Document ID: SEC-2015-1619-0001
Agency: sec
Document Type: Notice
Title: Self-Regulatory Organizations; Proposed Rule Changes: Chicago Board Options Exchange, Inc.
Posted Date: 2015-10-08T04:00Z

[Federal Register Volume 80, Number 195 (Thursday, October 8, 2015)]
[Notices]
[Pages 60941-60944]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-25598]

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-76068; File No. SR-CBOE-2015-077]

Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Filing of a Proposed Rule Change Relating To 
Margin Requirements

October 2, 2015.
    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 September 22, 2015, 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, 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.
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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 related to margin 
requirements. The text of the proposed rule change is provided below.
    (additions are italicized; deletions are [bracketed])

* * * * *

Chicago Board Options Exchange, Incorporated Rules

* * * * *

Rule 12.3. Margin Requirements

    (a)-(b) No change.
    (c) Customer Margin Account--Exception. The foregoing 
requirements are subject to the following exceptions. Nothing in 
this paragraph (c) shall prevent a broker-dealer from requiring 
margin from any account in excess of the amounts specified in these 
provisions.
    (1)-(4) No change.
    (5) Initial and Maintenance Margin Requirements on Short 
Options, Stock Index Warrants, Currency Index Warrants and Currency 
Warrants.
    (A)-(B) No change.
    (C) Related Securities Positions--Listed or OTC Options. Unless 
otherwise specified, margin must be deposited and maintained in the 
following amounts for each of the following types of positions.
    (1) No change.
    (2) Covered Calls/Covered Puts.
    (a) No margin [need be]is required [in respect of]for a[n] call 
(put) option contract[, stock index warrant, currency index warrant] 
or [currency ]warrant carried in a short position [which is covered 
by] where there is carried in the same account a long (short) 
position in equivalent units of the underlying security[ in the case 
of a call, or a short position in equivalent units of the underlying 
security in the case of a put, provided, however, in computing 
margin on such position in the underlying security, the current 
market value to be used shall not be greater than the exercise price 
in the case of a call. In the case of a put, in computing margin on 
the underlying position, margin shall be the amount required by 
subparagraph (b)(2) of this Rule, plus the amount, if any, by which 
the exercise price of the put exceeds the current market value of 
the underlying].
    (b) No margin is required for[In respect of an] a call (put) 
index option contract or warrant [on a market index ]carried in a 
short position[,] where there is carried in the same account a long 
(short) position in an (i) underlying stock basket, (ii) index 
mutual fund, (iii) IPR (as defined in Rule 1.1, Interpretation and 
Policy .02), or (iv) IPS (as defined in Rule 1.1, Interpretation and 
Policy .03), that is based on the same index underlying the index 
option or warrant and having a market value at least equal to the 
aggregate current index value [subject to the

[[Page 60942]]

same requirements for computing margin, may serve as cover].
    [No margin is required in respect of a call option contract on a 
Standard and Poor's 500 (S&P 500) market index carried in a short 
position where there is carried for the same account a long position 
in the underlying open-end index mutual fund (which shall be 
specifically designated by the Exchange) having an aggregate market 
value at least equal to the underlying value of the S&P 500 
contracts to be covered.]
    (c) In order for the exceptions in subparagraphs (a) and (b) 
above to apply, in computing margin on positions in the underlying 
security, underlying stock basket, index mutual fund, IPR or IPS, as 
applicable, (i) in the case of a call, the current market value to 
be used shall not be greater than the exercise price, and (ii) in 
the case of a put, margin shall be the amount required by 
subparagraph (b)(2) of this Rule, plus the amount, if any, by which 
the exercise price exceeds the current market value.
    (3)-(4) No change.
    (d)-(n) No change.
    . . . Interpretations and Policies:
    .01-.19 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.

