Self-Regulatory Organizations; Chicago Board Options Exchange, Incorporated; Notice of Filing of Proposed Rule Change Relating to Customer Portfolio Margining Requirements, 17519-17529 [E6-4989]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 71, Number 66 (Thursday, April 6, 2006)]
[Notices]
[Pages 17519-17529]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-4989]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53576; File No. SR-CBOE-2006-14]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of Proposed Rule Change Relating to 
Customer Portfolio Margining Requirements

March 30, 2006.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Exchange Act'' or ``Act''),\1\ and Rule 19b-4 thereunder,\2\ 
notice is hereby given that on February 2, 2006, the Chicago Board 
Options Exchange, Incorporated (``CBOE'' or the ``Exchange'') filed 
with the Securities and Exchange Commission (the ``Commission'') the 
proposed rule change 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\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    CBOE is proposing to broaden its Rule 12.4--Portfolio Margin and 
Cross-Margin for Index Options--to allow portfolio margining of listed 
equity options, narrow-based index options, and security futures, as 
well as certain OTC instruments. The text of the proposed rule change 
is below. Additions are in italics. Deletions are in brackets.
* * * * *
Chicago Board Options Exchange, Inc.
Chapter XII
Margins
Rule 12.4. Portfolio Margin for Index and Equity Options, and Cross-
Margin for Index Options
    As an alternative to the transaction / position specific margin 
requirements set forth in Rule 12.3 of this Chapter 12, members may 
require margin for listed[, broad-based U.S.] index and equity options 
(defined below as a ``listed option''), options on exchange traded 
funds, security futures products, index warrants, [and] underlying 
instruments and unlisted derivatives (as defined below) in accordance 
with the portfolio margin requirements contained in this Rule 12.4.
    In addition, members, provided they are a Futures Commission 
Merchant (``FCM'') and are either a clearing member of a futures 
clearing organization or have an affiliate that is a clearing member of 
a futures clearing organization, are permitted under this Rule 12.4 to 
combine a customer's related instruments (as defined below), listed 
index options, options on exchange traded funds [and listed, broad-
based U.S. index options], index warrants, [and ]underlying instruments 
and unlisted derivatives and compute a margin requirement (``cross-
margin'') on a portfolio margin basis. Members must confine cross-
margin positions to a portfolio margin account dedicated exclusively to 
cross-margining.
    Application of the portfolio margin and cross-margining provisions 
of this Rule 12.4 to IRA accounts is prohibited.
    (a) Definitions.
    (1) The term ``listed option'' shall mean any option traded on a 
registered national securities exchange or automated facility of a 
registered national securities association.
    (2) The term ``security future'' means a contract of sale for 
future delivery of a single security or of a narrow-based security 
index, including any interest therein or based on the value thereof, to 
the extent that that term is defined in Section 3(a)(55) of the 
Securities Exchange Act of 1934.
    (3) The term ``security futures product'' means a security future, 
or an option on any security future.
    ([2]4) The term ``unlisted derivative[option]'' means any equity-
based (or equity index-based) unlisted option, forward contract or swap 
that can be priced by a model approved by a ``DEA'' covering the same 
underlying instrument[ not included in the definition of listed 
option].

[[Page 17520]]

    (5) The term ``option series'' means all option contracts of the 
same type (either a call or a put) and exercise style, covering the 
same underlying instrument with the same exercise price, expiration 
date, and number of underlying units.
    ([3]6) The term ``options class'' refers to all options contracts 
covering the same underlying instrument.
    ([4]7) The term ``portfolio'' means options of the same options 
class grouped with their corresponding security futures products, 
underlying instruments and related instruments.
    ([6]8) The term ``related instrument'' within an option class or 
product group means futures contracts and options on futures contracts 
covering the same underlying instrument , but does not include security 
futures products.
    ([7]9) The term ``underlying instrument'' means long and short 
positions, as appropriate, covering the same security, group or index 
of securities, or a security which is exchangeable for or convertible 
into the underlying security or group of securities within a period of 
90 days, or [in ]an exchange traded fund or other fund product 
registered under the Investment Company Act of 1940 that holds the same 
securities, and in the same proportion, as contained in an [broad-based 
]index on which options are listed. The term underlying instrument 
shall not be deemed to include futures contracts, options on futures 
contracts[,] or underlying stock baskets[, or unlisted instruments]. 
Securities that are included in the FT Actuaries World index can 
qualify as an underlying instrument. Restricted and control stock 
qualify as an underlying instrument provided that the offsetting option 
or other eligible derivative has been established in a manner 
consistent with SEC Rule 144 or SEC ``no-action'' positions to permit 
the sale of the stock without restriction upon exercise of the option 
or other eligible derivative.
    ([8]10) The term ``product group'' means two or more portfolios of 
the same type [(see subparagraph (a)(9) below) ]for which it has been 
determined by Rule 15c3-1a(b)(ii) under the Securities Exchange Act of 
1934 that a percentage of offsetting profits may be applied to losses 
at the same valuation point.
    ([9]11) The terms ``theoretical gains and losses'' means the gain 
and loss in the value of each eligible position[individual option 
series and related instruments] at 10 equidistant intervals (valuation 
points) ranging from an assumed movement (both up and down) in the 
current market value of the underlying instrument.
    The magnitude of the valuation point range shall be as follows:

------------------------------------------------------------------------
                                            Up/down market move  (high &
              Portfolio type                    low valuation points)
------------------------------------------------------------------------
[Non-]High Capitalization, Broad-based      [+/-10%]+6%/-8%
 U.S. Market Index [Option] \1\.
Non-High Capitalization, Broad-based U.S.   [+6%/-8%]+/-10%
 Market Index [Option] \1\.
Narrow-based Index \1\....................  +/-15%
Individual Equity \1\.....................  +/-15%
------------------------------------------------------------------------
\1\ In accordance with sub-paragraph (b)(1)(i)(B) of Rule 15c3-1a under
  the Securities Exchange Act of 1934.

