Self-Regulatory Organizations; New York Stock Exchange, Inc.; Notice of Filing of Proposed Rule Change and Partial Amendment No. 1 To Amend Exchange Rule 431 (Margin Requirements), 68501-68503 [05-22454]

Download as PDF Federal Register / Vol. 70, No. 217 / Thursday, November 10, 2005 / Notices Commission, and all written communications relating to the proposed rule change between the Commission and any person, other than those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for inspection and copying in the Commission’s Public Reference Room. Copies of the filing will also be available for inspection and copying at the principal office of the NYSE. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File number SR–NYSE–2005–65 and should be submitted by November 25, 2005. For the Commission, by the Division of Market Regulation, pursuant to delegated authority.48 Jonathan G. Katz, Secretary. [FR Doc. 05–22413 Filed 11–9–05; 8:45 am] BILLING CODE 8010–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–52738; File No. SR–NYSE– 2004–39] Self-Regulatory Organizations; New York Stock Exchange, Inc.; Notice of Filing of Proposed Rule Change and Partial Amendment No. 1 To Amend Exchange Rule 431 (Margin Requirements) November 4, 2005. Pursuant to section 19(b)(1) 1 of the Securities Exchange Act of 1934 (the ‘‘Exchange Act’’) 2 and Rule 19b–4 thereunder,3 notice is hereby given that on July 12, 2004, the New York Stock Exchange, Inc. (the ‘‘Exchange’’ or ‘‘NYSE’’) filed with the Securities and Exchange Commission (‘‘SEC’’ or the ‘‘Commission’’) the proposed rule change and on September 29, 2005, filed a partial amendment to its proposed rule change 4 as described in Items I, II and III below, which Items have been prepared by the Exchange. The Commission is publishing this notice to 48 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 15 U.S.C. 78s et seq. 3 17 CFR 240.19b–4. 4 SR–NYSE–204–39: Amendment No. 1. The NYSE, in coordination with the Chicago Board Options Exchange, Incorporated (‘‘CBOE’’), filed the partial amendment to conform the complex options spreads strategies to which its rule amendments apply to those of the CBOE. 1 15 VerDate Aug<31>2005 19:02 Nov 09, 2005 Jkt 208001 solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change The Exchange is proposing amendments to Rule 431 (Margin Requirements) that will recognize specific additional complex option spread strategies and set margin requirements commensurate with the risk of such spread strategies. These complex spread strategies are a combination of two or more basic option spreads that are already covered under Exchange Rule 431. In addition, the Exchange is proposing the elimination of the two-dollar standard exercise price interval limitation for listed options and certain terminology with respect to ‘‘permitted offsets,’’ as defined in its Rule. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, the Exchange included statements concerning the purpose of, and basis for, the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. The Exchange has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change 1. Purpose On July 12, 2004, the Exchange filed with the Securities and Exchange Commission proposed rule change to Rule 431, filed as SR–NYSE–2004–39, that would recognize specific additional complex option spread strategies and set margin requirements commensurate with the risk of such spread strategies. The purpose of this filing is to amend SR–NYSE–2004–39.5 These complex spread strategies are a combination of two or more basic option spreads that are already covered under Exchange Rule 431. In addition, the Exchange is proposing the elimination of the two-dollar standard exercise price 5 At the request of the NYSE, the Commission staff clarified that the Exchange filed a partial amendment. Telephone conversation between Al Lucks, Managing Director, Member Firm Regulation, NYSE, and Matthew Comstock, Branch Chief, Division of Market Regulation (‘‘Division’’), on November 4, 2005. PO 00000 Frm 00110 Fmt 4703 Sfmt 4703 68501 interval limitation for listed options and certain terminology with respect to ‘‘permitted offsets’’ as defined in Rule 431. Background Rule 431 prescribes minimum maintenance margin requirements for customer accounts held at members and member organizations. In April 1996, the Exchange established a Rule 431 Committee (the ‘‘Committee’’) to assess the adequacy of Rule 431 on an ongoing basis, review margin requirements, and make recommendations for change. The Exchange’s Board of Directors has approved a number of proposed amendments resulting from the Committee’s recommendations since it was established. Similarly, the Committee has recommended the proposed amendments discussed below. The proposed amendments described below have been developed in conjunction with the Chicago Board Options Exchange (‘‘CBOE’’). Complex Option Spreads The Exchange is proposing amendments to Rule 431 to