[Federal Register: March 27, 2003 (Volume 68, Number 59)]
[Notices]
[Page 15015-15023]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr27mr03-80]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-47550; File No. SR-NASD-2003-45]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of Proposed Rule Change by National
Association of Securities Dealers, Inc. To Adopt, on a Permanent Basis,
Margin Requirements for Security Futures Contracts Pursuant to NASD
Rule 2520
March 20, 2003.
Pursuant to section 19(b)(1) of the Securities Exchange Act of 1934
(``Act'')\1\ and rule 19b-4 thereunder,\2\ notice is hereby given that
on March 19, 2003, the National Association of Securities Dealers, Inc.
(``NASD''), filed with the Securities and Exchange Commission (``SEC''
or ``Commission'') the proposed rule change as described in items I,
II, and III below, which items have been prepared by NASD. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons and to grant accelerated
approval of the proposed rule change.
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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
NASD proposes to adopt, on a permanent basis, amendments to NASD
Rule 2520 establishing margin requirements for security futures
contracts (``SFCs''). The SEC originally approved these amendments on a
pilot basis (``the Pilot'') until March 6, 2003,\3\ and thereafter
extended the Pilot until March 20, 2003.\4\ NASD believes that the
proposed rule change would make its margin rule consistent with margin
rules already adopted by the SEC, the Commodity Futures Trading
Commission (``CFTC'') and other self-regulatory organizations
(``SROs'') regarding security futures contracts.
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\3\ See Securities Exchange Act Release No. 47244 (January 24,
2003), 68 FR 5317 (February 3, 2003) (SR-NASD-2002-166).
\4\ See Securities Exchange Act Release No. 47470 (March 7,
2003), 68 FR 12397 (March 14, 2003) (SR-NASD-2003-31).
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Specifically, the proposed rule change would: (1) Permit customer
margining of security futures contracts, and establish initial and
maintenance margin requirements for security futures contracts; (2)
allow for initial and maintenance margin levels for offsetting
positions involving security futures contracts and related positions at
lower levels than would be required if
[[Page 15016]]
margined separately; (3) provide for a Market Maker exclusion for
proprietary trades of a ``Security Futures Dealer'' (``SFD'') and allow
for ``good faith'' margin treatment for the accounts of approved
options specialists, market makers, and other specialists; (4) provide
definitions relative to security futures contracts for application of
this rule; (5) provide that security futures contracts transacted in a
futures account shall not be subject to any provisions of NASD Rule
2520; (6) provide for money market mutual funds as defined in rule 2a-7
\5\ under the Investment Company Act of 1940 (the ``ICA''),\6\ to be
used to satisfy margin requirements for security futures contracts
provided certain conditions are met; (7) require that security futures
contracts transacted in a securities account be subject to all other
provisions of NASD rule 2520, particularly Rule 2520(f)(8)(B) (``Day
Trading''); and (8) permit members for which NASD is the Designated
Examining Authority (``DEA'') to participate in the trading of security
futures contracts.
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\5\ 17 CFR 270.2a-7.
\6\ 15 U.S.C. 80a et seq.
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In addition, NASD is proposing non-substantive technical changes to
NASD Rule 2520.\7\
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\7\ See NASD Rule 2520(b)(2); (b)(3); (e)(7)(B); and (e)(8).
Telephone conversation between Patricia Albrecht, Assistant General
Counsel, NASD, and Lisa N. Jones, Attorney, Division of Market
Regulation, Commission, dated March 18, 2003.
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Below is the text of the proposed rule change. Proposed new
language is italicized; proposed deletions are in brackets.
* * * * *
2520. Margin Requirements
(a) Definitions
For the purposes of this paragraph, the following term shall have
the meanings specified below:
(1) The term ``basket'' shall mean a group of stocks that NASD or
any national securities exchange designates as eligible for execution
in a single trade through its trading facilities and that consists of
stocks whose inclusion and relative representation in the group are
determined by the inclusion and relative representation of their
current market prices in a widely-disseminated stock index reflecting
the stock market as a whole.
(2) The term ``current market value'' means the total cost or net
proceeds of a security on the day it was purchased or sold or at any
other time the preceding business day's closing price as shown by any
regularly published reporting or quotation service, except for security
futures contracts (see paragraph (f)(11)(C)(ii)). If there is no
closing price, a member may use a reasonable estimate of the market
value of the security as of the close of business on the preceding
business day.
(3) The term ``customer'' means any person for whom securities are
purchased or sold or to whom securities are purchased or sold whether
on a regular way, when issued, delayed or future delivery basis. It
will also include any person for whom securities are held or carried
and to or for whom a member organization extends, arranges or maintains
any credit. The term will not include the following: (a) a broker or
dealer from whom a security has been purchased or to whom a security
has been sold for the account of the member organization or its
customers, or (b) an ``exempted borrower'' as defined by Regulation T
of the Board of Governors of the Federal Reserve System (``Regulation
T''), except for the proprietary account of a broker/dealer carried by
a member organization pursuant to section (e)(6) of this rule.
