[Federal Register Volume 67, Number 190 (Tuesday, October 1, 2002)]
[Notices]
[Pages 61707-61715]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-24906]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-46555; File No. SR-OC-2002-01]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by OneChicago, LLC Relating to Customer Margin Requirements for
Security Futures
September 26, 2002.
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 August 30, 2002, OneChicago, LLC, (``OneChicago'') filed with the
Securities and Exchange Commission (``Commission'') the proposed rule
change as described in Items I, II, and III below, which Items have
been prepared by OneChicago. On September 25, 2002, OneChicago
submitted Amendment No. 1 to the proposed rule change.\3\ On September
25, 2002, OneChicago submitted Amendment No. 2 to the proposed rule
change.\4\ The Commission is publishing this notice to solicit comments
on the proposed rule change, as amended, from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See letter from Kieran P. Hennigan, Sullivan & Cromwell, to
Assistant Director for Security Futures Products, Division of Market
Regulation (``Division''), Commission, dated September 24, 2002,
(``Amendment No. 1''). In Amendment No. 1, OneChicago replaced the
Form 19b-4 originally filed on August 30, 2002 in its entirety. The
changes made by Amendment No. 1 have been incorporated into this
notice.
\4\ See letter from Frank Ochsenfeld, Sullivan & Cromwell,
attention to T.R. Lazo, Senior Special Counsel, Division,
Commission, dated September 24, 2002, (``Amendment No. 2''). In
Amendment No. 2, OneChicago made a technical correction to the rule
text. The changes made by Amendment No. 2 have been incorporated
into this notice.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
OneChicago is proposing to adopt new Rule 515, including Schedule A
thereto (the ``Proposed Rule''), to (i) establish general requirements
and procedures relating to customer margining by security futures
intermediaries (the ``General Margin Rules''), (ii) set initial or
maintenance margin levels for offsetting positions involving security
futures and related positions at levels lower than the levels that
would be required if those positions were margined separately (the
``Margin Offset Rule'') and (iii) exclude proprietary trades of
qualifying security futures dealers from the margin requirements set
forth in the Proposed
[[Page 61708]]
Rule and the related regulatory requirements (the ``Market Maker
Exclusion'').\5\ The General Margin Rules, which are contained in
paragraphs (a) through (l) of the Proposed Rule, are detailed below.
The Margin Offset Rule consists of paragraph (m) of the Proposed Rule
and the table of offsets attached thereto as Schedule A, which
describes in detail the margin offsets available with respect to
particular combinations of security futures and related positions.
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\5\ Terms used in this filing that are defined in the Act, or
the Rules thereunder, have the meanings assigned to them in the Act
or Rules thereunder.
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Below is the text of the proposed rule change. Proposed new
language is italicized.
* * * * *
Customer Margin Requirements
515. General Requirements; Offsetting Positions; Exclusion for Market
Makers
(a) Scope of Rule. This Rule 515 shall apply to positions resulting
from transactions in Contracts traded on the Exchange or subject to the
Rules of the Exchange to the extent that such positions are held by
Clearing Members or, if applicable, Exchange Members on behalf of
Customers in futures accounts (as such term is defined in Commission
Regulation Sec. 1.3(vv) and Exchange Act Regulation 15c3-3(a)), with
paragraph (n) of this Rule 515 also applying to such positions held in
securities accounts (as such term is defined in Commission Regulation
Sec. 1.3(ww) and Exchange Act Regulation 15c3-3(a)). As used in this
Rule 515, the term ``Customer'' does not include (i) any exempted
person (as such term is defined in Commission Regulation Sec.
41.43(a)(9) and Exchange Act Regulation 401(a)(9)) and (ii) any Market
Maker (as such term is defined in paragraph (n) below). Nothing in this
Rule 515 shall alter the obligation of each Clearing Member and, if
applicable, Exchange Member to comply with Applicable Law relating to
customer margin for transactions in Single Stock Futures and Stock
Index Futures, including without limitation Commission Regulations
Sec. Sec. 41.42 through 41.49 or Rules 400 through 406 under the
Exchange Act, as applicable (including in each case any successor
regulations or rules).
(b) Margin System. The Standard Portfolio Analysis of Risk
(SPAN[reg]) is the margin system adopted by the Exchange. SPAN[reg]
generated margin requirements shall constitute Exchange margin
requirements. All references to margin in the Rules of the Exchange
shall be to margin computed on the basis of SPAN[reg]. Margin systems
other than SPAN[reg] may be used to meet Exchange margin requirements
if the relevant Clearing Member or, if applicable, Exchange Member can
demonstrate that its margin system will result in margin requirements
that are in all cases equal to or greater than the corresponding
requirements determined on the basis of SPAN[reg].
(c) Margin Rate. The Exchange will set and publish the initial and
maintenance margin rates to be used in determining Exchange margin
requirements; provided that in no case shall the required margin for
any long or short position held by a Clearing Member or, if applicable,
Exchange Member on behalf of a Customer be less than 20% of the current
market value of the relevant Contract (or such other rate from time to
time determined by the Commission and the Securities and Exchange
Commission for purposes of Commission Regulation Sec. 41.45(b)(1) and
Rule 403(b)(1) under the Exchange Act) unless a lower margin level is
available for such position pursuant to paragraph (m) below.
(d) Acceptable Margin Deposits.
