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Joint Proposed Rule:
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| DESCRIPTION OF OFFSET | SECURITY UNDERLYING THE SECURITY FUTURE | INITIAL MARGIN REQUIREMENT | MAINTENANCE MARGIN REQUIREMENT | |
1 |
Long security future or short security future | Individual stock or narrow-based security index | 20% current market value of the security future. | 20% current market value of the security future. |
2 |
Long security future (or basket of security futures representing each component of a narrow-based securities index84) and long put option85 on the same underlying security (or index) | Individual stock or narrow-based security index | 20% of the current market value of the long security future, plus pay for the long put in full. | The lower of: (1) 10% of the aggregate exercise price86 of the put plus the aggregate put out-of-the-money87 amount, if any; or (2) 20% of the current market value of the long security future. |
3 |
Short security future (or basket of security futures representing each component of a narrow-based securities index) and short put option on the same underlying security (or index) | Individual stock or narrow-based security index | 20% of the current market value of the short security future, plus the aggregate put in-the-money amount, if any. Proceeds from the put sale may be applied. | 20% of the current market value of the short security future, plus the aggregate put in-the-money amount, if any. 88 |
4 |
Long security future and short position in the same security (or securities basket) underlying the security future | Individual stock or narrow-based security index | The initial margin required under Regulation T for the short stock or stocks. | 10% of the current market value as defined in Regulation T of the stock or stocks underlying the security future. |
5 |
Long security future (or basket of security futures representing each component of a narrow-based securities index) and Short call option on the same underlying security (or index) | Individual stock or narrow-based security index | 20% of the current market value of the long security future, plus the aggregrate call in-the-money amount, if any. Proceeds from the call sale may be applied. | 20% of the current market value of the long security future, plus the aggregate call in-the-money amount, if any. |
6 |
Long a basket of narrow-based security futures that together tracks a broad based index and short a broad-based security index call option contract on the same index | Narrow-based security index | 20% of the current market value of the long basket of narrow-based security futures, plus the aggregate call in-the-money amount, if any. Proceeds from the call sale may be applied. | 20% of the current market value of the long basket of narrow-based security futures, plus the aggregate call in-the-money amount, if any. |
7 |
Short a basket of narrow-based security futures that together tracks a broad-based security index and short a broad-based security index put option contract on the same index | Narrow-based security index | 20% of the current market value of the short basket of narrow-based security futures, plus the aggregate put in-the-money amount, if any. Proceeds from the put sale may be applied. | 20% of the current market value of the short basket of narrow-based security futures, plus the aggregate put in-the-money amount, if any. |
8 |
Long a basket of narrow-based security futures that together tracks a broad-based security index and long a broad-based security index put option contract on the same index | Narrow-based security index | 20% of the current market value of the long basket of narrow-based security futures, plus pay for the long put in full. | The lower of: (1) 10% of the aggregate exercise price of the put, plus the aggregate put out-of-the-money amount, if any; or (2) 20% of the current market value of the long basket of security futures. |
9 |
Short a basket of narrow-based security futures that together tracks a broad-based security index and long a broad-based security index call option contract on the same index | Narrow-based security index | 20% of the current market value of the short basket of narrow-based security futures, plus pay for the long call in full. | The lower of: (1) 10% of the aggregate exercise price of the call, plus the aggregate call out-of-the-money amount, if any; or (2) 20% of the current market value of the short basket of security futures. |
10 |
Long security future and short security future on the same underlying security (or index) | Individual stock or narrow-based security index | The greater of: 10% of the current market value of the long security future; or (2) 10% of the current market value of the short security future. | The greater of: 10% of the current market value of the long security future; or (2) 10% of the current market value of the short security future. |
11 |
Long security future, long put option and short call option. The long security future, long put and short call must be on the same underlying security and the put and call must have the same exercise price. (Conversion) | Individual stock or narrow-based security index | 20% of the current market value of the long security future, plus the aggregate call in-the-money amount, if any, plus pay for the put in full. Proceeds from the call sale may be applied. | 10% of the aggregate exercise price, plus the aggregate call in-the-money amount, if any. |
12 |
Long security future, long put option and short call option. The long security future, long put and short call must be on the same underlying security and the put exercise price must be below the call exercise price (Collar) | Individual stock or narrow-based security index | 20% of the current market value of the long security future, plus the aggregate call in-the-money amount, if any, plus pay for the put in full. Proceeds from call sale may be applied. | The lower of: (1) 10% of the aggregate exercise price of the put plus the aggregate put out-of-the-money amount, if any; or (2) 20% of the aggregate exercise price of the call, plus the aggregate call in-the-money amount, if any. |
13 |
Short security future and long position in the same security (or securities basket) underlying the security future (or long position in a security immediately convertible into the same security underlying the security future, without restriction, including the payment of money) | Individual stock or narrow-based security index | The initial margin required under Regulation T for the long stock or stocks. | 10% of the current market value, as defined in Regulation T, of the long stock or stocks. |
14 |
Short security future (or basket of security futures representing each component of a narrow-based securities index) and long call option or warrant on the same underlying security (or index) | Individual stock or narrow-based security index | 20% of the current market value of the short security future, plus pay for the call in full. | The lower of: (1) 10% of the aggregate exercise price of the call, plus the aggregate call out-of-the-money amount, if any; or (2) 20% of the current market value of the short security future. |
15 |
Short security future, Short put option and long call option. The short security future, short put and long call must be on the same underlying security and the put and call must have the same exercise price. (Reverse Conversion) | Individual stock or narrow-based security index | 20% of the current market value of the short security future, plus the aggregate put in-the-money amount, if any, plus pay for the call in full. Proceeds from put sale may be applied. | 10% of the aggregate exercise price, plus the aggregate put in-the-money amount, if any. |
16 |
Long (short) a basket of security futures, each based on a narrow-based security index that together tracks the broad-based index and short (long) a broad based-index future | Narrow-based security index | 20% of the current market value of the long (short) basket of security futures. | 10% of the current market value of the long (short) basket of security futures. |
17 |
Long (short) a basket of security futures that together tracks a narrow-based index and short (long) a narrow based-index future | Individual stock and narrow-based security index | The greater of: (1) 20% of the current market value of the long security future(s); or (2) 20% of the current market value of the short security future(s). | The greater of: (1) 10% of the current market value of the long security future(s); or (2) 10% of the current market value of the short security future(s). |
Q 19 (a) Are there offset positions in addition to those enumerated in the above chart that are consistent with margin requirements for comparable options, which the Commissions should consider adding to the list of permissible offsets?
