable,
Trading Privilege Holders may not extend loans to Customers for margin
purposes unless such loans are secured within the meaning of Commission
Regulation 1.17(c)(3). The proceeds of any such loan must be treated in
accordance with Commission Regulation 1.30.
(i) Aggregation of Accounts and Positions. For purposes of
determining margin requirements under this Rule 517, Clearing Members
and, if applicable, Trading Privilege Holders shall aggregate accounts
under identical ownership if such accounts fall within the same
classifications of customer segregated, customer secured, special
reserve account for the exclusive benefit of customers and non-
segregated for margin purposes. Clearing Members and, if applicable,
Trading Privilege Holders may compute margin requirements for
identically owned concurrent long and short positions on a net basis.
(j) Omnibus Accounts. Clearing Members and, if applicable, Trading
Privilege Holders shall collect margin on a gross basis for positions
held in domestic and foreign omnibus accounts. For omnibus accounts,
initial margin requirements shall equal the corresponding maintenance
margin requirements. Clearing Members and, if applicable, Trading
Privilege Holders shall obtain and maintain written instructions from
domestic and foreign omnibus accounts for positions that are eligible
for offsets pursuant to paragraph (m) below.
(k) Liquidation of Positions. If a Customer fails to comply with a
margin call required by Commission Regulations 41.42 through 41.49 or
Rules 400 through 406 under the Exchange Act, as applicable, within a
reasonable period of time (which shall be no more than five Business
Days, although the relevant Clearing Member or, if applicable, Trading
Privilege Holder may deem one hour to be a reasonable period of time),
the relevant Clearing Member or, if applicable, Trading Privilege
Holder may liquidate positions in such Customer's account to ensure
compliance with the applicable margin requirements.
(l) Failure To Maintain Required Margin. If a Clearing Member or,
if applicable, Trading Privilege Holder fails to maintain sufficient
margin for any Customer account in accordance with this Rule 517, the
Exchange may direct such Clearing Member or Trading Privilege Holder to
immediately liquidate all or any part of the positions in such account
to eliminate the deficiency.
(m) Offsetting Positions. For purposes of Commission Regulation
Sec. 41.45(b)(2) and Rule 403(b)(2) under the Exchange Act, the
initial and maintenance margin requirements for offsetting positions
involving Security Futures, on the one hand, and related positions, on
the other hand, are set at the levels specified in Schedule A to this
Chapter 5.
(n) Exclusion for Market Makers.
(i) A Person shall be a ``Market Maker'' for purposes of this Rule
517, and shall be excluded from the requirements set forth in
Commission Regulations 41.42 through 41.49 and Rules 400 through 406
under the Exchange Act, as applicable, in accordance with Commission
Regulation 41.42(c)(2)(v) and Rule 400(c)(2)(v) under the Exchange Act
with respect to all trading in Security Futures for its own account, if
such Person is a Trading Privilege Holder or Authorized Trader that is
registered with the Exchange as a dealer (as such term is defined in
Section 3(a)(5) of the Exchange Act) in Security Futures.
(ii) Each Market Maker shall:
(A) be registered as a floor trader or a floor broker with the
Commission under Section 4f(a)(1) of the CEA or as a dealer with the
Securities and Exchange Commission (or any successor agency or
authority) under Section 15(b) of the Exchange Act;
(B) maintain records sufficient to prove compliance with the
requirements set forth in this paragraph (n) and Commission Regulation
41.42(c)(2)(v) or Rule 400(c)(2)(v) under the Exchange Act, as
applicable, including without limitation trading account statements and
other financial records sufficient to detail activity; and
(C) hold itself out as being willing to buy and sell Security
Futures for its own account on a regular or continuous basis.
A Market Maker satisfies condition (C) above if:
(1) such Market Maker: (x) provides continuous two-sided quotations
throughout the trading day for all delivery months of Security Futures
representing a meaningful proportion of the total trading volume on the
Exchange from Security Futures in which that Market Maker is designated
as a Market Maker, subject to relaxation during unusual market
conditions as determined by the Exchange (such as a fast market in
either a Security Future or a security underlying such Security Future)
at which times such Market Maker must use its best efforts to quote
continuously and competitively; and (y) when providing quotations,
quotes with a maximum bid/ask spread of no more than the greater of
$0.20 or 150% of the bid/ask spread in the primary market for the
security underlying each Security Future; or
(2) such Market Maker: (x) responds to at least 75% of the requests
for quotation for all delivery months of Security Futures representing
a
[[Page 53818]]
meaningful proportion of the total trading volume on the Exchange from
Security Futures in which that Market Maker is designated as a Market
Maker, subject to relaxation during unusual market conditions as
determined by the Exchange (such as a fast market in either a Security
Future or a security underlying such Security Future) at which times
such Market Maker must use its best efforts to quote competitively; and
(y) when responding to requests for quotation, quotes within five
seconds with a maximum bid/ask spread of no more than the greater of
$0.20 or 150% of the bid/ask spread in the primary market for the
security underlying each Security Future.