(i) Clearing Members and, if applicable, Exchange Members may
accept from their Customers as margin deposits of cash, margin
securities (subject to the limitations set forth in the following
sentence), exempted securities, any other assets permitted under
Regulation T of the Board of Governors of the Federal Reserve System
(as in effect from time to time) to satisfy a margin deficiency in a
securities margin account, and any combination of the foregoing, each
as valued in accordance with Commission Regulation Sec. 41.46(c) and
(e) or Rule 404(c) under the Exchange Act, as applicable. Shares of a
money market mutual fund that meet the requirements of Commission
Regulation Sec. 1.25 may be accepted as a margin deposit from a
Customer for purposes of this Rule 515.
(ii) A Clearing Member or, if applicable, Exchange Member shall not
accept as margin from any Customer securities that have been issued by
such Customer or an Affiliate of such Customer unless such Clearing
Member or Exchange Member files a petition with and receives permission
from the Exchange for such purpose.
(iii) All assets deposited by a Customer to meet margin
requirements must be and remain unencumbered by third party claims
against the depositing Customer.
(iv) Except to the extent prescribed otherwise by the Exchange,
cash margin deposits shall be valued at market value and all other
margin deposits shall be valued at an amount not to exceed that set
forth in Commission Regulations Sec. Sec. 41.42 through 41.49 or Rules
400 through 406 under the Exchange Act, as applicable (including in
each case any successor regulations or rules).
(e) Acceptance of Orders. Clearing Members and, if applicable,
Exchange Members may accept Orders for a particular Customer account
only if sufficient margin is on deposit in such account or is
forthcoming within a reasonable period of time (which shall be no more
than five Business Days, although the relevant Clearing Member or, if
applicable, Exchange Member may deem one hour to be a reasonable period
of time). For a Customer account that has been subject to calls for
margin for an unreasonable period of time, Clearing Members and, if
applicable, Exchange Members may only accept Orders that, when
executed, will reduce the margin requirements resulting from the
existing positions in such account. Clearing Members and, if
applicable, Exchange Members may not accept Orders for a Customer
account that would liquidate to a deficit or that has a debit balance.
(f) Margin Calls. Clearing Members and, if applicable, Exchange
Members must call for margin from a particular Customer:
(i) when the margin equity on deposit in such Customer's account
falls below the applicable maintenance margin requirement; or
(ii) subsequently, when the margin equity on deposit in such
Customer's account, together with any outstanding margin calls, is less
than the applicable maintenance margin requirement.
Any such call must be made within one Business Day after the
occurrence of the event giving rise to such call. Clearing Members and,
if applicable, Exchange Members may call for additional margin at their
discretion.
Clearing Members and, if applicable, Exchange Members shall reduce
any call for margin only to the extent that margin deposits permitted
under paragraph (d) above are received in the relevant account.
Clearing Members and, if applicable, Exchange Members may delete any
call for margin only if (i) margin deposits permitted under paragraph
(d) above equal to or in excess of the deposits called are received in
the relevant account or (ii) inter-day favorable market movements or
the liquidation of positions result in the margin on deposit in the
relevant account being equal to or greater than the applicable initial
margin requirement. In the event of any such reduction or deletion, the
oldest
[[Page 61709]]
outstanding margin call shall be reduced or deleted first.
Clearing Members and, if applicable, Exchange Members, shall
maintain written records of any and all margin calls issued, reduced or
deleted by them.
(g) Disbursements of Excess Margin. Clearing Members and, if
applicable, Exchange Members may release to Customers margin on deposit
in any account only to the extent that such margin is in excess of the
applicable initial margin requirement under this Rule 515 and any other
applicable margin requirement.
(h) Loans to Customers. Clearing Members and, if applicable,
Exchange Members may not extend loans to Customers for margin purposes
unless such loans are secured within the meaning of Commission
Regulation Sec. 1.17(c)(3). The proceeds of any such loan must be
treated in accordance with Commission Regulation Sec. 1.30.
(i) Aggregation of Accounts and Positions. For purposes of
determining margin requirements under this Rule 515, Clearing Members
and, if applicable, Exchange Members shall aggregate accounts under
identical ownership if such accounts fall within the same
classifications of customer segregated, customer secured, special
reserve account for the exclusive benefit of customers and non-
segregated for margin purposes. Clearing Members and, if applicable,
Exchange Members may compute margin requirements for identically owned
concurrent long and short positions on a net basis.
(j) Omnibus Accounts. Clearing Members and, if applicable, Exchange
Members shall collect margin on a gross basis for positions held in
domestic and foreign omnibus accounts. For omnibus accounts, initial
margin requirements shall equal the corresponding maintenance margin
requirements. Clearing Members and, if applicable, Exchange Members
shall obtain and maintain written instructions from domestic and
foreign omnibus accounts for positions that are eligible for offsets
pursuant to paragraph (m) below.
(k) Liquidation of Positions. If a Customer fails to comply with a
margin call required by Commission Regulations Sec. Sec. 41.42 through
41.49 or Rules 400 through 406 under the Exchange Act, as applicable,
within a reasonable period of time (which shall be no more than five
Business Days, although the relevant Clearing Member or, if applicable,
Exchange Member may deem one hour to be a reasonable period of time),
the relevant Clearing Member or, if applicable, Exchange Member may
liquidate positions in such Customer's account to ensure compliance
with the applicable margin requirements.
