

[Federal Register: April 17, 2006 (Volume 71, Number 73)]
[Notices]               
[Page 19774-19781]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr17ap06-113]                         

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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-53626; File No. SR-CBOT-2006-01]

 
Self-Regulatory Organizations; Board of Trade of the City of 
Chicago, Inc.; Notice of Filing and Order Granting Accelerated Approval 
of Proposed Rule Change Relating to Customer Margin Requirements for 
Security Futures

April 10, 2006.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Exchange Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby 
given that on March 2, 2006, the Board of Trade of the City of Chicago, 
Inc. (``CBOT[supreg]'' or ``Exchange'') filed with the Securities and 
Exchange Commission (``Commission'' or ``SEC'') 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 
and to grant accelerated approval to the proposed rule change.
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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 is proposing to establish procedures relating to the 
determination and administration of customer margin for security 
futures positions established on the Exchange and maintained in futures 
accounts. Further, the proposed regulations define the applicability of 
these requirements, specifically excluding qualifying security futures 
dealers from customer security futures margin requirements and related 
regulatory requirements. The text of the proposed rule change is below. 
New text is italicized.
* * * * *

New Regulation 431.07 Customer Margins for Security Futures Positions 
Held in Futures Accounts

    Margin requirements associated with Security Futures positions, 
which result from transactions made on the Exchange on behalf of 
Customers, and which are held in a futures account, shall be determined 
and administered in accordance with the Rules and Regulations of the 
Exchange, and in compliance with CFTC Regulations 41.42 through 41.49 
and SEC Regulations 242.400 through 242.406. With regard to such 
Security Futures positions, if Exchange Rules or Regulations are 
inconsistent with CFTC Regulations 41.42 through 41.49 and SEC 
Regulations 242.400 through 242.406, including any successor 
Regulations, the CFTC and SEC Regulations shall prevail.
    (a) Initial and maintenance margin rates used in determining 
Exchange margin requirements applicable to Security Futures that are 
held on behalf of Customers in a futures account, shall be established 
at levels no lower than those prescribed by CFTC Regulation 41.45 and 
SEC Regulation 242.403, including any successor Regulations.
    (b) As used in this Regulation, the term ``Customer'' does not 
include (a) an ``exempted person'' as defined in CFTC Regulation 
41.43(a)(9) and SEC Regulation 242.401(a)(9); or (b) Market Makers as 
defined below.
    (c) A Person shall be a ``Market Maker'' for purposes of this Rule, 
and shall be excluded from the requirements set forth in CFTC 
Regulations 41.42 through 41.49 and SEC Regulations 242.400 through 
242.406, as applicable, in accordance with CFTC Regulation 
41.42(c)(2)(v) and SEC Regulation 242.400(c)(2)(v), with respect to all 
trading in Security Futures for its own account, if such Person is an 
Exchange Member that is registered with the Exchange as a ``Security 
Futures Dealer.''
    Each such Market Maker shall: (a) be a member of the Exchange and 
be registered as a floor trader or a floor broker with the CFTC under 
Section 4f(a)(1) of the CEA or be registered as a dealer with the SEC 
under Section 15(b) of the Exchange Act; (b) maintain records 
sufficient to prove compliance with the requirements set forth in this 
Regulation and CFTC Regulation 41.42(c)(2)(v) or SEC Regulation 
242.400(c)(2)(v), as applicable, including without limitation, trading 
account statements and other financial records sufficient to detail 
activity; and (c) hold itself out as being willing to buy and sell 
Security Futures for its own account on a regular or continuous basis.
    A Market Maker satisfies condition (c) above if any of the 
following three requirements are fulfilled:
    (1) The Market Maker:
    (i) Provides continuous two-sided quotations throughout the trading 
day for all delivery months of Security Futures Contracts representing 
a meaningful proportion of the total trading volume of Security Futures 
Contracts on the Exchange, subject to relaxation during unusual market 
conditions as determined by the Exchange (such as a fast market in

[[Page 19775]]

