Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of Filing of a Proposed Rule Change To Amend Rule 10.3 Regarding Margin Requirements, 74199-74204 [2022-26234]
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Federal Register / Vol. 87, No. 231 / Friday, December 2, 2022 / Notices
Historical Fee Rate determined pursuant
to paragraph (b)(i) of this Section 11.3.
(B) Historical CAT Fee Filing. When
the Participants file with the SEC
pursuant to Section 19(b) of the
Exchange Act the Historical CAT
Assessment calculated using the
Historical Fee Rate that the Operating
Committee approved in accordance with
paragraph (b) of this Section 11.3, such
filing shall set forth (A) the Historical
Fee Rate; (B) a brief description of the
amount and type of the Historical CAT
Costs; (C) the Historical Recovery Period
and the reasons for its length; and (D)
the projected total executed equivalent
share volume of all transactions in
Eligible Securities for the Historical
Recovery Period, and a description of
the calculation of the projection.
[(i) Each Industry Member that is the
clearing firm for the buyer in a
transaction in Eligible Securities
(‘‘Clearing Broker for the Buyer’’ or
‘‘CBB’’) will be required to pay a fee for
each such transaction in Eligible
Securities based on CAT Data. The
CBB’s fee for each transaction in Eligible
Securities will be calculated by
multiplying the number of executed
equivalent shares in the transaction by
one-third and by the Fee Rate.]
[(ii) Each Industry Member that is the
clearing firm for the seller in a
transaction in Eligible Securities
(‘‘Clearing Broker for the Seller’’ or
‘‘CBS’’) will be required to pay a fee for
each transaction in Eligible Securities
based on CAT Data. The CBS’s fee for
each transaction in Eligible Securities
will be calculated by multiplying the
number of executed equivalent shares in
the transaction by one-third and by the
Fee Rate.]
[(iii) CBBs and CBSs will be required
to pay CAT fees related to Past CAT
Costs. The Fee Rate for the CAT fees
related to Past CAT Costs will be
calculated by dividing the Past CAT
Costs for the relevant period (as
determined by the Operating
Committee) by the projected total
executed equivalent share volume of all
transactions in Eligible Securities for the
relevant period based on CAT Data.]
[(iv) CBBs and CBSs will be required
to pay CAT fees related to Prospective
CAT Costs. The Fee Rate for the CAT
fees related to Prospective CAT Costs
will be the same as set forth in
paragraph (a)(iv) above.]
(c) The Operating Committee may
establish any other fees ancillary to the
operation of the CAT that it reasonably
determines appropriate, including fees:
(i) for the late or inaccurate reporting of
information to the CAT; (ii) for
correcting submitted information; and
(iii) based on access and use of the CAT
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for regulatory and oversight purposes
(and not including any reporting
obligations).
(d) The Company shall make publicly
available a schedule of effective fees and
charges adopted pursuant to this
Agreement as in effect from time to
time. The Operating Committee shall
review such fee schedule on at least an
annual basis and shall make any
changes to such fee schedule that it
deems appropriate. The Operating
Committee is authorized to review such
fee schedule on a more regular basis, but
shall not make any changes on more
than a semiannual basis unless,
pursuant to a Supermajority Vote, the
Operating Committee concludes that
such change is necessary for the
adequate funding of the Company.
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APPENDIX B
Fee Schedule
Consolidated Audit Trail Funding Fees
for Participants
(a) CAT Fee.
[(1) Each Participant that is a national
securities exchange shall pay a fee for
each transaction in Eligible Securities
executed on the exchange based on CAT
Data, where the fee for each transaction
will be calculated by multiplying the
number of executed equivalent shares in
the transaction by one-third and by the
Fee Rate.
(2) Each Participant that is a national
securities association shall pay a fee for
each transaction in Eligible Securities
executed otherwise than on exchange
based on CAT Data, where the fee for
each transaction will be calculated by
multiplying the number of executed
equivalent shares in the transaction by
one-third and by the Fee Rate.
(b) Fee Rate.
(1) The Operating Committee will
calculate the Fee Rate at the beginning
of each year by dividing the budgeted
CAT costs for the year by the projected
total executed equivalent share volume
of all transactions in Eligible Securities
for the year. After setting the Fee Rate
at the beginning of each year, the Fee
Rate may be adjusted once during the
year, if necessary, due to changes in the
budgeted or actual costs or projected or
actual total executed equivalent share
volume during the year.
(2) For purposes of calculating the
fees, executed equivalent shares in a
transaction in Eligible Securities will be
counted as follows:
(i) each executed share for a
transaction in NMS Stocks will be
counted as one executed equivalent
share;
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(ii) each executed contract for a
transaction in Listed Options will be
counted based on the multiplier
applicable to the specific Listed Option
(i.e., 100 executed equivalent shares or
such other applicable multiplier); and
(iii) each executed share for a
transaction in OTC Equity Securities
shall be counted as 0.01 executed
equivalent share.
(3) Budgeted CAT Costs. The
budgeted CAT costs for the year shall be
comprised of all fees, costs and
expenses budgeted to be incurred by or
for the Company in connection with the
development, implementation and
operation of the CAT as set forth in the
annual operating budget approved by
the Operating Committee pursuant to
Section 11.1(a) of the CAT NMS Plan, or
as adjusted during the year by the
Operating Committee.
(4) Projected Total Executed
Equivalent Share Volume of
Transactions in Eligible Securities. The
Operating Committee shall determine
the projected total executed equivalent
share volume of all transactions in
Eligible Securities for each relevant
period based on the executed equivalent
share volume of all transactions in
Eligible Securities for the prior six
months.]
[(c) Fee Payments/Collection.] Each
Participant shall pay the CAT Fee [fee]
set forth in Section 11.3(a) of the CAT
NMS Plan [paragraph (a)] to
Consolidated Audit Trail, LLC in the
manner prescribed by Consolidated
Audit Trail, LLC on a monthly basis
based on the Participant’s transactions
in Eligible Securities in the prior month.
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[FR Doc. 2022–26235 Filed 12–1–22; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–96395; File No. SR–CBOE–
2022–058]
Self-Regulatory Organizations; Cboe
Exchange, Inc.; Notice of Filing of a
Proposed Rule Change To Amend Rule
10.3 Regarding Margin Requirements
November 28, 2022.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934 (the
‘‘Act’’), 1 and Rule 19b–4 thereunder, 2
notice is hereby given that on November
14, 2022, Cboe Exchange, Inc. (the
‘‘Exchange’’ or ‘‘Cboe Options’’) filed
with the Securities and Exchange
Commission (the ‘‘Commission’’) the
1 15
2 17
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U.S.C. 78s(b)(1).
CFR 240.19b–4.
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proposed rule change as described in
Items I, II, and III below, which Items
have been prepared by the Exchange.
The Commission is publishing this
notice to solicit comments on the
proposed rule change from interested
persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
Cboe Exchange, Inc. (the ‘‘Exchange’’
or ‘‘Cboe Options’’) proposes to amend
Rule 10.3 regarding margin
requirements. The text of the proposed
rule change is provided below.
(additions are italicized; deletions are
[bracketed])
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Rules of Cboe Exchange, Inc.
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Rule 10.3 Margin Requirements
(a)–(b) No change.
(c) Customer Margin Account—Exception.
The foregoing requirements are subject to the
following exceptions. Nothing in this
paragraph (c) shall prevent a broker-dealer
from requiring margin from any account in
excess of the amounts specified in these
provisions.
(1)–(4) No change.
(5) Initial and Maintenance Margin
Requirements on Short Options, Stock Index
Warrants, Currency Index Warrants and
Currency Warrants.
(A)–(B) No change.
(C) Related Securities Positions—Listed or
OTC Options. Unless otherwise specified,
margin must be deposited and maintained in
the following amounts for each of the
following types of positions.
(i)–(ii) No change.
(iii) Covered Calls/Covered Puts. [(a)] No
margin is required for a call (put) option
contract or warrant carried in a short position
where there is carried in the same account a
long (short) position in equivalent units of
the underlying security.
[(b) No margin is required for a call (put)
index option contract or warrant carried in a
short position where there is carried in the
same account a long (short) position in an (1)
underlying stock basket, (2) index mutual
fund, (3) IPR, or (4) IPS, that is based on the
same index underlying the index option or
warrant and having a market value at least
equal to the aggregate current index value.
