[Federal Register Volume 87, Number 231 (Friday, December 2, 2022)]
[Notices]
[Pages 74199-74204]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2022-26234]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-96395; File No. SR-CBOE-2022-058]


Self-Regulatory Organizations; Cboe Exchange, Inc.; Notice of 
Filing of a Proposed Rule Change To Amend Rule 10.3 Regarding Margin 
Requirements

November 28, 2022.
    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 November 14, 2022, Cboe Exchange, Inc. (the ``Exchange'' or 
``Cboe Options'') filed with the Securities and Exchange Commission 
(the ``Commission'') the

[[Page 74200]]

proposed rule change as described in Items I, II, and III below, which 
Items have been prepared by the Exchange. The Commission is publishing 
this notice to solicit comments on the proposed rule change from 
interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Cboe Exchange, Inc. (the ``Exchange'' or ``Cboe Options'') proposes 
to amend Rule 10.3 regarding margin requirements. The text of the 
proposed rule change is provided below.
(additions are italicized; deletions are [bracketed])
* * * * *

Rules of Cboe Exchange, Inc.

* * * * *

Rule 10.3 Margin Requirements

    (a)-(b) No change.
    (c) Customer Margin Account--Exception. The foregoing 
requirements are subject to the following exceptions. Nothing in 
this paragraph (c) shall prevent a broker-dealer from requiring 
margin from any account in excess of the amounts specified in these 
provisions.
    (1)-(4) No change.
    (5) Initial and Maintenance Margin Requirements on Short 
Options, Stock Index Warrants, Currency Index Warrants and Currency 
Warrants.
    (A)-(B) No change.
    (C) Related Securities Positions--Listed or OTC Options. Unless 
otherwise specified, margin must be deposited and maintained in the 
following amounts for each of the following types of positions.
    (i)-(ii) No change.
    (iii) Covered Calls/Covered Puts. [(a)] No margin is required 
for a call (put) option contract or warrant carried in a short 
position where there is carried in the same account a long (short) 
position in equivalent units of the underlying security.
    [(b) No margin is required for a call (put) index option 
contract or warrant carried in a short position where there is 
carried in the same account a long (short) position in an (1) 
underlying stock basket, (2) index mutual fund, (3) IPR, or (4) IPS, 
that is based on the same index underlying the index option or 
warrant and having a market value at least equal to the aggregate 
current index value.
    (c)] In order for th[e]is exception[s in subparagraphs (a) and 
(b) above] to apply, in computing margin on positions in the 
underlying security[, underlying stock basket, index mutual fund, 
IPR or IPS, as applicable], ([1]a) in the case of a call, the 
current market value to be used shall not be greater than the 
exercise price, and ([2]b) in the case of a put, margin shall be the 
amount required by subparagraph (b)(2) of this Rule, plus the 
amount, if any, by which the exercise price exceeds the current 
market value.
    (iv) Exceptions. The following paragraphs set forth the minimum 
amount of margin which must be maintained in margin accounts of 
customers having positions in components underlying options, stock 
index warrants, currency index warrants or currency warrant when 
such components are held in conjunction with certain positions in 
the overlying option or warrant. In respect of an option or warrant 
on a market index, an underlying stock basket is an eligible 
underlying component. The option or warrant must be listed or 
guaranteed by the carrying broker dealer. In the case of a call 
option or warrant carried in a short position, a related long 
position in the underlying component shall be valued at no more than 
the call option/warrant exercise price for margin equity purposes.
    (a) Long Option Offset. When a component underlying an option or 
warrant is carried long (short) in [an]the same account [in which 
there is also carried]as a long put (call) option or warrant 
specifying equivalent units of the underlying component, the minimum 
amount of margin which must be maintained on the underlying 
component is 10% of the option/warrant exercise price plus the out-
of-the-money amount not to exceed the minimum maintenance required 
pursuant to paragraph (b) of this Rule.
    (b) Conversion. When a call option or warrant carried in a short 
position is covered by a long position in equivalent units of the 
underlying component and there is [also] carried in the same account 
a long put option or warrant specifying equivalent units of the same 
underlying component and having the same exercise price and 
expiration date as the short call option or warrant, the minimum 
amount of margin which must be maintained for the underlying 
component shall be 10% of the exercise price.
    (c) Reverse Conversion. When a put option or warrant carried in 
a short position is covered by a short position in equivalent units 
of the underlying component and there is [also] carried in the same 
account a long call option or warrant specifying equivalent units of 
the same underlying component and having the same exercise price and 
expiration date as the short put option or warrant, the minimum 
amount of margin which must be maintained for the underlying 
component shall be 10% of the exercise price plus the amount by 
which the exercise price of the put exceeds the current market value 
of the underlying, if any.
    (d) Collar. When a call option or warrant carried in a short 
position is covered by a long position in equivalent units of the 
underlying component and there is [also] carried in the same account 
a long put option or warrant specifying equivalent units of the same 
underlying component and having a lower exercise price than, and 
same expiration date as, the short call option/warrant, the minimum 
amount of margin which must be maintained for the underlying 
component shall be the lesser of 10% of the exercise price of the 
put plus the put out-of- the-money amount or 25% of the call 
exercise price.
    (e) Protected Option. When an index call (put) option contract 
or warrant is carried in a short position (the ``protected option or 
warrant position'') and there is carried in the same account a long 
(short) position in an underlying stock basket, non-leveraged index 
mutual fund or non-leveraged exchange-traded fund (each, the 
``protection'') that is based on the same index underlying the index 
option or warrant, the protected option or warrant position is not 
subject to the requirement set forth in subparagraph (c)(5)(A) above 
if the following conditions are met:
    (1) when the protected option or warrant position is created, 
the absolute value of the protection is not less than 100% of the 
aggregate current underlying index value associated with the 
protected option or warrant position determined at either (A) the 
time the order that created the protected option or warrant position 
was entered or executed; or (B) the close of business on the trading 
day the protected option or warrant position was created;
    (2) the absolute value of the protection is at no time less than 
95% of the aggregate current underlying index value associated with 
the protected option or warrant position; and
    (3) margin is maintained in an amount equal to the greater of: 
(A) the amount, if any, by which the aggregate current underlying 
index value is above (below) the aggregate exercise price of the 
protected call (put) option or warrant position; or (B) the amount, 
if any, by which the absolute value of the protection is below 100% 
of the aggregate current underlying index value associated with the 
protected option or warrant.
* * * * *
    The text of the proposed rule change is also available on the 
Exchange's website (http://www.cboe.com/AboutCBOE/CBOELegalRegulatoryHome.aspx), at the Exchange's Office of the 
Secretary, and at the Commission's Public Reference Room.