either a Security Futures Contract or a security underlying a Security 
Futures Contract) at which times the Market Maker must use its best 
efforts to quote continuously and competitively; and
    (ii) When providing quotations, quotes with a maximum bid/ask 
spread of no more than the greater of $0.20 or 150% of the bid/ask 
spread in the primary market for the security underlying each Security 
Futures Contract.
    (2) The Market Maker:
    (i) Responds to at least 75% of the requests for quotation for all 
delivery months of Security Futures Contracts representing a meaningful 
proportion of the total trading volume of Security Futures Contracts on 
the Exchange, subject to relaxation during unusual market conditions as 
determined by the Exchange (such as a fast market in either a Security 
Futures Contract or a security underlying a Security Futures Contract) 
at which times the Market Maker must use its best efforts to quote 
competitively; and
    (ii) When responding to requests for quotation, quotes within five 
seconds with a maximum bid/ask spread of no more than the greater of 
$0.20 or 150% of the bid/ask spread in the primary market for the 
security underlying each Security Futures Contract.
    (3) The Market Maker:
    (i) Is assigned to a group of Security Futures Contracts listed on 
the Exchange that is either unlimited in nature (``Unlimited 
Assignment'') or is assigned to no more that 20% of the Security 
Futures Contracts listed on the Exchange (``Limited Assignment''); and
    (ii) At least 75% of the Market Maker's total trading activity in 
Exchange Security Futures Contracts is in its assigned Security Futures 
Contracts, measured on a quarterly basis; and
    (iii) During at least 50% of the trading day, the Market Maker has 
bids or offers in the market that are at or near the best market, 
except in unusual market conditions as determined by the Exchange (such 
as a fast market in either a Security Futures Contract or a security 
underlying a Security Futures Contract), with respect to at least 25% 
(in the case of an Unlimited Assignment) or at least one (in the case 
of a Limited Assignment) of its assigned Security Futures Contracts; 
and
    (iv) The requirements in (ii) and (iii) are satisfied on (a) at 
least 90% of the trading days in each calendar quarter by Market Makers 
who have undertaken an Unlimited Assignment; or (b) at least 80% of the 
trading days in each calendar quarter by Market Makers who have 
undertaken a Limited Assignment; or (c) on at least 80% of the trading 
days in each calendar quarter by Market Makers who have undertaken 
either an Unlimited Assignment or Limited Assignment but where the 
Exchange is listing four (4) or fewer Security Futures Contracts.
    For purposes of clauses (1) and (2) above, beginning on the 181st 
calendar day after the commencement of trading of Security Futures 
Contracts on the Exchange, a ``meaningful proportion of the total 
trading volume of Security Futures Contracts on the Exchange'' shall 
mean a minimum of 20% of such trading volume.
    Any Market Maker that fails to comply with the applicable Rules of 
the Exchange, CFTC Regulations 41.42 through 41.49 or SEC Regulations 
242.400 through 242.406, as applicable, shall be subject to 
disciplinary action in accordance with Chapter 5. Appropriate sanctions 
in the case of any such failure shall include, without limitation, a 
revocation of such Market Maker's registration with the Exchange as a 
Security Futures Dealer.
    (d) The Exchange shall establish initial and maintenance margin 
requirements applicable to Security Futures that are held in a futures 
account, provided that the margin requirement for any long or short 
position held by a member firm on behalf of a Customer shall not be 
less than 20% of the current market value of the relevant Security 
Futures Contract, or such other requirement as may be established by 
the CFTC and SEC for purposes of CFTC Regulation 41.45(b)(1) and SEC 
Regulation 242.403(b)(1), unless a lower margin level is available for 
such position pursuant to paragraph (e) below.
    (e) Initial and maintenance margin requirements for offsetting 
positions involving Security Futures and related positions are provided 
in the schedule below, for purposes of CFTC Regulation 41.45(b)(2) and 
SEC Regulation 242.403(b)(2).

                                  Margin Requirements for Offsetting Positions
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1................  Long security future    Individual stock or     20% of the current      The lower of: (1) 10%
                    (or basket of           narrow-based security   market value of the     of the aggregate
                    security futures        index.                  long security future,   exercise price \5\
                    representing each                               plus pay for the long   of the put plus the
                    component of a narrow-                          put in full.            aggregate put out-of-
                    based securities                                                        the-money \6\
                    index \3\) and long                                                     amount, if any; or
                    put option \4\ on the                                                   (2) 20% of the
                    same underlying                                                         current market value
                    security (or index).                                                    of the long security
                                                                                            future.
2................  Short security future   Individual stock or     20% of the current      20% of the current
                    (or basket of           narrow-based security   market value of the     market value of the
                    security futures        index.                  short security          short security
                    representing each                               future, plus the        future, plus the
                    component of a narrow-                          aggregate put in-the-   aggregate put in-the-
                    based securities                                money amount, if any.   money amount, if
                    index) and short put                            Proceeds from the put   any.\7\
                    option on the same                              sale may be applied.
                    underlying security
                    (or index).
3................  Long security future    Individual stock or     The initial margin      5% of the current
                    and short position in   narrow-based security   required under          market value as
                    the same security (or   index.                  Regulation T for the    defined in
                    securities basket)                              short stock or stocks.  Regulation T of the
                    underlying the                                                          stock or stocks
                    security future.                                                        underlying the
                                                                                            security future.
4................  Long security future    Individual stock or     20% of the current      20% of the current
                    (or basket of           narrow-based security   market value of the     market value of the
                    security futures        index.                  long security future,   long security
                    representing each                               plus the aggregate      future, plus the
                    component of a narrow-                          call in-the-money       aggregate call in-
                    based securities                                amount, if any.         the-money amount, if
                    index) and short call                           Proceeds from the       any.
                    option on the same                              call sale may be
                    underlying security                             applied.
                    (or index).