For purposes of clauses (1) and (2) above, beginning on the 181st
calendar day after the commencement of trading of Security Futures, a
``meaningful proportion of the total trading volume on the Exchange
from Security Futures in which that Market Maker is designated as a
Market Maker'' shall mean a minimum of 20% of such trading volume.
(iii) Any Market Maker that fails to comply with the Rules of the
Exchange, Commission Regulations 41.42 through 41.49 or Rules 400
through 406 under the Exchange Act, as applicable, shall be subject to
disciplinary action in accordance with Chapter 7. Appropriate sanctions
in the case of any such failure shall include, without limitation, a
revocation of such Market Maker's registration as a dealer in Security
Futures pursuant to clause (i) above.
* * * * *
Schedule A to CFE Chapter 5
Margin Levels for Offsetting Positions
----------------------------------------------------------------------------------------------------------------
Security underlying the Initial margin Maintenance margin
Description of offset security future requirement requirement
----------------------------------------------------------------------------------------------------------------
1. Long security future (or basket of Individual stock or 20% of the current The lower of: (1) 10%
security futures representing each narrow-based security market value of the of the aggregate
component of a narrow-based index. long security future, exercise price \3\ of
securities index \1\) and long put plus pay for the long the put plus the
option \2\ on the same underlying put in full. aggregate put out-of-
security (or index). the-money \4\ amount,
if any; or (2) 20% of
the current market
value of the long
security future.
2. Short security future (or basket Individual stock or 20% of the current 20% of the current
of security futures representing narrow-based security market value of the market value of the
each component of a narrow-based index. short security future, short security future,
securities index) and short put plus the aggregate put plus the aggregate put
option on the same underlying in-the-money amount, in-the-money amount,
security (or index). if any. Proceeds from if any.\5\
the put sale may be
applied.
3. Long security future and short Individual stock or The initial margin 5% of the current
position in the same security (or narrow-based security required under market value as
securities basket) underlying the index. Regulation T for the defined in Regulation
security future. short stock or stocks. T of the stock or
stocks underlying the
security future.
4. Long security future (or basket of Individual stock or 20% of the current 20% of the current
security futures representing each narrow-based security market value of the market value of the
component of a narrow-based index. long security future, long security future,
securities index) and short call plus the aggregate plus the aggregate
option on the same underlying call in-the-money call in-the-money
security (or index). amount, if any. amount, if any.
Proceeds from the call
sale may be applied.
5. Long a basket of narrow-based Narrow-based security 20% of the current 20% of the current
security futures that together index. market value of the market value of the
tracks a broad-based index and short long basket of narrow- long basket of narrow-
a broad-based security index call based security based security
option contract on the same index. futures, plus the futures, plus the
aggregate call in-the- aggregate call in-the-
money amount, if any. money amount, if any.
Proceeds from the call
sale may be applied.
6. Short a basket of narrow-based Narrow-based security 20% of the current 20% of the current
security futures that together index. market value of the market value of the
tracks a broad-based security index short basket of narrow- short basket of narrow-
and short a broad-based security based security based security
index put option contract on the futures, plus the futures, plus the
same index. aggregate put in-the- aggregate put in-the-
money amount, if any. money amount, if any.
Proceeds from the put
sale may be applied.
7. Long a basket of narrow-based Narrow-based security 20% of the current The lower of: (1) 10%
security futures that together index. market value of the of the aggregate
tracks a broad-based security index long basket of narrow- exercise price of the
and long a broad-based security based security put, plus the
index put option contract on the futures, plus pay for aggregate put out-of-
same index. the long put in full. the-money amount, if
any; or (2) 20% of the
current market value
of the long basket of
security futures.
[[Page 53819]]
8. Short a basket of narrow-based Narrow-based security 20% of the current The lower of: (1) 10%
security futures that together index. market value of the of the aggregate
tracks a broad-based security index short basket of narrow- exercise price of the
and long a broad-based security based security call, plus the
index call option contract on the futures, plus pay for aggregate call out-of-
same index. the long call in full. the-money amount, if
any; or (2) 20% of the
current market value
of the short basket of
security futures.
9. Long security future and short Individual stock or The greater of: 5% of The greater of: 5% of
security future on the same narrow-based security the current market the current market
underlying security (or index). index. value of the long value of the long
security future; or security future; or
(2) 5% of the current (2) 5% of the current
market value of the market value of the
short security future. short security future.
