COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 41

RIN 3038-AE88

SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 242

[Release No. 34-86304; File No. S7-09-19]

RIN 3235-AM55

CUSTOMER MARGIN RULES RELATING TO SECURITY FUTURES 

AGENCIES: Commodity Futures Trading Commission and Securities and 

Exchange Commission.

ACTION: Joint proposed rules.

SUMMARY: The Commodity Futures Trading Commission (“CFTC”) and the 

Securities and Exchange Commission (“SEC”) (collectively, the “Commissions”) are 

proposing amendments to regulations that establish minimum customer margin 

requirements for security futures. More specifically, the proposed amendments would 

lower the margin requirement for an unhedged security futures position from 20% to 

15%, as well as propose certain revisions to the margin offset table consistent with the 

proposed reduction in margin.

DATES: Comments should be received on or before [Insert date 30 days from the 

date of publication in the Federal Register].

ADDRESSES: Comments should be sent to both agencies at the addresses listed 

below.
2

CFTC: You may submit comments, identified by RIN 3038-AE88, by any of the 

following methods:

• CFTC website: https://comments.cftc.gov. Follow the instructions for 

submitting comments through the website.

• Mail: Christopher Kirkpatrick, Secretary of the Commission, Commodity 

Futures Trading Commission, Three Lafayette Centre, 1155 21st Street, NW, 

Washington, DC 20581.

• Hand Delivery/Courier: Same as Mail above.

Please submit your comments using only one method.

All comments must be submitted in English, or if not, accompanied by an 

English translation. Comments will be posted as received to https://www.cftc.gov. 

You should submit only information that you wish to make available publicly. If you 

wish for the CFTC to consider information that you believe is exempt from disclosure 

under the Freedom of Information Act, a petition for confidential treatment of the 

exempt information may be submitted according to the procedures established in 

CFTC Rule 145.9, 17 CFR 145.9.

The CFTC reserves the right, but shall have no obligation, to review, prescreen, filter, redact, refuse, or remove any or all of your submission from 

https://www.cftc.gov that it may deem to be inappropriate for publication, such as 

obscene language. All submissions that have been redacted or removed that contain 

comments on the merits of the rulemaking will be retained in the public comment file 

and will be considered as required under the Administrative Procedure Act and other 

applicable laws, and may be accessible under the Freedom of Information Act.
3

SEC: Comments may be submitted by any of the following methods:

Electronic comments:

• Use the SEC’s Internet comment form 

(http://www.sec.gov/rules/proposed.shtml); or

• Send an e-mail to rule-comments@sec.gov. Please include File 

Number S7-09-19 on the subject line.

Paper comments:

• Send paper comments to Secretary, Securities and Exchange 

Commission, 100 F Street, NE, Washington, DC 20549-1090. 

All submissions should refer to File Number S7-09-19. This file number should be 

included on the subject line if e-mail is used. To help the SEC process and review 

your comments more efficiently, please use only one method. The SEC will post all 

comments on the SEC’s website (http://www.sec.gov/rules/proposed.shtml). 

Comments are also available for website viewing and printing in the SEC’s Public 

Reference Room, 100 F Street, NE, Room 1580,Washington, DC 20549, on official 

business days between the hours of 10:00 a.m. and 3:00 p.m. All comments received 

will be posted without change. Persons submitting comments are cautioned that the 

SEC does not redact or edit personal identifying information from comment 

submissions. You should submit only information that you wish to make publicly 

available. 

Studies, memoranda, or other substantive items may be added by the SEC or 

staff to the comment file during this rulemaking. A notification of the inclusion in the 

comment file of any such materials will be made available on the SEC’s website. To 
4

ensure direct electronic receipt of such notifications, sign up through the “Stay 

Connected” option at www.sec.gov to receive notifications by e-mail.

FOR FURTHER INFORMATION CONTACT:

CFTC: Melissa A. D’Arcy, Special Counsel and Sarah E. Josephson, Deputy Director, 

Division of Clearing and Risk, at (202) 418-5430; and Michael A. Penick, Economist 

at (202) 418-5279, and Ayla Kayhan, Economist at (202) 418-5947, Office of the 

Chief Economist, Commodity Futures Trading Commission, Three Lafayette Centre, 

1155 21st Street, NW, Washington, DC 20581.

SEC: Michael A. Macchiaroli, Associate Director, at (202) 551-5525; Thomas K. 

McGowan, Associate Director, at (202) 551-5521; Randall W. Roy, Deputy Associate 

Director, at (202) 551-5522; Sheila Dombal Swartz, Senior Special Counsel, at (202) 

551-5545; or Abraham Jacob, Special Counsel, at (202) 551-5583; Division of Trading 

and Markets, Securities and Exchange Commission, 100 F Street, NE, Washington, 

DC 20549-7010.

SUPPLEMENTARY INFORMATION:

I. BACKGROUND

A. Applicable Statutory Framework

B. Prior Regulatory Action by the Commissions

C. Consideration of SROs’ Risk-Based Portfolio Margining Approaches

D. Consideration of Statutory Requirements

II. DISCUSSION

A. Minimum Margin for Unhedged Positions

1. Current Security Futures Margin Rules

2. SRO Risk-based Portfolio Margin Accounts may hold Comparable 

Exchange-Traded Options

3. Minimum Levels of Margin Required for Security Futures

4. The Commissions have Authority to Determine which Exchange-Traded 

Options are Comparable to Security Futures
5

5. The Margin Requirements are Consistent for Comparable Exchange-traded 

Options

6. The Proposed Margin Rule is Consistent with the Federal Reserve’s 

Regulation T

7. The Proposed Margin Rule Permits Higher Margin Requirements

8. Request for Comments

B. Margin Offsets

III. PAPERWORK REDUCTION ACT

A. CFTC

B. SEC

IV. CONSIDERATION OF COSTS AND BENEFITS (CFTC) AND ECONOMIC 

ANALYSIS (SEC) OF THE PROPOSED AMENDMENTS

A. CFTC

1. Introduction.

2. Economic Baseline

3. Summary of Proposed Amendment

4. Description of Possible Costs

i. Risk-Related Costs for Security Futures Intermediaries and Customers

ii. Appropriateness of Margin Requirements

iii. Costs Associated with Margin Offsets Table

5. Description of Possible Benefits

6. Consideration of Section 15(a) Factors

i. Protection of market participants and the public

ii. The efficiency, competitiveness and financial integrity of the markets

iii. Price discovery

iv. Risk management

v. Other public interest considerations

7. Request for Comment

B. SEC

1. Introduction

2. Baseline

i. The Security Futures Market

ii. Regulation

3. Analysis of the Proposals

i. Benefits
6

ii. Costs

iii. Effects on Efficiency, Competition, and Capital Formation

iv. Alternatives Considered

V. REGULATORY FLEXIBILITY ACT

A. CFTC

B. SEC

VI. SMALL BUSINESS REGULATORY ENFORCEMENT FAIRNESS ACT

VII. ANTI-TRUST CONSIDERATIONS

VIII. STATUTORY BASIS

The CFTC is proposing to amend CFTC Rule 41.45(b)(1), 17 CFR 41.45(b)(1), 

and the SEC is proposing to amend SEC Rule 403(b)(1), 17 CFR 242.403(b)(1),1

under authority delegated by the Board of Governors of the Federal Reserve System 

(“Federal Reserve Board”) pursuant to Section 7(c)(2) of the Securities Exchange Act 

of 1934 (“Exchange Act”).2 The Commissions also are proposing to revise the margin 

offset table, consistent with the proposed reduction in margin.

I. BACKGROUND 

The Commodity Futures Modernization Act of 2000 (“CFMA”),3 which 

became law on December 21, 2000, lifted the ban on trading security futures4 and 

established a framework for the joint regulation of security futures by the CFTC and 

 1 CFTC regulations referred to herein are found at 17 CFR Ch. 1; SEC regulations 

referred to herein are found at 17 CFR Ch. 2.

2 15 U.S.C. 78g(c)(2).

3 Appendix E of Pub.L.No.106-554, 114 Stat. 2763 (2000).

4 See Section 1a(31) of the Commodity Exchange Act (“CEA”), 7 U.S.C. 1a(44); and 

Section 3(a)(55) of the Exchange Act, 15 U.S.C. 78c(a)(55) (defining the term 

“security future”).
7

the SEC. A security future is a futures contract on a single security or on a narrowbased security index.5

A. Applicable Statutory Framework 

As part of the statutory scheme for the regulation of security futures, the 

CFMA provided for the issuance of regulations governing customer margin for 

security futures. Customer margin for security futures includes two types of margin, 

(i) initial margin, and (ii) maintenance margin. Together, the initial and maintenance 

margin must satisfy the required margin established by the Commissions.6 

The CFMA added a new subsection (2) to Section 7(c) of the Exchange Act,7

which directs the Federal Reserve Board to prescribe regulations establishing initial 

and maintenance customer margin requirements imposed by brokers, dealers, and 

 5 Id. A “security future” is distinguished from a “security futures product,” which is 

defined to include security futures as well as any put, call, straddle, option, or 

privilege on any security future. See Section 1a(45) of the CEA, 7 U.S.C. 1a(45); and 

Section 3(a)(56) of the Exchange Act, 15 U.S.C. 78c(a)(56) (defining the term 

“security futures product”). Futures on indexes that are not narrow-based security 

indexes are subject to the exclusive jurisdiction of the CFTC. This rule proposal 

applies only to margin on security futures and not to margin on options on security 

futures. For the purposes of this proposal, most discussion will relate to security 

futures only. For the sake of clarity and consistency, the term “security futures 

products” will be used when discussing security futures and the options on security 

futures together throughout this proposal. Under CEA Section 2(a)(1)(D)(iii)(II) and 

Exchange Act Section 6(h)(6), the CFTC and SEC may, by order, jointly determine to 

permit the listing of options on security futures; that authority has not been exercised.

6 Initial margin must be deposited as collateral when a customer makes an initial 

investment in security futures. Maintenance margin is the minimum amount a 

customer must maintain in its margin account while owning security futures. If a 

customer’s margin level falls below the maintenance margin amount, a customer may 

be required to make an additional deposit. Maintenance margin for security futures is 

different from variation settlement. Variation settlement is a daily or intraday mark to 

market payment for a security future. See CFTC Rule 41.43(a)(32), 17 CFR 

41.43(a)(32); SEC Rule 401(a)(32), 17 CFR 242.401(a)(32). 

7 15 U.S.C. 78g(c)(2).
8

members8 of national securities exchanges9 for security futures. In addition, Section 

7(c)(2) provides that the Federal Reserve Board may delegate this rulemaking 

authority jointly to the Commissions. 

Section 7(c)(2)(B) of the Exchange Act provides that the customer margin 

requirements, “including the establishment of levels of margin10 (initial and 

maintenance) for security futures products,” must satisfy four requirements. First, 

they must preserve the financial integrity of markets trading security futures products. 

Second, they must prevent systemic risk. Third, they must (1) be consistent with the 

margin requirements for comparable options traded on any exchange registered 

pursuant to Section 6(a) of the Exchange Act;11 and (2) provide for initial and 

maintenance margin levels that are not lower than the lowest level of margin, 

exclusive of premium, required for any comparable exchange-traded options. Fourth, 

 8 Futures commission merchants (as defined in Section 1(a)(28) of the CEA), which 

may be members of national securities exchanges, clearing members at 

clearinghouses, or customers of clearing members at clearinghouses, are discussed in 

detail below. 

9 OneChicago, LLC (“OCX”), the only U.S. national securities exchange currently 

listing security futures, filed a rulemaking petition, dated August 1, 2008, requesting 

that the minimum required margin for unhedged security futures be reduced from 20% 

to 15%. Letter from Donald L. Horwitz, Managing Director and General Counsel, 

OCX, to David Stawick, Secretary, CFTC, and Nancy M. Morris, Secretary, SEC, 

dated Aug. 1, 2008, at 2 (“OCX Petition”). OCX also is a designated contract market 

registered with the CFTC.

10 The terms “margin level” and “level of margin”, when used with respect to a security 

futures product, mean the amount of margin required to secure any extension or 

maintenance of credit, or the amount of margin required as a performance bond related 

to the purchase, sale, or carrying of a security futures product. 15 U.S.C. 

78c(a)(57)(B).

11 Given the statutory language, for the sake of clarity and consistency, the term 

“comparable exchange-traded options” will be used to describe single stock options

throughout this proposal.
9

they must be, and remain consistent with, the margin requirements established by the 

Federal Reserve Board under Regulation T (“Regulation T”).12

With regard to the third requirement, there is limited legislative history13

regarding how or why the comparison should be to exchange-traded options. As 

discussed further below, under certain circumstances the products behave similarly in 

terms of their overall risk profiles. However, from the perspective of market 

participants, exchange-traded options and security futures often serve two distinct 

economic functions. 

Exchange-traded options are tools for hedging and speculating on the 

underlying equity markets. On the other hand, security futures are “delta one 

derivatives”14 that are more similar to total return equity swaps insofar as they provide 

exposure to equities without requiring ownership of the underlying instrument. 

Specifically, security futures are used to (1) establish synthetic long or short exposure 

to the underlying equity security or equity securities, and/or (2) temporarily transfer 

securities, similar to securities lending or equity repurchase agreements.15 However, 

 12 12 CFR 220 et seq.

13 For example, earlier versions of the statutory language stated that margin should be set 

at levels appropriate to “prevent competitive distortions between markets offering 

similar products”, and the reasons given for instituting the margin requirements was 

that “[u]nder the bill, margin levels on these products would be required to be 

harmonized with the options markets.” See S. Report 106-390 (Aug. 25, 2000) at pp.5 

and 39.

14 Delta one derivatives are financial instruments with a delta that is close or equal to 

one. Delta measures the rate of change in a derivative relative to a unit of change in 

the underlying instrument. Delta one derivatives have no optionality, and therefore, as 

the price of the underlying instrument moves, the price of the derivative is expected to 

move at, or close to, the same rate. 

15 See e.g., OCX (describing trading strategies for security futures), available at 

https://www.onechicago.com/?page_id=25157.
10

while exchange-traded options and security futures can serve distinct economic 

functions, they generally share similar risk profiles for purposes of assessing margin. 

For example, both short security futures positions and certain exchange-traded options 

strategies produce unlimited downside risk. Investors in security futures and writers of 

options may lose their margin deposits and premium payments and be required to pay 

additional funds. As a result, the margin requirements for security futures can be 

compared to margin practices for exchange-traded options in order to determine 

appropriate margin levels. 

In comparison, security futures traded in Europe are subject to risk-based 

margin calculations that differ from the margin requirements that apply to security 

futures in the U.S. LCH Ltd. applies a Standard Portfolio Analysis of Risk (“SPAN”) 

margin methodology for the security futures it clears,

16 and Eurex applies portfoliobased margining through its new margin methodology, Eurex Clearing Prisma, to its 

cleared security futures.17 As described below, in the U.S., security futures may be 

portfolio margined under current rules only if they are held in a securities account.18 

 16 See LCH’s discussion of “London SPAN”, available at https://www.lch.com/riskcollateral-management/group-risk-management/risk-management-ltd/ltd-marginmethodology/london. 

17 See Eurex Exchange’s discussion of “Risk parameters and initial margins”, available 

at http://www.eurexchange.com/exchange-en/market-data/clearing-data/riskparameters. 

18 See the Financial Industry Regulatory Authority, Inc. (“FINRA”) Rule 4210(g) and 

the Cboe Exchange, Inc. (“CBOE”) Rule 12.4. See also Section 713 of the DoddFrank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). Pub. L. 

No. 111-203,124 Stat. 1376 (2010). The Dodd-Frank Act provided the SEC and 

CFTC with authority to facilitate portfolio margining by allowing cash and securities 

to be held in a futures account, and futures and options on futures and related 

collateral to be held in a securities account, subject to certain conditions. See

Exchange Act Section 15(c)(3)(C) and CEA Section 4d(h), 15 U.S.C. 78o(c)(3)(C), 

and 7 U.S.C. 6d(h).
11

B. Prior Regulatory Action by the Commissions

On March 6, 2001, the Federal Reserve Board delegated its authority under 

Section 7(c)(2) to the Commissions.19 Pursuant to that authority, the SEC and the 

CFTC adopted customer margin requirements for security futures.

20

The 2002 Final Rules establish margin requirements for security futures to be 

collected by security futures intermediaries from their customers.21 A security futures 

intermediary is a creditor, as defined under Regulation T, with respect to its financial 

relations with any person involving security futures, and includes registered entities 

such as brokers, dealers, and futures commission merchants (“FCMs”).22 The

amendments proposed today to CFTC regulation 41.45(b)(1) and SEC rule 

242.403(b)(1) concern the minimum required margin such entities would be required 

to collect from customers in this context. 