[[Page 19776]]


5................  Long a basket of        Narrow-based security   20% of the current      20% of the current
                    narrow-based security   index.                  market value of the     market value of the
                    futures that together                           long basket of narrow-  long basket of
                    tracks a broad-based                            based security          narrow-based
                    index and short a                               futures, plus the       security futures,
                    broad-based security                            aggregate call in-the-  plus the aggregate
                    index call option                               money amount, if any.   call in-the-money
                    contract on the same                            Proceeds from the       amount, if any.
                    index.                                          call sale may be
                                                                    applied.
6................  Short a basket of       Narrow-based security   20% of the current      20% of the current
                    narrow-based security   index.                  market value of the     market value of the
                    futures that together                           short basket of         short basket of
                    tracks a broad-based                            narrow-based security   narrow-based
                    security index and                              futures, plus the       security futures,
                    short a broad-based                             aggregate put in-the-   plus the aggregate
                    security index put                              money amount, if any.   put in-the-money
                    option contract on                              Proceeds from the put   amount, if any.
                    the same index.                                 sale may be applied.
7................  Long a basket of        Narrow-based security   20% of the current      The lower of: (1) 10%
                    narrow-based security   index.                  market value of the     of the aggregate
                    futures that together                           long basket of narrow-  exercise price of
                    tracks a broad-based                            based security          the put, plus the
                    security index and                              futures, plus pay for   aggregate put out-of-
                    long a broad-based                              the long put in full.   the-money amount, if
                    security index put                                                      any; or (2) 20% of
                    option contract on                                                      the current market
                    the same index.                                                         value of the long
                                                                                            basket of security
                                                                                            futures.
8................  Short a basket of       Narrow-based security   20% of the current      The lower of: (1) 10%
                    narrow-based security   index.                  market value of the     of the aggregate
                    futures that together                           short basket of         exercise price of
                    tracks a broad-based                            narrow-based security   the call, plus the
                    security index and                              futures, plus pay for   aggregate call out-
                    long a broad-based                              the long call in full.  of-the-money amount,
                    security index call                                                     if any; or (2) 20%
                    option contract on                                                      of the current
                    the same index.                                                         market value of the
                                                                                            short basket of
                                                                                            security futures.
9................  Long security future    Individual stock or     The greater of: (1) 5%  The greater of: (1)
                    and short security      narrow-based security   of the current market   5% of the current
                    future on the same      index.                  value of the long       market value of the
                    underlying security                             security future; or     long security
                    (or index).                                     (2) 5% of the current   future; or (2) 5% of
                                                                    market value of the     the current market
                                                                    short security future.  value of the short
                                                                                            security future.
10...............  Long security future,   Individual stock or     20% of the current      10% of the aggregate
                    long put option and     narrow-based security   market value of the     exercise price, plus
                    short call option.      index.                  long security future,   the aggregate call
                    The long security                               plus the aggregate      in-the-money amount,
                    future, long put and                            call in-the-money       if any.
                    short call must be on                           amount, if any, plus
                    the same underlying                             pay for the put in
                    security and the put                            full. Proceeds from
                    and call must have                              the call sale may be
                    the same exercise                               applied.
                    price. (Conversion).
11...............  Long security future,   Individual stock or     20% of the current      The lower of: (1) 10%
                    long put option and     narrow-based security   market value of the     of the aggregate
                    short call option.      index.                  long security future,   exercise price of
                    The long security                               plus the aggregate      the put plus the
                    future, long put and                            call in-the-money       aggregate put out-of-
                    short call must be on                           amount, if any, plus    the money amount, if
                    the same underlying                             pay for the put in      any; or (2) 20% of
                    security and the put                            full. Proceeds from     the aggregate
                    exercise price must                             call sale may be        exercise price of
                    be below the call                               applied.                the call, plus the
                    exercise price                                                          aggregate call in-
                    (Collar).                                                               the-money amount, if
                                                                                            any.
12...............  Short security future   Individual stock or     The initial margin      5% of the current
                    and long position in    narrow-based security   required under          market value, as
                    the same security (or   index.                  Regulation T for the    defined in
                    securities basket)                              long stock or stocks.   Regulation T, of the
                    underlying the                                                          long stock or
                    security future.                                                        stocks.
13...............  Short security future   Individual stock or     The initial margin      10% of the current
                    and long position in    narrow-based security   required under          market value, as
                    a security              index.                  Regulation T for the    defined in
                    immediately                                     long security.          Regulation T, of the
                    convertible into the                                                    long security.
                    same security
                    underlying the
                    security future,
                    without restriction,
                    including the payment
                    of money.
14...............  Short security future   Individual stock or     20% of the current      The lower of: (1) 10%
                    (or basket of           narrow-based security   market value of the     of the aggregate
                    security futures        index.                  short security          exercise price of
                    representing each                               future, plus pay for    the call, plus the
                    component of a narrow-                          the call in full.       aggregate call out-
                    based securities                                                        of-the-money amount,
                    index) and long call                                                    if any; or (2) 20%
                    option or warrant on                                                    of the current
                    the same underlying                                                     market value of the
                    security (or index).                                                    short security
                                                                                            future.

