Self-Regulatory Organizations; Board of Trade of the City of Chicago, Inc.; Notice of Filing and Order Granting Accelerated Approval of Proposed Rule Change Relating to Customer Margin Requirements for Security Futures, 19774-19781 [E6-5650]
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19774
Federal Register / Vol. 71, No. 73 / Monday, April 17, 2006 / Notices
Commission believes that the
Exchange’s market maker registration
policy and procedures, and the
qualification requirements for ‘‘60/40’’
tax treatment, should help ensure that
market makers provide liquidity and
orderliness in the CBOT market.
The CBOT has requested that the
Commission approve the proposed rule
change prior to the thirtieth day after
publication of notice of the filing in the
Federal Register. The Commission
believes that the market maker
registration policy and procedures and
the qualification requirement for ‘‘60/
40’’ tax treatment are an extension of the
obligations adopted in connection with
the CBOT’s customer margin rules,
which set forth the standards under
which a CBOT member may be
excluded from the Exchange’s margin
requirements as a ‘‘market maker,’’ and
therefore should raise no novel
regulatory issues related to margin
requirements.15 Furthermore, the
Commission notes that the proposed
rule change is substantially similar to
OneChicago, LLC’s market maker
registration policy and procedures,
which were approved by the
Commission. Accordingly, the
Commission finds good cause,
consistent with section 19(b)(2) of the
Act,16 to approve the proposed rule
change prior to the thirtieth day after
publication of the notice of filing thereof
in the Federal Register.
V. Conclusion
It is therefore ordered, pursuant to
section 19(b)(2) of the Act 17 that the
proposed rule change (SR–CBOT–2006–
02) is hereby approved on an
accelerated basis.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.18
Nancy M. Morris,
Secretary.
[FR Doc. E6–5611 Filed 4–14–06; 8:45 am]
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BILLING CODE 8010–01–P
15 See Securities Exchange Act Release No. 50115
(July 29, 2004) 69 FR 48261 (August 9, 2004).
16 15 U.S.C. 78s(b)(2).
17 Id.
18 17 CFR 200.30–3(a)(12).
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SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–53626; File No. SR–CBOT–
2006–01]
Self-Regulatory Organizations; Board
of Trade of the City of Chicago, Inc.;
Notice of Filing and Order Granting
Accelerated Approval of Proposed
Rule Change Relating to Customer
Margin Requirements for Security
Futures
April 10, 2006.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Exchange Act’’),1 and Rule 19b–4
thereunder,2 notice is hereby given that
on March 2, 2006, the Board of Trade of
the City of Chicago, Inc. (‘‘CBOT’’ or
‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’ or ‘‘SEC’’) 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 and to
grant accelerated approval to the
proposed rule change.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The Exchange is proposing to
establish procedures relating to the
determination and administration of
customer margin for security futures
positions established on the Exchange
and maintained in futures accounts.
Further, the proposed regulations define
the applicability of these requirements,
specifically excluding qualifying
security futures dealers from customer
security futures margin requirements
and related regulatory requirements.
The text of the proposed rule change is
below. New text is italicized.
*
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*
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New Regulation 431.07 Customer
Margins for Security Futures Positions
Held in Futures Accounts
Margin requirements associated with
Security Futures positions, which result
from transactions made on the
Exchange on behalf of Customers, and
which are held in a futures account,
shall be determined and administered
in accordance with the Rules and
Regulations of the Exchange, and in
compliance with CFTC Regulations
41.42 through 41.49 and SEC
Regulations 242.400 through 242.406.
With regard to such Security Futures
1 15
2 17
PO 00000
U.S.C. 78s(b)(1).
CFR 240.19b–4.
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positions, if Exchange Rules or
Regulations are inconsistent with CFTC
Regulations 41.42 through 41.49 and
SEC Regulations 242.400 through
242.406, including any successor
Regulations, the CFTC and SEC
Regulations shall prevail.
(a) Initial and maintenance margin
rates used in determining Exchange
margin requirements applicable to
Security Futures that are held on behalf
of Customers in a futures account, shall
be established at levels no lower than
those prescribed by CFTC Regulation
41.45 and SEC Regulation 242.403,
including any successor Regulations.
(b) As used in this Regulation, the
term ‘‘Customer’’ does not include (a)
an ‘‘exempted person’’ as defined in
CFTC Regulation 41.43(a)(9) and SEC
Regulation 242.401(a)(9); or (b) Market
Makers as defined below.
(c) A Person shall be a ‘‘Market
Maker’’ for purposes of this Rule, and
shall be excluded from the requirements
set forth in CFTC Regulations 41.42
through 41.49 and SEC Regulations
242.400 through 242.406, as applicable,
in accordance with CFTC Regulation
41.42(c)(2)(v) and SEC Regulation
242.400(c)(2)(v), with respect to all
trading in Security Futures for its own
account, if such Person is an Exchange
Member that is registered with the
Exchange as a ‘‘Security Futures
Dealer.’’
Each such Market Maker shall: (a) be
a member of the Exchange and be
registered as a floor trader or a floor
broker with the CFTC under Section
4f(a)(1) of the CEA or be registered as a
dealer with the SEC under Section 15(b)
of the Exchange Act; (b) maintain
records sufficient to prove compliance
with the requirements set forth in this
Regulation and CFTC Regulation
41.42(c)(2)(v) or SEC Regulation
242.400(c)(2)(v), as applicable,
including without limitation, trading
account statements and other financial
records sufficient to detail activity; and
(c) hold itself out as being willing to buy
and sell Security Futures for its own
account on a regular or continuous
basis.
A Market Maker satisfies condition (c)
above if any of the following three
requirements are fulfilled:
(1) The Market Maker:
(i) Provides continuous two-sided
quotations throughout the trading day
for all delivery months of Security
Futures Contracts representing a
meaningful proportion of the total
trading volume of Security Futures
Contracts on the Exchange, subject to
relaxation during unusual market
conditions as determined by the
Exchange (such as a fast market in
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Federal Register / Vol. 71, No. 73 / Monday, April 17, 2006 / Notices
either a Security Futures Contract or a
security underlying a Security Futures
Contract) at which times the Market
Maker must use its best efforts to quote
continuously and competitively; and
(ii) When providing quotations, quotes
with a maximum bid/ask spread of no
more than the greater of $0.20 or 150%
of the bid/ask spread in the primary
market for the security underlying each
Security Futures Contract.
(2) The Market Maker:
(i) Responds to at least 75% of the
requests for quotation for all delivery
months of Security Futures Contracts
representing a meaningful proportion of
the total trading volume of Security
Futures Contracts on the Exchange,
subject to relaxation during unusual
market conditions as determined by the
Exchange (such as a fast market in
either a Security Futures Contract or a
security underlying a Security Futures
Contract) at which times the Market
Maker must use its best efforts to quote
competitively; and
(ii) When responding to requests for
quotation, quotes within five seconds
with a maximum bid/ask spread of no
more than the greater of $0.20 or 150%
of the bid/ask spread in the primary
market for the security underlying each
Security Futures Contract.
(3) The Market Maker:
(i) Is assigned to a group of Security
Futures Contracts listed on the
Exchange that is either unlimited in
nature (‘‘Unlimited Assignment’’) or is
assigned to no more that 20% of the
Security Futures Contracts listed on the
Exchange (‘‘Limited Assignment’’); and
(ii) At least 75% of the Market
Maker’s total trading activity in
Exchange Security Futures Contracts is
in its assigned Security Futures
Contracts, measured on a quarterly
basis; and
(iii) During at least 50% of the trading
day, the Market Maker has bids or offers
in the market that are at or near the best
market, except in unusual market
conditions as determined by the
Exchange (such as a fast market in
either a Security Futures Contract or a
security underlying a Security Futures
Contract), with respect to at least 25%
(in the case of an Unlimited
Assignment) or at least one (in the case
of a Limited Assignment) of its assigned
Security Futures Contracts; and
(iv) The requirements in (ii) and (iii)
are satisfied on (a) at least 90% of the
trading days in each calendar quarter by
Market Makers who have undertaken an
Unlimited Assignment; or (b) at least
80% of the trading days in each
calendar quarter by Market Makers who
have undertaken a Limited Assignment;
or (c) on at least 80% of the trading days
in each calendar quarter by Market
Makers who have undertaken either an
Unlimited Assignment or Limited
Assignment but where the Exchange is
listing four (4) or fewer Security Futures
Contracts.
For purposes of clauses (1) and (2)
above, beginning on the 181st calendar
day after the commencement of trading
of Security Futures Contracts on the
Exchange, a ‘‘meaningful proportion of
the total trading volume of Security
19775
Futures Contracts on the Exchange’’
shall mean a minimum of 20% of such
trading volume.
Any Market Maker that fails to
comply with the applicable Rules of the
Exchange, CFTC Regulations 41.42
through 41.49 or SEC Regulations
242.400 through 242.406, as applicable,
shall be subject to disciplinary action in
accordance with Chapter 5. Appropriate
sanctions in the case of any such failure
shall include, without limitation, a
revocation of such Market Maker’s
registration with the Exchange as a
Security Futures Dealer.
(d) The Exchange shall establish
initial and maintenance margin
requirements applicable to Security
Futures that are held in a futures
account, provided that the margin
requirement for any long or short
position held by a member firm on
behalf of a Customer shall not be less
than 20% of the current market value of
the relevant Security Futures Contract,
or such other requirement as may be
established by the CFTC and SEC for
purposes of CFTC Regulation 41.45(b)(1)
and SEC Regulation 242.403(b)(1),
unless a lower margin level is available
for such position pursuant to paragraph
(e) below.
(e) Initial and maintenance margin
requirements for offsetting positions
involving Security Futures and related
positions are provided in the schedule
below, for purposes of CFTC Regulation
41.45(b)(2) and SEC Regulation
242.403(b)(2).
Margin Requirements for Offsetting Positions
1 ..........
2 ..........
3 ..........
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4 ..........
Long security future (or basket
of security futures representing each component of
a narrow-based securities
index 3) and long put option 4
on the same underlying security (or index).
Short security future (or basket
of security futures representing each component of
a narrow-based securities
index) and short put option
on the same underlying security (or index).
Long security future and short
position in the same security
(or securities basket) underlying the security future.
Long security future (or basket
of security futures representing each component of
a narrow-based securities
index) and short call option
on the same underlying security (or index).
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Individual stock or narrowbased security index.
20% of the current market
value of the long security future, plus pay for the long put
in full.
Individual stock or narrowbased security index.
20% of the current market
value of the short security future, plus the aggregate put
in-the-money amount, if any.
Proceeds from the put sale
may be applied.