 19 Letter from Jennifer J. Johnson, Secretary of the Board, Federal Reserve Board, to 

James E. Newsome, Acting Chairman, CFTC, and Laura S. Unger, Acting Chairman, 

SEC (Mar. 6, 2001) (“FRB Letter”), reprinted as Appendix B to Customer Margin 

Rules Relating to Security Futures, 66 FR 50720, 50741 (Oct. 4, 2001) (joint proposed 

rulemaking by the Commissions) (“2001 Proposed Rules”). 

20 See Customer Margin Rules Relating to Security Futures, 67 FR 53146 (Aug. 14, 

2002) (joint rulemaking by the Commissions, hereinafter the “2002 Final Rules”); 17 

CFR 41.42-41.49 (CFTC regulations); 17 CFR 242.400-242.406 (SEC regulations). 

21 See CFTC Rule 41.45(a), 17 CFR 41.45(a); SEC Rule 403, 17 CFR 242.403. 

22 See CFTC Rule 41.43(a)(29), 17 CFR 41.43(a)(29); SEC Rule 401(a)(29), 17 CFR 

242.401(a)(29). A security future is both a security and a future, so customers who 

wish to buy or sell security futures must conduct the transaction through a person 

registered both with the CFTC as either an FCM or an introducing broker and the SEC 

as a broker-dealer. The term “security futures intermediary” includes FCMs that are 

clearing members or customers of clearing members of the Options Clearing 

Corporation (“OCC”), which is the clearinghouse that clears security futures listed on 

OCX.
12

In the 2002 Final Rules, the Commissions established minimum initial and 

maintenance margin levels for unhedged security futures at 20% of their “current 

market value.”23 In addition, the Commissions’ rules permit self-regulatory 

organizations and self-regulatory authorities (together “SROs”),24 to set margin levels 

lower than 20% of current market value for customers with certain strategy-based 

offset positions involving security futures and one or more related securities or 

futures.25

Neither the current regulations nor the proposed amendments prohibit SROs or 

security futures intermediaries from establishing higher initial or maintenance margin 

levels than the required margin or from taking appropriate action to preserve their own 

financial integrity.26 SROs and security futures intermediaries may determine that 

higher margin levels are required for security futures under certain market conditions. 

Similar to current regulations, the Commissions are proposing to preserve this 

flexibility because it is important for SROs and security futures intermediaries to be 

able to manage their customers’ risks appropriately. 

 23 See CFTC Rule 41.45(b)(1), 17 CFR 41.45(b)(1); SEC Rule 403(b)(1), 17 CFR 

242.403(b)(1). See also CFTC Rule 41.43(a)(4), 17 CFR 41.43(a)(4); SEC Rule 

401(a)(4), 17 CFR 242.401(a)(4) (defining the term “current market value”).

24 For the sake of clarity and consistency, the defined term “SRO” will be used to 

describe self-regulatory organizations and self-regulatory authorities throughout this 

proposal. “Self-regulatory authority” is defined at CFTC Rule 41.43(a)(30), 17 CFR 

41.43(a)(30) and SEC Rule 401(a)(30), 17 CFR 242.401(a)(30).

25 See CFTC Rule 41.45(b)(2), 17 CFR 41.45(b)(2); SEC Rule 403(b)(2), 17 CFR 

242.403(b)(2).

26 See CFTC Rule 41.42(c)(1), 17 CFR 41.42(c)(1); SEC Rule 400(c)(1), 17 CFR 

242.400(c)(1).
13

The Commissions enumerated specific exclusions from the margin rule for 

security futures, and those exclusions would continue under the proposed 

amendments.27 For example, margin requirements that derivatives clearing 

organizations (“DCOs”) or clearing agencies impose on their members are not subject 

to the 20% security futures margin requirement, as this provides clearinghouses 

flexibility and discretion in managing their members’ exposures. In addition, Section 

7(c)(2) of the Exchange Act does not confer authority over margin requirements for 

clearing agencies and DCOs.28 The margin rules of clearing agencies registered with 

the SEC are approved by the SEC pursuant to Section 19(b)(2) of the Exchange Act.

29 

The CFTC has authority to ensure compliance with core principles for DCOs

registered with the CFTC under Sections 5b and 5c of the CEA.30

Another exclusion is for margin calculated by a portfolio margining system 

under rules that meet the four criteria set forth in Section 7(c)(2)(B) of the Exchange 

Act31 and that have been approved by the SEC and, as applicable, the CFTC.32 

Subsequent to the adoption of 2002 Final Rules, and consistent with the exclusion, 

 27 See CFTC Rule 41.42(c)(2)(i)-(v), 17 CFR 41.42(c)(2)(i)-(v); SEC Rule 400(c)(2)(i)-

(v), 17 CFR 242.400(c)(2)(i)-(v). 

28 See CFTC Rule 41.42(c)(2)(iii), 17 CFR 41.42(c)(2)(iii); SEC Rule 400(c)(2)(iii), 17 

CFR 242.400(c)(2)(iii). See also 15 U.S.C. 78g(c)(2) and FRB Letter (“The authority 

delegated by the [Federal Reserve Board] is limited to customer margin requirements 

imposed by brokers, dealers, and members of national securities exchanges. It does 

not cover requirements imposed by clearing agencies on their members.”).

29 15 U.S.C. 78s(b)(2).

30 7 U.S.C. 7a-1 and 7 U.S.C. 7a-2.

31 15 U.S.C. 78g(c)(2)(B).

32 See CFTC Rule 41.42(c)(2)(i), 17 CFR 41.42(c)(2)(i); SEC Rule 400(c)(2)(i), 17 CFR 

242.400(c)(2)(i).
14

three SROs33 initiated pilot programs for risk-based portfolio margining rules that 

permit a security futures intermediary to combine certain of a customer’s securities 

and futures positions in a securities portfolio margin account to compute the 

customer’s margin requirements based on the net market risk of all the customer’s 

positions in the account.

34 As discussed in more detail below, these SRO risk-based 

portfolio margin rules established a margin requirement for unhedged exchange-traded 

options and security futures of 15% (i.e., a valuation point range of +/- 15%).35 In 

proposed rule filings seeking to make the pilots permanent, the SROs noted that they 

did not encounter any problems or difficulties relating to such pilot programs.36 These 

 33 The three SROs that proposed pilot programs are FINRA, the New York Stock 

Exchange LLC (“NYSE”) and CBOE (formerly known as Chicago Board Options 

Exchange, Inc.). The SEC has regulatory authority over all three SROs. In 2010, the 

CBOE conducted a restructuring transaction in which CBOE became a wholly-owned 

subsidiary of CBOE Holdings, Inc. The CFTC regulates the Cboe Futures Exchange, 

LLC (a wholly-owned subsidiary of CBOE Holdings, Inc.) as a designated contract 

market under Section 5 of the CEA. 

34 See Exchange Act Release No. 55471 (Mar. 14, 2007), 72 FR 13149 (Mar. 20, 2007) 

(SR-NASD-2007-013, relating to the National Association of Securities Dealers’ (now 

known as FINRA) rule change to permit members to adopt a portfolio margin 

methodology on a pilot basis); Exchange Act Release No. 54918 (Dec. 12, 2006), 71

FR 75790 (Dec. 18, 2006) (SR-NYSE-2006-13, relating to further amendments to the 

NYSE’s portfolio margin pilot program); Exchange Act Release No. 54919 (Dec. 12, 

2006), 71 FR 75781 (Dec. 18, 2006) (SR-CBOE 2006-14, relating to amendments to 

CBOE’s portfolio margin pilot program to include security futures); Exchange Act 

Release No. 54125 (Jul. 11, 2006), 71 FR 40766 (Jul. 18, 2006) (SR-NYSE-2005-93, 

relating to amendments to the NYSE’s portfolio margin pilot program to include 

security futures); Exchange Act Release No. 52031 (Jul. 14, 2005), 70 FR 42130 (Jul. 

21, 2005) (SR-NYSE-2002-19, relating to the NYSE’s original portfolio margin pilot 

proposal); Exchange Act Release No. 52032 (Jul. 14, 2005), 70 FR 42118 (Jul. 21, 

2005) (SR-CBOE-2002-03, relating to the CBOE’s original portfolio margin pilot 

proposal). 

35 See discussion in section I.C. below.

36 See Exchange Act Release No. 58251 (Jul. 30, 2008), 73 FR 45506 (Aug. 5, 2008) 

(SR-FINRA-2008-041, relating to the FINRA’s proposal to make the portfolio margin 

pilot program permanent under NASD Rule 2520(g) and Incorporated NYSE Rule 

431(g)); Exchange Act Release No. 58243 (Jul. 29, 2008), 73 FR 45505 (Aug. 5, 
15

SRO risk-based portfolio margining rules – originally adopted as a pilot program –

became permanent in 2008. These SRO rules require 15% margin (i.e., a valuation 

point range of +/- 15%) for an unhedged exchange-traded option on an equity security 

or narrow-based index.37 

Subsequent to the adoption of 2002 Final Rules, each Commission adopted 

rules to enhance core principles and standards for the operation and governance of 

DCOs and covered clearing agencies that, as discussed below, also are generally 

applicable to the clearance and settlement of security futures. In 2011, the CFTC 

issued regulations applicable to DCOs, including CFTC Rule 39.13, which concerns 

margin – both initial and variation margin – that is required to be collected by a DCO 

from its clearing members.38 Any DCO clearing security futures is subject to CFTC 

Rule 39.13,39 and most of the requirements under CFTC Rule 39.13 apply broadly to 

all transactions cleared by the DCO, but in some cases security futures transactions are 

 

2008) (SR-CBOE-2008-73, relating to the CBOE’s proposal to make the portfolio 

margin pilot program permanent); and Exchange Act Release No. 58261 (Jul. 30,

2008), 73 FR 46116 (Aug. 7, 2008) (SR-NYSE-2008-66, relating to the NYSE’s 

proposal to make the portfolio margin pilot program permanent). FINRA Rule 4210 

(Margin Requirements) became effective December 2, 2010. See Exchange Act 

Release No. 62482 (July 12, 2010) 75 FR 41562 (July 16, 2010) (SR-FINRA-2010-

024, relating to FINRA’s proposal to adopt FINRA Rule 4210 (Margin Requirements) 

as part of the process of developing a consolidated FINRA rulebook) and FINRA 

Regulatory Notice 10-45. As of February 14, 2019, of the 3,777 broker-dealers 

registered with the SEC, FINRA is the designated examining authority for 3,654 firms 

(96.7%).

37 Id. 

38 See DCO General Provisions and Core Principles, 76 FR 69334, 69364-69379 (Nov. 

8, 2011).

39 The CFTC adopted enhanced risk management requirements for all registered DCOs 

in 2011. See id. 
16

excluded.40 Any of a DCO’s clearing members that are FCMs and that are clearing 

security futures on behalf of customers would be subject to CFTC Rule 41.45(b)(1).41 

In 2016, the SEC adopted final rules applicable to clearing agencies registered 

with the SEC, including SEC Rule 17Ad-22(e)(6), to establish enhanced standards for 

the operation and governance of registered clearing agencies that meet the definition of 

“covered clearing agency.42 This rule requires a covered clearing agency that provides 

central clearing services to establish, implement, maintain, and enforce written policies 

and procedures reasonably designed to, as applicable, cover its credit exposures to its 

participants by establishing a risk-based margin system that meets certain minimum 

standards prescribed in the rule.43 OCC, as a covered clearing agency, is subject to 

these rules, and its broker-dealer clearing members that clear security futures are 

subject to SEC Rule 403(b)(1).44 

 40 For example, CFTC Rule 39.13(g)(8)(ii) (requiring DCOs to collect customer initial 

margin, for non-hedge positions, at a level that is greater than 100% of the DCO’s 

initial margin requirements) does not apply to initial margin collected for security 

futures positions. In September 2012, the CFTC’s Division of Clearing and Risk 

issued an interpretive letter regarding CFTC Rule 39.13(g)(8)(ii) to provide 

clarifications to DCOs complying with the rule. CFTC Letter No. 12-08 (Sept. 14, 

2012). CFTC Letter No. 12-08 states that the customer margin rule under CFTC Rule 

39.13(g)(8)(ii) “does not apply to customer initial margin collected as performance 

bond for customer security futures positions.” CFTC Letter No. 12-08 is limited in its 

discussion to CFTC Rule 39.13(g)(8)(ii) only and, accordingly, the remaining 

provisions of CFTC Rule 39.13 continue to apply to DCOs clearing security futures. 

41 Currently, the OCC is the only clearinghouse in the United States that clears security 

futures. OCC is registered with the SEC as a clearing agency pursuant to Section 17A 

of the Exchange Act and registered with the CFTC as a DCO pursuant to Section 5b of 

the CEA. 

42 See Standards for Covered Clearing Agencies, Exchange Act Release No. 78961 

(Sept. 28, 2016), 81 FR 70786 (Oct. 13, 2016). 

43 17 CFR 240.17Ad-22(e)(6). 

44 17 CFR 242.403(b)(1).
17

C. Consideration of SROs’ Risk-Based Portfolio Margining 

Approaches

As discussed below, the Commissions are proposing to amend the customer 

margin requirements for security futures that are held outside of risk-based portfolio 

margining accounts. This amended margin requirement would equal the level of 

margin required to be collected for security futures under risk-based portfolio 

margining methodologies. The amended margin requirement also would equal the 

margin requirement for an unhedged exchange-traded option held in a securities 

portfolio margin account. Security futures and exchange-traded options held in 

securities accounts are permitted to take advantage of SRO risk-based portfolio 

margining, and the Commissions are seeking to align the margin requirement for 

security futures not held in portfolio margin accounts (by lowering their overall 

margin rate) with security futures and exchanged-traded options held in these 

securities accounts. 

Under the SRO risk-based portfolio margining rules, the minimum initial and 

maintenance margin on a customer’s entire portfolio, including an unhedged position 

in a security future or exchange-traded option, shall be the greater of: (i) the amount 

of any of the ten equidistant valuation points representing the largest theoretical loss in 

the portfolio as calculated under the rule,45 or (ii) the total calculated by multiplying 

 45 The actual percentage used to stress a financial instrument will depend on the financial 

instrument. For example, the up/down market move (high and low valuation points) is 

+6%/-8% for high capitalization, broad-based market indexes; +/-10% for non-high 

capitalization, broad-based market indexes; and +/-15% for any other eligible product 

that is, or is based on, an equity security or a narrow-based index. See FINRA Rule 

4210(g)(2)(F) and CBOE Rule 12.4(a)(11). Portfolio types containing volatility 

indexes are subject to market moves of +/-20% for 30-day implied volatility, and +/-

40% for 9-day implied volatility. See CBOE Rule 12.4(a)(11).
18

$0.375 for each position by the instrument’s multiplier, not to exceed the market value 

in the case of long positions.46

The SRO risk-based portfolio margining system approved by the SEC is a 

methodology for determining a customer’s margin requirement by calculating the 

greatest theoretical loss on a portfolio of financial instruments at ten equidistant points 

along a range representing a potential percentage increase and decrease in the value of 

the instrument or underlying instrument in the case of a derivative. Theoretical gains 

and losses for each instrument in the portfolio are netted at each valuation point along 

the range to derive a potential portfolio-wide gain or loss for the point. Under current 

SRO risk-based portfolio margining rules, the range of theoretical gains and losses for 

portfolios of security futures and exchange-traded options that are based on a single 

equity security or narrow-based index is a market increase of 15% and a decrease of 

15% (i.e., the valuation points would be +/- 3%, 6%, 9%, 12%, and 15%).47 

In addition to requiring a 15% margin for unhedged security futures and 

exchange-traded options, as a pre-condition to offering portfolio margining to 

customers under the SRO risk-based portfolio margining system, security futures 

intermediaries are required to establish a comprehensive, written risk analysis 

methodology to assess the potential risk to the security futures intermediary’s capital 

 46 See FINRA Rule 4210(g)(7) and CBOE Rule 12.4(e).

47 A theoretical options pricing model is used to derive position values at each valuation 

point for the purpose of determining the gain or loss. See FINRA Rule 4210(g)(2)(F) 

(defining the term “theoretical gains and losses”). For example, assuming that the 

15% market move creates the largest theoretical loss in the portfolio and that security 

futures have a linear function (i.e., a price movement in the underlying instrument will 

translate into a specific dollar value change in the security future), the initial and 

maintenance margin for a security future will equal close to 15% of the overall 

unhedged security futures portfolio. 
19

over a specified range of possible market movements for positions held in a securities 

portfolio margin account.