[[Page 19777]]


15...............  Short security future,  Individual stock or     20% of the current      10% of the aggregate
                    short put option and    narrow-based security   market value of the     exercise price, plus
                    long call option. The   index.                  short security          the aggregate put in-
                    short security                                  future, plus the        the-money amount, if
                    future, short put and                           aggregate put in-the-   any.
                    long call must be on                            money amount, if any,
                    the same underlying                             plus pay for the call
                    security and the put                            in full. Proceeds
                    and call must have                              from put sale may be
                    the same exercise                               applied.
                    price. (Reverse
                    Conversion).
16...............  Long (short) a basket   Narrow-based security   5% of the current       5% of the current
                    of security futures,    index.                  market value for the    market value of the
                    each based on a                                 long (short) basket     long (short) basket
                    narrow-based security                           of security futures.    of security futures.
                    index that together
                    tracks the broad-
                    based index and short
                    (long) a broad-based
                    index future.
17...............  Long (short) a basket   Individual stock or     The greater of: (1) 5%  The greater of: (1)
                    of security futures     narrow-based security   of the current market   5% of the current
                    that together tracks    index.                  value of the long       market value of the
                    a narrow-based index                            security future(s);     long security
                    and short (long) a                              or (2) 5% of the        future(s); or (2) 5%
                    narrow-based index                              current market value    of the current
                    future.                                         of the short security   market value of the
                                                                    future(s).              short security
                                                                                            future(s).
18...............  Long (short) a          Individual stock or     The greater of: (1) 3%  The greater of: (1)
                    security future and     narrow-based security   of the current market   3% of the current
                    short (long) an         index.                  value of the long       market value of the
                    identical security                              security future(s);     long security
                    future traded on a                              or (2) 3% of the        future(s); or (2) 3%
                    different market.\8\.                           current market value    of the current
                                                                    of the short security   market value of the
                                                                    future(s).              short security
                                                                                            future(s).
----------------------------------------------------------------------------------------------------------------

New Regulation 431.08 Acceptable Margin for Security Futures and 
Treatment of Undermargined Accounts
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    \3\ Baskets of securities or security futures contracts must 
replicate the securities that comprise the index, and in the same 
proportion.
    \4\ Generally, for the purposes of these regulations, unless 
otherwise specified, stock index warrants shall be treated as if 
they were index options.
    \5\ ``Aggregate exercise price,'' with respect to an option or 
warrant based on an underlying security, means the exercise price of 
an option or warrant contract multiplied by the numbers of units of 
the underlying security covered by the option contract or warrant. 
``Aggregate exercise price'' with respect to an index option, means 
the exercise price multiplied by the index multiplier. See, e.g., 
Amex Rules 900 and 900C; CBOE Rule 12.3; and NASD Rule 2522.
    \6\ ``Out-of-the-money'' amounts shall be determined as follows:
    (1) for stock call options and warrants, any excess of the 
aggregate exercise price of the option or warrant over its current 
market value (as determined in accordance with Regulation T of the 
Board of Governors of the Federal Reserve System);
    (2) for stock put options or warrants, any excess of the current 
market value (as determined in accordance with Regulation T of the 
Board of Governors of the Federal Reserve System) of the option or 
warrant over its aggregate exercise price;
    (3) for stock index call options and warrants, any excess of the 
aggregate exercise price of the option or warrant over the product 
of the current index value and the applicable index multiplier; and
    (4) for stock index put options and warrants, any excess of the 
product of the current index value and the applicable index 
multiplier over the aggregate exercise price of the option or 
warrant. See, e.g., NYSE Rule 431 (Exchange Act Release No. 42011 
(October 14, 1999), 64 FR 57172 (October 22, 1999) (order approving 
SR-NYSE-99-03)); Amex Rule 462 (Exchange Act Release No. 43582 
(November 17, 2000), 65 FR 71151 (November 29, 2000) (order 
approving SR-Amex-99-27)); CBOE Rule 12.3 (Exchange Act Release No. 
41658 (July 27, 1999), 64 FR 42736 (August 5, 1999) (order approving 
SR-CBOE-97-67)); or NASD Rule 2520 (Exchange Act Release No. 43581 
(November 17, 2000), 65 FR 70854 (November 28, 2000) (order 
approving SR-NASD-00-15)).
    \7\ ``In-the-money'' amounts must be determined as follows:
    (1) for stock call options and warrants, any excess of the 
current market value (as determined in accordance with Regulation T 
of the Board of Governors of the Federal Reserve System) of the 
option or warrant over its aggregate exercise price;
    (2) for stock put options or warrants, any excess of the 
aggregate exercise price of the option or warrant over its current 
market value (as determined in accordance with Regulation T of the 
Board of Governors of the Federal Reserve System);
    (3) for stock index call options and warrants, any excess of the 
product of the current index value and the applicable index 
multiplier over the aggregate exercise price of the option or 
warrant; and
    (4) for stock index put options and warrants, any excess of the 
aggregate exercise price of the option or warrant over the product 
of the current index value and the applicable index multiplier.
    \8\ Two security futures will be considered ``identical'' for 
this purpose if they are issued by the same clearing agency or 
cleared and guaranteed by the same derivatives clearing 
organization, have identical contract specifications, and would 
offset each other at the clearing level.
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    Notwithstanding any other Exchange Rules or Regulations, the 
following provisions shall establish the acceptable margin for Security 
Futures Positions that are held on behalf of Customers in a futures 
account, and the treatment of undermargined futures accounts containing 
Security Futures Contracts.
    (a) Member firms may accept from their Customers as margin for 
Security Futures held in a futures account, deposits of cash, margin 
securities (subject to the limitations set forth in the following 
sentence), exempted securities, any other assets permitted under 
Regulation T of the Board of Governors of the Federal Reserve System 
(as in effect from time to time) to satisfy a margin deficiency in a 
securities margin account, and any combination of the foregoing, each 
as valued in accordance with CFTC Regulations 41.46(c) and 41.46(e) or 
SEC Regulations 242.404(c) and 242.404(e), as applicable. Shares of a 
money market mutual fund that meet the requirements of CFTC Regulation 
1.25 may be accepted as a margin deposit from a Customer for purposes 
of this Rule.
    (b) A member firm shall not accept as margin from any Customer 
securities that have been issued by such Customer or an Affiliate of 
such Customer unless such member firm files a petition with and 
receives permission from the Exchange for such purpose.
    (c) All assets deposited by a Customer to meet margin requirements 
must be and remain unencumbered by third party claims against the 
depositing Customer.
    (d) If a Customer fails to comply with a margin call within a 
reasonable period of time (the member firm may deem one hour to be a 
reasonable period of time), the relevant member firm shall take the 
deduction required with respect to an undermargined account in 
computing its net capital under applicable CFTC and SEC Regulations.
    (e) If at any time there is a liquidating deficit in an account in 
which Security Futures are held, the member firm shall take steps to 
liquidate positions in the