Individual stock or narrowbased security index.
The initial margin required
under Regulation T for the
short stock or stocks.
Individual stock or narrowbased security index.
20% of the current market
value of the long security future, plus the aggregate call
in-the-money amount, if any.
Proceeds from the call sale
may be applied.
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The lower of: (1) 10% of the
aggregate exercise price 5 of
the put plus the aggregate
put out-of-the-money 6
amount, if any; or (2) 20% of
the current market value of
the long security future.
20% of the current market
value of the short security future, plus the aggregate put
in-the-money amount, if any.7
5% of the current market value
as defined in Regulation T of
the stock or stocks underlying the security future.
20% of the current market
value of the long security future, plus the aggregate call
in-the-money amount, if any.
19776
Federal Register / Vol. 71, No. 73 / Monday, April 17, 2006 / Notices
Margin Requirements for Offsetting Positions—Continued
5 ..........
Long a basket of narrow-based
security futures that together
tracks a broad-based index
and short a broad-based security index call option contract on the same index.
Narrow-based security index ....
6 ..........
Short a basket of narrow-based
security futures that together
tracks a broad-based security
index and short a broadbased security index put option contract on the same
index.
Long a basket of narrow-based
security futures that together
tracks a broad-based security
index and long a broadbased security index put option contract on the same
index.
Short a basket of narrow-based
security futures that together
tracks a broad-based security
index and long a broadbased security index call option contract on the same
index.
Narrow-based security index ....
Narrow-based security index ....
20% of the current market
value of the short basket of
narrow-based security futures, plus pay for the long
call in full.
9 ..........
Long security future and short
security future on the same
underlying security (or index).
Individual stock or narrowbased security index.
10 ........
Long security future, long put
option and short call option.
The long security future, long
put and short call must be on
the same underlying security
and the put and call must
have the same exercise
price. (Conversion).
Long security future, long put
option and short call option.
The long security future, long
put and short call must be on
the same underlying security
and the put exercise price
must be below the call exercise price (Collar).
Short security future and long
position in the same security
(or securities basket) underlying the security future.
Short security future and long
position in a security immediately convertible into the
same security underlying the
security future, without restriction, including the payment of money.
Short security future (or basket
of security futures representing each component of
a narrow-based securities
index) and long call option or
warrant on the same underlying security (or index).
Individual stock or narrowbased security index.
The greater of: (1) 5% of the
current market value of the
long security future; or (2)
5% of the current market
value of the short security future.
20% of the current market
value of the long security future, plus the aggregate call
in-the-money amount, if any,
plus pay for the put in full.
Proceeds from the call sale
may be applied.
7 ..........
8 ..........
11 ........
12 ........
13 ........
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14 ........
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Narrow-based security index ....
20% of the current market
value of the long basket of
narrow-based security futures, plus the aggregate call
in-the-money amount, if any.
Proceeds from the call sale
may be applied.
20% of the current market
value of the short basket of
narrow-based security futures, plus the aggregate put
in-the-money amount, if any.
Proceeds from the put sale
may be applied.
20% of the current market
value of the long basket of
narrow-based security futures, plus pay for the long
put in full.
20% of the current market
value of the long basket of
narrow-based security futures, plus the aggregate call
in-the-money amount, if any.
20% of the current market
value of the short basket of
narrow-based security futures, plus the aggregate put
in-the-money amount, if any.
The lower of: (1) 10% of the
aggregate exercise price of
the put, plus the aggregate
put out-of-the-money amount,
if any; or (2) 20% of the current market value of the long
basket of security futures.
The lower of: (1) 10% of the
aggregate exercise price of
the call, plus the aggregate
call out-of-the-money
amount, if any; or (2) 20% of
the current market value of
the short basket of security
futures.
The greater of: (1) 5% of the
current market value of the
long security future; or (2)
5% of the current market
value of the short security future.
10% of the aggregate exercise
price, plus the aggregate call
in-the-money amount, if any.
Individual stock or narrowbased security index.
20% of the current market
value of the long security future, plus the aggregate call
in-the-money amount, if any,
plus pay for the put in full.
Proceeds from call sale may
be applied.
Individual stock or narrowbased security index.
The initial margin required
under Regulation T for the
long stock or stocks.
The lower of: (1) 10% of the
aggregate exercise price of
the put plus the aggregate
put out-of-the money amount,
if any; or (2) 20% of the aggregate exercise price of the
call, plus the aggregate call
in-the-money amount, if any.
5% of the current market value,
as defined in Regulation T, of
the long stock or stocks.
Individual stock or narrowbased security index.
The initial margin required
under Regulation T for the
long security.
10% of the current market
value, as defined in Regulation T, of the long security.
Individual stock or narrowbased security index.
20% of the current market
value of the short security future, plus pay for the call in
full.
The lower of: (1) 10% of the
aggregate exercise price of
the call, plus the aggregate
call out-of-the-money
amount, if any; or (2) 20% of
the current market value of
the short security future.
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Federal Register / Vol. 71, No. 73 / Monday, April 17, 2006 / Notices
19777
Margin Requirements for Offsetting Positions—Continued
15 ........
16 ........
17 ........
18 ........
Short security future, short put
option and long call option.
The short security future,
short put and long call must
be on the same underlying
security and the put and call
must have the same exercise
price. (Reverse Conversion).
Long (short) a basket of security futures, each based on a
narrow-based security index
that together tracks the
broad-based index and short
(long) a broad-based index
future.
Long (short) a basket of security futures that together
tracks a narrow-based index
and short (long) a narrowbased index future.
Individual stock or narrowbased security index.
20% of the current market
value of the short security future, plus the aggregate put
in-the-money amount, if any,
plus pay for the call in full.
Proceeds from put sale may
be applied.
10% of the aggregate exercise
price, plus the aggregate put
in-the-money amount, if any.
Narrow-based security index ....
5% of the current market value
for the long (short) basket of
security futures.
5% of the current market value
of the long (short) basket of
security futures.
Individual stock or narrowbased security index.
Long (short) a security future
and short (long) an identical
security future traded on a
different market.8.
Individual stock or narrowbased security index.
The greater of: (1) 5% of the
current market value of the
long security future(s); or (2)
5% of the current market
value of the short security future(s).
The greater of: (1) 3% of the
current market value of the
long security future(s); or (2)
3% of the current market
value of the short security future(s).
The greater of: (1) 5% of the
current market value of the
long security future(s); or (2)
5% of the current market
value of the short security future(s).
The greater of: (1) 3% of the
current market value of the
long security future(s); or (2)
3% of the current market
value of the short security future(s).
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New Regulation 431.08 Acceptable
Margin for Security Futures and
Treatment of Undermargined Accounts
Notwithstanding any other Exchange
Rules or Regulations, the following
3 Baskets of securities or security futures contracts
must replicate the securities that comprise the
index, and in the same proportion.
4 Generally, for the purposes of these regulations,
unless otherwise specified, stock index warrants
shall be treated as if they were index options.
5 ‘‘Aggregate exercise price,’’ with respect to an
option or warrant based on an underlying security,
means the exercise price of an option or warrant
contract multiplied by the numbers of units of the
underlying security covered by the option contract
or warrant. ‘‘Aggregate exercise price’’ with respect
to an index option, means the exercise price
multiplied by the index multiplier. See, e.g., Amex
Rules 900 and 900C; CBOE Rule 12.3; and NASD
Rule 2522.
6 ‘‘Out-of-the-money’’ amounts shall be
determined as follows:
(1) for stock call options and warrants, any excess
of the aggregate exercise price of the option or
warrant over its current market value (as
determined in accordance with Regulation T of the
Board of Governors of the Federal Reserve System);
(2) for stock put options or warrants, any excess
of the current market value (as determined in
accordance with Regulation T of the Board of
Governors of the Federal Reserve System) of the
option or warrant over its aggregate exercise price;
(3) for stock index call options and warrants, any
excess of the aggregate exercise price of the option
or warrant over the product of the current index
value and the applicable index multiplier; and
(4) for stock index put options and warrants, any
excess of the product of the current index value and
the applicable index multiplier over the aggregate
exercise price of the option or warrant. See, e.g.,
NYSE Rule 431 (Exchange Act Release No. 42011
(October 14, 1999), 64 FR 57172 (October 22, 1999)
(order approving SR–NYSE–99–03)); Amex Rule 462
(Exchange Act Release No. 43582 (November 17,
2000), 65 FR 71151 (November 29, 2000) (order
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provisions shall establish the acceptable
margin for Security Futures Positions
that are held on behalf of Customers in
a futures account, and the treatment of
undermargined futures accounts
containing Security Futures Contracts.
(a) Member firms may accept from
their Customers as margin for Security
Futures held in a futures account,
deposits of cash, margin securities
(subject to the limitations set forth in the
following sentence), exempted
approving SR–Amex–99–27)); CBOE Rule 12.3
(Exchange Act Release No. 41658 (July 27, 1999),
64 FR 42736 (August 5, 1999) (order approving SR–
CBOE–97–67)); or NASD Rule 2520 (Exchange Act
Release No. 43581 (November 17, 2000), 65 FR
70854 (November 28, 2000) (order approving SR–
NASD–00–15)).
7 ‘‘In-the-money’’ amounts must be determined as
follows:
(1) for stock call options and warrants, any excess
of the current market value (as determined in
accordance with Regulation T of the Board of
Governors of the Federal Reserve System) of the
option or warrant over its aggregate exercise price;
(2) for stock put options or warrants, any excess
of the aggregate exercise price of the option or
warrant over its current market value (as
determined in accordance with Regulation T of the
Board of Governors of the Federal Reserve System);
(3) for stock index call options and warrants, any
excess of the product of the current index value and
the applicable index multiplier over the aggregate
exercise price of the option or warrant; and
(4) for stock index put options and warrants, any
excess of the aggregate exercise price of the option
or warrant over the product of the current index
value and the applicable index multiplier.
8 Two security futures will be considered
‘‘identical’’ for this purpose if they are issued by the
same clearing agency or cleared and guaranteed by
the same derivatives clearing organization, have
identical contract specifications, and would offset
each other at the clearing level.
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securities, any other assets permitted
under Regulation T of the Board of
Governors of the Federal Reserve System
(as in effect from time to time) to satisfy
a margin deficiency in a securities
margin account, and any combination
of the foregoing, each as valued in
accordance with CFTC Regulations
41.46(c) and 41.46(e) or SEC
Regulations 242.404(c) and 242.404(e),
as applicable. Shares of a money market
mutual fund that meet the requirements
of CFTC Regulation 1.25 may be
accepted as a margin deposit from a
Customer for purposes of this Rule.