10. Long security future, long put Individual stock or 20% of the current 10% of the aggregate
option and short call option. The narrow-based security market value of the exercise price, plus
long security future, long put and index. long security future, the aggregate call in-
short call must be on the same plus the aggregate the-money amount, if
underlying security and the put and call in-the-money any.
call must have the same exercise amount, if any, plus
price. (Conversion). pay for the put in
full. Proceeds from
the call sale may be
applied.
11. Long security future, long put Individual stock or 20% of the current The lower of: (1) 10%
option and short call option. The narrow-based security market value of the of the aggregate
long security future, long put and index. long security future, exercise price of the
short call must be on the same plus the aggregate put plus the aggregate
underlying security and the put call in-the-money put out-of-the money
exercise price must be below the amount, if any, plus amount, if any; or (2)
call exercise price (Collar). pay for the put in 20% of the aggregate
full. Proceeds from exercise price of the
call sale may be call, plus the
applied. aggregate call in-the-
money amount, if any.
12. Short security future and long Individual stock or The initial margin 5% of the current
position in the same security (or narrow-based security required under market value, as
securities basket) underlying the index. Regulation T for the defined in Regulation
security future. long stock or stocks. T, of the long stock
or stocks.
13. Short security future and long Individual stock or The initial margin 10% of the current
position in a security immediately narrow-based security required under market value, as
convertible into the same security index. Regulation T for the defined in Regulation
underlying the security future, long security. T, of the long
without restriction, including the security.
payment of money.
14. Short security future (or basket Individual stock or 20% of the current The lower of: (1) 10%
of security futures representing narrow-based security market value of the of the aggregate
each component of a narrow-based index. short security future, exercise price of the
securities index) and long call plus pay for the call call, plus the
option or warrant on the same in full. aggregate call out-of-
underlying security (or index). the-money amount, if
any; or (2) 20% of the
current market value
of the short security
future.
15. Short security future, Short put Individual stock or 20% of the current 10% of the aggregate
option and long call option. The narrow-based security market value of the exercise price, plus
short security future, short put and index. short security future, the aggregate put in-
long call must be on the same plus the aggregate put the-money amount, if
underlying security and the put and in-the-money amount, any.
call must have the same exercise if any, plus pay for
price. (Reverse Conversion). the call in full.
Proceeds from put sale
may be applied.
16. Long (short) a basket of security Narrow-based security 5% of the current 5% of the current
futures, each based on a narrow- index. market value for the market value of the
based security index that together long (short) basket of long (short) basket of
tracks the broad-based index and security futures. security futures.
short (long) a broad-based index
future.
17. Long (short) a basket of security Individual stock and The greater of: (1) 5% The greater of: (1) 5%
futures that together tracks a narrow-based security of the current market of the current market
narrow-based index and short (long) index. value of the long value of the long
a narrow-based index future. security future(s); or security future(s); or
(2) 5% of the current (2) 5% of the current
market value of the market value of the
short security short security
future(s). future(s).
[[Page 53820]]
18. Long (short) a security future Individual stock and The greater of: (1) 3% The greater of: (1) 3%
and short (long) an identical narrow-based security of the current market of the current market
security future traded on a index. value of the long value of the long
different market.\6\. security future(s); or security future(s); or
(2) 3% of the current (2) 3% of the current
market value of the market value of the
short security short security
future(s). future(s).
----------------------------------------------------------------------------------------------------------------
\1\ Baskets of securities or security futures contracts must replicate the securities that comprise the index,
and in the same proportion.
\2\ Generally, for the purposes of these rules, unless otherwise specified, stock index warrants shall be
treated as if they were index options.
\3\ ``Aggregate exercise price,'' with respect to an option or warrant based on an underlying security, means
the exercise price of an option or warrant contract multiplied by the numbers of units of the underlying
security covered by the option contract or warrant. ``Aggregate exercise price'' with respect to an index
option, means the exercise price multiplied by the index multiplier. See, e.g., Amex Rules 900 and 900C; CBOE
Rule 12.3; and NASD Rule 2522.
\4\ ``Out-of-the-money'' amounts shall be determined as follows:
(1) for stock call options and warrants, any excess of the aggregate exercise price of the option or warrant
over its current market value (as determined in accordance with Regulation T of the Board of Governors of the
Federal Reserve System);
(2) for stock put options or warrants, any excess of the current market value (as determined in accordance with
Regulation T of the Board of Governors of the Federal Reserve System) of the option or warrant over its
aggregate exercise price;
(3) for stock index call options and warrants, any excess of the aggregate exercise price of the option or
warrant over the product of the current index value and the applicable index multiplier; and
(4) for stock index put options and warrants, any excess of the product of the current index value and the
applicable index multiplier over the aggregate exercise price of the option or warrant. See, e.g., NYSE Rule
431 (Exchange Act Release No. 42011 (October 14, 1999), 64 FR 57172 (October 22, 1999) (order approving SR-
NYSE-99-03)); Amex Rule 462 (Exchange Act Release No. 43582 (November 17, 2000), 65 FR 71151 (November 29,
2000) (order approving SR-Amex-99-27)); CBOE Rule 12.3 (Exchange Act Release No. 41658 (July 27, 1999), 64 FR
42736 (August 5, 1999) (order approving SR-CBOE-97-67)); or NASD Rule 2520 (Exchange Act Release No. 43581
(November 17, 2000), 65 FR 70854 (November 28, 2000) (order approving SR-NASD-00-15)).
