Document ID: SEC-2006-0594-0001
Agency: sec
Document Type: Notice
Title: Self-regulatory organizations; proposed rule changes: National Association of Securities Dealers, Inc.
Posted Date: 2006-05-08T04:00Z

[Federal Register: May 8, 2006 (Volume 71, Number 88)]
[Notices]               
[Page 26797-26804]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr08my06-74]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53743; File No. SR-NASD-2006-045]

 
Self-Regulatory Organizations; National Association of Securities 
Dealers, Inc.; Notice of Filing and Immediate Effectiveness of Proposed 
Rule Change Relating to Amendments to Rule 2520 (Margin Requirements)

April 28, 2006.
    Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on April 3, 2006, the National Association of Securities Dealers, Inc. 
(``NASD'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I, 
II, and III below, which Items have been prepared by NASD. NASD has 
designated the proposed rule change as constituting a ``non-
controversial'' rule change pursuant to section 19(b)(3)(A) \3\ of the 
Act and Rule 19b-4(f)(6) thereunder,\4\ which renders the proposal 
effective upon filing with the Commission. 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.
    \3\ 15 U.S.C. 78s(b)(3)(A).
    \4\ 17 CFR 240.19b-4(f)(6). NASD gave the Commission written 
notice of its intent to file this proposed rule change on March 24, 
2006.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASD is proposing to amend NASD Rules 2520 and 2522 that will 
revise the margin requirements to (1) recognize specific additional 
complex option

[[Page 26798]]