(b) A member firm shall not accept as
margin from any Customer securities
that have been issued by such Customer
or an Affiliate of such Customer unless
such member firm files a petition with
and receives permission from the
Exchange for such purpose.
(c) All assets deposited by a Customer
to meet margin requirements must be
and remain unencumbered by third
party claims against the depositing
Customer.
(d) If a Customer fails to comply with
a margin call within a reasonable period
of time (the member firm may deem one
hour to be a reasonable period of time),
the relevant member firm shall take the
deduction required with respect to an
undermargined account in computing
its net capital under applicable CFTC
and SEC Regulations.
(e) If at any time there is a liquidating
deficit in an account in which Security
Futures are held, the member firm shall
take steps to liquidate positions in the
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Federal Register / Vol. 71, No. 73 / Monday, April 17, 2006 / Notices
account promptly and in an orderly
manner.
*
*
*
*
*
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II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of, and basis for,
the proposed rule change. The text of
these statements may be examined at
the places specified in Item III below.
The Exchange has prepared summaries,
set forth in sections A, B, and C below,
of the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
Proposed Regulation 431.07 generally
establishes that the determination and
administration of customer margins
shall be consistent with prevailing
practices on the Exchange. To the
extent, however, that Exchange
practices may be inconsistent with
Commodity Futures Trading
Commission (‘‘CFTC’’) Regulations
41.42 through 41.49 9 or SEC
Regulations 242.400 through 242.406,10
as applicable, the CFTC and SEC
Regulations shall prevail.
General Applicability—Proposed
Regulation 431.07 only applies to
security futures transactions executed
on the CBOT. To the extent that security
futures intermediaries engage in
security futures transactions on or
through other exchanges, they will need
to comply with the margin requirements
established by those other exchanges
with respect to such transactions. In
addition, proposed Regulation 431.07
only applies to transactions made on
behalf of ‘‘Customers’’ as defined in
paragraph (b) of the proposed
Regulation. Furthermore, proposed
Regulation 431.07 is applicable only to
security futures positions held in
futures accounts. While security futures
may alternatively be held in a securities
account, the administration of securities
accounts will be governed by applicable
regulations, and by rules adopted by
other relevant self-regulatory
organizations.
Proposed Regulation 431.07(b)
excludes ‘‘exempted persons’’ and
‘‘Market Makers’’ from the definition of
‘‘Customer.’’ Therefore, the transactions
of exempted persons and Market Makers
are not subject to the customer margin
9 17
CFR 41.42–41.49.
CFR 242.400–406.
10 17
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requirements set forth in proposed
Regulation 431.07. Exempted persons
are identified by reference to applicable
CFTC and SEC Regulations and Market
Makers are defined as described below.
Market Maker Exclusion—CFTC
Regulation 41.42(c)(2)(v) 11 and SEC
Regulation 242.400(c)(2)(v) 12 permit
exchanges to adopt rules containing
specified requirements for security
futures dealers, on the basis of which
the financial relations between security
futures intermediaries and qualifying
security futures dealers are excluded
from the customer margin requirements
for security futures. Any rules so
adopted by an exchange must meet the
criteria set forth in Section 7(c)(2)(B) of
the Exchange Act.13
Proposed Regulation 431.07(c) relies
on CFTC Regulation 41.42(c)(2)(v) 14
and SEC Regulation 242.400(c)(2)(v) 15
in establishing a Market Maker
exclusion. In particular, CBOT members
who meet certain qualifications would
be permitted to register with the
Exchange as Security Futures Dealers,
such that their accounts would not be
subject to customer security futures
margin requirements. Rather, their
accounts would be subject to security
futures margin requirements established
pursuant to proposed Regulation
431.07(d).
Market Makers will be floor traders or
floor brokers registered with the CFTC
under Section 4f(a)(1) of the Commodity
Exchange Act, as amended (‘‘CEA’’),16
or dealers registered with the SEC under
Section 15(b) of the Exchange Act.17 As
such, they may not qualify as exempted
persons within the meaning of
Regulation 242.401(a)(9) under the
Exchange Act.18 Absent the provisions
of proposed Regulation 431.07, they
arguably would have to be treated as
customers for purposes of determining
margin requirements, even with respect
to their proprietary market making
activities. This would be different from
the treatment of security futures dealers
on securities exchanges under Section
7(c)(3) of the Exchange Act,19 and
therefore would be contrary to the
statutory objectives reflected in Section
7(c)(2)(B) of the Exchange Act.20
The Market Maker exclusion, as
proposed, contains all of the criteria and
limitations set forth in CFTC Regulation
11 17
CFR 41.42(c)(2)(v).
CFR 242.400(c)(2)(v).
13 15 U.S.C. 78g(c)(2)(B).
14 17 CFR 41.42(c)(2)(v).
15 17 CFR 242.400(c)(2)(v).
16 7 U.S.C. 6f(a)(1).
17 15 U.S.C. 78(o)(b).
18 17 CFR 242.401(a)(9).
19 15 U.S.C. 78g(c)(3).
20 15 U.S.C. 78g(c)(2)(B).
12 17
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41.42(c)(2)(v) 21 and SEC Regulation
242.400(c)(2)(v),22 including a clause
that requires that a Market Maker ‘‘hold
itself out as being willing to buy and sell
security futures for its own account on
a regular or continuous basis.’’ In the
release on Customer Margin Rules
Relating to Security Futures (‘‘Customer
Margin Release’’),23 the Commission
and the CFTC identified three alternate
means by which to demonstrate such
willingness, as follows:
1. An exchange may require market
makers to effect a certain percentage of
their security futures trades with
persons other than those registered as
market makers;
2. Market makers could be subject to
rules that impose an affirmative
obligation to quote on a regular or
continuous basis; or
3. An exchange may require that a
‘‘large majority’’ of a market maker’s
revenue be derived from trading listed
financial based derivatives including
futures and options on stocks, stock
indexes, foreign currencies, and interest
rate instruments.
The CBOT generally proposes to
apply the second standard listed above,
which includes affirmative obligations
to make markets. Specifically, under
proposed Regulation 431.07(c), a Market
Maker is considered willing to hold
itself out to buy and sell security futures
on a continuous or regular basis if it
fulfills any one of three tests.
The first test, set forth in Regulation
431.07(c)(1), requires a Market Maker to
provide:
* * * continuous two-sided
quotations throughout the trading day
for all delivery months of [specified]
Security Futures Contracts * * * and
* * * [quote] * * * with a maximum
bid/ask spread no more than the greater
of $0.20 or 150% of the bid/ask spread
in the primary market for the security
underlying each Security Futures
Contract.
The second test, set forth in
Regulation 431.07(c)(2), requires a
Market Maker to respond:
* * * to at least 75% of the requests
for quotation for all delivery months of
[specified] Security Futures Contracts
* * * and * * * [w]hen responding to
requests for quotation, [quote] within
five seconds with a maximum bid/ask
spread no more than the greater of $0.20
or 150% of the bid/ask spread in the
primary market for the security
underlying each Security Futures
Contract.
21 17
CFR 41.42(c)(2)(v).
CFR 242.400(c)(2)(v).
23 Exchange Act Release No. 46292 (August 1,
2002), 67 FR 53146 (August 14, 2002).
22 17
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The first and second tests require
Market Makers to be assigned to a
meaningful proportion of Security
Futures Contracts listed on the
Exchange. A ‘‘meaningful proportion’’ is
defined in proposed Regulation
431.07(c) to refer to Security Futures
Contracts that represent at least 20% of
the total Security Futures Contract
trading volume on the Exchange after
the 181st calendar day subsequent to the
commencement of trading in Security
Futures Contracts on the Exchange.
The third test, set forth in Regulation
431.07(c)(3), requires that a Market
Maker must be:
* * * assigned to a group of Security
Futures Contracts listed on the
Exchange that is either unlimited in
nature (‘‘Unlimited Assignment’’) or is
assigned to no more that 20% of the
Security Futures Contracts listed on the
Exchange (‘‘Limited Assignment’’); and
* * * [a]t least 75% of the Market
Maker’s total trading activity in
Exchange Security Futures Contracts is
in its assigned Security Futures
Contracts, measured on a quarterly
basis; and * * * [d]uring at least 50%
of the trading day, the Market Maker has
bids or offers in the market that are at
or near the best market * * * with
respect to at least 25% (in the case of
an Unlimited Assignment) or at least
one (in the case of a Limited
Assignment) of its assigned Security
Futures Contracts; and * * * [these
obligations must be] satisfied on (a) at
least 90% of the trading days in each
calendar quarter by Market Makers who
have undertaken an Unlimited
Assignment; or (b) at least 80% of the
trading days in each calendar quarter by
Market Makers who have undertaken a
Limited Assignment; or (c) on at least
80% of the trading days in each
calendar quarter * * * where the
Exchange is listing four (4) or fewer
Security Futures Contracts.
Market Makers are required to
maintain books and records in order to
evidence compliance with these
standards. This recordkeeping
requirement includes, without
limitation, trading account statements
and other financial records necessary to
detail Market Maker activity. Failure on
the part of a Market Maker to comply
with these standards may result in
revocation of the Market Maker’s
registration with the Exchange as a
Security Futures Dealer, or other
sanctions under CBOT Rules and
Regulations.
The CBOT believes that proposed
Regulation 431.07(b) and (c) are
consistent with the requirements of the
Exchange Act and with the explanations
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15:16 Apr 14, 2006
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accompanying the publication of those
requirements.
Margin Rates—Proposed Regulation
431.07(a) requires that customer margin
rates be established at levels no lower
than those prescribed by CFTC
Regulation 41.45 24 and SEC Regulation
242.403.25 Proposed Regulation
431.07(d) specifically provides that the
margin level for each long or short
position in a Security Futures contract
held on behalf of a customer shall not
be less than 20% of the current market
value of such Security Futures contract,
as required by SEC Regulation
242.403(b)(1) 26 and CFTC Regulation
41.45(b)(1).27
Exceptions to the 20% requirement
are established under proposed
Regulation 431.07(e). These exceptions
rely upon SEC Regulation
242.403(b)(2) 28 and CFTC Regulation
41.45(b)(2) 29 that provide that a selfregulatory authority may set the
required initial or maintenance margin
level for offsetting positions involving
security futures and related positions at
a level lower than the level that would
apply if margin requirements for such
positions were calculated separately
based on the 20% requirement,
provided that the rules establishing
such lower margin levels meet the
criteria set forth in Section 7(c)(2)(B) of
the Exchange Act.30 That Section
requires that:
(I) The margin requirements for a
security futures product be consistent
with the margin requirements for
comparable option contracts traded on
any exchange registered pursuant to
Section 6(a) of [the Exchange Act]; and
(II) Initial and maintenance margin
levels for a security futures product not
be lower than the lowest level of
margin, exclusive of premium, required
for any comparable option contract
traded on any exchange registered
pursuant to Section 6(a) of [the
Exchange Act], other than an option on
a security future.