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

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The Exchange has prepared summaries, set forth in 
sections A, B, and C below, of the most significant aspects of such 
statements.

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

1. Purpose
    The proposed rule change amends Rule 10.3 regarding margin 
requirements. Specifically, the Exchange proposes to amend Rule 
10.3(c)(5)(C)(iii)(b) to update the provisions that provide margin 
relief for

[[Page 74201]]

a cash-settled index option written against a holding in an exchange-
traded fund that tracks the same index as the index underlying the 
index option. Rule 10.3 sets forth margin requirements, and certain 
exceptions to those requirements, applicable to security positions of 
Trading Permit Holders' (``TPHs'') customers. Rule 10.3(c)(5)(C)(iii) 
currently requires no margin for covered calls and puts. Specifically, 
that rule provides the following:
     No margin is required for a call (put) option contract or 
warrant carried in a short position where there is carried in the same 
account a long (short) position in equivalent units of the underlying 
security.\3\
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    \3\ In computing margin on such a position in the underlying 
security, (a) in the case of a call, the current market value to be 
used shall not be greater than the exercise price and (b) in the 
case of a put, margin will be the amount required by Rule 
10.3(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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     No margin is required for a call (put) index option 
contract or warrant carried in a short position where there is carried 
in the same account a long (short) position in an (1) underlying stock 
basket,\4\ (2) index mutual fund, (3) index portfolio receipt 
(``IPR''),\5\ or (4) index portfolio share (``IPS''),\6\ that is based 
on the same index underlying the index option or warrant and having a 
market value at least equal to the aggregate current index value.
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    \4\ An ``underlying stock basket'' means a group of securities 
that includes each of the component securities of the applicable 
index and which meets the following conditions: (a) the quantity of 
each stock in the basket is proportional to its representation in 
the index, (b) the total market value of the basket is equal to the 
underlying index value of the index options or warrants to be 
covered, (c) the securities in the basket cannot be used to cover 
more than the number of index options or warrants represented by 
that value and (d) the securities in the basket shall be unavailable 
to support any other option or warrant transaction in the account. 
See Rule 10.3(a)(7).
    \5\ IPRs are 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 Rules. See Rule 1.1. A UIT Interest is any share, 
unit, or other interest in or relating to a unit investment trust, 
including any component resulting from the subdivision or separation 
of such an interest.
    \6\ IPSs are 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 Rule 1.1.
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     In order for the exceptions in the previous bullets to 
apply, in computing margin on positions in the underlying security, 
underlying stock basket, index mutual fund, IPR or IPS, as 
applicable,\7\ (1) in the case of a call, the current market value to 
be used shall not be greater than the exercise price, and (2) in the 
case of a put, margin shall be the amount required by subparagraph 
(b)(2) of Rule 10.3, plus the amount, if any, by which the exercise 
price exceeds the current market value.
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    \7\ IPRs and IPSs are commonly referred to as ETFs.
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    Rule 10.3(c)(5) generally requires TPHs to obtain from a customer, 
and maintain, a margin deposit for short cash-settled index options in 
an amount equal to 100% of the current market value of the option plus 
15% (if overlying a broad-based index) or 20% (if overlying a narrow-
based index) of the amount equal to the index value multiplied by the 
index multiplier minus the amount, if any, by which the option is out-
