[Federal Register Volume 62, Number 76 (Monday, April 21, 1997)]
[Notices]
[Pages 19363-19364]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-10160]
[[Page 19363]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38502; File No. SR-CBOE-97-18]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Chicago Board Options Exchange, Incorporated Relating to
Changes to its Margin Rules
April 14, 1997.
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 March 21, 1997, the Chicago Board Options Exchange, Incorporated
(``CBOE'' or the ``Exchange'') filed with the Securities and Exchange
Commission (``SEC'' or ``Commission'') the proposed rule change as
described in Items I, II and III below, which Items have been prepared
by the CBOE. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The CBOE proposes to make revisions to its rules governing margin
that will: (i) Permit a market-maker to receive market-maker margin
treatment on transactions in options and other securities and (ii)
allow certain defined strategies involving options to be carried in a
cash account. The text of the proposed rule change is available at the
Office of the Secretary, CBOE and at the Commission.
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 CBOE 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 CBOE 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, Proposed Rule Change
The purpose of the proposed rule change is to make revisions to the
Exchange's rules governing margin that will: (i) Permit a market-maker
to receive market-maker margin treatment on transactions in options and
other securities,\3\ and (ii) allow certain defined strategies
involving options to be carried in a cash account. The Exchange is also
submitting concurrently separate changes to its margin rules in a
separate rule filing. That other filing proposes to make significant
changes to the CBOE's margin rules in order to: (i) Establish CBOE
rules to govern areas of margin regulation that will no longer be
addressed by Regulation T (``Regulation T'') of the Board of Governors
of the Federal Reserve System (``Federal Reserve Board'' or ``Board''),
and (ii) conform certain CBOE margin provisions to those of the New
York Stock Exchange. That other filing will be referred to herein as
the ``First Margin Filing.'' See SR-CBOE-97-17. The present filing will
be referred to as the ``Second Margin Filing.''
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\3\ Market-maker margin treatment provides that the member
carrying a market-maker's account (``Clearing Firm'') may extend
credit to a market-maker on specified market-maker and permitted
offset transactions on a basis that is mutually satisfactory.
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CBOE Rule 24.11A currently permits a debit put spread to be carried
in a cash account.\4\ The Exchange is proposing to allow also (as more
fully described below) credit put spreads and both debit and credit
call spreads in European, cash settled options to be carried in a cash
account because such strategies are substantially similar to the
presently permitted debit put spread and fully meet the criteria
established by Regulation T. The Federal Reserve Board decided to defer
to the options exchanges' determination of the allowable specific
options related strategies to be effected in the cash account, provided
that the risk of the strategy is defined and the account contains the
securities and/or cash required to fully cover the exposure.\5\ The
proposed provision would permit a customer to hold short European-style
options offset by long European-style options on the same underlying
component or index in a cash account. In order to qualify for the cash
account, the long position would have to be held in the account, or be
purchased for the account on the same day as the short position is
established. In addition, the option premium would have to be held in
the account until full cash payment for the long option is received;
the long option must expire with the short option, and the account must
hold cash or cash equivalents of not less than any amount by which the
aggregate exercise price of a long call (short put) exceeds the
aggregate exercise price of a short call (long put). In the near
future, the CBOE intends to propose inclusion in the cash account of
other strategies meeting the criteria established by the Federal
Reserve Board.
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\4\ The Commission notes that CBOE Rule 24.11A relates to debit
put spreads in cash account transactions, and not Rule 24.11 as
inadvertently referred to in the rule filing.
\5\ See 61 FR 20386 (May 6, 1996).
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The Exchange is proposing to add these new provisions to Rule 12.3.
Although most of the provisions governing the margin of index options
are contained in Rule 24.11, the Exchange intends ultimately to move
most of the margin provisions to Chapter 12 of its rules and so is
proposing to add the index option cash account provision to Rule 12.3.
Market Maker and Specialist Accounts
The CBOE rules and the rules of the other regulatory bodies have
always distinguished the margin treatment for market-makers and
specialists from that applicable to customers and other broker-dealers
because of the unique position of market-makers and specialists in
maintaining liquid markets. The rules recognize that options market-
makers and specialists must engage in various hedging transactions to
manage the risk involved in fulfilling their role. Specific provisions
governing permitted offset treatment for market-makers and specialists
are being deleted from Regulation T, which as a result will defer to
the rules of the self-regulatory-organizations (``SROs'').