Absent the margin relief afforded by
proposed Regulation 431.07(e), security
futures intermediaries would be
required to collect margin from their
customers equal to at least 20% of the
current market value of the security
futures held on behalf of such
customers, even if such security futures
positions were hedged. With respect to
option contracts traded on securities
24 17
CFR 41.45.
CFR 242.403.
26 17 CFR 242.403(b)(1).
27 17 CFR 41.45(b)(1).
28 17 CFR 242.403(b)(2).
29 17 CFR 41.45(b)(2).
30 15 U.S.C. 78g(c)(2)(B).
25 17
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19779
exchanges, the Commission has
recognized that it is appropriate for the
SROs to recognize the hedged nature of
certain combined options strategies and
prescribe margin requirements that
better reflect the risk of those
strategies.31
The CBOT believes that the same
considerations apply in connection with
the determination of margin levels for
offsetting positions involving security
futures and related positions. If margin
offsets were not available with respect
to security futures, the customer margin
requirements applicable to such
instruments would effectively be
inconsistent with, and more onerous
than, the margin requirements for
comparable option contracts traded on
securities exchanges. This would be
contrary to the statutory objectives
reflected in Section 7(c)(2)(B) of the
Exchange Act.32
Proposed Regulation 431.07(e)
incorporates a schedule which describes
in detail the margin offsets available
with respect to particular combinations
of security futures and related positions.
This schedule is substantively identical
to the table of offsets included in the
Customer Margin Release. While the
table differs in certain respects from
similar tables in effect for exchangetraded options, the Commission
acknowledged in its Customer Margin
Release that these limited differences
are warranted by different
characteristics of the instruments to
which they relate. Accordingly, the
CBOT believes that proposed Regulation
431.07(e) is consistent with the
requirements of the Exchange Act and
the Rules and Regulations thereunder.
Margin Administration—Proposed
Regulation 431.08(a) identifies the types
of instruments that a security futures
intermediary may accept from a
customer as margin for security futures
positions held in a futures account.
Consistent with SEC Regulation
242.404(b) 33 and CFTC Regulation
41.46(b),34 acceptable types of margin
are limited to deposits of cash, margin
securities (subject to specified
restrictions), exempted securities, any
other assets permitted under Regulation
31 See Exchange Act Release Nos. 41658 (July 27,
1999), 64 FR 42736 (August 5, 1999) (order
approving SR–CBOE–97–67 amending CBOE Rule
12.3); 42011 (October 14, 1999) (order approving
SR–NYSE–99–03 amending NYSE Rule 431); 43582
(November 17, 2000), 65 FR 70854 (November 28,
2000) (order approving SR–Amex–99–27 amending
Amex Rule 462); and 43581 (November 17, 2000),
65 FR 71151 (November 29, 2000) (order approving
SR–NASD–00–15 amending NASD Rule 2520).
32 15 U.S.C. 78g(c)(2)(B).
33 17 CFR 242.404(b).
34 17 CFR 41.46(b).
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Federal Register / Vol. 71, No. 73 / Monday, April 17, 2006 / Notices
T 35 of the Board of Governors of the
Federal Reserve System to satisfy a
margin deficiency in a securities margin
account, and any combination of the
foregoing. Proposed Regulation
431.08(a) further provides that the
different types of eligible margin
deposits are to be valued in accordance
with the applicable principles set forth
in SEC Regulations 242.404(c) and
242.404(e) 36 and CFTC Regulations
41.46(c) and 41.46(e).37
Proposed Regulation 431.08(d)
requires a security futures intermediary
to take the deduction required with
respect to an undermargined account in
computing its net capital under
applicable SEC and CFTC Regulations if
the customer has failed to comply with
a required margin call within a
reasonable period of time. This
requirement is consistent with SEC
Regulation 242.406(a) 38 and CFTC
Regulation 41.48(a).39 Further, proposed
Regulation 431.08(e) requires the
liquidation of an account in which
security futures are held where there is
a liquidating deficit, in accordance with
SEC Regulation 242.406(b) 40 and CFTC
Regulation 41.48(b).41
The Exchange Act Regulations and
related provisions of the Exchange Act
are premised on each self-regulatory
organization adopting margin
requirements that are functionally
equivalent to proposed CBOT
Regulations 431.07 and 431.08.
Accordingly, proposed Regulations
431.07 and 431.08 represent a corollary
of, and are designed to give effect to, the
Exchange Act Regulations and related
provisions of the Exchange Act.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The CBOT does not believe that the
proposed rule change will impose any
burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act.
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.
dsatterwhite on PROD1PC76 with NOTICES
III. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
35 2
CFR 220.1 et seq.
CFR 242.404(c) and 242.404(e).
37 17 CFR 41.46(c) and 41.46(e).
38 17 CFR 242.406(a).
39 17 CFR 41.48(a).
40 17 CFR 242.406(b).
41 17 CFR 41.48(b).
36 17
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exchange.42 In particular, the
Commission finds that the proposed
rule change is consistent with the
requirements of Section 6(b)(5) of the
Act,43 which requires, among other
things, that the rules of the Exchange be
Electronic Comments
designed to promote just and equitable
principles of trade and, in general, to
• Use the Commission’s Internet
protect investors and the public interest.
comment form (https://www.sec.gov/
In addition, the Commission believes
rules/sro.shtml); or
that the proposed rule change is
• Send e-mail to ruleconsistent with Section 7(c)(2)(B) of the
comments@sec.gov. Please include File
Act,44 which provides, among other
Number SR–CBOT–2006–01 on the
things, that the margin requirements for
subject line.
security futures must preserve the
financial integrity of markets trading
Paper Comments
security futures and prevent systemic
risk. The Commission also believes that
• Send paper comments in triplicate
the proposed rule change is consistent
to Nancy M. Morris, Secretary,
with the customer margin rules set forth
Securities and Exchange Commission,
in Rules 400 through 406 under the
100 F Street, NE., Washington, DC
Act.45
20549–1090.
The Exchange has requested that the
All submissions should refer to File
Commission approve this proposed rule
Number SR–CBOT–2006–01. This file
change prior to the thirtieth day after
number should be included on the
subject line if e-mail is used. To help the publication of notice of the filing in the
Federal Register. The Commission
Commission process and review your
believes that nothing in this proposed
comments more efficiently, please use
only one method. The Commission will rule change raises any new, unique, or
post all comments on the Commission’s substantive issues from those previously
raised in SR–OC–2002–01, as amended,
Internet Web site (https://www.sec.gov/
and SR–CME–2002–01, as amended 46
rules/sro/shtml). Copies of the
which rule filings set forth
submission, all subsequent
OneChicago’s and the Chicago
amendments, all written statements
Mercantile Exchange’s (‘‘CME’’) margin
with respect to the proposed rule
requirements for security futures,
change that are filed with the
respectively. The Exchange’s proposed
Commission, and all written
rules set forth herein are substantively
communications relating to the
identical to the parallel provisions in
proposed rule change between the
OneChicago Rule 515 and CME Rule
Commission and any person, other than 930. The Exchange noted that that
those that may be withheld from the
OneChicago Rule 515(a) specifies that
public in accordance with the
its market maker exclusion applies to
provisions of 5 U.S.C. 552, will be
security futures positions held in
available for inspection and copying in
securities accounts, as well as those
the Commission’s Public Reference
held in futures accounts. The proposed
Room. Copies of such filing also will be margin rules only address security
available for inspection and copying at
futures positions held in futures
the principal office of the Exchange. All accounts. Further, the offsets proposed
comments received will be posted
by CBOT are consistent with the
without change; the Commission does
strategy-based offsets permitted for
not edit personal identifying
comparable offset positions involving
information from submissions. You
exchange-traded options and therefore
should submit only information that
consistent with Section 7(c)(2)(B) of the
you wish to make available publicly. All Exchange Act.47 Finally, approval of the
submission should refer to File Number proposed rule change is necessary for
SR–CBOT–2006–01 and should be
CBOT to begin trading security futures.
submitted on or before May 8, 2006.
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Exchange
Act. Comments may be submitted by
any of the following methods:
IV. Commission Findings and Order
Granting Accelerated Approval of a
Proposed Rule Change
The Commission finds that the
proposed rule change is consistent with
the requirements of the Act and the
rules and regulations thereunder
applicable to a national securities
PO 00000
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Fmt 4703
Sfmt 4703
42 In approving this proposal, the Commission has
considered its impact on efficiency, competition,
and capital formation. 15 U.S.C. 78c(f).
43 15 U.S.C. 78f(b)(5).
44 15 U.S.C. 78g(c)(2)(B).
45 17 CFR 242.400–406.
46 See also SR–CME–2003–01 (approving, on a
permanent basis, a standard under which a market
maker can qualify for exclusion from CME’s margin
rules).
47 15 U.S.C. 78g(c)(2)(B).
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Accordingly, the Commission finds
good cause for approving this proposed
rule change prior to the thirtieth day
after the date of publication of notice
thereof in the Federal Register.
Specifically, the Commission believes
that it is consistent with Section 19(b)(2)
of the Act 48 to approve the Exchange’s
proposed rule change prior to the
thirtieth day after publication of the
notice of filing thereof in the Federal
Register.
V. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,49 that the
proposed rule change (File No. SR–
CBOT–2006–01) is approved on an
accelerated basis.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.50
Nancy M. Morris,
Secretary.
[FR Doc. E6–5650 Filed 4–14–06; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–53610; File No. SR–PCX–
2006–12]
Self-Regulatory Organizations; Pacific
Exchange, Inc. (n/k/a NYSE Arca, Inc.);
Order Granting Approval of Proposed
Rule Change Relating to Clearly
Erroneous Executions
April 6, 2006.
On February 23, 2006, the Pacific
Exchange, Inc. (n/k/a NYSE Arca, Inc.)
(‘‘Exchange’’) 1 filed with the Securities
and Exchange Commission
(‘‘Commission’’) a proposed rule change
pursuant to section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),2 and Rule 19b-4 thereunder,3 to
amend PCX Equities, Inc. (n/k/a NYSE
Arca Equities, Inc.) (‘‘NYSE Arca
Equities’’) Rule 7.10(e) pertaining to
clearly erroneous executions of
securities issued in initial public
offerings (‘‘IPOs’’). The proposed rule
change was published for comment in
48 15
U.S.C. 78s(b)(2).
