[Federal Register Volume 71, Number 88 (Monday, May 8, 2006)]
[Notices]
[Pages 26797-26804]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E6-6911]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-53743; File No. SR-NASD-2006-045]
Self-Regulatory Organizations; National Association of Securities
Dealers, Inc.; Notice of Filing and Immediate Effectiveness of Proposed
Rule Change Relating to Amendments to Rule 2520 (Margin Requirements)
April 28, 2006.
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 April 3, 2006, 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. NASD has
designated the proposed rule change as constituting a ``non-
controversial'' rule change pursuant to section 19(b)(3)(A) \3\ of the
Act and Rule 19b-4(f)(6) thereunder,\4\ which renders the proposal
effective upon filing with the Commission. The Commission is publishing
this notice to solicit comments on the proposed rule change from
interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ 15 U.S.C. 78s(b)(3)(A).
\4\ 17 CFR 240.19b-4(f)(6). NASD gave the Commission written
notice of its intent to file this proposed rule change on March 24,
2006.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
NASD is proposing to amend NASD Rules 2520 and 2522 that will
revise the margin requirements to (1) recognize specific additional
complex option
[[Page 26798]]
spread strategies for purposes of determining required margin and (2)
amend the provisions relating to ``permitted offsets'' for certain
listed option transactions.
The text of the proposed rule change is below. Proposed new
language is italicized; deletions are in brackets.
* * * * *
2520. Margin Requirements
(a) through (e) No Change.
(f) Other Provisions
(1) No Change.
(2) Puts, Calls and Other Options, Currency Warrants, Currency
Index Warrants and Stock Index Warrants
(A) through (B) No Change.
(C) For purposes of this subparagraph (f)(2), obligations issued by
the United States Government shall be referred to as United States
Government obligations. Mortgage pass-through obligations guaranteed as
to timely payment of principal and interest by the Government National
Mortgage Association shall be referred to as GNMA obligations.
In the case of any put, call, currency warrant, currency index
warrant, or stock index warrant carried ``long'' in a customer's
account that expires in nine months or less, initial margin must be
deposited and maintained equal to at least 100% of the purchase price
of the option or warrant.
Long Listed Option or Warrant With An Expiration Exceeding Nine
Months. In the case of a put, call, index stock group option, or stock
index warrant that is issued by a registered clearing agency, margin
must be deposited and maintained equal to at least 75% of the current
market value of the option or warrant; provided that the option or
warrant has a remaining period to expiration exceeding nine months.
Long OTC Option or Warrant With An Expiration Exceeding Nine
Months. In the case of a[n OTC] put, [or ]call, index stock group
option,[ on a stock or stock index, and a] or stock index warrant[,]
carried long that is not issued by a registered clearing agency[ with
an expiration exceeding 9 months], margin must be deposited and
maintained equal to at least 75% of the option's or warrant's ``in-the-
money'' amount plus 100% of the amount, if any, by which the current
market value of the option or warrant exceeds its ``in-the-money''
amount provided the option or warrant:[. Options or warrants margined
pursuant to this paragraph must:]
(i) [be valued at all times for margin purposes at an amount not to
exceed, the in-the-money amount,]
[(ii) be]is guaranteed by the carrying broker-dealer, [and]
(ii) [(iii) have]has an American-style exercise provision, and
(iii) has a remaining period to expiration exceeding nine months.
(D) through (F) No Change.
(G) (i) through (iv) No Change.
(v) The following requirements set forth the minimum amount of
margin that must be maintained in margin accounts of customers having
positions in components underlying options, and stock index warrants,
when such components are held in conjunction with certain positions in
the overlying option or warrant. The option or warrant must be issued
by a registered clearing agency or guaranteed by the carrying broker/
dealer. In the case of a call or warrant carried in a short position, a
related long position in the underlying component shall be valued at no
more than the call/warrant exercise price for margin equity purposes.
a. Long Option or Warrant Offset. When a component underlying an
option or warrant is carried long (short) in an account in which there
is also carried a long put (call) or warrant specifying equivalent
units of the underlying component, the minimum amount of margin that
must be maintained on the underlying component is 10% of the
[aggregate] option/warrant exercise price plus the ``out-of-the-money''
amount, not to exceed the minimum maintenance required pursuant to
paragraph (c) of this Rule.
b. Conversions. When a call 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 with a long put or warrant
specifying equivalent units of the same underlying component and having
the same exercise price and expiration date as the short call or
warrant, the minimum amount of margin that must be maintained for the
underlying component shall be 10% of the [aggregate] exercise price.
