Self-Regulatory Organizations; National Association of Securities Dealers, Inc.; Notice of Filing and Immediate Effectiveness of Proposed Rule Change Relating to Amendments to Rule 2520 (Margin Requirements), 26797-26804 [E6-6911]
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Federal Register / Vol. 71, No. 88 / Monday, May 8, 2006 / Notices
4642, 4632A, 6420, and 6620 governing
trade reporting that currently prohibit
member firms from reporting odd-lot
transactions, away from the market
sales, and OTC options, as well as other
identified transactions, to clarify that
the prohibition found in the transaction
reporting rules is limited to the
submission of a transaction for
publication purposes.7
NASD will announce the effective
date of the proposed rule change in a
Notice to Members to be published no
later than 60 days following
Commission approval, if the
Commission approves this proposal.
The effective date would be at least 90
days following publication of the Notice
to Members announcing Commission
approval to allow firms sufficient time
to make any necessary systems changes.
2. Statutory Basis
NASD believes that the proposed rule
change is consistent with the provisions
of Section 15A(b)(6) of the Act,8 which
requires, among other things, that NASD
rules be designed to prevent fraudulent
and manipulative acts and practices, to
promote just and equitable principles of
trade, and, in general, to protect
investors and the public interest. NASD
believes that requiring members to
report, in an automated manner, all
transactions that must be reported to
NASD and are subject to the regulatory
transaction fee would ensure more
accurate and timely reporting of such
transactions and would reduce the
burden on members that results from
manually reporting certain transactions.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
NASD does not believe that the
proposed rule change would result in
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
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Written comments were neither
solicited nor received.
designate transactions effected pursuant to the
exercise of an OTC option.
7 The proposed amendments to NASD Rules
4632A and 6420 solely amend the headings of
NASD Rules 4632A(k) and 6420(e), respectively.
The text of these rules does not need to be amended
because it already stated that the prohibition on
reporting the identified transactions is limited to
the submission of a transaction for publication
purposes (or in the case of listed securities, for
inclusion on the Consolidated Tape).
8 15 U.S.C. 78o–3(b)(6).
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III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of
publication of this notice in the Federal
Register or within such longer period (i)
as the Commission may designate up to
90 days of such date if it finds such
longer period to be appropriate and
publishes its reasons for so finding or
(ii) as to which the self-regulatory
organization consents, the Commission
will:
A. By order approve such proposed
rule change; or
B. Institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number SR–NASD–2006–055 on the
subject line.
26797
comments received will be posted
without change; the Commission does
not edit personal identifying
information from submissions. You
should submit only information that
you wish to make available publicly. All
submissions should refer to File
Number SR–NASD–2006–055 and
should be submitted on or before May
30, 2006.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.9
Nancy M. Morris,
Secretary.
[FR Doc. 06–4280 Filed 5–5–06; 8:45 am]
BILLING CODE 8010–01–M
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–53743; File No. SR–NASD–
2006–045]
Self-Regulatory Organizations;
National Association of Securities
Dealers, Inc.; Notice of Filing and
Immediate Effectiveness of Proposed
Rule Change Relating to Amendments
to Rule 2520 (Margin Requirements)
April 28, 2006.
Pursuant to section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’) 1 and Rule 19b–4 thereunder,2
notice is hereby given that on April 3,
Paper Comments
2006, the National Association of
Securities Dealers, Inc. (‘‘NASD’’) filed
• Send paper comments in triplicate
with the Securities and Exchange
to Nancy M. Morris, Secretary,
Commission (‘‘SEC’’ or ‘‘Commission’’)
Securities and Exchange Commission,
the proposed rule change as described
Station Place, 100 F Street, NE.,
in Items I, II, and III below, which Items
Washington, DC 20549–1090.
have been prepared by NASD. NASD
All submissions should refer to File
has designated the proposed rule change
Number SR–NASD–2006–055. This file
as constituting a ‘‘non-controversial’’
number should be included on the
subject line if e-mail is used. To help the rule change pursuant to section
19(b)(3)(A) 3 of the Act and Rule 19b–
Commission process and review your
4(f)(6) thereunder,4 which renders the
comments more efficiently, please use
only one method. The Commission will proposal effective upon filing with the
post all comments on the Commission’s Commission. The Commission is
publishing this notice to solicit
Internet Web site (https://www.sec.gov/
comments on the proposed rule change
rules/sro.shtml). Copies of the
from interested persons.
submission, all subsequent
amendments, all written statements
I. Self-Regulatory Organization’s
with respect to the proposed rule
Statement of the Terms of Substance of
change that are filed with the
the Proposed Rule Change
Commission, and all written
NASD is proposing to amend NASD
communications relating to the
Rules 2520 and 2522 that will revise the
proposed rule change between the
Commission and any person, other than margin requirements to (1) recognize
specific additional complex option
those that may be withheld from the
public in accordance with the
9 17 CFR 200.30–3(a)(12).
provisions of 5 U.S.C. 552, will be
1 15 U.S.C. 78s(b)(1).
available for inspection and copying in
2 17 CFR 240.19b–4.
the Commission’s Public Reference
3 15 U.S.C. 78s(b)(3)(A).
Room. Copies of such filing also will be
4 17 CFR 240.19b–4(f)(6). NASD gave the
available for inspection and copying at
Commission written notice of its intent to file this
proposed rule change on March 24, 2006.
the principal office of NASD. All
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spread strategies for purposes of
determining required margin and (2)
amend the provisions relating to
‘‘permitted offsets’’ for certain listed
option transactions.
The text of the proposed rule change
is below. Proposed new language is
italicized; deletions are in brackets.
*
*
*
*
*
2520. Margin Requirements
(a) through (e) No Change.
(f) Other Provisions
(1) No Change.
(2) Puts, Calls and Other Options,
Currency Warrants, Currency Index
Warrants and Stock Index Warrants
(A) through (B) No Change.
(C) For purposes of this subparagraph
(f)(2), obligations issued by the United
States Government shall be referred to
as United States Government
obligations. Mortgage pass-through
obligations guaranteed as to timely
payment of principal and interest by the
Government National Mortgage
Association shall be referred to as
GNMA obligations.
In the case of any put, call, currency
warrant, currency index warrant, or
stock index warrant carried ‘‘long’’ in a
customer’s account that expires in nine
months or less, initial margin must be
deposited and maintained equal to at
least 100% of the purchase price of the
option or warrant.
Long Listed Option or Warrant With
An Expiration Exceeding Nine Months.
In the case of a put, call, index stock
group option, or stock index warrant
that is issued by a registered clearing
agency, margin must be deposited and
maintained equal to at least 75% of the
current market value of the option or
warrant; provided that the option or
warrant has a remaining period to
expiration exceeding nine months.
Long OTC Option or Warrant With An
Expiration Exceeding Nine Months. In
the case of a[n OTC] put, [or ]call, index
stock group option,[ on a stock or stock
index, and a] or stock index warrant[,]
carried long that is not issued by a
registered clearing agency[ with an
expiration exceeding 9 months], margin
must be deposited and maintained equal
to at least 75% of the option’s or
warrant’s ‘‘in-the-money’’ amount plus
100% of the amount, if any, by which
the current market value of the option
or warrant exceeds its ‘‘in-the-money’’
amount provided the option or
warrant:[. Options or warrants margined
pursuant to this paragraph must:]
(i) [be valued at all times for margin
purposes at an amount not to exceed,
the in-the-money amount,]
[(ii) be]is guaranteed by the carrying
broker-dealer, [and]
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(ii) [(iii) have]has an American-style
exercise provision, and
(iii) has a remaining period to
expiration exceeding nine months.
(D) through (F) No Change.
(G) (i) through (iv) No Change.
(v) The following requirements set
forth the minimum amount of margin
that must be maintained in margin
accounts of customers having positions
in components underlying options, and
stock index warrants, when such
components are held in conjunction
with certain positions in the overlying
option or warrant. The option or
warrant must be issued by a registered
clearing agency or guaranteed by the
carrying broker/dealer. In the case of a
call or warrant carried in a short
position, a related long position in the
underlying component shall be valued
at no more than the call/warrant
exercise price for margin equity
purposes.
a. Long Option or Warrant Offset.
When a component underlying an
option or warrant is carried long (short)
in an account in which there is also
carried a long put (call) or warrant
specifying equivalent units of the
underlying component, the minimum
amount of margin that must be
maintained on the underlying
component is 10% of the [aggregate]
option/warrant exercise price plus the
‘‘out-of-the-money’’ amount, not to
exceed the minimum maintenance
required pursuant to paragraph (c) of
this Rule.
b. Conversions. When a call or
warrant carried in a short position is
covered by a long position in equivalent
units of the underlying component and
[there] is also carried with a long put or
warrant specifying equivalent units of
the same underlying component and
having the same exercise price and
expiration date as the short call or
warrant, the minimum amount of
margin that must be maintained for the
underlying component shall be 10% of
the [aggregate] exercise price.
c. Reverse Conversions. When a put or
warrant carried in a short position is
covered by a short position in
equivalent units of the underlying
component and is also carried with a
long call or warrant specifying
equivalent units of the same underlying
component and having the same
exercise price and expiration date as the
short put or warrant, the minimum
amount of margin that must be
maintained for the underlying
component shall be 10% of the
[aggregate] exercise price plus the
amount by which the exercise price of
the put exceeds the current market
value of the underlying, if any.
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d. Collars. When a call or warrant
carried in a short position is covered by
a long position in equivalent units of the
underlying component and is also
carried with a long put or warrant
specifying equivalent units of the same
underlying component and having a
lower exercise price and the same
expiration date as the short call/warrant,
the minimum amount of margin that
must be maintained for the underlying
component shall be the lesser of 10% of
the [aggregate] exercise price of the put
plus the put ‘‘out-of-the-money’’ amount
or 25% of the call aggregate exercise
price.
e. Butterfly Spread. This
subparagraph applies to a butterfly
spread as defined in Rule 2522 where
all option positions are issued by a
registered clearing agency or guaranteed
by the carrying broker/dealer.