    (b) Eligible Participants.
    Any member organization intending to apply the portfolio margin 
provisions of this Rule 12.4 to its accounts must receive prior 
approval from its Designated Examining Authority (``DEA''). The member 
organization will be required to, among other things, demonstrate 
compliance with Rule 15.8A--Risk Analysis of Portfolio Margin Accounts, 
and with the net capital requirements of Rule 13.5--Customer Portfolio 
Margin Accounts.
    The application of the portfolio margin provisions of this Rule 
12.4, including cross-margining, is limited to the following:
    (1) Any broker or dealer registered pursuant to section 15 of the 
Securities Exchange Act of 1934 subject to minimum margin requirements 
under paragraph (e)(2)(A) below;
    (2) Any member of a national futures exchange to the extent that 
listed index options hedge the member's index futures subject to 
minimum margin requirements under paragraph (e)(2)A) below, and
    (3)(i) Any [other ]person or entity not included in (b)(1) or 
(b)(2) above that has or establishes, and maintains, equity of at least 
5 million dollars subject to minimum margin requirements under 
paragraph (e)(2)(A) below. For purposes of this equity requirement, all 
securities and futures accounts carried by the member for the same 
customer may be combined provided ownership across the accounts is 
identical. A guarantee by any other account for purposes of the minimum 
equity requirement is not to be permitted.
    (ii) Any other person or entity not included in (b)(1), (b)(2) or 
(b)(3)(i) above that is approved under paragraph (c) below, provided 
that no unlisted derivative as defined in paragraph (a)(4) above is 
carried, and the minimum margin requirements under paragraph (e)(2)(B) 
below are applied.
    (c) Opening of Accounts.
    (1) Only customers that, pursuant to Rule 9.7, have been approved 
[for options transactions, and specifically approved] to engage in 
uncovered short option contracts, are permitted to utilize a portfolio 
margin account.
    (2) On or before the date of the initial transaction in a portfolio 
margin account, a member shall:
    A. Furnish the customer with a special written disclosure statement 
describing the nature and risks of portfolio margining and cross-
margining which includes an acknowledgement for all portfolio margin 
account owners to sign, and an additional acknowledgement for owners 
that also engage in cross-margining to sign, attesting that they have 
read and understood the disclosure statement, and agree to the terms 
under which a portfolio margin account and the cross-margin account, 
respectively, are provided, and
    B. Obtain a signed acknowledgement(s) from the customer, both of 
which are required for cross-margining customers, and record the date 
of receipt.
    (d) Establishing Account and Eligible Positions.
    (1) Portfolio Margin Account. For purposes of applying the 
portfolio margin requirements provided in this Rule 12.4, members are 
to establish and utilize a dedicated securities margin account, or sub-
account of a margin account, clearly identified as a portfolio margin 
account that is separate from any other securities account carried for 
a customer.
    (2) Cross-Margin Account. For purposes of combining related 
instruments and unlisted derivatives, and listed [broad-based U.S.] 
index options, index warrants and underlying instruments and applying 
the portfolio margin requirements provided in this Rule 12.4, members 
are to establish and utilize a portfolio margin account, clearly 
identified as a cross-margin account, that is separate from any other 
securities account or portfolio margin account carried for a customer.
    A margin deficit in either the portfolio margin account or the 
cross-margin account of a customer may not be considered as satisfied 
by excess equity in the other account. Funds and/or securities must be 
transferred to the deficient account and a written record created and 
maintained.

[[Page 17521]]

(3) Portfolio Margin Account--Eligible Positions
    (i) A transaction in, or transfer of, a listed[, broad-based U.S.] 
index or equity option, security futures product,[or] index warrant, or 
unlisted derivative (except for an account approved under paragraph 
(b)(3)(ii)) may be effected in the portfolio margin account.
    (ii) With the exception of eligible participants operating pursuant 
to paragraphs (b)(1), (b)(2) or (b)(3)(i) above, a[A] transaction in, 
or transfer of, an underlying instrument may not be effected in the 
portfolio margin account unless[provided] a position in an offsetting 
listed[, broad-based U.S.] index or equity option, security futures 
product,[ or] index warrant or unlisted derivative is in the account or 
is established in the account on the same day.
    (iii) With the exception of eligible participants operating 
pursuant to paragraphs (b)(1), (b)(2) or (b)(3)(i) above, [If, in the 
portfolio margin account,]if the listed[, broad-based U.S.] index or 
equity option, security futures product,[or] index warrant, or unlisted 
derivative position offsetting an underlying instrument position ceases 
to exist and is not replaced within 10 business days, the underlying 
instrument position must be transferred to a regular margin account, 
subject to [Regulation T initial margin and] the margin required 
pursuant to the other provisions of this chapter. Members will be 
expected to monitor portfolio margin accounts for possible abuse of 
this provision.
    (iv) In the event that fully paid for long options and/or index 
warrants are the only positions contained within a portfolio margin 
account, such long positions must be transferred to a securities 
account other than a portfolio margin account or cross-margin account 
within 10 business days, subject to the margin required pursuant to the 
other provisions of this chapter, unless the status of the account 
changes such that it is no longer composed solely of fully paid for 
long options and/or index warrants.
(4) Cross-Margin Account--Eligible Positions
    (i) A transaction in, or transfer of, a related instrument may be 
effected in the cross margin account provided a position in an 
offsetting listed[, U.S. broad-based] index option, index warrant, [or 
]underlying instrument or unlisted derivative is in the account or is 
established in the account on the same day.
    (ii) If the listed[, U.S. broad-based] index option, index 
warrant,[ or] underlying instrument or unlisted derivative position 
offsetting a related instrument ceases to exist and is not replaced 
within 10 business days, the related instrument position must be 
transferred to a futures account. Members will be expected to monitor 
cross-margin accounts for possible abuse of this provision.
    (iii) With the exception of eligible participants operating 
pursuant to paragraphs (b)(1), (b)(2) or (b)(3)(i) above, if the 
related instrument position offsetting an underlying instrument 
position ceases to exist and is not replaced within 10 business days, 
the underlying instrument position must be transferred to a regular 
margin account, subject to the margin required pursuant to the other 
provisions of this chapter. Members will be expected to monitor 
portfolio margin accounts for possible abuse of this provision.
    (iiii) In the event that fully paid for long index options and/or 
index warrants (securities) are the only positions contained within a 
cross-margin account, such long positions must be transferred to a 
securities account other than a portfolio margin account or cross-
margin account within 10 business days, subject to the margin required 
pursuant to the other provisions of this chapter, unless the status of 
the account changes such that it is no longer composed solely of fully 
paid for long options and/or index warrants.
    (e) Initial and Maintenance Margin Required. The amount of margin 
required under this Rule 12.4 for each portfolio shall be the greater 
of:
    (1) The amount for any of the 10 equidistant valuation points 
representing the largest theoretical loss as calculated pursuant to 
paragraph (f) below or
    (2)(A) In the case of an account operating under paragraph (b)(1), 
(b)(2) or (b)(3) of this Rule 12.4, $.375 for each listed [index 
]option, security futures product,[and] related instrument and unlisted 
derivative, multiplied by the contract or instrument's multiplier, not 
to exceed the market value in the case of long positions in listed 
options, including options on security futures, and options on futures 
contracts.
    (B) In the case of an account operating under paragraph (b)(3)(ii) 
of this Rule 12.4, for any portfolio that holds a position in the 
underlying instrument, $.75 for each listed option (excluding broad-
based index options and options on broad-based exchange traded funds), 
security futures product and related instrument multiplied by the 
contract or instrument's multiplier, not to exceed the market value in 
the case of long options, including options on security futures, and 
options on futures contracts. In the case of a portfolio not holding a 
position in the underlying instrument, or a broad-based index 
portfolio, $.375 shall be applied instead of $.75.
    (f) Method of Calculation.
    (1) Long and short positions in listed options, security futures 
products, underlying instruments,[ and] related instruments and 
unlisted derivatives are to be grouped by option class; each option 
class group being a ``portfolio''. Each portfolio is categorized as one 
of the portfolio types specified in paragraph (a)([9]11) above.
    (2) For each portfolio, theoretical gains and losses are calculated 
for each position as specified in paragraph (a)([9]11) above. For 
purposes of determining the theoretical gains and losses at each 
valuation point, members shall obtain and utilize the theoretical value 
of a listed [index]option, security futures product, underlying 
instrument, [or]related instrument and unlisted derivative, rendered by 
a theoretical pricing model that, in accordance with paragraph 
(b)(1)(i)(B) of Rule 15c3-1a under the Securities Exchange Act of 1934, 
qualifies for purposes of determining the amount to be deducted in 
computing net capital under a portfolio based methodology.
    (3) Offsets. Within each portfolio, theoretical gains and losses 
may be netted fully at each valuation point.
    Offsets between portfolios within the High Capitalization, Broad-
Based Index Option, [product group and the]Non-High Capitalization, 
Broad-Based Index Option [product group]and Narrow-Based Index Option 
product groups may then be applied as permitted by Rule 15c3-1a under 
the Securities Exchange Act of 1934.
    (4) After applying paragraph (3) above, the sum of the greatest 
loss from each portfolio is computed to arrive at the total margin 
required for the account (subject to the per contract minimum).
    If a security that is exchangeable or convertible into the 
underlying security requires the payment of money or results in a loss 
upon conversion at the time when the security is deemed an underlying 
instrument, the full amount of the conversion loss will be required.
    (g) Equity Deficiency. If, at any time, equity declines below the[ 
5 million dollar] minimum required under Paragraph (b)[(4)] of this 
Rule 12.4 and is not brought back up to the required level[at least 5 
million dollars] within three (3) business days (T+3) by a deposit of 
funds or securities, or