c. Reverse Conversions. When a put or warrant carried in a short
position is covered by a short position in equivalent units of the
underlying component and is also carried with a long call or warrant
specifying equivalent units of the same underlying component and having
the same exercise price and expiration date as the short put or
warrant, the minimum amount of margin that must be maintained for the
underlying component shall be 10% of the [aggregate] exercise price
plus the amount by which the exercise price of the put exceeds the
current market value of the underlying, if any.
d. Collars. When a call or warrant carried in a short position is
covered by a long position in equivalent units of the underlying
component and is also carried with a long put or warrant specifying
equivalent units of the same underlying component and having a lower
exercise price and the same expiration date as the short call/warrant,
the minimum amount of margin that must be maintained for the underlying
component shall be the lesser of 10% of the [aggregate] exercise price
of the put plus the put ``out-of-the-money'' amount or 25% of the call
aggregate exercise price.
e. Butterfly Spread. This subparagraph applies to a butterfly
spread as defined in Rule 2522 where all option positions are issued by
a registered clearing agency or guaranteed by the carrying broker/
dealer.
1. No Change.
2. With respect to a short butterfly spread as defined in Rule
2522, margin must be deposited and maintained equal to at least the
amount of the [aggregate] difference between the two lowest exercise
prices with respect to short butterfly spreads comprised of calls or
the [aggregate] difference between the two highest exercise prices with
respect to short butterfly spreads comprised of puts. The net proceeds
from the sale of short option components may be applied to the
requirement.
f. Box Spread. This subparagraph applies to box spreads as defined
in Rule 2522, where all option positions are issued by a registered
clearing agency or guaranteed by the carrying broker/dealer.
1. With respect to a long box spread as defined in Rule 2522, the
net debit must be paid in full.
2. With respect to a short box spread as defined in Rule 2522,
margin must be deposited and maintained equal to at least the amount of
the [aggregate] difference between the exercise prices. The net
proceeds from the sale of the short option components may be applied to
the requirement.
g. Long Box Spread in European-Style Options. With respect to a
long box spread as defined in Rule 2522, in which all component options
have a European-style exercise provision and are issued by a registered
clearing agency or guaranteed by the carrying broker/dealer, margin
must be deposited and maintained equal to at least 50% of the
[aggregate] difference in the exercise prices. The net proceeds from
the sale of short option components may be applied to the requirement.
For margin purposes, the long box spread may be valued at an amount not
to exceed
[[Page 26799]]
100% of the [aggregate] difference in the exercise prices.
h. Long Condor Spread. This subparagraph applies to a long condor
spread as defined in Rule 2522 where all option positions are issued by
a registered clearing agency or guaranteed by the carrying broker/
dealer. With respect to a long condor spread as defined in Rule 2522,
the net debit must be paid in full.
i. Short Iron Butterfly Spread. This subparagraph applies to a
short iron butterfly spread as defined in Rule 2522 where all option
positions are issued by a registered clearing agency or guaranteed by
the carrying broker/dealer. With respect to a short iron butterfly
spread as defined in Rule 2522, margin must be deposited and maintained
equal to at least the amount of the exercise price interval. The net
proceeds from the sale of short option components may be applied to the
requirement.
j. Short Iron Condor Spread. This subparagraph applies to a short
iron condor spread as defined in Rule 2522 where all option positions
are issued by a registered clearing agency or guaranteed by the
carrying broker/dealer. With respect to a short iron condor spread as
defined in Rule 2522, margin must be deposited and maintained equal to
at least the amount of the exercise price interval. The net proceeds
from the sale of short option components may be applied to the
requirement.
k. Long Calendar Butterfly Spread. This subparagraph applies to a
long calendar butterfly spread as defined in Rule 2522 where all option
positions are issued by a registered clearing agency or guaranteed by
the carrying broker/dealer. With respect to a long calendar butterfly
spread as defined in Rule 2522, the net debit must be paid in full.
l. Long Calendar Condor Spread. This subparagraph applies to a long
calendar condor spread as defined in Rule 2522 where all option
positions are issued by a registered clearing agency or guaranteed by
the carrying broker/dealer. With respect to a long calendar condor
spread as defined in Rule 2522, the net debit must be paid in full.