spread strategies for purposes of determining required margin and (2) 
amend the provisions relating to ``permitted offsets'' for certain 
listed option transactions.
    The text of the proposed rule change is below. Proposed new 
language is italicized; deletions are in brackets.
* * * * *
2520. Margin Requirements
    (a) through (e) No Change.
    (f) Other Provisions
    (1) No Change.
    (2) Puts, Calls and Other Options, Currency Warrants, Currency 
Index Warrants and Stock Index Warrants
    (A) through (B) No Change.
    (C) For purposes of this subparagraph (f)(2), obligations issued by 
the United States Government shall be referred to as United States 
Government obligations. Mortgage pass-through obligations guaranteed as 
to timely payment of principal and interest by the Government National 
Mortgage Association shall be referred to as GNMA obligations.
    In the case of any put, call, currency warrant, currency index 
warrant, or stock index warrant carried ``long'' in a customer's 
account that expires in nine months or less, initial margin must be 
deposited and maintained equal to at least 100% of the purchase price 
of the option or warrant.
    Long Listed Option or Warrant With An Expiration Exceeding Nine 
Months. In the case of a put, call, index stock group option, or stock 
index warrant that is issued by a registered clearing agency, margin 
must be deposited and maintained equal to at least 75% of the current 
market value of the option or warrant; provided that the option or 
warrant has a remaining period to expiration exceeding nine months.
    Long OTC Option or Warrant With An Expiration Exceeding Nine 
Months. In the case of a[n OTC] put, [or ]call, index stock group 
option,[ on a stock or stock index, and a] or stock index warrant[,] 
carried long that is not issued by a registered clearing agency[ with 
an expiration exceeding 9 months], margin must be deposited and 
maintained equal to at least 75% of the option's or warrant's ``in-the-
money'' amount plus 100% of the amount, if any, by which the current 
market value of the option or warrant exceeds its ``in-the-money'' 
amount provided the option or warrant:[. Options or warrants margined 
pursuant to this paragraph must:]
    (i) [be valued at all times for margin purposes at an amount not to 
exceed, the in-the-money amount,]
    [(ii) be]is guaranteed by the carrying broker-dealer, [and]
    (ii) [(iii) have]has an American-style exercise provision, and
    (iii) has a remaining period to expiration exceeding nine months.
    (D) through (F) No Change.
    (G) (i) through (iv) No Change.
    (v) The following requirements set forth the minimum amount of 
margin that must be maintained in margin accounts of customers having 
positions in components underlying options, and stock index warrants, 
when such components are held in conjunction with certain positions in 
the overlying option or warrant. The option or warrant must be issued 
by a registered clearing agency or guaranteed by the carrying broker/
dealer. In the case of a call or warrant carried in a short position, a 
related long position in the underlying component shall be valued at no 
more than the call/warrant exercise price for margin equity purposes.
    a. Long Option or Warrant Offset. When a component underlying an 
option or warrant is carried long (short) in an account in which there 
is also carried a long put (call) or warrant specifying equivalent 
units of the underlying component, the minimum amount of margin that 
must be maintained on the underlying component is 10% of the 
[aggregate] option/warrant exercise price plus the ``out-of-the-money'' 