1. No Change.
2. With respect to a short butterfly
spread as defined in Rule 2522, margin
must be deposited and maintained equal
to at least the amount of the [aggregate]
difference between the two lowest
exercise prices with respect to short
butterfly spreads comprised of calls or
the [aggregate] difference between the
two highest exercise prices with respect
to short butterfly spreads comprised of
puts. The net proceeds from the sale of
short option components may be
applied to the requirement.
f. Box Spread. This subparagraph
applies to box spreads as defined in
Rule 2522, where all option positions
are issued by a registered clearing
agency or guaranteed by the carrying
broker/dealer.
1. With respect to a long box spread
as defined in Rule 2522, the net debit
must be paid in full.
2. With respect to a short box spread
as defined in Rule 2522, margin must be
deposited and maintained equal to at
least the amount of the [aggregate]
difference between the exercise prices.
The net proceeds from the sale of the
short option components may be
applied to the requirement.
g. Long Box Spread in European-Style
Options. With respect to a long box
spread as defined in Rule 2522, in
which all component options have a
European-style exercise provision and
are issued by a registered clearing
agency or guaranteed by the carrying
broker/dealer, margin must be deposited
and maintained equal to at least 50% of
the [aggregate] difference in the exercise
prices. The net proceeds from the sale
of short option components may be
applied to the requirement. For margin
purposes, the long box spread may be
valued at an amount not to exceed
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100% of the [aggregate] difference in the
exercise prices.
h. Long Condor Spread. This
subparagraph applies to a long condor
spread as defined in Rule 2522 where
all option positions are issued by a
registered clearing agency or guaranteed
by the carrying broker/dealer. With
respect to a long condor spread as
defined in Rule 2522, the net debit must
be paid in full.
i. Short Iron Butterfly Spread. This
subparagraph applies to a short iron
butterfly spread as defined in Rule 2522
where all option positions are issued by
a registered clearing agency or
guaranteed by the carrying broker/
dealer. With respect to a short iron
butterfly spread as defined in Rule 2522,
margin must be deposited and
maintained equal to at least the amount
of the exercise price interval. The net
proceeds from the sale of short option
components may be applied to the
requirement.
j. Short Iron Condor Spread. This
subparagraph applies to a short iron
condor spread as defined in Rule 2522
where all option positions are issued by
a registered clearing agency or
guaranteed by the carrying broker/
dealer. With respect to a short iron
condor spread as defined in Rule 2522,
margin must be deposited and
maintained equal to at least the amount
of the exercise price interval. The net
proceeds from the sale of short option
components may be applied to the
requirement.
k. Long Calendar Butterfly Spread.
This subparagraph applies to a long
calendar butterfly spread as defined in
Rule 2522 where all option positions are
issued by a registered clearing agency or
guaranteed by the carrying broker/
dealer. With respect to a long calendar
butterfly spread as defined in Rule 2522,
the net debit must be paid in full.
l. Long Calendar Condor Spread. This
subparagraph applies to a long calendar
condor spread as defined in Rule 2522
where all option positions are issued by
a registered clearing agency or
guaranteed by the carrying broker/
dealer. With respect to a long calendar
condor spread as defined in Rule 2522,
the net debit must be paid in full.
m. Short Calendar Iron Butterfly
Spread. This subparagraph applies to a
short calendar iron butterfly spread as
defined in Rule 2522 where all option
positions are issued by a registered
clearing agency or guaranteed by the
carrying broker/dealer. With respect to a
short calendar iron butterfly spread as
defined in Rule 2522, margin must be
deposited and maintained equal to at
least the amount of the exercise price
interval. The net proceeds from the sale
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of short option components may be
applied to the requirement.
n. Short Calendar Iron Condor
Spread. This subparagraph applies to a
short calendar iron condor spread as
defined in Rule 2522 where all option
positions are issued by a registered
clearing agency or guaranteed by the
carrying broker/dealer. With respect to a
short calendar iron condor spread as
defined in Rule 2522, margin must be
deposited and maintained equal to at
least the amount of the exercise price
interval. The net proceeds from the sale
of short option components may be
applied to the requirement.
(H) through (I) No Change.
(J) (i) Registered specialists, market
makers or traders—Notwithstanding the
other provisions of this subparagraph
(f)(2), a member may clear and carry the
listed option transactions of one or more
registered specialists, registered market
makers or registered traders in options
(whereby[which] registered traders are
deemed specialists for all purposes
under the Act, pursuant to the rules of
a national securities exchange)
(hereinafter referred to as
‘‘specialist(s)’’), upon a ‘‘Good Faith’’
margin basis satisfactory to the
concerned parties, provided the ‘‘Good
Faith’’ margin requirement[s] is not less
than the Net Capital haircut deduction
of the member [organization] carrying
the transaction pursuant to SEC Rule
15c3–1 under the Act. In lieu of
collecting the ‘‘Good Faith’’ margin
requirement, a carrying member
[organization] may elect to deduct in
computing its Net Capital the amount of
any deficiency between the equity
maintained in the account and the
‘‘Good Faith’’ margin required.
For purposes of this paragraph
(f)(2)(J), a permitted offset position
means, in the case of an option in which
a specialist or market maker makes a
market, a position in the underlying
asset or other related assets, and in the
case of other securities in which a
specialist or market maker makes a
market, a position in options overlying
the securities in which a specialist or
market maker makes a market.
Accordingly, a specialist or market
maker in options may establish, on a
share-for-share basis, a long or short
position in the securities underlying the
options in which the specialist or
market maker makes a market, and a
specialist or market maker in securities
other than options may purchase or
write options overlying the securities in
which the specialist or market maker
makes a market, if the account holds the
following permitted offset positions:
a. A short option position which [is
‘‘in or at the money’’ and] is not offset
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26799
by a long or short option position for an
equal or greater number of shares of the
same underlying security which is ‘‘in
the money’’;
b. A long option position which [is
‘‘in or at the money’’ and] is not offset
by a long or short option position for an
equal or greater number of shares of the
same underlying security which is ‘‘in
the money’’;
c. A short option position against
which an exercise notice was tendered;
d. A long option position which was
exercised;
e. A net long position in a security
(other than an option) in which a
specialist or market maker makes a
market;
f. A net short position in a security
(other than an option) in which the
specialist or market maker makes a
market; or
g. A specified portfolio type as
referred to in SEC Rule 15c3–1,
including its appendices, or any
applicable SEC staff interpretation or
no-action position.
Permitted offset transactions must be
effected for specialist or market making
purposes such as hedging, risk
reduction, rebalancing of positions,
liquidation, or accommodation[s] of
customer orders, or other similar
[market making]specialist or market
maker purpose. The specialist or market
maker must be able to demonstrate
compliance with this provision.
For purposes of this paragraph (f)(2)(J)
[the term ‘‘in or at the money’’ means
the current market price of the
underlying security is not more than
two standard exercise intervals below
(with respect to a call option) or above
(with respect to a put option) the
exercise price of the option;] the term
‘‘in the money’’ means the current
market price of the underlying asset or
index is not below (with respect to a call
option) or above (with respect to a put
option) the exercise price of the option;
and, the term ‘‘overlying option’’ means
a put option purchased or a call option
written against a long position in an
underlying asset; or a call option
purchased or a put option written
against a short position in an underlying
asset.
(ii) Securities, including options, in
such accounts shall be valued
conservatively in the light of current
market prices and the amount which
might be realized upon liquidation.
Substantial additional margin must be
required or excess [n]Net [c]Capital
maintained in all cases where the
securities carried:
a. through b. No Change.
c. In one or more or all accounts,
including proprietary accounts
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combined, are such that they cannot be
liquidated promptly or represent undue
concentration of risk in view of the
carrying member’s [n]Net [c]Capital and
its overall exposure to material loss.
(K) through (L) No Change.
(M) Cash account transactions—A
member may make option transactions
in a customer’s cash account, provided
that:
(i) No Change.
(ii) Spreads. A European-style cashsettled index stock group option or
stock index warrant carried in a short
position is deemed a covered position,
and eligible for the cash account,
provided a long position in a Europeanstyle cash-settled stock group index
option, or stock index warrant having
the same underlying component or
index that is based on the same
aggregate current underlying value, is
held in or purchased for the account on
the same day, provided that:
a. through b. No Change.
c. There is held in the account at the
time the positions are established, or
received into the account promptly
thereafter:
1. Cash or cash equivalents of not less
than any amount by which the
[aggregate] exercise price of the long call
or call warrant (short put or put
warrant) exceeds the [aggregate] exercise
price of the short call or call warrant
(long put or put warrant), to which
[requirement of] net proceeds from the
sale of the short position may be
applied, or
2. An escrow agreement.
The escrow agreement must certify
that the bank holds for the account of
the customer as security for the
agreement i. cash, ii. cash equivalents,
or iii. a combination thereof having an
aggregate market value at the time the
positions are established of not less than
any amount by which the [aggregate]
exercise price of the long call or call
warrant (short put or put warrant)
exceeds the [aggregate] exercise price of
a short call or call warrant (long put or
put warrant) and that the bank will
promptly pay the member such amount
in the event the account is assigned an
exercise notice or that the bank will
promptly pay the member funds
sufficient to purchase a warrant sold
short in the event of a buy-in.
d. No Change.
(iii) Long Butterfly Spreads, Short
Butterfly Spreads, Long Condor
Spreads, Short Iron Butterfly Spreads,
or Short Iron Condor Spreads. Put or
call options carried in a short position
are deemed covered positions and
eligible for the cash account provided
that the account contains long positions
of the same type which in conjunction
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with the short options, constitute a long
butterfly spread, short butterfly spread,
long condor spread, short iron butterfly
spread, or short iron condor spread as
defined in Rule 2522 and provided that:
a. through d. No Change.
e. All components options expire
concurrently;
[e]f. With respect to a long butterfly
spread or long condor spread as defined
in Rule 2522, the net debit is paid in
full; and
[f]g. With respect to a short butterfly
spread, short iron butterfly spread or
short iron condor spread as defined in
Rule 2522, there is held in the account
at the time the positions are established
or received into the account promptly
thereafter:
1. Cash or cash equivalents of not less
than the amount of the [aggregate]
difference between the two lowest
exercise prices with respect to short
butterfly spreads comprised of call
options or the [aggregate] difference
between the two highest exercise prices
with respect to short butterfly spreads
comprised [or] of put options, to which
[requirement] the net proceeds from the
sale of short option components may be
applied; or
2. An escrow agreement.
The escrow agreement must certify
that the bank holds for the account of
the customer as security for the
agreement i. cash, ii. cash equivalents or
iii. a combination thereof having an
aggregate market value at the time the
positions are established of not less than
the amount of the [aggregate] difference
between the two lowest exercise prices
with respect to short butterfly spreads
comprised of calls or the [aggregate]
difference between the two highest
exercise prices with respect to short
butterfly spreads comprised of puts and
that the bank will promptly pay the
member such amount in the event the
account is assigned an exercise notice
on the call (put) with the lowest
(highest) exercise price.