[[Page 19778]]

account promptly and in an orderly manner.
* * * * *

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. The 
text of these statements may be examined at the places specified in 
Item III 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

    Proposed Regulation 431.07 generally establishes that the 
determination and administration of customer margins shall be 
consistent with prevailing practices on the Exchange. To the extent, 
however, that Exchange practices may be inconsistent with Commodity 
Futures Trading Commission (``CFTC'') Regulations 41.42 through 41.49 
\9\ or SEC Regulations 242.400 through 242.406,\10\ as applicable, the 
CFTC and SEC Regulations shall prevail.
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    \9\ 17 CFR 41.42-41.49.
    \10\ 17 CFR 242.400-406.
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    General Applicability--Proposed Regulation 431.07 only applies to 
security futures transactions executed on the CBOT. To the extent that 
security futures intermediaries engage in security futures transactions 
on or through other exchanges, they will need to comply with the margin 
requirements established by those other exchanges with respect to such 
transactions. In addition, proposed Regulation 431.07 only applies to 
transactions made on behalf of ``Customers'' as defined in paragraph 
(b) of the proposed Regulation. Furthermore, proposed Regulation 431.07 
is applicable only to security futures positions held in futures 
accounts. While security futures may alternatively be held in a 
securities account, the administration of securities accounts will be 
governed by applicable regulations, and by rules adopted by other 
relevant self-regulatory organizations.
    Proposed Regulation 431.07(b) excludes ``exempted persons'' and 
``Market Makers'' from the definition of ``Customer.'' Therefore, the 
transactions of exempted persons and Market Makers are not subject to 
the customer margin requirements set forth in proposed Regulation 
431.07. Exempted persons are identified by reference to applicable CFTC 
and SEC Regulations and Market Makers are defined as described below.
    Market Maker Exclusion--CFTC Regulation 41.42(c)(2)(v) \11\ and SEC 
Regulation 242.400(c)(2)(v) \12\ permit exchanges to adopt rules 
containing specified requirements for security futures dealers, on the 
basis of which the financial relations between security futures 
intermediaries and qualifying security futures dealers are excluded 
from the customer margin requirements for security futures. Any rules 
so adopted by an exchange must meet the criteria set forth in Section 
7(c)(2)(B) of the Exchange Act.\13\
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    \11\ 17 CFR 41.42(c)(2)(v).
    \12\ 17 CFR 242.400(c)(2)(v).
    \13\ 15 U.S.C. 78g(c)(2)(B).
---------------------------------------------------------------------------

    Proposed Regulation 431.07(c) relies on CFTC Regulation 
41.42(c)(2)(v) \14\ and SEC Regulation 242.400(c)(2)(v) \15\ in 
establishing a Market Maker exclusion. In particular, CBOT members who 
meet certain qualifications would be permitted to register with the 
Exchange as Security Futures Dealers, such that their accounts would 
not be subject to customer security futures margin requirements. 
Rather, their accounts would be subject to security futures margin 
requirements established pursuant to proposed Regulation 431.07(d).
---------------------------------------------------------------------------

    \14\ 17 CFR 41.42(c)(2)(v).
    \15\ 17 CFR 242.400(c)(2)(v).
---------------------------------------------------------------------------