\5\ ``In-the-money'' amounts must be determined as follows:
(1) for stock call options and warrants, any excess of the current market value (as determined in accordance
with Regulation T of the Board of Governors of the Federal Reserve System) of the option or warrant over its
aggregate exercise price;
(2) for stock put options or warrants, any excess of the aggregate exercise price of the option or warrant over
its current market value (as determined in accordance with Regulation T of the Board of Governors of the
Federal Reserve System);
(3) for stock index call options and warrants, any excess of the product of the current index value and the
applicable index multiplier over the aggregate exercise price of the option or warrant; and
(4) for stock index put options and warrants, any excess of the aggregate exercise price of the option or
warrant over the product of the current index value and the applicable index multiplier.
\6\ Two security futures will be considered ``identical'' for this purpose if they are issued by the same
clearing agency or cleared and guaranteed by the same derivatives clearing organization, have identical
contract specifications, and would offset each other at the clearing level.
* * * * *
CFE Policy and Procedure VII. Security Futures Market Maker
Registration Policy and Procedures
A. Security Futures Market Maker Program
Pursuant to Exchange Rule 514, the Exchange has adopted a market
maker program under which one or more Trading Privilege Holders or
Authorized Traders may be designated as market makers in respect of one
or more Security Futures to provide liquidity and orderliness in the
market for such Security Futures. To be designated as an Exchange
market marker in Security Futures, a Trading Privilege Holder or
Authorized Trader must complete and file with the Exchange a Market
Maker Registration Form. By signing the registration form the Trading
Privilege Holder or Authorized Trader will confirm that it meets and
will continue to meet the qualifications to act as market maker in
Security Futures in accordance with Exchange Rules. The member will be
required to identify all Security Futures for which it seeks to be
designated as a market maker and elect which of the two alternative
sets of market maker obligations specified in Exchange Rule 517(n) it
intends to undertake.
B. Market Maker Exclusion from Customer Margin Requirements
To qualify for the market maker exclusion in Exchange Rule 517(n)
for purposes of the Exchange's customer margin rules relating to
Security Futures, a person must:
(1) be a Trading Privilege Holder or Authorized Trader that is
registered with the Exchange as a dealer in Security Futures as defined
in Section 3(a)(5) of the Exchange Act;
(2) be registered as a floor trader or a floor broker under Section
4f(a)(1) of the CEA or as a dealer with the Securities and Exchange
Commission (``SEC'') under Section 15(b) of the Exchange Act;
(3) maintain records sufficient to prove compliance with the
requirements of Exchange Rule 517(n) and Commission Rule 41.42(c)(2)(v)
and SEC Rule 400(c)(2)(v) under the Exchange Act as applicable,
including without limitation trading account statements and other
financial records sufficient to detail activity; and
(4) hold itself out as being willing to buy and sell Security
Futures for its own account on regular or continuous basis.
In addition, the market maker exclusion provides that any market
maker that fails to comply with the rules of the Exchange or the margin
rules adopted by the SEC and the Commission shall be subject to
disciplinary action in accordance with Chapter 7 of the Exchange's
rules, and that appropriate sanctions in the case of any such failure
shall include, without limitation, a revocation of such market maker's
registration as a dealer in Security Futures.
C. Market Maker Categories
Exchange Rule 517(n) specifies two alternative ways for a Trading
Privilege Holder or Authorized Trader to satisfy the requirement that a
market maker hold itself out as being willing to buy and sell Security
Futures for its own account on a regular or continuous basis. Each
Trading Privilege Holder or Authorized Trader seeking market maker
designation must register for one of the following two market maker
categories and will undertake to perform all of the obligations set
forth in the elected category:
[[Page 53821]]
Category 1. The market maker will provide continuous two-sided
quotations throughout the trading day for all delivery months of
Security Futures representing a meaningful proportion of the total
trading volume on the Exchange from Security Futures in which that
market maker is designated as a market maker, subject to relaxation
during unusual market conditions as determined by the Exchange (such as
a fast market in either a Security Future or a security underlying such
Security Future) at which times such market maker must use its best
efforts to quote continuously and competitively; and when providing
quotations, quotes for a minimum of one contract with a maximum bid/ask
spread of no more than the greater of $0.20 or 150 percent of the bid/
ask spread in the primary market for the security underlying each
Security Future; or
Category 2. The market maker will respond to at least 75 percent of
the requests for quotations for all delivery months of Security Futures
representing a meaningful proportion of the total trading volume on the
Exchange from Security Futures in which that market maker is designated
as a market maker, subject to relaxation during unusual market
conditions as determined by the Exchange (such as a fast market in
either a Security Future or a security underlying such Security Future)
at which times such market maker must use its best efforts to quote
competitively; and when responding to requests for quotation, quotes
within five seconds for a minimum of one contract with a maximum bid/
ask spread of no more than the greater of $0.20 or 150 percent of the
bid/ask spread in the primary market for the security underlying each
Security Future.