amount, not to exceed the minimum maintenance required pursuant to 
paragraph (c) of this Rule.
    b. Conversions. When a call or warrant carried in a short position 
is covered by a long position in equivalent units of the underlying 
component and [there] is also carried with a long put or warrant 
specifying equivalent units of the same underlying component and having 
the same exercise price and expiration date as the short call or 
warrant, the minimum amount of margin that must be maintained for the 
underlying component shall be 10% of the [aggregate] exercise price.
    c. Reverse Conversions. When a put or warrant carried in a short 
position is covered by a short position in equivalent units of the 
underlying component and is also carried with a long call or warrant 
specifying equivalent units of the same underlying component and having 
the same exercise price and expiration date as the short put or 
warrant, the minimum amount of margin that must be maintained for the 
underlying component shall be 10% of the [aggregate] exercise price 
plus the amount by which the exercise price of the put exceeds the 
current market value of the underlying, if any.
    d. Collars. When a call or warrant carried in a short position is 
covered by a long position in equivalent units of the underlying 
component and is also carried with a long put or warrant specifying 
equivalent units of the same underlying component and having a lower 
exercise price and the same expiration date as the short call/warrant, 
the minimum amount of margin that must be maintained for the underlying 
component shall be the lesser of 10% of the [aggregate] exercise price 
of the put plus the put ``out-of-the-money'' amount or 25% of the call 
aggregate exercise price.
    e. Butterfly Spread. This subparagraph applies to a butterfly 
spread as defined in Rule 2522 where all option positions are issued by 
a registered clearing agency or guaranteed by the carrying broker/
dealer.
    1. No Change.
    2. With respect to a short butterfly spread as defined in Rule 
2522, margin must be deposited and maintained equal to at least the 
amount of the [aggregate] difference between the two lowest exercise 
prices with respect to short butterfly spreads comprised of calls or 
the [aggregate] difference between the two highest exercise prices with 
respect to short butterfly spreads comprised of puts. The net proceeds 
from the sale of short option components may be applied to the 
requirement.
    f. Box Spread. This subparagraph applies to box spreads as defined 
in Rule 2522, where all option positions are issued by a registered 
clearing agency or guaranteed by the carrying broker/dealer.
    1. With respect to a long box spread as defined in Rule 2522, the 
net debit must be paid in full.
    2. With respect to a short box spread as defined in Rule 2522, 
margin must be deposited and maintained equal to at least the amount of 
the [aggregate] difference between the exercise prices. The net 
proceeds from the sale of the short option components may be applied to 
the requirement.
    g. Long Box Spread in European-Style Options. With respect to a 
long box spread as defined in Rule 2522, in which all component options 
have a European-style exercise provision and are issued by a registered 
clearing agency or guaranteed by the carrying broker/dealer, margin 
must be deposited and maintained equal to at least 50% of the 
[aggregate] difference in the exercise prices. The net proceeds from 
the sale of short option components may be applied to the requirement. 
For margin purposes, the long box spread may be valued at an amount not 
to exceed

[[Page 26799]]