    Market Makers will be floor traders or floor brokers registered 
with the CFTC under Section 4f(a)(1) of the Commodity Exchange Act, as 
amended (``CEA''),\16\ or dealers registered with the SEC under Section 
15(b) of the Exchange Act.\17\ As such, they may not qualify as 
exempted persons within the meaning of Regulation 242.401(a)(9) under 
the Exchange Act.\18\ Absent the provisions of proposed Regulation 
431.07, they arguably would have to be treated as customers for 
purposes of determining margin requirements, even with respect to their 
proprietary market making activities. This would be different from the 
treatment of security futures dealers on securities exchanges under 
Section 7(c)(3) of the Exchange Act,\19\ and therefore would be 
contrary to the statutory objectives reflected in Section 7(c)(2)(B) of 
the Exchange Act.\20\
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    \16\ 7 U.S.C. 6f(a)(1).
    \17\ 15 U.S.C. 78(o)(b).
    \18\ 17 CFR 242.401(a)(9).
    \19\ 15 U.S.C. 78g(c)(3).
    \20\ 15 U.S.C. 78g(c)(2)(B).
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    The Market Maker exclusion, as proposed, contains all of the 
criteria and limitations set forth in CFTC Regulation 41.42(c)(2)(v) 
\21\ and SEC Regulation 242.400(c)(2)(v),\22\ including a clause that 
requires that a Market Maker ``hold itself out as being willing to buy 
and sell security futures for its own account on a regular or 
continuous basis.'' In the release on Customer Margin Rules Relating to 
Security Futures (``Customer Margin Release''),\23\ the Commission and 
the CFTC identified three alternate means by which to demonstrate such 
willingness, as follows:
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    \21\ 17 CFR 41.42(c)(2)(v).
    \22\ 17 CFR 242.400(c)(2)(v).
    \23\ Exchange Act Release No. 46292 (August 1, 2002), 67 FR 
53146 (August 14, 2002).
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    1. An exchange may require market makers to effect a certain 
percentage of their security futures trades with persons other than 
those registered as market makers;
    2. Market makers could be subject to rules that impose an 
affirmative obligation to quote on a regular or continuous basis; or
    3. An exchange may require that a ``large majority'' of a market 
maker's revenue be derived from trading listed financial based 
derivatives including futures and options on stocks, stock indexes, 
foreign currencies, and interest rate instruments.
    The CBOT generally proposes to apply the second standard listed 
above, which includes affirmative obligations to make markets. 
Specifically, under proposed Regulation 431.07(c), a Market Maker is 
considered willing to hold itself out to buy and sell security futures 
on a continuous or regular basis if it fulfills any one of three tests.
    The first test, set forth in Regulation 431.07(c)(1), requires a 
Market Maker to provide:
    * * * continuous two-sided quotations throughout the trading day 
for all delivery months of [specified] Security Futures Contracts * * * 
and * * * [quote] * * * with a maximum bid/ask spread no more than the 
greater of $0.20 or 150% of the bid/ask spread in the primary market 
for the security underlying each Security Futures Contract.
    The second test, set forth in Regulation 431.07(c)(2), requires a 
Market Maker to respond:
    * * * to at least 75% of the requests for quotation for all 
delivery months of [specified] Security Futures Contracts * * * and * * 
* [w]hen responding to requests for quotation, [quote] within five 
seconds with a maximum bid/ask spread no more than the greater of $0.20 
or 150% of the bid/ask spread in the primary market for the security 
underlying each Security Futures Contract.

[[Page 19779]]