(l) Failure to Maintain Required Margin. If a Clearing Member or,
if applicable, Exchange Member fails to maintain sufficient margin for
any Customer account in accordance with this Rule 515, the Exchange may
direct such Clearing Member or Exchange Member to immediately liquidate
all or any part of the positions in such account to eliminate the
deficiency.
(m) Offsetting Positions. For purposes of Commission Regulation
Sec. 41.45(b)(2) and Rule 403(b)(2) under the Exchange Act, the
initial and maintenance margin requirements for offsetting positions
involving Single Stock Futures and Stock Index Futures, on the one
hand, and related positions, on the other hand, are set at the levels
specified in Schedule A to this Chapter 5.
(n) Exclusion for Market Makers.
(i) A Person shall be a ``Market Maker'' for purposes of this Rule
515, and shall be excluded from the requirements set forth in
Commission Regulations Sec. Sec. 41.42 through 41.49 or Rules 400
through 406 under the Exchange Act, as applicable, in accordance with
Commission Regulation Sec. 41.42(c)(2)(v) or Rule 400(c)(2)(v) under
the Exchange Act with respect to all trading in security futures (as
such term is defined in Section 1a(31) of the CEA) for its own account,
if such Person is an Exchange Member that is registered with the
Exchange as a dealer (as such term is defined in Section 3(a)(5) of the
Exchange Act) in security futures.
(ii) Each Market Maker shall:
(A) be registered as a floor trader or a floor broker with the
Commission under Section 4f(a)(1) of the CEA or as a dealer with the
Securities and Exchange Commission (or any successor agency or
authority) under Section 15(b) of the Exchange Act;
(B) maintain records sufficient to prove compliance with the
requirements set forth in this paragraph (n) and Commission Regulation
Sec. 41.42(c)(2)(v) or Rule 400(c)(2)(v) under the Exchange Act, as
applicable; and
(C) hold itself out as being willing to buy and sell security
futures for its own account on a regular or continuous basis.
A Market Maker satisfies condition (C) above if: (x) at least
seventy-five percent (75%) of its gross revenue on an annual basis is
derived from business activities or occupations from trading listed
financial derivatives and the instruments underlying those derivatives,
including security futures, stock index futures and options, stock and
index options, stocks, foreign currency futures and options, foreign
currencies, interest rate futures and options, fixed income instruments
and commodity futures and options; or (y) except for unusual
circumstances, at least fifty percent (50%) of its trading activity in
Contracts on the Exchange in any calendar quarter (measured in terms of
contract volume) is in the contracts to which it is assigned under a
market making program adopted by the Exchange pursuant to Rule 514.\6\
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\6\ OneChicago has represented that it will amend this paragraph
prior to approval of the proposed rule change to specify the types
of records security futures intermediaries will be required to
maintain to demonstrate compliance with the Market Maker Exclusion.
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(iii) Any Market Maker that fails to comply with the Rules of the
Exchange, Commission Regulations Sec. Sec. 41.42 through 41.49 or
Rules 400 through 406 under the Exchange Act, as applicable, shall be
subject to disciplinary action in accordance with Chapter 7.
Appropriate sanctions in the case of any such failure shall include,
without limitation, a revocation of such Market Maker's registration as
a dealer in security futures pursuant to clause (i) above.
[[Page 61710]]
Schedule A to Chapter 5.--Margin Levels for Offsetting Positions
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Security underlying the Initial margin Maintenance margin
Description of offset security future requirement requirement
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1. Long security future (or Individual stock or narrow- 20% of the current The lower of: (1) 10%
basket of security futures based security index. market value of the of the aggregate
representing each component of long security future, exercise price \9\ of
a narrow-based securities index plus play for the long the put plus the
\7\) and long put option \8\ on put in full. aggregate put out-of-
the same underlying security the-money \10\ amount,
(or index). if any; or (2) 20% of
the current market
value of the long
security future.
---------------------------------
2. Short security future (or Individual stock or narrow- 20% of the current 20% of the current
basket of security futures based security index. market value of the market value of the
representing each component of short security future, short security future,
a narrow-based securities plus the aggregate put plus the aggregate put
index) and short put option on in-the-money, if any. in-the-money, if
the same underlying security Proceeds from the put any.\11\
(or index). sale may be applied.
---------------------------------
3. Long security future and Individual stock or narrow- The initial margin 5% of the current
short position 20% in the same based security index. required under market value as
security (or securities basket) Regulation T for the defined in Regulation
underlying the security future. short stock or stocks. T of the stock or
stocks underlying the
security future.
---------------------------------
4. Long security future basket Individual stock or narrow- 20% of the current 20% of the current
of long security futures based security index. market value of the market value of the
representing each component of long security future, long security future,
a narrow-based securities plus the aggregate call plus the aggregate
index) and short call option on in-the-money amount, if call in-the-money
the same underlying security any. Proceeds from the amount, if any.
(or index). call sale may be
applied.
---------------------------------
5. Long a basket of narrow-based Narrow-based security index 20% of the current 20% of the current
security futures that together market value of the market value of the
tracks a broad-based index and long basket of narrow- long basket of narrow-
short a broad-based security based security futures, based security
index call option contract on plus the aggregate call futures, plus
the same index. in-the-money amount, if aggregate call in-the-
any. Proceeds from the money amount, if any.
call sale may be
applied.