For purposes of Categories (1) and (2) above, beginning on the
181st calendar day after the commencement of trading of Security
Futures, a ``meaningful proportion of the total trading volume on the
Exchange from Security Futures in which that market maker is designated
as a market maker'' shall mean a minimum of 20 percent of such trading
volume.
D. Qualification for ``60/40'' Tax Treatment
To qualify as a ``dealer'' in security futures contracts within the
meaning of Section 1256(g)(9) of the Internal Revenue Code of 1986, as
amended (the ``Code''), a Trading Privilege Holder or Authorized Trader
is required (i) to register as a market maker for purposes of the
Exchange's margin rules under Category 1 or Category 2 above; (ii) to
undertake in its registration form to provide quotations for all
products specified for the market maker exclusion from the Exchange
margin rules; and (iii) to quote a minimum size of
(A) ten (10) contracts for each product not covered by (B) or (C)
below;
(B) five (5) contracts for each product specified by the member to
the extent such quotations are provided for delivery months other than
the next two delivery months then trading; and
(C) one (1) contract for any single stock futures contract where
the average market price for the underlying stock was $100 or higher
for the preceding calendar month or for any futures contract on a
narrow-based security index, as defined by Section 1a(25) of the CEA.
E. Products
As noted above in completing the Market Maker Registration Form, a
member must specify all Security Futures for which it intends to act as
a market maker. The Exchange will assign to the Trading Privilege
Holder or Authorized Trader all of the Security Futures listed on its
registration form, unless the Exchange provides written notice to the
Trading Privilege Holder or Authorized Trader identifying any Security
Futures for which such assignment is withheld. A Trading Privilege
Holder or Authorized Trader may change the list of Security Futures for
which it undertakes to act as market maker for any calendar quarter by
filing a revised Market Maker Registration Form with the Exchange on
any business day prior to the last trading day of such quarter, and
such change shall be effective retroactive to the first trading day of
such quarter. Each market maker shall be responsible for maintaining
books and records that confirm that it has fulfilled its quarterly
obligations under the market maker category elected on its Market Maker
Registration Form in respect of all Security Futures designated for
that calendar quarter.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item III below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant parts of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
CFE is proposing to adopt new CFE Rule 517, including Schedule A
thereto (the ``Proposed Rule'') to (i) establish general requirements
and procedures relating to customer margining by security futures
intermediaries (``General Margin Rules''), (ii) set initial and
maintenance margin levels for offsetting positions involving security
futures and related positions at levels lower than the levels that
would be required if those positions were margined separately (``Margin
Offset Rule''), and (iii) exclude proprietary trades of qualifying
security futures dealers from the margin requirements set forth in the
Proposed Rule and the related regulatory requirements (``Market Maker
Exclusion''). The General Margin Rules, which are contained in
paragraphs (a) through (l) of the Proposed Rule, are detailed below.
The Margin Offset Rule consists of paragraph (m) of the Proposed Rule
and a table of offsets contained in proposed Schedule A to Chapter 5 of
CFE's Rules, which describes in detail the margin offsets available
with respect to particular combinations of security futures and related
positions. Lastly, the proposed rule change sets forth a security
futures market maker program in proposed CFE Policy and Procedure VII,
which is being adopted pursuant to CFE Rule 514.
(a) General Margin Rules
The General Margin Rules, which are identical to the rules of
OneChicago, LLC (``OneChicago'') that relate to customer margining by
security futures intermediaries, are designed to complement the
customer margin rules set forth in Rules 400 through 406 under the Act
(``Exchange Act Rules'').\3\ The Exchange Act Rules contain detailed
requirements with respect to the margin to be collected from customers
in connection with security futures and related positions held by
security futures intermediaries on behalf of such customers. While the
General Margin Rules are based on the standardized margin procedures
developed by the U.S. futures exchanges' Joint Audit Committee and
similar rules in effect for other contract markets designated under the
Commodity Exchange Act, as
[[Page 53822]]
amended (``CEA''), \4\ those precedents have been modified in certain
respects to conform to the requirements of the Exchange Act Rules. The
following paragraphs contain a brief explanation of each paragraph of
the General Margin Rules:
---------------------------------------------------------------------------
\3\ 17 CFR 242.400-406.