[[Page 17522]]

through favorable market action; members are prohibited from accepting 
opening orders starting on T+4, except that opening orders entered for 
the purpose of hedging existing positions may be accepted if the result 
would be to lower margin requirements. This prohibition shall remain in 
effect until such time as the[an] required minimum account equity [of 5 
million dollars] is re-established.
    A deduction in computing net capital in the amount of a customer's 
equity deficiency may not serve in lieu of complying with the above 
requirements.
    (h) Determination of Value for Margin Purposes. For the purposes of 
this Rule 12.4, all [listed index options and related instruments] 
eligible positions shall be valued at current market prices. Account 
equity for the purposes of this Rule 12.4 shall be calculated 
separately for each portfolio margin account by adding the current 
market value of all long positions, subtracting the current market 
value of all short positions, and adding the credit (or subtracting the 
debit) balance in the account.
    (i) Additional Margin.
    (1) If at any time, the equity in any portfolio margin account, 
including a cross-margin account, is less than the margin required, 
additional margin must be obtained within [one]three business days 
(T+[1]3). During the three business day period, member organizations 
are prohibited from accepting opening or closing orders that would 
increase the margin requirement until the additional margin is 
obtained. In the event a customer fails to deposit additional margin 
within [one]three business days, the member must liquidate positions in 
an amount sufficient to, at a minimum, lower the total margin required 
to an amount less than or equal to account equity. Exchange Rule 12.9--
Meeting Margin Calls by Liquidation shall not apply to portfolio margin 
accounts. However, members will be expected to monitor the risk of 
portfolio margin accounts pursuant to the risk monitoring procedures 
required by Rule 15.8A. Guarantees by any other account for purposes of 
margin requirements is not to be permitted.
    (2) Pursuant to Chapter XIII--Net Capital and Rule 13.5--Customer 
Portfolio Margin Accounts--thereunder, if additional margin required is 
not obtained by the close of business on T+1, member organizations must 
deduct in computing net capital any amount of the additional margin 
that is still outstanding until such time as the additional margin is 
obtained or positions are liquidated pursuant to (i)(1) above.
    (3) A deduction in computing net capital in the amount of a 
customer's margin deficiency may not serve in lieu of complying with 
the requirements of (i)(1) above.
    (4) A member organization may request from its Designated Examining 
Authority an extension of time for a customer to deposit additional 
margin. Such request must be in writing and will be granted only in 
extraordinary circumstances.
    (5[2]) The day trading requirements of Exchange Rule 12.3(j) shall 
not apply to portfolio margin accounts, including cross-margin 
accounts.
    (j) Cross-Margin Accounts--Requirement to Liquidate.
    (1) A member is required immediately either to liquidate, or 
transfer to another broker-dealer eligible to carry cross-margin 
accounts, all customer cross-margin accounts that contain positions in 
futures and/or options on futures if the member is:
    (i) Insolvent as defined in section 101 of title 11 of the United 
States Code, or is unable to meet its obligations as they mature;
    (ii) The subject of a proceeding pending in any court or before any 
agency of the United States or any State in which a receiver, trustee, 
or liquidator for such debtor has been appointed;
    (iii) Not in compliance with applicable requirements under the 
Securities Exchange Act of 1934 or rules of the Securities and Exchange 
Commission or any self-regulatory organization with respect to 
financial responsibility or hypothecation of customers' securities; or
    (iv) Unable to make such computations as may be necessary to 
establish compliance with such financial responsibility or 
hypothecation rules.
    (2) Nothing in this paragraph (j) shall be construed as limiting or 
restricting in any way the exercise of any right of a registered 
clearing agency to liquidate or cause the liquidation of positions in 
accordance with its by-laws and rules.
* * * * *
Chapter 9
Doing Business with the Public
Rule 9.15. Delivery of Current Options Disclosure Documents and 
Prospectus
    (a) no change.
    (b) no change.
    (c) The special written disclosure statement describing the nature 
and risks of portfolio margining and cross-margining, and 
acknowledgement for customer signature, required by Rule 12.4(c)(2) 
shall be in a format prescribed by the Exchange or in a format 
developed by the member organization, provided it contains 
substantially similar information as the prescribed Exchange format and 
has received prior written approval of the Exchange.
Sample Risk Description for Use by Firms To Satisfy Requirements of 
Exchange Rule 9.15(d)
Portfolio Margining and Cross-Margining
Disclosure Statement and Acknowledgement
    For a Description of the Special Risks Applicable to a Portfolio 
Margin Account and its Cross-Margining Features, See the Material Under 
Those Headings Below.
Overview of Portfolio Margining
    1. Portfolio margining is a margin methodology that sets margin 
requirements for an account based on the greatest projected net loss of 
all positions in a ``portfolio[product class]'' or ``product group'' as 
determined by an options pricing model using multiple pricing 
scenarios. These pricing scenarios are designed to measure the 
theoretical loss of the positions given changes in both the underlying 
price and implied volatility inputs to the model. Portfolio margining 
is currently limited to equity and equity index products[product 
classes and groups of index products relating to broad-based market 
indexes].
    2. The goal of portfolio margining is to set levels of margin that 
more precisely reflect actual net risk. The customer benefits from 
portfolio margining in that margin requirements calculated on net risk 
are generally lower than alternative ``position'' or ``strategy'' based 
methodologies for determining margin requirements. Lower margin 
requirements allow the customer more leverage in an account.
Customers Eligible for Portfolio Margining
    3. To be eligible for portfolio margining, customers [(other than 
broker-dealers)] must meet the basic standards for having an options 
account that is approved for uncovered writing. If a customer wishes to 
utilize unlisted derivatives, [and]the customer must have and maintain 
at all times account net equity of not less than $5 million, aggregated 
across all accounts under identical ownership at the clearing broker. 
The identical ownership requirement excludes accounts held by the same 
customer in different capacities (e.g., as a trustee and as an 
individual) and accounts where