---------------------------------
6. Short a basket of narrow- Narrow-based security index 20% of the current 20% of the current
based security futures that market value of the market value of the
together tracks a broad-based short basket of narrow- short basket of narrow-
security index and short a based security futures, based security
broad-based security index put plus the aggregate put futures, plus
option contract on the same in-the-money amount, if aggregate put in-the-
index. any. Proceeds from the money amount, if any.
put sale may be applied.
---------------------------------
7. Long a basket of narrow-based Narrow-based security index 20% of the current The lower of: (1) 10%
security futures that together market value of the of the aggregate
tracks a broad-based security long basket of narrow- exercise price of the
index and long a broad-based based security futures, put, plus the
security index put option plus pay the long put aggregate put out-of-
contract on the same index. in full. the-money amount, if
any; or (2) 20% of the
current market value
of the long basket of
security futures.
---------------------------------
8. Long a basket of narrow-based Narrow-based security index 20% of the current The lower of: (1) 10%
security futures that together market value of the of the aggregate
tracks a broad-based security short basket of narrow- exercise price of the
index and long a broad-based based security futures, call, plus the
security index call option plus pay the long call aggregate call out-of-
contract on the same index. in full. the-money amount, if
any; or (2) 20% of the
current market value
of the short basket of
security futures.
---------------------------------
9. Long security future and Individual stock or narrow- The greater of: 5% of The greater of: 5% of
short security future on the based security index. the current market the current market
same underlying security (or value of the long value of the long
index). security future; or (2) security future; or
5% of the current (2) 5% of the current
market value of the market value of the
short security future. short security future.
---------------------------------
10. Long security future, long Individual stock or narrow- 20% of the current 10% of the aggregate
put option and short call based security index. market value of the exercise price, plus
option. The long security long security futures, the aggregate call in-
future, long put and short call plus the aggregate call the-money amount, if
must be on the same underlying in-the-money amount, if any.
security and the put and call any, plus pay for the
must have the same exercise put in full. Proceeds
price. (Conversion). from the put sale may
be applied.
---------------------------------
[[Page 61711]]
11. Long security future, long Individual stock or narrow- 20% of the current The lower of: (1) 10%
put option and short call based security index. market value of the of the aggregate
option. The long security long security futures, exercise price of the
future, long put and short call plus the aggregate call put plus the aggregate
must be on the same underlying in-the-money amount, if call out-of-the money
security and the put exercise any, plus pay for the amount, if any; or (2)
price must be below the call put in full. Proceeds 20% of the aggregate
exercise price. (Collar). from the call sale may exercise price of the
be applied. call, plus the
aggregate call in-the-
money amount, if any.
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12. Short security future and Individual stock or narrow- The initial margin 5% of the current
long position in the same based security index. required under market value, as
security (or securities basket) Regulation T for the defined in Regulation
underlying the security future. long stock or stocks. T, of the long stock
or stocks.
---------------------------------
13. Short security future and Individual stock or narrow- The initial margin 10% of the current
long position in a security based security index. required under market value, as
immediately convertible into Regulation T for the defined in Regulation
the same security underlying long security. T, of the long
the security future, without security.
restriction, including the
payment of money.
---------------------------------
14. Short security future (or Individual stock or narrow- 20% of the current The lower of: (1) 10%
basket of security futures based security index. market value of the of the aggregate
representing each component of short security future, exercise price of the
a narrow-based securities plus pay for the call call, plus the
index) and long call option or in full. aggregate call out-of-
warrant on the same underlying the-money amount, if
security (or index). any; or (2) 20% of the
current market value
of the short security
future.
---------------------------------
15. Short security future, Short Individual stock or narrow- 20% of the current 10% of the aggregate
put option and long call based security index. market value of the exercise price, plus
option. The short security short security futures, the aggregate put in-
future, short put and long call plus the aggregate call the-money amount, if
must be on the same underlying in-the-money amount, if any.
security and the put and call any, plus pay for the
must have the same exercise call in full. Proceeds
price. (Reverse Conversion). from the put sale may
be applied.
---------------------------------
16. Long (short) a basket of Narrow-based security index 5% of the current market 5% of the current
security futures, each based on value for the long market value of the
a narrow-based security index (short) basket of long (short) basket of
that together tracks the broad- security futures. security futures.
based index and short (long) a
broad-based index future.
---------------------------------
17. Long (short) a basket of Individual stock or narrow- The greater of: (1) 5% The greater of: (1) 5%
security futures that together based security index. of the current market of the current market
tracks a broad-based and short value of the long value of the long
(long) a narrow-based index security future(s); or security future(s); or
future. (2) 5% of the current (2) 5% of the current
market value of the market value of the
short security short security
future(s). future(s).
---------------------------------
18. Long (short) a security Individual stock or narrow- The greater of: (1) 3% The greater of: (1) 3%
future and short (long) an based security index. of the current market of the current market
identical security future value of the long value of the long
traded on a different security future(s); or security future(s); or
market.\12\. (2) 3% of the current (2) 3% of the current
market value of the market value of the
short security short security
future(s). future(s).
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* * * * * * *
\7\ Baskets of securities or security futures contracts must replicate the securities that comprise the index,
and in the same proportion.
\8\ Generally, for the purposes of these rules, unless otherwise specified, stock index warrants shall be
treated as if they were index options.