(c)] In order for th[e]is exception[s in
subparagraphs (a) and (b) above] to apply, in
computing margin on positions in the
underlying security[, underlying stock
basket, index mutual fund, IPR or IPS, as
applicable], ([1]a) in the case of a call, the
current market value to be used shall not be
greater than the exercise price, and ([2]b) in
the case of a put, margin shall be the amount
required by subparagraph (b)(2) of this Rule,
plus the amount, if any, by which the
exercise price exceeds the current market
value.
(iv) Exceptions. The following paragraphs
set forth the minimum amount of margin
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which must be maintained in margin
accounts of customers having positions in
components underlying options, stock index
warrants, currency index warrants or
currency warrant when such components are
held in conjunction with certain positions in
the overlying option or warrant. In respect of
an option or warrant on a market index, an
underlying stock basket is an eligible
underlying component. The option or
warrant must be listed or guaranteed by the
carrying broker dealer. In the case of a call
option or warrant carried in a short position,
a related long position in the underlying
component shall be valued at no more than
the call option/warrant exercise price for
margin equity purposes.
(a) Long Option Offset. When a component
underlying an option or warrant is carried
long (short) in [an]the same account [in
which there is also carried]as a long put (call)
option or warrant specifying equivalent units
of the underlying component, the minimum
amount of margin which must be maintained
on the underlying component is 10% of the
option/warrant exercise price plus the out-ofthe-money amount not to exceed the
minimum maintenance required pursuant to
paragraph (b) of this Rule.
(b) Conversion. When a call option 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 in the same account a long put option
or warrant specifying equivalent units of the
same underlying component and having the
same exercise price and expiration date as
the short call option or warrant, the
minimum amount of margin which must be
maintained for the underlying component
shall be 10% of the exercise price.
(c) Reverse Conversion. When a put option
or warrant carried in a short position is
covered by a short position in equivalent
units of the underlying component and there
is [also] carried in the same account a long
call option or warrant specifying equivalent
units of the same underlying component and
having the same exercise price and
expiration date as the short put option or
warrant, the minimum amount of margin
which must be maintained for the underlying
component shall be 10% of the exercise price
plus the amount by which the exercise price
of the put exceeds the current market value
of the underlying, if any.
(d) Collar. When a call option 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 in the same account a long put option
or warrant specifying equivalent units of the
same underlying component and having a
lower exercise price than, and same
expiration date as, the short call option/
warrant, the minimum amount of margin
which must be maintained for the underlying
component shall be the lesser of 10% of the
exercise price of the put plus the put out-ofthe-money amount or 25% of the call
exercise price.
(e) Protected Option. When an index call
(put) option contract or warrant is carried in
a short position (the ‘‘protected option or
warrant position’’) and there is carried in the
same account a long (short) position in an
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underlying stock basket, non-leveraged index
mutual fund or non-leveraged exchangetraded fund (each, the ‘‘protection’’) that is
based on the same index underlying the
index option or warrant, the protected option
or warrant position is not subject to the
requirement set forth in subparagraph
(c)(5)(A) above if the following conditions are
met:
(1) when the protected option or warrant
position is created, the absolute value of the
protection is not less than 100% of the
aggregate current underlying index value
associated with the protected option or
warrant position determined at either (A) the
time the order that created the protected
option or warrant position was entered or
executed; or (B) the close of business on the
trading day the protected option or warrant
position was created;
(2) the absolute value of the protection is
at no time less than 95% of the aggregate
current underlying index value associated
with the protected option or warrant position;
and
(3) margin is maintained in an amount
equal to the greater of: (A) the amount, if any,
by which the aggregate current underlying
index value is above (below) the aggregate
exercise price of the protected call (put)
option or warrant position; or (B) the amount,
if any, by which the absolute value of the
protection is below 100% of the aggregate
current underlying index value associated
with the protected option or warrant.
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The text of the proposed rule change
is also available on the Exchange’s
website (https://www.cboe.com/
AboutCBOE/CBOELegalRegulatory
Home.aspx), at the Exchange’s Office of
the Secretary, and at the Commission’s
Public Reference Room.
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission, the
Exchange included statements
concerning the purpose of and basis for
the proposed rule change and discussed
any comments it received on the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below. The
Exchange has prepared summaries, set
forth in sections A, B, and C below, of
the most significant aspects of such
statements.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
The proposed rule change amends
Rule 10.3 regarding margin
requirements. Specifically, the
Exchange proposes to amend Rule
10.3(c)(5)(C)(iii)(b) to update the
provisions that provide margin relief for
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a cash-settled index option written
against a holding in an exchange-traded
fund that tracks the same index as the
index underlying the index option. Rule
10.3 sets forth margin requirements, and
certain exceptions to those
requirements, applicable to security
positions of Trading Permit Holders’
(‘‘TPHs’’) customers. Rule
10.3(c)(5)(C)(iii) currently requires no
margin for covered calls and puts.
Specifically, that rule provides the
following:
• No margin is required for a call
(put) option contract or warrant carried
in a short position where there is carried
in the same account a long (short)
position in equivalent units of the
underlying security.3
• No margin is required for a call
(put) index option contract or warrant
carried in a short position where there
is carried in the same account a long
(short) position in an (1) underlying
stock basket,4 (2) index mutual fund, (3)
index portfolio receipt (‘‘IPR’’),5 or (4)
index portfolio share (‘‘IPS’’),6 that is
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3 In
computing margin on such a position in the
underlying security, (a) in the case of a call, the
current market value to be used shall not be greater
than the exercise price and (b) in the case of a put,
margin will be the amount required by Rule
10.3(b)(2), plus the amount, if any, by which the
exercise price of the put exceeds the current market
value of the underlying.
4 An ‘‘underlying stock basket’’ means a group of
securities that includes each of the component
securities of the applicable index and which meets
the following conditions: (a) the quantity of each
stock in the basket is proportional to its
representation in the index, (b) the total market
value of the basket is equal to the underlying index
value of the index options or warrants to be
covered, (c) the securities in the basket cannot be
used to cover more than the number of index
options or warrants represented by that value and
(d) the securities in the basket shall be unavailable
to support any other option or warrant transaction
in the account. See Rule 10.3(a)(7).
5 IPRs are securities that (a) represent an interest
in a unit investment trust (‘‘UIT’’) which holds the
securities that comprise an index on which a series
of IPRs is based; (b) are issued by the UIT in a
specified aggregate minimum number in return for
a ‘‘Portfolio Deposit’’ consisting of specified
numbers of shares of stock plus a cash amount; (c)
when aggregated in the same specified minimum
number, may be redeemed from the UIT, which will
pay to the redeeming holder the stock and cash then
comprising the Portfolio Deposit; and (d) pay
holders a periodic cash payment corresponding to
the regular cash dividends or distributions declared
and paid with respect to the component securities
of the stock index on which the IPRs are based, less
certain expenses and other charges as set forth in
the UIT prospectus. IPRs are ‘‘UIT interests’’ within
the meaning of the Rules. See Rule 1.1. A UIT
Interest is any share, unit, or other interest in or
relating to a unit investment trust, including any
component resulting from the subdivision or
separation of such an interest.
6 IPSs are securities that (a) are issued by an openend management investment company based on a
portfolio of stocks or fixed income securities
designed to provide investment results that
correspond generally to the price and yield
performance of a specified foreign or domestic stock
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based on the same index underlying the
index option or warrant and having a
market value at least equal to the
aggregate current index value.
• In order for the exceptions in the
previous bullets to apply, in computing
margin on positions in the underlying
security, underlying stock basket, index
mutual fund, IPR or IPS, as applicable,7
(1) in the case of a call, the current
market value to be used shall not be
greater than the exercise price, and (2)
in the case of a put, margin shall be the
amount required by subparagraph (b)(2)
of Rule 10.3, plus the amount, if any, by
which the exercise price exceeds the
current market value.
Rule 10.3(c)(5) generally requires
TPHs to obtain from a customer, and
maintain, a margin deposit for short
cash-settled index options in an amount
equal to 100% of the current market
value of the option plus 15% (if
overlying a broad-based index) or 20%
(if overlying a narrow-based index) of
the amount equal to the index value
multiplied by the index multiplier
minus the amount, if any, by which the
option is out-of-the-money.8 The
minimum margin required for such an
option is 100% of the option current
market value plus 10% of the index
value multiplied by the index multiplier
for a call or 10% of the exercise price
multiplied by the index multiplier for a
put.
