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]

Download as PDF 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 wwhite on PROD1PC61 with NOTICES 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). VerDate Aug<31>2005 16:05 May 05, 2006 Jkt 208001 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 (http://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 (http://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 PO 00000 Frm 00065 Fmt 4703 Sfmt 4703 E:\FR\FM\08MYN1.SGM 08MYN1 26798 Federal Register / Vol. 71, No. 88 / Monday, May 8, 2006 / Notices wwhite on PROD1PC61 with NOTICES 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] VerDate Aug<31>2005 16:05 May 05, 2006 Jkt 208001 (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. PO 00000 Frm 00066 Fmt 4703 Sfmt 4703 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 E:\FR\FM\08MYN1.SGM 08MYN1 wwhite on PROD1PC61 with NOTICES Federal Register / Vol. 71, No. 88 / Monday, May 8, 2006 / Notices 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 VerDate Aug<31>2005 16:05 May 05, 2006 Jkt 208001 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 PO 00000 Frm 00067 Fmt 4703 Sfmt 4703 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 E:\FR\FM\08MYN1.SGM 08MYN1 wwhite on PROD1PC61 with NOTICES 26800 Federal Register / Vol. 71, No. 88 / Monday, May 8, 2006 / Notices 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 VerDate Aug<31>2005 16:05 May 05, 2006 Jkt 208001 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 PO 00000 Frm 00068 Fmt 4703 Sfmt 4703 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 E:\FR\FM\08MYN1.SGM 08MYN1 wwhite on PROD1PC61 with NOTICES Federal Register / Vol. 71, No. 88 / Monday, May 8, 2006 / Notices 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 VerDate Aug<31>2005 16:05 May 05, 2006 Jkt 208001 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 PO 00000 Frm 00069 Fmt 4703 Sfmt 4703 26801 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 E:\FR\FM\08MYN1.SGM 08MYN1 26802 Federal Register / Vol. 71, No. 88 / Monday, May 8, 2006 / Notices 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 wwhite on PROD1PC61 with NOTICES 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). VerDate Aug<31>2005 16:05 May 05, 2006 Jkt 208001 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 PO 00000 Frm 00070 Fmt 4703 Sfmt 4703 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. E:\FR\FM\08MYN1.SGM 08MYN1 Federal Register / Vol. 71, No. 88 / Monday, May 8, 2006 / Notices wwhite on PROD1PC61 with NOTICES 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 VerDate Aug<31>2005 16:05 May 05, 2006 Jkt 208001 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 PO 00000 CFR 240.15c3–1. U.S.C. 78o–3(b)(6). Frm 00071 Fmt 4703 Sfmt 4703 26803 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 E:\FR\FM\08MYN1.SGM 08MYN1 26804 Federal Register / Vol. 71, No. 88 / Monday, May 8, 2006 / Notices 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 (http://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 wwhite on PROD1PC61 with NOTICES 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 (http://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). VerDate Aug<31>2005 16:05 May 05, 2006 Jkt 208001 PO 00000 Frm 00072 Fmt 4703 Sfmt 4703 (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]


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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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \8\ 17 CFR 240.15c3-1.
---------------------------------------------------------------------------

    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.
---------------------------------------------------------------------------

    \9\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

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\
---------------------------------------------------------------------------

    \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.
---------------------------------------------------------------------------

    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\
---------------------------------------------------------------------------

    \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).
---------------------------------------------------------------------------

    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 (http://
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 (http://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