(4) The term ``designated account'' means the account of a bank,
trust company, insurance company, investment trust, state or political
subdivision thereof, charitable or nonprofit educational institution
regulated under the laws of the United States or any state, or pension
or profit sharing plan subject to ERISA or of an agency of the United
States or of a state or a political subdivision thereof.
(5) The term ``equity'' means the customer's ownership interest in
the account, computed by adding the current market value of all
securities ``long'' and the amount of any credit balance and
subtracting the current market value of all securities ``short'' and
the amount of any debit balance. Any variation settlement received or
paid on a security futures contract shall be considered a credit or
debit to the account for purposes of equity.
(6) The term ``exempted security'' or ``exempted securities'' has
the meaning as in section 3(a)(12) of the Act.
(7) The term ``margin'' means the amount of equity to be maintained
on a security position held or carried in an account.
(8) The term ``person'' has the meaning as in section 3(a)(9) of
the Act.
(b) Initial Margin
For the purpose of effecting new securities transactions and
commitments, the customer shall be required to deposit margin in cash
and/or securities in the account which shall be at least the greater
of:
(1) the amount specified in regulation T, or rules 400 through 406
under the Act or rules 41.42 through 41.48 under the Commodity Exchange
Act (``CEA''); or
(2) the amount specified in section (c)[(3)] of this rule; or
(3) such greater amount as NASD [the Association] may from time to
time require for specific securities; or
(4) equity of at least $2,000 except that cash need not be
deposited in excess of the cost of any security purchased (this equity
and cost of purchase provision shall not apply to ``when distributed''
securities in a cash account). The minimum equity requirement for a
``pattern day trader'' is $25,000 pursuant to paragraph (f)(8)(B)(iv)a.
of this rule.
Withdrawals of cash or securities may be made from any account
which has a debit balance, ``short'' position or commitments, provided
it is in compliance with regulation T and rules 400 through 406 under
the Act and rules 41.42 through 41.48 under the CEA, and after such
withdrawal the equity in the account is at least the greater of $2,000
($25,000 in the case of a ``pattern day trader'') or an amount
sufficient to meet the maintenance margin requirements of this rule.
(c) Maintenance Margin
The margin that must be maintained in all accounts of customers,
except for cash accounts subject to other provisions of this rule,
shall be as follows:
(1) 25 percent of the current market value of all securities,
except for security futures contracts, ``long'' in the account; plus
(2) $2.50 per share or 100 percent of the current market value,
whichever amount is greater, of each stock ``short'' in the account
selling at less than $5.00 per share; plus
(3) $5.00 per share or 30 percent of the current market value,
whichever amount is greater, of each stock ``short'' in the account
selling at $5.00 per share or above; plus
(4) 5 percent of the principal amount or 30 percent of the current
market value, whichever amount is greater, of each bond ``short'' in
the account.
(5) The minimum maintenance margin levels for security futures
contracts, long and short, shall be 20 percent of the current market
value of such contract. (See paragraph (f) of this rule for other
provisions pertaining to security futures contracts.)
(d) No Change.
[[Page 15017]]
(e) Exceptions to Rule
The foregoing requirements of this rule are subject to the
following exceptions: (1) through (5) No Change.
(6) Broker/Dealer Accounts
(A) A member may carry the proprietary account of another broker/
dealer, which is registered with the Commission, upon a margin basis
which is satisfactory to both parties, provided the requirements of
regulation T and rules 400 through 406 under the Act and rules 41.42
through 41.48 under the CEA are adhered to and the account is not
carried in a deficit equity condition. The amount of any deficiency
between the equity maintained in the account and the haircut
requirements pursuant to SEC rule 15c3-1 shall be charged against the
member's net capital when computing net capital under SEC rule 15c3-1.
(B) No Change.
(7) Nonpurpose Credit
In a nonsecurities credit account, a member may extend and maintain
nonpurpose credit to or for any customer without collateral or on any
collateral whatever, provided:
(A) the account is recorded separately and confined to the
transactions and relations specifically authorized by regulation T;
(B) the account is not used in any way for the purpose of evading
or circumventing any regulation of NASD [the Association] or of the
Board of Governors of the Federal Reserve System and rules 400 through
406 under the Act and rules 41.42 through 41.48 under the CEA; and
(C) the amount of any deficiency between the equity in the account
and the margin required by the other provisions of this paragraph shall
be charged against the member's net capital as provided in SEC rule
15c3-1.
The term ``nonpurpose credit'' means an extension of credit other
than ``purpose credit,'' as defined in section 220.2 of regulation T.
(8) No Change.\8\
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\8\ This provision of the rule text reflects the correction of a
typographical error from the rule text that NASD submitted with the
proposed rule change.
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(f) Other Provisions
(1) through (10) No Change.
(11) Customer Margin rules Relating to Security Futures
(A) Applicability
No member may effect a transaction involving, or carry an account
containing, a security futures contract with or for a customer in a
margin account, without obtaining proper and adequate margin as set
forth in this section. (B) Amount of customer margin.
(i) General rule. As set forth in paragraphs (b) and (c) of this
rule, the minimum initial and maintenance margin levels for each
security futures contract, long and short, shall be twenty (20) percent
of the current market value of such contract.