recognize certain additional complex option spread strategies that are the net result of combining two or more spread strategies that are currently recognized in the Exchange’s margin rules. The netting of contracts in option series common to each of the currently recognized spreads in an aggregation reduces it to the complex spread strategies noted below. Basic option spreads can be paired in such ways that they offset each other in terms of risk. The total risk of the combined spreads is less than the sum of the risk of both spread positions if viewed as stand-alone strategies. The specific complex spread strategies listed below are structured using the same principles as, and are essentially expansions of, the advanced spreads currently allowed in Rule 431. Currently, Rule 431 recognizes and prescribes margin requirements for advanced spread strategies known as the ‘‘butterfly spread’’ 6 and the ‘‘box 6 NYSE Rule 431(f)(2)(C) defines a ‘‘butterfly spread’’ as an aggregation of positions in three series of either puts or calls all having the same underlying component or index, and time of expiration, and based on the same aggregate current underlying value, where the interval between the exercise price of each series is equal, which positions are structured as either: (A) A ‘‘long butterfly spread’’ in which two short options in the same series are offset by one long option with a higher exercise price and one long option with a lower exercise price of (B) a ‘‘short butterfly spread’’ in which two long options in the same series offset one short option with a higher exercise E:\FR\FM\10NON1.SGM Continued 10NON1 68502 Federal Register / Vol. 70, No. 217 / Thursday, November 10, 2005 / Notices spread.’’ 7 However, these option spreads are limited in scope. The Exchange’s proposal seeks to expand upon the types of pairings that would qualify for butterfly spread and box spread treatment. Exchange Rule 431(f)(2)(G)(i) recognizes ‘‘calendar spreads,’’ 8 also known as ‘‘time spreads,’’ yet it is not identified as such. The Exchange proposes to define this term as ‘‘the sale of one option and the simultaneous purchase of an option with a more distant expiration date, both specifying the same underlying component with the same exercise price where the long options do not expire before the short option with the longest term expiration’’ in the definition section of the Rule (NYSE 431(f)(2)(C)) since some of the complex spreads it wants to recognize in this proposal will include this component of spread strategies. To be eligible for the margin requirements set forth below, a complex spread must be consistent with one of the seven patterns specified below. The expiration months and the sequence of the exercise prices must correspond to the same pattern, and the intervals between the exercise prices must be equal. Members and member organizations will be required to obtain initial and maintenance margin for the subject complex spreads, whether established outright or through netting, of not less than the sum of the margin required on price and one short option with a lower exercise price. 7 NYSE Rule 431(f)(2)(C) defines a ‘‘box spread’’ as an aggregation of positions in a long call and short put with the same exercise price (‘‘buy side’’) coupled with a long put and short call with the same exercise price (‘‘sell side’’) all of which have the same underlying component or index and time of expiration, and are based on the same aggregate current underlying value, and are structured as: (A) A ‘‘long box spread’’ in which the sell side exercise price exceeds the buy side exercise price or, (B) a ‘‘short box spread’’ in which the buy side exercise price exceeds the sell side exercise price. 8 NYSE Rule 431(f)(2)(G)(i) states: Where a call that is issued by a registered clearing agency is carried ‘‘long’’ for a customer’s account and the account is also ‘‘short’’ a call issued by a registered clearing agency, expiring on or before the date of expiration of the ‘‘long’’ listed call and specifying the same underlying component, the margin required on the ‘‘short’’ call shall be the lower of (1) the margin required pursuant to (f)(2)(D)(i) or (2) the amount, if any, by which the exercise price of the ‘‘long’’ call exceeds the exercise price of the ‘‘short’’ call. Where a put that is issued by a registered clearing agency is carried ‘‘long’’ for a customer’s account and the account is also ‘‘short’’ a put issued by a registered clearing agency, expiring on or before the date of expiration of the ‘‘long’’ listed put and specifying the same underlying component, the margin required on the ‘‘short’’ put shall be the lower of (1) the margin required pursuant to (f)(2)(D)(i) or (2) the amount, if any, by which the exercise price of the ‘‘short’’ put exceeds the exercise price of the ‘‘long’’ put. VerDate Aug<31>2005 19:02 Nov 09, 2005 Jkt 208001 each basic spread in the equivalent aggregation. The basic