100% of the [aggregate] difference in the exercise prices.
    h. Long Condor Spread. This subparagraph applies to a long condor 
spread as defined in Rule 2522 where all option positions are issued by 
a registered clearing agency or guaranteed by the carrying broker/
dealer. With respect to a long condor spread as defined in Rule 2522, 
the net debit must be paid in full.
    i. Short Iron Butterfly Spread. This subparagraph applies to a 
short iron butterfly spread as defined in Rule 2522 where all option 
positions are issued by a registered clearing agency or guaranteed by 
the carrying broker/dealer. With respect to a short iron butterfly 
spread as defined in Rule 2522, margin must be deposited and maintained 
equal to at least the amount of the exercise price interval. The net 
proceeds from the sale of short option components may be applied to the 
requirement.
    j. Short Iron Condor Spread. This subparagraph applies to a short 
iron condor spread as defined in Rule 2522 where all option positions 
are issued by a registered clearing agency or guaranteed by the 
carrying broker/dealer. With respect to a short iron condor spread as 
defined in Rule 2522, margin must be deposited and maintained equal to 
at least the amount of the exercise price interval. The net proceeds 
from the sale of short option components may be applied to the 
requirement.
    k. Long Calendar Butterfly Spread. This subparagraph applies to a 
long calendar butterfly spread as defined in Rule 2522 where all option 
positions are issued by a registered clearing agency or guaranteed by 
the carrying broker/dealer. With respect to a long calendar butterfly 
spread as defined in Rule 2522, the net debit must be paid in full.
    l. Long Calendar Condor Spread. This subparagraph applies to a long 
calendar condor spread as defined in Rule 2522 where all option 
positions are issued by a registered clearing agency or guaranteed by 
the carrying broker/dealer. With respect to a long calendar condor 
spread as defined in Rule 2522, the net debit must be paid in full.
    m. Short Calendar Iron Butterfly Spread. This subparagraph applies 
to a short calendar iron butterfly spread as defined in Rule 2522 where 
all option positions are issued by a registered clearing agency or 
guaranteed by the carrying broker/dealer. With respect to a short 
calendar iron butterfly spread as defined in Rule 2522, margin must be 
deposited and maintained equal to at least the amount of the exercise 
price interval. The net proceeds from the sale of short option 
components may be applied to the requirement.
    n. Short Calendar Iron Condor Spread. This subparagraph applies to 
a short calendar iron condor spread as defined in Rule 2522 where all 
option positions are issued by a registered clearing agency or 
guaranteed by the carrying broker/dealer. With respect to a short 
calendar iron condor spread as defined in Rule 2522, margin must be 
deposited and maintained equal to at least the amount of the exercise 
price interval. The net proceeds from the sale of short option 
components may be applied to the requirement.
    (H) through (I) No Change.
    (J) (i) Registered specialists, market makers or traders--
Notwithstanding the other provisions of this subparagraph (f)(2), a 
member may clear and carry the listed option transactions of one or 
more registered specialists, registered market makers or registered 
traders in options (whereby[which] registered traders are deemed 
specialists for all purposes under the Act, pursuant to the rules of a 
national securities exchange) (hereinafter referred to as 
``specialist(s)''), upon a ``Good Faith'' margin basis satisfactory to 
the concerned parties, provided the ``Good Faith'' margin 
requirement[s] is not less than the Net Capital haircut deduction of 
the member [organization] carrying the transaction pursuant to SEC Rule 
15c3-1 under the Act. In lieu of collecting the ``Good Faith'' margin 
requirement, a carrying member [organization] may elect to deduct in 
computing its Net Capital the amount of any deficiency between the 
equity maintained in the account and the ``Good Faith'' margin 
required.
    For purposes of this paragraph (f)(2)(J), a permitted offset 
position means, in the case of an option in which a specialist or 
market maker makes a market, a position in the underlying asset or 
other related assets, and in the case of other securities in which a 
specialist or market maker makes a market, a position in options 
overlying the securities in which a specialist or market maker makes a 
market. Accordingly, a specialist or market maker in options may 
establish, on a share-for-share basis, a long or short position in the 
securities underlying the options in which the specialist or market 
maker makes a market, and a specialist or market maker in securities 
other than options may purchase or write options overlying the 
securities in which the specialist or market maker makes a market, if 
the account holds the following permitted offset positions:
    a. A short option position which [is ``in or at the money'' and] is 
not offset by a long or short option position for an equal or greater 
number of shares of the same underlying security which is ``in the 
money'';
    b. A long option position which [is ``in or at the money'' and] is 
not offset by a long or short option position for an equal or greater 
number of shares of the same underlying security which is ``in the 
money'';
    c. A short option position against which an exercise notice was 
tendered;
    d. A long option position which was exercised;
    e. A net long position in a security (other than an option) in 
which a specialist or market maker makes a market;
    f. A net short position in a security (other than an option) in 
which the specialist or market maker makes a market; or
    g. A specified portfolio type as referred to in SEC Rule 15c3-1, 
including its appendices, or any applicable SEC staff interpretation or 
no-action position.
    Permitted offset transactions must be effected for specialist or 
market making purposes such as hedging, risk reduction, rebalancing of 
positions, liquidation, or accommodation[s] of customer orders, or 
other similar [market making]specialist or market maker purpose. The 
specialist or market maker must be able to demonstrate compliance with 
this provision.
    For purposes of this paragraph (f)(2)(J) [the term ``in or at the 
money'' means 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;] the term ``in the money'' means the current market 
price of the underlying asset or index is not below (with respect to a 
call option) or above (with respect to a put option) the exercise price 
of the option; and, the term ``overlying option'' means a put option 
purchased or a call option written against a long position in an 
underlying asset; or a call option purchased or a put option written 
against a short position in an underlying asset.
    (ii) Securities, including options, in such accounts shall be 
valued conservatively in the light of current market prices and the 
amount which might be realized upon liquidation. Substantial additional 
margin must be required or excess [n]Net [c]Capital maintained in all 
cases where the securities carried:
    a. through b. No Change.
    c. In one or more or all accounts, including proprietary accounts