(ii) Excluded from the rule's requirements are arrangements between
a member and a customer with respect to the customer's financing of
proprietary positions in security futures, based on the member's good
faith determination that the customer is an ``Exempted Person,'' as
defined in rule 401(a)(9) under the Act, and rule 41.43(a)(9) under the
CEA, except for the proprietary account of a broker/dealer carried by a
member pursuant to paragraph (e)(6)(A) of this rule. Once a registered
broker or dealer, or member of a national securities exchange ceases to
qualify as an ``Exempted Person,'' it shall notify the member of this
fact before establishing any new security futures positions. Any new
security futures positions will be subject to the provisions of this
paragraph.
(iii) Permissible Offsets. Notwithstanding the minimum margin
levels specified in paragraph (f)(11)(B)(i) of this rule, customers
with offset positions involving security futures and related positions
may have initial or maintenance margin levels (pursuant to the offset
table below) that are lower than the levels specified in paragraph
(f)(11)(B)(i) of this rule.
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Security underlying the Initial margin Maintenance margin
Description of offset security future requirement requirement
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(1) Long security future (or Individual stock or 20 percent of the The lower of: (1) 10
basket of security futures narrow-based security current market value of percent of the
representing each component of a index. the long security aggregate exercise
narrow-based securities index) future, plus pay for price of the put plus
and long put option on the same the long put in full. the aggregate put out-
underlying security (or index). of-the-money amount, if
any; or (2) 20 percent
of the current market
value of the long
security future.
(2) Short security future (or Individual stock or 20 percent of the 20 percent of the
basket of security futures narrow-based security current market value of current market value of
representing each component of a index. the short security the short security
narrow-based securities index) future, plus the future, plus the
and short put option on the same aggregate put-in-the- aggregate put in-the-
underlying security (or index). money amount, if any. money amount, if any.
Proceeds from the put
sale may be applied.
(3) Long security future and Individual stock or The initial margin 5 percent of the current
short position in the same narrow-based security required under market value as defined
security (or securities basket) index. Regulation T for the in Regulation T of the
underlying the security future. short stock or stocks. stock or stocks
underlying the security
future.
(4) Long security future (or Individual stock or 20 percent of the 20 percent of the
basket of security futures narrow-based security current market value of current market value of
representing each component of a index. the long security the long security
narrow-based securities index) future, plus the future, plus the
and short call option on the aggregate call-in-the- aggregate call in-the-
same underlying security (or money amount, if any. money amount, if any.
index). Proceeds from the call
sale may be applied.
(5) Long a basket of narrow-based Narrow-based security 20 percent of the 20 percent of the
security futures that together index. current market value of current market value of
tracks a broad-based index and the long basket of the long basket of
short a broad-based security narrow-based security narrow-based security
index call option contract on futures, plus the futures, plus the
the same index. aggregate call in-the- aggregate call in-the-
money amount, if any. money amount, if any.
Proceeds from the call
sale may be applied.
[[Page 15018]]
(6) Short based of narrow-based Narrow-based security 20 percent of the 20 percent of the
security futures that together index. current market value of current market value of
tracks a broad-based security the short basket of the short basket of
index and short a broad-based narrow-based security narrow-based security
security index put option futures, plus the futures, plus the
contract on the same index. aggregate put in-the- aggregate put in-the-
money amount, if any. money amount, if any.
Proceeds from the put
sale may be applied.
(7) Long a basket of narrow-based Narrow-based security 20 percent of the The lower of: (1) 10
security futures that together index. current market value of percent of the
tracks a broad-based security the long basket of aggregate exercise
index and long a broad-based narrow-based security price of the put, plus
security index put option futures, plus pay for the aggregate put out-
contract on the same index. the long put in full. of-the-money amount, if
any; or (2) 20 percent
of the current market
value of the long
basket of security
futures.
(8) Short a basket of narrow- Narrow-based security 20 percent of the The lower of: (1) 10
based security futures that index. current market value of percent of the
together tracks a broad-based the short basket of aggregate exercise
security index and long a broad- narrow-based security price of the call, plus
based security index call option futures, plus pay for the aggregate call out-
contract on the same index. the long call in full. of-the-money amount, if
any; or (2) 20 percent
of the current market
value of the short
basket of security
futures.
(9) Long security future and Individual stock or The greater of: 5 The greater of: 5
short security future on the narrow-based security percent of the current percent of the current
same underlying security (or index. market value of the market value of the
index). long security future; long security future;
or (2) 5 percent of the or (2) 5 percent of the
current market value of current market value of
the short security the short security
future. future.
(10) Long security future, long Individual stock or 20 percent of the 10 percent of the
put option and short call narrow-based security current market value of aggregate exercise
option. The long security index. the long security price, plus the
future, long put and short call future, plus the aggregate call in-the-
must be on the same underlying aggregate call in-the- money amount, if any.
security and the put and call money amount, if any,
must have the same exercise plus pay for the put in
price (Conversion). full. Proceeds from the
call sale may be
applied.