(iv) Box Spreads. Puts and calls
carried in a short position are deemed
covered positions and eligible for the
cash account provided that the account
contains long positions which in
conjunction with the short options
constitute a box spread as defined in
Rule 2522 provided that:
a. through d. No Change.
e. All component options expire
concurrently;
[e]f. With respect to a long box spread
as defined in Rule 2522, the net debit is
paid in full; and
[f]g. With respect to a short box
spread as defined in Rule 2522, there is
held in the account at the time the
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positions are established, or received
into the account promptly thereafter:
1. Cash or cash equivalents of not less
than the amount of the [aggregate]
difference between the exercise prices,
to which [requirement] the net proceeds
from the sale of short option
components may be applied; or
2. An escrow agreement.
The escrow agreement must certify
that the bank holds for the account of
the customer as security for the
agreement i. cash, ii. cash equivalents or
iii. a combination thereof having an
aggregate market value at the time the
positions are established of not less than
the amount of the [aggregate] difference
between the exercise prices and that the
bank will promptly pay the member
such amount in the event the account is
assigned an exercise notice on either
short option.
(3) through (11) No Change.
*
*
*
*
*
2522. Definitions Related to Options,
Currency Warrants, Currency Index
Warrants and Stock Index Warrants
Transactions.
(a) The following definitions shall
apply to the margin requirements for
options, currency warrants, currency
index warrants and stock index
warrants transactions:
(1) through (5) No Change.
(6) Box Spread.
The term ‘‘box spread’’ means an
aggregation of positions in a long call
and short put with the same exercise
price (‘‘buy side’’) coupled with a long
put and short call with the same
exercise price (‘‘sell side’’) [all of which
have the same underlying component or
index and time of expirations, and are
based on the same aggregate current
underlying value, and are] structured
as[;]: (A) a ‘‘long box spread’’ in which
the sell side exercise price exceeds the
buy side exercise price or (B) a ‘‘short
box spread’’ in which the buy side
exercise price exceeds the sell side
exercise price[.], all of which have the
same contract size, underlying
component or index and time of
expiration, and are based on the same
aggregate current underlying value.
(7) through (8) No Change.
(9) Butterfly Spread
The term ‘‘butterfly spread’’ means an
aggregation of positions in three series
of either puts or calls, [all having the
same underlying component or index,
and time of expiration, and based on the
same aggregate current underlying
value, where the interval between the
exercise price of each series is equal,
which positions are] structured as
either: (A) a ‘‘long butterfly spread’’ in
which two short options in the same
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series are offset by one long option with
a higher exercise price and one long
option with a lower exercise price or (B)
a ‘‘short butterfly spread’’ in which two
long options in the same series offset
one short option with a higher exercise
price and one short option with a lower
exercise price[.], all of which have the
same contract size, underlying
component or index and time of
expiration, are based on the same
aggregate current underlying value,
where the interval between the exercise
price of each series is equal, and the
exercise prices are in ascending order.
(10) Calendar Spread
The term ‘‘calendar spread’’ or ‘‘time
spread’’ means the sale of one option
and the simultaneous purchase of
another option of the same type, both
specifying the same underlying
component with the same exercise price
or different exercise prices, where the
‘‘long’’ option expires after the ‘‘short’’
option.
(10) through (22) renumbered as (11)
through (23).
[(23)](24) Escrow Agreement
The term ‘‘escrow agreement,’’ when
used in connection with cash settled
calls, puts, currency warrants, currency
index warrants, or stock index warrants
carried short, means any agreement
issued in a form acceptable to [the
Association]NASD under which a bank
holding cash, cash equivalents, one or
more qualified equity securities or a
combination thereof in the case of a call
[option] or warrant or cash, cash
equivalents or a combination thereof in
the case of a put [option] or warrant is
obligated (in the case of an option) to
pay the creditor the exercise settlement
amount in the event an option is
assigned an exercise notice or, (in the
case of a warrant) the funds sufficient to
purchase a warrant sold short in the
event of a buy-in.
[The term ‘‘escrow agreement’’ when
used in connection with non cash
settled call or put options carried short,
means any agreement issued in a form
acceptable to the Association under
which a bank holding the underlying
security (in the case of a call option) or
required cash or cash equivalents or a
combination thereof (in the case of a put
option) is obligated to deliver to the
creditor (in the case of a call option) or
accept from the creditor (in the case of
a put option) the underlying security
against payment of the exercise price in
the event of the call or put is assigned
an exercise notice.]
(24) through (40) renumbered as (25)
through (41).
(42) Long Calendar Butterfly Spread
The term ‘‘long calendar butterfly
spread’’ means an aggregation of
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positions in three series of either puts or
calls, structured as two short options
with the same exercise price, offset by
a long option with a lower exercise price
and a long option with a higher exercise
price, all of which have the same
contract size, underlying component or
index, are based on the same aggregate
current underlying value, where the
interval between the exercise price of
each series is equal, the exercise prices
are in consecutive order, and one long
option expires after the other three
options expire concurrently. However, a
long calendar butterfly spread cannot be
composed of cash-settled, Europeanstyle index options. This strategy can
also be considered a combination of one
long calendar spread and one long
butterfly spread, as defined in this rule.
(43) Long Calendar Condor Spread
The term ‘‘long calendar condor
spread’’ means an aggregation of
positions in four series of either puts or
calls, structured as a long option with
the lowest exercise price, two short
options with the next two consecutively
higher exercise prices and a long option
with the highest exercise price, all of
which have the same contract size,
underlying component or index, are
based on the same aggregate current
underlying value, where the interval
between the exercise price of each series
is equal, the exercise prices are in
consecutive order, and one long option
expires after the other three options
expire concurrently. However, a long
calendar condor spread cannot be
composed of cash-settled, Europeanstyle index options. This strategy can
also be considered a combination of one
long calendar spread and two long
butterfly spreads, as defined in this rule.
(44) Long Condor Spread
The term ‘‘long condor spread’’
means an aggregation of positions in
four series of either puts or calls,
structured as a long option with the
lowest exercise price, two short options
with the next two consecutively higher
exercise prices and a long option with
the highest exercise price, all of which
have the same contract size, underlying
component or index and time of
expiration, are based on the same
aggregate current underlying value,
where the interval between the exercise
price of each series is equal, and the
exercise prices are in consecutive order.
This strategy can also be considered a
combination of two long butterfly
spreads, as defined in this rule.
(41) through (60) renumbered as (45)
through (64).
(65) Short Calendar Iron Butterfly
Spread
The term ‘‘short calendar iron
butterfly spread’’ means an aggregation
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of positions in two series of puts and
two series of calls, structured as a short
put and a short call with the same
exercise price, offset by a long put with
a lower exercise price and a long call
with a higher exercise price, all of which
have the same contract size, underlying
component or index, are based on the
same aggregate current underlying
value, where the interval between the
exercise price of each series is equal, the
exercise prices are in consecutive order,
and one long option expires after the
other three options expire concurrently.
However, a short calendar iron butterfly
spread cannot be composed of cashsettled, European-style index options.
This strategy can also be considered a
combination of one long calendar
spread, one long butterfly spread, and
one short box spread, as defined in this
rule.
(66) Short Calendar Iron Condor
Spread
The term ‘‘short calendar iron condor
spread’’ means an aggregation of
positions in two series of puts and two
series of calls, structured as a long put
with the lowest exercise price, a short
put and a short call with the next two
consecutively higher exercise prices and
a long call with the highest exercise
price, all of which have the same
contract size, underlying component or
index, are based on the same aggregate
current underlying value, where the
interval between the exercise price of
each series is equal, the exercise prices
are in consecutive order, and one long
option expires after the other three
options expire concurrently. However, a
short calendar iron condor spread
cannot be composed of cash-settled,
European-style index options. This
strategy can also be considered a
combination of one long calendar
spread, two long butterfly spreads, and
one short box spread, as defined in this
rule.
(67) Short Iron Butterfly Spread
The term ‘‘short iron butterfly spread’’
means an aggregation of positions in
two series of puts and two series of calls,
structured as a short put and a short
call with the same exercise price, offset
by a long put with a lower exercise price
and a long call with a higher exercise
price, all of which have the same
contract size, underlying component or
index and time of expiration, are based
on the same aggregate current
underlying value, where the interval
between the exercise price of each series
is equal, and the exercise prices are in
consecutive order. This strategy can also
be considered a combination of one long
butterfly spread and one short box
spread, as defined in this rule.
(68) Short Iron Condor Spread
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The term ‘‘short iron condor spread’’
means an aggregation of positions in
two series of puts and two series of calls,
structured as a long put with the lowest
exercise price, a short put and a short
call with the next two consecutively
higher exercise prices, and a long call
with the highest exercise price, all of
which have the same contract size,
underlying component or index and
time of expiration, are based on the
same aggregate current underlying
value, where the interval between the
exercise price of each series is equal,
and the exercise prices are in
consecutive order. This strategy can also
be considered a combination of two long
butterfly spreads and one short box
spread, as defined in this rule.
(61) through (77) renumbered as (69)
through (85).