[[Page 26800]]

combined, are such that they cannot be liquidated promptly or represent 
undue concentration of risk in view of the carrying member's [n]Net 
[c]Capital and its overall exposure to material loss.
    (K) through (L) No Change.
    (M) Cash account transactions--A member may make option 
transactions in a customer's cash account, provided that:
    (i) No Change.
    (ii) Spreads. A European-style cash-settled index stock group 
option or stock index warrant carried in a short position is deemed a 
covered position, and eligible for the cash account, provided a long 
position in a European-style cash-settled stock group index option, or 
stock index warrant having the same underlying component or index that 
is based on the same aggregate current underlying value, is held in or 
purchased for the account on the same day, provided that:
    a. through b. No Change.
    c. There is held in the account at the time the positions are 
established, or received into the account promptly thereafter:
    1. Cash or cash equivalents of not less than any amount by which 
the [aggregate] exercise price of the long call or call warrant (short 
put or put warrant) exceeds the [aggregate] exercise price of the short 
call or call warrant (long put or put warrant), to which [requirement 
of] net proceeds from the sale of the short position may be applied, or
    2. An escrow agreement.
    The escrow agreement must certify that the bank holds for the 
account of the customer as security for the agreement i. cash, ii. cash 
equivalents, or iii. a combination thereof having an aggregate market 
value at the time the positions are established of not less than any 
amount by which the [aggregate] exercise price of the long call or call 
warrant (short put or put warrant) exceeds the [aggregate] exercise 
price of a short call or call warrant (long put or put warrant) and 
that the bank will promptly pay the member such amount in the event the 
account is assigned an exercise notice or that the bank will promptly 
pay the member funds sufficient to purchase a warrant sold short in the 
event of a buy-in.
    d. No Change.
    (iii) Long Butterfly Spreads, Short Butterfly Spreads, Long Condor 
Spreads, Short Iron Butterfly Spreads, or Short Iron Condor Spreads. 
Put or call options carried in a short position are deemed covered 
positions and eligible for the cash account provided that the account 
contains long positions of the same type which in conjunction with the 
short options, constitute a long butterfly spread, short butterfly 
spread, long condor spread, short iron butterfly spread, or short iron 
condor spread as defined in Rule 2522 and provided that:
    a. through d. No Change.
    e. All components options expire concurrently;
    [e]f. With respect to a long butterfly spread or long condor spread 
as defined in Rule 2522, the net debit is paid in full; and
    [f]g. With respect to a short butterfly spread, short iron 
butterfly spread or short iron condor spread as defined in Rule 2522, 
there is held in the account at the time the positions are established 
or received into the account promptly thereafter:
    1. Cash or cash equivalents of not less than the amount of the 
[aggregate] difference between the two lowest exercise prices with 
respect to short butterfly spreads comprised of call options or the 
[aggregate] difference between the two highest exercise prices with 
respect to short butterfly spreads comprised [or] of put options, to 
which [requirement] the net proceeds from the sale of short option 
components may be applied; or
    2. An escrow agreement.
    The escrow agreement must certify that the bank holds for the 
account of the customer as security for the agreement i. cash, ii. cash 
equivalents or iii. a combination thereof having an aggregate market 
value at the time the positions are established of not less than the 
amount of the [aggregate] difference between the two lowest exercise 
prices with respect to short butterfly spreads comprised of calls or 
the [aggregate] difference between the two highest exercise prices with 
respect to short butterfly spreads comprised of puts and that the bank 
will promptly pay the member such amount in the event the account is 
assigned an exercise notice on the call (put) with the lowest (highest) 
exercise price.
    (iv) Box Spreads. Puts and calls carried in a short position are 
deemed covered positions and eligible for the cash account provided 
that the account contains long positions which in conjunction with the 
short options constitute a box spread as defined in Rule 2522 provided 
that:
    a. through d. No Change.
    e. All component options expire concurrently;
    [e]f. With respect to a long box spread as defined in Rule 2522, 
the net debit is paid in full; and
    [f]g. With respect to a short box spread as defined in Rule 2522, 
there is held in the account at the time the positions are established, 
or received into the account promptly thereafter:
    1. Cash or cash equivalents of not less than the amount of the 
[aggregate] difference between the exercise prices, to which 
[requirement] the net proceeds from the sale of short option components 
may be applied; or
    2. An escrow agreement.
    The escrow agreement must certify that the bank holds for the 
account of the customer as security for the agreement i. cash, ii. cash 
equivalents or iii. a combination thereof having an aggregate market 
value at the time the positions are established of not less than the 
amount of the [aggregate] difference between the exercise prices and 
that the bank will promptly pay the member such amount in the event the 
account is assigned an exercise notice on either short option.
    (3) through (11) No Change.
* * * * *
    2522. Definitions Related to Options, Currency Warrants, Currency 
Index Warrants and Stock Index Warrants Transactions.
    (a) The following definitions shall apply to the margin 
requirements for options, currency warrants, currency index warrants 
and stock index warrants transactions:
    (1) through (5) No Change.
    (6) Box Spread.
    The term ``box spread'' means 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 expirations, 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[.], all of which have the 
same contract size, underlying component or index and time of 
expiration, and are based on the same aggregate current underlying 
value.
    (7) through (8) No Change.
    (9) Butterfly Spread
    The term ``butterfly spread'' means 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