(b) Are there offset positions included in the above chart, which the Commissions should consider deleting from the list of permissible offsets?
Q 20 Have the Commissions appropriately taken into account the overall risk of a position for the specified offset positions?
Q 21 Are the proposed minimum margin levels prudential and efficient in meeting the objectives of preserving the financial integrity of security futures markets and preventing systemic risk?
Q 22 Are there other ways of meeting the comparability standard in setting margin levels for offsetting positions? For example:
(a) Is it necessary to consider a long or short security futures position to be comparable to a long or short position in an underlying security for the purpose of determining margin for offset positions that only involve security futures and options contracts? If not, commenters are asked for specific recommendations on alternatives.
(b) Does the comparability standard necessitate that initial and maintenance margin requirements for strategy-based offsets be set at different levels?
4. Higher Margin Levels
Notwithstanding the proposed minimum initial and maintenance margin levels specified above, the Commissions further propose that the regulatory authorities may impose on their members initial and maintenance margin levels that are higher than the minimum margin levels specified in Proposed CFTC Rule 41.45(b)(1) and Proposed SEC Rule 402(b)(1).89 This is to permit regulatory authorities to set higher margin levels as may, from time to time, be considered prudent by such regulatory authorities. In addition, regulatory authorities may permit their members to use a method for calculating required initial and maintenance margin that may result in margin levels that are higher than the minimum margin levels specified in those proposed rules.90 Any such higher margin requirement would have to be filed with the SEC under Section 19(b) of the Exchange Act.91 The Commissions also propose that a national securities exchange registered with the SEC under Section 6(g) of the Exchange Act ("Security Futures Product Exchange")92 or a national securities association registered with the SEC under Section 15A(k) of the Exchange Act ("Limited Purpose National Securities Association")93 may raise or lower the required margin level to a level not lower than that specified in Proposed CFTC Rule 41.45 and Proposed SEC Rule 402, 94 in accordance with Section 19(b)(7) of the Exchange Act.95
E. Time Limits for Collection of Margin
The Commissions also propose other margin requirements for security futures. Specifically, the Commissions propose that the amount of initial margin required by Proposed CFTC Rule 41.45 and Proposed SEC Rule 402 would be obtained as promptly as possible and in any event within three business days after the position is established, or within such shorter time period as may be imposed by applicable regulatory authority rules approved by the SEC in accordance with Section 19(b)(2) of the Exchange Act.96
Currently, Regulation T requires the collection of margin calls for certain securities covered by Regulation T within five business days after the position is established, and regulatory authority rules require the collection of maintenance margin as promptly as possible and in any event within fifteen business days.97 To lower counterparty risk in transactions involving security futures, the Commissions are proposing shorter time periods than those permitted by Regulation T. Specifically, the Commissions are proposing a three business day time period.98
Further, the Commissions propose that the amount of maintenance margin required by Proposed CFTC Rule 41.45 and Proposed SEC Rule 402 would be obtained as promptly as possible and in any event within three business days after the margin deficiency is created or increased, or within such shorter time period as may be imposed by applicable regulatory authority rules approved by the SEC pursuant to Section 19(b)(2) of the Exchange Act.99
Finally, the Commissions propose that the time limits for collection of initial margin may be extended upon application by the creditor to its examining authority100 to the extent permitted by applicable regulatory authority rules approved by the SEC pursuant to Section 19(b)(2) of the Exchange Act.101
Q 23 Are the proposed time limits for collection of margin appropriate for security futures?
Section 7(c)(2)(B)(iv) of the Exchange Act requires that the margin requirements for security futures products (other than levels of margin), including the type, form, and use of collateral for security future products, are and remain consistent with the requirements established by the Federal Reserve Board in Regulation T pursuant to subparagraphs (A) and (B) of Section 7(c)(1) of the Exchange Act.102 Regulation T requires a customer to deposit margin with its broker or dealer whenever securities transactions by the customer, on any given day, create or increase a "margin deficiency"103 in the customer's margin account.104 Under Regulation T, such a deposit must be made in the form of cash, margin securities, exempted securities, or any combination thereof, within one "payment period"105 after the margin deficiency was created or increased.106
For dealings in security futures, the Commissions propose that, under Proposed CFTC Rule 41.47(a) and Proposed SEC Rule 404(a), a broker, dealer or a member of a national securities exchange may accept from a customer as collateral to satisfy its margin requirement, the following: cash, margin securities as defined in Regulation T,107 exempted securities as defined in Section 3(a)(12) of the Exchange Act,108 or other collateral permitted under Regulation T to satisfy a margin deficiency in the margin account.
