[Federal Register Volume 75, Number 244 (Tuesday, December 21, 2010)]
[Notices]
[Pages 80099-80101]
From the Federal Register Online via the Government Publishing 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\3\ Amendment No. 1 to SR-CBOE-2010-106 replaced and superseded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 [email protected]. 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