Pursuant to current Rule
10.3(c)(5)(C)(iii)(b) and (c), however, a
TPH requires no margin deposit for a
short cash-settled index call option if
the TPH is holding in the same account
a long position in an ETF that tracks the
same index underlying the index
option 9 if the current market value of
the ETF for margin purposes (1) is at
index or fixed income securities index; (b) are
issued by such an open-end management
investment company in a specified aggregate
minimum number in return for a deposit of
specified number of shares of stock and/or a cash
amount, or a specified portfolio of fixed income
securities and/or a cash amount, with a value equal
to the next determined net asset value; and (c) when
aggregated in the same specified minimum number,
may be redeemed at a holder’s request by such
open-end management investment company, which
will pay to the redeeming holder stock and/or cash,
or a specified portfolio of fixed income securities
and/or cash with a value equal to the next
determined net asset value. See Rule 1.1.
7 IPRs and IPSs are commonly referred to as ETFs.
8 The out-of-the-money amount for a call is any
excess of the aggregate exercise price of the option
or warrant over the product of the current (spot or
cash) index value and the applicable multiplier.
The out-of-the-money amount for a put is any
excess of the product of the current (spot or cash)
index value and the applicable multiplier over the
aggregate exercise price of the option or warrant.
9 This is the same margin treatment that applies
to an option on an equity security written against
the underlying security. See current Rule
10.3(c)(5)(C)(iii)(a).
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least equal to the aggregate current
index value and (2) is not greater than
the exercise price. If an account is short
a cash-settled index put option and is
holding in the same account a short
position in the ETF, a TPH needs to
require a margin deposit for the amount
required by Rule 10.3(b)(2) 10 plus the
amount, if any, by which the exercise
price of the option exceeds the market
value of the ETF if the market value of
the ETF is at least equal to the aggregate
current index value.
The Exchange proposes to amend this
exception to margin requirements
applicable to short option positions or
warrants on indexes that are offset by
positions in an underlying stock basket,
non-leveraged index mutual fund, or
non-leveraged exchange-traded fund
(each, the ‘‘protection’’) that is based on
the same index option, as well as move
it within Rule 10.3 to Rule
10.3(c)(5)(C)(iv).11 Specifically, the
proposed rule change adopts the
following as Rule 10.3(c)(5)(C)(iv)(e): 12
(e) When an index call (put) option
contract or warrant is carried in a short
position (the ‘‘protected option or warrant
position’’) and there is carried in the same
account a long (short) position in an
underlying stock basket, non-leveraged index
mutual fund or non-leveraged exchangetraded fund (each, the ‘‘protection’’) that is
based on the same index underlying the
index option or warrant, the protected option
or warrant position is not subject to the
requirement set forth in subparagraph
10 Rule 10.3(b)(2) provides the minimum amount
of margin that must be maintained in customer
margin accounts having positions in securities is:
(1) with respect to long positions, 25% of the
current market value of all long in the account; plus
(2) with respect to short positions, (a) $2.50 per
share or 100% of the current market value,
whichever is greater, of each security short in the
account that has a current market value of less than
$5.00 per share; plus (b) $5.00 per share or 30% of
the current market value, whichever is greater, of
each security short in the account that has a current
market value of $5.00 per share or more.
11 Proposed paragraph (e) limits the margin relief
to index options written against an underlying stock
basket, non-leveraged index mutual fund or nonleveraged exchange-traded fund (compared to
underlying stock basket, index mutual fund, IPR, or
IPS in current subparagraph (iii)(b)). The Exchange
proposes to add the non-leveraged limitation to
clarify that this exception is not intended to and
does not apply to leveraged instruments.
Additionally, the Exchange excludes IPRs and IPSs
from being eligible for the margin relief in
paragraph (e), as the Exchange understands that the
use and availability of these products has
diminished and has not observed the writing of
index options against them.
12 The proposed rule change identifies the
strategy described in proposed subparagraph (e) as
a ‘‘protected option,’’ which is a strategy of writing
an index option against a holding in an ETF based
on the same index as the index option, to
differentiate it from a ‘‘covered call,’’ which is a
strategy of writing an option against a position in
an underlying security (the margin treatment for
which is described in current subparagraph (iii)(a)).
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(c)(5)(A) above if the following conditions are
met:
(1) when the protected option or warrant
position is created, the absolute value of the
protection is not less than 100% of the
aggregate current underlying index value
associated with the protected option or
warrant position determined at either (A) the
time the order that created the protected
option or warrant position was entered or
executed; or (B) the close of business on the
trading day the protected option or warrant
position was created;
(2) the absolute value of the protection is
at no time less than 95% of the aggregate
current underlying index value associated
with the protected option or warrant
position; and
(3) margin is maintained in an amount
equal to the greater of: (A) the amount, if any,
by which the aggregate current underlying
index value associated with the protected
option or warrant position is above (below)
the aggregate exercise price of the protected
call (put) option or warrant position; or (B)
the amount, if any, by which the absolute
value of the protection is below the aggregate
current underlying index value associated
with the protected option or warrant
position.
The proposed rule change provides
that the margin requirement for an
uncovered, short index option or
warrant does not apply to a protected
option or warrant position if certain
conditions are met. The first proposed
condition to qualify for the exception is
that the TPH must carry or establish in
the same account as the protected
option or warrant position protection
with an absolute value of not less than
100% of the aggregate underlying index
value at either the time the order that
created the protected option or warrant
position was entered or executed or the
close of business on the trading day the
protected option or warrant position
was created. This proposed first
condition provides clearing brokers
with flexibility regarding the point in
time at which to value the protection.
The aggregate underlying index value
used would be that which existed at the
same point in time the clearing broker
selects to value the protection. This first
condition corresponds to the concept of
covered writing (such as writing a
covered call). When writing a covered
call, a market participant must have in
the same account as the short call
position a fully offsetting position in the
underlying stock (in other words, 100%
of the short position’s aggregate
underlying value, which is equal to the
price of the stock times 100 (the number
of shares underlying one option)).
The second proposed condition to
qualify for the exception is that the
absolute value of the protection must at
no time be less than 95% of the
aggregate underlying index value
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associated with the protected option or
warrant position. Like the first proposed
condition, this second proposed
condition is intended to correspond to
covered writing by requiring a market
participant to maintain the protection in
an amount close to the aggregate
underlying index value associated with
the protected option or warrant
position. Because the value of the
protection typically will not track
exactly the aggregate underlying index
value (i.e., tracking error), the 95%
threshold will require the absolute value
of the protection to remain close to the
aggregate underlying index value while
effectively imposing a cap of 5% on
how much the two values may diverge
(i.e., the value of the protection may not
be more than 5% less than the value of
the aggregate underlying index value). If
the absolute value of the protection falls
below 95% of the aggregate underlying
index value associated with the
protected option or warrant position,
the protected option or warrant position
would be deemed uncovered and thus
no longer eligible for relief from the
uncovered, short index option margin
requirement. When that occurs, a
clearing broker must either collect the
required margin amount for the short
index option or warrant position,
require that the value of the protection
be increased to the 100% of the
aggregate underlying index value, or
liquidate the short index option or
warrant position.
The third proposed condition to
qualify for the exception is to maintain
margin in an amount equal to the greater
of: (a) the amount, if any, by which the
aggregate underlying index value
associated with the protected option or
warrant position is above (below) the
aggregate exercise price of the protected
call (put) option or warrant position; or
(b) the amount, if any, by which the
absolute value of the protection is below
the aggregate underlying index value
associated with the protected option or
warrant (which would be subject to the
95% threshold imposed by the second
proposed condition, as described
above).
The proposed margin requirement to
cover any difference by which the
underlying index value is above (below)
the exercise price of a call (put), in
aggregate, would capture any amount by
which a protected option or warrant
position is in-the-money (i.e., the
amount the aggregate underlying index
value exceeds the aggregate exercise
price for a short call). Pursuant to this
proposed requirement, margin
equivalent to the in-the-money amount
of the protected option or warrant
position would need to be held in the
PO 00000
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Fmt 4703
Sfmt 4703
account with that position, which
would then be available to offset any
debit to that account in the event of an
exercise of the protected option or
warrant. This corresponds to current
Cboe Rule 10.3(c)(5)(C)(iii)(c), which
requires the value of the protection or
underlying stock to be capped at the
exercise price of a covered call for no
additional margin to be required for that
call position. Both approaches prevent
any in-the-money amount from
contributing equity to the account and
being used to support other positions.