requirements are as follows: (a) The complex spreads must be carried in a margin account; (b) European-style 9 options are prohibited for complex spread combinations having a long option series that expires after the other option series (that is, those that involve a time spread such as items 5, 6 and 7 below.) Only American-style 10 options may be used in these combinations. Additionally, the intervals between exercise prices must be equal, and each complex spread must comprise four option series, with the exception of item 4 below, which must comprise three option series. The sum of the margin required on each currently recognized spread in each of the applicable aggregations renders a margin requirement for the subject complex spread strategies as stated below. The additional complex option strategies and maintenance margin requirements are as follows: (1) A Long Condor Spread is comprised of two long Butterfly Spreads. The proposal requires initial and maintenance margin of full cash payment of the net debit incurred when this spread strategy is established. Full payment of the net debit incurred will cover any potential risk to the carrying broker-dealer. (2) A Short Iron Butterfly Spread is comprised of one long Butterfly Spread and one short Box Spread. The establishment of a long Butterfly Spread results in a margin requirement equal to the net debit incurred. The establishment of a short Box Spread requires margin equal to the aggregate difference between the exercise prices. The net proceeds from the sale of short option components may be applied to the margin requirement. Accordingly, to cover the risk to the carrying brokerdealer, the proposal requires a deposit of the aggregate exercise price differential. The net credit received may be applied to the deposit required. (3) A Short Iron Condor Spread is comprised of two long Butterfly Spreads and one short Box Spread. The establishment of long Butterfly Spreads results in a margin requirement equal to the net debit incurred. The establishment of a short Box Spread requires margin equal to the difference in the strike price. Accordingly, to cover the risk to the carrying broker-dealer, the proposal requires a deposit of the 9 A European-style option is an option contract that can be exercised only on its expiration date. 10 An American-style option is an option contract that can be exercised at any time between the date of purchase and its expiration date. PO 00000 Frm 00111 Fmt 4703 Sfmt 4703 aggregate exercise price differential. The net credit received may be applied to the deposit required. (4) A Long Calendar Butterfly Spread is comprised of one long Calendar Spread and one long Butterfly Spread. The proposal requires initial and maintenance margin of full cash payment of the net debit incurred when this spread strategy is established. Full payment of the net debit incurred will cover any potential risk to the carrying broker-dealer. (5) A Long Calendar Condor Spread is comprised of one long Calendar Spread and two long Butterfly Spreads. The proposal requires initial and maintenance margin of full cash payment of the net debit incurred when this spread strategy is established. Full payment of the net debit incurred will cover any potential risk to the carrying broker-dealer. (6) A Short Calendar Iron Butterfly Spread is comprised of one long Calendar Spread plus one long Butterfly Spread and one short Box Spread. To cover the risk to the carrying brokerdealer, the proposal requires a deposit of the aggregate exercise price differential. The net credit received may be applied to the deposit required. (7) A Short Calendar Iron Condor Spread is comprised of one Long Calendar Spread plus two long Butterfly Spreads and one short Box Spread. To cover the risk to the carrying brokerdealer, the proposal requires a deposit of the aggregate exercise price differential. The net credit received may be applied to the deposit required. The purpose and benefit is to set levels of margin that more precisely represent the actual net risk of the option positions in the account and to enable customers to implement these strategies more efficiently. Permitted Offsets Currently, Exchange Rule 431(f)(2)(J) limits permitted offsets 11 for specialists and market makers in options to option series that are ‘‘in-or-at-the-money.’’ 12 Recently, various options exchanges have provided for the listing of options with one-dollar strike intervals in a number of classes. As a result, the use 11 NYSE Rule 431(f)(2)(J) defines a permitted offset position as, in the case of an option in which a specialist makes a market, a position in the underlying asset or other related assets, and in the case of other securities in which a specialist makes a market, a position in options overlying the securities in which a specialist makes a market. 