[[Page 17523]]

ownership is overlapping but not identical (e.g., individual accounts 
and joint accounts).
    Carrying broker-dealers will have their own minimum account equity 
requirement, and possibly other eligibility requirements. Also, 
pursuant to exchange rules, a higher per contract minimum margin 
requirement will apply to portfolios holding the underlying instrument 
whenever account net equity is less than $5 million and no position in 
an unlisted derivative is held.
    Neither the $5 million minimum account equity requirement nor the 
higher per contract minimum is applicable to portfolio margining of 
customers that are broker-dealers or futures locals.
Positions Eligible for a Portfolio Margin Account
    4. All positions in [broad-based U.S. market]index and equity 
options, security futures products, and index warrants listed on a 
national securities exchange, underlying instruments (including[and] 
exchange traded funds and other fund products registered under the 
Investment Company Act of 1940 that are managed to track the same index 
that underlies permitted index options), are eligible for a portfolio 
margin account. Additionally, an account that elects to operate with 
account net equity of not less than $5 million may carry positions in 
unlisted derivatives (e.g., OTC swaps, options) that have the same 
underlying instrument as an index or equity option and can be priced by 
an approved vendor of theoretical values.
Special Rules for Portfolio Margin Accounts
    5. A portfolio margin account may be either a separate account or a 
subaccount of a customer's regular margin account. In the case of a 
subaccount, equity in the regular account will be available to satisfy 
any margin requirement in the portfolio margin subaccount without 
transfer to the subaccount.
    6. A portfolio margin account or subaccount that elects to operate 
with account equity of not less than $5 million will be subject to a 
minimum margin requirement of $.375 multiplied by the index multiplier 
for every options contract, security futures product, [or ]index 
warrant, unlisted derivative and related instrument carried long or 
short in the account. No minimum margin is required in the case of 
underlying instruments, eligible exchange traded funds or other 
eligible fund products. A portfolio margin account that elects to 
operate with account equity of less than $5 million will be subject to 
a minimum margin requirement of $.75 multiplied by the index multiplier 
for every options contract, security futures product, index warrant, 
unlisted derivative and related instrument carried long or short in any 
portfolio that contains a position in the underlying instrument. For 
portfolios that do not contain a position in the underlying security, a 
$.375 minimum will apply.
    7. Margin calls in the portfolio margin account or subaccount, 
regardless of whether due to new commitments or the effect of adverse 
market moves on existing positions, must be met within [one]three 
business days. Any shortfall in aggregate net equity across accounts 
must be met within three business days. Once a margin call is incurred, 
the entry of an opening or closing order that would increase the margin 
requirement is prohibited until the margin call is met. Failure to meet 
a margin call when due will result in immediate liquidation of 
positions to the extent necessary to reduce the margin requirement. 
Failure to meet an equity call prior to the end of the third business 
day will result in a prohibition on entering any new orders that would 
increase the margin requirement[opening orders, with the exception of 
opening orders that hedge existing positions], beginning on the fourth 
business day and continuing until such time as the minimum equity 
requirement is satisfied.
    8. Except for accounts that maintain account net equity of $5 
million, a[A] position in an underlying instrument[exchange traded fund 
or other eligible fund product] may not be established in a portfolio 
margin account unless there exists, or there is established on the same 
day, an offsetting position in securities options or other eligible 
securities.
    Underlying instruments[Exchange traded index funds and/or other 
eligible funds] will be transferred out of the portfolio margin account 
and into a regular securities account subject to strategy based margin 
if, for more than 10 business days and for any reason, the offsetting 
securities options or other eligible securities no longer remain in the 
account.
    9. When a broker-dealer carries a regular cash account or margin 
account for a customer, the broker-dealer is limited by rules of the 
Securities and Exchange Commission and of The Options Clearing 
Corporation (``OCC'') in the extent to which the broker-dealer may 
permit OCC to have a lien against long option positions in those 
accounts. In contrast, OCC will have a lien against all long option 
positions that are carried by a broker-dealer in a portfolio margin 
account, and this could, under certain circumstances, result in greater 
losses to a customer having long option positions in such an account in 
the event of the insolvency of the customer's broker. Furthermore, the 
carrying broker-dealer has a lien on all long securities in a portfolio 
margin account, including underlying instruments, even if fully paid. 
Accordingly, to the extent that a customer does not borrow against long 
option and underlying instrument positions in a portfolio margin 
account or have margin requirements in the account against which the 
long option or underlying instruments can be credited, there is no 
advantage to carrying the long options and underlying instruments in a 
portfolio margin account and the customer should consider carrying them 
in an account other than a portfolio margin account.
Special Risks of Portfolio Margin Accounts
    10. Portfolio margining generally permits greater leverage in an 
account, and greater leverage creates greater losses in the event of 
adverse market movements.
    11. Because the time limit for meeting margin calls is shorter than 
in a regular margin account, there is increased risk that a customer's 
portfolio margin account will be liquidated involuntarily, possibly 
causing losses to the customer.
    12. Because portfolio margin requirements are determined using 
sophisticated mathematical calculations and theoretical values that 
must be calculated from market data, it may be more difficult for 
customers to predict the size of future margin calls in a portfolio 
margin account. This is particularly true in the case of customers who 
do not have access to specialized software necessary to make such 
calculations or who do not receive theoretical values calculated and 
distributed periodically by OCC.
    13. For the reasons noted above, a customer that carries long 
options and underlying instrument positions in a portfolio margin 
account could, under certain circumstances, be less likely to recover 
the full value of those positions in the event of the insolvency of the 
carrying broker.
    14. Trading of securities index and equity products in a portfolio 
margin account is generally subject to all the risks of trading those 
same products in a regular securities margin account. Customers should 
be thoroughly familiar with the risk disclosure materials applicable to 
those products,