(11) Long security future, long Individual stock or 20 percent of the The lower of: (1) 10
put option and short call narrow-based security current market value of percent of the
option. The long security index. the long security aggregate exercise
future, long put and short call future, plus the price of the put plus
must be on the same underlying aggregate call in-the- the aggregate put out-
security and the put exercise money amount, if any, of-the-money amount, if
price must be below the call plus pay for the put in any; or (2) 20 percent
exercise price (Collar). full. Proceeds from of the aggregate
call sale may be exercise price of the
applied. call, plus the
aggregate call in-the-
money amount, if any.
(12) Short security future and Individual stock or The initial margin 5 percent of the current
long position in the same narrow-based security required under market value, as
security (or securities basket) index. Regulation T for the defined in Regulation
underlying the security future. long security or T, of the long stock or
securities. stocks.
(13) Short security future and Individual stock or The initial margin 10 percent of the
long position in a security narrow-based security required under current market value,
immediately convertible into the index. Regulation T for the as defined in
same security future, without long seucrity or Regulation T, of the
restriction, including the securities. long stock or stocks.
payment of money.
(14) Short security future (or Individual stock or 20 percent of the The lower of: (1) 10
basket of security futures narrow-based security current market value of percent of the
representing each component of a index. the short security aggregate exercise
narrow-based securities index) future, plus pay for price of the call, plus
and long call option or warrant the call in full. the aggregate call out-
on the same underlying security of-the-money amount, if
(or index). any; or (2) 20 percent
of the current market
value of the short
security future.
(15) Short security future, short Individual stock or 20 percent of the 10 percent of the
put option and long call option. narrow-based security current market value of aggregate exercise
The short security future, short index. the short security price, plus the
put and long call must be on the future, plus the aggregate put in-the-
same underlying security and the aggregate put in-the- money amount, if any.
put and call must have the same money amount, if any,
exercise price (Reverse plus pay for the call
Conversion). in full. Proceeds from
put sale may be applied.
(16) Long (short) a security Individual stock and The greater of: (1) 3 The greater of: (1) 3
future and short (long) an narrow-based security percent of the current percent of the current
identical \9\ security future index. market value of the market value of the
traded on a different market. long security long security
future(s); or (2) 3 future(s); or (2) 3
percent of the current percent of the current
market value of the market value of the
short security short security
future(s). future(s).
[[Page 15019]]
(17) Long (short) a basket of Individual stock or Threater of: (1) 5 The greater of: (1) 5
security futures that together narrow-based security percent of the current percent of the current
tracks a narrow-based index and index. market value of the market value of the
short (long) a narrow-based long security long security
index future. future(s); or (2) 5 future(s); or (2) 5
percent of the current percent of the current
market value of the market value of the
short security short security
future(s). future(s).
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(C) Definitions. For the purposes of paragraph (f)(11) of this rule
and the offset table noted above, with respect to the term ``security
futures contracts,'' the following terms shall have the meanings
specified below:
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\9\ Two security futures contracts will be considered
``identical'' for this purpose if they are issued by the same
clearing agency or cleared and guaranteed by the same derivatives
clearing organization, have identical specifications, and would
offset each other at the clearing level.
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(i) The term ``security futures contract'' means a ``security
future'' as defined in section 3(a)(55) of the Act.
(ii) The term ``current market value'' has the same meaning as
defined in rule 401(a)(4) under the Act and rule 41.43(a)(4) under the
CEA.
(iii) The term ``underlying security'' means, in the case of
physically settled security futures contracts, the security that is
delivered upon expiration of the contract, and, in the case of cash
settled security futures contracts, the security or securities index
the price or level of which determines the final settlement price for
the security futures contract upon its expiration.
(iv) The term ``underlying basket'' means, in the case of a
securities index, a group of security futures contracts where the
underlying securities as defined in subparagraph (iii) above include
each of the component securities of the applicable index and that meets
the following conditions: (1) The quantity of each underlying security
is proportional to its representation in the index, (2) the total
market value of the underlying securities is equal to the aggregate
value of the applicable index, (3) the basket cannot be used to offset
more than the number of contracts or warrants represented by its total
market value, and (4) the security futures contracts shall be
unavailable to support any other contract or warrant transaction in the
account.
(v) The term ``underlying stock basket'' means a group of
securities that includes each of the component securities of the
applicable index and that meets the following conditions: (1) The
quantity of each stock in the basket is proportional to its
representation in the index, (2) the total market value of the basket
is equal to the underlying index value of the index options or warrants
to be covered, (3) the securities in the basket cannot be used to cover
more than the number of index options or warrants represented by that
value, and (4) the securities in the basket shall be unavailable to
support any other option or warrant transaction in the account.
(vi) The term ``variation settlement'' has the same meaning as
defined in rule 401(a) under the Act and rule 41.43(a)(32) under the
CEA.
(D) Security Futures Dealers' Accounts
(i) Notwithstanding the other provisions of this paragraph (f)(11),
a member may carry and clear the market maker permitted offset
positions (as defined below) of one or more security futures dealers in
an account that is limited to market maker transactions, upon a ``Good
Faith'' margin basis that is satisfactory to the concerned parties,
provided the ``Good Faith'' margin requirement is not less than the Net
Capital haircut deduction of the member carrying the transaction
pursuant to rule 15c3-1 under the Act. In lieu of collecting the ``Good
Faith'' margin requirement, a carrying member may elect to deduct in
computing its Net Capital the amount of any deficiency between the
equity maintained in the account and the ``Good Faith'' margin
required.