12 NYSE Rule 431(f)(2)(J) defines the term ‘‘in or at the money’’ as the current market price of the underlying security is not more than two standard exercise intervals below (with respect to a call option) or above (with respect to a put option) the exercise price of the option. E:\FR\FM\10NON1.SGM 10NON1 Federal Register / Vol. 70, No. 217 / Thursday, November 10, 2005 / Notices of securities to hedge option series that have one-dollar strike intervals has unintentionally become more restrictive. The proposed rule change will remove the two-dollar standard exercise price interval limitation for listed options and the definition of ‘‘in-or-atthe-money.’’ As proposed, Rule 431(f)(2)(J) would require permitted offset transactions be effected for specialist or market-making purposes such as hedging, risk reduction, rebalancing of positions, liquidation, or accommodation of customer orders, or other similar specialist or marketmaking purposes, while prohibiting trading in an underlying security that is not related to specialist or market making option activities, or that does not constitute a reasonable hedge. Since clearing firms have risk monitoring systems that alert them to unhedged positions and haircut requirements pursuant to Rule 15c3–113 of the Exchange Act 14 perform a similar function as NYSE margin requirements relative to providing adequate risk coverage to broker-dealers, the Exchange believes that the elimination of the twodollar standard exercise price limitation and definition of ‘‘in-or-at-the-money’’ will not diminish the ‘‘safety and soundness’’ protections that Rule 431 provides. 2. Statutory Basis The basis for the proposed rule change is the requirement under section 6(b)(5) 15 of the Exchange Act that the rules of the Exchange be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and, in general, to protect investors and the public interest. In addition, section 6(b)(5) of the Exchange Act requires the rules of an exchange to foster cooperation and coordination with persons engaged in regulating transactions in securities. B. Self-Regulatory Organization’s Statement on Burden on Competition The Exchange does not believe that the proposed rule change will impose any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Exchange Act 13 17 CFR 240.15c3–1. U.S.C. 78a. 15 15 U.S.C. 78f(b)(5). 14 15 VerDate Aug<31>2005 19:02 Nov 09, 2005 Jkt 208001 C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants or Others The Exchange has neither solicited nor received written comments on the proposed rule change. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 35 days of the date of publication of this notice in the Federal Register or within such longer period (i) as the Commission may designate up to 90 days of such date if it finds such longer period to be appropriate and publishes its reason for so finding or (ii) as to which the self-regulatory organization consents, the Commission will: (a) By order approve the proposed rule change, or (b) Institute proceedings to determine whether the proposed rule change should be disapproved. Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change, as amended, is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an e-mail to rulecomments@sec.gov. Please include File Number SR–NYSE–2004–39 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 20549–9303. All submissions should refer to File Number SR–NYSE–2004–39. 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 Frm 00112 Fmt 4703 Sfmt 4703 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 the filing also will be available for inspection and copying at the principal office of the Exchange. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–NYSE–2004–39 and should be submitted on or before December 1, 2005. For the Commission, by the Division of Market Regulation, pursuant to delegated authority. Jonathan G. Katz, Secretary. [FR Doc. 05–22454 Filed 11–9–05; 8:45 am] BILLING CODE 8010–01–P IV. Solicitation of Comments PO 00000 68503 SECURITIES AND EXCHANGE COMMISSION [Release No. 34–52719; File No. SR–PCX– 2005–73] Self-Regulatory Organizations; Pacific Exchange, Inc.; Order Approving Proposed Rule Change and Amendment No. 1 Thereto Relating to the Establishment of a Portfolio Crossing Service on the Archipelago Exchange November 2, 2005. I. Introduction On June 7, 2005, the Pacific Exchange, Inc. (‘‘PCX’’ or ‘‘Exchange’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 a proposed rule change to establish an after-hours Portfolio Crossing Service (‘‘PCS’’). The PCX filed Amendment No. 1 to the proposed rule change on September 14, 2005.3 The proposed rule change, as amended, was published for comment in the Federal Register on September 28, 2005.4 The Commission received no comments from the public in response to the proposed rule change. This order 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 Amendment No. 1 replaced and superseded the original filing in its entirety. 4 See Securities Exchange Act Release No. 52472 (September 20, 2005), 70 FR 56762. 2 17 E:\FR\FM\10NON1.SGM 10NON1