49 Id.
50 17
CFR 200.30–3(a)(12).
March 6, 2006, the Exchange filed with the
Commission a proposed rule change, which was
effective upon filing, to change the name of the
Exchange, as well as several other related entities,
to reflect the recent acquisition of PCX by
Archipelago Holdings, Inc. (‘‘Archipelago’’) and the
merger of NYSE with Archipelago. See File No. SR–
PCX–2006–24. All references herein have been
changed to reflect the aforementioned rule change.
2 15 U.S.C. 78s(b)(1).
3 17 CFR 240.19b–4.
dsatterwhite on PROD1PC76 with NOTICES
1 On
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15:16 Apr 14, 2006
Jkt 208001
the Federal Register on March 3, 2006.4
The Commission received no comments
on the proposal. This order approves the
proposed rule change.
The proposed rule change would
revise the procedures in NYSE Arca
Equities Rule 7.10(e) relating to trade
nullifications (‘‘busts’’) and price
adjustments (‘‘adjusts’’) of the initial
trade of securities issued in IPOs that
are traded on the Archipelago Exchange
(n/k/a NYSE Arca Marketplace) on an
unlisted trading privileges basis.
Currently, initial trades on NYSE Arca
Marketplace of these securities that are
executed at prices of $1.00 or 10%
(whichever is lesser) away from the
primary listing exchange’s opening
price are automatically busted or
adjusted to the opening price of the
security on the primary listing
exchange. Under the proposed rule
change, NYSE Arca Equities staff would
have the discretion to bust or adjust
initial trades in IPO securities that are
executed at $1.00 or 10% (whichever is
lesser) away from the opening price on
the primary listing exchange. The
Exchange states that this discretion is
necessary because the primary listing
exchange often has multiple prices for
an IPO security during the first
moments that the IPO security begins to
trade.
The Commission finds that the
proposed rule change is consistent with
the requirements of the Act and the
rules and regulations thereunder
applicable to a national securities
exchange.5 In particular, the
Commission believes that the proposal
is consistent with section 6(b)(5) of the
Act,6 which requires that the rules of an
exchange be designed to prevent
fraudulent and manipulative acts and
practices, to promote just and equitable
principles of trade, to foster cooperation
and coordination with persons engaged
in facilitating transactions in securities,
and to remove impediments to and
perfect the mechanism of a free and
open market and a national market
system.
The Commission believes that the
proposed rule change, by granting NYSE
Arca Equities staff the discretion to bust
or adjust initial trades for IPO securities
that are executed at $1.00 or 10%
(whichever is lesser) away from the
primary listed exchange’s opening price,
and thus no longer require NYSE Arca
Equities staff to automatically bust or
adjust such trades, is designed to help
4 See Securities Exchange Act Release No. 53376
(February 27, 2006), 71 FR 11008 (‘‘Notice’’).
5 In approving this proposal, the Commission has
considered its impact on efficiency, competition,
and capital formation. See 15 U.S.C. 78c(f).
6 15 U.S.C. 78f(b)(5).
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19781
ensure that the Exchange’s clearly
erroneous execution rule is exercised in
a fair and reasonable manner. As the
Exchange noted, the primary listing
exchange’s opening price for an IPO
security may not necessarily be
indicative of the actual trading price of
the security, and, thus the Commission
believes that it is fair and reasonable for
NYSE Arca Equities staff to have the
discretion to review all prices at the
time the IPO security first trades on the
primary listing exchange to determine
whether it is appropriate to adjust or
bust the trade at issue.
It is therefore ordered, pursuant to
section 19(b)(2) of the Act,7 that the
proposed rule change (SR–PCX–2006–
12) is approved.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.8
Nancy M. Morris,
Secretary.
[FR Doc. E6–5609 Filed 4–14–06; 8:45 am]
BILLING CODE 8010–01–P
SMALL BUSINESS ADMINISTRATION
[Disaster Declaration # 10442 and # 10443]
Missouri Disaster #MO–00003
U.S. Small Business
Administration.
ACTION: Notice.
AGENCY:
SUMMARY: This is a Notice of the
Presidential declaration of a major
disaster for the State of Missouri
(FEMA–1635–DR), dated 04/05/2006.
Incident: Severe Storms, Tornadoes,
and Flooding.
Incident Period: 03/30/2006 through
04/03/2006.
Effective Date: 04/05/2006.
Physical Loan Application Deadline
Date: 06/05/2006.
Economic Injury (EIDL) Loan
Application Deadline Date: 01/05/2007.
ADDRESSES: Submit completed loan
applications to: U.S. Small Business
Administration, National Processing
and Disbursement Center, 14925
Kingsport Road, Fort Worth, TX 76155.
FOR FURTHER INFORMATION CONTACT: A.
Escobar, Office of Disaster Assistance,
U.S. Small Business Administration,
409 3rd Street, SW., Suite 6050,
Washington, DC 20416.
SUPPLEMENTARY INFORMATION: Notice is
hereby given that as a result of the
President’s major disaster declaration on
04/05/2006, applications for disaster
loans may be filed at the address listed
7 15
8 17
E:\FR\FM\17APN1.SGM
U.S.C. 78s(b)(2).
CFR 200.30–3(a)(12).
17APN1
]]>Agencies
[Federal Register Volume 71, Number 73 (Monday, April 17, 2006)]
[Notices]
[Pages 19774-19781]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-5650]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-53626; File No. SR-CBOT-2006-01]
Self-Regulatory Organizations; Board of Trade of the City of
Chicago, Inc.; Notice of Filing and Order Granting Accelerated Approval
of Proposed Rule Change Relating to Customer Margin Requirements for
Security Futures
April 10, 2006.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Exchange Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby
given that on March 2, 2006, the Board of Trade of the City of Chicago,
Inc. (``CBOT[supreg]'' or ``Exchange'') filed with the Securities and
Exchange Commission (``Commission'' or ``SEC'') 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
and to grant accelerated approval to the proposed rule change.
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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
The Exchange is proposing to establish procedures relating to the
determination and administration of customer margin for security
futures positions established on the Exchange and maintained in futures
accounts. Further, the proposed regulations define the applicability of
these requirements, specifically excluding qualifying security futures
dealers from customer security futures margin requirements and related
regulatory requirements. The text of the proposed rule change is below.
New text is italicized.
* * * * *
New Regulation 431.07 Customer Margins for Security Futures Positions
Held in Futures Accounts
Margin requirements associated with Security Futures positions,
which result from transactions made on the Exchange on behalf of
Customers, and which are held in a futures account, shall be determined
and administered in accordance with the Rules and Regulations of the
Exchange, and in compliance with CFTC Regulations 41.42 through 41.49
and SEC Regulations 242.400 through 242.406. With regard to such
Security Futures positions, if Exchange Rules or Regulations are
inconsistent with CFTC Regulations 41.42 through 41.49 and SEC
Regulations 242.400 through 242.406, including any successor
Regulations, the CFTC and SEC Regulations shall prevail.
(a) Initial and maintenance margin rates used in determining
Exchange margin requirements applicable to Security Futures that are
held on behalf of Customers in a futures account, shall be established
at levels no lower than those prescribed by CFTC Regulation 41.45 and
SEC Regulation 242.403, including any successor Regulations.
(b) As used in this Regulation, the term ``Customer'' does not
include (a) an ``exempted person'' as defined in CFTC Regulation
41.43(a)(9) and SEC Regulation 242.401(a)(9); or (b) Market Makers as
defined below.
(c) A Person shall be a ``Market Maker'' for purposes of this Rule,
and shall be excluded from the requirements set forth in CFTC
Regulations 41.42 through 41.49 and SEC Regulations 242.400 through
242.406, as applicable, in accordance with CFTC Regulation
41.42(c)(2)(v) and SEC Regulation 242.400(c)(2)(v), with respect to all
trading in Security Futures for its own account, if such Person is an
Exchange Member that is registered with the Exchange as a ``Security
Futures Dealer.''
Each such Market Maker shall: (a) be a member of the Exchange and
be registered as a floor trader or a floor broker with the CFTC under
Section 4f(a)(1) of the CEA or be registered as a dealer with the SEC
under Section 15(b) of the Exchange Act; (b) maintain records
sufficient to prove compliance with the requirements set forth in this
Regulation and CFTC Regulation 41.42(c)(2)(v) or SEC Regulation
242.400(c)(2)(v), as applicable, including without limitation, trading
account statements and other financial records sufficient to detail
activity; and (c) hold itself out as being willing to buy and sell
Security Futures for its own account on a regular or continuous basis.
A Market Maker satisfies condition (c) above if any of the
following three requirements are fulfilled:
(1) The Market Maker:
(i) Provides continuous two-sided quotations throughout the trading
day for all delivery months of Security Futures Contracts representing
a meaningful proportion of the total trading volume of Security Futures
Contracts on the Exchange, subject to relaxation during unusual market
conditions as determined by the Exchange (such as a fast market in
[[Page 19775]]
either a Security Futures Contract or a security underlying a Security
Futures Contract) at which times the Market Maker must use its best
efforts to quote continuously and competitively; and
(ii) When providing quotations, quotes with a maximum bid/ask
spread of no more than the greater of $0.20 or 150% of the bid/ask
spread in the primary market for the security underlying each Security
Futures Contract.
(2) The Market Maker:
(i) Responds to at least 75% of the requests for quotation for all
delivery months of Security Futures Contracts representing a meaningful
proportion of the total trading volume of Security Futures Contracts on
the Exchange, subject to relaxation during unusual market conditions as
determined by the Exchange (such as a fast market in either a Security
Futures Contract or a security underlying a Security Futures Contract)
at which times the Market Maker must use its best efforts to quote
competitively; and
(ii) When responding to requests for quotation, quotes within five
seconds with a maximum bid/ask spread of no more than the greater of
$0.20 or 150% of the bid/ask spread in the primary market for the
security underlying each Security Futures Contract.
(3) The Market Maker:
(i) Is assigned to a group of Security Futures Contracts listed on
the Exchange that is either unlimited in nature (``Unlimited
Assignment'') or is assigned to no more that 20% of the Security
Futures Contracts listed on the Exchange (``Limited Assignment''); and
(ii) At least 75% of the Market Maker's total trading activity in
Exchange Security Futures Contracts is in its assigned Security Futures
Contracts, measured on a quarterly basis; and
(iii) During at least 50% of the trading day, the Market Maker has
bids or offers in the market that are at or near the best market,
except in unusual market conditions as determined by the Exchange (such
as a fast market in either a Security Futures Contract or a security
underlying a Security Futures Contract), with respect to at least 25%
(in the case of an Unlimited Assignment) or at least one (in the case
of a Limited Assignment) of its assigned Security Futures Contracts;
and
(iv) The requirements in (ii) and (iii) are satisfied on (a) at
least 90% of the trading days in each calendar quarter by Market Makers
who have undertaken an Unlimited Assignment; or (b) at least 80% of the
trading days in each calendar quarter by Market Makers who have
undertaken a Limited Assignment; or (c) on at least 80% of the trading
days in each calendar quarter by Market Makers who have undertaken
either an Unlimited Assignment or Limited Assignment but where the
Exchange is listing four (4) or fewer Security Futures Contracts.