For the purpose of this paragraph (f)(11)(D), the term ``security
futures dealer'' means (1) a member or member organization of a
national securities exchange or a national securities association
registered pursuant to section 15A(a) of the Act; (2) is registered
with such exchange or association as a security futures dealer pursuant
to rules that are effective in accordance with section 19(b)(2) of the
Act and, as applicable section 5c(c) of the CEA, that: (a) Requires
such member or member organization to be registered as a floor trader
or a floor broker with the CFTC under section 4f(a)(1) of the CEA, or
as a dealer with the Commission under section 15(b) of the Act; (b)
requires such member or member organization to maintain records
sufficient to prove compliance with the rules of the exchange or
association of which it is a member; (c) requires such member or member
organization to hold itself out as being willing to buy and sell
security futures for its own account on a regular and continuous basis;
and (d) provides for disciplinary action, including revocation of such
member's or member organization's registration as a security futures
dealer, for such member's or member organization's failure to comply
with rule 400 through 406 of the Act and rules 41.42 through 41.49 of
the CEA or the rules of the exchange or association of which the
security futures dealer is a member or member organization.
(ii) For purposes of this paragraph (f)(11)(D), a permitted offset
position means in the case of a security futures contract in which a
security futures dealer makes a market, a position in the underlying
asset or other related assets, or positions in options overlying the
asset or related assets. Accordingly, a security futures dealer may
establish a long or short position in the assets underlying the
security futures contracts in which the security futures dealer makes a
market, and may purchase or write options overlying those assets if the
account holds the following permitted offset positions:
a. A long position in the security futures contract or underlying
asset offset by a short option position that is ``in or at the money;''
b. A short position in the security futures contract or underlying
asset offset by a long option position that is ``in or at the money;''
c. A position in the underlying asset resulting from the assignment
of a market-maker short option position or making delivery in respect
of a short security futures contract;
d. A position in the underlying asset resulting from the assignment
of a market-maker long option position or taking delivery in respect of
a long security futures contract;
e. A net long position in a security futures contract in which a
security futures dealer makes a market or the underlying asset;
f. A net short position in a security futures contract in which a
security futures dealer makes a market or the underlying asset; or
[[Page 15020]]
g. An offset position as defined in rule 15c3-1 under the Act,
including its appendices, or any applicable SEC staff interpretation or
no-action position.
(E) Approved Options Specialists' or Market Maker Accounts
(i) Notwithstanding the other provisions of (f)(11) and (f)(2)(J),
a member may carry and clear the market maker permitted offset
positions (as defined below) of one or more approved options
specialists or market makers in an account that is limited to approved
options specialist or market maker transactions, upon a ``Good Faith''
margin basis that is satisfactory to the concerned parties, provided
the ``Good Faith'' margin requirement is not less than the Net Capital
haircut deduction of the member carrying the transaction pursuant to
rule 15c3-1 under the Act. In lieu of collecting the ``Good Faith''
margin requirement, a carrying member may elect to deduct in computing
its Net Capital the amount of any deficiency between the equity
maintained in the account and the ``Good Faith'' margin required. For
the purpose of this paragraph (f)(11)(E), the term ``approved options
specialist or market maker'' means a specialist, market maker, or
registered trader in options as referenced in paragraph (f)(2)(J) of
this rule, who is deemed a specialist for all purposes under the Act
and who is registered pursuant to the rules of a national securities
exchange.
(ii) For purposes of this paragraph (f)(11)(E), a permitted offset
position means a position in the underlying asset or other related
assets. Accordingly, a specialist or market maker may establish a long
or short position in the assets underlying the options in which the
specialist or market maker makes a market, or a security futures
contract thereon, if the account holds the following permitted offset
positions:
a. A long position in the underlying instrument or security futures
contract offset by a short option position that is ``in or at the
money;''
b. A short position in the underlying instrument or security
futures contract offset by a long option position that is ``in or at
the money;''
c. A stock position resulting from the assignment of a market-maker
short option position or delivery in respect of a short security
futures contract;
d. A stock position resulting from the exercise of a market maker
long option position or taking delivery in respect of a long security
futures contract;
e. A net long position in a security (other than an option) in
which the market maker makes a market;
f. A net short position in a security (other than an option) in
which the market maker makes a market; or
g. An offset position as defined in rule 15c3-1 under the Act,
including its appendices, or any applicable SEC staff interpretation or
no-action position.
(iii) For purposes of paragraphs (f)(11)(D) and (E), the term ``in
or at the money'' means that the current market price of the underlying
security is not more than two standard exercise intervals below (with
respect to a call option) or above (with respect to a put option) the
exercise price of the option; the term ``in the money'' means that the
current market price of the underlying asset or index is not below
(with respect to a call option) or above (with respect to a put option)
the exercise price of the option; the term ``overlying option'' means a
put option purchased or a call option written against a long position
in an underlying asset; or a call option purchased, or a put option
written against a short position in an underlying asset.
(iv) Securities, including options and security futures contracts,
in such accounts shall be valued conservatively in light of current
market prices and the amount that might be realized upon liquidation.
