[Federal Register Volume 79, Number 203 (Tuesday, October 21, 2014)]
[Notices]
[Pages 62995-62998]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2014-24957]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-73355; File No. SR-CBOE-2014-073]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing and Immediate Effectiveness of a 
Proposed Rule Change Relating to Margin Treatment of Over-the-Counter 
Options Contracts Cleared by The Options Clearing Corporation

October 15, 2014.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(the ``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given 
that on October 1, 2014, Chicago Board Options Exchange, Incorporated 
(the ``Exchange'' or ``CBOE'') filed with the Securities and Exchange 
Commission (the ``Commission'') the proposed rule change as described 
in Items I, and II, 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.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange proposes to amend its rules regarding the margin 
treatment of over-the-counter (``OTC'') options cleared by The Options 
Clearing Corporation (``OCC''). The text of the proposed rule change is 
provided below. (additions are italicized; deletions are [bracketed])
* * * * *
Chicago Board Options Exchange, Incorporated Rules
* * * * *
    Rule 1.1. When used in these Rules, unless the context otherwise 
requires:
    (a)-(l) No change.
Option Contract
    (m) Except as otherwise provided, [T]the term ``option contract'' 
means a put or call issued, or subject to issuance, by the Clearing 
Corporation pursuant to the Rules of the Clearing Corporation.
    (n)-(ooo) No change.
OCC Cleared OTC Option Contract
    (ppp) The term ``OCC cleared OTC option contract'' means an over-
the-counter option contract that is issued and guaranteed by the 
Clearing Corporation. Except as otherwise provided, an OCC cleared OTC 
option contract is not an ``options contract'' as defined in the Rules.
    . . . Interpretations and Policies:
    .01-.05 No change.
* * * * *
Rule 12.3. Margin Requirements
    (a) Definitions. For purposes of this Rule, the following terms 
shall have the meanings specified below.
    (1)-(8) No change.
    (9) The term ``listed'' for purposes of this Chapter 12 means a 
security traded on a registered national securities exchange or 
automated facility of a registered national securities association or 
issued and guaranteed by the Clearing Corporation and shall include OCC 
cleared OTC options contracts.
    (10)-(13) No change.
    (14) The term ``OTC option'' as used with reference to a call or a 
put option contract in this Chapter 12 means an over-the-counter option 
contract that is issued and guaranteed by the carrying broker-dealer 
and not traded on a national securities exchange or issued and 
guaranteed by the Clearing Corporation [and is issued and guaranteed by 
the carrying broker-dealer].
    (b)-(n) No change.
* * * * *
Rule 12.4--Portfolio Margin
    Rule 12.4. As an alternative to the transaction/position specific 
margin requirements set forth in Rule 12.3 of this Chapter 12, a TPH 
organization may require margin for all margin equity securities (as 
defined in Section 220.2 of Regulation T), listed options, unlisted 
derivatives, security futures products, and index warrants in 
accordance with the portfolio margin requirements contained in this 
Rule 12.4.
    In addition, a TPH organization, provided it is a Futures 
Commission Merchant (``FCM'') and is either a clearing member of a 
futures clearing organization or has an affiliate that is a clearing 
member of a futures clearing organization, is permitted under this Rule 
12.4 to combine a customer's related instruments (as defined below), 
listed index options, unlisted derivatives, options on exchange traded 
funds, index warrants, and underlying instruments and compute a margin 
requirement for such combined products on a portfolio margin basis.
    Application of the portfolio margin provisions of this Rule 12.4 to 
IRA accounts is prohibited.
    (a) Definitions.
    (1) The term ``listed option'' for purposes of this Rule shall mean 
any equity (or equity index-based) option traded on a registered 
national securities exchange or automated facility of a registered 
national securities association or issued and guaranteed by the 
Clearing Corporation and shall include OCC cleared OTC options 
contracts.
    (2)-(3) No change.
    (4) The term ``unlisted derivative'' for purposes of this Rule 
means any equity-based (or equity index-based) unlisted option, forward 
contract or swap that can be valued by a theoretical pricing model 
approved by the Securities and Exchange Commission and does not include 
OCC cleared OTC options contracts.
    (5)-(11) No change.
    (b)-(j) No change.
* * * * *
    The text of the proposed rule change is also available on the 
Exchange's Web site (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the 
Secretary, and at the Commission's Public Reference Room.