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
    Rule 12.3 sets forth margin requirements, and certain exceptions to 
those requirements, applicable to security positions of Trading Permit 
Holders' customers. Rule 12.3(c)(5)(C)(2) currently requires no margin 
for covered calls and puts. Specifically, that rule provides the 
following:
     No margin need be required in respect of an option 
contract, stock index warrant, currency index warrant or currency 
warrant carried in a short position which is covered by a long position 
in equivalent units of the underlying security in the case of a call 
(covered call), or a short position in equivalent units of the 
underlying security in the case of a put (covered put).\3\
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    \3\ In computing margin on such a position in the underlying 
security, (a) in the case of a call, the current market value to be 
used shall not be greater than the exercise price and (b) in the 
case of a put, margin will be the amount required by Rule 
12.3(b)(2), plus the amount, if any, by which the exercise price of 
the put exceeds the current market value of the underlying.
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     An underlying stock basket \4\ may serve as cover for an 
option contract or warrant on a market index carried short (subject to 
the same requirements for computing margin).
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    \4\ An ``underlying stock basket'' means a group of securities 
that includes each of the component securities of the applicable 
index and which meets the following conditions: (a) The quantity of 
each stock in the basket is proportional to its representation in 
the index, (b) the total market value of the basket is equal to the 
underlying index value of the index options or warrants to be 
covered, (c) the securities in the basket cannot be used to cover 
more than the number of index options or warrants represented by 
that value and (d) the securities in the basket shall be unavailable 
to support any other option or warrant transaction in the account. 
See Rule 12.3(a)(7).
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     No margin is required in respect of a call option on a 
Standard and Poor's 500 (S&P 500) market index carried in a short 
position where there is carried for the same account a long position in 
an underlying open-end index mutual fund (which will be specifically 
designated by the Exchange) having an aggregate market value at least 
equal to the underlying value of the S&P 500 contracts to be covered.
    First, the proposed rule change makes some nonsubstantive changes 
to Rule 12.3(c)(5)(C)(2). The proposed rule change letters the 
provisions listed in the first two bulleted paragraphs above to become 
subparagraphs (2)(a) and (b) and moves part of the provision in the 
first bulleted paragraph to proposed subparagraph (2)(c) (as discussed 
below, the proposed rule change deletes the third bulleted paragraph 
above). Additionally, the proposed rule change revises the language to 
be consistent throughout these provisions, including clarifying that 
the underlying security or one of the other permissible offsets must be 
carried in the same account as the option position. The proposed rule 
change also makes the language more plain English, eliminates 
repetitive language, and inserts a missing space in proposed 
subparagraph (b).
    Second, the proposed rule change adds circumstances in which 
covered calls and puts require no margin. The proposed rule change 
applies the provision in proposed subparagraph (b) to index mutual 
funds, index portfolio receipts (``IPRs''),\5\ and index portfolio 
shares (``IPSs''),\6\ in addition to underlying stock baskets, based on 
the same index underlying the index option and having a market value at 
least equal to the aggregate current index value.\7\ IPRs and IPSs are 
commonly referred to as exchange-traded funds (``ETFs''). The proposed 
rule change also deletes the provision that provides no margin is 
required in respect of options on a Standard and Poor's 500 (S&P 500) 
market index carried in a short position where there is carried for the 
same account a long position in the underlying open-end index mutual 
fund having an aggregate market value at least equal to the underlying 
value of the S&P 500 contracts to be covered.\8\ Proposed subparagraph 
(b) extends the same margin exception to any index option offset by a 
position in a mutual fund based on the same underlying index, making 
this current provision duplicative.
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    \5\ The term ``index portfolio receipts'' or ``IPRs'' means 
securities that (a) represent an interest in a unit investment trust 
(``UIT'') which holds the securities that comprise an index on which 
a series of IPRs is based; (b) are issued by the UIT in a specified 
aggregate minimum number in return for a ``Portfolio Deposit'' 
consisting of specified numbers of shares of stock plus a cash 
amount; (c) when aggregated in the same specified minimum number, 
may be redeemed from the UIT which will pay to the redeeming holder 
the stock and cash then comprising the Portfolio Deposit; and (d) 
pay holders a periodic cash payment corresponding to the regular 
cash dividends or distributions declared and paid with respect to 
the component securities of the stock index on which the IPRs are 
based, less certain expenses and other charges as set forth in the 
UIT prospectus. IPRs are ``UIT interests'' within the meaning of the 
CBOE Rules. See CBOE Rule 1.1, Interpretation and Policy .02.
    \6\ The term ``index portfolio shares'' or ``IPSs'' means 
securities that (a) are issued by an open-end management investment 
company based on a portfolio of stocks or fixed income securities 
designed to provide investment results that correspond generally to 
the price and yield performance of a specified foreign or domestic 
stock index or fixed income securities index; (b) are issued by such 
an open-end management investment company in a specified aggregate 
minimum number in return for a deposit of specified number of shares 
of stock and/or a cash amount, or a specified portfolio of fixed 
income securities and/or a cash amount, with a value equal to the 
next determined net asset value; and (c) when aggregated in the same 
specified minimum number, may be redeemed at a holder's request by 
such open-end management investment company which will pay to the 
redeeming holder stock and/or cash, or a specified portfolio of 
fixed income securities and/or cash with a value equal to the next 
determined net asset value. See CBOE Rule 1.1, Interpretation and 
Policy .03.
    \7\ The term ``aggregate current index value'' means the current 
index value times the index multiplier. See CBOE Rule 12.3, 
Interpretation and Policy .07.
    \8\ The proposed rule change also deletes the requirement for 
CBOE to specifically designate funds, as it thinks this is no longer 
necessary due to the continued increase in availability of these 
types of products, as discussed below.