\4\ 7 U.S.C. 1 et seq.
---------------------------------------------------------------------------
Paragraph (a) of the Proposed Rule defines the scope of application
of the Proposed Rule in two important respects. First, it provides that
the Proposed Rule only applies to transactions in contracts traded on
or subject to the rules of CFE. To the extent that security futures
intermediaries engage in security futures transactions on or through
other exchanges as well, they will need to comply with the respective
margin requirements established by such other exchanges. Second,
paragraph (a) clarifies that the requirements set forth in the Proposed
Rule generally only apply to security futures intermediaries that carry
security futures products in futures accounts (with the exception of
paragraph (n), which also applies to positions held in securities
accounts). As provided in Rule 402(a) under the Act,\5\ security
futures intermediaries that carry security futures in securities
accounts are subject to the Exchange Act Rules, Regulation T \6\ of the
Board of Governors of the Federal Reserve System, and the margin
requirements of the self-regulatory organizations of which they are a
member. In addition, paragraph (a) tracks the exemption for ``exempted
persons'' pursuant to Rule 401(a)(9) under the Act.\7\
---------------------------------------------------------------------------
\5\ 17 CFR 242.402(a).
\6\ 12 CFR 220.1 et seq.
\7\ 17 CFR 242.401(a)(9).
---------------------------------------------------------------------------
Paragraph (b) of the Proposed Rule adopts the Standard Portfolio
Analysis of Risk (SPAN[supreg]) as the margining system for CFE.
SPAN[supreg] was developed by the Chicago Mercantile Exchange Inc. and
has also been adopted by OneChicago. SPAN[supreg] evaluates the risk of
the futures and options portfolio in each account and assesses a margin
requirement based on such risk by establishing reasonable movements in
futures prices over a one day period. Security futures intermediaries
entering into transactions on CFE can receive risk arrays based on
SPAN[supreg] to calculate margins for each of their accounts, so that
they can calculate minimum margin requirements for such accounts on a
daily basis. However, until such time as portfolio margining is
approved and implemented for security futures without a required
minimum margin level, SPAN[supreg] must be programmed to generate a
margin level for each long or short position in a security future at a
level not less than the required margin level for such security future.
Paragraph (c) of the Proposed Rule sets the required minimum margin
level for each long or short position in a security future at 20
percent of the current market value of such security future, as
required by Rule 403(b) under the Act.\8\ The only exception from this
general requirement contemplated by the Proposed Rule is the Margin
Offset Rule, which is described in greater detail under section (b)
below.
---------------------------------------------------------------------------
\8\ 17 CFR 242.403(b).
---------------------------------------------------------------------------
Paragraph (d) of the Proposed Rule specifies the types of margin
that a security futures intermediary may accept from a customer.
Consistent with Rule 404(b) under the Act,\9\ acceptable types of
margin are limited to deposits of cash, margin securities (subject to
specified restrictions), exempted securities, any other assets
permitted under Regulation T \10\ of the Board of Governors of the
Federal Reserve System to satisfy a margin deficiency in a securities
margin account, and any combination of the foregoing. Paragraph (d) of
the Proposed Rule further provides that the different types of eligible
margin are to be valued in accordance with the applicable principles
set forth in Rule 404 under the Act.\11\
---------------------------------------------------------------------------
\9\ 17 CFR 242.404(b).
\10\ 12 CFR 220.1 et seq.
\11\ 17 CFR 242.404.
---------------------------------------------------------------------------
Paragraph (e) of the Proposed Rule provides that security futures
intermediaries may accept orders for a particular account only if (i)
sufficient margin is on deposit in such account or is forthcoming
within a reasonable time, or (ii) in the event that the conditions set
forth in (i) are not satisfied, such orders reduce the margin
requirements resulting from the existing positions in such account.
This provision is designed to prevent account holders from exacerbating
any already existing margin deficiency by entering into further
transactions.
Paragraph (f) of the Proposed Rule establishes the general
principle that a security futures intermediary must call for initial or
maintenance margin equity whenever the minimum margin requirements
determined in accordance with paragraph (c) of the Proposed Rule
(taking into account any relief available under the Margin Offset Rule)
is not satisfied. Any such margin call must be made within one business
day after the occurrence of the event giving rise to the call.
Paragraph (f) also clarifies that security futures intermediaries may
call for margin in excess of CFE's minimum requirements. Finally,
paragraph (f) provides that a margin call may only be reduced or
deleted if and to the extent that (i) qualifying margin deposits are
received or (ii) inter-day favorable market movements or the
liquidation of positions have offset the previously existing margin
deficiency. In each case, the oldest margin call outstanding at any
time is to be reduced or deleted first. These provisions address
necessary technical aspects of customer margining and are consistent
with similar provisions contained in the precedents referred to above.