[[Page 62996]]

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to amend its margin requirements rules to 
treat OTC options contracts that are issued and guaranteed by the OCC 
(``OCC cleared OTC option contracts'') consistent with FINRA Rule 4210 
(Margin Requirements).\3\ Specifically, the Exchange proposes a 
definition of OCC cleared OTC option contract in Rule 1.1(ppp) and, for 
margin purposes, proposes to amend the definitions of the terms 
``listed'' in Rule 12.3(a)(9) and ``listed option'' in Rule 12.4(a)(1) 
to include OCC cleared OTC option contracts. The Exchange also 
proposes, for margin purposes, to amend the definitions of the terms 
``OTC'' in Rule 12.3(a)(14) and ``unlisted derivative'' in Rule 
12.4(a)(4) to exclude OCC cleared OTC option contracts. The Exchange's 
proposal is materially based on, and substantially similar to, changes 
made by FINRA to its margin requirements rules under FINRA Rule 
4210.\4\ The Exchange believes that a consistent margin treatment 
regime with respect to OCC cleared OTC option contracts will make 
margin requirements rules easier for market participants to understand 
and that the proposal is in the best interest of investors.
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    \3\ See FINRA Rule 4210(f)(2)(A)(xxiv); see also FINRA Rules 
2360(a)(9), (19), (32), (33) and 4210(g)(2)(A).
    \4\ See Securities Exchange Act Release No. 70619 (October 7, 
2013), 78 FR 62722 (October 22, 2013) (Order Granting Approval of 
Proposed Rule Change Relating to Amendments to FINRA Rules 2360 and 
4210 in Connection with OCC Cleared Over-the-Counter Options) (SR-
FINRA-2013-027) (``Order'').
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    On April 25, 2014, the OCC launched central clearing services for 
bilaterally negotiated OTC equity index options contracts on the S&P 
500 Index. Under OCC By-laws, the OCC may, under limited circumstances, 
clear OTC options on the S&P 500 Index. Such contracts must be of a 
term between four months and five years and have minimum notional 
values of either 500,000 or 100,000 times the value of the S&P 500 
Index. In clearing these options, the OCC becomes both the issuer and 
guarantor of the OTC contract.
    In response to rules adopted by the OCC permitting the OCC to issue 
and guarantee these particular OTC option contracts and responsive 
rules adopted by FINRA regarding OCC cleared OTC option contracts, the 
Exchange proposes to adopt a definition of OCC cleared OTC option 
contract and make certain changes to its margin rules. The Exchange 
proposes to define the term OCC cleared OTC option contract to carve-
out OCC cleared OTC option contracts from the definition of ``option 
contract'' reflecting the fact that the Rules are intended to control 
transactions in options contracts traded at the Exchange. Specifically, 
the Exchange proposes changes to Rule 1.1(m) defining ``option 
contract'' and the adoption of Rule 1.1(ppp) to define the term ``OCC 
cleared OTC option contract'' in the Rules.
    Under Rule 1.1(m), an ``option contract'' is defined as ``a put or 
a call issued, or subject to issuance, by the [Options] Clearing 
Corporation pursuant to the rules of the [Options] Clearing 
Corporation.'' OCC cleared OTC option contracts are option contracts 
that are subject to issuance by the OCC. Accordingly, the Exchange 
proposes to amend Rule 1.1(m) to exclude OCC cleared OTC option 
contracts. Proposed Rule 1.1(ppp) would define OCC cleared OTC option 
contracts as over-the-counter option contracts that are issued and 
guaranteed by the Clearing Corporation. The proposed definition would 
also provide that except as otherwise indicated in the Rules, OCC 
cleared OTC option contracts are not ``options contracts'' under the 
Rules. Thus, consistent with the proposed changes to Rule 1.1(m), 
proposed Rule 1.1(ppp) would make clear that OCC cleared OTC option 
contracts are not Exchange-traded products and that the Rules, unless 
otherwise indicated, are not intended to extend to OCC cleared OTC 
options contracts.
    The Exchange also proposes changes to its margin treatment rules 
with respect to OCC cleared OTC options contracts. In general, the 
margin requirements for options listed on an exchange (and cleared and 
guaranteed by the OCC) are lower than the margin requirement for OTC 
options (not cleared or guaranteed by the OCC). This is because the 
clearing and guaranteeing functions performed by the OCC greatly reduce 
the counterparty risk present on exchange-traded option contracts. 
Thus, for margin requirements and securities setoff purposes, the 
Exchange requires less initial and maintenance margin for listed 
options positions than for OTC options positions.\5\ The reasons 
underlying the more favorable margin treatment for listed (and OCC 
cleared and guaranteed) options, however, apply with equal force to OCC 
cleared OTC options contracts. The clearing and guaranteeing functions 
performed by the OCC reduce the counterparty credit risk associated 
with these contracts to levels more commonly associated with listed 
options contacts. In light of the clearing and guaranteeing functions 
performed by the OCC, the Exchange proposes to treat OCC cleared OTC 
options as it treats other cleared and guaranteed options by defining 
OCC cleared OTC option contracts as ``listed'' option contracts for 
margin purposes only. Notably, the Exchange proposes to treat OCC 
cleared OTC options as listed options only after such contracts have 
been accepted for clearing and guaranteed by the OCC.
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    \5\ See generally CBOE Rule 12.3 (Margin Requirements).
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    Exchange Rules 12.3 (Margin Requirements) and 12.4 (Portfolio 
Margin) describe minimum transaction or position-specific and portfolio 
margin requirements that Trading Permit Holders (``TPHs'') must require 
and securities offsets that may be applied for margin requirements 
purposes. For margin purposes only, the Exchange proposes to modify the 
definition of the term ``listed'' in Rule 12.3(a)(9) to include OCC 
cleared OTC options. Similarly, the Exchange proposes changes to Rule 
12.4(a)(1) to define the term ``listed option'' to include OCC cleared 
OTC option contracts for portfolio margin purposes only. These rule 
changes would allow the Exchange to treat OCC cleared OTC options in 
the same manner as Exchange-listed options for margin purposes, but 
make clear that the Rules are not intended to extend to or control 
transactions involving unlisted option contracts or OTC options 
contracts. The Exchange also proposes to change the definitions of the 
terms ``OTC'' in Rule 12.3(a)(14) \6\ and