\9\ ``Aggregate exercise price,'' with respect to an option or warrant based on an underlying security, means
the exercise price of an option or warrant contract multiplied by the numbers of units of the underlying
security covered by the option contract or warrant. ``Aggregate exercise price'' with respect to an index
option, means the exercise price multiplied by the index multiplier. See, e.g., Amex Rules 900 and 900C; CBOE
Rule 12.3; and NASD Rule 2522.
\10\ ``Out-of-the-money'' amounts shall be determined as follows:
(1) for stock call options and warrants, and excess of the aggregate exercise price of the option or warrant
over its current market value (as determined in accordance with Regulation T of the Broad of Governors of the
Federal Reserve System);
(2) for stock put options or warrants, any excess of the current market value (as determined in accordance with
Regulation T of the Board of Governors of the Federal Reserve System) of the option or warrant over its
aggregate exercise price;
(3) for stock index call options and warrants, any excess of the aggregate exercise price of the option or
warrant over the product of the current index value and the applicable index multiplier; and
(4) for stock index put options and warrants, any excess of the product of the current index value and the
applicable index multiplier over the aggregate exercise price of the option or warrant. (See, e.g., NYSE Rule
431 (Exchange Act Release No. 42011 (October 14, 1999), 64 FR 57172 (October 22, 1999) (order approving SR-
NYSE-99-03)); Amex Rule 462 (Exchange Act Release No. 43582 (November 17, 2000), 65 FR 71151 (November 29,
2000) (order approving SR-Amex-99-27)); CBOE Rule 12.3 (Exchange Act Release No. 41658 (July 27, 1999), 64 FR
42736 (August 5, 1999) (order approving SR-CBOE-97-67)); or NASD Rule 2520 (Exchange Act Release No. 43581
(November 17, 2000), 65 FR 70854 (November 28, 2000) (order approving SR-NASD-00-15)).
\11\ ``In-the-money'' amounts must be determined as follows:
(1) for stock call options and warrants, any excess of the current market value (as determined in accordance
with Regulation T of the Board of Governors of the Federal Reserve System) of the option or warrant over its
aggregate exercise price;
[[Page 61712]]
(2) for stock put options or warrants, any excess of the aggregate exercise price of the option or warrant over
its current market value (as determined in accordance with Regulation T of the Broad of Governors of the
Federal Reserve System);
(3) for stock index call options and warrants, any excess of the products of the current index value and the
applicable index multiplier over the aggregate exercise price of the option or warrant; and
(4) for stock index put options and warrants, any excess of the aggregate exercise price of the option or
warrant over the product of the current index value and the applicable index multiplier.
\12\ Two security futures will be considered ``identical'' for this purpose if they are issued by the same
clearing agency or cleared and guaranteed by the same derivatives clearing organization, have identical
contract specifications, and would offset each other at the clearing level.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, OneChicago 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. OneChicago 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
(a) General Margin Rules. The General Margin Rules are designed to
complement the customer margin rules set forth in Rules 400 through 406
under the Act (the ``Exchange Act Rules'').\13\ The Exchange Act Rules
contain detailed requirements with respect to the margin to be
collected from customers in connection with security futures and
related positions held by security futures intermediaries on behalf of
such customers. While the General Margin Rules are based on the
standardized margin procedures developed by the U.S. futures exchanges'
Joint Audit Committee and similar rules in effect for other contract
markets \14\ designated under the Commodity Exchange Act, as amended
(the ``Commodity Exchange Act''), those precedents have been modified
in certain respects to conform to the requirements of the Exchange Act
Rules. The following paragraphs contain a brief explanation of each
paragraph of the General Margin Rules:
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\13\ 17 CFR 242.400-242.406.
\14\ Specifically, OneChicago modeled the General Margin Rules
after Rule 930 of the Chicago Mercantile Exchange, Inc.
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Paragraph (a) of the Proposed Rule defines the scope of application
of the Proposed Rule in two important respects. First, it provides that
the Proposed Rule only applies to transactions in contracts traded on
or subject to the rules of OneChicago. To the extent that security
futures intermediaries engage in security futures transactions on or
through other exchanges as well, they will need to comply with the
respective margin requirements established by such other exchanges.
Second, paragraph (a) clarifies that the requirements set forth in the
Proposed Rule generally only apply to security futures intermediaries
that carry security futures products in futures accounts (with the
exception of paragraph (n), which also applies to positions held in
securities accounts). As provided in Rule 402(a) under the Act,\15\
security futures intermediaries that carry security futures in
securities accounts are subject to the Exchange Act Rules, Regulation T
of the Board of Governors of the Federal Reserve System,\16\ and the
margin requirements of the self-regulatory organizations of which they
are a member. In addition, paragraph (a) tracks the exemption for
``exempted persons'' pursuant to Rule 401(a)(9) under the Act.\17\
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\15\ 17 CFR 242.402(a).
\16\ 12 CFR 220 et seq.
\17\ 17 CFR 242.401(a)(9).
