

[Federal Register: December 20, 2005 (Volume 70, Number 243)]
[Notices]               
[Page 75512-75513]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr20de05-92]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-52950; File No. SR-CBOE-2004-53]

 
Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Approving a Proposed Rule Change and Partial 
Amendment No. 1 Relating to Margin Requirements for Complex Options 
Spreads

December 14, 2005.

I. Introduction

    On July 30, 2004, the Chicago Board Options Exchange, Incorporated 
(``CBOE'' or the ``Exchange'') filed with the Securities and Exchange 
Commission (``Commission'') a proposed rule change related to margin 
requirements for complex options spreads under Section 19(b)(1) of the 
Securities Exchange Act of 1934 (the ``Act'') \1\ and Rule 19b-4.\2\ On 
August 23, 2005, the Exchange filed a partial amendment to its proposed 
rule change.\3\ The proposed rule change, as amended, was published in 
the Federal Register on November 14, 2005.\4\ The Commission received 
no comments on the proposal.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR240.19b-4.
    \3\ SR-CBOE-2004-53: Amendment No. 1. CBOE, in coordination with 
the New York Stock Exchange, Inc. (``NYSE''), filed the partial 
amendment to conform the complex spreads strategies to which its 
rule amendments apply to those of the NYSE.
    \4\ See Securities Exchange Act Release No. 52739 (Nov. 4, 
2005); 70 FR 69173 (Nov. 14, 2005).
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II. Description

    The CBOE has proposed to incorporate the provisions of a Regulatory 
Circular (RG03-066--Margin Requirements for Certain Complex Spreads, 
dated August 13, 2003) (the ``Circular'') into the Exchange's margin 
rules (Chapter 12). The Circular presents an interpretation of current 
margin requirements that allows the Exchange to derive, and put into 
effect, margin requirements for certain complex option spreads. The 
Commission approved the Circular on a one-year pilot basis.\5\ The 
Commission granted two extensions of the pilot period.\6\
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    \5\ See Securities Exchange Act Release No. 48306 (Aug. 8, 
2003), 68 FR 48974 (Aug. 15, 2003) (approving SR-CBOE-2003-24).
    \6\ See Securities Exchange Act Release No. 50164 (Aug. 6, 
2004), 69 FR 50405 (Aug. 16, 2004) and Securities Exchange Act 
Release No. 51407 (Mar. 22, 2005), 70 FR 15669 (Mar. 28, 2005).
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    The Exchange has proposed to add definitions of a ``long condor 
spread,'' ``short iron butterfly spread'' and ``short iron condor 
spread'' to Rule 12.3(a). These definitions cover six of the seven 
strategies identified in the Circular. Each definition covers two 
strategies identified in the Circular because each definition provides 
for a base strategy, in which all options expire at the same time, and 
a calendar spread strategy, in which a long option may expire after the 
other options expire concurrently.
    The Exchange has proposed a revision to its current definition of a 
butterfly spread to provide for the remaining strategy, a calendar 
spread version of the long butterfly spread. These revisions consist of 
(1) splitting the current butterfly spread definition into two 
definitions, one for the long butterfly spread and one for the short 
butterfly spread, (2) fashioning the two definitions so that they are 
consistent with the style and format of the new definitions referred to 
in the prior paragraph, and (3) providing for a calendar spread version 
in the long butterfly spread definition.
    In the Circular, call options were utilized to construct three of 
the seven strategy examples. Each of these three strategies has a 
parallel application with put options. For brevity, the put option 
versions were not specifically identified in the Circular, but the 
Circular was intended to apply to the put option counterpart of each of 
the strategies demonstrated with call options. Both the put and call 
option versions are provided for in the newly proposed rule 
definitions. The remaining four complex spread strategies originally 
identified in the Circular involved both call options and put options 
(that is, ``iron'' strategies). Each of these four strategies has a 
reciprocal configuration (that is, the call options can precede the put 
options in ascending sequence of exercise prices). However, there is no 
need to address the reciprocal variations because there is no benefit 
from a margin requirement standpoint of including them in the iron 
strategy definitions.
    According to the Exchange, each of the complex spreads identified 
in the proposed rule can be derived by combining and netting two or 
more option spreads (that is, the butterfly spread, the box spread and 
the time spread) that already are identified in the margin rules and 
ascribed a margin requirement. Furthermore, the sum of the margin 
required on the basic option spreads that can be combined and netted to 
form a complex spread covers the maximum risk of the complex spread 
and, as in the Circular, is the margin requirement specified in the 
proposed rules. Each of the subject complex spread strategies has a 
known and limited risk when configured as specified in the proposed 
definitions. The Exchange has proposed to revise current Rule 
12.3(c)(5)(C)(6) to provide a margin requirement for each of the long 
condor spread, short iron butterfly spread and short iron condor 
spread.
    The Exchange noted that the proposed rule prohibits European style 
options in the case of the calendar version of a complex spread and 
requires that the interval between each option series be equal in the 
case of all complex spread strategies. Unlike the Circular, the 
proposed rules would not limit complex spreads to a margin account. The 
Exchange also has proposed a revision to Rule 12.3(e)--Customer Cash 
Account--Spreads, that adds the long condor spread, short iron 
butterfly spread and short iron condor spread as strategies permitted 
to be established and carried in a cash account, provided they are 
composed of cash-settled, European style options that all expire at the 
same time.
    The Exchange noted that it has received no negative comments 
concerning the Circular since it was issued. Moreover, the Exchange is 
not aware of any negative consequences as a result of applying the 
margin requirements permitted by the Circular.

III. Discussion and Commission Findings

    After careful review, the Commission finds that the proposed rule 
change, as amended, is consistent with the requirements of the Act and 
the rules and regulations thereunder applicable to a national 
securities exchange.\7\ In particular, the Commission believes that the 
proposed rule change is consistent with Section 6(b)(5) of the Act,\8\ 
which requires that the rules of the exchange be designed, among other 
things, to remove impediments to and perfect the mechanisms of a free 
and open market, and, in general, to protect investors and the public 
interest. The Commission finds that amending the rules to permit 
complex option spread strategies that are the net result of combining 
two or

[[Page 75513]]

more spread strategies that are currently recognized in the Exchange's 
margin rules is consistent with the requirements of Section 6(b)(5) 
because the amendments will allow the Exchange to set levels of margin 
that more precisely represent the actual net risk of the option 
positions in the account and enable customers to implement these 
strategies more efficiently.
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    \7\ In approving this proposal rule change, the Commission notes 
that it has considered the proposed rule's impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).
    \8\ 15 U.S.C. 78f(b)(5).
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IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\9\ that the proposed rule change (File No. SR-CBOE-2004-53), as 
amended, be, and it hereby is, approved.
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    \9\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
 [FR Doc. E5-7522 Filed 12-19-05; 8:45 am]

BILLING CODE 8010-01-P