The proposed alternative margin
requirement to cover any difference by
which the absolute value of the
protection is below the aggregate
underlying index value associated with
the protected option or warrant would
compensate for any tracking error.
Pursuant to this proposed requirement,
margin equivalent to the value of the
divergence between the absolute value
of the protection and the aggregate
underlying index value would need to
be maintained once a protected option
or warrant position is created. However,
this requirement would be rendered
moot if the absolute value of the
protection fell below 95% of the
aggregate underlying index value
associated with the protected option or
warrant position, because the position at
that point would be considered
uncovered. To the extent equity is not
available in the margin account to meet
this requirement, a TPH can require its
customer to deposit margin into the
account. The Exchange believes this is
more practical than requiring the value
of the protection to be maintained at
100% of the aggregate underlying index
value in actual shares (or applicable
units) of the protection, as this would
require continuous small transactions in
the protection instrument to offset
tracking differences (which are
generally no larger than 2%).
Because there may be instances where
margin requirements for the in-themoney amount and the tracking error
may be duplicative,13 the Exchange
proposes to require only the greater
amount of the two to avoid requiring an
unnecessarily high amount of margin.
Currently, if the absolute value of the
protection is less than the aggregate
underlying index value, the protection
position must be supplemented to
address the deficiency. As proposed,
such deficiency would require margin
(to the extent such deficiency is not
13 Two out of a total of six possible orderings of
underlying index value, exercise price and
protection value would result in overlapping
margin requirements as proposed. For all others,
one of the proposed margin requirement
alternatives would be zero.
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lotter on DSK11XQN23PROD with NOTICES1
greater than 5%) in the form of available
equity in the margin account or a
deposit of margin in any form (e.g., cash
or marginable securities) rather than the
purchase, sale, or deposit of additional
protection to address a deficiency
(regardless of the amount of the
deficiency).14 As a result, the proposed
rule change will reduce the need for
small and potentially frequent
purchases, sales, or deposits of
additional protection, which may
reduce the operational cost of the
protected option strategy for customers.
While the structure of protection,
particularly ETFs, and market forces
may cause the protection’s value to
differ from the index value, the
Exchange has observed that these values
are generally highly correlated and thus
do not deviate significantly. Therefore,
the Exchange believes the proposed
margin requirement for protected
options is an effective safeguard against
the risk of a short option position.
Additionally, the proposed rule
change eliminates the requirement to
mark the price of a long ETF with an
index call option written against it at
the lower of the ETF’s market value or
the index option strike price. With
covered call options, this requirement is
intended to cap favorable moves in the
price of the underlying security at the
strike price because moves above the
strike price will not be realized.
Currently, the Exchange applies this
same requirement (as set forth in Rule
10.3(c)(5)(C)(iii)(c)) to protected options
written against ETF holdings to
maintain equivalency with the
treatment of covered options. As an
alternative, the proposed rule
substitutes a margin requirement in this
situation, which would require margin
to be collected in an amount equal to,
for example, the amount by which the
aggregate underlying index value
exceeds the aggregate exercise price in
the case of a protected index call option
or warrant position.
Further to the above, the proposed
rule change deletes Rule
10.3(c)(5)(C)(iii)(b), as well as the crossreference to such paragraph and the
references to underlying stock basket,
index mutual fund, IPR or IPS, as
applicable,15 in current subparagraph
(c), as those terms relate specifically to
14 Pursuant to the current Rules, if the protection
market value is not at least equal to the aggregate
index value, and additional shares are not
purchased or deposited, then the required margin
is equal to the amount of the option current market
value plus 15% (if a broad-based index) or 20% (if
a narrow-based index) of the aggregate index value
minus any out-of-the-money amount, subject to a
minimum requirement.
15 These terms are related only to current
subparagraph (b).
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19:14 Dec 01, 2022
Jkt 259001
current subparagraph (b). Because this
would leave only one section in Rule
10.3(c)(5)(C)(iii), the proposed rule
change deletes subparagraph lettering
and combines current subparagraph
(iii)(a) and current subparagraph (iii)(c)
into a single provision as subparagraph
(iii) and makes corresponding
conforming changes.
The proposed rule change also makes
clarifying, nonsubstantive changes in
each subparagraph of Rule
10.3(c)(5)(C)(iv) to conform language in
those subparagraphs to language used
throughout Rule 10.3. Specifically, the
proposed rule change amends the
provision of each subparagraph to state
that the minimum amount of required
margin in the circumstances described
in each subparagraph applies when the
applicable long position is carried ‘‘in
the same account as’’ the applicable
short position, rather than ‘‘also
carried.’’ This language is consistent
with the language in, for example,
current Rule 10.3(c)(5)(C)(iii), as margin
requirements are determined generally
based on positions held in the same
account.
2. Statutory Basis
The Exchange believes the proposed
rule change is consistent with the
Securities Exchange Act of 1934 (the
‘‘Act’’) and the rules and regulations
thereunder applicable to the Exchange
and, in particular, the requirements of
Section 6(b) of the Act.16 Specifically,
the Exchange believes the proposed rule
change is consistent with the Section
6(b)(5) 17 requirements that the rules of
an exchange be designed to prevent
fraudulent and manipulative acts and
practices, to promote just and equitable
principles of trade, to foster cooperation
and coordination with persons engaged
in regulating, clearing, settling,
processing information with respect to,
and facilitating transactions in
securities, to remove impediments to
and perfect the mechanism of a free and
open market and a national market
system, and, in general, to protect
investors and the public interest.
Additionally, the Exchange believes the
proposed rule change is consistent with
the Section 6(b)(5) 18 requirement that
the rules of an exchange not be designed
to permit unfair discrimination between
customers, issuers, brokers, or dealers.
The Exchange further believes the
proposed rule change furthers the
objectives of Section 6(c)(3) of the Act,19
which authorizes the Exchange to,
16 15
17 15
U.S.C. 78f(b).
U.S.C. 78f(b)(5).
18 Id.
19 15
PO 00000
U.S.C. 78f(c)(3).
Frm 00081
Fmt 4703
Sfmt 4703
74203
among other things, prescribe standards
of financial responsibility or operational
capability and standards of training,
experience and competence for its
Trading Permit Holders and person
associated with Trading Permit Holders.
In particular, the proposed rule
change amends a specific margin
treatment related to short index options
written against ETFs in the same
manner. Given the difference described
above between short stock options
written against the underlying stock and
short index options written against
ETFs, the Exchange believes it is
reasonable to apply different margin
treatments to these different strategies.
While the economic outcomes of
covered options and protected options
are similar, as described above, the
Exchange believes it promotes just and
equitable principles of trade to apply
margin slightly differently to protected
options than covered options. While the
proposed rule change may result in
lower margin requirements for protected
option strategies, the Exchange believes
the proposed floor on the value of
protection and the margin amounts are
more reasonable than the current
requirements, as they are more tailored
to these strategies and reflect the
potential deficiencies between the value
of the protection and the value of the
index. As a result, the Exchange
believes the proposed margin required
will still be sufficient for protected
option strategies. Given the high
correlation between these values, the
Exchange believes it is appropriate to
require margin in an amount necessary
to only cover this deficiency, as
ultimately that is the risk against which
the margin requirement is protecting.
Furthermore, any amount by which the
aggregate underlying index value is
above (below) the aggregate exercise
price of the option in the case of a call
(put) (i.e., the-in-the-money amount)
would also be required as margin under
the proposal. This in-the-money amount
margin requirement prevents protection
value in excess of the exercise price of
the option (in the case of a short index
call) from contributing to margin
account equity and replaces the current
requirement that caps the value of the
protection at the aggregate exercise price
of the option to qualify for a margin
exception. The proposed rule change
requires only the greater of the two
margin requirements (the in-the-money
amount or the protection deficiency
amount) to apply to avoid requiring a
customer to maintain unnecessarily
high margin.