Agencies

[Federal Register Volume 70, Number 217 (Thursday, November 10, 2005)]
[Notices]
[Pages 68501-68503]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 05-22454]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52738; File No. SR-NYSE-2004-39]


Self-Regulatory Organizations; New York Stock Exchange, Inc.; 
Notice of Filing of Proposed Rule Change and Partial Amendment No. 1 To 
Amend Exchange Rule 431 (Margin Requirements)

November 4, 2005.
    Pursuant to section 19(b)(1) \1\ of the Securities Exchange Act of 
1934 (the ``Exchange Act'') \2\ and Rule 19b-4 thereunder,\3\ notice is 
hereby given that on July 12, 2004, the New York Stock Exchange, Inc. 
(the ``Exchange'' or ``NYSE'') filed with the Securities and Exchange 
Commission (``SEC'' or the ``Commission'') the proposed rule change and 
on September 29, 2005, filed a partial amendment to its proposed rule 
change \4\ as described in Items I, II and III below, which Items have 
been prepared by the Exchange. The Commission is publishing this notice 
to solicit comments on the proposed rule change from interested 
persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 15 U.S.C. 78s et seq.
    \3\ 17 CFR 240.19b-4.
    \4\ SR-NYSE-204-39: Amendment No. 1. The NYSE, in coordination 
with the Chicago Board Options Exchange, Incorporated (``CBOE''), 
filed the partial amendment to conform the complex options spreads 
strategies to which its rule amendments apply to those of the CBOE.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is proposing amendments to Rule 431 (Margin 
Requirements) that will recognize specific additional complex option 
spread strategies and set margin requirements commensurate with the 
risk of such spread strategies. These complex spread strategies are a 
combination of two or more basic option spreads that are already 
covered under Exchange Rule 431. In addition, the Exchange is proposing 
the elimination of the two-dollar standard exercise price interval 
limitation for listed options and certain terminology with respect to 
``permitted offsets,'' as defined in its Rule.