The Commissions also propose under Proposed CFTC Rule 41.47(b) and Proposed SEC Rule 404(b) that nothing in the proposed rules would prevent a regulatory authority from prescribing margin collateral requirements (other than margin levels) including the type, form, and use of collateral for security futures, as long as those requirements are consistent with the requirements of Regulation T, subject to approval by the SEC in accordance with Section 19(b)(2) of the Exchange Act.109
Finally, the Commissions propose under Proposed CFTC Rule 41.47(c) and Proposed SEC Rule 404(c) that, for purposes of this section, security futures are not margin securities. This is to clarify that transactions and positions in security futures, like short options, would not have loan value for margin purposes. As is the case with short options, margin deposited on a long or short security future represents a performance bond to assure performance on such contract.
The daily gains and losses on security futures are either credited to the party that made a gain on such contract, or debited from the account of the party that had a loss, such that the margin in each party's account represents only the required amount of performance bond on such contract. Because it is not an asset, a security future cannot be put up as collateral for another security or futures transaction.
III. SEC and CFTC Rule Review Processes Relating to Margin Requirements for Security Futures Products
A. CFTC Rule Review Process and Procedures for Notification of Proposed Rule Changes Related to Margin
In general, designated contract markets, including "notice-designated" contract markets,110 or registered DTFs that propose to make a rule change regarding their security futures margin requirements (other than proposed rule changes that result in higher margin levels) must submit the proposed rule change to the SEC for approval in accordance with Section 19(b) of the Exchange Act.111 In addition, contract markets designated pursuant to Section 5 of the CEA and registered DTFs are also required under Section 5c(c) of the CEA to make certain filings with the CFTC regarding rule changes, including those for security futures products.112 Because ATSs are not SROs under the Exchange Act, notice-designated contract markets that are ATSs are not required to submit proposed rule changes to the SEC for approval in accordance with Section 19(b) of the Exchange Act.
Section 5c(c) of the CEA provides for two alternative procedures by which such a designated contract market or registered DTF may implement a proposed rule change.113 First, in accordance with Section 5c(c)(1) of the CEA, a proposed rule change may be implemented by providing the CFTC with a written certification that the proposed rule change complies with the CEA.114 Second, Section 5c(c)(2) of the CEA provides that, before the implementation of a proposed rule change, an entity may request that the CFTC grant prior approval of the rule change.115
Proposed CFTC Rule 41.48(a) would require any notice-designated contract market that files a proposed rule change regarding customer margin for security futures with the SEC for approval in accordance with Section 19(b)(2) of the Exchange Act116 to concurrently provide to the CFTC a copy of such a proposed rule change and any accompanying documentation filed with the SEC.117 It is not required to provide any supplemental information, even if such information is subsequently provided to the SEC in the course of the SEC's review of the proposed rule change. The purpose of this proposed rule is to provide the CFTC, as a joint regulator of markets offering security futures products, with timely notification of a proposed rule change.
Proposed CFTC Rule 41.48(b) sets forth the notification process for contract markets designated pursuant to Section 5 of the CEA118 and registered DTFs. The process by which such an entity is to notify the CFTC of having filed a proposed rule change with the SEC will depend on which procedure under Section 5c(c) of the CEA119 the entity elects to follow.
Proposed CFTC Rule 41.48(b)(1) would apply to any designated contract market registered under section 5 of the CEA or registered DTF that elects to seek the prior approval of the CFTC for a proposed rule change, in accordance with Section 5c(c)(2) of the CEA.120 In such case, the contract market or DTF would file its requests with the SEC and CFTC concurrently.
Under Proposed CFTC Rule 41.48(b)(2), an entity that elects to implement a proposed rule change by filing a written certification with the CFTC in accordance with Section 5c(c)(1) of the CEA121 is required to provide a copy of the proposed rule change and any accompanying documentation that was filed with the SEC, concurrent with the SEC filing. Promptly after the SEC has approved the proposed rule change, the designated contract market or registered DTF will file the written certification with the CFTC.
The CFTC has considered an alternative procedure under which an entity would file its written certification with the CFTC at the same time as it files the proposed rule change with the SEC, rather than after the SEC approves the proposed rule change. This alternative could facilitate immediate implementation of the rule change once the rule is approved by the SEC. The CFTC notes, however, that if the proposed rule change were to be modified during the SEC approval process such that the rule approved by the SEC was not the same rule that had been certified to the CFTC, a new written certification would have to be filed before the rule, as approved, could be implemented.
Q 24 Are there preferable alternative methods for meeting the dual filing requirements for margin rule changes? For example, should designated contract markets and DTFs file a rule certification with the CFTC at the same time as the proposed rule change is submitted to the SEC, and then file a new certification only if the proposed rule change is modified? Or, should an entity be able to choose whether to file a certification with the CFTC after SEC approval of such proposed rule change or at the same time as filing the proposed rule change with the SEC? Commenters are asked to be specific with respect to the costs and administrative convenience of the proposed procedures or any alternative procedures they submit for the CFTC's consideration.
