Federal Register / Vol. 70, No. 217 / Thursday, November 10, 2005 / Notices 68501 

48 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 15 U.S.C. 78s et seq. 

3 17 CFR 240.19b–4. 

4SR–NYSE–204–39: Amendment No. 1. The 

NYSE, in coordination with the Chicago Board 

Options Exchange, Incorporated (‘‘CBOE’’), filed the 

partial amendment to conform the complex options 

spreads strategies to which its rule amendments 

apply to those of the CBOE. 

5At the request of the NYSE, the Commission 

staff clarified that the Exchange filed a partial 

amendment. Telephone conversation between Al 

Lucks, Managing Director, Member Firm 

Regulation, NYSE, and Matthew Comstock, Branch 

Chief, Division of Market Regulation (‘‘Division’’), 

on November 4, 2005. 

6NYSE Rule 431(f)(2)(C) defines a ‘‘butterfly 

spread’’ as an aggregation of positions in three 

series of either puts or calls all having the same 

underlying component or index, and time of 

expiration, and based on the same aggregate current 

underlying value, where the interval between the 

exercise price of each series is equal, which 

positions are structured as either: (A) A ‘‘long 

butterfly spread’’ in which two short options in the 

same series are offset by one long option with a 

higher exercise price and one long option with a 

lower exercise price of (B) a ‘‘short butterfly 

spread’’ in which two long options in the same 

series offset one short option with a higher exercise 

Continued 

Commission, and all written 

communications relating to the 

proposed rule change between the 

Commission and any person, other than 

those that may be withheld from the 

public in accordance with the 

provisions of 5 U.S.C. 552, will be 

available for inspection and copying in 

the Commission’s Public Reference 

Room. Copies of the filing will also be 

available for inspection and copying at 

the principal office of the NYSE. All 

comments received will be posted 

without change; the Commission does 

not edit personal identifying 

information from submissions. You 

should submit only information that 

you wish to make available publicly. All 

submissions should refer to File number 

SR–NYSE–2005–65 and should be 

submitted by November 25, 2005. 

For the Commission, by the Division of 

Market Regulation, pursuant to delegated 

authority.48

Jonathan G. Katz, 

Secretary. 

[FR Doc. 05–22413 Filed 11–9–05; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–52738; File No. SR–NYSE–

2004–39] 

Self-Regulatory Organizations; New 

York Stock Exchange, Inc.; Notice of 

Filing of Proposed Rule Change and 

Partial Amendment No. 1 To Amend 

Exchange Rule 431 (Margin 

Requirements) 

November 4, 2005. 

Pursuant to section 19(b)(1) 1 of the 

Securities Exchange Act of 1934 (the 

‘‘Exchange Act’’) 2 and Rule 19b–4 

thereunder,3 notice is hereby given that 

on July 12, 2004, the New York Stock 

Exchange, Inc. (the ‘‘Exchange’’ or 

‘‘NYSE’’) filed with the Securities and 

Exchange Commission (‘‘SEC’’ or the 

‘‘Commission’’) the proposed rule 

change and on September 29, 2005, filed 

a partial amendment to its proposed 

rule change 4 as described in Items I, II 

and III below, which Items have been 

prepared by the Exchange. The 

Commission is publishing this notice to 

solicit comments on the proposed rule 

change from interested persons. 

I. Self-Regulatory Organization’s 

Statement of the Terms of Substance of 

the Proposed Rule Change 

The Exchange is proposing 

amendments to Rule 431 (Margin 

Requirements) that will recognize 

specific additional complex option 

spread strategies and set margin 

requirements commensurate with the 

risk of such spread strategies. These 

complex spread strategies are a 

combination of two or more basic option 

spreads that are already covered under 

Exchange Rule 431. In addition, the 

Exchange is proposing the elimination 

of the two-dollar standard exercise price 

interval limitation for listed options and 

certain terminology with respect to 

‘‘permitted offsets,’’ as defined in its 

Rule. 

II. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

In its filing with the Commission, the 

Exchange included statements 

concerning the purpose of, and basis for, 

the proposed rule change and discussed 

any comments it received on the 

proposed rule change. The text of these 

statements may be examined at the 

places specified in Item IV below. The 

Exchange has prepared summaries, set 

forth in sections A, B, and C below, of 

the most significant aspects of such 

statements. 

A. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

1. Purpose 

On July 12, 2004, the Exchange filed 

with the Securities and Exchange 

Commission proposed rule change to 

Rule 431, filed as SR–NYSE–2004–39, 

that would recognize specific additional 

complex option spread strategies and set 

margin requirements commensurate 

with the risk of such spread strategies. 

The purpose of this filing is to amend 

SR–NYSE–2004–39.5

These complex spread strategies are a 

combination of two or more basic option 

spreads that are already covered under 

Exchange Rule 431. In addition, the 

Exchange is proposing the elimination 

of the two-dollar standard exercise price 

interval limitation for listed options and 

certain terminology with respect to 

‘‘permitted offsets’’ as defined in Rule 

431. 

Background 

Rule 431 prescribes minimum 

maintenance margin requirements for 

customer accounts held at members and 

member organizations. In April 1996, 

the Exchange established a Rule 431 

Committee (the ‘‘Committee’’) to assess 

the adequacy of Rule 431 on an ongoing 

basis, review margin requirements, and 

make recommendations for change. The 

Exchange’s Board of Directors has 

approved a number of proposed 

amendments resulting from the 

Committee’s recommendations since it 

was established. Similarly, the 

Committee has recommended the 

proposed amendments discussed below. 

The proposed amendments described 

below have been developed in 

conjunction with the Chicago Board 

Options Exchange (‘‘CBOE’’). 

Complex Option Spreads 

The Exchange is proposing 

amendments to Rule 431 to recognize 

certain additional complex option 

spread strategies that are the net result 

of combining two or more spread 

strategies that are currently recognized 

in the Exchange’s margin rules. The 

netting of contracts in option series 

common to each of the currently 

recognized spreads in an aggregation 

reduces it to the complex spread 

strategies noted below. 

Basic option spreads can be paired in 

such ways that they offset each other in 

terms of risk. The total risk of the 

combined spreads is less than the sum 

of the risk of both spread positions if 

viewed as stand-alone strategies. The 

specific complex spread strategies listed 

below are structured using the same 

principles as, and are essentially 

expansions of, the advanced spreads 

currently allowed in Rule 431. 

Currently, Rule 431 recognizes and 

prescribes margin requirements for 

advanced spread strategies known as the 

‘‘butterfly spread’’ 6 and the ‘‘box 

68502 Federal Register / Vol. 70, No. 217 / Thursday, November 10, 2005 / Notices 

price and one short option with a lower exercise 

price. 

7NYSE Rule 431(f)(2)(C) defines a ‘‘box spread’’

as an aggregation of positions in a long call and 

short put with the same exercise price (‘‘buy side’’) 

coupled with a long put and short call with the 

same exercise price (‘‘sell side’’) all of which have 

the same underlying component or index and time 

of expiration, and are based on the same aggregate 

current underlying value, and are structured as: (A) 

A ‘‘long box spread’’ in which the sell side exercise 

price exceeds the buy side exercise price or, (B) a 

‘‘short box spread’’ in which the buy side exercise 

price exceeds the sell side exercise price. 

8NYSE Rule 431(f)(2)(G)(i) states: Where a call 

that is issued by a registered clearing agency is 

carried ‘‘long’’ for a customer’s account and the 

account is also ‘‘short’’ a call issued by a registered 

clearing agency, expiring on or before the date of 

expiration of the ‘‘long’’ listed call and specifying 

the same underlying component, the margin 

required on the ‘‘short’’ call shall be the lower of 

(1) the margin required pursuant to (f)(2)(D)(i) or (2) 

the amount, if any, by which the exercise price of 

the ‘‘long’’ call exceeds the exercise price of the 

‘‘short’’ call. Where a put that is issued by a 

registered clearing agency is carried ‘‘long’’ for a 

customer’s account and the account is also ‘‘short’’

a put issued by a registered clearing agency, 

expiring on or before the date of expiration of the 

‘‘long’’ listed put and specifying the same 

underlying component, the margin required on the 

‘‘short’’ put shall be the lower of (1) the margin 

required pursuant to (f)(2)(D)(i) or (2) the amount, 

if any, by which the exercise price of the ‘‘short’’

put exceeds the exercise price of the ‘‘long’’ put. 