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[[Page 60943]]

    Index ETFs and mutual funds function in a similar manner to 
underlying stock baskets, as they are intended to replicate the 
performance of their underlying market indexes. The types and diversity 
of products available on the market that track indexes continues to 
increase and provide additional investment and hedging opportunities. 
While an ETF or mutual fund may not meet the definition of an 
underlying stock basket (for example, some ETFs have a sampling of the 
securities that comprise the underlying index), it essentially has the 
same purpose as an underlying stock basket for investors. It closely 
tracks an underlying index, and thus can function as an offsetting 
position to an index option overlying the same index in the same way as 
an underlying stock basket.\9\
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    \9\ The Exchange notes that current federal net capital rules 
that apply to options define a qualified stock basket to mean a set 
or basket of stock positions which represents no less than 50% of 
the capitalization for a high-capitalization or non-high-
capitalization diversified market index or no less than 95% of the 
capitalization of a narrow-based index. Those rules require 
positions in index options be grouped with related instruments 
within the option's class and qualified stock baskets in the same 
index. See 17 CFR 240.15c3-1a(b)(1)(i)(D) and (ii). Similar to a 
qualified stock basket, while an ETF or mutual fund may not hold 
every stock included in the underlying market index, its holdings 
are intended to track the index.
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    The Board of Governors of the Federal Reserve System (``FRB'') 
previously indicated that no margin would be required if an index 
option (on a broad-based stock index with at least a 99% correlation 
with the S&P 500 index) is covered by an offsetting position in S&P 
Index Depositary Receipts (SPDRS), but rather such SPDR positions would 
be treated as cover in accordance with Section 220.5(c)(3) of 
Regulation T.\10\ CBOE and another exchange later afforded the same 
margin treatment to options on the Dow Jones Industrial Average (DJIA) 
covered by units of the DIAMONDS Trust held in the same account.\11\ 
Based on this previous guidance from the FRB and the Commission, and in 
conjunction with the Exchange's current rules, CBOE has applied this 
margin treatment to short index option positions where there are 
offsetting positions in an ETF that tracks the same underlying index 
held in the same margin account (which treatment the Exchange has 
announced in Regulatory Circulars).\12\ The proposed rule change is 
consistent with these previous findings and applies this margin 
treatment generally to all ETFs and mutual funds that overly market 
indexes, in the same manner that the rules currently apply to 
underlying stock baskets. Given that the Exchange regularly lists new 
products, including index options, the Exchange believes it is 
appropriate to have a more general rule related to margin on these 
index option products that applies in the same manner rather than 
identifying this margin treatment in Regulatory Circulars.
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    \10\ See Letter dated February 1, 1993 from Michael J. 
Schoenfeld, FRB, to James McNeil, American Stock Exchange 
(``Amex''); see also Letter dated August 19, 1992 from James M. 
McNeil, Amex, to Sharon Lawson, Commission, and Letter dated January 
14, 1993 from James M. McNeil, Amex, to Laura M. Homer, FRB. The 
section of Regulation T referenced in these letters currently 
corresponds to Section 220.4(b)(4), which provides margin 
requirements when stock is used as cover for short option positions.
    \11\ See Letter dated December 3, 1997 from James M. McNeil, 
Amex, to Scott Holz, FRB, and Letter dated January 8, 1998 from 
Scott Holz, FRB to James M. McNeil, Amex; see also Letter dated 
December 16, 1997 from Richard Lewandowski, CBOE, to Mr. Michael 
Walinskas, Commission. There was no objection from the FRB or the 
Commission to Amex's or CBOE's extension of the margin treatment 
previously provided to SPDRS to DIAMONDS.
    \12\ See Regulatory Circulars RG99-09 (permitting SPDRS and 
DIAMONDS to cover short positions of options on the S&P 500 (``SPX 
options'') and on the DJIA (DJX), respectively); RG00-171 
(permitting units of iShares S&P 100 Index Fund to cover short 
positions of options on the S&P 100 Index (OEX)); RG01-119 
(permitting Nasdaq-100 Index Tracking Shares to cover short 
positions of options on the Nasdaq-100 Shares (QQQ), the Nasdaq 100 
Index (NDX) or the Mini-Nasdaq 100 Index (MNX); RG02-110 (permitting 
units of the iShares S&P 500 Fund (IVV) to cover short SPX option 
positions); and RG07-126 (permitting units of the iShares Russell 
200 Index Fund (IWM) to cover short positions of options on the 
Russell 2000 index (RUT)).
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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.\13\ Specifically, the Exchange believes the proposed rule change 
is consistent with the section 6(b)(5) \14\ 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) \15\ requirement that the rules of 
an exchange not be designed to permit unfair discrimination between 
customers, issuers, brokers, or dealers.
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    \13\ 15 U.S.C. 78f(b).
    \14\ 15 U.S.C. 78f(b)(5).
    \15\ Id.
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    In particular, the proposed rule change provides for a specific 
margin treatment related to covered puts and calls to apply to all 
index options in the same manner. The current rules, together with a 
no-action letter from the FRB and Regulatory Circulars, provide that no 
margin is required for a short position in certain specified index 
options if a long position in an underlying stock basket that meets a 
specific definition or certain specified ETFs that relate to the index 
are also held in the same account. The proposed rule change merely 
expands the availability of this margin treatment to all index options 
to the extent covered by any ETF based on the same index underlying the 
index option. Similarly, current rules provide for this margin 
treatment to apply to SPX options if covered by an approved mutual 
fund, and the proposed rule change merely expands the availability of 
this margin treatment to any mutual fund based on the same index 
underlying the index option. Stock baskets, ETFs and mutual funds that 
track a reference index can generally provide the same economic 
function as a security underlying an option. Therefore, the Exchange 
believes it is appropriate to extend the same ability to secure short 
index option positions to ETFs and mutual funds that is currently 
available to underlying stock baskets. Allowing this singular margin 
treatment to securities providing a similar economic function promotes 
just and equitable principles of trade. The Exchange believes including 
this in its rules, rather than specifying single indexes covered by 
this rule in Regulatory Circulars, and creating this clarity and 
consistency in margin requirements will remove impediments to and 
perfect the mechanisms of a free and open market and a national market 
system. Additionally, proposed subparagraph (b) is substantially 
similar to the rules of another options exchange.\16\
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    \16\ See NYSE MKT LLC (``NYSE MKT'') Section 7, Rule 
462(d)(12)(B)(ii)(C) and Interpretation and Policy .06.
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    The Exchange also believes the proposed rule change furthers the 
objectives of section 6(c)(3) of the Act,\17\ which authorizes the 
Exchange to, among other things, prescribe standards of financial 
responsibility or operational capability and standards of training, 
experience and competence for its Trading Permit Holders and person 
associated with Trading Permit Holders, as well as Regulation T issued 
by the

