[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