National securities exchanges registered pursuant to Section 6(a) of the Exchange Act122 and national securities associations registered pursuant to Section 15A(a) of the Exchange Act123 must file proposed rule changes, including those related to the trading of securities futures products, with the SEC under Section 19(b)(1) of the Exchange Act.124 Security Futures Product Exchanges125 and Limited Purpose National Securities Associations126 must submit proposed rule changes to the SEC in the following three circumstances.
First, Security Futures Product Exchanges and Limited Purpose National Securities Associations are required to submit proposed rule changes that relate to margin for security futures products, except for those that result in higher margin levels, under Sections 19(b)(1) and (b)(2) of the Exchange Act.127 Section 19(b)(1) of the Exchange Act states that proposed rule changes are not effective unless approved by the SEC or otherwise permitted in accordance with the provisions of Section 19(b).128 Section 19(b)(2) of the Exchange Act sets forth the standards by which the SEC must determine whether a proposed rule change submitted pursuant to Section 19(b)(1) of the Exchange Act must be either approved or disapproved.129 Specifically, the SEC is directed to approve a proposed rule change if it finds that such proposed rule change is consistent with the requirements of the Exchange Act, and the rules and regulations thereunder applicable to such SRO, or to disapprove a proposed rule change if it cannot make such a finding.
Second, proposed rule changes by Security Futures Product Exchanges and Limited Purpose National Securities Associations that relate to higher margin levels, fraud or manipulation, recordkeeping, reporting, listing standards, or decimal pricing for security futures products, sales practices for security futures products for persons who effect transactions in security futures products, or rules effectuating such SRO's obligation to enforce the securities laws, must be submitted to the SEC pursuant to new Section 19(b)(7) of the Exchange Act.130 A proposed rule change filed pursuant to this section may take effect when: (1) a written certification has been filed with the CFTC under Section 5c(c) of the CEA;131 (2) the CFTC determines that review of the proposed rule change is not necessary; or (3) the CFTC approves the proposed rule change.132 The SEC, after consultation with the CFTC, has the authority to summarily abrogate a proposed rule change that has taken effect pursuant to Section 19(b)(7)(B) of the Exchange Act133 if it appears to the SEC that such rule change unduly burdens competition or efficiency, conflicts with the securities laws, or is inconsistent with the public interest and the protection of investors.134
Finally, in the event that the SEC abrogates a proposed rule change, Security Futures Product Exchanges and Limited Purpose National Securities Associations would be required, pursuant to Sections 6(g)(4)(B)(iii)135 and 15A(k)(3)(C)136 of the Exchange Act, respectively, to refile the proposed rule change pursuant to the requirements of Section 19(b)(1) of the Exchange Act.137
The SEC must (within 35 days of the date of publication of notice of the filing of the proposed rule change, or within such longer period as the SEC may designate up to 90 days after such date if the SEC finds such longer period to be appropriate and publishes its reasons for so finding, or as to which the SRO consents) either by order approve the proposed rule change or, after consultation with the CFTC, institute disapproval proceedings.138 Section 19(b)(7)(D)(ii) of the Exchange Act139 states that the SEC must approve a proposed rule change that has been abrogated and refiled under Section 19(b)(1) of the Exchange Act140 if the SEC finds that it does not unduly burden competition or efficiency, does not conflict with the securities laws, and is not inconsistent with the public interest or the protection of investors.
The Commissions solicit comments on all aspects of Proposed CFTC Rules 41.43 through 41.48 and Proposed SEC Rules 242.400 through 242.404. In addition, the Commissions are seeking responses to the numbered questions posed throughout this proposal.
Commenters are welcome to offer their views on any other matters raised by the proposed rules.
The Paperwork Reduction Act of 1995 ("PRA")141 imposes certain requirements on federal agencies (including the CFTC and the SEC) in connection with their conducting or sponsoring any collection of information as defined by the PRA. The proposed rules do not require a new collection of information on the part of any entities subject to the proposed rules. Accordingly, the requirements imposed by the PRA are not applicable to the proposed rules.
The PRA does not apply because the proposed rules do not impose recordkeeping or information collection requirements, or other collections of information which require approval of the Office of Management and Budget under 44 U.S.C. 3501, et. seq.
VI. COSTS AND BENEFITS OF THE PROPOSED RULES
Section 15(a) of the CEA142 requires that the CFTC, before promulgating a regulation under the CEA or issuing an order, consider the costs and benefits of its action. By its terms, Section 15(a) does not require the CFTC to quantify the costs and benefits of a new rule or determine whether the benefits of the rule outweigh its costs. Rather, Section 15(a) simply requires the CFTC to "consider the costs and benefits" of its action.
Section 15(a) further specifies that costs and benefits shall be evaluated in light of the following considerations: (1) protection of market participants and the public; (2) efficiency, competitiveness, and financial integrity of futures markets; (3) price discovery; (4) sound risk management practices; and (5) other public interest considerations. Accordingly, the CFTC could, in its discretion, give greater weight to any one of the five considerations and could, in its discretion, determine that, notwithstanding its costs, a particular rule was necessary or appropriate to protect the public interest or to effectuate any of the provisions or to accomplish any of the purposes of the CEA.
The proposed rules constitute a package of related rule provisions. The rules establish the amount of initial and maintenance customer margin for transactions in security futures. The CFTC believes that the proposed customer margin requirements for security futures are, in accordance with the CFMA, consistent with the margin requirements for comparable option contracts traded on any exchange registered pursuant to Section 6(a) of the Exchange Act.143 The CFTC is evaluating the costs and benefits of the proposed rules in light of the specific considerations identified in Section 15(a) of the CEA:
After evaluating these considerations, the CFTC has determined to propose the rules discussed above. The CFTC invites public comment on the application of the cost-benefit provision of Section 15(a) of the CEA in regard to the proposed rules. Commenters are also invited to submit any data that they may have quantifying the costs and benefits of the proposed rules.