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

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

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

1. Purpose
    On July 12, 2004, the Exchange filed with the Securities and 
Exchange Commission proposed rule change to Rule 431, filed as SR-NYSE-
2004-39, that would recognize specific additional complex option spread 
strategies and set margin requirements commensurate with the risk of 
such spread strategies. The purpose of this filing is to amend SR-NYSE-
2004-39.\5\
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    \5\ At the request of the NYSE, the Commission staff clarified 
that the Exchange filed a partial amendment. Telephone conversation 
between Al Lucks, Managing Director, Member Firm Regulation, NYSE, 
and Matthew Comstock, Branch Chief, Division of Market Regulation 
(``Division''), on November 4, 2005.
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    These complex spread strategies are a combination of two or more 
basic option spreads that are already covered under Exchange Rule 431. 
In addition, the Exchange is proposing the elimination of the two-
dollar standard exercise price interval limitation for listed options 
and certain terminology with respect to ``permitted offsets'' as 
defined in Rule 431.
Background
    Rule 431 prescribes minimum maintenance margin requirements for 
customer accounts held at members and member organizations. In April 
1996, the Exchange established a Rule 431 Committee (the ``Committee'') 
to assess the adequacy of Rule 431 on an ongoing basis, review margin 
requirements, and make recommendations for change. The Exchange's Board 
of Directors has approved a number of proposed amendments resulting 
from the Committee's recommendations since it was established. 
Similarly, the Committee has recommended the proposed amendments 
discussed below. The proposed amendments described below have been 
developed in conjunction with the Chicago Board Options Exchange 
(``CBOE'').
Complex Option Spreads
    The Exchange is proposing amendments to Rule 431 to recognize 
certain additional complex option spread strategies that are the net 
result of combining two or more spread strategies that are currently 
recognized in the Exchange's margin rules. The netting of contracts in 
option series common to each of the currently recognized spreads in an 
aggregation reduces it to the complex spread strategies noted below.
    Basic option spreads can be paired in such ways that they offset 
each other in terms of risk. The total risk of the combined spreads is 
less than the sum of the risk of both spread positions if viewed as 
stand-alone strategies. The specific complex spread strategies listed 
below are structured using the same principles as, and are essentially 
expansions of, the advanced spreads currently allowed in Rule 431.
    Currently, Rule 431 recognizes and prescribes margin requirements 
for advanced spread strategies known as the ``butterfly spread'' \6\ 
and the ``box

[[Page 68502]]