m. Short Calendar Iron Butterfly Spread. This subparagraph applies
to a short calendar iron butterfly spread as defined in Rule 2522 where
all option positions are issued by a registered clearing agency or
guaranteed by the carrying broker/dealer. With respect to a short
calendar iron butterfly spread as defined in Rule 2522, margin must be
deposited and maintained equal to at least the amount of the exercise
price interval. The net proceeds from the sale of short option
components may be applied to the requirement.
n. Short Calendar Iron Condor Spread. This subparagraph applies to
a short calendar iron condor spread as defined in Rule 2522 where all
option positions are issued by a registered clearing agency or
guaranteed by the carrying broker/dealer. With respect to a short
calendar iron condor spread as defined in Rule 2522, margin must be
deposited and maintained equal to at least the amount of the exercise
price interval. The net proceeds from the sale of short option
components may be applied to the requirement.
(H) through (I) No Change.
(J) (i) Registered specialists, market makers or traders--
Notwithstanding the other provisions of this subparagraph (f)(2), a
member may clear and carry the listed option transactions of one or
more registered specialists, registered market makers or registered
traders in options (whereby[which] registered traders are deemed
specialists for all purposes under the Act, pursuant to the rules of a
national securities exchange) (hereinafter referred to as
``specialist(s)''), upon a ``Good Faith'' margin basis satisfactory to
the concerned parties, provided the ``Good Faith'' margin
requirement[s] is not less than the Net Capital haircut deduction of
the member [organization] carrying the transaction pursuant to SEC Rule
15c3-1 under the Act. In lieu of collecting the ``Good Faith'' margin
requirement, a carrying member [organization] 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 purposes of this paragraph (f)(2)(J), a permitted offset
position means, in the case of an option in which a specialist or
market maker makes a market, a position in the underlying asset or
other related assets, and in the case of other securities in which a
specialist or market maker makes a market, a position in options
overlying the securities in which a specialist or market maker makes a
market. Accordingly, a specialist or market maker in options may
establish, on a share-for-share basis, a long or short position in the
securities underlying the options in which the specialist or market
maker makes a market, and a specialist or market maker in securities
other than options may purchase or write options overlying the
securities in which the specialist or market maker makes a market, if
the account holds the following permitted offset positions:
a. A short option position which [is ``in or at the money'' and] is
not offset by a long or short option position for an equal or greater
number of shares of the same underlying security which is ``in the
money'';
b. A long option position which [is ``in or at the money'' and] is
not offset by a long or short option position for an equal or greater
number of shares of the same underlying security which is ``in the
money'';
c. A short option position against which an exercise notice was
tendered;
d. A long option position which was exercised;
e. A net long position in a security (other than an option) in
which a specialist or market maker makes a market;
f. A net short position in a security (other than an option) in
which the specialist or market maker makes a market; or
g. A specified portfolio type as referred to in SEC Rule 15c3-1,
including its appendices, or any applicable SEC staff interpretation or
no-action position.
Permitted offset transactions must be effected for specialist or
market making purposes such as hedging, risk reduction, rebalancing of
positions, liquidation, or accommodation[s] of customer orders, or
other similar [market making]specialist or market maker purpose. The
specialist or market maker must be able to demonstrate compliance with
this provision.
For purposes of this paragraph (f)(2)(J) [the term ``in or at the
money'' means 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 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; and, 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.
(ii) Securities, including options, in such accounts shall be
valued conservatively in the light of current market prices and the
amount which might be realized upon liquidation. Substantial additional
margin must be required or excess [n]Net [c]Capital maintained in all
cases where the securities carried:
a. through b. No Change.
c. In one or more or all accounts, including proprietary accounts
[[Page 26800]]
combined, are such that they cannot be liquidated promptly or represent
undue concentration of risk in view of the carrying member's [n]Net
[c]Capital and its overall exposure to material loss.
(K) through (L) No Change.
(M) Cash account transactions--A member may make option
transactions in a customer's cash account, provided that:
(i) No Change.
(ii) Spreads. A European-style cash-settled index stock group
option or stock index warrant carried in a short position is deemed a
covered position, and eligible for the cash account, provided a long
position in a European-style cash-settled stock group index option, or
stock index warrant having the same underlying component or index that
is based on the same aggregate current underlying value, is held in or
purchased for the account on the same day, provided that:
a. through b. No Change.
c. There is held in the account at the time the positions are
established, or received into the account promptly thereafter:
1. Cash or cash equivalents of not less than any amount by which
the [aggregate] exercise price of the long call or call warrant (short
put or put warrant) exceeds the [aggregate] exercise price of the short
call or call warrant (long put or put warrant), to which [requirement
of] net proceeds from the sale of the short position may be applied, or
2. An escrow agreement.
The escrow agreement must certify that the bank holds for the
account of the customer as security for the agreement i. cash, ii. cash
equivalents, or iii. a combination thereof having an aggregate market
value at the time the positions are established of not less than any
amount by which the [aggregate] exercise price of the long call or call
warrant (short put or put warrant) exceeds the [aggregate] exercise
price of a short call or call warrant (long put or put warrant) and
that the bank will promptly pay the member such amount in the event the
account is assigned an exercise notice or that the bank will promptly
pay the member funds sufficient to purchase a warrant sold short in the
event of a buy-in.
d. No Change.