[[Page 62997]]

``unlisted derivative'' in Rule 12.4(a)(4) to exclude OCC cleared OTC 
option contracts for margin purposes. These proposed changes are 
substantially similar in all material respects to FINRA Rule 
4210(f)(2)(A)(xxiv), which the Commission recently approved.\7\
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    \6\ The Exchange is also proposing to add the word ``option'' to 
its definition of ``OTC'' in Rule 12.3(a)(14) to make clear that OTC 
as used in Chapter 12 would refer to an options contract. Since the 
current definition already states that that ``OTC'' ``as used with 
reference to a call or a put option contract means an over-the-
counter option contract . . .'', the Exchange believes that the 
addition of the word ``option'' would simply clarify the language in 
the Rule without any substantive change to the Rule.
    \7\ See Order, supra note 4.
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    Notably, the Exchange is not proposing changes to Chapter IX of the 
Rules, particularly Rules 9.7 (Opening of Accounts) or 9.15 (Delivery 
of Current Options Disclosure Documents) therein. Under Rule 9.7, TPHs 
are required to furnish the options disclosure documents described in 
Rule 9.15 to customers at or prior to approving a customer's account 
for options trading. Because Rules 9.7 and 9.15 relate to disclosures 
that must be made before a customer's account may be approved for 
trading in options at the Exchange, no rule changes are needed to 
accommodate OCC cleared OTC option contracts, which are not Exchange-
traded products. In addition, the Exchange echoes FINRA's comments that 
such delivery requirements are unnecessary because the counterparties 
to OCC cleared OTC options must be ``eligible contract participants'' 
as defined in the Act,\8\ and thus, are more sophisticated investors 
who are likely to be aware of the risks associated with trading OTC 
options.
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    \8\ See 15 U.S.C. 78c(a)(65) which states that an ``eligible 
contract participant has the same meaning as in section 1a of the 
Commodity Exchange Act.'' The Commodity Exchange Act details the 
requirements for eligibility as an ``eligible contract participant'' 
which generally require a sufficient regulated status or a specified 
minimum amount of assets; see also 7 U.S.C. 1(a)(18).
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2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Act and the rules and regulations thereunder applicable to the 
Exchange and, in particular, the requirements of Section 6(b) of the 
Act.\9\ Specifically, the Exchange believes the proposed rule change is 
consistent with the Section 6(b)(5) \10\ requirements that the rules of 
an exchange be designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, to remove impediments to and 
perfect the mechanism of a free and open market and a national market 
system, and, in general, to protect investors and the public interest. 
Additionally, the Exchange believes the proposed rule change is 
consistent with the Section 6(b)(5) \11\ requirement that the rules of 
an exchange not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \9\ 15 U.S.C. 78f(b).
    \10\ 15 U.S.C. 78f(b)(5).
    \11\ Id.
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    In particular, the Exchange believes that the proposed rule change 
will add consistency to the margin treatment rules and make them easier 
for investors to understand. For purposes of margin treatment, the 
Exchange believes that the clearing and guaranteeing functions 
performed by the OCC support a determination to treat OCC cleared OTC 
option contracts in the same manner as other option contracts that are 
cleared and guaranteed by the OCC. The Exchange believes that treating 
OCC cleared OTC option contracts as ``listed'' options for margin 
purposes is consistent with FINRA rules and the treatment of option 