For purposes of clauses (1) and (2) above, beginning on the 181st
calendar day after the commencement of trading of Security Futures
Contracts on the Exchange, a ``meaningful proportion of the total
trading volume of Security Futures Contracts on the Exchange'' shall
mean a minimum of 20% of such trading volume.
Any Market Maker that fails to comply with the applicable Rules of
the Exchange, CFTC Regulations 41.42 through 41.49 or SEC Regulations
242.400 through 242.406, as applicable, shall be subject to
disciplinary action in accordance with Chapter 5. Appropriate sanctions
in the case of any such failure shall include, without limitation, a
revocation of such Market Maker's registration with the Exchange as a
Security Futures Dealer.
(d) The Exchange shall establish initial and maintenance margin
requirements applicable to Security Futures that are held in a futures
account, provided that the margin requirement for any long or short
position held by a member firm on behalf of a Customer shall not be
less than 20% of the current market value of the relevant Security
Futures Contract, or such other requirement as may be established by
the CFTC and SEC for purposes of CFTC Regulation 41.45(b)(1) and SEC
Regulation 242.403(b)(1), unless a lower margin level is available for
such position pursuant to paragraph (e) below.
(e) Initial and maintenance margin requirements for offsetting
positions involving Security Futures and related positions are provided
in the schedule below, for purposes of CFTC Regulation 41.45(b)(2) and
SEC Regulation 242.403(b)(2).
Margin Requirements for Offsetting Positions
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1................ Long security future Individual stock or 20% of the current The lower of: (1) 10%
(or basket of narrow-based security market value of the of the aggregate
security futures index. long security future, exercise price \5\
representing each plus pay for the long of the put plus the
component of a narrow- put in full. aggregate put out-of-
based securities the-money \6\
index \3\) and long amount, if any; or
put option \4\ on the (2) 20% of the
same underlying current market value
security (or index). of the long security
future.
2................ Short security future Individual stock or 20% of the current 20% of the current
(or basket of narrow-based security market value of the market value of the
security futures index. short security short security
representing each future, plus the future, plus the
component of a narrow- aggregate put in-the- aggregate put in-the-
based securities money amount, if any. money amount, if
index) and short put Proceeds from the put any.\7\
option on the same sale may be applied.
underlying security
(or index).
3................ Long security future Individual stock or The initial margin 5% of the current
and short position in narrow-based security required under market value as
the same security (or index. Regulation T for the defined in
securities basket) short stock or stocks. Regulation T of the
underlying the stock or stocks
security future. underlying the
security future.
4................ Long security future Individual stock or 20% of the current 20% of the current
(or basket of narrow-based security market value of the market value of the
security futures index. long security future, long security
representing each plus the aggregate future, plus the
component of a narrow- call in-the-money aggregate call in-
based securities amount, if any. the-money amount, if
index) and short call Proceeds from the any.
option on the same call sale may be
underlying security applied.
(or index).
[[Page 19776]]
5................ Long a basket of Narrow-based security 20% of the current 20% of the current
narrow-based security index. market value of the market value of the
futures that together long basket of narrow- long basket of
tracks a broad-based based security narrow-based
index and short a futures, plus the security futures,
broad-based security aggregate call in-the- plus the aggregate
index call option money amount, if any. call in-the-money
contract on the same Proceeds from the amount, if any.
index. call sale may be
applied.
6................ Short a basket of Narrow-based security 20% of the current 20% of the current
narrow-based security index. market value of the market value of the
futures that together short basket of short basket of
tracks a broad-based narrow-based security narrow-based
security index and futures, plus the security futures,
short a broad-based aggregate put in-the- plus the aggregate
security index put money amount, if any. put in-the-money
option contract on Proceeds from the put amount, if any.
the same index. sale may be applied.
7................ Long a basket of Narrow-based security 20% of the current The lower of: (1) 10%
narrow-based security index. market value of the of the aggregate
futures that together long basket of narrow- exercise price of
tracks a broad-based based security the put, plus the
security index and futures, plus pay for aggregate put out-of-
long a broad-based the long put in full. the-money amount, if
security index put any; or (2) 20% of
option contract on the current market
the same index. value of the long
basket of security
futures.
8................ Short a basket of Narrow-based security 20% of the current The lower of: (1) 10%
narrow-based security index. market value of the of the aggregate
futures that together short basket of exercise price of
tracks a broad-based narrow-based security the call, plus the
security index and futures, plus pay for aggregate call out-
long a broad-based the long call in full. of-the-money amount,
security index call if any; or (2) 20%
option contract on of the current
the same index. market value of the
short basket of
security futures.
9................ Long security future Individual stock or The greater of: (1) 5% The greater of: (1)
and short security narrow-based security of the current market 5% of the current
future on the same index. value of the long market value of the
underlying security security future; or long security
(or index). (2) 5% of the current future; or (2) 5% of
market value of the the current market
short security future. value of the short
security future.
10............... Long security future, Individual stock or 20% of the current 10% of the aggregate
long put option and narrow-based security market value of the exercise price, plus
short call option. index. long security future, the aggregate call
The long security plus the aggregate in-the-money amount,
future, long put and call in-the-money if any.
short call must be on amount, if any, plus
the same underlying pay for the put in
security and the put full. Proceeds from
and call must have the call sale may be
the same exercise applied.
price. (Conversion).
11............... Long security future, Individual stock or 20% of the current The lower of: (1) 10%
long put option and narrow-based security market value of the of the aggregate
short call option. index. long security future, exercise price of
The long security plus the aggregate the put plus the
future, long put and call in-the-money aggregate put out-of-
short call must be on amount, if any, plus the money amount, if
the same underlying pay for the put in any; or (2) 20% of
security and the put full. Proceeds from the aggregate
exercise price must call sale may be exercise price of
be below the call applied. the call, plus the
exercise price aggregate call in-
(Collar). the-money amount, if
any.
12............... Short security future Individual stock or The initial margin 5% of the current
and long position in narrow-based security required under market value, as
the same security (or index. Regulation T for the defined in
securities basket) long stock or stocks. Regulation T, of the
underlying the long stock or
security future. stocks.
13............... Short security future Individual stock or The initial margin 10% of the current
and long position in narrow-based security required under market value, as
a security index. Regulation T for the defined in
immediately long security. Regulation T, of the
convertible into the long security.
same security
underlying the
security future,
without restriction,
including the payment
of money.
14............... Short security future Individual stock or 20% of the current The lower of: (1) 10%
(or basket of narrow-based security market value of the of the aggregate
security futures index. short security exercise price of
representing each future, plus pay for the call, plus the
component of a narrow- the call in full. aggregate call out-
based securities of-the-money amount,
index) and long call if any; or (2) 20%
option or warrant on of the current
the same underlying market value of the
security (or index). short security
future.
[[Page 19777]]
15............... Short security future, Individual stock or 20% of the current 10% of the aggregate
short put option and narrow-based security market value of the exercise price, plus
long call option. The index. short security the aggregate put in-
short security future, plus the the-money amount, if
future, short put and aggregate put in-the- any.
long call must be on money amount, if any,
the same underlying plus pay for the call
security and the put in full. Proceeds
and call must have from put sale may be
the same exercise applied.
price. (Reverse
Conversion).
16............... Long (short) a basket Narrow-based security 5% of the current 5% of the current
of security futures, index. market value for the market value of the
each based on a long (short) basket long (short) basket
narrow-based security of security futures. of security futures.
index that together
tracks the broad-
based index and short
(long) a broad-based
index future.
17............... Long (short) a basket Individual stock or The greater of: (1) 5% The greater of: (1)
of security futures narrow-based security of the current market 5% of the current
that together tracks index. value of the long market value of the
a narrow-based index security future(s); long security
and short (long) a or (2) 5% of the future(s); or (2) 5%
narrow-based index current market value of the current
future. of the short security market value of the
future(s). short security
future(s).
18............... Long (short) a Individual stock or The greater of: (1) 3% The greater of: (1)
security future and narrow-based security of the current market 3% of the current
short (long) an index. value of the long market value of the
identical security security future(s); long security
future traded on a or (2) 3% of the future(s); or (2) 3%
different market.\8\. current market value of the current
of the short security market value of the
future(s). short security
future(s).
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New Regulation 431.08 Acceptable Margin for Security Futures and
Treatment of Undermargined Accounts
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\3\ Baskets of securities or security futures contracts must
replicate the securities that comprise the index, and in the same
proportion.
\4\ Generally, for the purposes of these regulations, unless
otherwise specified, stock index warrants shall be treated as if
they were index options.
\5\ ``Aggregate exercise price,'' with respect to an option or
warrant based on an underlying security, means the exercise price of
an option or warrant contract multiplied by the numbers of units of
the underlying security covered by the option contract or warrant.
``Aggregate exercise price'' with respect to an index option, means
the exercise price multiplied by the index multiplier. See, e.g.,
Amex Rules 900 and 900C; CBOE Rule 12.3; and NASD Rule 2522.
\6\ ``Out-of-the-money'' amounts shall be determined as follows:
(1) for stock call options and warrants, any excess of the
aggregate exercise price of the option or warrant over its current
market value (as determined in accordance with Regulation T of the
Board of Governors of the Federal Reserve System);
(2) for stock put options or warrants, any excess of the current
market value (as determined in accordance with Regulation T of the
Board of Governors of the Federal Reserve System) of the option or
warrant over its aggregate exercise price;
(3) for stock index call options and warrants, any excess of the
aggregate exercise price of the option or warrant over the product
of the current index value and the applicable index multiplier; and
(4) for stock index put options and warrants, any excess of the
product of the current index value and the applicable index
multiplier over the aggregate exercise price of the option or
warrant. See, e.g., NYSE Rule 431 (Exchange Act Release No. 42011
(October 14, 1999), 64 FR 57172 (October 22, 1999) (order approving
SR-NYSE-99-03)); Amex Rule 462 (Exchange Act Release No. 43582
(November 17, 2000), 65 FR 71151 (November 29, 2000) (order
approving SR-Amex-99-27)); CBOE Rule 12.3 (Exchange Act Release No.
