
[Federal Register Volume 80, Number 226 (Tuesday, November 24, 2015)]
[Notices]
[Pages 73252-73254]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2015-29842]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-76469; File No. SR-CBOE-2015-077]


Self-Regulatory Organizations; Chicago Board Options Exchange, 
Incorporated; Order Granting Approval of Proposed Rule Change Relating 
to Margin Requirements

November 18, 2015.

I. Introduction

    On September 22, 2015, Chicago Board Options Exchange, Incorporated 
(``Exchange'' or ``CBOE'') filed with the Securities and Exchange 
Commission (``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 
thereunder,\2\ a proposed rule change relating to margin requirements. 
The proposed rule change was published for comment in the Federal 
Register on October 8, 2015.\3\ The Commission received no comments on 
the proposed rule change. This order grants approval of the proposed 
rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 76068 (October 2, 
2015), 80 FR 60941 (``Notice'').
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II. Description of the Proposed Rule Change

    CBOE proposes to amend its rules related to margin requirements. 
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

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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).\4\
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    \4\ See Notice, supra note 3, at 60942. CBOE notes, 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 \5\ 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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    \5\ See Notice, supra note 3, at 60942. 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 also 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.
    According to CBOE, the proposed rule change makes some 
nonsubstantive changes to Rule 12.3(c)(5)(C)(2). CBOE represents, 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). CBOE further represents, 
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. CBOE notes, the proposed rule 
change also makes the language more plain English, eliminates 
repetitive language, and inserts a missing space in proposed 
subparagraph (b).
    CBOE states, the proposed rule change adds circumstances in which 
covered calls and puts require no margin. According to CBOE, the 
proposed rule change applies the provision in proposed subparagraph (b) 
to index mutual funds, index portfolio receipts (``IPRs''),\6\ and 
index portfolio shares (``IPSs''),\7\ 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.\8\ 
IPRs and IPSs are commonly referred to as exchange-traded funds 
(``ETFs''). CBOE notes, 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.\9\ CBOE further notes, 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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    \6\ See Notice, supra note 3, at 60942. 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 also CBOE Rule 1.1, Interpretation and Policy .02.
    \7\ See Notice, supra note 3, at 60942. 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 
also CBOE Rule 1.1, Interpretation and Policy .03.
    \8\ See Notice, supra note 3, at 60942. The term ``aggregate 
current index value'' means the current index value times the index 
multiplier. See also CBOE Rule 12.3, Interpretation and Policy .07.
    \9\ See Notice, supra note 3, at 60942. CBOE notes, 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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    CBOE states that 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. CBOE believes, the 
types and diversity of products available on the market that track 
indexes continues to increase and provide additional investment and 
hedging opportunities. CBOE also believes 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. Therefore, CBOE represents, 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.\10\
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    \10\ See Notice, supra note 3, at 60943. 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 also 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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    According to CBOE, 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.\11\ CBOE and another exchange later 
afforded the same margin treatment to options on the Dow Jones 
Industrial Average (DJIA)

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covered by units of the DIAMONDS Trust held in the same account.\12\ 
CBOE notes, 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).\13\ CBOE believes 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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    \11\ See Notice, supra note 3, at 60943. 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.
    \12\ See Notice, supra note 3, at 60943. 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.
    \13\ See Notice, supra note 3, at 60943. See also 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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III. Discussion and Commission Findings

    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.\14\ 
Specifically, the Commission finds that the proposed rule change is 
consistent with Section 6(b)(5) of the Act,\15\ which requires, among 
other things, that the rules of a national securities exchange be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, 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. Specifically, the Commission believes that providing for a 
specific margin treatment related to covered puts and calls to apply to 
all index options in the same manner will promote just and equitable 
principles of trade because stock baskets, ETFs and mutual funds that 
trade a reference index can generally provide the same economic 
function as a security underlying an option.
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    \14\ In approving this proposed rule change, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. See 15 U.S.C. 78c(f).
    \15\ 15 U.S.C. 78f(b)(5).
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    Finally, the Commission believes the non-substantive technical 
changes will benefit investors by offering more clarity with respect to 
the margin rules by providing for more consistent and plain English 
language in the rule.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\16\ that the proposed rule change (SR-CBOE-2015-077) be, and 
hereby is, approved.
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    \16\ 15 U.S.C. 78s(b)(2).
    \17\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\17\
Robert W. Errett,
Deputy Secretary.
[FR Doc. 2015-29842 Filed 11-23-15; 8:45 am]
BILLING CODE 8011-01-P