    The first and second tests require Market Makers to be assigned to 
a meaningful proportion of Security Futures Contracts listed on the 
Exchange. A ``meaningful proportion'' is defined in proposed Regulation 
431.07(c) to refer to Security Futures Contracts that represent at 
least 20% of the total Security Futures Contract trading volume on the 
Exchange after the 181st calendar day subsequent to the commencement of 
trading in Security Futures Contracts on the Exchange.
    The third test, set forth in Regulation 431.07(c)(3), requires that 
a Market Maker must be:
    * * * assigned to a group of Security Futures Contracts listed on 
the Exchange that is either unlimited in nature (``Unlimited 
Assignment'') or is assigned to no more that 20% of the Security 
Futures Contracts listed on the Exchange (``Limited Assignment''); and 
* * * [a]t least 75% of the Market Maker's total trading activity in 
Exchange Security Futures Contracts is in its assigned Security Futures 
Contracts, measured on a quarterly basis; and * * * [d]uring at least 
50% of the trading day, the Market Maker has bids or offers in the 
market that are at or near the best market * * * with respect to at 
least 25% (in the case of an Unlimited Assignment) or at least one (in 
the case of a Limited Assignment) of its assigned Security Futures 
Contracts; and * * * [these obligations must be] satisfied on (a) at 
least 90% of the trading days in each calendar quarter by Market Makers 
who have undertaken an Unlimited Assignment; or (b) at least 80% of the 
trading days in each calendar quarter by Market Makers who have 
undertaken a Limited Assignment; or (c) on at least 80% of the trading 
days in each calendar quarter * * * where the Exchange is listing four 
(4) or fewer Security Futures Contracts.
    Market Makers are required to maintain books and records in order 
to evidence compliance with these standards. This recordkeeping 
requirement includes, without limitation, trading account statements 
and other financial records necessary to detail Market Maker activity. 
Failure on the part of a Market Maker to comply with these standards 
may result in revocation of the Market Maker's registration with the 
Exchange as a Security Futures Dealer, or other sanctions under CBOT 
Rules and Regulations.
    The CBOT believes that proposed Regulation 431.07(b) and (c) are 
consistent with the requirements of the Exchange Act and with the 
explanations accompanying the publication of those requirements.
    Margin Rates--Proposed Regulation 431.07(a) requires that customer 
margin rates be established at levels no lower than those prescribed by 
CFTC Regulation 41.45 \24\ and SEC Regulation 242.403.\25\ Proposed 
Regulation 431.07(d) specifically provides that the margin level for 
each long or short position in a Security Futures contract held on 
behalf of a customer shall not be less than 20% of the current market 
value of such Security Futures contract, as required by SEC Regulation 
242.403(b)(1) \26\ and CFTC Regulation 41.45(b)(1).\27\
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    \24\ 17 CFR 41.45.
    \25\ 17 CFR 242.403.
    \26\ 17 CFR 242.403(b)(1).
    \27\ 17 CFR 41.45(b)(1).
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    Exceptions to the 20% requirement are established under proposed 
Regulation 431.07(e). These exceptions rely upon SEC Regulation 
242.403(b)(2) \28\ and CFTC Regulation 41.45(b)(2) \29\ that provide 
that a self-regulatory authority may set the required initial or 
maintenance margin level for offsetting positions involving security 
futures and related positions at a level lower than the level that 
would apply if margin requirements for such positions were calculated 
separately based on the 20% requirement, provided that the rules 
establishing such lower margin levels meet the criteria set forth in 
Section 7(c)(2)(B) of the Exchange Act.\30\ That Section requires that:
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    \28\ 17 CFR 242.403(b)(2).
    \29\ 17 CFR 41.45(b)(2).
    \30\ 15 U.S.C. 78g(c)(2)(B).
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    (I) The margin requirements for a security futures product be 
consistent with the margin requirements for comparable option contracts 
traded on any exchange registered pursuant to Section 6(a) of [the 
Exchange Act]; and
    (II) Initial and maintenance margin levels for a security futures 
product not be lower than the lowest level of margin, exclusive of 
premium, required for any comparable option contract traded on any 
exchange registered pursuant to Section 6(a) of [the Exchange Act], 
other than an option on a security future.
    Absent the margin relief afforded by proposed Regulation 431.07(e), 
security futures intermediaries would be required to collect margin 
from their customers equal to at least 20% of the current market value 
of the security futures held on behalf of such customers, even if such 
security futures positions were hedged. With respect to option 
contracts traded on securities exchanges, the Commission has recognized 
that it is appropriate for the SROs to recognize the hedged nature of 
certain combined options strategies and prescribe margin requirements 
that better reflect the risk of those strategies.\31\
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    \31\ See Exchange Act Release Nos. 41658 (July 27, 1999), 64 FR 
42736 (August 5, 1999) (order approving SR-CBOE-97-67 amending CBOE 
Rule 12.3); 42011 (October 14, 1999) (order approving SR-NYSE-99-03 
amending NYSE Rule 431); 43582 (November 17, 2000), 65 FR 70854 
(November 28, 2000) (order approving SR-Amex-99-27 amending Amex 
Rule 462); and 43581 (November 17, 2000), 65 FR 71151 (November 29, 
2000) (order approving SR-NASD-00-15 amending NASD Rule 2520).
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    The CBOT believes that the same considerations apply in connection 
with the determination of margin levels for offsetting positions 
involving security futures and related positions. If margin offsets 
were not available with respect to security futures, the customer 
margin requirements applicable to such instruments would effectively be 
inconsistent with, and more onerous than, the margin requirements for 
comparable option contracts traded on securities exchanges. This would 
be contrary to the statutory objectives reflected in Section 7(c)(2)(B) 
of the Exchange Act.\32\
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    \32\ 15 U.S.C. 78g(c)(2)(B).
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    Proposed Regulation 431.07(e) incorporates a schedule which 
describes in detail the margin offsets available with respect to 
particular combinations of security futures and related positions. This 
schedule is substantively identical to the table of offsets included in 
the Customer Margin Release. While the table differs in certain 
respects from similar tables in effect for exchange-traded options, the 
Commission acknowledged in its Customer Margin Release that these 
limited differences are warranted by different characteristics of the 
instruments to which they relate. Accordingly, the CBOT believes that 
proposed Regulation 431.07(e) is consistent with the requirements of 
the Exchange Act and the Rules and Regulations thereunder.
    Margin Administration--Proposed Regulation 431.08(a) identifies the 
types of instruments that a security futures intermediary may accept 
from a customer as margin for security futures positions held in a 
futures account. Consistent with SEC Regulation 242.404(b) \33\ and 
CFTC Regulation 41.46(b),\34\ acceptable types of margin are limited to 
deposits of cash, margin securities (subject to specified 
restrictions), exempted securities, any other assets permitted under 
Regulation

[[Page 19780]]