*
*
*
*
*
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission,
NASD included statements concerning
the purpose of and basis for the
proposed rule change and discussed any
comments it received on the proposed
rule change. The text of these statements
may be examined at the places specified
in Item IV below. NASD has prepared
summaries, set forth in sections A, B
and C below, of the most significant
aspects of such statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
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Background
The proposed rule change is
consistent with recent margin rule
amendments by the New York Stock
Exchange (‘‘NYSE’’) and the Chicago
Board Options Exchange (‘‘CBOE’’),
which were recently approved by the
Commission.5 Specifically, NASD is
proposing to amend Rule 2520 to (1)
recognize specific additional complex
option spread strategies for purposes of
determining required margin and (2)
amend the provisions relating to
‘‘permitted offsets’’ for certain listed
option transactions. In addition, NASD
is proposing to amend Rule 2522 to
include definitions relating to the
proposed rule change described above
5 See Exchange Act Release No. 52951 (December
14, 2005), 70 FR 75523 (December 20, 2005) (SR–
NYSE–2004–39); and Exchange Act Release No.
52950 (December 14, 2005), 70 FR 75512 (December
20, 2005) (SR–CBOE–2004–53).
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as well as certain other conforming
definitional and language changes.
1. Complex Option Spread Strategies
NASD proposes to amend Rule 2520
and the corresponding definitions in
Rule 2522 to recognize specific
additional complex option spread
strategies and set margin requirements
commensurate with the risk of such
spread strategies. These complex option
spread strategies are the net result of
combining two or more spread strategies
that are currently recognized in NASD’s
margin rules. The netting of contracts in
option series common to each of the
currently recognized spreads in an
aggregation reduces it to the complex
spread strategies noted below.
Basic option spreads can be paired in
such ways that they offset each other in
terms of risk. The total risk of the
combined spreads is less than the sum
of the risk of both spread positions if
viewed as stand-alone strategies. The
specific complex option spread
strategies listed below are structured
using the same principles as, and are
essentially expansions of, the advanced
spreads currently allowed in Rule 2520
and as defined in Rule 2522.
Currently, Rule 2520 recognizes and
prescribes margin requirements for
advanced spread strategies known as the
‘‘butterfly spread’’ and the ‘‘box
spread.’’ However, these option spreads
are limited in scope. The proposed rule
change seeks to expand on the types of
pairings that would qualify for butterfly
spread and box spread margin
treatment. In addition, Rule 2520
recognizes a ‘‘calendar spread,’’ also
known as a ‘‘time spread,’’ yet it is not
identified as such. NASD proposes to
define this term as ‘‘the sale of one
option and the simultaneous purchase
of another option of the same type, both
specifying the same underlying
component with the same exercise price
or different exercise prices, where the
‘long’ option expires after the ‘short’
option,’’ in Rule 2522 since some of the
complex spreads NASD seeks to
recognize in the proposed rule change
will include this component of spread
strategies.
To be eligible for the margin
requirements set forth below, a complex
spread must be consistent with one of
the seven patterns specified below. The
expiration months and the sequence of
the exercise prices must correspond to
the same pattern, and the intervals
between the exercise prices must be
equal.
Members will be required to obtain
initial and maintenance margin for the
subject complex spreads, whether
established outright or through netting,
of not less than the sum of the margin
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required on each basic spread in the
equivalent aggregation.
The basic requirements are as follows:
(a) The complex option spreads must be
carried in a margin account; and (b)
European-style 6 options are prohibited
for complex spread combinations
having a long option series that expires
after the other option series (i.e., those
that involve a time spread such as items
5, 6, and 7 below). Only American-style
options 7 may be used in these
combinations. Additionally, the
intervals between exercise prices must
be equal, and each complex spread must
comprise four option series, with the
exception of item 4 below, which must
comprise three option series.
The sum of the margin required on
each currently recognized spread in
each of the applicable aggregations
renders margin requirements for the
subject complex spread strategies as
stated below. The additional complex
option spread strategies and
maintenance margin requirements are as
follows:
(1) A Long Condor Spread is
comprised of two long Butterfly
Spreads. The proposal requires initial
and maintenance margin of full cash
payment of the net debit incurred when
this spread strategy is established. Full
payment of the net debit incurred will
cover any potential risk to the carrying
broker-dealer.
(2) A Short Iron Butterfly Spread is
comprised of one long Butterfly Spread
and one short Box Spread. The
establishment of a long Butterfly Spread
results in a margin requirement equal to
the net debit incurred. The
establishment of a short Box Spread
requires margin equal to the aggregate
difference between the exercise prices.
The net proceeds from the sale of short
option components may be applied to
the margin requirement. Accordingly, to
cover the risk to the carrying brokerdealer, the proposal requires a deposit
of the aggregate exercise price
differential. The net credit received may
be applied to the deposit required.
(3) A Short Iron Condor Spread is
comprised of two long Butterfly Spreads
and one short Box Spread. The
establishment of long Butterfly Spreads
results in a margin requirement equal to
the net debit incurred. The
establishment of a short Box Spread
requires margin equal to the difference
in the strike price. Accordingly, to cover
the risk to the carrying broker-dealer,
6 A European-style option is an option contract
that can be exercised only on its expiration date.
7 An American-style option is an option contract
that can be exercised at any time between the date
of purchase and its expiration date.
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the proposal requires a deposit of the
aggregate exercise price differential. The
net credit received may be applied to
the deposit required.
(4) A Long Calendar Butterfly Spread
is comprised of one long Calendar
Spread and one long Butterfly Spread.
The proposal requires initial and
maintenance margin of full cash
payment of the net debit incurred when
this spread strategy is established. Full
payment of the net debit incurred will
cover any potential risk to the carrying
broker-dealer.
(5) A Long Calendar Condor Spread is
comprised of one long Calendar Spread
and two long Butterfly Spreads. The
proposal requires initial and
maintenance margin of full cash
payment of the net debit incurred when
this spread strategy is established. Full
payment of the net debit incurred will
cover any potential risk to the carrying
broker-dealer.
(6) A Short Calendar Iron Butterfly
Spread is comprised of one long
Calendar Spread plus one long Butterfly
Spread and one short Box Spread. To
cover the risk to the carrying brokerdealer, the proposal requires a deposit
of the aggregate exercise price
differential. The net credit received may
be applied to the deposit required.
(7) A Short Calendar Iron Condor
Spread is comprised of one Long
Calendar Spread plus two long Butterfly
Spreads and one short Box Spread. To
cover the risk to the carrying brokerdealer, the proposal requires a deposit
of the aggregate exercise price
differential. The net credit received may
be applied to the deposit required.
As noted above, the purpose and
benefit is to set levels of margin that
more precisely represent actual net risk
of the option positions in the account
and enable customers to implement
these strategies more efficiently.
2. Permitted Offsets
Rule 2520(f)(2)(J) addresses margin
requirements for members that clear and
carry the listed options transactions of
registered specialists, registered market
makers or registered traders in options,
and recognizes certain offset positions
in establishing the margin requirements.
The rule currently limits permitted
offsets for these parties to options series
that are ‘‘in or at the money,’’ which is
defined to mean ‘‘the current market
price of the underlying security is not
more than two standard exercise
intervals below (with respect to a call
option) or above (with respect to a put
option) the exercise price of the option.’’
Recently, various option exchanges
have provided for the listing of options
with one-dollar strike intervals in a
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number of classes. As a result, the use
of securities to hedge options series that
have one-dollar strike intervals has
unintentionally become more
restrictive. The proposed rule change
will eliminate the definition of ‘‘in or at
the money,’’ thereby eliminating the two
standard exercise interval limitation for
listed options. In addition, the proposed
rule change will require permitted offset
transactions to be effected for specialist
or market-making purposes such as
hedging, risk reduction, rebalancing of
positions, liquidation, or
accommodation of customer orders, or
other similar specialist or marketmaking purposes.
Since clearing firms have risk
monitoring systems that alert them to
unhedged positions and haircut
requirements pursuant to Rule 15c3–1
of the Act,8 which perform a similar
function as NASD margin requirements
relative to providing adequate risk
coverage to broker-dealers, elimination
of the two-dollar standard exercise price
limitation and definition of ‘‘in or at the
money’’ will not diminish the ‘‘safety
and soundness’’ protections that the
margin rules provide.
This proposed rule change is effective
upon filing. The effective date and the
implementation date will be the date of
filing.
2. Statutory Basis
NASD believes that the proposed rule
change is consistent with the provisions
of section 15A(b)(6) of the Act,9 which
requires, among other things, that NASD
rules must be designed to prevent
fraudulent and manipulative acts and
practices, to promote just and equitable
principles of trade, and, in general, to
protect investors and the public interest.
NASD believes that the proposed rule
change will set margin requirements
commensurate with the risk of the
identified options spread strategies and
will further promote consistent margin
requirements among the self-regulatory
organizations.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
NASD does not believe that the
proposed rule change will result in any
burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act.
8 17
9 15
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U.S.C. 78o–3(b)(6).
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C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
Written comments were neither
solicited nor received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule
change does not: (1) Significantly affect
the protection of investors or the public
interest; (2) impose any significant
burden on competition; and (3) by its
terms, become operative for 30 days
from the date on which it was filed, or
such shorter time as the Commission
may designate if consistent with the
protection of investors and the public
interest, the proposed rule change has
become effective pursuant to section
19(b)(3)(A) 10 of the Act and Rule 19b–
4(f)(6) thereunder.11
A proposed rule change filed under
Rule 19b–4(f)(6) 12 normally may not
become operative prior to 30 days after
the date of filing. However, Rule 19b–
4(f)(6)(iii) 13 permits the Commission to
designate a shorter time if such actions
is consistent with the protection of
investors and the public interest. NASD
has requested that the Commission
waive the 30-day operative delay and
designate the proposed rule change to
become operative on the date of filing
with the Commission, in order to
conform NASD’s margin rules to the
recent rule changes by the NYSE and
CBOE 14 and to avoid subjecting firms to
conflicting margin requirements. The
Commission believes that waiving the
30-day operative delay is consistent
with the protection of investors and the
public interest.15
At any time within 60 days of the
filing of the proposed rule change, the
Commission may summarily abrogate
such rule change if it appears to the
Commission that such action is
necessary or appropriate in the public
interest, for the protection of investors,
10 15
U.S.C. 78f(b)(3)(A).