of-the-money.\8\ The minimum margin required for such an option is 100% 
of the option current market value plus 10% of the index value 
multiplied by the index multiplier for a call or 10% of the exercise 
price multiplied by the index multiplier for a put.
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    \8\ The out-of-the-money amount for a call is any excess of the 
aggregate exercise price of the option or warrant over the product 
of the current (spot or cash) index value and the applicable 
multiplier. The out-of-the-money amount for a put is any excess of 
the product of the current (spot or cash) index value and the 
applicable multiplier over the aggregate exercise price of the 
option or warrant.
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    Pursuant to current Rule 10.3(c)(5)(C)(iii)(b) and (c), however, a 
TPH requires no margin deposit for a short cash-settled index call 
option if the TPH is holding in the same account a long position in an 
ETF that tracks the same index underlying the index option \9\ if the 
current market value of the ETF for margin purposes (1) is at least 
equal to the aggregate current index value and (2) is not greater than 
the exercise price. If an account is short a cash-settled index put 
option and is holding in the same account a short position in the ETF, 
a TPH needs to require a margin deposit for the amount required by Rule 
10.3(b)(2) \10\ plus the amount, if any, by which the exercise price of 
the option exceeds the market value of the ETF if the market value of 
the ETF is at least equal to the aggregate current index value.
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    \9\ This is the same margin treatment that applies to an option 
on an equity security written against the underlying security. See 
current Rule 10.3(c)(5)(C)(iii)(a).
    \10\ Rule 10.3(b)(2) provides the minimum amount of margin that 
must be maintained in customer margin accounts having positions in 
securities is: (1) with respect to long positions, 25% of the 
current market value of all long in the account; plus (2) with 
respect to short positions, (a) $2.50 per share or 100% of the 
current market value, whichever is greater, of each security short 
in the account that has a current market value of less than $5.00 
per share; plus (b) $5.00 per share or 30% of the current market 
value, whichever is greater, of each security short in the account 
that has a current market value of $5.00 per share or more.
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    The Exchange proposes to amend this exception to margin 
requirements applicable to short option positions or warrants on 
indexes that are offset by positions in an underlying stock basket, 
non-leveraged index mutual fund, or non-leveraged exchange-traded fund 
(each, the ``protection'') that is based on the same index option, as 
well as move it within Rule 10.3 to Rule 10.3(c)(5)(C)(iv).\11\ 
Specifically, the proposed rule change adopts the following as Rule 
10.3(c)(5)(C)(iv)(e): \12\
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    \11\ Proposed paragraph (e) limits the margin relief to index 
options written against an underlying stock basket, non-leveraged 
index mutual fund or non-leveraged exchange-traded fund (compared to 
underlying stock basket, index mutual fund, IPR, or IPS in current 
subparagraph (iii)(b)). The Exchange proposes to add the non-
leveraged limitation to clarify that this exception is not intended 
to and does not apply to leveraged instruments. Additionally, the 
Exchange excludes IPRs and IPSs from being eligible for the margin 
relief in paragraph (e), as the Exchange understands that the use 
and availability of these products has diminished and has not 
observed the writing of index options against them.
    \12\ The proposed rule change identifies the strategy described 
in proposed subparagraph (e) as a ``protected option,'' which is a 
strategy of writing an index option against a holding in an ETF 
based on the same index as the index option, to differentiate it 
from a ``covered call,'' which is a strategy of writing an option 
against a position in an underlying security (the margin treatment 
for which is described in current subparagraph (iii)(a)).