(iii) Long Butterfly Spreads, Short Butterfly Spreads, Long Condor
Spreads, Short Iron Butterfly Spreads, or Short Iron Condor Spreads.
Put or call options carried in a short position are deemed covered
positions and eligible for the cash account provided that the account
contains long positions of the same type which in conjunction with the
short options, constitute a long butterfly spread, short butterfly
spread, long condor spread, short iron butterfly spread, or short iron
condor spread as defined in Rule 2522 and provided that:
a. through d. No Change.
e. All components options expire concurrently;
[e]f. With respect to a long butterfly spread or long condor spread
as defined in Rule 2522, the net debit is paid in full; and
[f]g. With respect to a short butterfly spread, short iron
butterfly spread or short iron condor spread as defined in Rule 2522,
there is held in the account at the time the positions are established
or received into the account promptly thereafter:
1. Cash or cash equivalents of not less than the amount of the
[aggregate] difference between the two lowest exercise prices with
respect to short butterfly spreads comprised of call options or the
[aggregate] difference between the two highest exercise prices with
respect to short butterfly spreads comprised [or] of put options, to
which [requirement] the net proceeds from the sale of short option
components may be applied; or
2. An escrow agreement.
The escrow agreement must certify that the bank holds for the
account of the customer as security for the agreement i. cash, ii. cash
equivalents or iii. a combination thereof having an aggregate market
value at the time the positions are established of not less than the
amount of the [aggregate] difference between the two lowest exercise
prices with respect to short butterfly spreads comprised of calls or
the [aggregate] difference between the two highest exercise prices with
respect to short butterfly spreads comprised of puts and that the bank
will promptly pay the member such amount in the event the account is
assigned an exercise notice on the call (put) with the lowest (highest)
exercise price.
(iv) Box Spreads. Puts and calls carried in a short position are
deemed covered positions and eligible for the cash account provided
that the account contains long positions which in conjunction with the
short options constitute a box spread as defined in Rule 2522 provided
that:
a. through d. No Change.
e. All component options expire concurrently;
[e]f. With respect to a long box spread as defined in Rule 2522,
the net debit is paid in full; and
[f]g. With respect to a short box spread as defined in Rule 2522,
there is held in the account at the time the positions are established,
or received into the account promptly thereafter:
1. Cash or cash equivalents of not less than the amount of the
[aggregate] difference between the exercise prices, to which
[requirement] the net proceeds from the sale of short option components
may be applied; or
2. An escrow agreement.
The escrow agreement must certify that the bank holds for the
account of the customer as security for the agreement i. cash, ii. cash
equivalents or iii. a combination thereof having an aggregate market
value at the time the positions are established of not less than the
amount of the [aggregate] difference between the exercise prices and
that the bank will promptly pay the member such amount in the event the
account is assigned an exercise notice on either short option.
(3) through (11) No Change.
* * * * *
2522. Definitions Related to Options, Currency Warrants, Currency
Index Warrants and Stock Index Warrants Transactions.
(a) The following definitions shall apply to the margin
requirements for options, currency warrants, currency index warrants
and stock index warrants transactions:
(1) through (5) No Change.
(6) Box Spread.
The term ``box spread'' means an aggregation of positions in a long
call and short put with the same exercise price (``buy side'') coupled
with a long put and short call with the same exercise price (``sell
side'') [all of which have the same underlying component or index and
time of expirations, and are based on the same aggregate current
underlying value, and are] structured as[;]: (A) a ``long box spread''
in which the sell side exercise price exceeds the buy side exercise
price or (B) a ``short box spread'' in which the buy side exercise
price exceeds the sell side exercise price[.], all of which have the
same contract size, underlying component or index and time of
expiration, and are based on the same aggregate current underlying
value.
(7) through (8) No Change.