CFR 240.19b–4(f)(6). Rule 19b–4(f)(6)
requires that NASD give the Commission written
notice of NASD’s intention to file the proposed rule
change along with a brief description and text of the
proposed rule change at least five business days
prior to the date of the filing of the proposed rule
change. The Commission notes that NASD has
satisfied the pre-filing five-day notice requirement.
12 Id.
13 17 CFR 240.19b–4(f)(6)(iii).
14 See supra note 5.
15 For purposes only of waiving the operative
delay for this proposal, the Commission has
considered the proposed rule’s impact on
efficiency, competition and capital formation. See
15 U.S.C. 78c(f).
11 17
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or otherwise in furtherance of the
purposes of the Act.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
No. SR–NASD–2006–045 on the subject
line.
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–53742; File No. SR–NSCC–
2006–04]
Self-Regulatory Organizations;
National Securities Clearing
Corporation; Notice of Filing of
Proposed Rule Change Relating to
Trade Submission Requirements and
Fees and Pre-Netting
April 28, 2006.
Paper Comments
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For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.16
Nancy M. Morris,
Secretary.
[FR Doc. E6–6911 Filed 5–5–06; 8:45 am]
• 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–NASD–2006–045. 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 NASD. All
comments received will be posted
without change; the Commission does
not edit personal identifying
information from submissions. You
should submit only information that
you wish to make available publicly. All
submissions should refer to File
Number SR–NASD–2006–045 and
should be submitted on or before May
30, 2006.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’), 1 notice is hereby given that on
March 15, 2006, the National Securities
Clearing Corporation (‘‘NSCC’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’) and on
March 22, 2006, amended the proposed
rule change described in Items I, II, and
III below, which items have been
prepared primarily by NSCC. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested parties.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
NSCC is seeking to: (1) Require that
all locked-in trade data submitted to
NSCC for trade recording be submitted
on a real-time basis; (2) prohibit prenetting and other practices that prevent
real-time trade submissions; and (3)
establish a new fee model for equity
trade recording and netting services.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission,
NSCC included statements concerning
the purpose of and basis for the
proposed rule change and discussed any
comments it received on the proposed
rule change. The text of these statements
may be examined at the places specified
in Item IV below. NSCC has prepared
summaries, set forth in sections (A), (B),
and (C) below, of the most significant
aspects of these statements.2
1 15
U.S.C. 78s(b)(1).
Commission has modified the text of the
summaries prepared by NSCC.
2 The
16 17
CFR 200.30–3(a)(12).
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(A) Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Real-Time Trade Submission
NSCC processes approximately 25
million transaction sides per day with a
gross value of nearly $500 billion.3
These transactions are submitted
primarily on a locked-in basis by selfregulatory organizations (‘‘SROs’’) (such
as the New York Stock Exchange,
American Stock Exchange, Nasdaq
Stock Market Inc., and the regional
exchanges) and Qualified Special
Representatives (‘‘QSRs’’). Generally a
QSR is a member that (i) operates an
automated execution system where the
member is always the contra side to
every trade, (ii) has a parent corporation
or an affiliated corporation that operates
an automated execution system where
the member is always the contra side to
every trade, or (iii) clear for a brokerdealer that operates an automated
execution system where the brokerdealer is always the contra side to every
trade and the subscribers to the system
enter into an agreement with the brokerdealer and the member that
acknowledges the member’s role in the
clearance and settlement of trades
executed on the system.4
The New York Stock Exchange, the
American Stock Exchange, and The
Nasdaq Stock Market Inc., currently
submit trades executed on their
respective markets to NSCC on a realtime basis. Archipelago Exchange is
scheduled to begin submitting locked-in
trades on a real-time basis before the
end of 2006. Accordingly, before the
end of 2006, more than 70% of the
trades submitted to NSCC for trade
recording will be submitted on a realtime basis. However, the remaining
regional exchanges and most of the
QSRs currently submit their trades
either on a multi-batch or end-of-day
basis. NSCC understands that some of
these exchanges and QSRs are in the
process of developing real-time trade
submission capabilities.
The proposed rule change would
modify NSCC’s Procedure II (Trade
Comparison and Recording Service) to
require that all locked-in trades
submitted for trade recording by SROs
and QSRs be submitted on a real-time
3 Data
based upon second quarter, 2005, volumes.
remaining original trade data received by
NSCC is submitted by members for trade
comparison and consists of OTC equity trades and
OTC fixed income trades submitted through the
Fixed Income Clearing Corporation (‘‘FICC’’) RealTime Trade Matching System. In 2005, an average
of approximately 43,000 equity and fixed income
sides per day were submitted to NSCC for trade
comparison.
4 The
E:\FR\FM\08MYN1.SGM
08MYN1
]]>Agencies
[Federal Register Volume 71, Number 88 (Monday, May 8, 2006)]
[Notices]
[Pages 26797-26804]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-6911]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-53743; File No. SR-NASD-2006-045]
Self-Regulatory Organizations; National Association of Securities
Dealers, Inc.; Notice of Filing and Immediate Effectiveness of Proposed
Rule Change Relating to Amendments to Rule 2520 (Margin Requirements)
April 28, 2006.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on April 3, 2006, the National Association of Securities Dealers, Inc.
(``NASD'') filed with the Securities and Exchange Commission (``SEC''
or ``Commission'') the proposed rule change as described in Items I,
II, and III below, which Items have been prepared by NASD. NASD has
designated the proposed rule change as constituting a ``non-
controversial'' rule change pursuant to section 19(b)(3)(A) \3\ of the
Act and Rule 19b-4(f)(6) thereunder,\4\ which renders the proposal
effective upon filing with the Commission. The Commission is publishing
this notice to solicit comments on the proposed rule change from
interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 15 U.S.C. 78s(b)(3)(A).
\4\ 17 CFR 240.19b-4(f)(6). NASD gave the Commission written
notice of its intent to file this proposed rule change on March 24,
2006.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
NASD is proposing to amend NASD Rules 2520 and 2522 that will
revise the margin requirements to (1) recognize specific additional
complex option
[[Page 26798]]
spread strategies for purposes of determining required margin and (2)
amend the provisions relating to ``permitted offsets'' for certain
listed option transactions.
The text of the proposed rule change is below. Proposed new
language is italicized; deletions are in brackets.
* * * * *
2520. Margin Requirements
(a) through (e) No Change.
(f) Other Provisions
(1) No Change.
(2) Puts, Calls and Other Options, Currency Warrants, Currency
Index Warrants and Stock Index Warrants
(A) through (B) No Change.
(C) For purposes of this subparagraph (f)(2), obligations issued by
the United States Government shall be referred to as United States
Government obligations. Mortgage pass-through obligations guaranteed as
to timely payment of principal and interest by the Government National
Mortgage Association shall be referred to as GNMA obligations.
In the case of any put, call, currency warrant, currency index
warrant, or stock index warrant carried ``long'' in a customer's
account that expires in nine months or less, initial margin must be
deposited and maintained equal to at least 100% of the purchase price
of the option or warrant.
Long Listed Option or Warrant With An Expiration Exceeding Nine
Months. In the case of a put, call, index stock group option, or stock
index warrant that is issued by a registered clearing agency, margin
must be deposited and maintained equal to at least 75% of the current
market value of the option or warrant; provided that the option or
warrant has a remaining period to expiration exceeding nine months.
Long OTC Option or Warrant With An Expiration Exceeding Nine
Months. In the case of a[n OTC] put, [or ]call, index stock group
option,[ on a stock or stock index, and a] or stock index warrant[,]
carried long that is not issued by a registered clearing agency[ with
an expiration exceeding 9 months], margin must be deposited and
maintained equal to at least 75% of the option's or warrant's ``in-the-
money'' amount plus 100% of the amount, if any, by which the current
market value of the option or warrant exceeds its ``in-the-money''
amount provided the option or warrant:[. Options or warrants margined
pursuant to this paragraph must:]
(i) [be valued at all times for margin purposes at an amount not to
exceed, the in-the-money amount,]
[(ii) be]is guaranteed by the carrying broker-dealer, [and]
(ii) [(iii) have]has an American-style exercise provision, and
(iii) has a remaining period to expiration exceeding nine months.
(D) through (F) No Change.
(G) (i) through (iv) No Change.
(v) The following requirements set forth the minimum amount of
margin that must be maintained in margin accounts of customers having
positions in components underlying options, and stock index warrants,
when such components are held in conjunction with certain positions in
the overlying option or warrant. The option or warrant must be issued
by a registered clearing agency or guaranteed by the carrying broker/
dealer. In the case of a call or warrant carried in a short position, a
related long position in the underlying component shall be valued at no
more than the call/warrant exercise price for margin equity purposes.
a. Long Option or Warrant Offset. When a component underlying an
option or warrant is carried long (short) in an account in which there
is also carried a long put (call) or warrant specifying equivalent
units of the underlying component, the minimum amount of margin that
must be maintained on the underlying component is 10% of the
[aggregate] option/warrant exercise price plus the ``out-of-the-money''
amount, not to exceed the minimum maintenance required pursuant to
paragraph (c) of this Rule.
b. Conversions. When a call or warrant carried in a short position
is covered by a long position in equivalent units of the underlying
component and [there] is also carried with a long put or warrant
specifying equivalent units of the same underlying component and having
the same exercise price and expiration date as the short call or
warrant, the minimum amount of margin that must be maintained for the
underlying component shall be 10% of the [aggregate] exercise price.
c. Reverse Conversions. When a put or warrant carried in a short
position is covered by a short position in equivalent units of the
underlying component and is also carried with a long call or warrant
specifying equivalent units of the same underlying component and having
the same exercise price and expiration date as the short put or
warrant, the minimum amount of margin that must be maintained for the
underlying component shall be 10% of the [aggregate] exercise price
plus the amount by which the exercise price of the put exceeds the
current market value of the underlying, if any.
d. Collars. When a call or warrant carried in a short position is
covered by a long position in equivalent units of the underlying
component and is also carried with a long put or warrant specifying
equivalent units of the same underlying component and having a lower
exercise price and the same expiration date as the short call/warrant,
the minimum amount of margin that must be maintained for the underlying
component shall be the lesser of 10% of the [aggregate] exercise price
of the put plus the put ``out-of-the-money'' amount or 25% of the call
aggregate exercise price.
e. Butterfly Spread. This subparagraph applies to a butterfly
spread as defined in Rule 2522 where all option positions are issued by
a registered clearing agency or guaranteed by the carrying broker/
dealer.