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Paragraph (b) of the Proposed Rule adopts the Standard Portfolio
Analysis of Risk (SPAN[reg]) as the margining system for
OneChicago. Developed by the Chicago Mercantile Exchange Inc. in 1988,
SPAN[reg] has become the futures industry standard for
margining. SPAN[reg] evaluates the risk of the futures and
options portfolio in each account and assesses a margin requirement
based on such risk by establishing reasonable movements in futures
prices over a one day period. Security futures intermediaries entering
into transactions on OneChicago can receive risk arrays based on
SPAN[reg] to calculate margins for each of their accounts,
so that they can calculate minimum margin requirements for such
accounts on a daily basis.
Paragraph (c) of the Proposed Rule sets the required margin level
for each long or short position in a security future at 20 percent of
the current market value of such security future, as required by Rule
403(b) under the Act.\18\ The only exception from this general
requirement contemplated by the Proposed Rule is the Margin Offset
Rule, which is described in greater detail under (b) below.
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\18\ 17 CFR 242.403(b).
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Paragraph (d) of the Proposed Rule specifies the types of margin
that a security futures intermediary may accept from a customer.
Consistent with Rule 404(b) under the Act,\19\ acceptable types of
margin are limited to deposits of cash, margin securities (subject to
specified restrictions), exempted securities, any other assets
permitted under Regulation T \20\ of the Board of Governors of the
Federal Reserve System to satisfy a margin deficiency in a securities
margin account, and any combination of the foregoing. Paragraph (d) of
the Proposed Rule further provides that the different types of eligible
margin are to be valued in accordance with the applicable principles
set forth in Rule 404 under the Act.\21\
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\19\ 17 CFR 242.404(b).
\20\ 12 CFR 220 et seq.
\21\ 17 CFR 242.404.
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Paragraph (e) of the Proposed Rule provides that security futures
intermediaries may accept orders for a particular account only if (i)
sufficient margin is on deposit in such account or is forthcoming
within a reasonable time, or (ii) in the event that the conditions set
forth in (i) are not satisfied, such orders reduce the margin
requirements resulting from the existing positions in such account.
This provision is designed to prevent account holders from exacerbating
any already existing margin deficiency by entering into further
transactions.
Paragraph (f) of the Proposed Rule establishes the general
principle that a security futures intermediary must call for initial or
maintenance margin equity whenever the minimum margin requirements
determined in accordance with paragraph (c) of the Proposed Rule
(taking into account any relief available under the Margin Offset Rule)
is not satisfied. Any such margin call must be made within one business
day after the occurrence of the event giving rise to the call.
Paragraph (f) also clarifies that security futures intermediaries may
call for margin in excess of OneChicago's minimum requirements.
Finally, paragraph (f) provides that a margin call may only be reduced
or deleted if and to the extent that (i) qualifying margin deposits are
received or (ii) inter-day
[[Page 61713]]
favorable market movements or the liquidation of positions have offset
the previously existing margin deficiency. In each case, the oldest
margin call outstanding at any time is to be reduced or deleted first.
These provisions address necessary technical aspects of customer
margining and are consistent with similar provisions contained in the
precedents referred to above.
Paragraph (g) of the Proposed Rule limits the ability of customers
to obtain disbursements of excess margin to any amounts in excess of
the applicable initial margin requirement under the Proposed Rule and
any other applicable margin requirement. This limitation is consistent
with Rule 405(a) under the Act.\22\
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\22\ 17 CFR 242.405(a).
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Paragraph (h) of the Proposed Rule prohibits security futures
intermediaries from extending loans to Customers for margin purposes
unless such loans are secured within the meaning of Commission
Regulation 1.17(c)(3).\23\ This prohibition corresponds to similar
restrictions currently in effect on other contract markets.
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\23\ 17 CFR 1.17(c)(3).
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Paragraph (i) of the Proposed Rule provides that accounts under
identical ownership are to be aggregated for purposes of determining
the applicable margining requirements on a net basis if such accounts
fall within the same general classification (customer segregated,
customer secured, special reserve account for the exclusive benefit of
customers and non-segregated). This aggregation approach is consistent
with universal practice in the futures industry and reflects the fact
that several accounts under identical ownership may become subject to
liquidation of positions in the event of a failure to satisfy margin
calls with respect to any one of such accounts.
Paragraph (j) of the Proposed Rule establishes particular rules for
omnibus accounts of security futures intermediaries, namely that (i)
margin for positions held in such accounts is to be collected on a
gross basis, (ii) initial and maintenance margin requirements are
identical and (iii) security futures intermediaries are to obtain and
maintain written instructions from such accounts with respect to
positions which are eligible for offsets pursuant to the Margin Offset
Rule.
Paragraph (k) of the Proposed Rule enables a security futures
intermediary to liquidate positions in the account of any customer that
fails to comply with a required margin call within a reasonable period
of time. This provision complements the requirements set forth in Rule
406(a) and (b) under the Act.\24\
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\24\ 17 CFR 242.406(a) and (b).
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Paragraph (l) of the Proposed Rule authorizes OneChicago to direct
any security futures intermediaries that fail to maintain margin
requirements for any account in accordance with the Proposed Rule, to
immediately liquidate any or all of the positions in such account to
eliminate the resulting deficit. This provision is designed to ensure
compliance by security futures intermediaries with their obligations
under paragraph (k) and is an important function of OneChicago's
oversight over such intermediaries.