(9) Butterfly Spread
The term ``butterfly spread'' means an aggregation of positions in
three series of either puts or calls, [all having the same underlying
component or index, and time of expiration, and based on the same
aggregate current underlying value, where the interval between the
exercise price of each series is equal, which positions are] structured
as either: (A) a ``long butterfly spread'' in which two short options
in the same
[[Page 26801]]
series are offset by one long option with a higher exercise price and
one long option with a lower exercise price or (B) a ``short butterfly
spread'' in which two long options in the same series offset one short
option with a higher exercise price and one short option with a lower
exercise price[.], all of which have the same contract size, underlying
component or index and time of expiration, are based on the same
aggregate current underlying value, where the interval between the
exercise price of each series is equal, and the exercise prices are in
ascending order.
(10) Calendar Spread
The term ``calendar spread'' or ``time spread'' means the sale of
one option and the simultaneous purchase of another option of the same
type, both specifying the same underlying component with the same
exercise price or different exercise prices, where the ``long'' option
expires after the ``short'' option.
(10) through (22) renumbered as (11) through (23).
[(23)](24) Escrow Agreement
The term ``escrow agreement,'' when used in connection with cash
settled calls, puts, currency warrants, currency index warrants, or
stock index warrants carried short, means any agreement issued in a
form acceptable to [the Association]NASD under which a bank holding
cash, cash equivalents, one or more qualified equity securities or a
combination thereof in the case of a call [option] or warrant or cash,
cash equivalents or a combination thereof in the case of a put [option]
or warrant is obligated (in the case of an option) to pay the creditor
the exercise settlement amount in the event an option is assigned an
exercise notice or, (in the case of a warrant) the funds sufficient to
purchase a warrant sold short in the event of a buy-in.
[The term ``escrow agreement'' when used in connection with non
cash settled call or put options carried short, means any agreement
issued in a form acceptable to the Association under which a bank
holding the underlying security (in the case of a call option) or
required cash or cash equivalents or a combination thereof (in the case
of a put option) is obligated to deliver to the creditor (in the case
of a call option) or accept from the creditor (in the case of a put
option) the underlying security against payment of the exercise price
in the event of the call or put is assigned an exercise notice.]
(24) through (40) renumbered as (25) through (41).
(42) Long Calendar Butterfly Spread
The term ``long calendar butterfly spread'' means an aggregation of
positions in three series of either puts or calls, structured as two
short options with the same exercise price, offset by a long option
with a lower exercise price and a long option with a higher exercise
price, all of which have the same contract size, underlying component
or index, are based on the same aggregate current underlying value,
where the interval between the exercise price of each series is equal,
the exercise prices are in consecutive order, and one long option
expires after the other three options expire concurrently. However, a
long calendar butterfly spread cannot be composed of cash-settled,
European-style index options. This strategy can also be considered a
combination of one long calendar spread and one long butterfly spread,
as defined in this rule.
(43) Long Calendar Condor Spread
The term ``long calendar condor spread'' means an aggregation of
positions in four series of either puts or calls, structured as a long
option with the lowest exercise price, two short options with the next
two consecutively higher exercise prices and a long option with the
highest exercise price, all of which have the same contract size,
underlying component or index, are based on the same aggregate current
underlying value, where the interval between the exercise price of each
series is equal, the exercise prices are in consecutive order, and one
long option expires after the other three options expire concurrently.
However, a long calendar condor spread cannot be composed of cash-
settled, European-style index options. This strategy can also be
considered a combination of one long calendar spread and two long
butterfly spreads, as defined in this rule.
(44) Long Condor Spread
The term ``long condor spread'' means an aggregation of positions
in four series of either puts or calls, structured as a long option
with the lowest exercise price, two short options with the next two
consecutively higher exercise prices and a long option with the highest
exercise price, all of which have the same contract size, underlying
component or index and time of expiration, are based on the same
aggregate current underlying value, where the interval between the
exercise price of each series is equal, and the exercise prices are in
consecutive order. This strategy can also be considered a combination
of two long butterfly spreads, as defined in this rule.
(41) through (60) renumbered as (45) through (64).
(65) Short Calendar Iron Butterfly Spread
The term ``short calendar iron butterfly spread'' means an
aggregation of positions in two series of puts and two series of calls,
structured as a short put and a short call with the same exercise
price, offset by a long put with a lower exercise price and a long call
with a higher exercise price, all of which have the same contract size,
underlying component or index, are based on the same aggregate current
underlying value, where the interval between the exercise price of each
series is equal, the exercise prices are in consecutive order, and one
long option expires after the other three options expire concurrently.