1. No Change.
2. With respect to a short butterfly spread as defined in Rule
2522, margin must be deposited and maintained equal to at least the
amount of the [aggregate] difference between the two lowest exercise
prices with respect to short butterfly spreads comprised of calls or
the [aggregate] difference between the two highest exercise prices with
respect to short butterfly spreads comprised of puts. The net proceeds
from the sale of short option components may be applied to the
requirement.
f. Box Spread. This subparagraph applies to box spreads as defined
in Rule 2522, where all option positions are issued by a registered
clearing agency or guaranteed by the carrying broker/dealer.
1. With respect to a long box spread as defined in Rule 2522, the
net debit must be paid in full.
2. With respect to a short box spread as defined in Rule 2522,
margin must be deposited and maintained equal to at least the amount of
the [aggregate] difference between the exercise prices. The net
proceeds from the sale of the short option components may be applied to
the requirement.
g. Long Box Spread in European-Style Options. With respect to a
long box spread as defined in Rule 2522, in which all component options
have a European-style exercise provision and are issued by a registered
clearing agency or guaranteed by the carrying broker/dealer, margin
must be deposited and maintained equal to at least 50% of the
[aggregate] difference in the exercise prices. The net proceeds from
the sale of short option components may be applied to the requirement.
For margin purposes, the long box spread may be valued at an amount not
to exceed
[[Page 26799]]
100% of the [aggregate] difference in the exercise prices.
h. Long Condor Spread. This subparagraph applies to a long condor
spread as defined in Rule 2522 where all option positions are issued by
a registered clearing agency or guaranteed by the carrying broker/
dealer. With respect to a long condor spread as defined in Rule 2522,
the net debit must be paid in full.
i. Short Iron Butterfly Spread. This subparagraph applies to a
short iron butterfly spread as defined in Rule 2522 where all option
positions are issued by a registered clearing agency or guaranteed by
the carrying broker/dealer. With respect to a short iron butterfly
spread as defined in Rule 2522, margin must be deposited and maintained
equal to at least the amount of the exercise price interval. The net
proceeds from the sale of short option components may be applied to the
requirement.
j. Short Iron Condor Spread. This subparagraph applies to a short
iron condor spread as defined in Rule 2522 where all option positions
are issued by a registered clearing agency or guaranteed by the
carrying broker/dealer. With respect to a short iron condor spread as
defined in Rule 2522, margin must be deposited and maintained equal to
at least the amount of the exercise price interval. The net proceeds
from the sale of short option components may be applied to the
requirement.
k. Long Calendar Butterfly Spread. This subparagraph applies to a
long calendar butterfly spread as defined in Rule 2522 where all option
positions are issued by a registered clearing agency or guaranteed by
the carrying broker/dealer. With respect to a long calendar butterfly
spread as defined in Rule 2522, the net debit must be paid in full.
l. Long Calendar Condor Spread. This subparagraph applies to a long
calendar condor spread as defined in Rule 2522 where all option
positions are issued by a registered clearing agency or guaranteed by
the carrying broker/dealer. With respect to a long calendar condor
spread as defined in Rule 2522, the net debit must be paid in full.
m. Short Calendar Iron Butterfly Spread. This subparagraph applies
to a short calendar iron butterfly spread as defined in Rule 2522 where
all option positions are issued by a registered clearing agency or
guaranteed by the carrying broker/dealer. With respect to a short
calendar iron butterfly spread as defined in Rule 2522, margin must be
deposited and maintained equal to at least the amount of the exercise
price interval. The net proceeds from the sale of short option
components may be applied to the requirement.
n. Short Calendar Iron Condor Spread. This subparagraph applies to
a short calendar iron condor spread as defined in Rule 2522 where all
option positions are issued by a registered clearing agency or
guaranteed by the carrying broker/dealer. With respect to a short
calendar iron condor spread as defined in Rule 2522, margin must be
deposited and maintained equal to at least the amount of the exercise
price interval. The net proceeds from the sale of short option
components may be applied to the requirement.
(H) through (I) No Change.
(J) (i) Registered specialists, market makers or traders--
Notwithstanding the other provisions of this subparagraph (f)(2), a
member may clear and carry the listed option transactions of one or
more registered specialists, registered market makers or registered
traders in options (whereby[which] registered traders are deemed
specialists for all purposes under the Act, pursuant to the rules of a
national securities exchange) (hereinafter referred to as
``specialist(s)''), upon a ``Good Faith'' margin basis satisfactory to
the concerned parties, provided the ``Good Faith'' margin
requirement[s] is not less than the Net Capital haircut deduction of
the member [organization] carrying the transaction pursuant to SEC Rule
15c3-1 under the Act. In lieu of collecting the ``Good Faith'' margin
requirement, a carrying member [organization] may elect to deduct in
computing its Net Capital the amount of any deficiency between the
equity maintained in the account and the ``Good Faith'' margin
required.
For purposes of this paragraph (f)(2)(J), a permitted offset
position means, in the case of an option in which a specialist or
market maker makes a market, a position in the underlying asset or
other related assets, and in the case of other securities in which a
specialist or market maker makes a market, a position in options
overlying the securities in which a specialist or market maker makes a
market. Accordingly, a specialist or market maker in options may
establish, on a share-for-share basis, a long or short position in the
securities underlying the options in which the specialist or market
maker makes a market, and a specialist or market maker in securities
other than options may purchase or write options overlying the
securities in which the specialist or market maker makes a market, if
the account holds the following permitted offset positions:
a. A short option position which [is ``in or at the money'' and] is
not offset by a long or short option position for an equal or greater
number of shares of the same underlying security which is ``in the
money'';
b. A long option position which [is ``in or at the money'' and] is
not offset by a long or short option position for an equal or greater
number of shares of the same underlying security which is ``in the
money'';
c. A short option position against which an exercise notice was
tendered;
d. A long option position which was exercised;
e. A net long position in a security (other than an option) in
which a specialist or market maker makes a market;
f. A net short position in a security (other than an option) in
which the specialist or market maker makes a market; or
g. A specified portfolio type as referred to in SEC Rule 15c3-1,
including its appendices, or any applicable SEC staff interpretation or
no-action position.
Permitted offset transactions must be effected for specialist or
market making purposes such as hedging, risk reduction, rebalancing of
positions, liquidation, or accommodation[s] of customer orders, or
other similar [market making]specialist or market maker purpose. The
specialist or market maker must be able to demonstrate compliance with
this provision.
For purposes of this paragraph (f)(2)(J) [the term ``in or at the
money'' means the current market price of the underlying security is
not more than two standard exercise intervals below (with respect to a
call option) or above (with respect to a put option) the exercise price
of the option;] the term ``in the money'' means the current market
price of the underlying asset or index is not below (with respect to a
call option) or above (with respect to a put option) the exercise price
of the option; and, the term ``overlying option'' means a put option
purchased or a call option written against a long position in an
underlying asset; or a call option purchased or a put option written
against a short position in an underlying asset.
(ii) Securities, including options, in such accounts shall be
valued conservatively in the light of current market prices and the
amount which might be realized upon liquidation. Substantial additional
margin must be required or excess [n]Net [c]Capital maintained in all
cases where the securities carried:
a. through b. No Change.
c. In one or more or all accounts, including proprietary accounts
[[Page 26800]]
combined, are such that they cannot be liquidated promptly or represent
undue concentration of risk in view of the carrying member's [n]Net
[c]Capital and its overall exposure to material loss.
(K) through (L) No Change.
(M) Cash account transactions--A member may make option
transactions in a customer's cash account, provided that:
(i) No Change.
(ii) Spreads. A European-style cash-settled index stock group
option or stock index warrant carried in a short position is deemed a
covered position, and eligible for the cash account, provided a long
position in a European-style cash-settled stock group index option, or
stock index warrant having the same underlying component or index that
is based on the same aggregate current underlying value, is held in or
purchased for the account on the same day, provided that:
a. through b. No Change.
c. There is held in the account at the time the positions are
established, or received into the account promptly thereafter:
1. Cash or cash equivalents of not less than any amount by which
the [aggregate] exercise price of the long call or call warrant (short
put or put warrant) exceeds the [aggregate] exercise price of the short
call or call warrant (long put or put warrant), to which [requirement
of] net proceeds from the sale of the short position may be applied, or
2. An escrow agreement.
The escrow agreement must certify that the bank holds for the
account of the customer as security for the agreement i. cash, ii. cash
equivalents, or iii. a combination thereof having an aggregate market
value at the time the positions are established of not less than any
amount by which the [aggregate] exercise price of the long call or call
warrant (short put or put warrant) exceeds the [aggregate] exercise
price of a short call or call warrant (long put or put warrant) and
that the bank will promptly pay the member such amount in the event the
account is assigned an exercise notice or that the bank will promptly
pay the member funds sufficient to purchase a warrant sold short in the
event of a buy-in.
d. No Change.
(iii) Long Butterfly Spreads, Short Butterfly Spreads, Long Condor
Spreads, Short Iron Butterfly Spreads, or Short Iron Condor Spreads.
Put or call options carried in a short position are deemed covered
positions and eligible for the cash account provided that the account
contains long positions of the same type which in conjunction with the
short options, constitute a long butterfly spread, short butterfly
spread, long condor spread, short iron butterfly spread, or short iron
condor spread as defined in Rule 2522 and provided that:
a. through d. No Change.
e. All components options expire concurrently;
[e]f. With respect to a long butterfly spread or long condor spread
as defined in Rule 2522, the net debit is paid in full; and
[f]g. With respect to a short butterfly spread, short iron
butterfly spread or short iron condor spread as defined in Rule 2522,
there is held in the account at the time the positions are established
or received into the account promptly thereafter:
1. Cash or cash equivalents of not less than the amount of the
[aggregate] difference between the two lowest exercise prices with
respect to short butterfly spreads comprised of call options or the
[aggregate] difference between the two highest exercise prices with
respect to short butterfly spreads comprised [or] of put options, to
which [requirement] the net proceeds from the sale of short option
components may be applied; or
2. An escrow agreement.
The escrow agreement must certify that the bank holds for the
account of the customer as security for the agreement i. cash, ii. cash
equivalents or iii. a combination thereof having an aggregate market
value at the time the positions are established of not less than the
amount of the [aggregate] difference between the two lowest exercise
prices with respect to short butterfly spreads comprised of calls or
the [aggregate] difference between the two highest exercise prices with
respect to short butterfly spreads comprised of puts and that the bank
will promptly pay the member such amount in the event the account is
assigned an exercise notice on the call (put) with the lowest (highest)
exercise price.