Substantial additional margin must be required or excess Net Capital
maintained in all cases where the securities carried: (a) Are subject
to unusually rapid or violent changes in value including volatility in
the expiration months of options or security futures contracts, (b) do
not have an active market, or (c) in one or more or all accounts,
including proprietary accounts combined, are such that they cannot be
liquidated promptly or represent undue concentration of risk in view of
the carrying member's Net Capital and its overall exposure to material
loss.
(F) Approved Specialists' Accounts--others
(i) Notwithstanding the other provisions of (f)(11) and (f)(2)(J),
a member may carry the account of an ``approved specialist,'' which
account is limited to specialist transactions including hedge
transactions with security futures contracts upon a margin basis that
is satisfactory to both parties. The amount of any deficiency between
the equity in the account and haircut requirement pursuant to rule
15c3-1 shall be charged against the member's net capital when computing
net capital under SEC rule 15c3-1.
(ii) For purposes of this paragraph (f)(11)(F), the term ``approved
specialist'' means a specialist who is deemed a specialist for all
purposes under the Act and who is registered pursuant to the rules of a
national securities exchange.
(G) Additional Requirements
(i) Money market mutual funds, as defined in rule 2a-7 under the
Investment Company Act of 1940, can be used for satisfying margin
requirements under this paragraph (f)(11), provided that the
requirements of rule 404(b) under the Act and rule 46(b)(2) under the
CEA are satisfied.
(ii) Day trading of security futures is subject to the minimum
requirements of this rule. If deemed a pattern day-trader, the customer
must maintain equity of $25,000. The 20 percent requirement, for
security futures contracts, should be calculated based on the greater
of the initial or closing transaction and any amount exceeding NASD
excess must be collected. The creation of a customer call subjects the
account to all the restrictions contained in rule 2520(f)(8)(B).
(iii) The use of the ``time and tick'' method is based on the
member's ability to substantiate the validity of the system used.
Lacking this ability dictates the use of the aggregate method.
(iv) Security futures contracts transacted or held in a futures
account shall not be subject to any provision of this rule.
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 and is set forth in sections A, B, and C below.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Background
The CFTC and SEC have adopted customer margin requirements for SFCs
(``SEC/CFTC Margin Regulations'') \10\ pursuant to authority delegated
to them by the Federal Reserve Board (``FRB'') under section 7(c)(2)(B)
of the Act.\11\ As noted in the adopting release,\12\ section 7(c)(2)
of the Act provides that the
[[Page 15021]]
customer margin requirements for SFCs must satisfy four requirements:
(1) They must preserve the financial integrity of markets trading SFCs;
(2) they must prevent systemic risk; (3) they must (a) be consistent
with the margin requirements for comparable options traded on an
exchange registered pursuant to section 6(a) of the Act,\13\ and (b)
provide for initial and maintenance margin that are not lower than the
lowest level of margin, exclusive of premium, required for comparable
exchange traded options; and (4) they must be and remain consistent
with the margin requirements established by the FRB under Regulation
T.\14\ These margin regulations became effective on September 13, 2002.
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\10\ 17 CFR 242.400 through 406.
\11\ 15 U.S.C. 78g(c)(2)(B).
\12\ Securities Exchange Act Release No. 46292 (August 1, 2002),
67 FR 53146 (August 14, 2002).
\13\ 15 U.S.C. 78f.
\14\ 12 CFR 220.
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Subsequent to the adoption of the SEC/CFTC Margin Regulations, NASD
filed proposed amendments to NASD rule 2520.\15\ On January 24, 2003,
the Commission approved the amendments on a pilot basis until March 6,
2003.\16\ On March 5, 2003, the Commission extended the Pilot until
March 20, 2003, to allow the Pilot to permit customers to continue
trading SFCs on an uninterrupted basis in securities accounts while
NASD considered the comments it received on the Pilot.\17\
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\15\ On March 6, 2003, the Commission approved a proposed rule
change by the NYSE to adopt, on a permanent basis, margin
requirements for security futures contracts pursuant to NYSE Rule
431. See Securities Exchange Act Release No. 47460, 68 FR 12123
(March 13, 2003) (SR-NYSE-2003-05).
\16\ See supra note 3.
\17\ See supra note 4.
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Among the amendments approved as part of the Pilot was new NASD
rule 2520(f)(11) (``Customer Margin Rules Relating to Security
Futures''), which provides that SFCs transacted in a securities account
be subject to all other provisions of NASD rule 2520, including
2520(f)(8)(B) (``Day Trading''). Also approved as part of the Pilot
were NASD rule 2520(f)(11)(D) (``Security Futures Dealers' Accounts''),
rule 2520(f)(11)(E) (``Approved Options Specialists' or Market Makers'
Accounts''), and rule 2520(f)(11)(F) (``Approved Specialists''
Accounts--others''). Under the Pilot, NASD rule 2520 permits ``good
faith'' margin treatment for specified hedged offset positions carried
in the accounts noted above.
However, unlike the SFD rules of other SROs,\18\ The Pilot permits
members to accord offset treatment in accounts carried for such
specialists, market makers, and SFDs only when their activity is
limited to bona fide specialist or market making transactions. The
limitations imposed are consistent with NASD's belief that market
makers bear the primary responsibility and obligation to maintain fair
and orderly markets, and provide liquidity to the marketplace.