However, a short calendar iron butterfly spread cannot be composed of
cash-settled, European-style index options. This strategy can also be
considered a combination of one long calendar spread, one long
butterfly spread, and one short box spread, as defined in this rule.
(66) Short Calendar Iron Condor Spread
The term ``short calendar iron condor spread'' means an aggregation
of positions in two series of puts and two series of calls, structured
as a long put with the lowest exercise price, a short put and a short
call with the next two consecutively higher exercise prices and a long
call with the highest exercise price, all of which have the same
contract size, underlying component or index, are based on the same
aggregate current underlying value, where the interval between the
exercise price of each series is equal, the exercise prices are in
consecutive order, and one long option expires after the other three
options expire concurrently. However, a short calendar iron condor
spread cannot be composed of cash-settled, European-style index
options. This strategy can also be considered a combination of one long
calendar spread, two long butterfly spreads, and one short box spread,
as defined in this rule.
(67) Short Iron Butterfly Spread
The term ``short iron butterfly spread'' means an aggregation of
positions in two series of puts and two series of calls, structured as
a short put and a short call with the same exercise price, offset by a
long put with a lower exercise price and a long call with a higher
exercise price, all of which have the same contract size, underlying
component or index and time of expiration, are based on the same
aggregate current underlying value, where the interval between the
exercise price of each series is equal, and the exercise prices are in
consecutive order. This strategy can also be considered a combination
of one long butterfly spread and one short box spread, as defined in
this rule.
(68) Short Iron Condor Spread
[[Page 26802]]
The term ``short iron condor spread'' means an aggregation of
positions in two series of puts and two series of calls, structured as
a long put with the lowest exercise price, a short put and a short call
with the next two consecutively higher exercise prices, and a long call
with the highest exercise price, all of which have the same contract
size, underlying component or index and time of expiration, are based
on the same aggregate current underlying value, where the interval
between the exercise price of each series is equal, and the exercise
prices are in consecutive order. This strategy can also be considered a
combination of two long butterfly spreads and one short box spread, as
defined in this rule.
(61) through (77) renumbered as (69) through (85).
* * * * *
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, NASD 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. NASD 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
Background
The proposed rule change is consistent with recent margin rule
amendments by the New York Stock Exchange (``NYSE'') and the Chicago
Board Options Exchange (``CBOE''), which were recently approved by the
Commission.\5\ Specifically, NASD is proposing to amend Rule 2520 to
(1) recognize specific additional complex option spread strategies for
purposes of determining required margin and (2) amend the provisions
relating to ``permitted offsets'' for certain listed option
transactions. In addition, NASD is proposing to amend Rule 2522 to
include definitions relating to the proposed rule change described
above as well as certain other conforming definitional and language
changes.
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\5\ See Exchange Act Release No. 52951 (December 14, 2005), 70
FR 75523 (December 20, 2005) (SR-NYSE-2004-39); and Exchange Act
Release No. 52950 (December 14, 2005), 70 FR 75512 (December 20,
2005) (SR-CBOE-2004-53).
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1. Complex Option Spread Strategies
NASD proposes to amend Rule 2520 and the corresponding definitions
in Rule 2522 to recognize specific additional complex option spread
strategies and set margin requirements commensurate with the risk of
such spread strategies. These complex option spread strategies are the
net result of combining two or more spread strategies that are
currently recognized in NASD's margin rules. The netting of contracts
in option series common to each of the currently recognized spreads in
an aggregation reduces it to the complex spread strategies noted below.
Basic option spreads can be paired in such ways that they offset
each other in terms of risk. The total risk of the combined spreads is
less than the sum of the risk of both spread positions if viewed as
stand-alone strategies. The specific complex option spread strategies
listed below are structured using the same principles as, and are
essentially expansions of, the advanced spreads currently allowed in
Rule 2520 and as defined in Rule 2522.
Currently, Rule 2520 recognizes and prescribes margin requirements
for advanced spread strategies known as the ``butterfly spread'' and
the ``box spread.'' However, these option spreads are limited in scope.
The proposed rule change seeks to expand on the types of pairings that
would qualify for butterfly spread and box spread margin treatment. In
addition, Rule 2520 recognizes a ``calendar spread,'' also known as a
``time spread,'' yet it is not identified as such. NASD proposes to
define this term as ``the sale of one option and the simultaneous
purchase of another option of the same type, both specifying the same
underlying component with the same exercise price or different exercise
prices, where the `long' option expires after the `short' option,'' in
Rule 2522 since some of the complex spreads NASD seeks to recognize in
the proposed rule change will include this component of spread
strategies.