(iv) Box Spreads. Puts and calls carried in a short position are
deemed covered positions and eligible for the cash account provided
that the account contains long positions which in conjunction with the
short options constitute a box spread as defined in Rule 2522 provided
that:
a. through d. No Change.
e. All component options expire concurrently;
[e]f. With respect to a long box spread as defined in Rule 2522,
the net debit is paid in full; and
[f]g. With respect to a short box spread as defined in Rule 2522,
there is held in the account at the time the positions are established,
or received into the account promptly thereafter:
1. Cash or cash equivalents of not less than the amount of the
[aggregate] difference between the exercise prices, to which
[requirement] the net proceeds from the sale of short option components
may be applied; or
2. An escrow agreement.
The escrow agreement must certify that the bank holds for the
account of the customer as security for the agreement i. cash, ii. cash
equivalents or iii. a combination thereof having an aggregate market
value at the time the positions are established of not less than the
amount of the [aggregate] difference between the exercise prices and
that the bank will promptly pay the member such amount in the event the
account is assigned an exercise notice on either short option.
(3) through (11) No Change.
* * * * *
2522. Definitions Related to Options, Currency Warrants, Currency
Index Warrants and Stock Index Warrants Transactions.
(a) The following definitions shall apply to the margin
requirements for options, currency warrants, currency index warrants
and stock index warrants transactions:
(1) through (5) No Change.
(6) Box Spread.
The term ``box spread'' means an aggregation of positions in a long
call and short put with the same exercise price (``buy side'') coupled
with a long put and short call with the same exercise price (``sell
side'') [all of which have the same underlying component or index and
time of expirations, and are based on the same aggregate current
underlying value, and are] structured as[;]: (A) a ``long box spread''
in which the sell side exercise price exceeds the buy side exercise
price or (B) a ``short box spread'' in which the buy side exercise
price exceeds the sell side exercise price[.], all of which have the
same contract size, underlying component or index and time of
expiration, and are based on the same aggregate current underlying
value.
(7) through (8) No Change.
(9) Butterfly Spread
The term ``butterfly spread'' means an aggregation of positions in
three series of either puts or calls, [all having the same underlying
component or index, and time of expiration, and based on the same
aggregate current underlying value, where the interval between the
exercise price of each series is equal, which positions are] structured
as either: (A) a ``long butterfly spread'' in which two short options
in the same
[[Page 26801]]
series are offset by one long option with a higher exercise price and
one long option with a lower exercise price or (B) a ``short butterfly
spread'' in which two long options in the same series offset one short
option with a higher exercise price and one short option with a lower
exercise price[.], all of which have the same contract size, underlying
component or index and time of expiration, are based on the same
aggregate current underlying value, where the interval between the
exercise price of each series is equal, and the exercise prices are in
ascending order.
(10) Calendar Spread
The term ``calendar spread'' or ``time spread'' means the sale of
one option and the simultaneous purchase of another option of the same
type, both specifying the same underlying component with the same
exercise price or different exercise prices, where the ``long'' option
expires after the ``short'' option.
(10) through (22) renumbered as (11) through (23).
[(23)](24) Escrow Agreement
The term ``escrow agreement,'' when used in connection with cash
settled calls, puts, currency warrants, currency index warrants, or
stock index warrants carried short, means any agreement issued in a
form acceptable to [the Association]NASD under which a bank holding
cash, cash equivalents, one or more qualified equity securities or a
combination thereof in the case of a call [option] or warrant or cash,
cash equivalents or a combination thereof in the case of a put [option]
or warrant is obligated (in the case of an option) to pay the creditor
the exercise settlement amount in the event an option is assigned an
exercise notice or, (in the case of a warrant) the funds sufficient to
purchase a warrant sold short in the event of a buy-in.
[The term ``escrow agreement'' when used in connection with non
cash settled call or put options carried short, means any agreement
issued in a form acceptable to the Association under which a bank
holding the underlying security (in the case of a call option) or
required cash or cash equivalents or a combination thereof (in the case
of a put option) is obligated to deliver to the creditor (in the case
of a call option) or accept from the creditor (in the case of a put
option) the underlying security against payment of the exercise price
in the event of the call or put is assigned an exercise notice.]
(24) through (40) renumbered as (25) through (41).
(42) Long Calendar Butterfly Spread
The term ``long calendar butterfly spread'' means an aggregation of
positions in three series of either puts or calls, structured as two
short options with the same exercise price, offset by a long option
with a lower exercise price and a long option with a higher exercise
price, all of which have the same contract size, underlying component
or index, are based on the same aggregate current underlying value,
where the interval between the exercise price of each series is equal,
the exercise prices are in consecutive order, and one long option
expires after the other three options expire concurrently. However, a
long calendar butterfly spread cannot be composed of cash-settled,
European-style index options. This strategy can also be considered a
combination of one long calendar spread and one long butterfly spread,
as defined in this rule.
(43) Long Calendar Condor Spread
The term ``long calendar condor spread'' means an aggregation of
positions in four series of either puts or calls, structured as a long
option with the lowest exercise price, two short options with the next
two consecutively higher exercise prices and a long option with the
highest exercise price, all of which have the same contract size,
underlying component or index, are based on the same aggregate current
underlying value, where the interval between the exercise price of each
series is equal, the exercise prices are in consecutive order, and one
long option expires after the other three options expire concurrently.
However, a long calendar condor spread cannot be composed of cash-
settled, European-style index options. This strategy can also be
considered a combination of one long calendar spread and two long
butterfly spreads, as defined in this rule.
(44) Long Condor Spread
The term ``long condor spread'' means an aggregation of positions
in four series of either puts or calls, structured as a long option
with the lowest exercise price, two short options with the next two
consecutively higher exercise prices and a long option with the highest
exercise price, all of which have the same contract size, underlying
component or index and time of expiration, are based on the same
aggregate current underlying value, where the interval between the
exercise price of each series is equal, and the exercise prices are in
consecutive order. This strategy can also be considered a combination
of two long butterfly spreads, as defined in this rule.
(41) through (60) renumbered as (45) through (64).
(65) Short Calendar Iron Butterfly Spread
The term ``short calendar iron butterfly spread'' means an
aggregation of positions in two series of puts and two series of calls,
structured as a short put and a short call with the same exercise
price, offset by a long put with a lower exercise price and a long call
with a higher exercise price, all of which have the same contract size,
underlying component or index, are based on the same aggregate current
underlying value, where the interval between the exercise price of each
series is equal, the exercise prices are in consecutive order, and one
long option expires after the other three options expire concurrently.
However, a short calendar iron butterfly spread cannot be composed of
cash-settled, European-style index options. This strategy can also be
considered a combination of one long calendar spread, one long
butterfly spread, and one short box spread, as defined in this rule.
(66) Short Calendar Iron Condor Spread
The term ``short calendar iron condor spread'' means an aggregation
of positions in two series of puts and two series of calls, structured
as a long put with the lowest exercise price, a short put and a short
call with the next two consecutively higher exercise prices and a long
call with the highest exercise price, all of which have the same
contract size, underlying component or index, are based on the same
aggregate current underlying value, where the interval between the
exercise price of each series is equal, the exercise prices are in
consecutive order, and one long option expires after the other three
options expire concurrently. However, a short calendar iron condor
spread cannot be composed of cash-settled, European-style index
options. This strategy can also be considered a combination of one long
calendar spread, two long butterfly spreads, and one short box spread,
as defined in this rule.
(67) Short Iron Butterfly Spread
The term ``short iron butterfly spread'' means an aggregation of
positions in two series of puts and two series of calls, structured as
a short put and a short call with the same exercise price, offset by a
long put with a lower exercise price and a long call with a higher
exercise price, all of which have the same contract size, underlying
component or index and time of expiration, are based on the same
aggregate current underlying value, where the interval between the
exercise price of each series is equal, and the exercise prices are in
consecutive order. This strategy can also be considered a combination
of one long butterfly spread and one short box spread, as defined in
this rule.
(68) Short Iron Condor Spread
[[Page 26802]]
The term ``short iron condor spread'' means an aggregation of
positions in two series of puts and two series of calls, structured as
a long put with the lowest exercise price, a short put and a short call
with the next two consecutively higher exercise prices, and a long call
with the highest exercise price, all of which have the same contract
size, underlying component or index and time of expiration, are based
on the same aggregate current underlying value, where the interval
between the exercise price of each series is equal, and the exercise
prices are in consecutive order. This strategy can also be considered a
combination of two long butterfly spreads and one short box spread, as
defined in this rule.
(61) through (77) renumbered as (69) through (85).
* * * * *
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, NASD included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. NASD has prepared summaries, set forth in sections A, B
and C below, of the most significant aspects of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Background
The proposed rule change is consistent with recent margin rule
amendments by the New York Stock Exchange (``NYSE'') and the Chicago
Board Options Exchange (``CBOE''), which were recently approved by the
Commission.\5\ Specifically, NASD is proposing to amend Rule 2520 to
(1) recognize specific additional complex option spread strategies for
purposes of determining required margin and (2) amend the provisions
relating to ``permitted offsets'' for certain listed option
transactions. In addition, NASD is proposing to amend Rule 2522 to
include definitions relating to the proposed rule change described
above as well as certain other conforming definitional and language
changes.
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\5\ See Exchange Act Release No. 52951 (December 14, 2005), 70
FR 75523 (December 20, 2005) (SR-NYSE-2004-39); and Exchange Act
Release No. 52950 (December 14, 2005), 70 FR 75512 (December 20,
2005) (SR-CBOE-2004-53).