48

D. Consideration of Statutory Requirements

As noted above, in Section 7(c)(2)(B)(iii) of the Exchange Act49 Congress 

provided that the margin requirements for security futures must be consistent with the 

margin requirements for comparable exchange-traded options, and that the initial and 

maintenance margin levels for security futures may not be lower than the lowest level 

of margin, exclusive of premium, required for any comparable exchange-traded 

option. 

As noted above, despite some distinct economic uses for exchange-traded 

options and security futures, both products share similar risk profiles. Accordingly, 

the Commissions are proposing to apply margin requirements to security futures that 

are consistent with the margin requirements for comparable exchange-traded options. 

In summary, as discussed in detail below, because unhedged exchange-traded 

options and security futures in SRO risk-based portfolio margining programs were 

permitted to be margined at a lower 15% rate as early as 2008, when the SRO riskbased portfolio margining programs became permanent,50 the Commissions are 

proposing to amend their joint margin rules relating to security futures to reduce the 

minimum required margin for unhedged security futures from 20% to 15%, reflecting 

 48 See FINRA Rule 4210(g)(1) and CBOE Rule 15.8A. See also CFTC Rule 1.11 

(requiring FCMs to establish risk management programs that address market, credit, 

liquidity, capital and other applicable risks, regardless of the type of margining 

offered). 

49 15 U.S.C. 78g(c)(2)(B)(iii).

50 See supra note 36.
20

the current margin requirements available for comparable exchange-traded options.51

With regard to the other three statutory requirements, the Commissions 

preliminarily believe this proposed action is consistent with preserving the financial 

integrity of the security futures market, is unlikely to lead to systemic risk, and is 

consistent with the margin requirements established by the Federal Reserve Board 

under Regulation T.52

II. DISCUSSION

A. Minimum Margin for Unhedged Positions

1. Current Security Futures Margin Rules

Under existing CFTC and SEC regulations, the current minimum initial and 

maintenance margin levels required of customers for each unhedged long or short 

position in security futures is 20% of the current market value of such a security 

future.53 This margin level was based on the margin requirements for an unhedged 

short, at-the-money exchange-traded option in 2002.54 Currently, the margin 

requirement for an unhedged short, at-the-money exchange-traded option held in a 

customer account that is not subject to SRO risk-based portfolio margining, where the 

underlying instrument is either an equity security or a narrow-based index of equity 

 51 See 2001 Proposed Rules, 66 FR at 50726 (“Pending adoption of such [portfolio 

margin] systems by regulatory authorities, however, the 20 percent level is consistent 

with the current requirements for comparable equity options.”).

52 As discussed in the CFTC’s Consideration of Costs and Benefits and the SEC’s 

Economic Analysis, in sections IV.A and B, respectively, the Commissions believe 

that margin coverage is sufficient and tailored to preserve financial integrity and 

prevent systemic risk in the security futures market. 

53 See CFTC Rule 41.45(b), 17 CFR 41.45(b); SEC Rule 403(b), 17 CFR 242.403(b).

54 See 2002 Final Rules, 67 FR at 53157. 
21

securities, is 100% of the exchange-traded option proceeds, plus 20% of the value of 

the underlying security or narrow-based index.55 

2. SRO Risk-based Portfolio Margin Accounts may hold 

Comparable Exchange-Traded Options

When the Commissions adopted the 2002 Final Rules, market participants had 

no opportunity to margin short exchange-traded options on an equity security or a 

narrow-based index, at a rate lower than 20%. Therefore, according to Section 

7(c)(2)(B)(iii)(II) of the Exchange Act, the Commissions could not establish a margin 

level for security futures that was lower than the 20% margin level applicable to 

exchange-traded options. Now, after the adoption of the SRO risk-based portfolio 

margining for securities customer accounts, market participants may choose to hold 

their exchange-traded options in accounts that are margined at levels of 15% or 

lower.56 

At the time of the 2002 Final Rules, the SROs had not yet proposed portfolio 

margining rules for exchange-traded options. As of the publication of the 2002 Final 

Rules, all short exchange-traded options on an equity security or a narrow-based index 

were required to satisfy a 20% margin rate and it was the Commissions’ view that 

 55 See generally FINRA Rule 4210 and CBOE Rule 12.3. For long, exchange-traded 

options, the purchaser is generally required to pay the full amount of the contract. 

56 As stated above, SRO risk-based portfolio margin rules permit a security futures 

intermediary to combine certain of a customer’s securities positions to compute 

margin requirements. In cases where a customer holds hedged positions (such as 

options) on the same underlying security, the portfolio margin requirement may be 

less than 15%. For purposes of the analysis of the proposed rule amendments, 

however, the Commissions are determining whether the proposed 15% margin 

requirement for an unhedged security future held outside a securities portfolio margin 

account is comparable to a 15% margin requirement for unhedged exchanged-traded 

options held in a securities portfolio margin account.
22

security futures should be subject to the same margin rate for those comparable 

exchange-traded options. 

Today, there is an alternative margin methodology for exchange-traded options 

that are held in a securities margin account and subject to permanent portfolio margin 

requirements implemented successfully by market participants. The Commissions 

preliminarily believe that they have satisfied the third prong of the Exchange Act’s 

margin requirements to determine that the margin rate for security futures should be 

consistent with the margin rate for those exchange-traded options. The Commissions 

preliminarily believe there is sufficient basis to make that determination at this time, 

and are proposing that the margin rate for unhedged security futures be consistent 

with, and the same as, the margin rate for unhedged exchange-traded options held in a 

risk-based portfolio margining account. 

3. Minimum Levels of Margin Required for Security Futures

Congress stated explicitly that the margin level for a security future should not 

be lower than the lowest level of margin for any comparable exchange-traded option,57

but it did not state a specific amount that the Commissions would be required to set as 

a minimum margin requirement. Today, there are exchange-traded options based on 

an equity security or narrow-based index that are margined at 15%, or lower, as a 

result of portfolio margining that is now being offered by a number of SROs. 

Congress intended for the Commissions to set a margin level for a security future that 

was not lower than the margin rate required for comparable exchange-traded options, 

which is to say that the Commissions cannot set a margin rate for security futures 

 57 15 U.S.C. 78g(c)(2)(B)(iii)(II).
23

lower than 15%. The margin required for an unhedged exchange-traded option in a 

risk-based portfolio margin account, calculated using the SROs’ current rules, will 

equal 15% or less of the underlying equity security’s value, because the largest 

theoretical loss produced by shocking the portfolio will not be more than 15%. 

Because the current SRO required margin levels for unhedged exchange-traded 

options held in a portfolio margin account are set at a level based on shocking the 

portfolio at 15% price movements, the Commissions preliminarily believe that the 

unhedged security futures margin rate should not be lower than 15%. Therefore, the 

Commissions’ proposal to lower the margin requirement for security futures complies 

with the statutory requirement that the margin level for a security future be consistent 

with the margin for any comparable exchange-traded option. 

4. The Commissions have Authority to Determine which 

Exchange-Traded Options are Comparable to Security 

Futures

In this proposal, the Commissions seek to align the margin rate for security 

futures with the lower portfolio-based margin rate for exchange-traded options 

because the Commissions view exchange-traded options held in portfolio margin 

accounts as comparable to security futures that may be held alongside the exchangetraded options. 

Congress did not instruct the Commissions to set the margin requirement for 

security futures at the same exact level as the margin requirements for exchange-traded 

options. The Commissions are required to establish a margin requirement that is 

“consistent” with the margin requirements for “comparable” exchange-traded options. 

Because the Commissions have some flexibility in establishing the margin rate for 

security futures, the Commissions are making the determination that establishing the 
24

margin rate for unhedged security futures at the same rate as the margin rate for 

exchange-traded options that are held alongside security futures inside a portfolio 

margin account subject to an SRO’s portfolio margining rules will provide the most 

consistent result for security futures. 

The Commissions are proposing to decrease the margin requirement for 

unhedged security futures from 20% to 15% in order to reflect the comparability 

between unhedged security futures and exchange-traded options that are held in riskbased portfolio margin accounts. The SRO portfolio margining rules, upon which this 

change is based, are discussed in more detail below. 

The Commissions explained in the 2001 proposing release for customer margin 

for security futures that “the Federal Reserve Board has expressed the view that ‘more 

risk-sensitive, portfolio-based approaches to margining security futures products’ 

should be adopted [citing the FRB Letter]. Pending adoption of such systems by 

regulatory authorities, however, the 20% level is consistent with the current 

requirements for comparable equity options.”58

With the adoption of the SRO securities risk-based portfolio margining rules –

including portfolio margining for security futures – the Commissions have 

preliminarily determined that a proposed minimum margin level of 15% meets the 

comparability standard of Section 7(c)(2) of the Exchange Act.59 Under the SROs’ 

securities risk-based portfolio margining rules, a security futures intermediary may 

combine a customer’s related products and calculate margin for a group of similar 

 58 See 2001 Proposed Rules, 66 FR at 50726.

59 See 15 U.S.C. 78g(c)(2).
25

products on a portfolio margin basis. Each group of products may be subject to a 

different margin calculation, depending on its risk profile.60 Portfolios containing 

exchange-traded options and security futures based on the same underlying security, 

such as an individual equity or narrow-based index are grouped together.61 SRO rules 

calculate the margin requirement for these exchange-traded options and security 

futures by exposing the instruments to market moves that are +/-15%. The 

Commissions are proposing to allow security futures intermediaries to margin security 

futures held outside of these portfolios the same as security futures held inside of the 

portfolios with other instruments. As a result of this change, security futures held in 

futures accounts and strategy-based securities margin accounts would be subject to the 

same margin requirements as unhedged security futures held in securities portfolio 

margin accounts. The Commissions are proposing to require 15% margin for 

unhedged security futures because it would bring security futures held outside of a 

securities portfolio margin account into alignment with the margin requirements for 

unhedged security futures held within a securities account using risk-based portfolio 

 60 Each of the SROs has different portfolio types that will be margined according to the 

portfolio’s risk profile. These portfolio types include: (i) high capitalization, broadbased market index (margin required is calculated using +6/-8% market moves), (ii) 

non-high capitalization, broad-based market index (margin required is calculated using 

+/-10% market moves), (iii) narrow-based index (margin required is calculated using 

+/-15% market moves), (iv) individual equity (margin required is calculated using +/-

15% market moves), (v) volatility index (30-day implied) (margin required is 

calculated using +/-20% market moves), and (vi) volatility index (9-day implied) 

(margin required is calculated using +/-40% market moves). See, e.g., FINRA Rule 

4210(g)(2)(F) and CBOE Rule 12.4(a)(11).

61 Certain portfolios are allowed offsets such that, at the same valuation point, for 

example, 90% of a gain in one portfolio may reduce or offset a loss in another 

portfolio. These offsets would be allowed between portfolios within the narrow-based 

index group, but not for class groups containing different individual equity securities 

or eligible products (such as options and security futures) as the underlying security.
26

margining. 

5. The Margin Requirements are Consistent for Comparable 

Exchange-traded Options

Under the statutory requirement, customer margin requirements, including the 

establishment of levels of margin (initial and maintenance) for security futures must be 

consistent with the margin requirements for comparable options traded on any 

exchange registered pursuant to Section 6(a) of the Exchange Act. As noted above, 

the Commissions believe that certain types of exchange-traded options, no matter what 

type of an account they are in, are comparable to security futures. The margin 

requirements for comparable exchange-traded options and security futures must be 

consistent. 

Under this proposal, the Commissions are using a stress level percentage set 

out for unhedged exchange-traded options based on an equity security or narrow-based 

index in a portfolio margin account (e.g., +/-15%) to establish a consistent margin 

level for security futures held outside of a securities portfolio margin account, which 

use a fixed-rate percentage of market value to set margin.62 While these two regimes 

reflect certain differences (in that portfolio margin calculates margin on a portfolio or 

net basis for securities with the same underlying position, and outside a securities 

portfolio margin account, margin is calculated on a position-by-position basis), the 

 62 While the Commissions are using a single unhedged option for comparison, the 

Commissions note that a long (short) security future position can be replicated by a 

portfolio containing one long (short) at-the-money call and one short (long) at-themoney put. This options portfolio creates a synthetic security futures position. The 

margin requirement applicable to the options portfolio, under approved SRO portfolio 

margin system rules, is also 15%. In addition, a very deep-in-the-money call or put on 

the same security (with a delta of one) is an option contract comparable to a security 

futures contract that will also result in a consistent 15% margin level. 
27

Commissions believe that these two regimes are consistent when comparing unhedged 

security futures with comparable exchange-traded options.

As stated above, the Commissions noted in the 2001 Proposed Rules that 

“[p]ending adoption of such [portfolio margining] systems by regulatory authorities, 

however, the 20% level is consistent with the current requirements for comparable 

equity options.”63 Since the adoption of the SRO risk-based portfolio margin rules, 

subsequent to the adoption of the 2002 Final Rules, unhedged exchanged-traded 

options based on an equity security or a narrow-based index and unhedged security 

futures held in a securities portfolio margin account may be margined at 15%. As a 

result of these developments, the Commissions are proposing to reduce the margin 

requirement for an unhedged security future held outside of a securities portfolio 

margin account from 20% to 15%. Consequently, the Commissions preliminarily 

believe that the proposed level of margin is consistent with the margin requirements 

for comparable options traded on any exchange registered pursuant to Section 6(a) of 

the Exchange Act. 

6. The Proposed Margin Rule is Consistent with the Federal 

Reserve’s Regulation T

Section 7(c)(2)(B)(iv) of the Exchange Act requires that margin requirements 

for security futures (other than levels of margin), including the type, form, and use of 

collateral, must be consistent with the requirements of Regulation T.64 In the 2002 

Final Rules, while the Commissions determined not to apply Regulation T in its 

entirety to margin requirements for security futures, the Commissions adopted final 

 63 2001 Proposed Rules, 66 FR at 50726.

64 15 U.S.C. 78g(c)(2)(B)(iv).
28

rules which included certain provisions that govern account administration, type, form, 

and use of collateral, calculation of equity, withdrawals from accounts, and the 

treatment of undermargined accounts. In the 2002 Final Rules, the Commissions 

stated that “the inclusion of these provisions in the Final Rules satisfies the statutory 

requirement that the margin rules for security futures be consistent with Regulation 

T.”65 Because the proposed amendments today solely relate to a reduction in the 

“levels of margin” for security futures, which are not required under the Exchange Act 

to be consistent with Regulation T, the Commissions preliminarily believe that the 

margin requirements for security futures as proposed to be amended would continue to 

be consistent with Regulation T.

7. The Proposed Margin Rule Permits Higher Margin 

Requirements

Again, under this proposal, the joint margin regulations will continue to permit 

SROs and security futures intermediaries to establish higher margin levels and to take 

appropriate action to preserve their own financial integrity.66 The proposed minimum 

margin requirement of 15% would apply to an unhedged position in a security future, 

whether the position is held in a securities account or a futures account.67 The 15% 

margin requirement for unhedged security futures would not preclude the use of an 

 65 2002 Final Rules, 67 FR at 53155.

66 See CFTC Rule 41.42(c)(1), 17 CFR 41.42(c)(1); SEC Rule 400(c)(1), 17 CFR 

242.400(c)(1).

67 In its petition, OCX stated that “because of operational issues at the securities firms,

almost all security futures positions are carried in a futures account regulated by the 

CFTC and not in a securities account. The proposed joint rulemaking would permit 

customers carrying security futures in futures accounts to receive margin treatment 

consistent with that permitted under the [portfolio] margining provisions of CBOE.” 

See OCX Petition at 2.
29

existing portfolio margining system, such as SPAN, by an FCM for security futures 

held in a futures account, so long as the portfolio margining system is modified to 

produce results that comply with the margin requirements for security futures.68

8. Request for Comments

In summary, the Commissions propose that the required minimum margin for 

each long or short position in a security future shall be 15% of the current market 

value of such security future. The Commissions request comment on all aspects of the 

proposed amendment to reduce the margin requirement to 15%. In addition, the 

Commissions request comment, including empirical data in support of the comments, 

on the following questions related to the proposal:

• As discussed above, the Commissions believe that because the margin 

requirement for a comparable option held in a portfolio margin account is 

calculated by exposing the option to market moves that are +/-15%, the margin 

methodologies for security futures and comparable exchange-traded options 

are consistent. Is the Commissions’ belief correct? If not, why not? 