The Exchange Act Rules and related provisions of the Act (such as,
among others, sections 6(g)(4)(B)(ii) \25\ and 6(h)(3)(L) \26\ of the
Act) are premised on each self-regulatory organization adopting margin
requirements that are functionally equivalent to those contained in the
General Margin Rules. Accordingly, the General Margin Rules represent a
corollary of, and are designed to give effect to, the Exchange Act
Rules and related provisions of the Exchange Act. As discussed in the
preceding paragraphs, the General Margin Rules as proposed comply with
the applicable requirements set forth in the Exchange Act Rules.
OneChicago therefore believes that the General Margin Rules are
consistent with the requirements of the Exchange Act and the rules and
regulations thereunder applicable to OneChicago.
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\25\ 15 U.S.C. 78f(g)(4)(B)(ii).
\26\ 15 U.S.C. 78f(h)(3)(L).
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(b) Margin Offset Rule. Security futures intermediaries entering
into transactions on OneChicago will be subject, among other things, to
Rule 403(b)(1) under the Act,\27\ which provides that the margin for
each long or short position in a security future will generally be 20
percent of the current market value of such security future. As
discussed above, this requirement is reflected in paragraph (c) of the
General Margin Rules. Pursuant to Rule 403(b)(2) under the Act,\28\
however, a self-regulatory authority may set the required initial or
maintenance margin level for offsetting positions involving security
futures and related positions at a level lower than the level that
would apply if such positions were margined separately based on the
aforementioned 20 percent requirement, provided the rules establishing
such lower margin levels meet the criteria set forth in section
7(c)(2)(B) of the Act.\29\ That Section requires, in relevant part,
that:
\27\ 17 CFR 242.403(b)(1).
\28\ 17 CFR 242.403(b)(2).
\29\ 15 U.S.C. 78(c)(2)(b).
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``(I) The margin requirements for a security futures product be
consistent with the margin requirements for comparable option
contracts traded on any exchange registered pursuant to section 6(a)
of (the Exchange Act); and
(II) Initial and maintenance margin levels for a security
futures product not be lower than the lowest level of margin,
exclusive of premium, required for any comparable option contract
traded on any exchange registered pursuant to section 6(a) of (the
Exchange Act), other than an option on a security future.'' \30\
\30\ Id.
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OneChicago is proposing the Margin Offset Rule pursuant to, and in
reliance on, Rule 403(b)(2) under the Act.\31\ Without the margin
relief afforded by the Margin Offset Rule, security futures
intermediaries would be required to collect margin from their customers
equal to 20 percent of the current market value of the security futures
held on behalf of such customers, irrespective of whether such security
futures positions are hedged or unhedged. With respect to option
contracts traded on securities exchanges, the Commission has recognized
that it is ``appropriate for the SROs to recognize the hedged nature of
certain combined options strategies and prescribe margin requirements
that better reflect the risk of those strategies.'' \32\ OneChicago
believes that the same considerations apply in connection with the
determination of margin levels for offsetting positions involving
security futures and related positions. If margin offsets were not
available with respect to security futures, the customer margin
requirements applicable to such instruments would effectively be
inconsistent with, and more onerous than, the margin requirements for
comparable option contracts traded on securities exchanges. This would
be contrary to the statutory objectives reflected in section 7(c)(2)(B)
of the Act.
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\31\ 17 CFR 242.403(b)(2).
\32\ See Securities Exchange Act Release Nos. 41658 (July 27,
1999), 64 FR 42736 (August 5, 1999) (order approving SR-CBOE-97-67
amending CBOE Rule 12.3); 42011 (October 14, 1999), 64 FR 57172
(October 22, 1999) (order approving SR-NYSE-99-03 amending NYSE Rule
431); 43581 (November 17, 2000), 65 FR 70854 (November 28, 2000)
(order approving SR-NASD-2000-15 amending NASD Rule 2520); and 43582
(November 17, 2000), 65 FR 71151 (November 29, 2000) (order
approving SR-Amex-99-27 amending Amex Rule 462).
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At the core of the Margin Offset Rule will be the table of offsets
attached to the Proposed Rule as Schedule A, which describes in detail
the margin offsets available with respect to particular combinations of
security futures and related positions. Such Schedule A is
[[Page 61714]]
substantively identical to the table of offsets included in the
Commission's release on Customer Margin Rules Relating to Security
Futures (the ``Customer Margin Release'').\33\ While the table differs
in certain specified respects from similar tables in effect for
exchange-traded options, the Commission acknowledged in the Customer
Margin Release that these limited differences are warranted by
different characteristics of the instruments to which they relate. For
the reasons set forth above, OneChicago believes that the Margin Offset
Rule is consistent with the requirements of the Exchange Act and the
rules and regulations thereunder applicable to OneChicago.
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\33\ Securities Exchange Act Release No. 46292 (August 1, 2002),
67 FR 53146 (August 14, 2002).
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(c) Market Maker Exclusion. Rule 400(c)(2)(v) under the Act \34\
permits a national securities exchange to adopt rules containing
specified requirements for security futures dealers, on the basis of
which the financial relations between security futures intermediaries,
on the one hand, and qualifying security futures dealers, on the other
hand, are excluded from the margin requirements contained in the
Exchange Act Rules. Any rules so adopted by an exchange must meet the
criteria set forth in section 7(c)(2)(B) of the Act, which is
reproduced in relevant part under (b) above.
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\34\ 17 CFR 242.400(c)(2)(v).