[[Page 26801]]

series are offset by one long option with a higher exercise price and 
one long option with a lower exercise price or (B) a ``short butterfly 
spread'' in which two long options in the same series offset one short 
option with a higher exercise price and one short option with a lower 
exercise price[.], all of which have the same contract size, underlying 
component or index and time of expiration, are based on the same 
aggregate current underlying value, where the interval between the 
exercise price of each series is equal, and the exercise prices are in 
ascending order.
    (10) Calendar Spread
    The term ``calendar spread'' or ``time spread'' means the sale of 
one option and the simultaneous purchase of another option of the same 
type, both specifying the same underlying component with the same 
exercise price or different exercise prices, where the ``long'' option 
expires after the ``short'' option.
    (10) through (22) renumbered as (11) through (23).
    [(23)](24) Escrow Agreement
    The term ``escrow agreement,'' when used in connection with cash 
settled calls, puts, currency warrants, currency index warrants, or 
stock index warrants carried short, means any agreement issued in a 
form acceptable to [the Association]NASD under which a bank holding 
cash, cash equivalents, one or more qualified equity securities or a 
combination thereof in the case of a call [option] or warrant or cash, 
cash equivalents or a combination thereof in the case of a put [option] 
or warrant is obligated (in the case of an option) to pay the creditor 
the exercise settlement amount in the event an option is assigned an 
exercise notice or, (in the case of a warrant) the funds sufficient to 
purchase a warrant sold short in the event of a buy-in.
    [The term ``escrow agreement'' when used in connection with non 
cash settled call or put options carried short, means any agreement 
issued in a form acceptable to the Association under which a bank 
holding the underlying security (in the case of a call option) or 
required cash or cash equivalents or a combination thereof (in the case 
of a put option) is obligated to deliver to the creditor (in the case 
of a call option) or accept from the creditor (in the case of a put 
option) the underlying security against payment of the exercise price 
in the event of the call or put is assigned an exercise notice.]
    (24) through (40) renumbered as (25) through (41).
    (42) Long Calendar Butterfly Spread
    The term ``long calendar butterfly spread'' means an aggregation of 
positions in three series of either puts or calls, structured as two 
short options with the same exercise price, offset by a long option 
with a lower exercise price and a long option with a higher exercise 
price, all of which have the same contract size, underlying component 
or index, are based on the same aggregate current underlying value, 
where the interval between the exercise price of each series is equal, 
the exercise prices are in consecutive order, and one long option 
expires after the other three options expire concurrently. However, a 
long calendar butterfly spread cannot be composed of cash-settled, 
European-style index options. This strategy can also be considered a 
combination of one long calendar spread and one long butterfly spread, 
as defined in this rule.
    (43) Long Calendar Condor Spread
    The term ``long calendar condor spread'' means an aggregation of 
positions in four series of either puts or calls, structured as a long 
option with the lowest exercise price, two short options with the next 
two consecutively higher exercise prices and a long option with the 
highest exercise price, all of which have the same contract size, 
underlying component or index, are based on the same aggregate current 
underlying value, where the interval between the exercise price of each 
series is equal, the exercise prices are in consecutive order, and one 
long option expires after the other three options expire concurrently. 
However, a long calendar condor spread cannot be composed of cash-
settled, European-style index options. This strategy can also be 
considered a combination of one long calendar spread and two long 
butterfly spreads, as defined in this rule.
    (44) Long Condor Spread
    The term ``long condor spread'' means an aggregation of positions 
in four series of either puts or calls, structured as a long option 
with the lowest exercise price, two short options with the next two 
consecutively higher exercise prices and a long option with the highest 
exercise price, all of which have the same contract size, underlying 
component or index and time of expiration, are based on the same 
aggregate current underlying value, where the interval between the 
exercise price of each series is equal, and the exercise prices are in 
consecutive order. This strategy can also be considered a combination 
of two long butterfly spreads, as defined in this rule.
    (41) through (60) renumbered as (45) through (64).
    (65) Short Calendar Iron Butterfly Spread
    The term ``short calendar iron butterfly spread'' means an 
aggregation of positions in two series of puts and two series of calls, 
structured as a short put and a short call with the same exercise 
price, offset by a long put with a lower exercise price and a long call 
with a higher exercise price, all of which have the same contract size, 
underlying component or index, are based on the same aggregate current 
underlying value, where the interval between the exercise price of each 
series is equal, the exercise prices are in consecutive order, and one 
long option expires after the other three options expire concurrently. 
However, a short calendar iron butterfly spread cannot be composed of 
cash-settled, European-style index options. This strategy can also be 
considered a combination of one long calendar spread, one long 
butterfly spread, and one short box spread, as defined in this rule.
    (66) Short Calendar Iron Condor Spread
    The term ``short calendar iron condor spread'' means an aggregation 
of positions in two series of puts and two series of calls, structured 
as a long put with the lowest exercise price, a short put and a short 
call with the next two consecutively higher exercise prices and a long 
call with the highest exercise price, all of which have the same 
contract size, underlying component or index, are based on the same 
aggregate current underlying value, where the interval between the 
exercise price of each series is equal, the exercise prices are in 
consecutive order, and one long option expires after the other three 
options expire concurrently. However, a short calendar iron condor 
spread cannot be composed of cash-settled, European-style index 
options. This strategy can also be considered a combination of one long 
calendar spread, two long butterfly spreads, and one short box spread, 
as defined in this rule.
    (67) Short Iron Butterfly Spread
    The term ``short iron butterfly spread'' means an aggregation of 
positions in two series of puts and two series of calls, structured as 
a short put and a short call with the same exercise price, offset by a 
long put with a lower exercise price and a long call with a higher 
exercise price, all of which have the same contract size, underlying 
component or index and time of expiration, are based on the same 
aggregate current underlying value, where the interval between the 
exercise price of each series is equal, and the exercise prices are in 
consecutive order. This strategy can also be considered a combination 
of one long butterfly spread and one short box spread, as defined in 
this rule.
    (68) Short Iron Condor Spread

[[Page 26802]]