9A European-style option is an option contract 

that can be exercised only on its expiration date. 

10An American-style option is an option contract 

that can be exercised at any time between the date 

of purchase and its expiration date. 

11NYSE Rule 431(f)(2)(J) defines a permitted 

offset position as, in the case of an option in which 

a specialist makes a market, a position in the 

underlying asset or other related assets, and in the 

case of other securities in which a specialist makes 

a market, a position in options overlying the 

securities in which a specialist makes a market. 

12NYSE Rule 431(f)(2)(J) defines the term ‘‘in or 

at the money’’ as the current market price of the 

underlying security is not more than two standard 

exercise intervals below (with respect to a call 

option) or above (with respect to a put option) the 

exercise price of the option. 

spread.’’ 7 However, these option 

spreads are limited in scope. The 

Exchange’s proposal seeks to expand 

upon the types of pairings that would 

qualify for butterfly spread and box 

spread treatment. 

Exchange Rule 431(f)(2)(G)(i) 

recognizes ‘‘calendar spreads,’’ 8 also 

known as ‘‘time spreads,’’ yet it is not 

identified as such. The Exchange 

proposes to define this term as ‘‘the sale 

of one option and the simultaneous 

purchase of an option with a more 

distant expiration date, both specifying 

the same underlying component with 

the same exercise price where the long 

options do not expire before the short 

option with the longest term expiration’’

in the definition section of the Rule 

(NYSE 431(f)(2)(C)) since some of the 

complex spreads it wants to recognize 

in this proposal will include this 

component of spread strategies. 

To be eligible for the margin 

requirements set forth below, a complex 

spread must be consistent with one of 

the seven patterns specified below. The 

expiration months and the sequence of 

the exercise prices must correspond to 

the same pattern, and the intervals 

between the exercise prices must be 

equal. 

Members and member organizations 

will be required to obtain initial and 

maintenance margin for the subject 

complex spreads, whether established 

outright or through netting, of not less 

than the sum of the margin required on 

each basic spread in the equivalent 

aggregation. 

The basic requirements are as follows: 

(a) The complex spreads must be carried 

in a margin account; (b) European-style 9

options are prohibited for complex 

spread combinations having a long 

option series that expires after the other 

option series (that is, those that involve 

a time spread such as items 5, 6 and 7 

below.) Only American-style 10 options 

may be used in these combinations. 

Additionally, the intervals between 

exercise prices must be equal, and each 

complex spread must comprise four 

option series, with the exception of item 

4 below, which must comprise three 

option series. 

The sum of the margin required on 

each currently recognized spread in 

each of the applicable aggregations 

renders a margin requirement for the 

subject complex spread strategies as 

stated below. The additional complex 

option strategies and maintenance 

margin requirements are as follows: 

(1) A Long Condor Spread is 

comprised of two long Butterfly 

Spreads. The proposal requires initial 

and maintenance margin of full cash 

payment of the net debit incurred when 

this spread strategy is established. Full 

payment of the net debit incurred will 

cover any potential risk to the carrying 

broker-dealer. 

(2) A Short Iron Butterfly Spread is 

comprised of one long Butterfly Spread 

and one short Box Spread. The 

establishment of a long Butterfly Spread 

results in a margin requirement equal to 

the net debit incurred. The 

establishment of a short Box Spread 

requires margin equal to the aggregate 

difference between the exercise prices. 

The net proceeds from the sale of short 

option components may be applied to 

the margin requirement. Accordingly, to 

cover the risk to the carrying brokerdealer, the proposal requires a deposit 

of the aggregate exercise price 

differential. The net credit received may 

be applied to the deposit required. 