• Is the proposed reduction in margin for security futures to 15% consistent with 

the margin requirements for comparable exchange-traded option contracts

based on an equity security or narrow-based index held in a securities portfolio 

margin account? Is it appropriate to compare the proposed margin requirement 

 68 For example, a SPAN risk-based portfolio margining methodology can be used to 

compute required initial or maintenance margin that results in margin levels that are 

equal to or higher than the margin levels required by the proposed rules. In this 

regard, for example, the minimum margin requirement for unhedged security futures 

under the proposed rules would be 15%, and SPAN could not recognize any offset for 

combination positions that is not permitted under SRO rules, as provided in CFTC 

Rule 41.45(b)(2), 17 CFR 41.45(b)(2); SEC Rule 403(b)(2), 17 CFR 242.403(b)(2). 

See also note 27 in the 2002 Final Rules, 67 FR at 53148.
30

for an unhedged security futures position held outside a portfolio margin 

account to an unhedged exchange-traded option held in a securities portfolio 

margin account for purposes of the comparability standard in Section 

7(c)(2)(B)(iii)(I) of the Exchange Act?

• Are there any other comparisons or methodologies for comparison that the 

Commissions should consider in determining whether the proposed reduction 

in margin to 15% for security futures meets the standards in Section 

7(c)(2)(B)(iii) of the Exchange Act with respect to comparing the margin 

requirements for security futures with the margin requirements for comparable 

exchange-traded options? For example, should the comparison or 

methodologies for comparable options be based on a specific option position 

(or positions) held in a securities portfolio margin account, such as a deep inthe-money options position or matched pairs of long-short options positions? 

If so, please identify the position or positions and explain how they would meet 

the comparability standards under the Exchange Act.

• Are there any other risk-based margin methodologies that could be used to 

prescribe margin requirements for security futures? If so, please identify the 

margin methodologies and explain how they would meet the comparability 

standards under the Exchange Act.

B. Margin Offsets
31

The Commissions’ joint margin rules permit SROs69 to establish margin levels 

for offsetting positions involving security futures, which are lower than the required 

margin levels for unhedged positions.70 Thus, an SRO may adopt rules that set the 

required initial or maintenance margin level for an offsetting position involving 

security futures and related positions at a level lower than the level that would be 

required if the positions were margined separately. Such rules must meet the criteria 

set forth in Section 7(c)(2)(B) of the Exchange Act71 and must be effective in 

accordance with Section 19(b)(2) of the Exchange Act72 and, as applicable, Section 

5c(c) of the CEA.73

In issuing the 2002 Final Rules, the Commissions published a table of offsets 

for security futures that the Commissions had identified as consistent with those 

permitted for similar offsetting positions involving exchange-traded options and that 

would qualify for reduced margin levels.74 The Commissions are proposing to republish the table of offsets to reflect the proposed 15% minimum margin requirement.

 69 As noted above, for the sake of clarity and consistency, the defined term “SRO” is 

used to describe both self-regulatory organizations and self-regulatory authorities

throughout this proposal. 

70 See CFTC Rule 41.45(b)(2), 17 CFR 41.45(b)(2); SEC Rule 403(b)(2), 17 CFR 

242.403(b)(2). 

71 15 U.S.C. 78g(c)(2)(B).

72 15 U.S.C. 78s(b)(2).

73 7 U.S.C. 7a-2(c).

74 See 2002 Final Rules, 67 FR at 53159. The offset table was published in the 2002 

Final Rules. It is not part of the Code of Federal Regulations. See also FINRA Rule 

4210(f)(10)(B)(iii), CBOE Rule 12.3(k)(6), OCX Rule 515(m), and Schedule A to 

Chapter 5 of the OneChicago Exchange Rulebook. 
32

As compared to the offsets identified at the time of the adoption of the joint 

margin rules, certain offsets would reflect a 15% minimum margin requirement for 

certain offsetting positions (as opposed to the current 20% requirement) and would 

retain the same percentages for all other offsets.75 There are no additional adjustments 

to the offsets table, other than minor footnote edits.

The Commissions preliminarily believe that the offsets identified in the 

following re-stated table are consistent with the strategy-based offsets permitted for 

comparable offset positions involving exchange-traded options. SROs seeking to 

permit trading in security futures generally should modify their rules that impose 

levels of required margin for offsetting positions involving security futures in 

accordance with the margin percentages identified in the following table of offsets.

DESCRIPTION OF 

OFFSET

SECURITY 

UNDERLYING 

THE 

SECURITY 

FUTURE

INITIAL MARGIN 

REQUIREMENT

MAINTENANCE 

MARGIN 

REQUIREMENT

1 Long security future or 

short security future

Individual stock 

or narrow-based 

security index

15% of the current 

market value of the 

security future.

15% of the current 

market value of the 

security future.

2 Long security future (or 

basket of security futures 

representing each 

component of a narrowbased securities index1

)

and

long put option2 on the 

same underlying security 

(or index)

Individual stock 

or narrow-based 

security index

15% of the current 

market value of the long 

security future, plus pay 

for the long put in full.

The lower of: (1) 10% of 

the aggregate exercise 

price3 of the put plus the 

aggregate put out-of-themoney4 amount, if any; 

or (2) 15% of the current 

market value of the long 

security future.

 75 The offset table lists the margin percentages for a long security future and a short 

security future. These percentages are the baseline, not offsets, but they are included 

in the table to preserve consistency with the earlier offset table. 
33

3 Short security future (or 

basket of security futures 

representing each 

component of a narrowbased securities index1

)

and

short put option on the 

same underlying security 

(or index)

Individual stock 

or narrow-based 

security index

15% of the current 

market value of the short 

security future, plus the 

aggregate put in-themoney amount, if any. 

Proceeds from the put 

sale may be applied.

15% of the current 

market value of the short 

security future, plus the

aggregate put in-themoney amount, if any.5

4 Long security future 

and

short position in the same 

security (or securities 

basket1

) underlying the 

security future 

Individual stock 

or narrow-based 

security index

The initial margin 

required under 

Regulation T for the 

short stock or stocks.

5% of the current market 

value as defined in 

Regulation T of the stock 

or stocks underlying the 

security future.

5 Long security future 

(or basket of security 

futures representing each 

component of a narrowbased securities index1

)

and

short call option on the 

same underlying security 

(or index)

Individual stock 

or narrow-based 

security index

15% of the current 

market value of the long 

security future, plus the 

aggregate call in-themoney amount, if any. 

Proceeds from the call 

sale may be applied.

15% of the current 

market value of the long 

security future, plus the 

aggregate call in-themoney amount, if any. 

6 Long a basket of narrowbased security futures 

that together tracks a 

broad based index1 and 

short a broad-based 

security index call option 

contract on the same 

index

Narrow-based 

security index

15% of the current 

market value of the long 

basket of narrow-based 

security futures, plus the 

aggregate call in-themoney amount, if any. 

Proceeds from the call 

sale may be applied.

15% of the current 

market value of the long 

basket of narrow-based 

security futures, plus the 

aggregate call in-themoney amount, if any.

7 Short a basket of narrowbased security futures 

that together tracks a 

broad-based security 

index1 and short a broadbased security index put 

option contract on the 

same index

Narrow-based 

security index

15% of the current 

market value of the short 

basket of narrow-based 

security futures, plus the 

aggregate put in-themoney amount, if any. 

Proceeds from the put 

sale may be applied.

15% of the current 

market value of the short 

basket of narrow-based 

security futures, plus the 

aggregate put in-themoney amount, if any.

8 Long a basket of narrowbased security futures 

that together tracks a 

broad-based security 

index1 and 

long a broad-based 

security index put option 

contract on the same 

index

Narrow-based 

security index

15% of the current 

market value of the long 

basket of narrow-based 

security futures, plus pay 

for the long put in full.

The lower of: (1) 10% of 

the aggregate exercise 

price of the put, plus the 

aggregate put out-of-themoney amount, if any; or 

(2) 15% of the current 

market value of the long 

basket of security 

futures. 

 
34

9

Short a basket of narrowbased security futures 

that together tracks a 

broad-based security 

index1 and 

long a broad-based 

security index call option 

contract on the same 

index

Narrow-based 

security index

15% of the current 

market value of the short 

basket of narrow-based 

security futures, plus pay 

for the long call in full.

The lower of: (1) 10% of 

the aggregate exercise 

price of the call, plus the 

aggregate call out-of-themoney amount, if any; or 

(2) 15% of the current 

market value of the short 

basket of security 

futures. 

10 Long security future

and

short security future on 

the same underlying 

security (or index) 

Individual stock 

or narrow-based 

security index

The greater of: 5% of 

the current market value 

of the long security 

future; or (2) 5% of the 

current market value of 

the short security future. 

The greater of: (1) 5% of 

the current market value 

of the long security 

future; or (2) 5% of the 

current market value of 

the short security future. 

11 Long security future,

long put option 

and

short call option. The 

long security future, long 

put and short call must 

be on the same 

underlying security and 

the put

and call must have the 

same exercise price.

(Conversion)

Individual stock 

or narrow-based 

security index

15% of the current 

market value of the long 

security future, plus the 

aggregate call in-themoney amount, if any, 

plus pay for the put in 

full. Proceeds from the 

call sale may be applied.

10% of the aggregate 

exercise price, plus the 

aggregate call in the 

money amount, if any.

12 Long security future,

long put option

and

short call option. The 

long security future, long 

put and short call must 

be on the same 

underlying security and 

the put exercise price 

must be below the call 

exercise price. 

(Collar)

Individual stock 

or narrow-based 

security index

15% of the current 

market value of the long 

security future, plus the 

aggregate call in-themoney amount, if any, 

plus pay for the put in 

full. Proceeds from call 

sale may be applied.

The lower of: (1) 10% of 

the aggregate exercise 

price of the put plus the 

aggregate put out-of-themoney amount, if any; or 

(2) 15% of the aggregate 

exercise price of the call, 

plus the aggregate call 

in-the-money amount, if 

any.

13 Short security future

and

long position in the same 

security (or securities 

basket1

) underlying the 

security future 

Individual stock 

or narrow-based 

security index

The initial margin 

required under 

Regulation T for the long 

stock or stocks.

5% of the current market 

value, as defined in 

Regulation T, of the long 

stock or stocks.

14 Short security future

and

long position in a security 

immediately convertible 

into the same security 

underlying the security 

future, without 

restriction, including the 

payment of money

Individual stock 

or narrow-based 

security index

The initial margin 

required under 

Regulation T for the long 

security.

10% of the current 

market value, as defined 

in Regulation T, of the 

long security.
35

15 Short security future (or 

basket of security futures 

representing each 

component of a narrowbased securities index1

)

and

long call option or 

warrant on the same 

underlying security (or 

index)

Individual stock 

or narrow-based 

security index

15% of the current 

market value of the short 

security future, plus pay 

for the call in full.

The lower of: (1) 10% of 

the aggregate exercise 

price of the call, plus the 

aggregate call out-of-themoney amount, if any; or 

(2) 15% of the current 

market value of the short 

security future. 

16 Short security future,

Short put option

and

long call option. The 

short security future, 

short put and long call 

must be on the same 

underlying security and 

the put

and call must have the 

same exercise price.

(Reverse Conversion)

Individual stock 

or narrow-based 

security index

15% of the current 

market value of the short 

security future, plus the 

aggregate put in-themoney amount, if any, 

plus pay for the call in 

full. Proceeds from put 

sale may be applied. 

10% of the aggregate 

exercise price, plus the 

aggregate put in-themoney amount, if any.

17 Long (short) a basket of 

security futures, each 

based on a narrow-based 

security index that 

together tracks the 

broad-based index1

and

short (long) a broad 

based-index future

Narrow-based 

security index

5% of the current market 

value of the long (short) 

basket of security 

futures.

5% of the current market 

value of the long (short) 

basket of security 

futures.

18 Long (short) a basket of 

security futures that 

together tracks a narrowbased index1

and

short (long) a narrow 

based-index future

Individual stock

and

narrow-based 

security index

The greater of: (1) 5% of 

the current market value 

of the long security 

future(s); or (2) 5% of 

the current market value 

of the short security 

future(s).

The greater of: (1) 5% of 

the current market value 

of the long security 

future(s); or (2) 5% of 

the current market value 

of the short security 

future(s).

19 Long (short) a security 

future and short (long) 

an identical security 

future traded on a 

different market.6

Individual stock 

and narrowbased security 

index

The greater of: (1) 3% of 

the current market value 

of the long security 

future(s); or (2) 3% of 

the current market value 

of the short security 

future(s).

The greater of: (1) 3% of 

the current market value 

of the long security 

future(s); or (2) 3% of 

the current market value 

of the short security 

future(s).

 

1 Baskets of securities or security futures contracts replicate the securities that compose the 

index, and in the same proportion.

2 Generally, unless otherwise specified, stock index warrants are treated as if they were index 

options.

3 “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.

4 “Out-of-the-money” amounts are determined as follows:
36

The Commissions request comment on the re-stated table of offsets to reflect the 

proposed 15% minimum margin requirement. In addition, the Commissions request 

comment, including empirical data in support of the comments, on the following 

questions related to the re-stated table of offsets:

• In light of the proposed reduction in margin requirements for unhedged 

security futures from 20% to 15%, should any of the other percentages in the 

offsets table also be reduced? If so, would those percentages still be consistent 

with the margin requirements for comparable exchange-traded options?

 

(1) for stock call options and warrants, any excess of the aggregate exercise price of the 

option or warrant over the current market value of the equivalent number of shares of 

the underlying security;

(2) for stock put options or warrants, any excess of the current market value of the 

equivalent number of shares of the underlying security over the aggregate exercise 

price of the option or warrant;

(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.

5 “In the-money” amounts are determined as follows:

(1) for stock call options and warrants, any excess of the current market value of the 

equivalent number of shares of the underlying security over the aggregate exercise 

price of the option or warrant;

(2) for stock put options or warrants, any excess of the aggregate exercise price of the 

option or warrant over the current market value of the equivalent number of shares of 

the underlying security;

(3) for stock index call 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; 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.

6 Two security futures are 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.
37

• Are there offset positions in addition to those enumerated in the above chart 

that are consistent with the margin requirements for comparable exchangetraded options, and which the Commissions should consider adding to the list 

of offsets?

• Are there offset positions included in the above chart which the Commissions 

should delete from the list of offsets?

III. PAPERWORK REDUCTION ACT 

A. CFTC

The Paperwork Reduction Act of 1995 (“PRA”)76 imposes certain 

requirements on federal agencies (including the CFTC and the SEC) in connection 

with their conducting or sponsoring any collection of information as defined by the 

PRA. The proposed rules do not require a new collection of information on the part of 

any entities subject to these rules. Accordingly, the requirements imposed by the PRA 

are not applicable to these rules.

B. SEC

The PRA77 imposes certain requirements on federal agencies (including the 

CFTC and the SEC) in connection with their conducting or sponsoring any collection 

of information as defined by the PRA. The proposed amendments do not contain a 

“collection of information” requirement within the meaning of the PRA. Accordingly, 

the PRA is not applicable. 

 

76 44 U.S.C. 3501 et seq.

77 Id.
38

IV. CONSIDERATION OF COSTS AND BENEFITS (CFTC) AND 

ECONOMIC ANALYSIS (SEC) OF THE PROPOSED AMENDMENTS

A. CFTC 

1. Introduction

Section 15(a) of the CEA requires the CFTC to consider the costs and benefits 

of its actions before promulgating a regulation under the CEA or issuing certain 

orders.78 Section 15(a) further specifies that the costs and benefits shall be evaluated 

in light of five broad areas of market and public concern: (1) protection of market 

participants and the public; (2) efficiency, competitiveness, and financial integrity of 

futures markets; (3) price discovery; (4) sound risk management practices; and (5) 

other public interest considerations. The CFTC considers the costs and benefits 

resulting from its discretionary determinations with respect to the Section 15(a) factors 

below. Where reasonably feasible, the CFTC has endeavored to estimate quantifiable 

costs and benefits. Where quantification is not feasible, the CFTC identifies and 

describes costs and benefits qualitatively. 

2. Economic Baseline

The CFTC’s economic baseline for purposes of considering the proposed

amendment is the security futures margin rule that exists today. In the 2002 Final 

Rules, the Commissions adopted security futures margin rules that complied with the 

statutory requirements under Section 7(c)(2)(B) of the Exchange Act. The rules state 

that, “the required margin for each long or short position in a security future shall be 

 78 7 U.S.C. 19(a).
39

twenty (20) percent of the current market value of such security future.”79 The 2002 

Final Rules also allow SROs to set margin levels lower than the 20% minimum 

requirement for customers with “an offsetting position involving security futures and 

related positions.”80 In addition, the 2002 Final Rules permit certain customers to take 

advantage of exclusions to the minimum margin requirement for security futures. 

