
[Federal Register Volume 75, Number 244 (Tuesday, December 21, 2010)]
[Notices]
[Pages 80099-80101]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-31932]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-63546; File No. SR-CBOE-2010-106]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Notice of Proposed Rule Change, as Modified by Amendment 
No. 1, To Amend Margin Requirements for Credit Options

December 15, 2010.
    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 December 1, 2010, the Chicago Board Options Exchange, 
Incorporated (``Exchange'' or ``CBOE'') filed with the Securities and 
Exchange Commission (the ``Commission'') the proposed rule change as 
described in Items I and II, below, which Items have been substantially 
prepared by the Exchange. On December 14, 2010, the Exchange filed 
Amendment No. 1 to the proposed rule change.\3\ The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ Amendment No. 1 to SR-CBOE-2010-106 replaced and superseded 
the original rule filing in its entirety.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    CBOE proposes to amend Rule 12.3(l), Margin Requirements, to make 
CBOE's margin requirements for Credit Options consistent with Financial 
Industry Regulatory Authority (``FINRA'') Rule 4240, Margin 
Requirements for Credit Default Swaps. CBOE's Credit Options (i.e., 
Credit Default Options and Credit Default Basket Options) are analogous 
to credit default swaps.\4\ The text of the rule proposal is available 
on the Exchange's Web site (http://www.cboe.org/legal), at the 
Exchange's Office of the Secretary and at the Commission.
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    \4\ CBOE's Credit Default Options and Credit Default Basket 
Options are also referred to as Credit Event Binary Options.
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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 self-regulatory organization 
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 those 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 parts of such statements.

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

1. Purpose
    This filing proposes to amend Rule 12.3(l), Margin Requirements, to 
make CBOE's margin requirements for Credit Options consistent with 
FINRA Rule 4240, Margin Requirements for Credit Default Swaps. CBOE's 
Credit Options consist of two variations--Credit Default Options and 
Credit Default Basket Options. Credit Default Options and Credit 
Default Basket Options are also referred to as ``Credit Event Binary 
Options.'' Effectively, both contracts operate in the same manner as 
credit default swap contracts.
    Amendment No. 1 replaces the original filing in its entirety. The 
purpose of Amendment No. 1 is to restyle the original proposal on a 
pilot basis.
    As with a credit default swap contract, the buyer of a Credit 
Option contract is buying protection from the seller of the Credit 
Option. This protection is in the form of a monetary payment from the 
Credit Option seller to the Credit Option buyer in the event that the 
issuer of debt securities, or Reference Entity, specified as underlying 
the Credit Option contract has a Credit Event (e.g., declares 
bankruptcy), consequently defaulting on the payment of principal and 
interest on its debt securities. When a Credit Option buyer and seller 
initially open

[[Page 80100]]