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OneChicago is proposing the Market Maker Exclusion pursuant to, and
in reliance on, Rule 400(c)(2)(v) under the Act.\35\ OneChicago intends
to select certain of its members to serve as lead market makers in
accordance with Item VI. of its Policies and Procedures as in effect on
the date hereof. From time to time, OneChicago may adopt other programs
pursuant to Rule 514 of its Rulebook under which members may be
designated as market makers with respect to one or more security
futures products in order to provide liquidity and orderliness in the
relevant market or markets. A significant number of those members will
likely be floor traders or floor brokers registered with the Commodity
Futures Trading Commission under section 4f(a)(1) of the Commodity
Exchange Act, as amended, or dealers registered with the Commission
under section 15(b) of the Act.\36\ As such, they will not qualify as
exempted persons within the meaning of Rule 401(a)(9) under the Act.
\37\ Without the Market Maker Exclusion, they arguably would have to be
treated as customers for purposes of determining margin requirements,
even with respect to their proprietary market making activities. This
would be different from the treatment of security futures dealers on
securities exchanges under section 7(c)(3) of the Act,\38\ and,
therefore, would be contrary to the statutory objectives reflected in
section 7(c)(2)(B) of the Act.\39\
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\35\ 17 CFR 242.400(c)(2)(v).
\36\ 15 U.S.C. 78o.
\37\ 17 CFR 242.401(a)(9).
\38\ 15 U.S.C. 78g(c)(3).
\39\ 15 U.S.C. 78g(c)(2)(B).
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The Market Maker Exclusion as proposed reflects all of the criteria
and limitations set forth in Rule 400(c)(2)(v) under the Exchange
Act.\40\ Specifically, as contemplated by the Customer Margin Release,
the Market Maker Exclusion specifies the circumstances under which a
Market Maker will be considered to ``hold itself out as being willing
to buy and sell security futures for its own account on a regular or
continuous basis.'' \41\ Under the Market Maker Exclusion, a Market
Maker satisfies this condition if either (i) at least seventy-five
percent (75%) of its gross revenue on an annual basis is derived from
business activities or occupations from trading listed financial
derivatives and the instruments underlying those derivatives, including
security futures, stock index futures and options, stock and index
options, stocks, foreign currency futures and options, foreign
currencies, interest rate futures and options, fixed income instruments
and commodity futures and options or (ii) except for unusual
circumstances, at least fifty percent (50%) of its trading activity on
OneChicago in any calendar quarter is in classes of security futures
products to which it is assigned under a market making program adopted
by OneChicago pursuant to Rule 514 of its Rulebook.
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\40\ 17 CFR 242.400(c)(2)(v).
\41\ Cf. 17 CFR 242.400(c)(2)(v)(B)(3).
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These alternative standards proposed by OneChicago generally follow
examples given in the Customer Margin Release. With respect to the
standard described in (i) above, the Customer Margin Release provides
that the rules of the self-regulatory organization may ``require that a
large majority of [the Market Maker's] revenue is derived from business
activities or occupations from trading listed financial-based
derivatives.''\42\ Given the composition of the pool of exchange
members from which OneChicago will select Market Makers, the standard
proposed by OneChicago clarifies that such members' trading activities
related to the cash instruments underlying listed financial derivatives
are taken into account in determining gross revenue. The standard
described in (ii) above corresponds to similar requirements for market
makers on several U.S. options markets.\43\ Based on the foregoing,
OneChicago believes that the Market Maker Exclusion is consistent with
the requirements of the Exchange Act and the rules and regulations
thereunder applicable to OneChicago.
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\42\ See Securities Exchange Act Release No. 46292 (August 1,
2002), 67 FR 53146 (August 14, 2002).
\43\ See note 91 in the Customer Margin Release and the several
options exchange rules referenced therein.
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B. Self-Regulatory Organization's Statement on Burden on Competition
OneChicago does not believe that the Proposed Rule will have an
impact on competition because, as described under 3 above, (i) the
General Margin Rules are based on the standardized margin procedures
developed by the U.S. futures exchanges' Joint Audit Committee and
similar rules in effect for other contract markets, (ii) the Margin
Offset Rule will be consistent with similar rules in effect for option
contracts traded on exchanges registered pursuant to section 6(a) of
the Act \44\ and (iii) the Market Maker Exclusion ensures that
qualifying security futures dealers on OneChicago are subject to margin
requirements that are comparable to those traditionally applicable to
security futures dealers on securities exchanges. In addition, it can
be expected that other self-regulatory organizations that will list
security futures products will adopt rules that are substantially
similar to the Proposed Rule.
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\44\ 15 U.S.C. 78f.
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C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Comments on the Proposed Rule have not been solicited.
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 Exchange consents, the Commission will:
(A) By order approve such proposed rule change, as amended; or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
[[Page 61715]]
IV. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change, as amended, is consistent with the Act. Persons making written
submissions should file six copies thereof with the Secretary,
Securities and Exchange Commission, 450 Fifth Street, NW., Washington,
DC 20549-0609. Copies of the submission, all subsequent amendments, all
written statements with respect to the proposed rule change, as
amended, 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 the filing will also be available for
inspection and copying at the principal offices of the Exchange. All
submissions should refer to File No. SR-OC-2002-01 and should be
submitted by October 22, 2002.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\45\
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\45\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-24906 Filed 9-30-02; 8:45 am]
BILLING CODE 8010-01-P