The CFTC will consider the costs and benefits of this rule proposal as 

compared with the baseline of the current minimum initial and maintenance margin 

levels for unhedged security futures, which is set at 20% of the current market value of 

such security future.

3. Summary of Proposed Amendment

The proposed amendment would lower the minimum margin level for an 

unhedged position in a security future from 20% of its current market value to 15% of 

its current market value. In connection with this change, the security futures margin 

offsets table would be restated so that it is consistent with the proposed reduction in 

margin.

4. Description of Possible Costs

The CFTC has preliminarily determined that, to the extent that there are 

operational or technology costs associated with modifying operational and 

administrative systems for calculating security futures customer margin, such costs are 

not likely to be significant given that the infrastructure for calculating such margin 

already exists and is not likely to require major reprogramming. 

 79 CFTC Rule 41.45(b)(1), 17 CFR 41.45(b)(1). See CFTC Rule 41.43(a)(4), 17 CFR 

41.43(a)(4) (defining the term “current market value.”).

80 CFTC Rule 41.45(b)(2), 17 CFR 41.45(b)(2). 
40

i. Risk-Related Costs for Security Futures Intermediaries and 

Customers

There are three types of risk-related costs that could result from the adoption of 

the proposed amendment. The first risk-related cost is reducing margin requirements 

for security futures that could expose security futures intermediaries and their 

customers to losses in the event that margin collected is insufficient to protect against 

market moves and there is a default of a security futures intermediary or its customer. 

Pursuant to OCC’s bylaws, any security futures intermediary that is a clearing member 

of OCC grants a security interest in any account it establishes and maintains to OCC, 

and therefore a customer’s assets may be obligated to OCC upon default.

81 As a 

result, FCMs could be exposed to a loss if the 15% margin rate for security futures is 

insufficient. However, this risk is mitigated by the fact that if a 15% margin level is 

determined to be insufficient, the security futures intermediary has the authority to 

collect margin in an amount that exceeds the minimum requirement in order to protect 

its financial integrity.82 

A second type of risk-related cost might arise where an FCM collects the 

minimum margin required from customers in order to maintain or expand its customer 

business. Lower margin requirements might facilitate an FCM permitting its 

customers to take on additional risk in their positions in order to increase business for 

the FCM. Such additional risks could put the FCM at risk if the customer were to 

 81 See OCC Bylaws, Maintenance of Accounts, Section 3, Interpretations and Policies 

.07, adopted September 22, 2003, last accessed on January 3, 2018, available at 

https://www.theocc.com/components/docs/legal/rules_and_bylaws/occ_bylaws.pdf. 

82 See CFTC Rule 41.42(c)(1), 17 CFR 41.42(c)(1); SEC Rule 400(c)(1), 17 CFR 

242.400(c)(1). 
41

default, and other customers at the FCM could risk losses if the FCM or one of its 

customers defaulted. A related third type of risk-related cost stems from the 

possibility of increased leverage among security futures customers. Customers posting 

less margin to cover security futures positions might be able to increase their overall 

market exposure and thereby increase their leverage. 

The second and third risk-related costs are mitigated, to some degree, by 

regulations that apply to security futures intermediaries that are registered as FCMs. 

For example, FCMs are subject to capital requirements under CFTC regulations,83 and 

in instances where the security futures intermediary is jointly registered as a brokerdealer FCM, the SEC’s capital rules also apply.84 In addition, FCMs are required to 

establish a system of risk management policies and procedures pursuant to CFTC Rule 

1.11. This risk management program is designed to protect the FCM and its customers 

against a variety of risks, including the potential future exposure of a security futures 

position that initial and maintenance margin is designed to address. 

Lastly, risk-related costs to the security futures intermediary are further 

mitigated by the fact that OCX represents that the vast majority of its open interest is 

held by eligible contract participants (“ECPs”) as defined in Section 1a(18) of the 

CEA.85 Generally speaking, ECPs are financial entities or individuals with significant 

financial resources or other qualifications, that make them appropriate persons for 

 83 See CFTC Rule 1.17, 17 CFR 1.17. 

84 See SEC Rule 240.15c3-1, 17 CFR 240.15c3-1. 

85 See also CFTC Rule 1.3, 17 CFR 1.3. 
42

certain investments.86 According to data provided by OCX, over 99% of the notional 

value of OCX’s products was held by ECPs as of March 1, 2016 and March 1, 2017. 

ii. Appropriateness of Margin Requirements 

A possible risk-related cost of lowering margin requirements for security 

futures is that a DCO may not have sufficient margin on deposit to cover the potential 

future exposure of cleared security futures positions. However, as explained above, a 

review of margin coverage data for related options on futures supports the view that 

decreasing margin requirements from 20% to 15% margin will not have a significant 

effect on the safety and soundness of the security futures intermediaries and DCOs. 

Moreover, the risk management expertise at security futures intermediaries and DCOs, 

as well as the general applicability of CFTC Rule 39.13 to security futures, supports a 

view that DCOs and security futures intermediaries will continue to manage the risks 

of these products effectively even with lower margin requirements.87 

The CFTC has reviewed the security futures markets under normal market 

conditions and observed that a 15% level of margin would be sufficient to cover daily 

 86 For example, an individual can qualify as an ECP if the individual has amounts 

invested on a discretionary basis, the aggregate of which is in excess of: (i) 

$10,000,000; or (ii) $5,000,000 if the individual also enters into an agreement, 

contract, or transaction in order to manage the risk associated with an asset owned or 

liability incurred, or reasonably likely to be owned or incurred, by the individual. 

87 As discussed above, security futures intermediaries are authorized to collect margin 

above the amounts required by the Commissions. However, as for-profit entities, 

security futures intermediaries may be incentivized to lower their margin rates in order 

to compete for customer business. If security futures intermediaries engage in 

competition for business based on margin pricing, it is possible that security futures 

intermediaries will collect only the required level of margin (i.e., 15% under the 

proposed rule change), regardless of the market conditions, which could impair their 

ability to protect against market risk and losses. 
43

price moves in most instances (i.e., more than 99.5%).88 Therefore, the CFTC 

preliminarily believes that the proposed amendment will not have a substantial 

negative impact on (1) the protection of market participants or the public, (2) the 

financial integrity of security futures markets, or (3) sound risk management practices 

of DCOs or security futures intermediaries. 

The risk customers and/or intermediaries face from reducing margin for 

security futures is addressed at the clearinghouse level because there are additional 

protections under CFTC regulations. For example, CFTC Rule 39.13 requires a DCO 

to establish initial margin requirements that are commensurate with the risks of each 

product and portfolio. In addition, CFTC Rule 39.13 requires that initial margin 

models meet set liquidation time horizons and have established confidence levels of at 

least 99%. These DCO initial margin requirements are distinct from the margin 

requirements that are the subject of this proposal and serve to mitigate the possibility 

that a DCO may default (resulting in a systemic event). In the event that a DCO 

determined that a 15% margin level for security futures is insufficient to satisfy a 

 88 Conducting a value-at-risk analysis of 74 of the most liquid security futures contracts 

during a limited time-frame (November 2002 – June 2010), CFTC staff found that 

there were 195 instances where a 15% margin was insufficient and 99 instances where 

a 20% margin was insufficient. For all observations, a 15% margin was sufficient for 

99.81% of all observations while a 20% margin was sufficient for 99.91% of all 

observations. CFTC staff notes that this period covers the fall of 2008, one of the 

most volatile quarters in history. The CFTC staff also notes that since 2010, volatility 

in the equity markets has typically been lower (e.g., as measured by the Chicago 

Board Options Exchange Volatility Index (“VIX”)) than in the 2002 to 2010 period. 

In particular, the VIX, which measures market expectations of near term volatility as 

conveyed by stock index option prices, has, at its highest levels since June 2010, never 

reached levels higher than 48 (as compared to almost 90 at the peak during the 

financial crisis). It is therefore reasonable to conclude that a 15% margin would be 

sufficient for almost all days since 2010. See, e.g., VIX data available from the 

Federal Reserve Bank of Saint Louis at https://fred.stlouisfed.org/series/VIXCLS. 
44

DCO’s obligation under CFTC Rule 39.13, the DCO would be required to collect 

additional margin from its clearing members.89

The CFTC observes that the current and proposed margin requirements for 

security futures are materially distinct from initial margin requirements for DCOs. 

The initial margin requirements for DCOs are risk-based and designed to permit DCOs 

to use risk-based margin models to determine the appropriate level of margin to be 

collected, subject to the CFTC’s minimum requirements under CFTC regulations in 

Part 39. The current and proposed margin requirements for security futures do not 

incorporate risk-based strategies or calculations. Despite proposing a non-risk-based 

margin requirement for security futures, the CFTC continues to support the use of riskbased margin models for all derivatives because use of such models are a sound way 

for DCOs to manage their clearing risks appropriately. 

 89 The CFTC expects that any difference between the margin charged at the DCO and 

the margin charged by the security futures intermediary will be addressed by 

additional margin calls, if necessary. The DCO can require additional margin from its 

clearing members (which in some cases will be the security futures intermediary), to 

cover changes in market positions. DCOs and clearing members are familiar with 

margin call procedures and have established rules and policies to efficiently transfer 

funds when needed. If a customer’s account has insufficient funds to meet the margin

call, its clearing member may provide the amount to the DCO and collect it from the 

customer at a later time. In this scenario, the clearing member may take on a liability 

or additional risk on the customer’s behalf for a short period of time. The CFTC notes 

that this practice is the same for security futures as it is for other products subject to 

clearing and it does not view this temporary shifting of risk between the clearing 

member and the customer as a unique source of risk to security futures. Furthermore, 

this proposed change in required margin from 20% to 15% would not alter the 

relationship between DCOs and their clearing members, or between clearing members 

and their customers. The CFTC acknowledges that it is possible that DCOs and 

security futures intermediaries will collect different levels of margin, but it is not 

necessarily a result of this proposed rule change. Moreover, the difference in margin 

collected is not an unmitigated source of risk for the security futures intermediaries 

because they have the authority to collect additional funds from their customers in the 

event of a margin call and can choose to set margin levels higher than the minimum 

level required by the Commissions. 
45

iii. Costs Associated with Margin Offsets Table

The Commissions are proposing to restate the table of offsets for security 

futures to reflect the proposed 15% minimum margin requirement. The CFTC does 

not believe that lowering the margin requirements for certain offsets will increase 

costs to customers, security futures intermediaries, or DCOs. The categories of 

permissible offsets will remain the same and there will be no change to the inputs used 

to calculate the offset, other than to decrease the initial and maintenance margin on all 

security futures from 20 to 15%. Moreover, the same risk to the customers and 

security futures intermediaries will exist if the Commissions decrease the margin 

required for security futures trading combinations eligible for offsets as it will with 

security futures without an offset.

Finally, the CFTC notes that security futures intermediaries and customers will 

continue to be required to comply with daily mark-to-market and variation settlement 

procedures applied to security futures, as well as the large trader reporting regime that 

applies to futures accounts. 

5. Description of Possible Benefits

The CFTC has preliminarily determined that there are significant benefits 

associated with the proposed amendment. The proposed amendments would align 

customer margin requirements for security futures held in a futures or securities 

account with those that are held in a securities risk-based portfolio margin account. 

The CFTC believes that it would increase competition by establishing a level playing 

field between security futures carried in the SRO securities risk-based portfolio 

margining account and security futures carried in a futures account or a securities 

account. 
46

Additionally, the reduced minimum margin level could facilitate more trading 

in security futures, which would increase market liquidity to the benefit of market 

participants and the public. Increased liquidity could contribute to the financial 

integrity of security futures markets, particularly in the event an FCM finds that it 

must manage the default of a customer’s security futures positions. 

The lower minimum margin requirement also might decrease the direct cost of 

trading in security futures and increase capital efficiency because more funds would be 

available for other uses. Lowering the minimum margin requirement also could

enable the one U.S. security futures exchange to better compete in the global 

marketplace, where security futures traded on foreign exchanges are subject to riskbased margin requirements that are generally lower than those applied to security 

futures traded in the U.S. 

The proposal restates the table of offsets for security futures to reflect the 

proposed 15% minimum margin requirement. These offsets would continue to 

provide the benefits of capital efficiency to customers because offsets recognize the 

unique features of certain specified combined strategies and would permit margin 

requirements that better reflect the risk of these strategies. Moreover, the same 

benefits of lowering margin costs for customers and increasing business in security 

futures could result from lowering margin requirements for offsetting security futures 

positions. 

6. Consideration of Section 15(a) Factors

This section will discuss the expected results of the proposal to amend CFTC 

Rule 41.45(b)(1) to reduce the minimum initial and maintenance margin levels for 

each security future to 15% of the current market value of such contract from the 
47

current requirement of 20% in light of the five factors under Section 15(a) of the CEA, 

as itemized above.

i. Protection of market participants and the public 

The proposed amendment continues to protect market participants and the 

public from the risks of a default in the security futures market. As discussed above, 

the CFTC believes that a 15% minimum initial and maintenance margin requirement 

in combination with other protections, such as the general applicability of CFTC Rule 

39.13 to DCOs that offer to clear security futures products, will protect U.S. market 

participants, including security futures customers and security futures intermediaries, 

from the risk of a default in security futures. In addition, security futures 

intermediaries, such as FCMs, are authorized to collect additional margin from their 

customer if the FCM believes a customer’s positions may pose excessive risk. 

The existence of separate margin requirements at the DCO level provides 

assurance to the CFTC that lowering the minimum margin level for security futures 

will not present a risk to the financial system.90 In cases where the 15% margin level 

as determined by the security futures intermediary is insufficient to satisfy a DCO’s 

obligation under CFTC Rule 39.13, the DCO would be required to collect additional 

margin from its clearing members. As a result, DCOs will always have adequate 

margin to manage risks presented by security futures. 

 90 See CFTC Rule 39.13, 17 CFR 39.13.
48

Finally, the CFTC staff has reviewed market activity in security futures and 

found that a 15% level of margin would be sufficient to cover daily price moves in a 

significant number of instances (i.e., more than 99.5%).91

ii. The efficiency, competitiveness and financial integrity of the 

markets

This proposal is intended to enhance the efficiency and competitiveness of the 

security futures market in the U.S. by bringing the initial and maintenance margin 

requirements for security futures in line with requirements for security futures subject 

to an SRO risk-based portfolio margining program.92 Market participants trading in 

security futures will benefit from lower margin requirements, that more accurately 

reflect their risk exposures, and they will be able to use their capital more efficiently in 

other investment opportunities. Furthermore, a decrease in initial and maintenance 

margin requirements from 20% to 15% of the current market value of each security 

futures contract may increase the attractiveness of the U.S. security futures market and 

may increase the competitiveness of the U.S. security futures market with international 

markets. The proposal also improves the competitiveness of security futures as 

compared to exchange-traded options. For example, it would help to re-establish a 

level playing field between options exchanges and the security futures exchange, and 

between broker-dealers/securities accounts and FCMs/futures accounts. Overall, the 

 91 See supra note 88.

92 The CFTC preliminarily believes that this proposal effectively balances the need for 

greater efficiency with the statutory requirements under Section 7(c)(2)(B)(iii) of the 

Exchange Act, which prevents the CFTC from considering any alternatives to this 

proposal that would reduce the minimum initial margin and maintenance margin 

levels for unhedged security futures below 15%. The CFTC worked to identify 

alternatives, but it does not believe that there are any reasonable alternatives to this 

proposal. 
49

CFTC preliminarily believes that this proposal will have a positive effect on 

competition in the U.S. security futures market.93 

Furthermore, this proposal could enhance the financial integrity of the security 

futures market in the U.S. Lowering the amount of initial and maintenance margin 

required for customers trading in security futures may increase the number of 

customers trading in security futures and/or increase the amount of trading. Either an 

increase in the number of customers or trades in security futures market would 

strengthen the financial integrity of the security futures market by enhancing its 

liquidity. 

The CFTC preliminarily believes that a 15% margin requirement will be 

sufficient to protect against the risk of default in greater than 99% of cases. After 

examining the economic data, the CFTC believes that a 15% margin requirement for 

security futures will protect other customers and DCOs against most risks of default. 

Again, the CFTC notes that the DCOs clearing security futures are subject to 

CFTC regulations requiring the DCO to maintain adequate risk management policies, 

including initial margin requirements. DCOs may require additional margin, in an 

amount that is greater than 15%, on certain security futures positions or portfolios if 

the DCO notes particular risks associated with the products or portfolios. 