(3) A Short Iron Condor Spread is 

comprised of two long Butterfly Spreads 

and one short Box Spread. The 

establishment of long Butterfly Spreads 

results in a margin requirement equal to 

the net debit incurred. The 

establishment of a short Box Spread 

requires margin equal to the difference 

in the strike price. Accordingly, to cover 

the risk to the carrying broker-dealer, 

the proposal requires a deposit of the 

aggregate exercise price differential. The 

net credit received may be applied to 

the deposit required. 

(4) A Long Calendar Butterfly Spread 

is comprised of one long Calendar 

Spread and one long Butterfly Spread. 

The proposal requires initial and 

maintenance margin of full cash 

payment of the net debit incurred when 

this spread strategy is established. Full 

payment of the net debit incurred will 

cover any potential risk to the carrying 

broker-dealer. 

(5) A Long Calendar Condor Spread is 

comprised of one long Calendar Spread 

and two long Butterfly Spreads. The 

proposal requires initial and 

maintenance margin of full cash 

payment of the net debit incurred when 

this spread strategy is established. Full 

payment of the net debit incurred will 

cover any potential risk to the carrying 

broker-dealer. 

(6) A Short Calendar Iron Butterfly 

Spread is comprised of one long 

Calendar Spread plus one long Butterfly 

Spread and one short Box Spread. To 

cover the risk to the carrying brokerdealer, the proposal requires a deposit 

of the aggregate exercise price 

differential. The net credit received may 

be applied to the deposit required. 

(7) A Short Calendar Iron Condor 

Spread is comprised of one Long 

Calendar Spread plus two long Butterfly 

Spreads and one short Box Spread. To 

cover the risk to the carrying brokerdealer, the proposal requires a deposit 

of the aggregate exercise price 

differential. The net credit received may 

be applied to the deposit required. 

The purpose and benefit is to set 

levels of margin that more precisely 

represent the actual net risk of the 

option positions in the account and to 

enable customers to implement these 

strategies more efficiently. 

Permitted Offsets 

Currently, Exchange Rule 431(f)(2)(J) 

limits permitted offsets 11 for specialists 

and market makers in options to option 

series that are ‘‘in-or-at-the-money.’’ 12

Recently, various options exchanges 

have provided for the listing of options 

with one-dollar strike intervals in a 

number of classes. As a result, the use 

Federal Register / Vol. 70, No. 217 / Thursday, November 10, 2005 / Notices 68503 

13 17 CFR 240.15c3–1. 

14 15 U.S.C. 78a. 

15 15 U.S.C. 78f(b)(5). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3Amendment No. 1 replaced and superseded the 

original filing in its entirety. 

4See Securities Exchange Act Release No. 52472 

(September 20, 2005), 70 FR 56762. 

of securities to hedge option series that 

have one-dollar strike intervals has 

unintentionally become more 

restrictive. 

The proposed rule change will 

remove the two-dollar standard exercise 

price interval limitation for listed 

options and the definition of ‘‘in-or-atthe-money.’’ As proposed, Rule 

431(f)(2)(J) would require permitted 

offset transactions be effected for 

specialist or market-making purposes 

such as hedging, risk reduction, 

rebalancing of positions, liquidation, or 

accommodation of customer orders, or 

other similar specialist or marketmaking purposes, while prohibiting 

trading in an underlying security that is 

not related to specialist or market 

making option activities, or that does 

not constitute a reasonable hedge. 

Since clearing firms have risk 

monitoring systems that alert them to 

unhedged positions and haircut 

requirements pursuant to Rule 15c3–113

of the Exchange Act 14 perform a similar 

function as NYSE margin requirements 

relative to providing adequate risk 

coverage to broker-dealers, the Exchange 

believes that the elimination of the twodollar standard exercise price limitation 

and definition of ‘‘in-or-at-the-money’’

will not diminish the ‘‘safety and 

soundness’’ protections that Rule 431 

provides. 

2. Statutory Basis 

The basis for the proposed rule 

change is the requirement under section 

6(b)(5) 15 of the Exchange Act that the 

rules of the Exchange be designed to 

prevent fraudulent and manipulative 

acts and practices, to promote just and 

equitable principles of trade, and, in 

general, to protect investors and the 

public interest. In addition, section 

6(b)(5) of the Exchange Act requires the 

rules of an exchange to foster 

cooperation and coordination with 

persons engaged in regulating 

transactions in securities. 