    (e) When an index call (put) option contract or warrant is 
carried in a short position (the ``protected option or warrant 
position'') and there is carried in the same account a long (short) 
position in an underlying stock basket, non-leveraged index mutual 
fund or non-leveraged exchange-traded fund (each, the 
``protection'') that is based on the same index underlying the index 
option or warrant, the protected option or warrant position is not 
subject to the requirement set forth in subparagraph

[[Page 74202]]

(c)(5)(A) above if the following conditions are met:
    (1) when the protected option or warrant position is created, 
the absolute value of the protection is not less than 100% of the 
aggregate current underlying index value associated with the 
protected option or warrant position determined at either (A) the 
time the order that created the protected option or warrant position 
was entered or executed; or (B) the close of business on the trading 
day the protected option or warrant position was created;
    (2) the absolute value of the protection is at no time less than 
95% of the aggregate current underlying index value associated with 
the protected option or warrant position; and
    (3) margin is maintained in an amount equal to the greater of: 
(A) the amount, if any, by which the aggregate current underlying 
index value associated with the protected option or warrant position 
is above (below) the aggregate exercise price of the protected call 
(put) option or warrant position; or (B) the amount, if any, by 
which the absolute value of the protection is below the aggregate 
current underlying index value associated with the protected option 
or warrant position.