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\18\ See e.g., Securities Exchange Act Release No. 46555
(September 26, 2002), 67 FR 61707 (October 1, 2002) (SR-OC-2002-01).
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Discussion of Comments Received
NASD received one comment letter on the Pilot from the Chicago
Board Options Exchange, Inc. (``CBOE'').\19\ In its letter, the CBOE
requested that the Commission not grant permanent approval of NASD's
rule as proposed and approved on a pilot basis, unless NASD amended the
rule to exempt SFCs from its day trading provisions and deleted
references to the term ``bona fide'' in connection with market maker or
specialist transactions.
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\19\ See letter from Edward J. Joyce, President and Chief
Operating Officer (``COO''), CBOE, to Jonathan G. Katz, Secretary,
Commission, dated December 20, 2002. CBOE's December 20, 2002
comment letter on NASD's Pilot is a resubmission of its December 9,
2002 comment letter regarding the NYSE's proposed amendments to NYSE
Rule 431 relating to margin requirements for security futures
contracts. See Securities Exchange Act Release No. 46782 (November
7, 2003), 67 FR 69052 (November 14, 2002) (SR-NYSE-2002-53). The
CBOE stated that because the proposed amendments were so similar in
nature, its comments on the NYSE's proposed amendments were
applicable to NASD's proposed rule change. On March 6, 2003, the
Commission approved on a permanent basis amendments to NYSE Rule 431
to incorporate security futures contracts. Securities Exchange Act
Release No. 47460, 68 FR 12123 (March 13, 2003) (SR-NYSE-2003-05).
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Under the proposed rule change, NASD's day trading margin
requirements would apply to SFCs carried in securities accounts. The
CBOE believes that day trading provisions should not apply to such
accounts because it would create a disparity that the CFMA was designed
to eliminate. In this regard, CBOE's letter states that the SEC and
CFTC did not impose day trading margin requirements on SFCs carried in
futures and securities accounts. The CBOE argues that since similar
margin rules recently approved by the Commission do not impose day
trading margin requirements on SFCs carried in futures accounts,
permanent approval of NASD's proposed rule would lead to a regulatory
disparity the CFMA was designed to prevent.
NASD states that, in proposing its rule amendment on the
application of day trading margin requirements to SFCs carried in
securities accounts, it did not intend to create a regulatory disparity
with other SRO rules. However, NASD notes that SRO rules can be more
stringent than those of the Commission. While NASD is guided by the
Commission's rules in proposing its rules, NASD has latitude to
promulgate more stringent rules when it believes they are necessary for
the protection of investors. In this regard, NASD believes that the
application of day trading margin requirements of NASD rule 2520 to
SFCs is consistent with the treatment of all securities transacted in a
margin account under this rule. Accordingly, NASD proposes to apply
NASD's day trading margin requirements to SFCs carried in securities
accounts.
The CBOE also believes that NASD should delete the term ``bona
fide'' in connection with market maker or specialist transactions. The
CBOE commented that NASD does not define the term ``bona fide'' nor
does it use the term in relation to the other provisions of its margin
rule relating to market maker and specialist transactions.
In response to these comments, NASD is proposing to amend the rule
text by deleting the term ``bona fide'' in connection with specialist
or market maker transactions. In proposing such language under the
Pilot, it was NASD's intent to permit good faith margin treatment for
off-setting positions that were effected by specialists or market
makers in discharging the primary responsibilities noted above in its
original filing, rather than to permit persons other than qualified
market makers to act in such a capacity--hence, the term ``bona fide''
in connection with specialist and market making transactions. Upon
consideration, and in order to be consistent with similar rules
proposed by other SROs, NASD will not use the term ``bona fide'' and
instead incorporate the definition of an SFD as referenced in rule
400(c)(2)(v) \20\ under the Act to clarify what constitutes a SFD for
purposes of the rule. Notwithstanding this amendment, NASD reiterates
that good faith margin treatment will be permitted only for
transactions effected by SFDs in discharging their responsibilities and
obligations to maintain fair and orderly markets, and to provide
liquidity to the marketplace.
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\20\ 17 CFR 240.400(c)(2)(v).
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2. Statutory Basis
NASD believes that the proposed rule change is consistent with the
provisions of section 15A(b)(6) of the Act,\21\ which requires, among
other things, that NASD's rules be designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, and, in general, to protect investors and the
public interest.
[[Page 15022]]
NASD believes that the proposed rule change is designed to accomplish
these goals by permitting customers to trade SFCs in securities
accounts.
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\21\ 15 U.S.C. 78o-3(b)(6).
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B. Self-Regulatory Organization's Statement on Burden on Competition
NASD does not believe that the proposed rule change will result in
any burden on competition that is 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
NASD received written comments from the CBOE on the original
proposed rule change that was filed with the Commission on November 15,
2002 and amended on January 15, 2003. NASD has responded to the CBOE's
comments and hereby amends its original rule proposal filed with the
Commission on November 15, 2002.
III. 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. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street NW., Washington, DC 20549-0609.