As noted above, the Exchange
believes the proposed rule change may
reduce the need for small and
E:\FR\FM\02DEN1.SGM
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74204
Federal Register / Vol. 87, No. 231 / Friday, December 2, 2022 / Notices
potentially frequent purchases, sales, or
deposits of additional protection, which
may reduce the operational cost of the
protected option strategy. As a result,
the Exchange believes the proposed rule
change may make this strategy more
beneficial for customers and thus
remove impediments to and perfect the
mechanism of a free and open market,
as well as reduce the margin required
for such strategies, which will
potentially free up capital that can be
put back into the market, which
ultimately benefits investors.
The proposed clarifying,
nonsubstantive changes provide for
more consistent language in similar rule
provisions, which will ultimately
benefit investors.
lotter on DSK11XQN23PROD with NOTICES1
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange does not believe that
the proposed rule change will impose
any burden on competition that is not
necessary or appropriate in furtherance
of the purposes of the Act. The
proposed rule change is not intended as
a competitive filing, but rather to
modify margin requirements for a
certain option strategy to be more
reasonable and practical. The Exchange
does not believe that the proposed rule
change will impose any burden on
intramarket competition that is not
necessary or appropriate in furtherance
of the purposes of the Act, as it will
apply the same margin treatment to all
TPHs. The Exchange does not believe
that the proposed rule change will
impose any burden on intermarket
competition, as several other options
exchanges incorporate by reference the
Exchange’s margin rules into their rules
(and thus apply them to their members),
which incorporation by reference would
apply to the proposed rule change if
approved by the Commission.
Additionally, as discussed above, the
proposed rule change may reduce the
operational burden of protected option
strategies, as well as reduce the margin
required for such strategies, which may
make the strategies more beneficial for
customers.
C. Self-Regulatory Organization’s
Statement on Comments on the
Proposed Rule Change Received From
Members, Participants, or Others
The Exchange neither solicited nor
received comments on the proposed
rule change.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of
publication of this notice in the Federal
VerDate Sep<11>2014
19:14 Dec 01, 2022
Jkt 259001
Register or within such longer period
up to 90 days (i) as the Commission may
designate if it finds such longer period
to be appropriate and publishes its
reasons for so finding or (ii) as to which
the Exchange consents, the Commission
will:
A. by order approve or disapprove
such proposed rule change, or
B. institute proceedings to determine
whether the proposed rule change
should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an email to rule-comments@
sec.gov. Please include File Number SR–
CBOE–2022–058 on the subject line.
Paper Comments
• Send paper comments in triplicate
to Secretary, Securities and Exchange
Commission, 100 F Street NE,
Washington, DC 20549–1090.
All submissions should refer to File
Number SR–CBOE–2022–058. This file
number should be included on the
subject line if email 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 website (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for website viewing and
printing in the Commission’s Public
Reference Room, 100 F Street NE,
Washington, DC 20549 on official
business days between the hours of
10:00 a.m. and 3:00 p.m. Copies of the
filing also will be available for
inspection and copying at the principal
office of the Exchange. All comments
received will be posted without change;
the Commission does not edit personal
identifying information from
submissions. You should submit only
PO 00000
Frm 00082
Fmt 4703
Sfmt 4703
information that you wish to make
available publicly. All submissions
should refer to File Number SR–CBOE–
2022–058 and should be submitted on
or before December 23, 2022.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.20
Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2022–26234 Filed 12–1–22; 8:45 am]
BILLING CODE 8011–01–P
SMALL BUSINESS ADMINISTRATION
[Disaster Declaration #17649 and #17650;
Puerto Rico Disaster Number PR–00043]
Presidential Declaration Amendment of
a Major Disaster for Public Assistance
Only for the Commonwealth of Puerto
Rico
U.S. Small Business
Administration.
AGENCY:
ACTION:
Amendment 6.
This is an amendment of the
Presidential declaration of a major
disaster for Public Assistance Only for
the Commonwealth of Puerto Rico
(FEMA–4671–DR), dated 09/29/2022.
Incident: Hurricane Fiona.
Incident Period: 09/17/2022 through
09/21/2022.
DATES: Issued on 11/28/2022.
Physical Loan Application Deadline
Date: 11/28/2022.
Economic Injury (EIDL) Loan
Application Deadline Date: 06/29/2023.
ADDRESSES: Submit completed loan
applications to: U.S. Small Business
Administration, Processing and
Disbursement Center, 14925 Kingsport
Road, Fort Worth, TX 76155.
FOR FURTHER INFORMATION CONTACT: A.
Escobar, Office of Disaster Assistance,
U.S. Small Business Administration,
409 3rd Street SW, Suite 6050,
Washington, DC 20416, (202) 205–6734.
SUPPLEMENTARY INFORMATION: The notice
of the President’s major disaster
declaration for Private Non-Profit
organizations in the Commonwealth of
Puerto Rico, dated 09/29/2022, is hereby
amended to include the following areas
as adversely affected by the disaster.
Primary Municipalities: Culebra, Loiza,
Vieques
SUMMARY:
All other information in the original
declaration remains unchanged.
20 17
E:\FR\FM\02DEN1.SGM
CFR 200.30–3(a)(12).
02DEN1
]]>Agencies
[Federal Register Volume 87, Number 231 (Friday, December 2, 2022)]
[Notices]
[Pages 74199-74204]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-26234]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-96395; File No. SR-CBOE-2022-058]
Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of
Filing of a Proposed Rule Change To Amend Rule 10.3 Regarding Margin
Requirements
November 28, 2022.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given
that on November 14, 2022, Cboe Exchange, Inc. (the ``Exchange'' or
``Cboe Options'') filed with the Securities and Exchange Commission
(the ``Commission'') the
[[Page 74200]]
proposed rule change as described in Items I, II, and III below, which
Items have been prepared by the Exchange. The Commission is publishing
this notice to solicit comments on the proposed rule change from
interested persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe Options'') proposes
to amend Rule 10.3 regarding margin requirements. The text of the
proposed rule change is provided below.
(additions are italicized; deletions are [bracketed])
* * * * *
Rules of Cboe Exchange, Inc.
* * * * *
Rule 10.3 Margin Requirements
(a)-(b) No change.
(c) Customer Margin Account--Exception. The foregoing
requirements are subject to the following exceptions. Nothing in
this paragraph (c) shall prevent a broker-dealer from requiring
margin from any account in excess of the amounts specified in these
provisions.
(1)-(4) No change.
(5) Initial and Maintenance Margin Requirements on Short
Options, Stock Index Warrants, Currency Index Warrants and Currency
Warrants.
(A)-(B) No change.
(C) Related Securities Positions--Listed or OTC Options. Unless
otherwise specified, margin must be deposited and maintained in the
following amounts for each of the following types of positions.
(i)-(ii) No change.
(iii) Covered Calls/Covered Puts. [(a)] No margin is required
for a call (put) option contract or warrant carried in a short
position where there is carried in the same account a long (short)
position in equivalent units of the underlying security.
[(b) No margin is required for a call (put) index option
contract or warrant carried in a short position where there is
carried in the same account a long (short) position in an (1)
underlying stock basket, (2) index mutual fund, (3) IPR, or (4) IPS,
that is based on the same index underlying the index option or
warrant and having a market value at least equal to the aggregate
current index value.
(c)] In order for th[e]is exception[s in subparagraphs (a) and
(b) above] to apply, in computing margin on positions in the
underlying security[, underlying stock basket, index mutual fund,
IPR or IPS, as applicable], ([1]a) in the case of a call, the
current market value to be used shall not be greater than the
exercise price, and ([2]b) in the case of a put, margin shall be the
amount required by subparagraph (b)(2) of this Rule, plus the
amount, if any, by which the exercise price exceeds the current
market value.
(iv) Exceptions. The following paragraphs set forth the minimum
amount of margin which must be maintained in margin accounts of
customers having positions in components underlying options, stock
index warrants, currency index warrants or currency warrant when
such components are held in conjunction with certain positions in
the overlying option or warrant. In respect of an option or warrant
on a market index, an underlying stock basket is an eligible
underlying component. The option or warrant must be listed or
guaranteed by the carrying broker dealer. In the case of a call
option or warrant carried in a short position, a related long
position in the underlying component shall be valued at no more than
the call option/warrant exercise price for margin equity purposes.
(a) Long Option Offset. When a component underlying an option or
warrant is carried long (short) in [an]the same account [in which
there is also carried]as a long put (call) option or warrant
specifying equivalent units of the underlying component, the minimum
amount of margin which must be maintained on the underlying
component is 10% of the option/warrant exercise price plus the out-
of-the-money amount not to exceed the minimum maintenance required
pursuant to paragraph (b) of this Rule.