    The proposed rule change provides that the margin requirement for 
an uncovered, short index option or warrant does not apply to a 
protected option or warrant position if certain conditions are met. The 
first proposed condition to qualify for the exception is that the TPH 
must carry or establish in the same account as the protected option or 
warrant position protection with an absolute value of not less than 
100% of the aggregate underlying index value at either the time the 
order that created the protected option or warrant position was entered 
or executed or the close of business on the trading day the protected 
option or warrant position was created. This proposed first condition 
provides clearing brokers with flexibility regarding the point in time 
at which to value the protection. The aggregate underlying index value 
used would be that which existed at the same point in time the clearing 
broker selects to value the protection. This first condition 
corresponds to the concept of covered writing (such as writing a 
covered call). When writing a covered call, a market participant must 
have in the same account as the short call position a fully offsetting 
position in the underlying stock (in other words, 100% of the short 
position's aggregate underlying value, which is equal to the price of 
the stock times 100 (the number of shares underlying one option)).
    The second proposed condition to qualify for the exception is that 
the absolute value of the protection must at no time be less than 95% 
of the aggregate underlying index value associated with the protected 
option or warrant position. Like the first proposed condition, this 
second proposed condition is intended to correspond to covered writing 
by requiring a market participant to maintain the protection in an 
amount close to the aggregate underlying index value associated with 
the protected option or warrant position. Because the value of the 
protection typically will not track exactly the aggregate underlying 
index value (i.e., tracking error), the 95% threshold will require the 
absolute value of the protection to remain close to the aggregate 
underlying index value while effectively imposing a cap of 5% on how 
much the two values may diverge (i.e., the value of the protection may 
not be more than 5% less than the value of the aggregate underlying 
index value). If the absolute value of the protection falls below 95% 
of the aggregate underlying index value associated with the protected 
option or warrant position, the protected option or warrant position 
would be deemed uncovered and thus no longer eligible for relief from 
the uncovered, short index option margin requirement. When that occurs, 
a clearing broker must either collect the required margin amount for 
the short index option or warrant position, require that the value of 
the protection be increased to the 100% of the aggregate underlying 
index value, or liquidate the short index option or warrant position.
    The third proposed condition to qualify for the exception is to 
maintain margin in an amount equal to the greater of: (a) the amount, 
if any, by which the aggregate underlying index value associated with 
the protected option or warrant position is above (below) the aggregate 
exercise price of the protected call (put) option or warrant position; 
or (b) the amount, if any, by which the absolute value of the 
protection is below the aggregate underlying index value associated 
with the protected option or warrant (which would be subject to the 95% 
threshold imposed by the second proposed condition, as described 
above).
    The proposed margin requirement to cover any difference by which 
the underlying index value is above (below) the exercise price of a 
call (put), in aggregate, would capture any amount by which a protected 
option or warrant position is in-the-money (i.e., the amount the 
aggregate underlying index value exceeds the aggregate exercise price 
for a short call). Pursuant to this proposed requirement, margin 
equivalent to the in-the-money amount of the protected option or 
warrant position would need to be held in the account with that 
position, which would then be available to offset any debit to that 
account in the event of an exercise of the protected option or warrant. 
This corresponds to current Cboe Rule 10.3(c)(5)(C)(iii)(c), which 
requires the value of the protection or underlying stock to be capped 
at the exercise price of a covered call for no additional margin to be 
required for that call position. Both approaches prevent any in-the-
money amount from contributing equity to the account and being used to 
support other positions.
    The proposed alternative margin requirement to cover any difference 
by which the absolute value of the protection is below the aggregate 
underlying index value associated with the protected option or warrant 
would compensate for any tracking error. Pursuant to this proposed 
requirement, margin equivalent to the value of the divergence between 
the absolute value of the protection and the aggregate underlying index 
value would need to be maintained once a protected option or warrant 
position is created. However, this requirement would be rendered moot 
if the absolute value of the protection fell below 95% of the aggregate 
underlying index value associated with the protected option or warrant 
position, because the position at that point would be considered 
uncovered. To the extent equity is not available in the margin account 
to meet this requirement, a TPH can require its customer to deposit 
margin into the account. The Exchange believes this is more practical 
than requiring the value of the protection to be maintained at 100% of 
the aggregate underlying index value in actual shares (or applicable 
units) of the protection, as this would require continuous small 
transactions in the protection instrument to offset tracking 
differences (which are generally no larger than 2%).
    Because there may be instances where margin requirements for the 
in-the-money amount and the tracking error may be duplicative,\13\ the 
Exchange proposes to require only the greater amount of the two to 
avoid requiring an unnecessarily high amount of margin.
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    \13\ Two out of a total of six possible orderings of underlying 
index value, exercise price and protection value would result in 
overlapping margin requirements as proposed. For all others, one of 
the proposed margin requirement alternatives would be zero.
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    Currently, if the absolute value of the protection is less than the 
aggregate underlying index value, the protection position must be 
supplemented to address the deficiency. As proposed, such deficiency 
would require margin (to the extent such deficiency is not