[[Page 17524]]

including the booklet entitled Characteristics and Risks of 
Standardized Options.
    15. Customers should consult with their tax advisers to be certain 
that they are familiar with the tax treatment of transactions in 
securities index and equity products.
    16. The descriptions in this disclosure statement relating to 
eligibility requirements for portfolio margin accounts, and minimum 
equity and margin requirements for those accounts, are minimums imposed 
under exchange rules. Time frames within which margin and equity calls 
must be met are maximums imposed under exchange rules. Broker-dealers 
may impose their own more stringent requirements.
Overview of Cross-Margining
    17. With cross-margining, index futures and options on index 
futures are combined with offsetting positions in securities index 
options and underlying instruments, for the purpose of computing a 
margin requirement based on the net risk. This generally produces lower 
margin requirements than if the futures products and securities 
products are viewed separately, thus providing more leverage in the 
account.
    18. Cross-margining must be done in a portfolio margin account 
type. A separate portfolio margin account must be established 
exclusively for cross-margining.
    19. When index futures and options on index futures are combined 
with offsetting positions in index options and underlying instruments 
in a dedicated account, and a portfolio margining methodology is 
applied to them, cross-margining is achieved.
Customers Eligible for Cross-Margining
    20. The eligibility requirements for cross-margining are generally 
the same as for portfolio margining, and any customer eligible for 
portfolio margining is eligible for cross-margining.
    21. Members of futures exchanges on which cross-margining eligible 
index contracts are traded are also permitted to carry positions in 
cross-margin accounts without regard to the minimum aggregate account 
equity.
Positions Eligible for Cross-Margining
    22. All securities index option products eligible for portfolio 
margining are also eligible for cross-margining. Additionally, accounts 
that elect to maintain equity of not less than $5 million may carry 
positions in unlisted derivatives (e.g., OTC index swaps, options).
    23. All [broad-based U.S. market ]index futures and options on 
index futures [traded on a designated contract market ]that have the 
same underlying index as a securities index option permitted in 
paragraph 22 above and that are traded on a designated contract market 
subject to the jurisdiction of the Commodity Futures Trading Commission 
are eligible for cross-margining.
Special Rules for Cross-Margining
    24. Cross-margining must be conducted in a portfolio margin account 
type. A separate portfolio margin account must be established 
exclusively for cross-margining. A cross-margin account is a securities 
account, and must be maintained separate from all other securities 
accounts.
    25. Cross-margining is automatically accomplished with the 
portfolio margining methodology. Cross-margin positions are subject to 
the same minimum margin requirement for every contract, including 
futures contracts.
    26. Margin calls arising in the cross-margin account, and any 
shortfall in aggregate net equity across accounts, must be satisfied 
within the same time frames [(10 business days),] and subject to the 
same consequences, as in a portfolio margin account (see paragraph 7 
above).
    27. A position in a futures product may not be established in a 
cross-margin account unless there exists, or there is established on 
the same day, an offsetting position in securities options and/or other 
eligible securities. Futures products will be transferred out of the 
cross-margin account and into a futures account if, for more than 10 
business days and for any reason, the offsetting securities options 
and/or other eligible securities no longer remain in the account. If 
the transfer of futures products to a futures account causes the 
futures account to be undermargined, a margin call will be issued or 
positions will be liquidated to the extent necessary to eliminate the 
deficit.
    28. Except for accounts maintain account net equity of $5 million, 
a[A] position in an underlying instrument may not be established in a 
cross-margin account unless there exists, or there is established on 
the same day, an offsetting position in a related instrument. 
Underlying instrument positions will be transferred out of the cross-
margin account and into a regular securities account if, for more than 
10 business days and for any reason, the offsetting related instrument 
or other eligible instrument no longer remains in the account.
    [28]29. According to the rules of the exchanges, a broker-dealer is 
required to immediately liquidate, or, if feasible, transfer to another 
broker-dealer eligible to carry cross-margin accounts, all customer 
cross-margin accounts that contain positions in futures and/or options 
on futures in the event that the carrying broker-dealer becomes 
insolvent.
    [29]30. Customers participating in cross-margining will be required 
to sign an agreement acknowledging that their positions and property in 
the cross-margin account will be subject to the customer protection 
provisions of Rule 15c3-3 under the Securities Exchange Act of 1934 and 
the Securities Investor Protection Act, and will not be subject to the 
provisions of the Commodity Exchange Act, including segregation of 
funds.
    [30]31. In signing the agreement referred to in paragraph 29 above, 
a customer also acknowledges that a cross-margin account that contains 
positions in futures and/or options on futures will be immediately 
liquidated, or, if feasible, transferred to another broker-dealer 
eligible to carry cross-margin accounts, in the event that the carrying 
broker-dealer becomes insolvent.
Special Risks of Cross-Margining
    [31]32. Cross-margining must be conducted in a portfolio margin 
account type. Generally, cross-margining and the portfolio margining 
methodology both contribute to provide greater leverage than a regular 
margin account, and greater leverage creates greater losses in the 
event of adverse market movements.
    [32]33. As cross-margining must be conducted in a portfolio margin 
account type, the time required for meeting margin calls is shorter 
than in a regular securities margin account and may be shorter than the 
time ordinarily required by a futures commission merchant for meeting 
margin calls in a futures account. As a result, there is increased risk 
that a customer's cross-margin positions will be liquidated 
involuntarily, causing possible loss to the customer.
    [33]34. As noted above, cross-margin accounts are securities 
accounts and are subject to the customer protections set-forth in Rule 
15c3-3 under the Securities Exchange Act of 1934 and the Securities 
Investor Protection Act. Cross-margin positions are not subject to the 
customer protection rules under the segregation provisions of the 
Commodity Exchange Act and the rules of the Commodity Futures Trading 
Commission (``CFTC'') adopted pursuant to the Commodity Exchange Act.
    [34]35. Trading of index options and futures contracts in a cross-
margin