To be eligible for the margin requirements set forth below, a
complex spread must be consistent with one of the seven patterns
specified below. The expiration months and the sequence of the exercise
prices must correspond to the same pattern, and the intervals between
the exercise prices must be equal.
Members will be required to obtain initial and maintenance margin
for the subject complex spreads, whether established outright or
through netting, of not less than the sum of the margin required on
each basic spread in the equivalent aggregation.
The basic requirements are as follows: (a) The complex option
spreads must be carried in a margin account; and (b) European-style \6\
options are prohibited for complex spread combinations having a long
option series that expires after the other option series (i.e., those
that involve a time spread such as items 5, 6, and 7 below). Only
American-style options \7\ may be used in these combinations.
Additionally, the intervals between exercise prices must be equal, and
each complex spread must comprise four option series, with the
exception of item 4 below, which must comprise three option series.
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\6\ A European-style option is an option contract that can be
exercised only on its expiration date.
\7\ An American-style option is an option contract that can be
exercised at any time between the date of purchase and its
expiration date.
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The sum of the margin required on each currently recognized spread
in each of the applicable aggregations renders margin requirements for
the subject complex spread strategies as stated below. The additional
complex option spread strategies and maintenance margin requirements
are as follows:
(1) A Long Condor Spread is comprised of two long Butterfly
Spreads. The proposal requires initial and maintenance margin of full
cash payment of the net debit incurred when this spread strategy is
established. Full payment of the net debit incurred will cover any
potential risk to the carrying broker-dealer.
(2) A Short Iron Butterfly Spread is comprised of one long
Butterfly Spread and one short Box Spread. The establishment of a long
Butterfly Spread results in a margin requirement equal to the net debit
incurred. The establishment of a short Box Spread requires margin equal
to the aggregate difference between the exercise prices. The net
proceeds from the sale of short option components may be applied to the
margin requirement. Accordingly, to cover the risk to the carrying
broker-dealer, the proposal requires a deposit of the aggregate
exercise price differential. The net credit received may be applied to
the deposit required.
(3) A Short Iron Condor Spread is comprised of two long Butterfly
Spreads and one short Box Spread. The establishment of long Butterfly
Spreads results in a margin requirement equal to the net debit
incurred. The establishment of a short Box Spread requires margin equal
to the difference in the strike price. Accordingly, to cover the risk
to the carrying broker-dealer,
[[Page 26803]]
the proposal requires a deposit of the aggregate exercise price
differential. The net credit received may be applied to the deposit
required.
(4) A Long Calendar Butterfly Spread is comprised of one long
Calendar Spread and one long Butterfly Spread. The proposal requires
initial and maintenance margin of full cash payment of the net debit
incurred when this spread strategy is established. Full payment of the
net debit incurred will cover any potential risk to the carrying
broker-dealer.
(5) A Long Calendar Condor Spread is comprised of one long Calendar
Spread and two long Butterfly Spreads. The proposal requires initial
and maintenance margin of full cash payment of the net debit incurred
when this spread strategy is established. Full payment of the net debit
incurred will cover any potential risk to the carrying broker-dealer.
(6) A Short Calendar Iron Butterfly Spread is comprised of one long
Calendar Spread plus one long Butterfly Spread and one short Box
Spread. To cover the risk to the carrying broker-dealer, the proposal
requires a deposit of the aggregate exercise price differential. The
net credit received may be applied to the deposit required.
(7) A Short Calendar Iron Condor Spread is comprised of one Long
Calendar Spread plus two long Butterfly Spreads and one short Box
Spread. To cover the risk to the carrying broker-dealer, the proposal
requires a deposit of the aggregate exercise price differential. The
net credit received may be applied to the deposit required.
As noted above, the purpose and benefit is to set levels of margin
that more precisely represent actual net risk of the option positions
in the account and enable customers to implement these strategies more
efficiently.
2. Permitted Offsets
Rule 2520(f)(2)(J) addresses margin requirements for members that
clear and carry the listed options transactions of registered
specialists, registered market makers or registered traders in options,
and recognizes certain offset positions in establishing the margin
requirements. The rule currently limits permitted offsets for these
parties to options series that are ``in or at the money,'' which is
defined to mean ``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.''