(b) Conversion. When a call option 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 in the same account
a long put option or warrant specifying equivalent units of the same
underlying component and having the same exercise price and
expiration date as the short call option or warrant, the minimum
amount of margin which must be maintained for the underlying
component shall be 10% of the exercise price.
(c) Reverse Conversion. When a put option or warrant carried in
a short position is covered by a short position in equivalent units
of the underlying component and there is [also] carried in the same
account a long call option or warrant specifying equivalent units of
the same underlying component and having the same exercise price and
expiration date as the short put option or warrant, the minimum
amount of margin which must be maintained for the underlying
component shall be 10% of the exercise price plus the amount by
which the exercise price of the put exceeds the current market value
of the underlying, if any.
(d) Collar. When a call option 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 in the same account
a long put option or warrant specifying equivalent units of the same
underlying component and having a lower exercise price than, and
same expiration date as, the short call option/warrant, the minimum
amount of margin which must be maintained for the underlying
component shall be the lesser of 10% of the exercise price of the
put plus the put out-of- the-money amount or 25% of the call
exercise price.
(e) Protected Option. When an index call (put) option contract
or warrant is carried in a short position (the ``protected option or
warrant position'') and there is carried in the same account a long
(short) position in an underlying stock basket, non-leveraged index
mutual fund or non-leveraged exchange-traded fund (each, the
``protection'') that is based on the same index underlying the index
option or warrant, the protected option or warrant position is not
subject to the requirement set forth in subparagraph (c)(5)(A) above
if the following conditions are met:
(1) when the protected option or warrant position is created,
the absolute value of the protection is not less than 100% of the
aggregate current underlying index value associated with the
protected option or warrant position determined at either (A) the
time the order that created the protected option or warrant position
was entered or executed; or (B) the close of business on the trading
day the protected option or warrant position was created;
(2) the absolute value of the protection is at no time less than
95% of the aggregate current underlying index value associated with
the protected option or warrant position; and
(3) margin is maintained in an amount equal to the greater of:
(A) the amount, if any, by which the aggregate current underlying
index value is above (below) the aggregate exercise price of the
protected call (put) option or warrant position; or (B) the amount,
if any, by which the absolute value of the protection is below 100%
of the aggregate current underlying index value associated with the
protected option or warrant.
* * * * *
The text of the proposed rule change is also available on the
Exchange's website (https://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the
Secretary, and at the Commission's Public Reference Room.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
The proposed rule change amends Rule 10.3 regarding margin
requirements. Specifically, the Exchange proposes to amend Rule
10.3(c)(5)(C)(iii)(b) to update the provisions that provide margin
relief for
[[Page 74201]]
a cash-settled index option written against a holding in an exchange-
traded fund that tracks the same index as the index underlying the
index option. Rule 10.3 sets forth margin requirements, and certain
exceptions to those requirements, applicable to security positions of
Trading Permit Holders' (``TPHs'') customers. Rule 10.3(c)(5)(C)(iii)
currently requires no margin for covered calls and puts. Specifically,
that rule provides the following:
No margin is required for a call (put) option contract or
warrant carried in a short position where there is carried in the same
account a long (short) position in equivalent units of the underlying
security.\3\
---------------------------------------------------------------------------
\3\ In computing margin on such a position in the underlying
security, (a) in the case of a call, the current market value to be
used shall not be greater than the exercise price and (b) in the
case of a put, margin will be the amount required by Rule
10.3(b)(2), plus the amount, if any, by which the exercise price of
the put exceeds the current market value of the underlying.
---------------------------------------------------------------------------
No margin is required for a call (put) index option
contract or warrant carried in a short position where there is carried
in the same account a long (short) position in an (1) underlying stock
basket,\4\ (2) index mutual fund, (3) index portfolio receipt
(``IPR''),\5\ or (4) index portfolio share (``IPS''),\6\ that is based
on the same index underlying the index option or warrant and having a
market value at least equal to the aggregate current index value.
---------------------------------------------------------------------------
\4\ An ``underlying stock basket'' means a group of securities
that includes each of the component securities of the applicable
index and which meets the following conditions: (a) the quantity of
each stock in the basket is proportional to its representation in
the index, (b) the total market value of the basket is equal to the
underlying index value of the index options or warrants to be
covered, (c) the securities in the basket cannot be used to cover
more than the number of index options or warrants represented by
that value and (d) the securities in the basket shall be unavailable
to support any other option or warrant transaction in the account.
See Rule 10.3(a)(7).
\5\ IPRs are securities that (a) represent an interest in a unit
investment trust (``UIT'') which holds the securities that comprise
an index on which a series of IPRs is based; (b) are issued by the
UIT in a specified aggregate minimum number in return for a
``Portfolio Deposit'' consisting of specified numbers of shares of
stock plus a cash amount; (c) when aggregated in the same specified
minimum number, may be redeemed from the UIT, which will pay to the
redeeming holder the stock and cash then comprising the Portfolio
Deposit; and (d) pay holders a periodic cash payment corresponding
to the regular cash dividends or distributions declared and paid
with respect to the component securities of the stock index on which
the IPRs are based, less certain expenses and other charges as set
forth in the UIT prospectus. IPRs are ``UIT interests'' within the
meaning of the Rules. See Rule 1.1. A UIT Interest is any share,
unit, or other interest in or relating to a unit investment trust,
including any component resulting from the subdivision or separation
of such an interest.
\6\ IPSs are securities that (a) are issued by an open-end
management investment company based on a portfolio of stocks or
fixed income securities designed to provide investment results that
correspond generally to the price and yield performance of a
specified foreign or domestic stock index or fixed income securities
index; (b) are issued by such an open-end management investment
company in a specified aggregate minimum number in return for a
deposit of specified number of shares of stock and/or a cash amount,
or a specified portfolio of fixed income securities and/or a cash
amount, with a value equal to the next determined net asset value;
and (c) when aggregated in the same specified minimum number, may be
redeemed at a holder's request by such open-end management
investment company, which will pay to the redeeming holder stock
and/or cash, or a specified portfolio of fixed income securities
and/or cash with a value equal to the next determined net asset
value. See Rule 1.1.
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In order for the exceptions in the previous bullets to
apply, in computing margin on positions in the underlying security,
underlying stock basket, index mutual fund, IPR or IPS, as
applicable,\7\ (1) in the case of a call, the current market value to
be used shall not be greater than the exercise price, and (2) in the
case of a put, margin shall be the amount required by subparagraph
(b)(2) of Rule 10.3, plus the amount, if any, by which the exercise
price exceeds the current market value.
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\7\ IPRs and IPSs are commonly referred to as ETFs.
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Rule 10.3(c)(5) generally requires TPHs to obtain from a customer,
and maintain, a margin deposit for short cash-settled index options in
an amount equal to 100% of the current market value of the option plus
15% (if overlying a broad-based index) or 20% (if overlying a narrow-
based index) of the amount equal to the index value multiplied by the
index multiplier minus the amount, if any, by which the option is out-
of-the-money.\8\ The minimum margin required for such an option is 100%
of the option current market value plus 10% of the index value
multiplied by the index multiplier for a call or 10% of the exercise
price multiplied by the index multiplier for a put.
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\8\ The out-of-the-money amount for a call is any excess of the
aggregate exercise price of the option or warrant over the product
of the current (spot or cash) index value and the applicable
multiplier. The out-of-the-money amount for a put is any excess of
the product of the current (spot or cash) index value and the
applicable multiplier over the aggregate exercise price of the
option or warrant.
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Pursuant to current Rule 10.3(c)(5)(C)(iii)(b) and (c), however, a
TPH requires no margin deposit for a short cash-settled index call
option if the TPH is holding in the same account a long position in an
ETF that tracks the same index underlying the index option \9\ if the
current market value of the ETF for margin purposes (1) is at least
equal to the aggregate current index value and (2) is not greater than
the exercise price. If an account is short a cash-settled index put
option and is holding in the same account a short position in the ETF,
a TPH needs to require a margin deposit for the amount required by Rule
10.3(b)(2) \10\ plus the amount, if any, by which the exercise price of
the option exceeds the market value of the ETF if the market value of
the ETF is at least equal to the aggregate current index value.