The First Margin Filing proposes to allow various permitted offset
positions, which may be cleared and carried by a member on behalf of
one or more registered specialists, registered market-makers, or
Designated Primary Market-Makers (hereinafter referred to generically
as ``market-makers''), to be carried upon a margin basis satisfactory
to the concerned parties. A permitted offset position is defined to
mean, in the case of an option in which a market-maker makes a market,
a position in the underlying instrument or other related instrument,
and in the case of other securities in which a market-maker makes a
market, a position in options overlying the securities in which a
market-maker makes a market, if the account holds the following
positions: (i) A long position in the underlying instrument offset by a
short position which is ``in- or at-the-money;'' (ii) a short position
in the underlying instrument offset by a long option position which is
``in- or at-the-money;'' (iii) a stock position resulting from the
assignment of a market-maker short
[[Page 19364]]
option position; (iv) a stock position resulting from the exercise of a
market-maker long position; (v) a net long position in a security
(other than an option) in which a market-maker; or (vii) an offset
position as defined in Appendix A of SEC Rule 15c3-1.
In addition to the changes described above which were proposed in
the First Margin Filing, the Exchange is also proposing to permit a
market-maker to receive market-maker margin treatment on transactions
in options or other derivative securities effected on an exchange of
which he is not a member and on which he is not registered as a market-
maker if the options or other derivative securities are dually listed
on the exchange on which he is a registered market-maker, or if the
transactions are recognized offsets as defined by Rule 15c3-1.
These transactions may be maintained by a carrying broker-dealer on
a margin basis mutually satisfactory to the concerned parties, provided
that the member, in the same calendar quarter, executes 80% of his
total volume in the options class, product group or other SEC
recognized offset group on the exchange where he is registered as a
market-maker, and provided that such transactions are effected for the
purpose of hedging, reducing the risk of, rebalancing, liquidating open
positions of the market-maker, or for the purpose of effecting
transactions pursuant to the ``trade or fade'' rules of any options
exchange.\6\ This requirement will ensure that transactions effected by
order in markets where the member is not registered as a market-maker
are in fact reasonably related to his or her market-making function and
are not effected for the purpose of speculation on a margin basis which
is applicable only to market-makers and specialists.
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\6\ CBOE Rule 8.51(b) sets forth the trade or fade requirements
applicable to CBOE market-makers.
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A change is also being made to allow facsimile notice of a deficit
condition in an account. This change is consistent with the
Commission's Rule 15c3-1.
Interpretation to Rule 12.3
Interpretation .04 addresses the manner in which the carrying firm
may comply with its responsibility to extend credit properly to market-
maker permitted offset transactions effected on an exchange where the
market-maker is not registered. If a market-maker fails to specify to
which account such an order should be placed and the resulting
transaction clears in a market-maker account, and not a customer
account, it will be presumed that the market-maker elected market-maker
margin treatment for the position effected on an exchange of which he
is not a member. The clearing firm may rely on this in good faith
unless the clearing firm knows, or has reason to know, that the market-
maker is not or will not be in compliance with the requirement to
effect 80% of his transactions in a particular class or product offset
group on the exchange where he is registered as a market-maker.
Clearing firms are, however, responsible for implementing adequate
procedures to ensure that such orders are recorded accurately and
cleared into the appropriate accounts.
2. Statutory Basis
The basis under the Act for this proposed rule change is the
requirement under Section 6(b)(5) that an exchange have rules that are
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 protect 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.
The proposed rule change: (1) Permits a market-maker to receive
market-maker margin treatment on transactions in options and other
securities and (ii) allows certain defined strategies involving options
to be carried in a cash account. The Exchange believes that the
proposed rule change is consistent with, and furthers, the objectives
of Section 6(b) (5) of the Act, in that it is designed to perfect the
mechanisms of a free and open market and to protect investors and the
public interest.
B. Self-Regulatory Organization's Statement on Burden on Competition
The CBOE does not believe that the proposed rule change will impose
any burden on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
No written comments were solicited or received with respect to the
proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period: (i) As the Commission
may designate up to 90 days of such date if it finds such longer period
to be appropriate and publishes its reasons for so finding or (ii) as
to which the self-regulatory organization consents, the Commission
will:
(A) by order approve such proposed rule change, or
(B) institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.
Copies of the submission, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any person, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for inspection and copying in the
Commission's Public Reference Room. Copies of all such filing will also
be available for inspection and copying at the principal office of
CBOE. All submissions should refer to file number SR-CB0E-97-18 and
should be committed by May 12, 1997.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority. \7\
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\1\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-10160 Filed 4-18-97; 8:45 am]
BILLING CODE 8010-01-M