41658 (July 27, 1999), 64 FR 42736 (August 5, 1999) (order approving
SR-CBOE-97-67)); or NASD Rule 2520 (Exchange Act Release No. 43581
(November 17, 2000), 65 FR 70854 (November 28, 2000) (order
approving SR-NASD-00-15)).
\7\ ``In-the-money'' amounts must be determined as follows:
(1) for stock call options and warrants, any excess of the
current market value (as determined in accordance with Regulation T
of the Board of Governors of the Federal Reserve System) of the
option or warrant over its aggregate exercise price;
(2) for stock put options or warrants, any excess of the
aggregate exercise price of the option or warrant over its current
market value (as determined in accordance with Regulation T of the
Board of Governors of the Federal Reserve System);
(3) for stock index call options and warrants, any excess of the
product of the current index value and the applicable index
multiplier over the aggregate exercise price of the option or
warrant; and
(4) for stock index put options and warrants, any excess of the
aggregate exercise price of the option or warrant over the product
of the current index value and the applicable index multiplier.
\8\ Two security futures will be considered ``identical'' for
this purpose if they are issued by the same clearing agency or
cleared and guaranteed by the same derivatives clearing
organization, have identical contract specifications, and would
offset each other at the clearing level.
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Notwithstanding any other Exchange Rules or Regulations, the
following provisions shall establish the acceptable margin for Security
Futures Positions that are held on behalf of Customers in a futures
account, and the treatment of undermargined futures accounts containing
Security Futures Contracts.
(a) Member firms may accept from their Customers as margin for
Security Futures held in a futures account, deposits of cash, margin
securities (subject to the limitations set forth in the following
sentence), exempted securities, any other assets permitted under
Regulation T of the Board of Governors of the Federal Reserve System
(as in effect from time to time) to satisfy a margin deficiency in a
securities margin account, and any combination of the foregoing, each
as valued in accordance with CFTC Regulations 41.46(c) and 41.46(e) or
SEC Regulations 242.404(c) and 242.404(e), as applicable. Shares of a
money market mutual fund that meet the requirements of CFTC Regulation
1.25 may be accepted as a margin deposit from a Customer for purposes
of this Rule.
(b) A member firm shall not accept as margin from any Customer
securities that have been issued by such Customer or an Affiliate of
such Customer unless such member firm files a petition with and
receives permission from the Exchange for such purpose.
(c) All assets deposited by a Customer to meet margin requirements
must be and remain unencumbered by third party claims against the
depositing Customer.
(d) If a Customer fails to comply with a margin call within a
reasonable period of time (the member firm may deem one hour to be a
reasonable period of time), the relevant member firm shall take the
deduction required with respect to an undermargined account in
computing its net capital under applicable CFTC and SEC Regulations.
(e) If at any time there is a liquidating deficit in an account in
which Security Futures are held, the member firm shall take steps to
liquidate positions in the
[[Page 19778]]
account promptly and in an orderly manner.
* * * * *
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. The
text of these statements may be examined at the places specified in
Item III below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
Proposed Regulation 431.07 generally establishes that the
determination and administration of customer margins shall be
consistent with prevailing practices on the Exchange. To the extent,
however, that Exchange practices may be inconsistent with Commodity
Futures Trading Commission (``CFTC'') Regulations 41.42 through 41.49
\9\ or SEC Regulations 242.400 through 242.406,\10\ as applicable, the
CFTC and SEC Regulations shall prevail.
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\9\ 17 CFR 41.42-41.49.
\10\ 17 CFR 242.400-406.
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General Applicability--Proposed Regulation 431.07 only applies to
security futures transactions executed on the CBOT. To the extent that
security futures intermediaries engage in security futures transactions
on or through other exchanges, they will need to comply with the margin
requirements established by those other exchanges with respect to such
transactions. In addition, proposed Regulation 431.07 only applies to
transactions made on behalf of ``Customers'' as defined in paragraph
(b) of the proposed Regulation. Furthermore, proposed Regulation 431.07
is applicable only to security futures positions held in futures
accounts. While security futures may alternatively be held in a
securities account, the administration of securities accounts will be
governed by applicable regulations, and by rules adopted by other
relevant self-regulatory organizations.
Proposed Regulation 431.07(b) excludes ``exempted persons'' and
``Market Makers'' from the definition of ``Customer.'' Therefore, the
transactions of exempted persons and Market Makers are not subject to
the customer margin requirements set forth in proposed Regulation
431.07. Exempted persons are identified by reference to applicable CFTC
and SEC Regulations and Market Makers are defined as described below.
Market Maker Exclusion--CFTC Regulation 41.42(c)(2)(v) \11\ and SEC
Regulation 242.400(c)(2)(v) \12\ permit exchanges to adopt rules
containing specified requirements for security futures dealers, on the
basis of which the financial relations between security futures
intermediaries and qualifying security futures dealers are excluded
from the customer margin requirements for security futures. Any rules
so adopted by an exchange must meet the criteria set forth in Section
7(c)(2)(B) of the Exchange Act.\13\
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\11\ 17 CFR 41.42(c)(2)(v).
\12\ 17 CFR 242.400(c)(2)(v).
\13\ 15 U.S.C. 78g(c)(2)(B).
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Proposed Regulation 431.07(c) relies on CFTC Regulation
41.42(c)(2)(v) \14\ and SEC Regulation 242.400(c)(2)(v) \15\ in
establishing a Market Maker exclusion. In particular, CBOT members who
meet certain qualifications would be permitted to register with the
Exchange as Security Futures Dealers, such that their accounts would
not be subject to customer security futures margin requirements.
Rather, their accounts would be subject to security futures margin
requirements established pursuant to proposed Regulation 431.07(d).
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\14\ 17 CFR 41.42(c)(2)(v).
\15\ 17 CFR 242.400(c)(2)(v).
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Market Makers will be floor traders or floor brokers registered
with the CFTC under Section 4f(a)(1) of the Commodity Exchange Act, as
amended (``CEA''),\16\ or dealers registered with the SEC under Section
15(b) of the Exchange Act.\17\ As such, they may not qualify as
exempted persons within the meaning of Regulation 242.401(a)(9) under
the Exchange Act.\18\ Absent the provisions of proposed Regulation
431.07, they arguably would have to be treated as customers for
purposes of determining margin requirements, even with respect to their
proprietary market making activities. This would be different from the
treatment of security futures dealers on securities exchanges under
Section 7(c)(3) of the Exchange Act,\19\ and therefore would be
contrary to the statutory objectives reflected in Section 7(c)(2)(B) of
the Exchange Act.\20\
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\16\ 7 U.S.C. 6f(a)(1).
\17\ 15 U.S.C. 78(o)(b).
\18\ 17 CFR 242.401(a)(9).
\19\ 15 U.S.C. 78g(c)(3).
\20\ 15 U.S.C. 78g(c)(2)(B).
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The Market Maker exclusion, as proposed, contains all of the
criteria and limitations set forth in CFTC Regulation 41.42(c)(2)(v)
\21\ and SEC Regulation 242.400(c)(2)(v),\22\ including a clause that
requires that a Market Maker ``hold itself out as being willing to buy
and sell security futures for its own account on a regular or
continuous basis.'' In the release on Customer Margin Rules Relating to
Security Futures (``Customer Margin Release''),\23\ the Commission and
the CFTC identified three alternate means by which to demonstrate such
willingness, as follows:
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\21\ 17 CFR 41.42(c)(2)(v).
\22\ 17 CFR 242.400(c)(2)(v).
\23\ Exchange Act Release No. 46292 (August 1, 2002), 67 FR
53146 (August 14, 2002).
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1. An exchange may require market makers to effect a certain
percentage of their security futures trades with persons other than
those registered as market makers;
2. Market makers could be subject to rules that impose an
affirmative obligation to quote on a regular or continuous basis; or
3. An exchange may require that a ``large majority'' of a market
maker's revenue be derived from trading listed financial based
derivatives including futures and options on stocks, stock indexes,
foreign currencies, and interest rate instruments.
The CBOT generally proposes to apply the second standard listed
above, which includes affirmative obligations to make markets.
Specifically, under proposed Regulation 431.07(c), a Market Maker is
considered willing to hold itself out to buy and sell security futures
on a continuous or regular basis if it fulfills any one of three tests.
The first test, set forth in Regulation 431.07(c)(1), requires a
Market Maker to provide:
* * * continuous two-sided quotations throughout the trading day
for all delivery months of [specified] Security Futures Contracts * * *
and * * * [quote] * * * with a maximum bid/ask spread no more than the
greater of $0.20 or 150% of the bid/ask spread in the primary market
for the security underlying each Security Futures Contract.
The second test, set forth in Regulation 431.07(c)(2), requires a
Market Maker to respond:
* * * to at least 75% of the requests for quotation for all
delivery months of [specified] Security Futures Contracts * * * and * *
* [w]hen responding to requests for quotation, [quote] within five
seconds with a maximum bid/ask spread no more than the greater of $0.20
or 150% of the bid/ask spread in the primary market for the security
underlying each Security Futures Contract.
[[Page 19779]]
The first and second tests require Market Makers to be assigned to
a meaningful proportion of Security Futures Contracts listed on the
Exchange. A ``meaningful proportion'' is defined in proposed Regulation
431.07(c) to refer to Security Futures Contracts that represent at
least 20% of the total Security Futures Contract trading volume on the
Exchange after the 181st calendar day subsequent to the commencement of
trading in Security Futures Contracts on the Exchange.
The third test, set forth in Regulation 431.07(c)(3), requires that
a Market Maker must be:
* * * assigned to a group of Security Futures Contracts listed on
the Exchange that is either unlimited in nature (``Unlimited
Assignment'') or is assigned to no more that 20% of the Security
Futures Contracts listed on the Exchange (``Limited Assignment''); and
* * * [a]t least 75% of the Market Maker's total trading activity in
Exchange Security Futures Contracts is in its assigned Security Futures
Contracts, measured on a quarterly basis; and * * * [d]uring at least
50% of the trading day, the Market Maker has bids or offers in the
market that are at or near the best market * * * with respect to at
least 25% (in the case of an Unlimited Assignment) or at least one (in
the case of a Limited Assignment) of its assigned Security Futures
Contracts; and * * * [these obligations must be] satisfied on (a) at
least 90% of the trading days in each calendar quarter by Market Makers
who have undertaken an Unlimited Assignment; or (b) at least 80% of the
trading days in each calendar quarter by Market Makers who have
undertaken a Limited Assignment; or (c) on at least 80% of the trading
days in each calendar quarter * * * where the Exchange is listing four
(4) or fewer Security Futures Contracts.