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\9\ This is the same margin treatment that applies to an option
on an equity security written against the underlying security. See
current Rule 10.3(c)(5)(C)(iii)(a).
\10\ Rule 10.3(b)(2) provides the minimum amount of margin that
must be maintained in customer margin accounts having positions in
securities is: (1) with respect to long positions, 25% of the
current market value of all long in the account; plus (2) with
respect to short positions, (a) $2.50 per share or 100% of the
current market value, whichever is greater, of each security short
in the account that has a current market value of less than $5.00
per share; plus (b) $5.00 per share or 30% of the current market
value, whichever is greater, of each security short in the account
that has a current market value of $5.00 per share or more.
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The Exchange proposes to amend this exception to margin
requirements applicable to short option positions or warrants on
indexes that are offset by positions in an underlying stock basket,
non-leveraged index mutual fund, or non-leveraged exchange-traded fund
(each, the ``protection'') that is based on the same index option, as
well as move it within Rule 10.3 to Rule 10.3(c)(5)(C)(iv).\11\
Specifically, the proposed rule change adopts the following as Rule
10.3(c)(5)(C)(iv)(e): \12\
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\11\ Proposed paragraph (e) limits the margin relief to index
options written against an underlying stock basket, non-leveraged
index mutual fund or non-leveraged exchange-traded fund (compared to
underlying stock basket, index mutual fund, IPR, or IPS in current
subparagraph (iii)(b)). The Exchange proposes to add the non-
leveraged limitation to clarify that this exception is not intended
to and does not apply to leveraged instruments. Additionally, the
Exchange excludes IPRs and IPSs from being eligible for the margin
relief in paragraph (e), as the Exchange understands that the use
and availability of these products has diminished and has not
observed the writing of index options against them.
\12\ The proposed rule change identifies the strategy described
in proposed subparagraph (e) as a ``protected option,'' which is a
strategy of writing an index option against a holding in an ETF
based on the same index as the index option, to differentiate it
from a ``covered call,'' which is a strategy of writing an option
against a position in an underlying security (the margin treatment
for which is described in current subparagraph (iii)(a)).
(e) When an index call (put) option contract or warrant is
carried in a short position (the ``protected option or warrant
position'') and there is carried in the same account a long (short)
position in an underlying stock basket, non-leveraged index mutual
fund or non-leveraged exchange-traded fund (each, the
``protection'') that is based on the same index underlying the index
option or warrant, the protected option or warrant position is not
subject to the requirement set forth in subparagraph
[[Page 74202]]
(c)(5)(A) above if the following conditions are met:
(1) when the protected option or warrant position is created,
the absolute value of the protection is not less than 100% of the
aggregate current underlying index value associated with the
protected option or warrant position determined at either (A) the
time the order that created the protected option or warrant position
was entered or executed; or (B) the close of business on the trading
day the protected option or warrant position was created;
(2) the absolute value of the protection is at no time less than
95% of the aggregate current underlying index value associated with
the protected option or warrant position; and
(3) margin is maintained in an amount equal to the greater of:
(A) the amount, if any, by which the aggregate current underlying
index value associated with the protected option or warrant position
is above (below) the aggregate exercise price of the protected call
(put) option or warrant position; or (B) the amount, if any, by
which the absolute value of the protection is below the aggregate
current underlying index value associated with the protected option
or warrant position.
The proposed rule change provides that the margin requirement for
an uncovered, short index option or warrant does not apply to a
protected option or warrant position if certain conditions are met. The
first proposed condition to qualify for the exception is that the TPH
must carry or establish in the same account as the protected option or
warrant position protection with an absolute value of not less than
100% of the aggregate underlying index value at either the time the
order that created the protected option or warrant position was entered
or executed or the close of business on the trading day the protected
option or warrant position was created. This proposed first condition
provides clearing brokers with flexibility regarding the point in time
at which to value the protection. The aggregate underlying index value
used would be that which existed at the same point in time the clearing
broker selects to value the protection. This first condition
corresponds to the concept of covered writing (such as writing a
covered call). When writing a covered call, a market participant must
have in the same account as the short call position a fully offsetting
position in the underlying stock (in other words, 100% of the short
position's aggregate underlying value, which is equal to the price of
the stock times 100 (the number of shares underlying one option)).
The second proposed condition to qualify for the exception is that
the absolute value of the protection must at no time be less than 95%
of the aggregate underlying index value associated with the protected
option or warrant position. Like the first proposed condition, this
second proposed condition is intended to correspond to covered writing
by requiring a market participant to maintain the protection in an
amount close to the aggregate underlying index value associated with
the protected option or warrant position. Because the value of the
protection typically will not track exactly the aggregate underlying
index value (i.e., tracking error), the 95% threshold will require the
absolute value of the protection to remain close to the aggregate
underlying index value while effectively imposing a cap of 5% on how
much the two values may diverge (i.e., the value of the protection may
not be more than 5% less than the value of the aggregate underlying
index value). If the absolute value of the protection falls below 95%
of the aggregate underlying index value associated with the protected
option or warrant position, the protected option or warrant position
would be deemed uncovered and thus no longer eligible for relief from
the uncovered, short index option margin requirement. When that occurs,
a clearing broker must either collect the required margin amount for
the short index option or warrant position, require that the value of
the protection be increased to the 100% of the aggregate underlying
index value, or liquidate the short index option or warrant position.
The third proposed condition to qualify for the exception is to
maintain margin in an amount equal to the greater of: (a) the amount,
if any, by which the aggregate underlying index value associated with
the protected option or warrant position is above (below) the aggregate
exercise price of the protected call (put) option or warrant position;
or (b) the amount, if any, by which the absolute value of the
protection is below the aggregate underlying index value associated
with the protected option or warrant (which would be subject to the 95%
threshold imposed by the second proposed condition, as described
above).
The proposed margin requirement to cover any difference by which
the underlying index value is above (below) the exercise price of a
call (put), in aggregate, would capture any amount by which a protected
option or warrant position is in-the-money (i.e., the amount the
aggregate underlying index value exceeds the aggregate exercise price
for a short call). Pursuant to this proposed requirement, margin
equivalent to the in-the-money amount of the protected option or
warrant position would need to be held in the account with that
position, which would then be available to offset any debit to that
account in the event of an exercise of the protected option or warrant.
This corresponds to current Cboe Rule 10.3(c)(5)(C)(iii)(c), which
requires the value of the protection or underlying stock to be capped
at the exercise price of a covered call for no additional margin to be
required for that call position. Both approaches prevent any in-the-
money amount from contributing equity to the account and being used to
support other positions.
The proposed alternative margin requirement to cover any difference
by which the absolute value of the protection is below the aggregate
underlying index value associated with the protected option or warrant
would compensate for any tracking error. Pursuant to this proposed
requirement, margin equivalent to the value of the divergence between
the absolute value of the protection and the aggregate underlying index
value would need to be maintained once a protected option or warrant
position is created. However, this requirement would be rendered moot
if the absolute value of the protection fell below 95% of the aggregate
underlying index value associated with the protected option or warrant
position, because the position at that point would be considered
uncovered. To the extent equity is not available in the margin account
to meet this requirement, a TPH can require its customer to deposit
margin into the account. The Exchange believes this is more practical
than requiring the value of the protection to be maintained at 100% of
the aggregate underlying index value in actual shares (or applicable
units) of the protection, as this would require continuous small
transactions in the protection instrument to offset tracking
differences (which are generally no larger than 2%).
Because there may be instances where margin requirements for the
in-the-money amount and the tracking error may be duplicative,\13\ the
Exchange proposes to require only the greater amount of the two to
avoid requiring an unnecessarily high amount of margin.
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\13\ Two out of a total of six possible orderings of underlying
index value, exercise price and protection value would result in
overlapping margin requirements as proposed. For all others, one of
the proposed margin requirement alternatives would be zero.
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Currently, if the absolute value of the protection is less than the
aggregate underlying index value, the protection position must be
supplemented to address the deficiency. As proposed, such deficiency
would require margin (to the extent such deficiency is not
[[Page 74203]]
greater than 5%) in the form of available equity in the margin account
or a deposit of margin in any form (e.g., cash or marginable
securities) rather than the purchase, sale, or deposit of additional
protection to address a deficiency (regardless of the amount of the
deficiency).\14\ As a result, the proposed rule change will reduce the
need for small and potentially frequent purchases, sales, or deposits
of additional protection, which may reduce the operational cost of the
protected option strategy for customers. While the structure of
protection, particularly ETFs, and market forces may cause the
protection's value to differ from the index value, the Exchange has
observed that these values are generally highly correlated and thus do
not deviate significantly. Therefore, the Exchange believes the
proposed margin requirement for protected options is an effective
safeguard against the risk of a short option position.