spread.'' \7\ However, these option spreads are limited in scope. The 
Exchange's proposal seeks to expand upon the types of pairings that 
would qualify for butterfly spread and box spread treatment.
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    \6\ NYSE Rule 431(f)(2)(C) defines a ``butterfly spread'' as an 
aggregation of positions in three series of either puts or calls all 
having the same underlying component or index, and time of 
expiration, and based on the same aggregate current underlying 
value, where the interval between the exercise price of each series 
is equal, which positions are structured as either: (A) A ``long 
butterfly spread'' in which two short options in the same series are 
offset by one long option with a higher exercise price and one long 
option with a lower exercise price of (B) a ``short butterfly 
spread'' in which two long options in the same series offset one 
short option with a higher exercise price and one short option with 
a lower exercise price.
    \7\ NYSE Rule 431(f)(2)(C) defines a ``box spread'' as an 
aggregation of positions in a long call and short put with the same 
exercise price (``buy side'') coupled with a long put and short call 
with the same exercise price (``sell side'') all of which have the 
same underlying component or index and time of expiration, and are 
based on the same aggregate current underlying value, and are 
structured as: (A) A ``long box spread'' in which the sell side 
exercise price exceeds the buy side exercise price or, (B) a ``short 
box spread'' in which the buy side exercise price exceeds the sell 
side exercise price.
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    Exchange Rule 431(f)(2)(G)(i) recognizes ``calendar spreads,'' \8\ 
also known as ``time spreads,'' yet it is not identified as such. The 
Exchange proposes to define this term as ``the sale of one option and 
the simultaneous purchase of an option with a more distant expiration 
date, both specifying the same underlying component with the same 
exercise price where the long options do not expire before the short 
option with the longest term expiration'' in the definition section of 
the Rule (NYSE 431(f)(2)(C)) since some of the complex spreads it wants 
to recognize in this proposal will include this component of spread 
strategies.
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    \8\ NYSE Rule 431(f)(2)(G)(i) states: Where a call that is 
issued by a registered clearing agency is carried ``long'' for a 
customer's account and the account is also ``short'' a call issued 
by a registered clearing agency, expiring on or before the date of 
expiration of the ``long'' listed call and specifying the same 
underlying component, the margin required on the ``short'' call 
shall be the lower of (1) the margin required pursuant to 
(f)(2)(D)(i) or (2) the amount, if any, by which the exercise price 
of the ``long'' call exceeds the exercise price of the ``short'' 
call. Where a put that is issued by a registered clearing agency is 
carried ``long'' for a customer's account and the account is also 
``short'' a put issued by a registered clearing agency, expiring on 
or before the date of expiration of the ``long'' listed put and 
specifying the same underlying component, the margin required on the 
``short'' put shall be the lower of (1) the margin required pursuant 
to (f)(2)(D)(i) or (2) the amount, if any, by which the exercise 
price of the ``short'' put exceeds the exercise price of the 
``long'' put.
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    To be eligible for the margin requirements set forth below, a 
complex spread must be consistent with one of the seven patterns 
specified below. The expiration months and the sequence of the exercise 
prices must correspond to the same pattern, and the intervals between 
the exercise prices must be equal.
    Members and member organizations will be required to obtain initial 
and maintenance margin for the subject complex spreads, whether 
established outright or through netting, of not less than the sum of 
the margin required on each basic spread in the equivalent aggregation.
    The basic requirements are as follows: (a) The complex spreads must 
be carried in a margin account; (b) European-style \9\ options are 
prohibited for complex spread combinations having a long option series 
that expires after the other option series (that is, those that involve 
a time spread such as items 5, 6 and 7 below.) Only American-style \10\ 
options may be used in these combinations. Additionally, the intervals 
between exercise prices must be equal, and each complex spread must 
comprise four option series, with the exception of item 4 below, which 
must comprise three option series.
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    \9\ A European-style option is an option contract that can be 
exercised only on its expiration date.
    \10\ An American-style option is an option contract that can be 
exercised at any time between the date of purchase and its 
expiration date.
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    The sum of the margin required on each currently recognized spread 
in each of the applicable aggregations renders a margin requirement for 
the subject complex spread strategies as stated below. The additional 
complex option strategies and maintenance margin requirements are as 
follows:
    (1) A Long Condor Spread is comprised of two long Butterfly 
Spreads. The proposal requires initial and maintenance margin of full 
cash payment of the net debit incurred when this spread strategy is 
established. Full payment of the net debit incurred will cover any 
potential risk to the carrying broker-dealer.
    (2) A Short Iron Butterfly Spread is comprised of one long 
Butterfly Spread and one short Box Spread. The establishment of a long 
Butterfly Spread results in a margin requirement equal to the net debit 
incurred. The establishment of a short Box Spread requires margin equal 
to the aggregate difference between the exercise prices. The net 
proceeds from the sale of short option components may be applied to the 
margin requirement. Accordingly, to cover the risk to the carrying 
broker-dealer, the proposal requires a deposit of the aggregate 
exercise price differential. The net credit received may be applied to 
the deposit required.
    (3) A Short Iron Condor Spread is comprised of two long Butterfly 
Spreads and one short Box Spread. The establishment of long Butterfly 
Spreads results in a margin requirement equal to the net debit 
incurred. The establishment of a short Box Spread requires margin equal 
to the difference in the strike price. Accordingly, to cover the risk 
to the carrying broker-dealer, the proposal requires a deposit of the 
aggregate exercise price differential. The net credit received may be 
applied to the deposit required.
    (4) A Long Calendar Butterfly Spread is comprised of one long 
Calendar Spread and one long Butterfly Spread. The proposal requires 
initial and maintenance margin of full cash payment of the net debit 
incurred when this spread strategy is established. Full payment of the 
net debit incurred will cover any potential risk to the carrying 
broker-dealer.
    (5) A Long Calendar Condor Spread is comprised of one long Calendar 
Spread and two long Butterfly Spreads. The proposal requires initial 
and maintenance margin of full cash payment of the net debit incurred 
when this spread strategy is established. Full payment of the net debit 
incurred will cover any potential risk to the carrying broker-dealer.
    (6) A Short Calendar Iron Butterfly Spread is comprised of one long 
Calendar Spread plus one long Butterfly Spread and one short Box 
Spread. To cover the risk to the carrying broker-dealer, the proposal 
requires a deposit of the aggregate exercise price differential. The 
net credit received may be applied to the deposit required.
    (7) A Short Calendar Iron Condor Spread is comprised of one Long 
Calendar Spread plus two long Butterfly Spreads and one short Box 
Spread. To cover the risk to the carrying broker-dealer, the proposal 
requires a deposit of the aggregate exercise price differential. The 
net credit received may be applied to the deposit required.
    The purpose and benefit is to set levels of margin that more 
precisely represent the actual net risk of the option positions in the 
account and to enable customers to implement these strategies more 
efficiently.
Permitted Offsets
    Currently, Exchange Rule 431(f)(2)(J) limits permitted offsets \11\ 
for specialists and market makers in options to option series that are 
``in-or-at-the-money.'' \12\ Recently, various options exchanges have 
provided for the listing of options with one-dollar strike intervals in 
a number of classes. As a result, the use