B. SEC
Section 7 of the Exchange Act, which governs the amount of credit that may be initially extended and subsequently maintained on any security (other than an exempted security), was amended by the CFMA to add provisions related to margin for securities futures. On March 6, 2001, the Federal Reserve Board delegated its authority under Section 7(c)(2) of the Exchange Act to establish margin requirements for security futures to the SEC and CFTC. The SEC is proposing new Rules 400 through 404 under the Exchange Act to establish such margin requirements.
Specifically, the CFMA amended Section 7(c) of the Exchange Act to require that the rules preserve the financial integrity of markets trading security futures products, prevent systemic risk, and to require that: (1) the margin requirements for a security future be consistent with the margin requirements for comparable option contracts traded on any exchange registered pursuant to Section 6(a) of the Exchange Act;145 and (2) the initial and maintenance margin levels for a security future not be lower than the lowest level of margin, exclusive of premium, required for any comparable option contract traded on any exchange registered pursuant to Section 6(a) of the Exchange Act, other than an option on a security future, and to ensure that the margin requirements (other than levels of margin), including the type, form, and use of collateral for security futures, are and remain consistent with the requirements established by the Federal Reserve Board under Regulation T.
The SEC requests comments on all aspects of this cost-benefit analysis, including identification of any additional costs and/or benefits of the proposed rules. The SEC encourages commenters to identify and supply any relevant data, analysis and estimates concerning the costs and benefits of the proposed rules.
1. Costs
There would likely be various administrative costs to brokers, dealers, and members of national securities exchanges attributable to Proposed SEC Rules 400 through 404. Further, brokers, dealers, and members of national securities exchanges that choose to effect transactions for customers involving, or carrying an account for a customer containing, a security future are responsible for assuring compliance with these proposed rules and thus would incur various costs. While the SEC is unable at this time to estimate the extent of the costs that the proposed rules engender, it has identified below areas where the proposed rules may impose costs.
a. Compliance with Regulation T
Proposed SEC Rule 400(b)(1) would apply Regulation T to financial relations between brokers, dealers, and members of national securities exchanges and their customers with respect to transactions in security futures and any related securities or futures contracts that are used to offset positions in such security futures, to the extent consistent with the proposed rules.146
Under this proposed rule, security futures transactions would be recorded in a Margin Account. The proposed margin level requirements represent a performance bond to guarantee contract performance by both the buyer and seller of such contract. Any settlement variation would be credited to (or debited from) the Margin Account.147 The application of Regulation T provisions by brokers, dealers, or members of national securities exchanges to their customers' security futures positions would require these entities to incur certain costs, such as making systems changes, and hiring personnel, in adhering to Regulation T provisions.
The SEC requests comments, data, and estimates on all aspects of the costs of implementing Regulation T provisions pertaining to security futures.
b. Levels of Margin
Proposed SEC Rule 402(b)(1) sets the level of margin at 20 percent of current market value. The 20 percent level of margin is necessary to fulfill the statutory requirement that the margin requirements for security futures be consistent with the margin requirements for comparable options contracts traded on any national securities exchange registered under Section 6(a) of the Exchange Act.148
The SEC notes that the 20 percent margin level may appear to be high when compared to margining methodologies currently used for futures other than security futures. A potential cost of these higher margin requirements is that they may lead to reduced interest in trading security futures and, therefore, foregone hedging opportunities.
However, while margin requirements on non-security futures contracts generally range from 2-10 percent,149 SEC staff, based on its analysis, estimates that applying traditional futures risk-based margining methods to security futures would require margin of greater than 10 percent.150 Further, economic research has thus far not been able to establish a strong relationship between futures margin levels and interest in the product.151 On the other hand, SEC staff estimates that the proposed margin levels would reduce the chances that a margin account would not contain sufficient funds to cover a given day's price movement from approximately 5 percent using traditional risk-based futures margining to 0.3 percent.152 Therefore, while the margin levels proposed for security futures may impose a cost, the SEC believes that the proposed margin levels would lower chances of customer default and therefore lower systemic risk to the markets. For these reasons, and the statutory mandate that requires comparability between security futures margin and options margin, the SEC preliminarily believes that the proposed margin levels would be appropriate.
The SEC requests comments, data, and estimates on all aspects of the costs associated with the margin level described in Proposed SEC Rule 402(b)(1).
c. Computation of Margin
Proposed SEC Rule 402(b)(1) would require that brokers, dealers, and national securities exchange members compute and ensure, on a daily basis, that the initial and maintenance margin levels for each customer's security future carried or held by such entity are 20 percent of the current market value of such contract. This requirement is designed to assure contract performance and the integrity of the marketplace.153 In addition, all market participants pay or receive daily settlement variation payments (i.e., the daily net gain or loss on a security future) as a result of all open futures positions being marked to current market value by the clearing organization.