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\14\ Pursuant to the current Rules, if the protection market
value is not at least equal to the aggregate index value, and
additional shares are not purchased or deposited, then the required
margin is equal to the amount of the option current market value
plus 15% (if a broad-based index) or 20% (if a narrow-based index)
of the aggregate index value minus any out-of-the-money amount,
subject to a minimum requirement.
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Additionally, the proposed rule change eliminates the requirement
to mark the price of a long ETF with an index call option written
against it at the lower of the ETF's market value or the index option
strike price. With covered call options, this requirement is intended
to cap favorable moves in the price of the underlying security at the
strike price because moves above the strike price will not be realized.
Currently, the Exchange applies this same requirement (as set forth in
Rule 10.3(c)(5)(C)(iii)(c)) to protected options written against ETF
holdings to maintain equivalency with the treatment of covered options.
As an alternative, the proposed rule substitutes a margin requirement
in this situation, which would require margin to be collected in an
amount equal to, for example, the amount by which the aggregate
underlying index value exceeds the aggregate exercise price in the case
of a protected index call option or warrant position.
Further to the above, the proposed rule change deletes Rule
10.3(c)(5)(C)(iii)(b), as well as the cross-reference to such paragraph
and the references to underlying stock basket, index mutual fund, IPR
or IPS, as applicable,\15\ in current subparagraph (c), as those terms
relate specifically to current subparagraph (b). Because this would
leave only one section in Rule 10.3(c)(5)(C)(iii), the proposed rule
change deletes subparagraph lettering and combines current subparagraph
(iii)(a) and current subparagraph (iii)(c) into a single provision as
subparagraph (iii) and makes corresponding conforming changes.
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\15\ These terms are related only to current subparagraph (b).
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The proposed rule change also makes clarifying, nonsubstantive
changes in each subparagraph of Rule 10.3(c)(5)(C)(iv) to conform
language in those subparagraphs to language used throughout Rule 10.3.
Specifically, the proposed rule change amends the provision of each
subparagraph to state that the minimum amount of required margin in the
circumstances described in each subparagraph applies when the
applicable long position is carried ``in the same account as'' the
applicable short position, rather than ``also carried.'' This language
is consistent with the language in, for example, current Rule
10.3(c)(5)(C)(iii), as margin requirements are determined generally
based on positions held in the same account.
2. Statutory Basis
The Exchange believes the proposed rule change is consistent with
the Securities Exchange Act of 1934 (the ``Act'') and the rules and
regulations thereunder applicable to the Exchange and, in particular,
the requirements of Section 6(b) of the Act.\16\ Specifically, the
Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \17\ requirements that the rules of an exchange be
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade, to foster cooperation
and coordination with persons engaged in regulating, clearing,
settling, processing information with respect to, and facilitating
transactions in securities, to remove impediments to and perfect the
mechanism of a free and open market and a national market system, and,
in general, to protect investors and the public interest. Additionally,
the Exchange believes the proposed rule change is consistent with the
Section 6(b)(5) \18\ requirement that the rules of an exchange not be
designed to permit unfair discrimination between customers, issuers,
brokers, or dealers. The Exchange further believes the proposed rule
change furthers the objectives of Section 6(c)(3) of the Act,\19\ which
authorizes the Exchange to, among other things, prescribe standards of
financial responsibility or operational capability and standards of
training, experience and competence for its Trading Permit Holders and
person associated with Trading Permit Holders.
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\16\ 15 U.S.C. 78f(b).
\17\ 15 U.S.C. 78f(b)(5).
\18\ Id.
\19\ 15 U.S.C. 78f(c)(3).
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In particular, the proposed rule change amends a specific margin
treatment related to short index options written against ETFs in the
same manner. Given the difference described above between short stock
options written against the underlying stock and short index options
written against ETFs, the Exchange believes it is reasonable to apply
different margin treatments to these different strategies. While the
economic outcomes of covered options and protected options are similar,
as described above, the Exchange believes it promotes just and
equitable principles of trade to apply margin slightly differently to
protected options than covered options. While the proposed rule change
may result in lower margin requirements for protected option
strategies, the Exchange believes the proposed floor on the value of
protection and the margin amounts are more reasonable than the current
requirements, as they are more tailored to these strategies and reflect
the potential deficiencies between the value of the protection and the
value of the index. As a result, the Exchange believes the proposed
margin required will still be sufficient for protected option
strategies. Given the high correlation between these values, the
Exchange believes it is appropriate to require margin in an amount
necessary to only cover this deficiency, as ultimately that is the risk
against which the margin requirement is protecting. Furthermore, any
amount by which the aggregate underlying index value is above (below)
the aggregate exercise price of the option in the case of a call (put)
(i.e., the-in-the-money amount) would also be required as margin under
the proposal. This in-the-money amount margin requirement prevents
protection value in excess of the exercise price of the option (in the
case of a short index call) from contributing to margin account equity
and replaces the current requirement that caps the value of the
protection at the aggregate exercise price of the option to qualify for
a margin exception. The proposed rule change requires only the greater
of the two margin requirements (the in-the-money amount or the
protection deficiency amount) to apply to avoid requiring a customer to
maintain unnecessarily high margin.
As noted above, the Exchange believes the proposed rule change may
reduce the need for small and
[[Page 74204]]
potentially frequent purchases, sales, or deposits of additional
protection, which may reduce the operational cost of the protected
option strategy. As a result, the Exchange believes the proposed rule
change may make this strategy more beneficial for customers and thus
remove impediments to and perfect the mechanism of a free and open
market, as well as reduce the margin required for such strategies,
which will potentially free up capital that can be put back into the
market, which ultimately benefits investors.
The proposed clarifying, nonsubstantive changes provide for more
consistent language in similar rule provisions, which will ultimately
benefit investors.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act. The proposed rule change is
not intended as a competitive filing, but rather to modify margin
requirements for a certain option strategy to be more reasonable and
practical. The Exchange does not believe that the proposed rule change
will impose any burden on intramarket competition that is not necessary
or appropriate in furtherance of the purposes of the Act, as it will
apply the same margin treatment to all TPHs. The Exchange does not
believe that the proposed rule change will impose any burden on
intermarket competition, as several other options exchanges incorporate
by reference the Exchange's margin rules into their rules (and thus
apply them to their members), which incorporation by reference would
apply to the proposed rule change if approved by the Commission.
Additionally, as discussed above, the proposed rule change may reduce
the operational burden of protected option strategies, as well as
reduce the margin required for such strategies, which may make the
strategies more beneficial for customers.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
The Exchange neither solicited nor received comments on the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 45 days of the date of publication of this notice in the
Federal Register or within such longer period up to 90 days (i) as the
Commission may designate if it finds such longer period to be
appropriate and publishes its reasons for so finding or (ii) as to
which the Exchange consents, the Commission will:
A. by order approve or disapprove such proposed rule change, or
B. institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's internet comment form (https://www.sec.gov/rules/sro.shtml); or
Send an email to [email protected]. Please include
File Number SR-CBOE-2022-058 on the subject line.
Paper Comments
Send paper comments in triplicate to Secretary, Securities
and Exchange Commission, 100 F Street NE, Washington, DC 20549-1090.
All submissions should refer to File Number SR-CBOE-2022-058. This file
number should be included on the subject line if email 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 website (https://www.sec.gov/rules/sro.shtml).
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for website viewing and printing in
the Commission's Public Reference Room, 100 F Street NE, Washington, DC
20549 on official business days between the hours of 10:00 a.m. and
3:00 p.m. Copies of the filing also will be available for inspection
and copying at the principal office of the Exchange. All comments
received will be posted without change; the Commission does not edit
personal identifying information from submissions. You should submit
only information that you wish to make available publicly. All
submissions should refer to File Number SR-CBOE-2022-058 and should be
submitted on or before December 23, 2022.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\20\
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\20\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2022-26234 Filed 12-1-22; 8:45 am]
BILLING CODE 8011-01-P