T \35\ of the Board of Governors of the Federal Reserve System to 
satisfy a margin deficiency in a securities margin account, and any 
combination of the foregoing. Proposed Regulation 431.08(a) further 
provides that the different types of eligible margin deposits are to be 
valued in accordance with the applicable principles set forth in SEC 
Regulations 242.404(c) and 242.404(e) \36\ and CFTC Regulations 
41.46(c) and 41.46(e).\37\
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    \33\ 17 CFR 242.404(b).
    \34\ 17 CFR 41.46(b).
    \35\ 2 CFR 220.1 et seq.
    \36\ 17 CFR 242.404(c) and 242.404(e).
    \37\ 17 CFR 41.46(c) and 41.46(e).
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    Proposed Regulation 431.08(d) requires a security futures 
intermediary to take the deduction required with respect to an 
undermargined account in computing its net capital under applicable SEC 
and CFTC Regulations if the customer has failed to comply with a 
required margin call within a reasonable period of time. This 
requirement is consistent with SEC Regulation 242.406(a) \38\ and CFTC 
Regulation 41.48(a).\39\ Further, proposed Regulation 431.08(e) 
requires the liquidation of an account in which security futures are 
held where there is a liquidating deficit, in accordance with SEC 
Regulation 242.406(b) \40\ and CFTC Regulation 41.48(b).\41\
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    \38\ 17 CFR 242.406(a).
    \39\ 17 CFR 41.48(a).
    \40\ 17 CFR 242.406(b).
    \41\ 17 CFR 41.48(b).
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    The Exchange Act Regulations and related provisions of the Exchange 
Act are premised on each self-regulatory organization adopting margin 
requirements that are functionally equivalent to proposed CBOT 
Regulations 431.07 and 431.08. Accordingly, proposed Regulations 431.07 
and 431.08 represent a corollary of, and are designed to give effect 
to, the Exchange Act Regulations and related provisions of the Exchange 
Act.

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

    The CBOT 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.

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

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

III. 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 Exchange 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 e-mail to rule-comments@sec.gov. Please include File 

Number SR-CBOT-2006-01 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-CBOT-2006-01. 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 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 submission should refer to 
File Number SR-CBOT-2006-01 and should be submitted on or before May 8, 
2006.

IV. Commission Findings and Order Granting Accelerated Approval of a 
Proposed Rule Change

    The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange.\42\ In 
particular, the Commission finds that the proposed rule change is 
consistent with the requirements of Section 6(b)(5) of the Act,\43\ 
which requires, among other things, that the rules of the Exchange be 
designed to promote just and equitable principles of trade and, in 
general, to protect investors and the public interest. In addition, the 
Commission believes that the proposed rule change is consistent with 
Section 7(c)(2)(B) of the Act,\44\ which provides, among other things, 
that the margin requirements for security futures must preserve the 
financial integrity of markets trading security futures and prevent 
systemic risk. The Commission also believes that the proposed rule 
change is consistent with the customer margin rules set forth in Rules 
400 through 406 under the Act.\45\
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    \42\ In approving this proposal, the Commission has considered 
its impact on efficiency, competition, and capital formation. 15 
U.S.C. 78c(f).
    \43\ 15 U.S.C. 78f(b)(5).
    \44\ 15 U.S.C. 78g(c)(2)(B).
    \45\ 17 CFR 242.400-406.
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    The Exchange has requested that the Commission approve this 
proposed rule change prior to the thirtieth day after publication of 
notice of the filing in the Federal Register. The Commission believes 
that nothing in this proposed rule change raises any new, unique, or 
substantive issues from those previously raised in SR-OC-2002-01, as 
amended, and SR-CME-2002-01, as amended \46\ which rule filings set 
forth OneChicago's and the Chicago Mercantile Exchange's (``CME'') 
margin requirements for security futures, respectively. The Exchange's 
proposed rules set forth herein are substantively identical to the 
parallel provisions in OneChicago Rule 515 and CME Rule 930. The 
Exchange noted that that OneChicago Rule 515(a) specifies that its 
market maker exclusion applies to security futures positions held in 
securities accounts, as well as those held in futures accounts. The 
proposed margin rules only address security futures positions held in 
futures accounts. Further, the offsets proposed by CBOT are consistent 
with the strategy-based offsets permitted for comparable offset 
positions involving exchange-traded options and therefore consistent 
with Section 7(c)(2)(B) of the Exchange Act.\47\ Finally, approval of 
the proposed rule change is necessary for CBOT to begin trading 
security futures.
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    \46\ See also SR-CME-2003-01 (approving, on a permanent basis, a 
standard under which a market maker can qualify for exclusion from 
CME's margin rules).
    \47\ 15 U.S.C. 78g(c)(2)(B).

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[[Page 19781]]

    Accordingly, the Commission finds good cause for approving this 
proposed rule change prior to the thirtieth day after the date of 
publication of notice thereof in the Federal Register. Specifically, 
the Commission believes that it is consistent with Section 19(b)(2) of 
the Act \48\ to approve the Exchange's proposed rule change prior to 
the thirtieth day after publication of the notice of filing thereof in 
the Federal Register.
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    \48\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\49\ that the proposed rule change (File No. SR-CBOT-2006-01) is 
approved on an accelerated basis.
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    \49\ Id.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\50\
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    \50\ 17 CFR 200.30-3(a)(12).
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Nancy M. Morris,
Secretary.
 [FR Doc. E6-5650 Filed 4-14-06; 8:45 am]

BILLING CODE 8010-01-P