[[Page 17525]]

account is generally subject to all the risks of trading those same 
products in a futures account or a regular securities margin account, 
as the case may be. Customers should be thoroughly familiar with the 
risk disclosure materials applicable to those products, including the 
booklet entitled Characteristics and Risks of Standardized Options and 
the risk disclosure document required by the CFTC to be delivered to 
futures customers. Because this disclosure statement does not disclose 
the risks and other significant aspects of trading in futures and 
options, customers should review those materials carefully before 
trading in a cross-margin account.
    [35]36. Customers should bear in mind that the discrepancies in the 
cash flow characteristics of futures and certain options are still 
present even when those products are carried together in a cross-margin 
account. Both futures and options contracts are generally marked to the 
market at least once each business day, but the marks may take place 
with different frequency and at different times within the day. When a 
futures contract is marked to the market, the gain or loss is 
immediately credited to or debited from, respectively, the customer's 
account in cash. While a change[an increase] in the value of [a long]an 
option contract may increase or decrease the equity in the account, the 
gain or loss is not realized until the option is liquidated, [sold or 
]exercised or assigned. Accordingly, a customer may be required to 
deposit cash in the account in order to meet a variation payment on a 
futures contract even though the customer is in a hedged position and 
has experienced a corresponding (but as yet unrealized) gain on an 
[long ]option. On the other hand, a customer who is in a hedged 
position and would otherwise be entitled to receive a variation payment 
on a futures contract may find that the cash is required to be held in 
the account as margin collateral on an offsetting option position.
    [36]37. Customers should consult with their tax advisers to be 
certain that they are familiar with the tax treatment of transactions 
in index products, including tax consequences of trading strategies 
involving both futures and option contracts.
    [37]38. The descriptions in this disclosure statement relating to 
eligibility requirements for cross-margining, [and] minimum equity and 
margin requirements for cross-margin accounts, are minimums imposed 
under exchange rules. Time frames within which margin and equity calls 
must be met are maximums imposed under exchange rules. The broker-
dealer carrying a customer's portfolio margin account, including any 
cross-margin account, may impose its own more stringent requirements.
Acknowledgement for Customers Utilizing a Portfolio Margin Account 
Cross-Margining and Non Cross-Margining
    Rule 15c3-3 under the Securities Exchange Act of 1934 requires that 
a broker or dealer promptly obtain and maintain physical possession or 
control of all fully-paid securities and excess margin securities of a 
customer. Fully-paid securities are securities carried in a cash 
account and margin equity securities carried in a margin or special 
account (other than a cash account) that have been fully paid for. 
Excess margin securities are a customer's margin securities having a 
market value in excess of 140% of the total of the debit balances in 
the customer's non-cash accounts. For the purposes of Rule 15c3-3, 
securities held subject to a lien to secure obligations of the broker-
dealer are not within the broker-dealer's physical possession or 
control. The Securities and Exchange Commission has taken the position 
that all long option positions in a customer's portfolio-margining 
account (including any cross-margining account) may be subject to such 
a lien by OCC and will not be deemed fully-paid or excess margin 
securities under Rule 15c3-3. Furthermore, long positions, including 
underlying instruments, in a portfolio margin account (including any 
cross-margin account) are held subject to a lien by the carrying 
broker-dealer, even if fully paid.
    The hypothecation rules under the Securities Exchange Act of 1934 
(Rules 8c-1 and 15c2-1), prohibit broker-dealers from permitting the 
hypothecation of customer securities in a manner that allows those 
securities to be subject to any lien or liens in an amount that exceeds 
the customer's aggregate indebtedness. However, all long option 
positions in a portfolio-margining account (including any cross-
margining account) will be subject to OCC's lien, including any 
positions that exceed the customer's aggregate indebtedness. 
Furthermore, long positions, including underlying instruments, in a 
portfolio margin account (including any cross-margin account) are held 
subject to a lien by the carrying broker-dealer, even if fully paid. 
The Securities and Exchange Commission has granted an exemption from 
the hypothecation rules to allow customers to carry positions in 
portfolio-margining accounts (including any cross-margining account), 
even when those positions exceed the customer's aggregate indebtedness. 
Accordingly, within a portfolio margin account or cross-margin account, 
to the extent that you have long option or underlying instrument 
positions that do not operate to offset your aggregate indebtedness and 
thereby reduce your margin requirement, you receive no benefit from 
carrying those positions in your portfolio margin account or cross-
margin account and incur the additional risk of OCC's lien on your long 
option position(s) and the carrying broker-dealer's lien on your long 
underlying instrument position(s).
    By signing below, the customer affirms that the customer has read 
and understood the foregoing disclosure statement and acknowledges and 
agrees that long option positions in portfolio-margining accounts, and 
cross-margining accounts will be exempted from certain customer 
protection rules of the Securities and Exchange Commission as described 
above and will be subject to a lien by the Options Clearing Corporation 
without regard to such rules.

Customer Name: --------

By: --------

Date: --------
    (signature/title)
Acknowledgement for Customers Engaged in Cross-Margining
    As disclosed above, futures contracts and other property carried in 
customer accounts with Futures Commission Merchants (``FCM'') are 
normally subject to special protection afforded under the customer 
segregation provisions of the Commodity Exchange Act (``CEA'') and the 
rules of the CFTC adopted pursuant to the CEA. These rules require that 
customer funds be segregated from the accounts of financial 
intermediaries and be separately accounted for, however, they do not 
provide for, and regular futures accounts do not enjoy the benefit of, 
insurance protecting customer accounts against loss in the event of the 
insolvency of the intermediary carrying the accounts.
    As also has been discussed above, cross-margining must be conducted 
in a portfolio margin account dedicated exclusively to cross-margining, 
and cross-margin accounts are not treated as a futures account with an 
FCM. Instead, cross-margin accounts are treated as securities accounts 
carried with broker-dealers. As such, cross-margin accounts are covered 
by Rule 15c3-3 under the Securities Exchange Act of 1934, which