Accordingly, the proposed rule amendment would maintain or possibly improve the 

financial integrity of the security futures markets in the U.S. 

 93 See also the CFTC’s analysis of anti-trust considerations in section VII. below. The 

CFTC has preliminarily identified no anticompetitive effects of this proposal. 
50

iii. Price discovery 

As discussed above, the CFTC preliminarily believes that the proposed 

amendment is expected to have a positive effect on competition, which may result in 

some new customers entering the security futures market and increased trading by 

existing customers. In addition, trading from foreign markets may shift to the U.S. 

security futures market. This increased activity in the U.S. security futures market 

may have a positive effect on price discovery in the security futures market. While 

changes in price discovery may be difficult to measure, this proposal is unlikely to 

harm price discovery and indeed may improve price discovery in the security futures 

market in the U.S. 

iv. Risk management 

As discussed further above, margin requirements are a critical component of 

any risk management program for cleared financial products. Security futures have 

been risk-managed through central clearing and initial and maintenance margin 

requirements for over fifteen years. The CFTC recognizes the necessity of sound 

initial and maintenance margin requirements for DCO and FCM risk management 

programs. Initial and maintenance margin collected addresses potential future 

exposure, and in the event of a default, such margin protects non-defaulting parties 

from losses. 

v. Other public interest considerations

The CFTC has not identified any additional public interest considerations 

related to the costs and benefits of this proposal.
51

7. Request for Comment

The CFTC requests comment on all aspects of the costs and benefits associated 

with the proposed rule amendments, specifically, with regard to all Section 15(a) risk 

factors. In particular, the CFTC requests that commenters provide data and any other 

information or data upon which the commenters relied to reach any conclusions 

regarding the proposal. Finally, the CFTC seeks estimates and views regarding the 

specific costs and benefits for a security futures clearing organization, exchange, 

intermediary, or trader that may result from the adoption of the proposed rule 

amendment.

The CFTC seeks estimates of the costs and benefits that may result from the 

adoption of the proposed rule amendments to reduce the minimum margin requirement 

to 15% of current market value or the application of permitted margin offsets.

B. SEC 

1. Introduction

In the following economic analysis, the SEC considers the benefits and costs, 

as well as the effects on efficiency, competition, and capital formation that would 

result from the SEC’s proposed amendments. 94 The SEC evaluates these benefits, 

costs, and other economic effects relative to a baseline, which the SEC takes to be the 

 94 The Exchange Act states that when the SEC is engaging in rulemaking under the 

Exchange Act and is required to consider or determine whether an action is necessary 

or appropriate in the public interest, the SEC shall consider, in addition to the 

protection of investors, whether the action will promote efficiency, competition, and 

capital formation. 15 U.S.C. 78c(f). In addition, Exchange Act Section 23(a)(2) 

requires the SEC, when making rules or regulations under the Exchange Act, to 

consider, among other matters, the impact that any such rule or regulation would have 

on competition and states that the SEC shall not adopt any such rule or regulation 

which would impose a burden on competition that is not necessary or appropriate in 

furtherance of the Exchange Act. See 15 U.S.C. 78w(a)(2).
52

state of the markets for security futures products and the regulations applicable to 

those markets at the time of this proposal. 

The amendments that the SEC is proposing would reduce minimum margin 

requirements for security futures positions held in customer accounts of brokerdealers95 not subject to an approved portfolio margining system. As a result of the 

SEC’s proposed amendments, the minimum margin requirements on customers’ 

unhedged security futures positions would be lowered to 15%.96 Similarly, the SEC’s 

guidance on minimum margin requirements for certain hedged security futures 

positions would also be lowered in a conforming manner.97 The SEC’s proposed 

amendments would make minimum margin requirements on security futures positions 

held in securities accounts not eligible for portfolio margining consistent with the 

minimum margin requirements that would currently apply to those positions were they 

to be held in separate98 accounts eligible for portfolio margining.99

As discussed below, the SEC believes that the proposed rule amendments will 

primarily benefit broker-dealers offering security futures trading accounts that are not 

 95 The 2002 Final Rules established margin requirements for customers’ security futures 

accounts held through “security futures intermediaries”, including registered entities 

such as brokers, dealers, and FCMs. The SEC’s proposed amendments affect brokerdealers. See supra note 22 and accompanying text.

96 See proposed SEC Rule 403(b)(1).

97 Conforming reductions to minimum margin percentages on hedged security futures 

positions would be reflected in a restatement of the table of offsets published in the 

2002 Final Rules. This table of offsets is not part of the Code of Federal Regulations. 

See 2002 Final Rules, 67 FR at 53159. 

98 The presence of other (related) securities in the portfolio margin account (e.g.,

positions in the underlying) could affect the required margin for the security futures 

position. 

99 See supra note 47 and accompanying text. 
53

eligible for portfolio margining, their customers who trade (or wish to trade) security 

futures at higher levels of leverage than currently permitted, and exchanges that offer 

trading in security futures products.100 The SEC does not believe that the proposed 

rule amendments will impose any direct costs on market participants. 

Although the SEC believes that the proposed rule amendments will not impose 

any direct costs, they could nonetheless impose various indirect costs. Most 

importantly, lower minimum margin requirements are likely to facilitate greater 

leverage, which can harm financial stability, imposing costs on the broader financial 

system. However, because of the very small size of the U.S. security futures markets 

and their insignificance to the broader U.S. financial markets, the SEC does not 

believe the proposed amendments will have material impact on financial stability.101 

In addition, the greater leverage permitted under the proposed rule amendments may 

result in customers taking on additional risk. Customers who are not aware of these 

risks may suffer unexpected losses as a result.102

The SEC believes that the proposed rule amendments will improve competition 

among providers of customer security futures accounts (i.e., FCMs and brokerdealers), and increase the potential for competition across security futures, options, 

and other related markets. The SEC also believes that their impact on economic 

efficiency and capital formation will be minimal.103

 100 See infra sections IV.B.3.i. and ii.

101 See infra section IV.B.2. 

102 See infra sections IV.B.3.i. and ii. 

103 See infra section IV.B.3.iii.
54

Many of the costs, benefits, and other effects the SEC discusses are difficult to 

quantify. Therefore, much of the discussion is qualitative in nature. The SEC’s 

inability to quantify certain costs, benefits, and effects does not imply that such costs, 

benefits, or effects are less significant. The lack of a quantitative analysis is largely 

due to the SEC’s lack of data on the markets for security futures.104 The SEC requests 

that commenters provide relevant data and information to assist the SEC in analyzing 

the economic consequences of the proposed amendments. More generally, the SEC 

requests comment on all aspects of this initial economic analysis, including on whether 

the analysis has: (1) identified all benefits and costs, including all effects on efficiency, 

competition, and capital formation; and (2) given due consideration to each benefit and 

cost, including each effect on efficiency, competition, and capital formation. The SEC 

also requests comment on any reasonable alternatives to the proposed rule 

amendments. 

2. Baseline

The SEC evaluates the impact of rules relative to specific baselines. Here, the 

SEC takes the baseline to be the regulatory regime applicable to the markets for 

security futures as well as the state of these markets as of the end of 2017. As 

discussed above, the term “security futures” refers to futures on a single security and 

futures on narrow-based security indexes.105 More generally, “security futures

product” refers to security futures and options on security futures. Unlike futures 

markets on commodities or “broad-based” equity indexes, the U.S. market for security 

 104 See infra sections IV.B.2. and IV.B.3.i.

105 See supra section I.
55

futures is currently small and does not play a significant role in the U.S. financial 

system.106 The limited role of security futures markets is likely due to their short 

history,107 uncertainty relating to tax treatment,108 and competition from the more 

developed equity and options markets.109 Incentives to participate in the security 

futures markets (rather than the markets for the underlying or the options markets) 

arise either from reduced market frictions (e.g., short sale constraints, pin risk) or from 

a regulatory advantage (e.g., lower margin requirements).

As with other types of futures, both the buyer and seller in a security futures 

transaction can potentially default on his or her respective obligation. Because of this, 

an intermediary to a security futures transaction will typically require a performance 

bond (“margin”) from both parties to the transaction. Higher margin levels imply 

lower leverage, which reduces risk. Private incentives encourage a counterparty that 

intermediates security futures transactions to require a level of margin that adequately 

protects its interests. However, in the presence of market failures, private incentives 

alone may lead to margin levels that are inefficient. For example, margin levels set by 

intermediaries may allow investors who do not fully understand the risk of security 

futures products to take highly leveraged positions that may result in unexpected 

 106 See infra section IV.B.2.i. 

107 Trading in security futures became possible only after the passage of CFMA in 2000. 

See supra notes 4 and 5, and accompanying text. 

108 Specifically, the proposition that exchange-for-physical single stock security futures 

qualify for the same tax treatment as stock loan transactions under Section 1058 of the 

Internal Revenue Code has not been tested. See e.g., Exchange Act Release No. 

71505 (Feb. 7, 2014).

109 Security futures markets face competition from equity and options markets because in 

principle, the payoff from a security futures position is readily replicated using either 

the underlying security, or through options on the underlying security. 
56

losses. Moreover, even when all parties are fully aware of the risks of leverage, 

privately-negotiated margin arrangements may be too low. For example, the risk 

resulting from higher leverage levels can impose negative externalities on financial 

system stability, the costs of which would not be reflected in privately-negotiated 

margin arrangements. Such market failures provide an economic rationale for 

regulatory minimum margin requirements.110

i. The Security Futures Market

The security futures markets provide a convenient means of obtaining delta 

exposure to an underlying security.111 To effectively compete with other venues for 

obtaining similar exposures (i.e., equity and options markets), security futures markets 

must reduce market frictions or provide more favorable regulatory treatment. 112

Security futures markets may reduce market frictions by providing lower cost means 

of financing equity exposures. They can simplify taking short positions by eliminating

the need to “locate” borrowable securities.113 They can also provide an opportunity 

for customers to gain greater leverage through lower margin requirements (relative to 

margin in security or options transactions). The SEC does not currently have data on 

participants in the security futures markets or their trading motives.

 110 Monetary authorities may also rely on regulatory margin requirements as a policy tool. 

The SEC does not consider such motives here. 

111 The derivative of the theoretical price of a futures contract with respect to the price of 

the underlying (i.e., the “delta”) is 1: for a $1 increase (decrease) in the price of an 

underlying security, the theoretical price of its security future increases (decreases) by 

$1. 

112 See supra note 109.

113 In these respects, a security future functions like a cleared total return swap. 
57

Currently only one U.S. exchange, OCX, provides trading in security futures. 

OCX is a designated contract market regulated by the CFTC and a notice-registered 

national securities exchange.114 As of the end of 2017, 13,652 security futures 

contracts on 1,759 names were traded on the exchange.115 Of these 13,652 contracts, 

730 had open interest at the end of the year. Total open interest at the end of the year 

was 476,430 contracts, with a gross notional value of $3 billion. Annual trading 

volume in 2017 was 15 million contracts, an increase of 39% from the prior year.

Although growing, the security futures market is currently very small. For 

comparison, as of the end of 2017, open interest in equity options was 

290 million contracts with annual trading volume of 3.7 billion contracts.116

According to OCX, almost all security futures positions were carried in futures 

accounts of CFTC-regulated FCMs and introducing brokers (“IBs”).117 Consequently, 

the SEC believes only a small fraction of security futures accounts fall under the 

SEC’s margin rules. The SEC believes that none of the accounts that are subject to the 

SEC’s margin rules are currently using risk-based portfolio margining.118 Therefore, 

 114 Section 6(g) of the Exchange Act permits a notice of registration to be filed by an 

exchange registering as a national securities exchange for the sole purpose of trading 

security futures products. 15 U.S.C. 78f(g). See also Rule 6a-4 (Notice of registration 

under Section 6(g) of the Act, amendment to such notice, and supplemental materials 

to be filed by exchanges registered under Section 6(g) of the Act). 17 CFR 240.6a-4.

115 Security futures data from OCX, available 

at https://ftp.onechicago.com/market_data/.

116 Options data from OCC, available at https://www.theocc.com/webapps/historicalvolume-query.

117 See OCX Petition. 

118 If security futures positions were held in accounts eligible for portfolio margining, 

they would be included in the risk-based portfolio margin calculation and thus 

effectively subject to a lower (i.e., 15%) margin requirement under the baseline. 
58

the SEC believes that all of the accounts falling under the SEC’s margin rules are 

currently subject to the general margin requirement and the associated strategy-based 

offsets.119

The SEC is seeking comment on the characterization of the market for security 

futures:

• What are the principal motives for participants transacting in security futures? 

What are the advantages of these markets (vis-à-vis options or equity markets)? 

What are the disadvantages?

• Do customers transact in security futures through securities accounts ? Why or 

why not? 

• To the extent that customers transact security futures transactions through 

securities accounts, are these accounts subject to portfolio margining? If not, 

why not?

ii. Regulation

Under existing SEC rules the minimum margin requirement for a customer’s 

unhedged security futures position not subject to an exemption is 20%.

120 SROs may 

 

There are approximately 18 broker-dealers that have been approved by SROs to offer 

portfolio margining and are members of OCC to clear security futures. However, 

based on an analysis of FOCUS filings from year-end 2017, no broker-dealers had 

collected margin for security futures accounts subject to portfolio margining. See 

infra note 138. See also Exchange Act Release No. 54919 (Dec. 12, 2006), 71 FR 

75781 (Dec. 18, 2006) (SR-CBOE 2006-14, relating to amendments to CBOE’s 

portfolio margin pilot program to include security futures); Exchange Act Release No. 

54125 (Jul. 11, 2006), 71 FR 40766 (Jul. 18, 2006) (SR-NYSE-2005-93, relating to 

amendments to the NYSE’s portfolio margin pilot program to include security 

futures).

119 See supra note 25 and accompanying text.

120 See supra notes 20-23 and accompanying text.
59

allow margin levels lower than 20%for accounts with “strategy-based offsets” (i.e., 

hedged positions).121 Strategy-based offsets can involve security futures as well as 

one or more related securities or futures positions. Accounts subject to an SRO’s 

approved portfolio margining system are also exempt from the minimum margin 

requirement.

122 Under currently approved SRO portfolio margining systems, the 

effective margin requirement for an unhedged exposure to a security futures position 

on a narrow-based index or an individual equity would be 15%.

123 Under current 

rules, only customer securities accounts held through SEC-regulated broker-dealers 

could potentially be subject to portfolio margining; however, the SEC is not aware of 

any broker-dealers offering such accounts. Margin requirements for security futures 

positions of clearing members (i.e., their accounts at a clearing agency or DCO) are 

not subject to the aforementioned margin requirements.124

3. Analysis of the Proposals 

The SEC is proposing to amend SEC Rule 403(b)(1) to reduce the minimum 

initial and maintenance margin levels for unhedged security futures to 15% from the 

current requirement of 20%.

125 To the extent that the SROs file proposed rule changes 

 121 See supra note 25 and accompanying text.

122 See CFTC Rule 41.42(c)(2)(i), 17 CFR 41.42(c)(2)(i); SEC Rule 400(c)(2)(i), 17 CFR 

242.400(c)(2)(i).

123 This follows from the methodology of current SRO risk-based portfolio margining 

rules as applied to delta one securities. See supra notes 47 and 111.

124 See SEC Rule 400(c)(2)(i)-(v). 17 CFR 242.400(c)(2)(i)-(v). Clearing members are 

instead subject to margin rules of the clearing organization as approved by the SEC 

pursuant to Section 19(b)(2) of the Exchange Act, 15 U.S.C. 78s(b)(2). See notes 42-

44 and accompanying text.

125 17 CFR 242.403(b)(1). In addition, the Commissions are proposing to publish a restated table of offsets to reflect the proposed reduction in margin. See section II.B. 
60

and the SEC approves them, this would have the effect of reducing minimum margin 

on security futures positions held in customer securities accounts at broker-dealers that 

are not currently authorized to use a portfolio margining system.

126 As described in 

the previous section, the vast majority of security futures positions are held in futures 

accounts at CFTC-regulated entities. Consequently, the proposed changes to the 

margin requirements are expected to have very limited effects.

127

i. Benefits

The SEC believes that the proposed amendment to SEC Rule 403(b)(1) 128

would benefit customers currently trading security futures through securities accounts 

not subject to portfolio margining and whose house margin requirement is set (by the 

broker-dealer) to the current regulatory minimum. To the extent that customers with 

security futures accounts held at broker-dealers are currently subject to margin levels 

reflecting the regulatory minimums,129 the proposed reductions to margin requirements 

could reduce these customers’ costs of engaging in security futures transactions, 

 

above. This table of offsets is not part of the Code of Federal Regulations. See 2002 

Final Rules, 67 FR at 53159. SROs seeking to permit trading in security futures may 

modify their rules to parallel the levels identified in the re-stated table of offsets.