Paragraph (g) of the Proposed Rule limits the ability of customers
to obtain disbursements of excess margin to any amounts in excess of
the applicable initial margin requirement under the Proposed Rule and
any other applicable margin requirement. This limitation is consistent
with Rule 405(a) under the Act.\12\
---------------------------------------------------------------------------
\12\ 17 CFR 242.405(a).
---------------------------------------------------------------------------
Paragraph (h) of the Proposed Rule prohibits security futures
intermediaries from extending loans to customers for margin purposes
unless such loans are secured within the meaning of Commodity Futures
Trading Commission (``CFTC'') Regulation 1.17(c)(3).\13\ This
prohibition corresponds to similar restrictions currently in effect on
other contract markets.
---------------------------------------------------------------------------
\13\ 17 CFR 1.17(c)(3).
---------------------------------------------------------------------------
Paragraph (i) of the Proposed Rule provides that accounts under
identical ownership are to be aggregated for purposes of determining
the applicable margining requirements on a net basis if such accounts
fall within the same general classification (customer segregated,
customer secured, special reserve account for the exclusive benefit of
customers and nonsegregated). This aggregation approach is consistent
with universal practice in the futures industry and reflects the fact
that several accounts under identical ownership may become subject to
liquidation of positions in the event of a failure to satisfy margin
calls with respect to any one of such accounts.
Paragraph (j) of the Proposed Rule establishes particular rules for
omnibus accounts of security futures intermediaries, namely that (i)
margin for positions held in such accounts is to be collected on a
gross basis, (ii) initial and maintenance margin requirements are
identical, and (iii) security futures intermediaries are to obtain and
maintain written instructions from such accounts with respect to
positions which are eligible for offsets pursuant to the Margin Offset
Rule.
[[Page 53823]]
Paragraph (k) of the Proposed Rule enables a security futures
intermediary to liquidate positions in the account of any customer that
fails to comply with a required margin call within a reasonable period
of time. This provision complements the requirements set forth in Rule
406(a) and (b) under the Act.\14\
---------------------------------------------------------------------------
\14\ 17 CFR 242.406(a) and (b).
---------------------------------------------------------------------------
Paragraph (1) of the Proposed Rule authorizes CFE to direct any
security futures intermediaries that fail to maintain margin
requirements for any account in accordance with the Proposed Rule, to
immediately liquidate any or all of the positions in such account to
eliminate the resulting deficit. This provision is designed to ensure
compliance by security futures intermediaries with their obligations
under paragraph (k) and is an important function of CFE's oversight
over such intermediaries.
The Exchange Act Rules and related provisions of the Act (such as,
among others, Sections 6(g)(4)(B)(ii) \15\ and 6(h)(3)(L) \16\ of the
Act) are premised on each self-regulatory organization adopting margin
requirements that are functionally equivalent to those contained in the
General Margin Rules. Accordingly, the General Margin Rules represent a
corollary of, and are designed to give effect to, the Exchange Act
Rules and related provisions of the Act.
---------------------------------------------------------------------------
\15\ 15 U.S.C. 78f(g)(4)(B)(ii).
\16\ 15 U.S.C. 78f(h)(3)(L).
---------------------------------------------------------------------------
(b) Margin Offset Rule
Security futures intermediaries entering into transactions on CFE
will be subject to, among other things, Rule 403(b)(1) under the
Act,\17\ which provides that the margin for each long or short position
in a security future will generally be 20 percent of the current market
value of such security future. As discussed above, this requirement is
reflected in paragraph (c) of the General Margin Rules. Pursuant to
Rule 403(b)(2) under the Act,\18\ however, a self-regulatory authority
may set the required initial or maintenance margin level for offsetting
positions involving security futures and related positions at a level
lower than the level that would apply if such positions were margined
separately based on the aforementioned 20 percent requirement, provided
the rules establishing such lower margin levels meet the criteria set
forth in Section 7(c)(2)(B) of the Act.\19\ That Section requires, in
relevant part, that:
---------------------------------------------------------------------------
\17\ 17 CFR 242.403(b)(1).
\18\ 17 CFR 242.403(b)(2).
\19\ 15 U.S.C. 78g(c)(2)(B).
---------------------------------------------------------------------------
``(I) The margin requirements for a security futures product be
consistent with the margin requirements for comparable option contracts
traded on any exchange registered pursuant to section 6(a) of the
[Act]; and
(II) Initial and maintenance margin levels for a security future
product not be lower than the lowest level of margin, exclusive of
premium, required for any comparable option contract traded on any
exchange registered pursuant to section 6(a) of the [Act], other than
an option on a security future.''