[[Page 17526]]

protects customer accounts. Rule 15c3-3, among other things, requires a 
broker-dealer to maintain physical possession or control of all fully-
paid and excess margin securities and maintain a special reserve 
account for the benefit of their customers. However, in respect of 
cross-margin accounts, there is an exception to the possession or 
control requirement of Rule 15c3-3 that permits The Options Clearing 
Corporation to have a lien on long option positions, and the carrying 
broker-dealer to have a lien on any long securities. These[This] 
aspects are[is] outlined in a separate acknowledgement form that must 
be signed prior to or concurrent with this form. Additionally, the 
Securities Investor Protection Corporation (``SIPC'') insures customer 
accounts against the financial insolvency of a broker-dealer in the 
amount of up to $500,000 to protect against the loss of registered 
securities and cash maintained in the account for purchasing securities 
or as proceeds from selling securities (although the limit on cash 
claims is $100,000). According to the rules of the exchanges, a broker-
dealer is required to immediately liquidate, or, if feasible, transfer 
to another broker-dealer eligible to carry cross-margin accounts, all 
customer cross-margin accounts that contain positions in futures and/or 
options on futures in the event that the carrying broker-dealer becomes 
insolvent.
    By signing below, the customer affirms that the customer has read 
and understood the foregoing disclosure statement and acknowledges and 
agrees that: 1) positions and property in cross-margining accounts, 
will not be subject to the customer protection rules under the customer 
segregation provisions of the Commodity Exchange Act (``CEA'') and the 
rules of the Commodity Futures Trading Commission adopted pursuant to 
the CEA, and 2) cross-margining accounts that contain positions in 
futures and/or options on futures will be immediately liquidated, or, 
if feasible, transferred to another broker-dealer eligible to carry 
cross-margin accounts in the event that the carrying broker-dealer 
becomes insolvent.

Customer Name: --------

By: --------

Date: --------
    (signature/title)

* * * * *
Chapter XIII
Net Capital
Rule 13.5. Customer Portfolio Margin Accounts
    (a) No member organization that requires margin in any customer 
accounts pursuant to Rule 12.4--Portfolio Margin for Index and Equity 
Options, and Cross-Margin for Index Options, shall permit gross 
customer portfolio margin requirements to exceed 1,000 percent of its 
net capital for any period exceeding three business days. The member 
organization shall, beginning on the fourth business day of any non-
compliance, cease opening new portfolio margin accounts, including 
cross-margin accounts until compliance is achieved.
    (b) If, at any time, a member organization's gross customer 
portfolio margin requirements exceed 1,000 percent of its net capital, 
the member organization shall immediately transmit telegraphic or 
facsimile notice of such deficiency to the Office of Market 
Supervision, Division of Market Regulation, Securities and Exchange 
Commission, 100 F Street, NE[450 Fifth Street NW], Washington, DC, 
20549; to the district or regional office of the Securities and 
Exchange Commission for the district or region in which the member 
organization maintains its principal place of business; and to its 
Designated Examining Authority.
    (c) If any customer portfolio margin account becomes subject to a 
call for additional margin, and all of the additional margin is not 
obtained by the close of business on T+1, member organizations must 
deduct in computing net capital any amount of the additional margin 
that is still outstanding until such time as it is obtained or 
positions are liquidated pursuant to Rule 12.4(i)(1).
* * * * *
Chapter XV
Records, Reports and Audits
Rule 15.8A. Risk Analysis of Portfolio Margin Accounts
    (a) Each member organization that maintains any portfolio margin 
accounts for customers shall establish and maintain a sophisticated 
written risk analysis methodology[procedures] for assessing and 
monitoring the potential risk to the member organization's capital over 
a specified range of possible market movements of positions maintained 
in such accounts. [Current procedures shall be filed and maintained 
with the Department of Financial and Sales Practice Compliance.] The 
risk analysis methodology[procedures] shall specify the computations to 
be made, the frequency of computations, the records to be reviewed and 
maintained, and the person(s)[position(s)] within the organization 
responsible for the risk function. This risk analysis methodology must 
be approved by the member organization's Designated Examining Authority 
and then submitted to the SEC prior to the implementation of portfolio 
margining and cross-margining.
    (b) Upon direction by the Department of Member Firm 
Regulation[Financial and Sales Practice Compliance], each affected 
member organization shall provide to the Department such information as 
the Department may reasonably require with respect to the member 
organization's risk analysis for any or all of the portfolio margin 
accounts it maintains for customers.
    (c) In conducting the risk analysis of portfolio margin accounts 
required by this Rule 15.8A, each affected member organization is 
required to follow the Interpretations and Policies set forth under 
Rule 15.8--Risk Analysis of Market-Maker Accounts. In addition, each 
affected member organization shall include in the written risk analysis 
methodology[procedures] required pursuant to paragraph (a) above 
procedures and guidelines for[the following:
    (1) Obtaining and reviewing the appropriate customer account 
documentation and financial information necessary for assessing the 
amount of credit extended to customers,
    (2[1]) [Procedures and guidelines for ]the determination, review 
and approval of credit limits to each customer, and across all 
customers, utilizing a portfolio margin account[.],
    (3[2]) [Procedures and guidelines ]for monitoring credit risk 
exposure to the member organization, including intra-day credit risk, 
related to portfolio margin accounts[.],
    (4[3]) [Procedures and guidelines for ]the use of stress testing of 
portfolio margin accounts in order to monitor market risk exposure from 
individual accounts and in the aggregate[.],
    (5[4]) [Procedures providing for ]the regular review and testing of 
these risk analysis procedures by an independent unit such as internal 
audit or other comparable group[.],
    (6) The type, scope and frequency of reporting by management on 
credit extension exposure,
    (7) Managing the impact of credit extension on the member 
organization's overall risk exposure,

[[Page 17527]]

    (8) The appropriate response by management when limits on credit 
extensions have been exceeded, and
    (9) Determining the need to collect margin from a particular 
eligible participant, including whether that determination was based 
upon the creditworthiness of the participant and/or the risk of the 
eligible position(s).
    Moreover, management must periodically review, in accordance with 
written procedures, the member organization's credit extension 
activities for consistency with these guidelines. Management must 
determine if the data necessary to apply this Rule 15.8A is accessible 
on a timely basis and information systems are available to capture, 
monitor, analyze and report relevant data.