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 inspection and copying in the
Commission's Public Reference Room. Copies of such filing will also be
available for inspection and copying at the principal office of the
NASD. All submissions should refer to File No. SR-NASD-2003-45 and
should be submitted by April 17, 2003.
IV. Commission Findings and Order Granting Accelerated Approval of a
Proposed Rule Change
The NASD has asked that the Commission approve the proposed rule
change prior to the thirtieth day after publication of notice of the
filing in the Federal Register to accommodate the continuance of
trading of security futures in securities accounts pursuant to NASD
rule 2520 on an uninterrupted basis after the Pilot ends on March 20,
2003. The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a national securities association. In
particular, the Commission believes that the proposed rule change is
consistent with the requirements of 15A(b)(6) of the Act,\22\ which
requires, among other things, that the rules of NASD be designed to
promote just and equitable principles of trade and, in general, to
protect investors and the public interest.\23\ In addition, the
Commission believes that the proposed rule change is consistent with
section 7(c)(2)(B) of the Act,\24\ which provides, among other things,
that the margin requirements for security futures must preserve the
financial integrity of markets trading security futures, prevent
systemic risk, be consistent with the margin requirements for
comparable exchange-traded options, and provide that the margin levels
for security futures may be no lower than the lowest level of margin,
exclusive of premium, required for any comparable exchange-traded
option.
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\22\ Id.
\23\ In approving the proposed rule, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. 15 U.S.C. 78c(f).
\24\ 15 U.S.C. 78g(c)(2)(B).
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The Commission believes that the rule change is generally
consistent with the customer margin rules for security futures adopted
by the Commission and the CFTC. In particular, the Commission notes
that, consistent with rule 403 under the Act, the rule change provides
for a minimum margin level of 20% of current market value for all
positions in security futures carried in a securities account. The
Commission believes that 20% is the minimum margin level necessary to
satisfy the requirements of section 7(c)(2)(B) of the Act. Rule 403
under the Act \25\ also provides that a national securities association
may set margin levels lower than 20% of the current market value of the
security future for an offsetting position involving security futures
and related positions, provided that an association's margin levels for
offsetting positions meet the criteria set forth in section 7(c)(2)(B)
of the Act. The offsets proposed by NASD are consistent with the
strategy-based offsets permitted for comparable offset positions
involving exchange-traded options and therefore consistent with section
7(c)(2)(B) of the Act.
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\25\ 17 CFR 240.403(b)(2).
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In addition, the Commission believes it is consistent with the Act
for NASD to exclude from its margin requirements positions in SFCs
carried in a futures account. The Commission believes that by choosing
to exclude such positions from the scope of rule 2520, NASD's proposal
will make compliance by members with the regulatory requirements of
several SROs easier. Moreover, as proposed, NASD members will accord
``good faith'' margin treatment to specified offsetting positions
involving security futures, carried in a securities account for an SFD,
consistent with the customer margin rules for security futures adopted
by the Commission and the CFTC.
After careful consideration of the commenter's concern about
applying NASD's day trading margin requirements to SFCs, the Commission
believes that it is reasonable for NASD to impose day trading margin
requirements on its members with respect to SFCs carried in a
securities account. As NASD noted, an SRO may adopt more stringent
requirements than those promulgated by the Commission.
The Commission has also carefully considered the commenter's
concern of using the term ``bona fide'' with respect to market maker or
specialist transactions. The Commission notes that NASD has deleted the
term ``bona fide'' in reference to market maker or specialist
transactions, and instead is incorporating the definition of an SFD in
rule 400(c)(2)(v) under the Act. The Commission believes that if it
finds, in approving an SRO's rules for SFDs, that such rules are
consistent with the definition of SFD in rule 400(c)(2)(v), those rules
would also be consistent with NASD rule 2520 (f)(11)(D). Therefore, the
Commission believes this amendment should address the commenter's
concerns that NASD not impose a higher standard on transactions by
market maker and specialist registered pursuant to rules of another SRO
to qualify for favorable margin treatment.
The Commission finds good cause for approving the proposed rule
change prior to the thirtieth day after the date of publication of
notice of filing thereof in the Federal Register. The Commission
believes that accelerated approval of the proposed rule change should
enable NASD members to continue to trade SFCs in securities accounts on
an uninterrupted basis. In addition, the Commission believes that
granting accelerated approval to the proposed rule change should
clarify NASD members' obligations under NASD rule 2520 with respect to
their
[[Page 15023]]
trading in SFCs. The Commission notes it approved NASD's original
filing as a temporary pilot to give members of the public an
opportunity to comment on the substance of the proposed rule change
before it requests permanent approval. The NASD has responded to the
comments received, as described above. Accordingly, the Commission
finds good cause, consistent with section 19(b)(2) of the Act, to
approve the proposed rule change prior to the thirtieth day after
publication of the notice of filing.
V. Conclusion
It is therefore ordered, pursuant to section 19(b)(2) of the
Act,\26\ that the proposed rule change (File No. SR-NASD-2003-45) be
approved.
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\26\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\27\
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\27\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-7311 Filed 3-26-03; 8:45 am]
BILLING CODE 8010-01-P