B. Self-Regulatory Organization’s 

Statement on Burden on Competition 

The Exchange does not believe that 

the proposed rule change will impose 

any burden on competition that is not 

necessary or appropriate in furtherance 

of the purposes of the Exchange Act 

C. Self-Regulatory Organization’s 

Statement on Comments on the 

Proposed Rule Change Received From 

Members, Participants or Others 

The Exchange has neither solicited 

nor received written comments on the 

proposed rule change. 

III. Date of Effectiveness of the 

Proposed Rule Change and Timing for 

Commission Action 

Within 35 days of the date of 

publication of this notice in the Federal 

Register or within such longer period (i) 

as the Commission may designate up to 

90 days of such date if it finds such 

longer period to be appropriate and 

publishes its reason for so finding or (ii) 

as to which the self-regulatory 

organization consents, the Commission 

will: 

(a) By order approve the proposed 

rule change, or 

(b) Institute proceedings to determine 

whether the proposed rule change 

should be disapproved. 

IV. Solicitation of Comments 

Interested persons are invited to 

submit written data, views, and 

arguments concerning the foregoing, 

including whether the proposed rule 

change, as amended, is consistent with 

the Act. Comments may be submitted by 

any of the following methods: 

Electronic Comments 

• Use the Commission’s Internet 

comment form (http://www.sec.gov/ 

rules/sro.shtml); or 

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

Number SR–NYSE–2004–39 on the 

subject line. 

Paper Comments 

• Send paper comments in triplicate 

to Jonathan G. Katz, Secretary, 

Securities and Exchange Commission, 

100 F Street, NE., Washington, DC 

20549–9303. 

All submissions should refer to File 

Number SR–NYSE–2004–39. This file 

number should be included on the 

subject line if e-mail is used. To help the 

Commission process and review your 

comments more efficiently, please use 

only one method. The Commission will 

post all comments on the Commission’s 

Internet Web site (http://www.sec.gov/ 

rules/sro.shtml). Copies of the 

submission, all subsequent 

amendments, all written statements 

with respect to the proposed rule 

change that are filed with the 

Commission, and all written 

communications relating to the 

proposed rule change between the 

Commission and any person, other than 

those that may be withheld from the 

public in accordance with the 

provisions of 5 U.S.C. 552, will be 

available for inspection and copying in 

the Commission’s Public Reference 

Section, 100 F Street, NE., Washington, 

DC 20549. Copies of the filing also will 

be available for inspection and copying 

at the principal office of the Exchange. 

All comments received will be posted 

without change; the Commission does 

not edit personal identifying 

information from submissions. You 

should submit only information that 

you wish to make available publicly. All 

submissions should refer to File 

Number SR–NYSE–2004–39 and should 

be submitted on or before December 1, 

2005. 

For the Commission, by the Division of 

Market Regulation, pursuant to delegated 

authority. 

Jonathan G. Katz, 

Secretary. 

[FR Doc. 05–22454 Filed 11–9–05; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–52719; File No. SR–PCX–

2005–73] 

Self-Regulatory Organizations; Pacific 

Exchange, Inc.; Order Approving 

Proposed Rule Change and 

Amendment No. 1 Thereto Relating to 

the Establishment of a Portfolio 

Crossing Service on the Archipelago 

Exchange 

November 2, 2005. 

I. Introduction 

On June 7, 2005, the Pacific Exchange, 

Inc. (‘‘PCX’’ or ‘‘Exchange’’) filed with 

the Securities and Exchange 

Commission (‘‘Commission’’), pursuant 

to Section 19(b)(1) of the Securities 

Exchange Act of 1934 (‘‘Act’’) 1 and Rule 

19b–4 thereunder,2 a proposed rule 

change to establish an after-hours 

Portfolio Crossing Service (‘‘PCS’’). The 

PCX filed Amendment No. 1 to the 

proposed rule change on September 14, 

2005.3 The proposed rule change, as 

amended, was published for comment 

in the Federal Register on September 

28, 2005.4 The Commission received no 

comments from the public in response 

to the proposed rule change. This order