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

    In its filing with the Commission, CBOE 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. CBOE 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
    CBOE Rule 12.4--Portfolio Margin and Cross-Margin for Index 
Options--permits member organizations to compute a margin requirement 
for broad-based index option positions carried for customers using a 
portfolio (or risk-based) margin approach. The CBOE is proposing to 
broaden this rule by enabling portfolio margining of listed equity 
options, narrow-based index options, and security futures. The 
inclusion of offsetting (underlying) equity securities and related 
instruments (i.e., futures, options on futures) in a portfolio margin 
account is also proposed. The CBOE is also proposing to allow portfolio 
margining of certain unlisted options, forward contracts and swaps (or 
unlisted derivatives). Under the proposed amendments, a $5 million 
minimum account equity requirement would apply only to portfolio margin 
accounts that contain unlisted derivatives.
    The Exchange is proposing amendments to current Rule 12.4, as 
necessary, to accommodate portfolio margining of listed equity 
options,\3\ narrow-based index options, and security futures, as well 
as underlying securities, related instruments and unlisted derivatives 
that offset risk.\4\ In proposing these changes, the Exchange, in large 
part, is adopting the recommendations of a portfolio margining working 
group of the Securities Industry Association (``SIA'').\5\ The New York 
Stock Exchange's (``NYSE'') Rule 431 Committee endorsed the SIA working 
group's proposal, and the CBOE understands that the NYSE has, or will 
be, filing a substantively similar rule change proposal.
---------------------------------------------------------------------------

    \3\ Including options on exchange traded funds.
    \4\ It should be noted that the Chairman of the Commission, 
Christopher Cox, in a letter, dated September 27, 2005, to William 
J. Brodsky and John A. Thain, the Chief Executive Officers of CBOE 
and NYSE, respectively, encouraged each exchange to file a rule 
proposal to make portfolio margining available to equity options and 
security futures with the Commission by year-end 2005.
    \5\ Goldman, Sachs & Co., Morgan Stanley & Co., Inc., Merrill 
Lynch, Pierce, Fenner and Smith, Inc., Bear Stearns Securities Corp. 
and Credit Suisse First Boston Corp comprise the working group.
---------------------------------------------------------------------------

    For portfolios of equity options, narrow-based index options, and/
or security futures, the Exchange is proposing that the risk array for 
computing the portfolio margin requirement be set at up/down market 
moves of +15%/-15%. A portfolio of only broad-based index options and 
futures would continue to be stress tested as specified under the 
current rule: +6%/-8% for highly capitalized broad-based indices and +/
-10% for non-highly capitalized broad-based indices. Computation of the 
portfolio margin requirement would otherwise follow the same process 
prescribed by Rule 12.4. All equity options having the same underlying 
security, the underlying security itself, and any related futures, 
options on futures or security futures could be combined as a portfolio 
for purposes of computing a portfolio margin requirement. The +/-15% 
price range for computing a portfolio margin requirement is the same 
parameter required under Appendix A of the Commission's net capital 
rule (Exchange Act Rule 15c3-1) for computing deductions to a firm's 
net capital for proprietary positions.
    Rule 12.4 currently requires a person or entity that wishes to open 
a portfolio margin account to have and maintain $5 million dollars in 
account equity. All of a customer's accounts in the same name, at the 
same broker-dealer, including any futures accounts, may be combined for 
purposes of meeting this equity requirement. CBOE proposes to eliminate 
the requirement of a $5 million account equity requirement except for 
accounts that carry unlisted derivatives.
    The Exchange believes that there are a large number of market 
participants for which portfolio margining would be an appropriate and 
more practical methodology, but that do not qualify for portfolio 
margining only because they are unable to meet the $5 million minimum 
account equity requirement. The Exchange believes that portfolio 
margining provides an efficient and prudent margin methodology and that 
it should be available to as broad a population of market participants 
as possible. Portfolio margining as designed in this proposal would 
provide for an adequate level of margin for portfolios of options and 
any related, offsetting instruments (futures, options on futures). By 
testing the portfolio against assumed up and down market moves that 
reflect historical moves in the underlying security with a high level 
of confidence, and thereby assessing potential loss in a portfolio 
taken as a whole, portfolio margining provides an accurate and 
efficient means for deriving a reasonable margin requirement. A minimum 
account equity requirement is unnecessary to provide adequate margin 
coverage, particularly with the higher minimum contract charges 
contained in this proposal for accounts with less than $5 million 
equity that hold stock positions.\6\ The Exchange is proposing an 
amendment of Rule 12.4 that would permit customers that do not have $5 
million in account equity to open a portfolio margin account, but under 
more stringent controls. Under the proposed amendments, a portfolio 
margin account could be opened for a customer that does not meet the $5 
million minimum account equity, but such account would be subject to 
the following requirements:
---------------------------------------------------------------------------

    \6\ CBOE notes that the proposal would continue to equire that 
an account must be approved for uncovered options writing to be 
eligible for portfolio margining. As the equity requirement for 
uncovered accounts imposed by firms is generally at least $100,000, 
this will result in a minimum account equity requirement of at least 
$100,000.
---------------------------------------------------------------------------

    1. Only listed derivatives and underlying securities are permitted 
(no OTC instruments),
    2. A $75.00 per contract minimum charge for portfolios that contain 
underlying stock positions ($37.50 per contract minimum charge for 
portfolios that do not contain underlying stock positions).
    Additionally, Rule 12.4 is being amended to require that margin 
calls in a portfolio margin account be met by T+

[[Page 17528]]

3, instead of on T+1 (the current requirement). This is being done 
based on the SIA Working Group's proposal. Based on its input, the T+1 
requirement is onerous in that, from an operational and customer 
service standpoint, it is not practical, and risk is not viewed as 
significantly increased by going from a T+1 to a T+3 requirement.
    For added safety and soundness, the Exchange is also proposing a 
change to Rule 12.4 that would require carrying firms to deduct the 
amount of any outstanding customer margin call in a portfolio margining 
customer's account from net capital on T+1. Additionally, an amendment 
is proposed that would prohibit entry of new orders that would increase 
the margin requirement once a margin call is made, and continuing until 
the margin call is met. Additionally, amendments to Rule 15.8A--Risk 
Analysis of Portfolio Margin Accounts--are proposed under which the 
currently required risk analysis procedures for assessing and 
monitoring the risk of portfolio margin accounts to the carrying firm's 
capital would have to be sophisticated and be approved in advance by 
the firm's Designated Examining Authority. Also, several procedures/
guidelines have also been added to Rule 15.8A. Lastly, Rule 13.5--
Customer Portfolio Margin Accounts--will continue to require that a 
carrying firm limit its aggregate customer portfolio margin 
requirements (including cross-margin requirements) to not more than 
1,000% of its net capital.
    As with the current rule for broad-based index options, only the 
theoretical option values provided by The Options Clearing Corporation 
(the ``OCC'') may be used for computing gain or loss on portfolio 
positions.
    Additionally, it is being proposed that an unlisted derivative be 
allowed in a portfolio margin account only if the OCC can provide 
theoretical values.
    The Exchange proposes to amend Rule 12.4 to add a requirement that 
a firm be approved in advance by its Designated Examining Authority 
(``DEA'') to offer portfolio margining to customers. Exchange Rule 
15.8A--Risk Analysis o