126 Specifically, the SEC expects broker-dealers that become subject to lower regulatory 

minimum customer margin requirements on security futures to reduce customer 

margin requirements on security futures positions that are currently set at the 

regulatory lower bound (i.e., 20%). See supra text accompanying note 100.

127 Concurrently, the CFTC is proposing to similarly amend CFTC Rule 41.45(b), 

affecting security futures positions held in futures accounts at CFTC-regulated 

entities. See supra section II.A.

128 Throughout, the analysis of costs and benefits is limited to the effects of the SEC’s 

rule change, and does not reflect costs and benefits resulting from corresponding 

changes to CFTC rules. 

129 Security futures accounts may be subject to “house” margin requirements that exceed 

the regulatory minimums. 
61

increase their liquidity, and provide an opportunity for greater leverage. The SEC 

believes that these benefits are likely to result in increased position-taking by 

customers, with attendant benefits to broker-dealers providing security futures trading 

accounts, and to security futures trading exchanges.130

Based on data provided by OCX, at the end of 2017, open interest in the U.S. 

security futures markets was 476,430 contracts, with a gross notional value of $3 

billion.131 SEC staff understands that approximately 2% of these contracts are 

believed to involve securities accounts subject to SEC margin requirements. None of 

these accounts are believed to be subject to portfolio margining.132 The SEC

constructed an estimate of the upper bound of margin collected under SEC margin 

rules as the sum (across all contracts listed on OCX) of twice133 the product of: the 

contract settlement price, 20% (current margin requirement), the contract’s open 

interest, and 2% (the fraction of accounts believed to be subject to SEC customer 

margin rules). Because some of the contracts held in securities accounts may be 

subject to strategy offsets (that would result in lower margin requirements), this 

represents an upper bound. The SEC estimates that the margin requirements on

customers’ security futures positions held in securities accounts was no more than $24

million. To the extent that the proposed reduction in regulatory minimums is passed 

 130 Increased position-taking by customers is expected to increase fees collected related to 

security futures transactions effected by broker-dealers and security futures exchanges.

131 See supra note 115.

132 See supra note 118.

133 Both sides of a security futures contract may potentially be subject to SEC customer 

margin requirements. 
62

on to customers, the SEC estimates that the amount of margin required to secure 

security futures transactions in securities accounts could be reduced by as much as $6 

million. This reduction would benefit affected customers by improving their 

liquidity.134 

As part of this rulemaking, the Commissions are proposing to publish a 

restated table of offsets for hedged security futures positions.135 This restatement 

would make the table of offsets conform to the proposed 15% minimum margin 

requirement on unhedged positions.

136 These revisions to the offset table would 

provide guidance consistent with the lower general margin levels on unhedged 

positions that the SEC is proposing. Because the SEC does not have data on specific 

hedged positions held in broker-dealers’ customer accounts subject to SEC margin 

rules, the SEC is unable to further quantify the reductions in margin that would be 

attributable specifically to any potential SRO rules that follow the restatement of the 

offset table. 

The reductions to margin requirements the SEC is proposing will have the 

immediate effect of improving the liquidity of customers trading security futures 

through broker-dealer accounts. These improvements to liquidity could lead to 

increased participation in security futures markets with attendant benefits to broker-

 134 See Telser, Lester G., “Why There Are Organized Futures Markets,” The Journal of 

Law and Economics 24, no. 1 (Apr. 1, 1981): 1–22.

135 See 2002 Final Rules, 67 FR at 53159.

136 See 17 CFR 242.403(b)(2).
63

dealers providing security futures accounts, security futures exchanges, and clearing 

agencies.

137

In addition, the SEC believes that the proposed rule amendments may reduce 

costs for participants in the security futures markets through improved operational 

efficiency. In particular, the customers of broker-dealers that do not offer portfolio 

margining may be able to avail themselves of lower margin requirements on security 

futures transactions without having to maintain separate accounts with broker-dealers 

that do provide portfolio margining. 

It is not possible for the SEC to estimate broker-dealers’ customers’ sensitivity 

to margin requirements on security futures due to an absence of historical data. The 

SEC also does not possess data on current customer margin requirements (brokerdealers may set requirements above regulatory minimums),138 nor does the SEC 

possess data on broker-dealers’,139 security futures exchanges’,

140 or clearing 

agencies’141 profits related to security futures transactions, as this information is not 

reported to the SEC. Because the SEC lacks these data, the SEC is currently unable to 

 137 See supra note 130.

138 With respect to security futures, the SEC currently requires broker-dealers to provide 

only one item on quarterly regulatory filings: the amount of margin collected from 

accounts subject to portfolio margining rules (FOCUS item 4467). In the fourth 

quarter of 2017, no broker-dealer reported collecting any such margin; see also supra

note 118.

139 See id.

140 OCX does not release financial statements. 

141 OCC’s annual financial reports do not provide a breakdown of profits based on the 

type of product cleared. 
64

quantify the benefits to broker-dealers, security futures exchanges, and clearing 

agencies resulting from any reduction to minimum margin requirements. 

ii. Costs

Because broker-dealers may set customer margin levels higher than the 

proposed regulatory minimums, the proposed rule amendments do not impose direct 

conduct costs on broker-dealers. The SEC believes that broker-dealers will weigh any 

additional private costs associated with lower margin requirements against the private 

benefits of lower margin requirements.142 In so doing they may opt to leave margins 

at a higher level than the regulatory minimum.143 

If the reduction to the minimum margin requirement on security futures is—as 

the SEC expects—passed on to customers, it will lower the costs of customer position 

taking and provide opportunities for greater leverage. As described above, the SEC 

believes this will generally benefit investors trading in security futures.

144 However, 

to the extent that unsophisticated retail investors who trade security futures are not 

fully aware of the risks,

145 reducing margin requirements would increase the potential 

 142 That is, in weighing the costs and benefits the SEC does not expect broker-dealers to 

consider externalities resulting from their choices. 

143 Under broker-dealer margin rules, broker-dealers also can establish “house” margin 

requirements as long as they are at least as restrictive as the Federal Reserve and SRO 

margin rules. See, e.g., FINRA Rule 4210(d).

144 To the extent that regulatory margin requirements serve a micro-prudential function, 

these benefits may be reduced or eliminated. However the SEC does not believe that 

micro-prudential effects are a major consideration here. See infra note 152.

145 See FINRA, Security Futures—Know Your Risks, or Risk Your Future, available at 

http://www.finra.org/Investors/InvestmentChoices/P005912 and National Futures 

Association, Security Futures, An Introduction to Their Uses and Risks (2002), 

available at https://www.nfa.futures.org/members/member-resources/files/securityfutures.pdf.
65

for them to suffer unexpected losses.146 Thus, the proposed reduction in margin 

requirements could impose indirect costs on unsophisticated retail investors. Under 

the baseline, retail investors are believed to represent a very small fraction (less than 

1%) of open interest in security futures. Thus, the SEC believes that the potential 

costs borne by unsophisticated retail investors will be low. Moreover, the ability of 

margin requirements to serve as an efficient instrument of customer protection is 

questionable.

147

In addition, to the extent that the proposed reductions in regulatory margin 

requirements lead broker-dealers to decrease customer margin requirements, they 

could increase the risk of the broker-dealer defaulting. Such a default may impose 

costs on the defaulting broker-dealer’s customers as well as its counterparties. 

However, broker-dealers participating in security futures markets are subject to 

clearing organizations’ prudential margin requirements and the SEC believes that such 

requirements are reasonably designed to mitigate the risk of a broker-dealers’ 

default.148 In addition, the SEC believes that in the event of such a default, the SEC’s 

 146 The judgement of retail investors receives significant criticism in the academic 

literature. See e.g., Odean, Terrance. “Do Investors Trade Too Much?” The American 

Economic Review 89, no. 5 (1999): 1279–98. See also Barber, Brad M, and Terrance 

Odean. “Trading Is Hazardous to Your Wealth: The Common Stock Investment 

Performance of Individual Investors.” The Journal of Finance 55, no. 2 (April 1, 

2000): 773–806. See also Heimer, Rawley Z, and Alp Simsek. “Should Retail 

Investors’ Leverage Be Limited?” Working Paper. National Bureau of Economic 

Research, December 2017. 

147 Fixed margin requirements cannot differentiate between different types of customers 

(e.g., sophisticated vs. unsophisticated, financially constrained vs. unconstrained) or 

the risk of the position. See Figlewski Stephen, “Margins and Market Integrity: 

Margin Setting for Stock Index Futures and Options,” Journal of Futures Markets 4, 

no. 3 (1984): 385–416. See also FRB, A Review and Evaluation of Federal Margin 

Regulation: A Study (1984).

148 See supra notes 42-44 and accompanying text. 
66

customer protection rule would protect customers’ assets held in a securities 

account.149 

Because broker-dealers affected by the proposed amendments are already 

subject to a regulatory minimum level for customer margin requirements, and because 

they would be under no obligation to alter their existing customer margin 

requirements, the SEC believes that the compliance costs resulting from the proposed 

reduction to said minimum would be de minimis.

150 In addition, the SEC does not 

believe that the affected entities would bear any additional compliance costs as a result 

of the proposed rule amendments. 

The SEC requests comments, data, and estimates on all aspects of the costs and 

benefits associated with the proposed calculations for margin on security futures. The 

SEC requests data to quantify the potential costs and benefits described above. The 

SEC seeks estimates of these costs and benefits, as well as any costs and benefits that 

the SEC has not identified that may result from the adoption of these proposed rule 

amendments. The SEC also requests qualitative feedback on the nature of the 

potential benefits and costs described above and any benefits and costs the SEC may 

have overlooked.

 149 See Rule 15c3-3, 17 CFR 240.15c3-3. See also Applicability of CFTC and SEC 

Customer Protection, Recordkeeping, Reporting, and Bankruptcy Rules and the 

Securities Investor Protection Act of 1970 to Accounts Holding Security Futures 

Products, Final Rule, Exchange Act Release No. 46473 (Sept. 9, 2002), 67 FR 58284 

(Sept. 13, 2002).

150 Under the proposed rule, broker-dealers could maintain existing customer margin 

requirements and avoid incurring any implementation costs.
67

iii. Effects on Efficiency, Competition, and Capital Formation 

In addition to the specific costs and benefits discussed above, the reductions to 

margin requirements on security futures that the SEC is proposing may have broader

effects on efficiency, competition, and capital formation. The SEC believes that these 

effects will generally be positive, but unlikely to be significant. The SEC discusses 

these effects in more detail in the remainder of this section. The SEC requests

comment on all aspects of this analysis of the burden on competition and promotion of 

efficiency, competition, and capital formation. 

a. Efficiency

As discussed in the previous section, the SEC believes that broker-dealers will

weigh the costs associated with customer defaults against the benefits of lower margin 

requirements when setting margin requirements for their customers. Although private 

considerations would render market-determined margin levels optimal from a brokerdealer’s perspective, market imperfections could lead broker-dealers to impose margin 

requirements that are not economically efficient.

151 The relevant market imperfections

in the context of margin requirements relate to externalities on financial stability

arising from excessive leverage.

152

 151 See supra note 142.

152 The SEC acknowledges that other market imperfections (e.g., asymmetric 

information, adverse selection) may also play a role, although the SEC believes these 

to be less relevant to this context. Asymmetric information about market participants’ 

quality can lead privately-negotiated margin levels to be inefficient. For example, 

competition among broker-dealers may lead to a “race to the bottom” in margin 

requirements when customers’ “quality” is not perfectly observable. See e.g., Santos, 

Tano, and Jose A. Scheinkman, “Competition among Exchanges,” The Quarterly 

Journal of Economics 116, no. 3 (Aug. 1, 2001): 1027–61. Alternatively, problems of 

adverse selection (e.g., potential to re-invest customer margin in risky investments) or 

moral hazard (e.g., expectations of government rescue) may also create incentives for 

broker-dealers to offer margin requirements that are too low. Asymmetric information 
68

Historically, a key aspect of the rationale for regulatory margin requirements 

on securities transactions was the belief that such requirements could improve 

economic efficiency by limiting stock market volatility resulting from “pyramiding 

credit.”153 Leveraged exposures built up during price run ups could lead to the 

collapse of prices when a small shock triggers margin calls and a cascade of deleveraging. The utility of margin requirements in limiting such “excess” volatility and 

the contribution of derivative markets to such volatility have been a perennial topic of 

debate in the academic literature, rekindled periodically by crisis episodes.154 Most 

recently, the 2007—2008 financial crisis saw similar concerns (i.e., procyclical 

leverage, margin call-induced selling spirals) raised in the securitized debt markets.

155 

While the SEC believes that lower margin requirements can increase the risk and 

severity of market dislocations, the SEC does not believe—given the current limited 

scale of the security futures markets and the limited role played by SEC registrants in 

 

about broker-dealer quality may make it impossible for customers to provide sufficient 

market discipline, leading to a problem similar to that faced by bank depositors. See 

Dewatripont, Mathias, and Jean Tirole, “Efficient Governance Structure: Implications 

for Banking Regulation,” Capital Markets and Financial Intermediation, 1993, 12–35.

153 See Moore, Thomas Gale, “Stock Market Margin Requirements,” Journal of Political 

Economy 74, no. 2 (April 1, 1966): 158–67. 

154 See id. See also Figlewski, Stephen, “Futures Trading and Volatility in the GNMA 

Market,” The Journal of Finance 36, no. 2 (1981): 445–56. See also Edwards, 

Franklin R, “Does Futures Trading Increase Stock Market Volatility?,” Financial

Analysts Journal 44, no. 1 (1988): 63–69. See also Kupiec, Paul H, “Margin 

Requirements, Volatility, and Market Integrity: What Have We Learned Since the 

Crash?,” Journal of Financial Services Research 13, no. 3 (June 1, 1998): 231–55. 

155 See e.g., Adrian, Tobias, and Hyun Song Shin, “Liquidity and Leverage,” Journal of 

Financial Intermediation 19, no. 3 (2010): 418–437.
69

these markets—that the proposed reductions to minimum margin requirements present 

a material financial stability concern.156 

b. Competition

Under the baseline, risk-based portfolio margining is not available to customers 

holding security futures positions in futures accounts, and these positions are thus 

subject to the 20% margin requirement. The proposed reduction in margin would 

permit customers holding security futures in futures accounts to receive margin 

treatment consistent with margin treatment for customers holding security futures 

positions in a securities account permitted under the current SRO securities portfolio 

margining rules.157 This could establish a more level playing field between options 

exchanges and security futures exchanges, and between broker-dealers/securities 

accounts and FCMs/futures accounts. 

In principle, a more level playing field should enhance competition among 

broker-dealers and FCMs for security futures business. In practice however, the 

majority of security futures transactions are already conducted through futures 

accounts, and of those that are not, none are subject to portfolio margining.

158 It is 

therefore unlikely that the proposed changes will have an immediate impact on 

competition among existing intermediaries of security futures transactions (i.e.,

 156 If the security futures market were to significantly increase in size as a result of these 

proposed changes or other factors, the impact of lower margin requirements on overall 

market stability would be greater than the minimal impact the SEC expects under 

current market conditions. However, for reasons described in notes 106-108 and 

accompanying text, above, the SEC does not believe this type of significant growth is 

likely in the foreseeable future. 

157 See OCX Petition.

158 See supra note 118.
70

broker-dealers and FCMs). However, it is likely that the reduction in margin levels 

will increase participation in the security futures markets. If sufficiently large, such 

increased participation may spur additional broker-dealers and FCMs to offer security 

futures trading. 

More broadly, by aligning margin requirements applicable to a security futures 

position (which generally are not portfolio margined) with those applicable to 

equivalent options positions159 (which generally are subject to portfolio margining), 

the proposed amendment could be expected to encourage growth of the security 

futures market. The security futures market can provide a low-friction means of 

obtaining delta exposures, and relatively high margin requirements (vis-à-vis 

comparable options positions) which may have played a role in restraining its 

development. To the extent that reducing margin requirements leads to significant 

growth of this market, it may have additional—less direct—competitive implications. 