contracts cleared and guaranteed by the OCC generally. The Exchange 
believes that treating OCC cleared OTC option contracts in this manner 
would protect investors' interests and support a rational regulatory 
framework, which is in the best interest of investors.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. The Exchange believes that 
the proposed margin requirements rule changes are consistent with 
substantially similar rule changes made by FINRA. The Exchange believes 
that consistency across markets with respect to margin requirements 
will make it easier for investors to trade options and is in the 
interests of all investors. Moreover, the Exchange believes that the 
proposed rule changes are necessary in order to not disadvantage its 
TPHs who would otherwise be required to maintain additional margin in 
their accounts, placing TPHs at the Exchange at a competitive 
disadvantage in the market. Furthermore, because the proposed margin 
rules would be applied equally to all TPHs, no TPH would be placed at a 
competitive disadvantage at the Exchange.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    The Exchange neither solicited nor received comments on the 
proposed rule change.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Because the foregoing proposed rule change does not:
    A. significantly affect the protection of investors or the public 
interest;
    B. impose any significant burden on competition; and
    C. become operative for 30 days from the date on which it was 
filed, or such shorter time as the Commission may designate, it has 
become effective pursuant to Section 19(b)(3)(A) of the Act \12\ and 
Rule 19b-4(f)(6) \13\ thereunder. At any time within 60 days of the 
filing of the proposed rule change, the Commission summarily may 
temporarily suspend such rule change if it appears to the Commission 
that such action is necessary or appropriate in the public interest, 
for the protection of investors, or otherwise in furtherance of the 
purposes of the Act. If the Commission takes such action, the 
Commission will institute proceedings to determine whether the proposed 
rule change should be approved or disapproved.
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    \12\ 15 U.S.C. 78s(b)(3)(A).
    \13\ 17 CFR 240.19b-4(f)(6).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

    <bullet> Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
    <bullet> Send an email to <a href="/cdn-cgi/l/email-protection#c0b2b5aca5eda3afadada5aeb4b380b3a5a3eea7afb6"><span class="__cf_email__" data-cfemail="e092958c85cd838f8d8d858e9493a0938583ce878f96">[email protected]</span></a>. Please include 
File Number SR-CBOE-2014-073 on the subject line.

Paper Comments

    <bullet> Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street NE., Washington, DC 20549-1090.

All submissions should refer to File Number SR-CBOE-2014-073. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's Internet 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

[[Page 62998]]

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 Web site viewing and printing in 
the Commission's Public Reference Room, 100 F Street NE., Washington, 
DC 20549 on official business days between the hours of 10 a.m. and 3 
p.m. Copies of the filing also will be available for inspection and 
copying at the principal office of the Exchange. All comments received 
will be posted without change; the Commission does not edit personal 
identifying information from submissions. You should submit only 
information that you wish to make available publicly. All submissions 
should refer to File Number SR-CBOE-2014-073 and should be submitted on 
or before November 12, 2014.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\14\
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    \14\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2014-24957 Filed 10-20-14; 8:45 am]
BILLING CODE 8011-01-P


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