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1. Complex Option Spread Strategies
NASD proposes to amend Rule 2520 and the corresponding definitions
in Rule 2522 to recognize specific additional complex option spread
strategies and set margin requirements commensurate with the risk of
such spread strategies. These complex option spread strategies are the
net result of combining two or more spread strategies that are
currently recognized in NASD's margin rules. The netting of contracts
in option series common to each of the currently recognized spreads in
an aggregation reduces it to the complex spread strategies noted below.
Basic option spreads can be paired in such ways that they offset
each other in terms of risk. The total risk of the combined spreads is
less than the sum of the risk of both spread positions if viewed as
stand-alone strategies. The specific complex option spread strategies
listed below are structured using the same principles as, and are
essentially expansions of, the advanced spreads currently allowed in
Rule 2520 and as defined in Rule 2522.
Currently, Rule 2520 recognizes and prescribes margin requirements
for advanced spread strategies known as the ``butterfly spread'' and
the ``box spread.'' However, these option spreads are limited in scope.
The proposed rule change seeks to expand on the types of pairings that
would qualify for butterfly spread and box spread margin treatment. In
addition, Rule 2520 recognizes a ``calendar spread,'' also known as a
``time spread,'' yet it is not identified as such. NASD proposes to
define this term as ``the sale of one option and the simultaneous
purchase of another option of the same type, both specifying the same
underlying component with the same exercise price or different exercise
prices, where the `long' option expires after the `short' option,'' in
Rule 2522 since some of the complex spreads NASD seeks to recognize in
the proposed rule change will include this component of spread
strategies.
To be eligible for the margin requirements set forth below, a
complex spread must be consistent with one of the seven patterns
specified below. The expiration months and the sequence of the exercise
prices must correspond to the same pattern, and the intervals between
the exercise prices must be equal.
Members will be required to obtain initial and maintenance margin
for the subject complex spreads, whether established outright or
through netting, of not less than the sum of the margin required on
each basic spread in the equivalent aggregation.
The basic requirements are as follows: (a) The complex option
spreads must be carried in a margin account; and (b) European-style \6\
options are prohibited for complex spread combinations having a long
option series that expires after the other option series (i.e., those
that involve a time spread such as items 5, 6, and 7 below). Only
American-style options \7\ may be used in these combinations.
Additionally, the intervals between exercise prices must be equal, and
each complex spread must comprise four option series, with the
exception of item 4 below, which must comprise three option series.
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\6\ A European-style option is an option contract that can be
exercised only on its expiration date.
\7\ An American-style option is an option contract that can be
exercised at any time between the date of purchase and its
expiration date.
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The sum of the margin required on each currently recognized spread
in each of the applicable aggregations renders margin requirements for
the subject complex spread strategies as stated below. The additional
complex option spread strategies and maintenance margin requirements
are as follows:
(1) A Long Condor Spread is comprised of two long Butterfly
Spreads. The proposal requires initial and maintenance margin of full
cash payment of the net debit incurred when this spread strategy is
established. Full payment of the net debit incurred will cover any
potential risk to the carrying broker-dealer.
(2) A Short Iron Butterfly Spread is comprised of one long
Butterfly Spread and one short Box Spread. The establishment of a long
Butterfly Spread results in a margin requirement equal to the net debit
incurred. The establishment of a short Box Spread requires margin equal
to the aggregate difference between the exercise prices. The net
proceeds from the sale of short option components may be applied to the
margin requirement. Accordingly, to cover the risk to the carrying
broker-dealer, the proposal requires a deposit of the aggregate
exercise price differential. The net credit received may be applied to
the deposit required.
(3) A Short Iron Condor Spread is comprised of two long Butterfly
Spreads and one short Box Spread. The establishment of long Butterfly
Spreads results in a margin requirement equal to the net debit
incurred. The establishment of a short Box Spread requires margin equal
to the difference in the strike price. Accordingly, to cover the risk
to the carrying broker-dealer,
[[Page 26803]]
the proposal requires a deposit of the aggregate exercise price
differential. The net credit received may be applied to the deposit
required.
(4) A Long Calendar Butterfly Spread is comprised of one long
Calendar Spread and one long Butterfly Spread. The proposal requires
initial and maintenance margin of full cash payment of the net debit
incurred when this spread strategy is established. Full payment of the
net debit incurred will cover any potential risk to the carrying
broker-dealer.
(5) A Long Calendar Condor Spread is comprised of one long Calendar
Spread and two long Butterfly Spreads. The proposal requires initial
and maintenance margin of full cash payment of the net debit incurred
when this spread strategy is established. Full payment of the net debit
incurred will cover any potential risk to the carrying broker-dealer.
(6) A Short Calendar Iron Butterfly Spread is comprised of one long
Calendar Spread plus one long Butterfly Spread and one short Box
Spread. To cover the risk to the carrying broker-dealer, the proposal
requires a deposit of the aggregate exercise price differential. The
net credit received may be applied to the deposit required.
(7) A Short Calendar Iron Condor Spread is comprised of one Long
Calendar Spread plus two long Butterfly Spreads and one short Box
Spread. To cover the risk to the carrying broker-dealer, the proposal
requires a deposit of the aggregate exercise price differential. The
net credit received may be applied to the deposit required.
As noted above, the purpose and benefit is to set levels of margin
that more precisely represent actual net risk of the option positions
in the account and enable customers to implement these strategies more
efficiently.
2. Permitted Offsets
Rule 2520(f)(2)(J) addresses margin requirements for members that
clear and carry the listed options transactions of registered
specialists, registered market makers or registered traders in options,
and recognizes certain offset positions in establishing the margin
requirements. The rule currently limits permitted offsets for these
parties to options series that are ``in or at the money,'' which is
defined to mean ``the current market price of the underlying security
is not more than two standard exercise intervals below (with respect to
a call option) or above (with respect to a put option) the exercise
price of the option.''
Recently, various option exchanges have provided for the listing of
options with one-dollar strike intervals in a number of classes. As a
result, the use of securities to hedge options series that have one-
dollar strike intervals has unintentionally become more restrictive.
The proposed rule change will eliminate the definition of ``in or at
the money,'' thereby eliminating the two standard exercise interval
limitation for listed options. In addition, the proposed rule change
will require permitted offset transactions to be effected for
specialist or market-making purposes such as hedging, risk reduction,
rebalancing of positions, liquidation, or accommodation of customer
orders, or other similar specialist or market-making purposes.
Since clearing firms have risk monitoring systems that alert them
to unhedged positions and haircut requirements pursuant to Rule 15c3-1
of the Act,\8\ which perform a similar function as NASD margin
requirements relative to providing adequate risk coverage to broker-
dealers, elimination of the two-dollar standard exercise price
limitation and definition of ``in or at the money'' will not diminish
the ``safety and soundness'' protections that the margin rules provide.
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\8\ 17 CFR 240.15c3-1.
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This proposed rule change is effective upon filing. The effective
date and the implementation date will be the date of filing.
2. Statutory Basis
NASD believes that the proposed rule change is consistent with the
provisions of section 15A(b)(6) of the Act,\9\ which requires, among
other things, that NASD rules must be designed to prevent fraudulent
and manipulative acts and practices, to promote just and equitable
principles of trade, and, in general, to protect investors and the
public interest. NASD believes that the proposed rule change will set
margin requirements commensurate with the risk of the identified
options spread strategies and will further promote consistent margin
requirements among the self-regulatory organizations.
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\9\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition
NASD does not believe that the proposed rule change will result in
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
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change does not: (1)
Significantly affect the protection of investors or the public
interest; (2) impose any significant burden on competition; and (3) by
its terms, become operative for 30 days from the date on which it was
filed, or such shorter time as the Commission may designate if
consistent with the protection of investors and the public interest,
the proposed rule change has become effective pursuant to section
19(b)(3)(A) \10\ of the Act and Rule 19b-4(f)(6) thereunder.\11\
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\10\ 15 U.S.C. 78f(b)(3)(A).
\11\ 17 CFR 240.19b-4(f)(6). Rule 19b-4(f)(6) requires that NASD
give the Commission written notice of NASD's intention to file the
proposed rule change along with a brief description and text of the
proposed rule change at least five business days prior to the date
of the filing of the proposed rule change. The Commission notes that
NASD has satisfied the pre-filing five-day notice requirement.
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A proposed rule change filed under Rule 19b-4(f)(6) \12\ normally
may not become operative prior to 30 days after the date of filing.
However, Rule 19b-4(f)(6)(iii) \13\ permits the Commission to designate
a shorter time if such actions is consistent with the protection of
investors and the public interest. NASD has requested that the
Commission waive the 30-day operative delay and designate the proposed
rule change to become operative on the date of filing with the
Commission, in order to conform NASD's margin rules to the recent rule
changes by the NYSE and CBOE \14\ and to avoid subjecting firms to
conflicting margin requirements. The Commission believes that waiving
the 30-day operative delay is consistent with the protection of
investors and the public interest.\15\
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\12\ Id.
\13\ 17 CFR 240.19b-4(f)(6)(iii).
\14\ See supra note 5.
\15\ For purposes only of waiving the operative delay for this
proposal, the Commission has considered the proposed rule's impact
on efficiency, competition and capital formation. See 15 U.S.C.
78c(f).
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At any time within 60 days of the filing of the proposed rule
change, the Commission may summarily abrogate such rule change if it
appears to the Commission that such action is necessary or appropriate
in the public interest, for the protection of investors,
[[Page 26804]]
or otherwise in furtherance of the purposes of the Act.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://
www.sec.gov/rules/sro.shtml); or
Send an e-mail to rule-comments@sec.gov. Please include
File No. SR-NASD-2006-045 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-NASD-2006-045. 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 NASD. All comments received will be posted without
change; the Commission does not edit personal identifying information
from submissions. You should submit only information that you wish to
make available publicly. All submissions should refer to File Number
SR-NASD-2006-045 and should be submitted on or before May 30, 2006.
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\16\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\16\
Nancy M. Morris,
Secretary.
[FR Doc. E6-6911 Filed 5-5-06; 8:45 am]
BILLING CODE 8010-01-P