their positions via a transaction consummated on the Exchange, the 
Credit Option buyer's account is charged (debited) for the cost of the 
protection. The Credit Option seller's account is credited. For the 
protection, there is only a one-time debit and credit to the buyer and 
seller, respectively. If, prior to expiration of the Credit Option, a 
Credit Event occurs (e.g., bankruptcy is declared), the Credit Option 
contract is settled with a credit to the Credit Option buyer's account 
for a predetermined payout amount (e.g., $1,000), based on the 
Exchange's contract specifications. The Credit Option seller's account 
is debited (charged) for the payout amount.
    Credit Default Options have a single Reference Entity. Credit 
Default Basket Options have multiple Reference Entities. If a Credit 
Default Basket Option is specified as having a single payout, 
settlement is triggered when any one of the component Reference 
Entities has a Credit Event (e.g., declares bankruptcy) and thereafter 
the option ceases to exist. The payout is the settlement amount 
attached to that one Reference Entity. If a Credit Default Basket 
Option is specified as having multiple payouts, a settlement is 
triggered when any one of the component Reference Entities has a Credit 
Event (e.g., declares bankruptcy), but the option continues to exist 
until its expiration. Therefore, additional settlements would be 
triggered if, and as, any Credit Events occur in respect of the 
remaining Reference Entity components. The payout is the settlement 
amount attached to each particular Reference Entity.
    The current Exchange margin requirements for Credit Options were 
established before FINRA implemented margin requirements for credit 
default swaps (FINRA Rule 4240). In order to be consistent with FINRA 
margin requirements and establish a level playing field for similar 
instruments, CBOE's proposed amendments adopt the FINRA requirements to 
a large extent. For Credit Default Options, which overlie a single 
Reference Entity, CBOE proposes to adopt FINRA's margin percentage 
table for credit default swaps. With respect to Credit Default Basket 
Options, CBOE is adopting the margin percentage table that FINRA 
requires for CDX indices because, like an index, a Credit Default 
Basket Option involves multiple component Reference Entities. CBOE 
proposes to revise the FINRA column headings to fit Credit Options. 
FINRA Rule 4240 requires the percentage to be applied to the notional 
amount of a credit default swap. CBOE's proposed rules would require 
that the percentage be applied to the settlement value of a Credit 
Option to arrive at a margin requirement because the settlement value 
of a Credit Option is analogous to the notional amount of a credit 
default swap. CBOE's proposed rules incorporate all other relevant 
aspects of FINRA 4240, such as risk monitoring procedures and 
guidelines, and concentration charge (net capital) requirements.
    It should be noted that CBOE's proposed rules would require no 
margin in the case of a spread (i.e., long and short Credit Options 
with the same underlying Reference Entity or Entities.) This differs 
from FINRA Rule 4240, which requires margin of 50% of the margin 
required on the long or short (credit default swap), whichever is 
greater. CBOE is proposing no margin because the long and short are 
required to have the same underlying Reference Entity. Moreover, Credit 
Options are standardized and are settled through The Options Clearing 
Corp.
    CBOE's proposed rules would also require no margin on a short 
Credit Default Option that is offset with a short position in a debt 
security issued by the Reference Entity underlying the option. This 
language differs from the debt security offset allowed under FINRA Rule 
4240. However, applicable margin must still be collected on the short 
position in a debt security as prescribed pursuant to applicable margin 
rules. Rule 4240 requires no margin for a long credit default swap 
contract that is paired with a long position in the underlying debt 
security. However, this type of offset does not appear to be workable 
in respect of a Credit Default Option.
    The proposal will become effective on a pilot basis to run a 
parallel track with FINRA Rule 4240 that operates on an interim pilot 
basis which is currently scheduled to expire on July 16, 2011.\5\ If 
the Exchange were to propose an extension of the Credit Option Margin 
Pilot Program or should the Exchange propose to make the Pilot Program 
permanent, then the Exchange would submit a filing proposing such 
amendments to the Pilot Program.
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    \5\ See Securities Exchange Act Release No. 63391 (November 30, 
2010), 75 FR 75718 (December 6, 2010) (notice of filing for 
immediate effectiveness extending FINRA Rule 4240 margin interim 
pilot program to July 16, 2011).
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2. Statutory Basis
    The Exchange believes this rule proposal is consistent with the Act 
and the rules and regulations under the Act applicable to a national 
securities exchange and, in particular, the requirements of Section 
6(b) of the Act.\6\ Specifically, the Exchange believes that the 
proposed rule change is consistent with the Section 6(b)(5) Act \7\ 
requirements that the rules of an exchange be designed to promote just 
and equitable principles of trade, to prevent fraudulent and 
manipulative acts and, in general, to protect investors and the public 
interest, and because it enhances fair competition among exchange 
markets.
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    \6\ 15 U.S.C. 78f(b).
    \7\ 15 U.S.C. 78f(b)(5).
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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 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

    No written comments were solicited or received with respect to 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 (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization 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, as amended, is consistent with the Act. Comments may be 
submitted by any of the following methods:

Electronic Comments

     Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an e-mail to rule-comments@sec.gov. Please include 
File Number SR-CBOE-2010-106 on the subject line.

[[Page 80101]]

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street, NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-CBOE-2010-106. 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 website viewing and 
printing in the Commission's Public Reference Room, 100 F Street, NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of 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 submissions should refer to File Number SR-CBOE-2010-106 
and should be submitted on or before January 11, 2011.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-31932 Filed 12-20-10; 8:45 am]
BILLING CODE 8011-01-P