Market Makers are required to maintain books and records in order
to evidence compliance with these standards. This recordkeeping
requirement includes, without limitation, trading account statements
and other financial records necessary to detail Market Maker activity.
Failure on the part of a Market Maker to comply with these standards
may result in revocation of the Market Maker's registration with the
Exchange as a Security Futures Dealer, or other sanctions under CBOT
Rules and Regulations.
The CBOT believes that proposed Regulation 431.07(b) and (c) are
consistent with the requirements of the Exchange Act and with the
explanations accompanying the publication of those requirements.
Margin Rates--Proposed Regulation 431.07(a) requires that customer
margin rates be established at levels no lower than those prescribed by
CFTC Regulation 41.45 \24\ and SEC Regulation 242.403.\25\ Proposed
Regulation 431.07(d) specifically provides that the margin level for
each long or short position in a Security Futures contract held on
behalf of a customer shall not be less than 20% of the current market
value of such Security Futures contract, as required by SEC Regulation
242.403(b)(1) \26\ and CFTC Regulation 41.45(b)(1).\27\
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\24\ 17 CFR 41.45.
\25\ 17 CFR 242.403.
\26\ 17 CFR 242.403(b)(1).
\27\ 17 CFR 41.45(b)(1).
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Exceptions to the 20% requirement are established under proposed
Regulation 431.07(e). These exceptions rely upon SEC Regulation
242.403(b)(2) \28\ and CFTC Regulation 41.45(b)(2) \29\ that provide
that a self-regulatory authority may set the required initial or
maintenance margin level for offsetting positions involving security
futures and related positions at a level lower than the level that
would apply if margin requirements for such positions were calculated
separately based on the 20% requirement, provided that the rules
establishing such lower margin levels meet the criteria set forth in
Section 7(c)(2)(B) of the Exchange Act.\30\ That Section requires that:
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\28\ 17 CFR 242.403(b)(2).
\29\ 17 CFR 41.45(b)(2).
\30\ 15 U.S.C. 78g(c)(2)(B).
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(I) The margin requirements for a security futures product be
consistent with the margin requirements for comparable option contracts
traded on any exchange registered pursuant to Section 6(a) of [the
Exchange Act]; and
(II) Initial and maintenance margin levels for a security futures
product not be lower than the lowest level of margin, exclusive of
premium, required for any comparable option contract traded on any
exchange registered pursuant to Section 6(a) of [the Exchange Act],
other than an option on a security future.
Absent the margin relief afforded by proposed Regulation 431.07(e),
security futures intermediaries would be required to collect margin
from their customers equal to at least 20% of the current market value
of the security futures held on behalf of such customers, even if such
security futures positions were hedged. With respect to option
contracts traded on securities exchanges, the Commission has recognized
that it is appropriate for the SROs to recognize the hedged nature of
certain combined options strategies and prescribe margin requirements
that better reflect the risk of those strategies.\31\
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\31\ See Exchange Act Release Nos. 41658 (July 27, 1999), 64 FR
42736 (August 5, 1999) (order approving SR-CBOE-97-67 amending CBOE
Rule 12.3); 42011 (October 14, 1999) (order approving SR-NYSE-99-03
amending NYSE Rule 431); 43582 (November 17, 2000), 65 FR 70854
(November 28, 2000) (order approving SR-Amex-99-27 amending Amex
Rule 462); and 43581 (November 17, 2000), 65 FR 71151 (November 29,
2000) (order approving SR-NASD-00-15 amending NASD Rule 2520).
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The CBOT believes that the same considerations apply in connection
with the determination of margin levels for offsetting positions
involving security futures and related positions. If margin offsets
were not available with respect to security futures, the customer
margin requirements applicable to such instruments would effectively be
inconsistent with, and more onerous than, the margin requirements for
comparable option contracts traded on securities exchanges. This would
be contrary to the statutory objectives reflected in Section 7(c)(2)(B)
of the Exchange Act.\32\
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\32\ 15 U.S.C. 78g(c)(2)(B).
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Proposed Regulation 431.07(e) incorporates a schedule which
describes in detail the margin offsets available with respect to
particular combinations of security futures and related positions. This
schedule is substantively identical to the table of offsets included in
the Customer Margin Release. While the table differs in certain
respects from similar tables in effect for exchange-traded options, the
Commission acknowledged in its Customer Margin Release that these
limited differences are warranted by different characteristics of the
instruments to which they relate. Accordingly, the CBOT believes that
proposed Regulation 431.07(e) is consistent with the requirements of
the Exchange Act and the Rules and Regulations thereunder.
Margin Administration--Proposed Regulation 431.08(a) identifies the
types of instruments that a security futures intermediary may accept
from a customer as margin for security futures positions held in a
futures account. Consistent with SEC Regulation 242.404(b) \33\ and
CFTC Regulation 41.46(b),\34\ acceptable types of margin are limited to
deposits of cash, margin securities (subject to specified
restrictions), exempted securities, any other assets permitted under
Regulation
[[Page 19780]]
T \35\ of the Board of Governors of the Federal Reserve System to
satisfy a margin deficiency in a securities margin account, and any
combination of the foregoing. Proposed Regulation 431.08(a) further
provides that the different types of eligible margin deposits are to be
valued in accordance with the applicable principles set forth in SEC
Regulations 242.404(c) and 242.404(e) \36\ and CFTC Regulations
41.46(c) and 41.46(e).\37\
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\33\ 17 CFR 242.404(b).
\34\ 17 CFR 41.46(b).
\35\ 2 CFR 220.1 et seq.
\36\ 17 CFR 242.404(c) and 242.404(e).
\37\ 17 CFR 41.46(c) and 41.46(e).
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Proposed Regulation 431.08(d) requires a security futures
intermediary to take the deduction required with respect to an
undermargined account in computing its net capital under applicable SEC
and CFTC Regulations if the customer has failed to comply with a
required margin call within a reasonable period of time. This
requirement is consistent with SEC Regulation 242.406(a) \38\ and CFTC
Regulation 41.48(a).\39\ Further, proposed Regulation 431.08(e)
requires the liquidation of an account in which security futures are
held where there is a liquidating deficit, in accordance with SEC
Regulation 242.406(b) \40\ and CFTC Regulation 41.48(b).\41\
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\38\ 17 CFR 242.406(a).
\39\ 17 CFR 41.48(a).
\40\ 17 CFR 242.406(b).
\41\ 17 CFR 41.48(b).
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The Exchange Act Regulations and related provisions of the Exchange
Act are premised on each self-regulatory organization adopting margin
requirements that are functionally equivalent to proposed CBOT
Regulations 431.07 and 431.08. Accordingly, proposed Regulations 431.07
and 431.08 represent a corollary of, and are designed to give effect
to, the Exchange Act Regulations and related provisions of the Exchange
Act.
B. Self-Regulatory Organization's Statement on Burden on Competition
The CBOT does not believe that the proposed rule change will impose
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act.
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. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Exchange 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 e-mail to rule-comments@sec.gov. Please include File
Number SR-CBOT-2006-01 on the subject line.
Paper Comments
Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-CBOT-2006-01. This file
number should be included on the subject line if e-mail is used. To
help the Commission process and review your comments more efficiently,
please use only one method. The Commission will post all comments on
the Commission's Internet Web site (https://www.sec.gov/rules/sro/
shtml). Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change that are
filed with the Commission, and all written communications relating to
the proposed rule change between the Commission and any person, other
than those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for inspection and
copying in the Commission's Public Reference Room. Copies of such
filing also will be available for inspection and copying at the
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 submission should refer to
File Number SR-CBOT-2006-01 and should be submitted on or before May 8,
2006.
IV. Commission Findings and Order Granting Accelerated Approval of a
Proposed Rule Change
The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a national securities exchange.\42\ In
particular, the Commission finds that the proposed rule change is
consistent with the requirements of Section 6(b)(5) of the Act,\43\
which requires, among other things, that the rules of the Exchange be
designed to promote just and equitable principles of trade and, in
general, to protect investors and the public interest. In addition, the
Commission believes that the proposed rule change is consistent with
Section 7(c)(2)(B) of the Act,\44\ which provides, among other things,
that the margin requirements for security futures must preserve the
financial integrity of markets trading security futures and prevent
systemic risk. The Commission also believes that the proposed rule
change is consistent with the customer margin rules set forth in Rules
400 through 406 under the Act.\45\
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\42\ In approving this proposal, the Commission has considered
its impact on efficiency, competition, and capital formation. 15
U.S.C. 78c(f).
\43\ 15 U.S.C. 78f(b)(5).
\44\ 15 U.S.C. 78g(c)(2)(B).
\45\ 17 CFR 242.400-406.
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The Exchange has requested that the Commission approve this
proposed rule change prior to the thirtieth day after publication of
notice of the filing in the Federal Register. The Commission believes
that nothing in this proposed rule change raises any new, unique, or
substantive issues from those previously raised in SR-OC-2002-01, as
amended, and SR-CME-2002-01, as amended \46\ which rule filings set
forth OneChicago's and the Chicago Mercantile Exchange's (``CME'')
margin requirements for security futures, respectively. The Exchange's
proposed rules set forth herein are substantively identical to the
parallel provisions in OneChicago Rule 515 and CME Rule 930. The
Exchange noted that that OneChicago Rule 515(a) specifies that its
market maker exclusion applies to security futures positions held in
securities accounts, as well as those held in futures accounts. The
proposed margin rules only address security futures positions held in
futures accounts. Further, the offsets proposed by CBOT are consistent
with the strategy-based offsets permitted for comparable offset
positions involving exchange-traded options and therefore consistent
with Section 7(c)(2)(B) of the Exchange Act.\47\ Finally, approval of
the proposed rule change is necessary for CBOT to begin trading
security futures.
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\46\ See also SR-CME-2003-01 (approving, on a permanent basis, a
standard under which a market maker can qualify for exclusion from
CME's margin rules).
\47\ 15 U.S.C. 78g(c)(2)(B).
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[[Page 19781]]
Accordingly, the Commission finds good cause for approving this
proposed rule change prior to the thirtieth day after the date of
publication of notice thereof in the Federal Register. Specifically,
the Commission believes that it is consistent with Section 19(b)(2) of
the Act \48\ to approve the Exchange's proposed rule change prior to
the thirtieth day after publication of the notice of filing thereof in
the Federal Register.
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\48\ 15 U.S.C. 78s(b)(2).
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V. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\49\ that the proposed rule change (File No. SR-CBOT-2006-01) is
approved on an accelerated basis.
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\49\ Id.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\50\
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\50\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
[FR Doc. E6-5650 Filed 4-14-06; 8:45 am]
BILLING CODE 8010-01-P