[[Page 74203]]

greater than 5%) in the form of available equity in the margin account 
or a deposit of margin in any form (e.g., cash or marginable 
securities) rather than the purchase, sale, or deposit of additional 
protection to address a deficiency (regardless of the amount of the 
deficiency).\14\ As a result, the proposed rule change will reduce the 
need for small and potentially frequent purchases, sales, or deposits 
of additional protection, which may reduce the operational cost of the 
protected option strategy for customers. While the structure of 
protection, particularly ETFs, and market forces may cause the 
protection's value to differ from the index value, the Exchange has 
observed that these values are generally highly correlated and thus do 
not deviate significantly. Therefore, the Exchange believes the 
proposed margin requirement for protected options is an effective 
safeguard against the risk of a short option position.
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    \14\ Pursuant to the current Rules, if the protection market 
value is not at least equal to the aggregate index value, and 
additional shares are not purchased or deposited, then the required 
margin is equal to the amount of the option current market value 
plus 15% (if a broad-based index) or 20% (if a narrow-based index) 
of the aggregate index value minus any out-of-the-money amount, 
subject to a minimum requirement.
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    Additionally, the proposed rule change eliminates the requirement 
to mark the price of a long ETF with an index call option written 
against it at the lower of the ETF's market value or the index option 
strike price. With covered call options, this requirement is intended 
to cap favorable moves in the price of the underlying security at the 
strike price because moves above the strike price will not be realized. 
Currently, the Exchange applies this same requirement (as set forth in 
Rule 10.3(c)(5)(C)(iii)(c)) to protected options written against ETF 
holdings to maintain equivalency with the treatment of covered options. 
As an alternative, the proposed rule substitutes a margin requirement 
in this situation, which would require margin to be collected in an 
amount equal to, for example, the amount by which the aggregate 
underlying index value exceeds the aggregate exercise price in the case 
of a protected index call option or warrant position.
    Further to the above, the proposed rule change deletes Rule 
10.3(c)(5)(C)(iii)(b), as well as the cross-reference to such paragraph 
and the references to underlying stock basket, index mutual fund, IPR 
or IPS, as applicable,\15\ in current subparagraph (c), as those terms 
relate specifically to current subparagraph (b). Because this would 
leave only one section in Rule 10.3(c)(5)(C)(iii), the proposed rule 
change deletes subparagraph lettering and combines current subparagraph 
(iii)(a) and current subparagraph (iii)(c) into a single provision as 
subparagraph (iii) and makes corresponding conforming changes.
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    \15\ These terms are related only to current subparagraph (b).
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    The proposed rule change also makes clarifying, nonsubstantive 
changes in each subparagraph of Rule 10.3(c)(5)(C)(iv) to conform 
language in those subparagraphs to language used throughout Rule 10.3. 
Specifically, the proposed rule change amends the provision of each 
subparagraph to state that the minimum amount of required margin in the 
circumstances described in each subparagraph applies when the 
applicable long position is carried ``in the same account as'' the 
applicable short position, rather than ``also carried.'' This language 
is consistent with the language in, for example, current Rule 
10.3(c)(5)(C)(iii), as margin requirements are determined generally 
based on positions held in the same account.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the Securities Exchange Act of 1934 (the ``Act'') and the rules and 
regulations thereunder applicable to the Exchange and, in particular, 
the requirements of Section 6(b) of the Act.\16\ Specifically, the 
Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \17\ requirements that the rules of an exchange be 
designed to prevent fraudulent and manipulative acts and practices, to 
promote just and equitable principles of trade, to foster cooperation 
and coordination with persons engaged in regulating, clearing, 
settling, processing information with respect to, and facilitating 
transactions in securities, to remove impediments to and perfect the 
mechanism of a free and open market and a national market system, and, 
in general, to protect investors and the public interest. Additionally, 
the Exchange believes the proposed rule change is consistent with the 
Section 6(b)(5) \18\ requirement that the rules of an exchange not be 
designed to permit unfair discrimination between customers, issuers, 
brokers, or dealers. The Exchange further believes the proposed rule 
change furthers the objectives of Section 6(c)(3) of the Act,\19\ which 
authorizes the Exchange to, among other things, prescribe standards of 
financial responsibility or operational capability and standards of 
training, experience and competence for its Trading Permit Holders and 
person associated with Trading Permit Holders.
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    \16\ 15 U.S.C. 78f(b).
    \17\ 15 U.S.C. 78f(b)(5).
    \18\ Id.
    \19\ 15 U.S.C. 78f(c)(3).
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    In particular, the proposed rule change amends a specific margin 
treatment related to short index options written against ETFs in the 
same manner. Given the difference described above between short stock 
options written against the underlying stock and short index options 
written against ETFs, the Exchange believes it is reasonable to apply 
different margin treatments to these different strategies. While the 
economic outcomes of covered options and protected options are similar, 
as described above, the Exchange believes it promotes just and 
equitable principles of trade to apply margin slightly differently to 
protected options than covered options. While the proposed rule change 
may result in lower margin requirements for protected option 
strategies, the Exchange believes the proposed floor on the value of 
protection and the margin amounts are more reasonable than the current 
requirements, as they are more tailored to these strategies and reflect 
the potential deficiencies between the value of the protection and the 
value of the index. As a result, the Exchange believes the proposed 
margin required will still be sufficient for protected option 
strategies. Given the high correlation between these values, the 
Exchange believes it is appropriate to require margin in an amount 
necessary to only cover this deficiency, as ultimately that is the risk 
against which the margin requirement is protecting. Furthermore, any 
amount by which the aggregate underlying index value is above (below) 
the aggregate exercise price of the option in the case of a call (put) 
(i.e., the-in-the-money amount) would also be required as margin under 
the proposal. This in-the-money amount margin requirement prevents 
protection value in excess of the exercise price of the option (in the 
case of a short index call) from contributing to margin account equity 
and replaces the current requirement that caps the value of the 
protection at the aggregate exercise price of the option to qualify for 
a margin exception. The proposed rule change requires only the greater 
of the two margin requirements (the in-the-money amount or the 
protection deficiency amount) to apply to avoid requiring a customer to 
maintain unnecessarily high margin.
    As noted above, the Exchange believes the proposed rule change may 
reduce the need for small and