[[Page 60944]]

FRB. As discussed above, the proposed rule change is merely an 
extension of current margin standards and is consistent with an FRB no-
action letter that permitted the applicable margin treatment for a 
specific index option and related ETF.
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    \17\ 15 U.S.C. 78f(c)(3).
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    The proposed nonsubstantive, technical changes provide for more 
consistent and plain English language in similar rule provisions, which 
will ultimately benefit investors.

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

    CBOE 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 proposed rule change 
applies to all Trading Permit Holders in the same manner and makes the 
same margin treatment available to all Trading Permit Holders. The 
proposed rule change is unrelated to competition and instead is 
intended to bring uniformity to CBOE's margin rules. It is consistent 
with current rules and interpretations set forth in Regulatory 
Circulars, as well as regulatory guidance, and is not intended to 
impact trading on the Exchange. As discussed above, proposed 
subparagraph (b) is also substantially similar to the rule of another 
options exchange.\18\
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    \18\ See supra note 16.
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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

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period up to 90 days (i) as the 
Commission may designate if it finds such longer period to be 
appropriate and publishes its reasons for so finding or (ii) as to 
which the Exchange consents, the Commission will:
    A. By order approve or disapprove such proposed rule change, or
    B. institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, 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 email to rule-comments@sec.gov. Please include 
File Number SR-CBOE-2015-077 on the subject line.

Paper Comments

     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-2015-077. 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 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 
10:00 a.m. and 3:00 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-2015-077 and should be 
submitted on or before October 29, 2015.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\19\
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    \19\ 17 CFR 200.30-3(a)(12).
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Brent J. Fields,
Secretary.
[FR Doc. 2015-25598 Filed 10-7-15; 8:45 am]
 BILLING CODE 8011-01-P