Recently, various option exchanges have provided for the listing of
options with one-dollar strike intervals in a number of classes. As a
result, the use of securities to hedge options series that have one-
dollar strike intervals has unintentionally become more restrictive.
The proposed rule change will eliminate the definition of ``in or at
the money,'' thereby eliminating the two standard exercise interval
limitation for listed options. In addition, the proposed rule change
will require permitted offset transactions to be effected for
specialist or market-making purposes such as hedging, risk reduction,
rebalancing of positions, liquidation, or accommodation of customer
orders, or other similar specialist or market-making purposes.
Since clearing firms have risk monitoring systems that alert them
to unhedged positions and haircut requirements pursuant to Rule 15c3-1
of the Act,\8\ which perform a similar function as NASD margin
requirements relative to providing adequate risk coverage to broker-
dealers, elimination of the two-dollar standard exercise price
limitation and definition of ``in or at the money'' will not diminish
the ``safety and soundness'' protections that the margin rules provide.
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\8\ 17 CFR 240.15c3-1.
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This proposed rule change is effective upon filing. The effective
date and the implementation date will be the date of filing.
2. Statutory Basis
NASD believes that the proposed rule change is consistent with the
provisions of section 15A(b)(6) of the Act,\9\ which requires, among
other things, that NASD rules must 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. NASD believes that the proposed rule change will set
margin requirements commensurate with the risk of the identified
options spread strategies and will further promote consistent margin
requirements among the self-regulatory organizations.
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\9\ 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
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Because the foregoing proposed rule change does not: (1)
Significantly affect the protection of investors or the public
interest; (2) impose any significant burden on competition; and (3) by
its terms, become operative for 30 days from the date on which it was
filed, or such shorter time as the Commission may designate if
consistent with the protection of investors and the public interest,
the proposed rule change has become effective pursuant to section
19(b)(3)(A) \10\ of the Act and Rule 19b-4(f)(6) thereunder.\11\
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\10\ 15 U.S.C. 78f(b)(3)(A).
\11\ 17 CFR 240.19b-4(f)(6). Rule 19b-4(f)(6) requires that NASD
give the Commission written notice of NASD's intention to file the
proposed rule change along with a brief description and text of the
proposed rule change at least five business days prior to the date
of the filing of the proposed rule change. The Commission notes that
NASD has satisfied the pre-filing five-day notice requirement.
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A proposed rule change filed under Rule 19b-4(f)(6) \12\ normally
may not become operative prior to 30 days after the date of filing.
However, Rule 19b-4(f)(6)(iii) \13\ permits the Commission to designate
a shorter time if such actions is consistent with the protection of
investors and the public interest. NASD has requested that the
Commission waive the 30-day operative delay and designate the proposed
rule change to become operative on the date of filing with the
Commission, in order to conform NASD's margin rules to the recent rule
changes by the NYSE and CBOE \14\ and to avoid subjecting firms to
conflicting margin requirements. The Commission believes that waiving
the 30-day operative delay is consistent with the protection of
investors and the public interest.\15\
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\12\ Id.
\13\ 17 CFR 240.19b-4(f)(6)(iii).
\14\ See supra note 5.
\15\ For purposes only of waiving the operative delay for this
proposal, the Commission has considered the proposed rule's impact
on efficiency, competition and capital formation. See 15 U.S.C.
78c(f).
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At any time within 60 days of the filing of the proposed rule
change, the Commission may summarily abrogate such rule change if it
appears to the Commission that such action is necessary or appropriate
in the public interest, for the protection of investors,
[[Page 26804]]
or otherwise in furtherance of the purposes of the Act.
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 e-mail to [email protected]. Please include
File No. SR-NASD-2006-045 on the subject line.
Paper Comments
Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-NASD-2006-045. This
file number should be included on the subject line if e-mail is used.
To help the Commission process and review your comments more
efficiently, please use only one method. The Commission will post all
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). Copies of the submission, all subsequent amendments,
all written statements with respect to the proposed rule change that
are filed with the Commission, and all written communications relating
to the proposed rule change between the Commission and any person,
other than those that may be withheld from the public in accordance
with the provisions of 5 U.S.C. 552, will be available for inspection
and copying in the Commission's Public Reference Room. Copies of such
filing also will be available for inspection and copying at the
principal office of NASD. 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-NASD-2006-045 and should be submitted on or before May 30, 2006.
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\16\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\16\
Nancy M. Morris,
Secretary.
[FR Doc. E6-6911 Filed 5-5-06; 8:45 am]
BILLING CODE 8010-01-P