The SEC believes that the daily required computation of the initial and maintenance margin requirements and the collection and disbursement of daily settlement variation for security futures by brokers, dealers, or national securities exchanges members would require these entities to program or reprogram their computer systems to implement the margin computations and the settlement variation procedures for securities futures. These entities may also incur additional data storage costs and resource costs associated with these calculations. The SEC requests comments, data, and estimates on all aspects of the costs associated with the proposed calculations for margin on security futures, including whether Proposed SEC Rule 402(b)(1) under the Exchange Act is likely to require these entities mentioned above to increase the number of staff, or result in additional resource burdens, to perform and implement the required calculations.
d. Notification Requirements Regarding Exempted Borrowers
Proposed SEC Rule 400(b)(3)(iv)(A) would exclude from the proposed margin regulation margin arrangements between a creditor and a borrower with respect to the borrower's financing of proprietary positions in security futures, based on the creditor's good faith determination that the borrower is an "exempted borrower."154
Proposed SEC Rule 402(e) would provide that once a broker, dealer, or a member of a national securities exchange ceases to qualify as an exempted borrower, it must notify the creditor (i.e., the broker, dealer, or a national securities exchange member holding the position) of this fact before establishing any new security future positions because any new security future positions would be subject to the proposed rules.
The notification requirement under Proposed SEC Rule 402(e) is likely to result in various minor costs, including personnel time for preparing the notification by any means of communication, and sending such notification by a broker, dealer, or member of a national securities exchange that is required to send a notification to its creditor because it has ceased be an exempted borrower. The SEC requests comments and estimates on the costs associated with this notification requirement.
e. Time Limits for Collection of Margin
Proposed SEC Rules 403(a) and (b) together would require that the amount of initial and maintenance margin required by the proposed rules be obtained as promptly as possible and, in any event, within three business days after the position is established, or within such shorter time period as may be imposed by applicable regulatory authority rules approved by the SEC in accordance with Section 19(b)(2) of the Exchange Act. The SEC believes that the brokers, dealers, or national securities exchange members that are effecting transactions in security futures will need to gather information to determine for each customer's account involving security futures when margin on such position must be obtained from its customers. The SEC requests comments, data, and cost estimates relating to the time limits for collection of margin requirements.
2. Benefits
The benefits of Proposed SEC Rules 400 through 404 are related to the benefits that will accrue as a result of the enactment of the CFMA. By repealing the ban on single stock futures and futures on narrow-based security indexes, the CFMA will enable a greater variety of financial products to be traded that potentially could facilitate price discovery and the ability to hedge. Investors will benefit by having a wider choice of financial products to buy and sell, and markets and market participants will benefit by having the ability to trade these products. These rules are a prerequisite to the commencement of trading in the new products, and therefore, they are also a prerequisite to any benefits that may derive from the availability of these products.
a. Benefits to Brokers, Dealers, and Members of National Securities Exchanges
Proposed SEC Rule 402(b)(1) would provide that the minimum initial and maintenance margin levels for each security future would be 20 percent of the current market value of such contract. Moreover, Proposed SEC Rule 404(a) would provide that a broker, dealer or member of a national securities exchange may accept as collateral cash, margin securities, exempted securities, or other collateral permitted under Regulation T to satisfy a margin deficiency in the margin account.155 Proposed SEC Rule 404(b) further provides that a regulatory authority may prescribe margin collateral requirements (other than margin levels) including the type, form, and use of collateral for security futures, that are consistent with the requirements under Regulation T.156
The SEC preliminarily believes that the margin levels and other margin requirements proposed would provide sound protection from customer default by reducing chances of depletion of margin accounts, and therefore reduce systemic risk associated with the trading of these new products.
b. Benefits to Customers
Additionally, Proposed SEC Rule 402(d) would provide that customers be permitted to offset positions involving security futures with certain related securities or futures.157 Such offsets would be proposed by regulatory authority rules that would be approved by the SEC pursuant to Section 19(b)(2) of the Exchange Act if such offsets were consistent with the Exchange Act, including the requirement that margin requirements for security futures be no less restrictive than those imposed on options. These offsets likely would provide benefits to customers because such rules would recognize the hedged nature of the certain specified combined strategies and would permit lower margin requirements that better reflect the true risk of those strategies. Because security futures are new products, however, the SEC is unable at this time to quantify these benefits and therefore requests comments, data, and estimates regarding these benefits.
c. Regulatory Benefits
Proposed SEC Rule 400(b)(1) would provide, to the extent consistent with the proposed rules, that Regulation T applies to financial relations, including margin arrangements, between a creditor and a customer with respect to security futures and any related securities or futures contracts that are used to offset positions in security futures. This provision is designed to ensure that existing and future Federal Reserve Board interpretations of Regulation T would apply and that, therefore, margin requirements for security futures would remain consistent without further action by the Commissions.
To assist the SEC and the CFTC in their evaluation of the costs and benefits that may result from the proposed rulemaking, commenters are requested to provide analysis and data relating to the anticipated costs and benefits associated with the proposed rules. Specifically, the SEC and the CFTC request commenters to address whether the proposed rules would generate the anticipated benefits or impose additional costs on U.S. investors or others.
VII. CONSIDERATION OF BURDEN ON COMPETITION, PROMOTION OF EFFICIENCY, AND CAPITAL FORMATION
Section 3(f) of the Exchange Act158 requires the SEC, whenever it is engaged in rulemaking and is required to consider or determine whether an action is necessary or appropriate in the public interest, to consider whether the action will promote efficiency, competition, and capital formation. In addition, Section 23(a)(2) of the Exchange Act requires the SEC, in adopting rules under the Exchange Act, to consider the impact on competition of any rules it adopts.159 Section 23(a)(2) of the Exchange Act further provides that the SEC may not adopt a rule that would impose a burden on competition not necessary or appropriate in furtherance of the purposes of the Exchange Act.160 The rules proposed today would impose initial and maintenance margin requirements on brokers, dealers and members of national securities exchanges that collect customer margin for security futures. The SEC has considered the proposed rules in light of the standards set forth in Sections 3(f)161 and 23(a)(2)162 of the Exchange Act.