    The term ``short iron condor spread'' means an aggregation of 
positions in two series of puts and two series of calls, structured as 
a long put with the lowest exercise price, a short put and a short call 
with the next two consecutively higher exercise prices, and a long call 
with the highest exercise price, all of which have the same contract 
size, underlying component or index and time of expiration, are based 
on the same aggregate current underlying value, where the interval 
between the exercise price of each series is equal, and the exercise 
prices are in consecutive order. This strategy can also be considered a 
combination of two long butterfly spreads and one short box spread, as 
defined in this rule.
    (61) through (77) renumbered as (69) through (85).
* * * * *

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

    In its filing with the Commission, NASD 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. NASD 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

Background

    The proposed rule change is consistent with recent margin rule 
amendments by the New York Stock Exchange (``NYSE'') and the Chicago 
Board Options Exchange (``CBOE''), which were recently approved by the 
Commission.\5\ Specifically, NASD is proposing to amend Rule 2520 to 
(1) recognize specific additional complex option spread strategies for 
purposes of determining required margin and (2) amend the provisions 
relating to ``permitted offsets'' for certain listed option 
transactions. In addition, NASD is proposing to amend Rule 2522 to 
include definitions relating to the proposed rule change described 
above as well as certain other conforming definitional and language 
changes.
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    \5\ See Exchange Act Release No. 52951 (December 14, 2005), 70 
FR 75523 (December 20, 2005) (SR-NYSE-2004-39); and Exchange Act 
Release No. 52950 (December 14, 2005), 70 FR 75512 (December 20, 
2005) (SR-CBOE-2004-53).
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    1. Complex Option Spread Strategies
    NASD proposes to amend Rule 2520 and the corresponding definitions 
in Rule 2522 to recognize specific additional complex option spread 
strategies and set margin requirements commensurate with the risk of 
such spread strategies. These complex option spread strategies are the 
net result of combining two or more spread strategies that are 
currently recognized in NASD'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 option spread strategies 
listed below are structured using the same principles as, and are 
essentially expansions of, the advanced spreads currently allowed in 
Rule 2520 and as defined in Rule 2522.
    Currently, Rule 2520 recognizes and prescribes margin requirements 
for advanced spread strategies known as the ``butterfly spread'' and 
the ``box spread.'' However, these option spreads are limited in scope. 
The proposed rule change seeks to expand on the types of pairings that 
would qualify for butterfly spread and box spread margin treatment. In 
addition, Rule 2520 recognizes a ``calendar spread,'' also known as a 
``time spread,'' yet it is not identified as such. NASD proposes to 
define this term as ``the sale of one option and the simultaneous 
purchase of another option of the same type, both specifying the same 
underlying component with the same exercise price or different exercise 
prices, where the `long' option expires after the `short' option,'' in 
Rule 2522 since some of the complex spreads NASD seeks to recognize in 
the proposed rule change 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 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 option 
spreads must be carried in a margin account; and (b) European-style \6\ 
options are prohibited for complex spread combinations having a long 
option series that expires after the other option series (i.e., those 
that involve a time spread such as items 5, 6, and 7 below). Only 
American-style options \7\ 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.
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    \6\ A European-style option is an option contract that can be 
exercised only on its expiration date.
    \7\ An American-style option is an option contract that can be 
exercised at any time between the date of purchase and its 
expiration date.
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    The sum of the margin required on each currently recognized spread 
in each of the applicable aggregations renders margin requirements for 
the subject complex spread strategies as stated below. The additional 
complex option spread 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 
broker-dealer, 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,

[[Page 26803]]

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 broker-dealer, 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 broker-dealer, the proposal 
requires a deposit of the aggregate exercise price differential. The 
net credit received may be applied to the deposit required.
    As noted above, the purpose and benefit is to set levels of margin 
that more precisely represent actual net risk of the option positions 
in the account and enable customers to implement these strategies more 
efficiently.