[[Page 68503]]

of securities to hedge option series that have one-dollar strike 
intervals has unintentionally become more restrictive.
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    \11\ NYSE Rule 431(f)(2)(J) defines a permitted offset position 
as, in the case of an option in which a specialist makes a market, a 
position in the underlying asset or other related assets, and in the 
case of other securities in which a specialist makes a market, a 
position in options overlying the securities in which a specialist 
makes a market.
    \12\ NYSE Rule 431(f)(2)(J) defines the term ``in or at the 
money'' as the current market price of the underlying security is 
not more than two standard exercise intervals below (with respect to 
a call option) or above (with respect to a put option) the exercise 
price of the option.
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    The proposed rule change will remove the two-dollar standard 
exercise price interval limitation for listed options and the 
definition of ``in-or-at-the-money.'' As proposed, Rule 431(f)(2)(J) 
would require permitted offset transactions be effected for specialist 
or market-making purposes such as hedging, risk reduction, rebalancing 
of positions, liquidation, or accommodation of customer orders, or 
other similar specialist or market-making purposes, while prohibiting 
trading in an underlying security that is not related to specialist or 
market making option activities, or that does not constitute a 
reasonable hedge.
    Since clearing firms have risk monitoring systems that alert them 
to unhedged positions and haircut requirements pursuant to Rule 15c3-
1\13\ of the Exchange Act \14\ perform a similar function as NYSE 
margin requirements relative to providing adequate risk coverage to 
broker-dealers, the Exchange believes that the elimination of the two-
dollar standard exercise price limitation and definition of ``in-or-at-
the-money'' will not diminish the ``safety and soundness'' protections 
that Rule 431 provides.
---------------------------------------------------------------------------

    \13\ 17 CFR 240.15c3-1.
    \14\ 15 U.S.C. 78a.
---------------------------------------------------------------------------

2. Statutory Basis
    The basis for the proposed rule change is the requirement under 
section 6(b)(5) \15\ of the Exchange Act that the rules of the Exchange 
be designed to prevent fraudulent and manipulative acts and practices, 
to promote just and equitable principles of trade, and, in general, to 
protect investors and the public interest. In addition, section 6(b)(5) 
of the Exchange Act requires the rules of an exchange to foster 
cooperation and coordination with persons engaged in regulating 
transactions in securities.
---------------------------------------------------------------------------

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

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Exchange Act

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

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

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

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reason for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (a) By order approve the proposed rule change, or
    (b) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

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

Electronic Comments

     Use the Commission's Internet comment form (https://
www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-NYSE-2004-39 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 20549-9303.

All submissions should refer to File Number SR-NYSE-2004-39. 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 the filing also will be available 
for inspection and copying at the principal office of the Exchange. All 
comments received will be posted without change; the Commission does 
not edit personal identifying information from submissions. You should 
submit only information that you wish to make available publicly. All 
submissions should refer to File Number SR-NYSE-2004-39 and should be 
submitted on or before December 1, 2005.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.
Jonathan G. Katz,
Secretary.
[FR Doc. 05-22454 Filed 11-9-05; 8:45 am]
BILLING CODE 8010-01-P
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