The SEC preliminarily believes that the proposed rules should promote efficiency by setting forth clear guidelines for brokers, dealers, and members of national securities exchanges when collecting customer margin related to security futures. Further, the SEC believes that the proposed rules will provide sound protection from customer default by reducing chances of depletion of margin accounts, and therefore reduce system risk associated with the trading of these new products.
The SEC also preliminarily believes that the proposed rules would not impose any significant burden on competition. The proposed rules serve only to set forth margin requirements for security futures, including establishing margin levels and margin collateral requirements. Lastly, the SEC preliminarily believes that the proposed rules would not have any impact on capital formation because the proposed rules would merely establish rules governing the collection of customer margin. The SEC notes that these proposed margin requirements would protect brokers, dealers, and members of national securities exchanges from customers' default, thus encouraging participation by these market participants in the trading of futures contracts on both single stocks and narrow-based indexes. Therefore, the SEC preliminarily believes that there could be an increased demand for the underlying securities, resulting in increased capital formation. Nevertheless, the SEC believes that the benefits to the capital formation process principally flow from the CFMA itself, which lifts the ban on trading of single stock futures and narrow-based index stock futures.
The SEC requests comments on the impact of the proposed rules on competition, efficiency and capital formation.
VIII. REGULATORY FLEXIBILITY ACT CERTIFICATIONS
The Regulatory Flexibility Act ("RFA")163 requires that federal agencies, in promulgating rules, consider the impact of those rules on small entities. The proposed rules would affect designated contract markets, registered DTFs, and FCMs. The CFTC has previously established certain definitions of "small entities" to be used by the CFTC in evaluating the impact of its rules on small entities in accordance with the RFA.164
In its previous determinations, the CFTC has concluded that contract markets are not small entities for purposes of the RFA, based on the vital role contract markets play in the national economy and the significant amount of resources required to operate as SROs.165 Recently, the CFTC determined that notice-designated contract markets are not small entities for purposes of the RFA.166 In addition, the CFTC has determined that other trading facilities subject to its jurisdiction, including registered DTFs, are not small entities for purposes of the RFA.167
The CFTC also has previously determined that FCMs are not small entities for purposes of the RFA, based on the fiduciary nature of FCM-customer relationships as well as the requirements that FCMs meet certain minimum financial requirements.168 The CFTC is proposing to determine that notice-registered FCMs,169 for the reasons applicable to FCMs registered in accordance with Section 4f(a)(1) of the CEA,170 are not small entities for purposes of the RFA. Brokers or dealers that carry customer accounts and receive or hold funds for those customers, and are notice-registered as FCMs for the purpose of trading security futures, similarly have a fiduciary relationship with their customers and must meet analogous minimum financial requirements.171
Additionally, the CFTC notes that Congress mandated that customer margin for security futures be consistent with the margin requirements for comparable option contracts traded on any exchange registered pursuant to Section 6(a) of the Exchange Act.172 In proposing these rules, the Commissions have striven to fulfill this requirement in the least burdensome way possible.
Accordingly, the Acting Chairman, on behalf of the CFTC, certifies pursuant to 5 U.S.C. 605(b), that the proposed rules will not have a significant economic impact on a substantial number of small entities. The CFTC invites the public to comment on this finding and on its proposed determination that notice-registered FCMs are not small entities for purposes of the RFA.
Section 3(a) of the RFA173 requires the SEC to undertake an initial regulatory flexibility analysis of the proposed rules on the small entities unless the Chairman certifies that the rule, if adopted, would not have a significant economic impact on small entities.174 Proposed Rules 400 through 404 would apply to brokers, dealers and members of national securities exchanges.
Introducing brokers ("IBs") and FCM may register as broker-dealers by filing Form BD-N. However, because IBs cannot collect customer margin they are not subject to these rules.175 In addition, the CFTC has concluded that FCMs are not considered small entities for the purposes of the RFA.176 Accordingly, there are no FCMs or IBs that are small entities that would be affected by the proposed rules.
The proposed rules would also apply to broker-dealers and members of national securities exchanges. With one exception, all members of national securities exchanges registered under Section 6(a) of the Exchange Act are registered broker-dealers. The SEC believes that some small broker-dealers could be affected by the proposals, but that the proposals will not have a significant impact on a substantial number of small broker-dealers.
In addition, national securities exchanges registered under Section 6(g) of the Exchange Act may have members who are floor brokers or floor traders who are not registered broker-dealers. Floor brokers and floor traders, however, are not eligible to clear securities transactions or collect customer margin, and thus would not be subject to the proposed rules.177
Accordingly, the Chairman of the SEC has certified that the proposed rules, if adopted, would not have a significant economic impact on a substantial number of small entities. This certification is attached as Appendix A to this notice.
The SEC invites commenters to address whether the proposed rules would have a significant economic impact on a substantial number of small entities, and if so, what would be the nature of any impact on small entities. The SEC requests that commenters provide empirical data to support the extent of such impact.