For example, increased liquidity in security futures may lead to increased use of this 

market to obtain short exposures, which could, in turn, adversely affect intermediaries’ 

securities lending business. 

c. Capital Formation

The proposed rule changes are not expected to have an immediate material 

impact on capital formation. To the extent that the proposed reductions in margin 

requirements encourage significant growth in the security futures markets, it may, in 

time, improve price discovery for underlying securities. In particular, a more active 

 159 A long (short) security future position can be replicated by a portfolio containing one 

long (short) at-the-money call and one short (long) at-the-money put. The margin 

requirement applicable to the latter under approved portfolio margin systems is 15%. 
71

security futures market can reduce the frictions associated with shorting equity 

exposures, making it easier for negative information about a firm’s fundamentals to be 

incorporated into security prices. This could promote more efficient capital 

allocations by facilitating the flow of financial resources to their most productive uses.

The SEC generally requests comment on all aspects of this analysis of the 

burden on competition and promotion of efficiency, competition, and capital 

formation. 

iv. Alternatives Considered

The SEC believes that reducing minimum customer margin requirements for 

security futures to a level between 15% and 20% would maintain inconsistencies in 

margin requirements across security futures and options, without providing significant 

benefits as compared to the proposed amendments. Accordingly, in light of the 

objectives of this particular rulemaking, and in the context of the statutory framework 

discussed above, the SEC does not believe that there are reasonable alternatives to the 

proposal to reduce the minimum initial and maintenance margin levels for unhedged 

security futures to 15%. 

V. REGULATORY FLEXIBILITY ACT 

A. CFTC

The Regulatory Flexibility Act (“RFA”) requires that federal agencies, in 

promulgating rules, consider the impact of those rules on small entities.160 The 

proposed amendments will affect designated contract markets, FCMs, and customers 

who trade in security futures. The CFTC has previously established certain definitions 

 160 5 U.S.C. 601 et seq.
72

of “small entities” to be used by the CFTC in evaluating the impact of its rules on 

small entities in accordance with the RFA.161

In its previous determinations, the CFTC has concluded that contract markets 

are not small entities for purposes of the RFA, based on the vital role contract markets 

play in the national economy and the significant amount of resources required to 

operate as SROs.162 The CFTC also has determined that notice-designated contract 

markets are not small entities for purposes of the RFA.163

The CFTC has previously determined that FCMs are not small entities for 

purposes of the RFA, based on the fiduciary nature of FCM-customer relationships as 

well as the requirements that FCMs meet certain minimum financial requirements.164 

In addition, the CFTC has determined that notice-registered FCMs,165 for the reasons 

applicable to FCMs registered in accordance with Section 4f(a)(1) of the CEA,166 are 

not small entities for purposes of the RFA.167

Finally, the CFTC notes that according to data from OCX, 99% of all 

 161 Policy Statement and Establishment of Definitions of “Small Entities” for Purposes of 

the Regulatory Flexibility Act, 47 FR 18618, 18618-21 (Apr. 30, 1982).

162 Id. at 18619.

163 Designated Contract Markets in Security Futures Products: Notice-Designation 

Requirements, Continuing Obligations, Applications for Exemptive Orders, and 

Exempt Provisions, 66 FR 44960, 44964 (Aug. 27, 2001).

164 Supra note 159 at 18619.

165 A broker or dealer that is registered with the SEC and that limits its futures activities 

to those involving security futures products may notice register with the CFTC as an 

FCM in accordance with Section 4f(a)(2) of the CEA (7 U.S.C. 6f(a)(2)).

166 7 U.S.C. 6f(a)(1).

167 2002 Final Rules, 67 FR at 53171.
73

customers transacting in security futures as of March 1, 2016 and March 1, 2017 

qualified as ECPs. The CFTC has found that ECPs should not be considered small 

entities for the purposes of the RFA.168 An overwhelming majority of the customers 

transacting in security futures currently are ECPs and are not small entities. Therefore, 

a change in the margin level for security futures is not anticipated to affect small 

entities. 

Accordingly, the CFTC Chairman, on behalf of the CFTC, hereby certifies 

pursuant to 5 U.S.C. 605(b), that the proposed amendments will not have a significant 

economic impact on a substantial number of small entities. The CFTC invites public 

comments on this determination. 

B. SEC

The RFA requires that federal agencies, in promulgating rules, consider the 

impact of those rules on small entities.169 Section 3(a)170 of the RFA generally

requires the SEC to undertake a regulatory flexibility analysis of all proposed rules to

determine the impact of such rulemaking on small entities unless the SEC certifies that

the rule amendments, if adopted, would not have a significant economic impact on a 

substantial number of small entities.171

 168 Opting Out of Segregation, 66 FR 20740, 20743 (Apr. 25, 2001). 

169 5 U.S.C. 601 et seq.

170 5 U.S.C. 603.

171 5 U.S.C. 605(b). The proposed amendments are discussed in detail in section II. 

above. The SEC discusses the potential economic consequences of the amendments in 

section IV. (Economic Analysis) above. As discussed in section III (Paperwork 

Reduction Act) above, the proposed amendments do not contain a “collection of 

information” requirement within the meaning of the Paperwork Reduction Act.
74

For purposes of SEC rulemaking in connection with the RFA,172 a small entity 

includes a broker-dealer that had total capital (net worth plus subordinated liabilities) 

of less than $500,000 on the date in the prior fiscal year as of which its audited 

financial statements were prepared pursuant to SEC Rule 17a-5(d) (under the 

Exchange Act),

173 or, if not required to file such statements, a broker-dealer with total 

capital (net worth plus subordinated liabilities) of less than $500,000 on the last day of 

the preceding fiscal year (or in the time that it has been in business, if shorter); and is 

not affiliated with any person (other than a natural person) that is not a small business 

or small organization.

174 The proposed rule amendments would reduce the required 

margin for security futures from 20% to 15%. The proposed rule amendments would 

affect brokers, dealers, and members of national securities exchanges, including FCMs 

required to register as broker-dealers under Section 15(b)(11) of the Exchange Act, 

relating to security futures.175 

IBs and FCMs may register as broker-dealers by filing Form BD-N.176 

However, because such IBs may not collect customer margin they are not subject to 

 172 Although Section 601 of the RFA defines the term “small entity,” the statute permits 

agencies to formulate their own definitions. The SEC has adopted definitions for the 

term “small entity” for the purposes of SEC rulemaking in accordance with the RFA. 

Those definitions, as relevant to this proposed rulemaking, are set forth in SEC Rule 

0-10 (under the Exchange Act), 17 CFR 240.0-10. See Statement of Management on 

Internal Accounting Control, Exchange Act Release No. 18451 (Jan. 28, 1982), 47 FR 

5215 (Feb. 4, 1982).

173 17 CFR 240.17a-5(d).

174 See 17 CFR 240.0-10(c). 

175 See SEC Rule 400(a), 17 CFR 242.400(a).

176 These notice-registered broker-dealers are not included in the 1,060 small brokerdealers discussed below, as they are not required to file FOCUS Reports with the SEC. 

See SEC Rule 17a-5(m)(4), 17 CFR 240.17a-5(m)(4).
75

these rules. In addition, the CFTC has concluded that FCMs are not considered small 

entities for purposes of the RFA.177 Accordingly, there are no IBs or FCMs that are 

small entities for purposes of the RFA that would be subject to the proposed rule 

amendments. 

In addition, all members of national securities exchanges registered under 

Section 6(a) of the Exchange Act are registered broker-dealers.178 The SEC estimates 

that as of December 31, 2017, there were approximately 1,060 broker-dealers that 

were “small” for the purposes of SEC Rule 0-10. Of these, the SEC estimates that 

there are less than ten broker-dealers that are carrying broker-dealers (i.e., can carry 

customer margin accounts and extend credit). However, based on December 31, 2017 

FOCUS Report data, none of these small carrying broker-dealers carried debit 

balances. This means these “small” carrying firms are not extending margin credit to 

their customers, and therefore, the proposed rules likely would not apply to them. 

Therefore, while SEC believes that some small broker-dealers could be affected by the 

proposed amendments, the amendments will not have a significant impact on a 

substantial number of small broker-dealers. 

Accordingly, the SEC certifies that the proposed rule amendments would not 

have a significant economic impact on a substantial number of small entities for 

purposes of the RFA. The SEC encourages written comments regarding this 

 177 See 47 FR 18618, 18618-21 (Apr. 30, 1982). See also 66 FR 14262, 14268 (Mar. 9, 

2001).

178 National securities exchanges registered under Section 6(g) of the Exchange Act –

notice registration of security futures product exchanges – may have members who are 

floor brokers or floor traders who are not registered broker-dealers; however, these 

entities cannot clear securities transactions or collect customer margin, and, therefore, 

the proposed rules would not apply to them.
76

certification. The SEC solicits comment as to whether the proposed rule amendments 

could have an effect on small entities that has not been considered. The SEC requests 

that commenters describe the nature of any impact on small entities and provide 

empirical data to support the extent of such impact. 

VI. SMALL BUSINESS REGULATORY ENFORCEMENT FAIRNESS ACT

For purposes of the Small Business Regulatory Enforcement Fairness Act of 

1996, or “SBREFA,”179 a rule is considered “major” where, if adopted, it results or is 

likely to result in:

• an annual effect on the economy of $100 million or more (either in the form 

of an increase or a decrease);

• a major increase in costs or prices for consumers or individual industries; or

• significant adverse effect on competition, investment or innovation. 

If a rule is “major,” its effectiveness will generally be delayed for 60 days 

pending Congressional review. The Commissions request comment on the potential 

impact of the proposed amendments for margin requirements for security futures on: 

• The U.S. economy on an annual basis;

• Any potential increase in costs or prices for consumers or individual 

industries; and 

• Any potential effect on competition, investment, or innovation. 

Commenters are requested to provide empirical data and other factual support 

for their view to the extent possible.

 179 Pub. L. 104-121, Title II, 110 Stat. 857 (1996) (codified in various Sections of 5 

U.S.C., 15 U.S.C. and as a note to 5 U.S.C. 601).
77

VII. ANTI-TRUST CONSIDERATIONS

Section 15(b) of the CEA requires the CFTC to “take into consideration the 

public interest to be protected by the antitrust laws and endeavor to take the least 

anticompetitive means of achieving the purposes of [the CEA], in issuing any order or 

adopting any [CFTC] rule or regulation (including any exemption under Section 4(c) 

or 4c(b)), or in requiring or approving any bylaw, rule, or regulation of a contract 

market or registered futures association established pursuant to Section 17 of [the 

CEA].”180 The CFTC believes that the public interest to be protected by the antitrust 

laws is generally to protect competition. The CFTC requests comment on whether this

proposal implicates any other specific public interest to be protected by the antitrust 

laws.

The CFTC has considered the proposal to determine whether it is 

anticompetitive and has preliminarily identified no anticompetitive effects. The CFTC

requests comment on whether the proposal is anticompetitive and, if it is, what the 

anticompetitive effects are. 

Because the CFTC has preliminarily determined that the proposal is not 

anticompetitive and has no anticompetitive effects, the CFTC has not identified any 

less anticompetitive means of achieving the purposes of the CEA. The CFTC requests 

comment on whether there are less anticompetitive means of achieving the relevant 

purposes of the CEA that would otherwise be served by adopting the proposal.

 180 7 U.S.C. § 19(b).
78

VIII. STATUTORY BASIS

The SEC is proposing the amendment to SEC Rule 403(b)(1) pursuant to the 

Exchange Act, particularly Sections 3(b), 6, 7(c), 15A and 23(a). Further, these 

amendments are proposed pursuant to the authority delegated jointly to the SEC, 

together with the CFTC, by the Federal Reserve Board in accordance with Exchange 

Act Section 7(c)(2)(A). 

TEXT OF RULES

List of Subjects

17 CFR Part 41

Brokers, Margin, Reporting and recordkeeping requirements, Security futures 

products.

17 CFR Part 242

Brokers, Confidential business information, Reporting and recordkeeping 

requirements, Securities.

Commodity Futures Trading Commission

17 CFR Part 41

For the reasons discussed in the preamble, the Commodity Futures Trading 

Commission proposes to amend 17 CFR part 41 as set forth below:

PART 41 -- SECURITY FUTURES PRODUCTS

1. The authority citation for part 41 continues to read as follows: 

Authority: Sections 206, 251 and 252, Pub. L. 106-554, 114 Stat. 2763; 7 U.S.C. 

1a, 2, 6f, 6j, 7a-2, 12a; 15 U.S.C. 78g(c)(2).
79

2. Subpart E of part 41 to be amended by revising paragraph (b)(1) of Section

41.45 to read as follows:

§ 41.45 Required margin.

* * * * *

(b) Required margin.

(1) General rule. The required margin for each long or short position in a 

security future shall be fifteen (15) percent of the current market value of such security 

future.

* * * * *

Securities and Exchange Commission

17 CFR Part 242

In accordance with the foregoing Title 17, chapter II, part 242 of the Code of 

Federal Regulations is proposed to be amended as follows:

PART 242 -- REGULATIONS M, SHO, ATS, AC, NMS, AND SBSR AND 

CUSTOMER MARGIN REQUIREMENTS FOR SECURITY FUTURES

3. The authority citation for part 242 continues to read as follows:

Authority: 15 U.S.C. 77g, 77q(a), 77s(a), 78b, 78c, 78g(c)(2), 78i(a), 78j, 78k-1(c), 

78l, 78m, 78n, 78o(b), 78o(c), 78o(g), 78q(a), 78q(b), 78q(h), 78w(a), 78dd-1, 78mm, 

80a-23, 80a-29, and 80a-37.

4. Section 242.403 is amended by revising paragraph (b)(1) to read as follows:

§ 242.403 Required margin.

* * * * *

(b) Required margin.
80

(1) General rule. The required margin for each long or short position in a 

security future shall be fifteen (15) percent of the current market value of such security 

future.

* * * * *

By the Securities and Exchange Commission.

Dated: July 3, 2019

Vanessa A. Countyman

Secretary

Issued in Washington, DC, on July 9, 2019, by the Commodity Futures Trading 

Commission.

Christopher Kirkpatrick,

Secretary of the Commission.

NOTE: The following appendices will not appear in the Code of Federal Regulations.

Commodity Futures Trading Commission (CFTC) Appendices to Customer

Margin Rules Relating to Security Futures – CFTC Voting Summary and CFTC 

Commissioner’s Statement

Appendix 1 – CFTC Voting Summary

On this matter, Chairman Giancarlo and Commissioners Quintenz, Behnam, 

Stump, and Berkovitz voted in the affirmative. No Commissioner voted in the 

negative.
81

Appendix 2 – Statement of CFTC Commissioner Dan M. Berkovitz

I support issuing the joint notice of proposed rulemaking (“Proposal”) with the 

Securities Exchange Commission (“SEC”) (collectively with the CFTC, 

“Commissions”) to amend the security futures margin requirements.

In 2000, Congress passed the Commodity Futures Modernization Act 

(“CFMA”) which permitted security futures trading.1 The CFMA provides that 

customer margin requirements for security futures shall be set at levels that:

(1) require (a) consistency with the margin requirements for comparable exchangetraded options and (b) margin levels not lower than the lowest level of margin, 

exclusive of premium, required for any comparable exchange-traded options, 

(2) preserve the financial integrity of markets trading security futures products, 

(3) prevent systemic risk, and (4) are and remain consistent with certain margin 

requirements established by the Federal Reserve Board under its Regulation T.2

The Proposal would decrease the required minimum margin from 20 percent to 

15 percent of the current market value. The Proposal reasons that amending the 

minimum required margin reflects the current stress level percentage of 15 percent set 

for unhedged exchange-traded options in self-regulated organization risk-based 

portfolio margining programs.3 This action would increase consistency in the markets 

by bringing the margin requirement for security futures held outside of a securities 

 1 See App. E of Pub. L. No. 106-554, 114 Stat. 2,763 (2000).

2 See 15 U.S.C. 78g(c)(2)(B) (2018).

3 Proposal, section II.A.5.
82

portfolio margin account into alignment with the margining for security futures under 

risk-based portfolio margining methodologies.4

The 20 percent level was originally set by the Commissions in 2002. Markets 

have evolved since that time and it is appropriate to reconsider the margin level in 

light of the subsequent adoption of the risk-based portfolio margining programs. In 

doing so, the Proposal has followed the statutory mandate to set the security futures 

margin requirement at levels consistent with, and not lower than, levels for similar 

options.

In conclusion, I commend the joint work by the Commissions’ respective staffs 

in preparing the Proposal. The Proposal represents an opportunity for the 

Commissions to gain more knowledge about the security futures markets, reevaluate 

the status quo, and establish a more effective regulatory standard. I look forward to 

public comments in response to the Proposal, particularly comments that provide 

additional data and analysis regarding the appropriateness of the 15 percent level 

under each of the statutory factors the Commissions must consider.

 4 See id.