CFE is proposing the Margin Offset Rule pursuant to, and in
reliance on, Rule 403(b)(2) under the Act.\20\ At the core of the
Margin Offset Rule will be the table of offsets contained in proposed
Schedule A to Chapter 5 of CFE's Rules, which describes in detail the
margin offsets available with respect to particular combinations of
security futures and related positions. Such Schedule A is
substantively identical to the table of offsets included in the release
by the CFTC and the Commission on Customer Margin Rules Relating to
Security Futures (the ``Customer Margin Release''). While the table
differs in certain specified respects from similar tables in effect for
exchange-traded options, the CFTC and Commission acknowledged in the
Customer Margin Release that these limited differences are warranted by
different characteristics of the instruments to which they relate. For
the reasons set forth above, CFE believes that the Margin Offset Rule
is consistent with the requirements of the Act and the rules and
regulations thereunder applicable to CFE.
---------------------------------------------------------------------------
\20\ 17 CFR 242.403(b)(2).
---------------------------------------------------------------------------
(c) Market Maker Exclusion
Rule 400(c)(2)(v) under the Act \21\ permits a national securities
exchange to adopt rules containing specified requirements for security
futures dealers, on the basis of which the financial relations between
security futures intermediaries, on the one hand, and qualifying
security futures dealers, on the other hand, are excluded from the
margin requirements contained in the Exchange Act Rules. Any rules so
adopted by an exchange must meet the criteria set forth in Section
7(c)(2)(B) of the Act,\22\ which is reproduced in relevant part under
section (b) above.
---------------------------------------------------------------------------
\21\ 17 CFR 242.400(c)(2)(v).
\22\ 15 U.S.C. 78g(c)(2)(B).
---------------------------------------------------------------------------
CFE is proposing the Market Maker Exclusion pursuant to, and in
reliance on, Rule 400(c)(2)(v) under the Act.\23\ CFE may select
certain of its TPHs or Authorized Traders to serve as market makers
with respect to security futures contracts in accordance with proposed
CFE Policy and Procedure VII. From time to time, CFE may adopt other
programs pursuant to CFE Rule 514 under which TPHs or Authorized
Traders may be designated as market makers with respect to one or more
security futures contracts in order to provide liquidity and
orderliness in the relevant market or markets.
---------------------------------------------------------------------------
\23\ 17 CFR 242.400(c)(2)(v).
---------------------------------------------------------------------------
The Market Maker Exclusion as proposed reflects all of the criteria
and limitations set forth in Rule 400(c)(2)(v) under the Act.\24\
Specifically, as contemplated by the Customer Margin Release, the
Market Maker Exclusion specifies the circumstances under which a Market
Maker will be considered to ``hold itself out as being willing to buy
and sell security futures for its own account on a regular or
continuous basis.'' Under the Market Maker Exclusion, a Market Maker
satisfies this condition if such Market Maker either:
---------------------------------------------------------------------------
\24\ 17 CFR 242.400(c)(2)(v).
---------------------------------------------------------------------------
(i) provides continuous two-sided quotations throughout the trading
day for all delivery months of security futures representing a
meaningful proportion of the total trading volume on the CFE from
security futures in which that Market Maker is designated as a Market
Maker, subject to relaxation during unusual market conditions as
determined by the CFE (such as a fast market in either a security
future or a security underlying such security future) at which times
such Market Maker must use its best efforts to quote continuously and
competitively; and when providing quotations, quotes with a maximum
bid/ask spread of no more than the greater of $0.20 or 150% of the bid/
ask spread in the primary market for the security underlying each
security future; or
(ii) responds to at least 75% of the requests for quotation for all
delivery months of security futures representing a meaningful
proportion of the total trading volume on CFE from security futures in
which that Market Maker is designated as a Market Maker, subject to
relaxation during unusual market conditions as determined by CFE (such
as a fast market in either a security future or a security underlying
such security future) at which times such Market Maker must use its
best efforts to quote competitively; and when responding to requests
for quotation, quotes within five seconds with a
[[Page 53824]]
maximum bid/ask spread of no more than the greater of $0.20 or 150% of
the bid/ask spread in the primary market for the security underlying
each security future.
These two alternative standards proposed by CFE generally follow
examples given in the Customer Margin Release. These standards are also
identical to OneChicago Rules 515(n)(ii)(C)(1) and (2), except that the
CFE standards relate only to security futures contracts and are
specifically identified as such in the CFE standards. Although
OneChicago Rules 515(n)(ii)(C)(1) and (2) refer generally to
``contracts'' (and not security futures contracts) because OneChicago
only trades security futures, the effect of the both exchanges' rules
are identical since what is being measured is the trading volume of
security futures contracts.
(d) Security Futures Market Maker Program
Pursuant to CFE Rule 514, CFE is proposing to adopt a market maker
program in which TPHs or Authorized Traders may be designated as market
makers in respect to one or m