2. Permitted Offsets

    Rule 2520(f)(2)(J) addresses margin requirements for members that 
clear and carry the listed options transactions of registered 
specialists, registered market makers or registered traders in options, 
and recognizes certain offset positions in establishing the margin 
requirements. The rule currently limits permitted offsets for these 
parties to options series that are ``in or at the money,'' which is 
defined to mean ``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.''
    Recently, various option exchanges have provided for the listing of 
options with one-dollar strike intervals in a number of classes. As a 
result, the use of securities to hedge options series that have one-
dollar strike intervals has unintentionally become more restrictive. 
The proposed rule change will eliminate the definition of ``in or at 
the money,'' thereby eliminating the two standard exercise interval 
limitation for listed options. In addition, the proposed rule change 
will require permitted offset transactions to 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 market-making purposes.
    Since clearing firms have risk monitoring systems that alert them 
to unhedged positions and haircut requirements pursuant to Rule 15c3-1 
of the Act,\8\ which perform a similar function as NASD margin 
requirements relative to providing adequate risk coverage to broker-
dealers, elimination of the two-dollar standard exercise price 
limitation and definition of ``in or at the money'' will not diminish 
the ``safety and soundness'' protections that the margin rules provide.
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    \8\ 17 CFR 240.15c3-1.
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    This proposed rule change is effective upon filing. The effective 
date and the implementation date will be the date of filing.
2. Statutory Basis
    NASD believes that the proposed rule change is consistent with the 
provisions of section 15A(b)(6) of the Act,\9\ which requires, among 
other things, that NASD rules must 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. NASD believes that the proposed rule change will set 
margin requirements commensurate with the risk of the identified 
options spread strategies and will further promote consistent margin 
requirements among the self-regulatory organizations.
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    \9\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    NASD does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

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

    Written comments were neither solicited nor received.

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

    Because the foregoing proposed rule change does not: (1) 
Significantly affect the protection of investors or the public 
interest; (2) impose any significant burden on competition; and (3) by 
its terms, become operative for 30 days from the date on which it was 
filed, or such shorter time as the Commission may designate if 
consistent with the protection of investors and the public interest, 
the proposed rule change has become effective pursuant to section 
19(b)(3)(A) \10\ of the Act and Rule 19b-4(f)(6) thereunder.\11\
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    \10\ 15 U.S.C. 78f(b)(3)(A).
    \11\ 17 CFR 240.19b-4(f)(6). Rule 19b-4(f)(6) requires that NASD 
give the Commission written notice of NASD's intention to file the 
proposed rule change along with a brief description and text of the 
proposed rule change at least five business days prior to the date 
of the filing of the proposed rule change. The Commission notes that 
NASD has satisfied the pre-filing five-day notice requirement.
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    A proposed rule change filed under Rule 19b-4(f)(6) \12\ normally 
may not become operative prior to 30 days after the date of filing. 
However, Rule 19b-4(f)(6)(iii) \13\ permits the Commission to designate 
a shorter time if such actions is consistent with the protection of 
investors and the public interest. NASD has requested that the 
Commission waive the 30-day operative delay and designate the proposed 
rule change to become operative on the date of filing with the 
Commission, in order to conform NASD's margin rules to the recent rule 
changes by the NYSE and CBOE \14\ and to avoid subjecting firms to 
conflicting margin requirements. The Commission believes that waiving 
the 30-day operative delay is consistent with the protection of 
investors and the public interest.\15\
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    \12\ Id.
    \13\ 17 CFR 240.19b-4(f)(6)(iii).
    \14\ See supra note 5.
    \15\ For purposes only of waiving the operative delay for this 
proposal, the Commission has considered the proposed rule's impact 
on efficiency, competition and capital formation. See 15 U.S.C. 
78c(f).
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    At any time within 60 days of the filing of the proposed rule 
change, the Commission may summarily abrogate 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,

[[Page 26804]]

or otherwise in furtherance of the purposes of the Act.

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

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml.
); or     Send an e-mail to rule-comments@sec.gov. Please include 

File No. SR-NASD-2006-045 on the subject line.

Paper Comments

     Send paper comments in triplicate to Nancy M. Morris, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.
    All submissions should refer to File Number SR-NASD-2006-045. 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 Room. Copies of such 
filing also will be available for inspection and copying at the 
principal office of NASD. 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-NASD-2006-045 and should be submitted on or before May 30, 2006.
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    \16\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
Nancy M. Morris,
Secretary.
[FR Doc. E6-6911 Filed 5-5-06; 8:45 am]

BILLING CODE 8010-01-P