[[Page 74204]]

potentially frequent purchases, sales, or deposits of additional 
protection, which may reduce the operational cost of the protected 
option strategy. As a result, the Exchange believes the proposed rule 
change may make this strategy more beneficial for customers and thus 
remove impediments to and perfect the mechanism of a free and open 
market, as well as reduce the margin required for such strategies, 
which will potentially free up capital that can be put back into the 
market, which ultimately benefits investors.
    The proposed clarifying, nonsubstantive changes provide for more 
consistent language in similar rule provisions, which will ultimately 
benefit investors.

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

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Act. The proposed rule change is 
not intended as a competitive filing, but rather to modify margin 
requirements for a certain option strategy to be more reasonable and 
practical. The Exchange does not believe that the proposed rule change 
will impose any burden on intramarket competition that is not necessary 
or appropriate in furtherance of the purposes of the Act, as it will 
apply the same margin treatment to all TPHs. The Exchange does not 
believe that the proposed rule change will impose any burden on 
intermarket competition, as several other options exchanges incorporate 
by reference the Exchange's margin rules into their rules (and thus 
apply them to their members), which incorporation by reference would 
apply to the proposed rule change if approved by the Commission. 
Additionally, as discussed above, the proposed rule change may reduce 
the operational burden of protected option strategies, as well as 
reduce the margin required for such strategies, which may make the 
strategies more beneficial for customers.

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

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

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

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

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's internet comment form (http://www.sec.gov/rules/sro.shtml); or
     Send an email to [email protected]. Please include 
File Number SR-CBOE-2022-058 on the subject line.

Paper Comments

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

All submissions should refer to File Number SR-CBOE-2022-058. This file 
number should be included on the subject line if email is used. To help 
the Commission process and review your comments more efficiently, 
please use only one method. The Commission will post all comments on 
the Commission's internet website (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 10:00 a.m. and 
3:00 p.m. Copies of the filing also will be available for inspection 
and copying at the principal office of the Exchange. All comments 
received will be posted without change; the Commission does not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make available publicly. All 
submissions should refer to File Number SR-CBOE-2022-058 and should be 
submitted on or before December 23, 2022.

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\20\
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    \20\ 17 CFR 200.30-3(a)(12).
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Sherry R. Haywood,
Assistant Secretary.
[FR Doc. 2022-26234 Filed 12-1-22; 8:45 am]
BILLING CODE 8011-01-P