IX. STATUTORY BASIS AND TEXT OF PROPOSED RULES
The SEC is proposing Rules 400 through 404 pursuant to the Exchange Act, particularly Sections 3(b), 6, 7(c), 15A and 23(a). Further, these rules are proposed pursuant to the authority delegated jointly to the SEC, together with the CFTC, by the Federal Reserve Board in accordance with Exchange Act Section 7(c)(2)(A). See Appendix B.
List of Subjects
17 CFR Part 41
Brokers, Margin, Reporting and recordkeeping, Security futures products.
17 CFR Part 242
Brokers and Securities.
Commodity Futures Trading Commission
In accordance with the foregoing, Title 17, chapter 1 of the Code of Federal Regulations is proposed to be amended as follows:
1. The authority citation for Part 41 is revised to read as follows:
Authority: Sections 206, 251 and 252, Pub. L. 106-554, 114 Stat. 2763; 7 U.S.C. 1a, 2, 6f, 6j, 7a-2, 12a; 15 U.S.C. 78g(c)(2).
2. Part 41 is amended by adding §§ 41.43 through 41.48 to read as follows:
§ 41.43 Customer margin -- authority, purpose and scope.
(a) Authority and purpose. This Regulation is issued jointly by the Securities and Exchange Commission ("SEC") and the Commodity Futures Trading Commission ("CFTC") pursuant to authority delegated by the Board of Governors of the Federal Reserve System under Section 7(c)(2)(A) of the Securities Exchange Act of 1934 (the "Exchange Act") (15 U.S.C. 78g(c)(2)(A)). Its principal purpose is to regulate margin collected by brokers, dealers, and members of national securities exchanges relating to customers' transactions in security futures and imposes, among other requirements, minimum customer initial and maintenance margin levels for such security futures positions.
(b) Scope of section.
(1) Regulation T shall apply to financial relations, including margin arrangements, between a creditor and a customer with respect to security futures and any related securities or futures contracts that are used to offset positions in such security futures, to the extent consistent with this part.
(2) This part does not preclude a regulatory authority or creditor from imposing additional margin requirements on security futures, including higher margin levels and risk-sensitive criteria, consistent with this part, or from taking appropriate action to preserve its financial integrity.
(3) This part does not apply to:
(i) Financial relations between a customer and a creditor to the extent that they comply with a portfolio margining system under rules that have become effective in accordance with Section 19(b)(2) of the Exchange Act (15 U.S.C. 78s(b)(2)) and, as applicable, Section 5c(c) of the Commodity Exchange Act (the "Act") (7 U.S.C. 7a-2(c));
(ii) Financial relations between a foreign branch of a creditor and a foreign person involving foreign security futures;
(iii) Margin requirements that clearing agencies registered with the SEC or the CFTC impose on their members; and
(iv) Credit extended, maintained, or arranged by a creditor to or for a member of a national securities exchange or a registered broker or dealer if:
(A) Such creditor makes a good faith determination that the borrower is an exempted borrower;
(B) The borrower otherwise qualifies for exemption pursuant to Section 7(c)(3) of the Exchange Act (15 U.S.C. 78g(c)(3)); or
(C) The borrower is a member of a national securities exchange or a national securities association registered under Section 15A(a) of the Exchange Act (15 U.S.C. 78o-3(a)) and the borrower:
(1) Does not directly or indirectly accept or solicit orders from any customer or provide advice to any customer in connection with the trading of security futures; and
(2) Is registered with such exchange or such association as a security futures dealer, pursuant to regulatory authority rules that have become effective in accordance with Section 19(b)(2) of the Exchange Act (15 U.S.C. 78s(b)(2)) and, as applicable, Section 5c(c) of the Act (7 U.S.C. 7a-2(c)), that:
(i) Require such member to be registered as a floor trader or a floor broker with the CFTC under Section 4f(a)(1) of the Act (7 U.S.C. 6f(a)(1)), or as a dealer with the SEC under Section 15(b) of the Exchange Act (15 U.S.C. 78o(b));
(ii) Require such member to comply with applicable SEC or CFTC net capital requirements;
(iii) Require such member to maintain records sufficient to prove compliance with this paragraph and the rules of the exchange or association of which the borrower is a member;
(iv) Require such member to hold itself out as being willing to buy and sell security futures for its own account on a regular or continuous basis; and
(v) Provide for disciplinary action, including revocation of such member's registration as a security futures dealer, for such member's failure to comply with §§41.43 through 41.48 or the rules of the exchange or association.
§ 41.44 Customer Margin -- Definitions.
(a) For purposes of this part only, the following terms shall have the meanings set forth in this section.
(1) Contract multiplier means the number of units of a narrow-based security index expressed as a dollar amount, in accordance with the terms of the security future contract.
(2) On any day, current market value means with respect to a security future:
(i) If the instrument underlying such security future is a stock, the product of the daily settlement price of such security future as shown by any regularly published reporting or quotation service, and the applicable number of shares per contract; or
(ii) If the instrument underlying such security future is a narrow-based security index, as defined in Section 3(a)(55)(B) of the Exchange Act (15 U.S.C. 78c(a)(55)(B)), the product of the daily settlement price of such security future as shown by any regularly published reporting or quotation service, and the applicable contract multiplier.
(3) Examining authority with respect to a creditor means:
(i) The regulatory authority of which such creditor is a member, if such creditor is a member of only one regulatory authority;
(ii) The regulatory authority designated responsibility by the SEC pursuant to § 240.17d-1 of this title for examining such creditor for compliance with applicable financial responsibility rules, if a regulatory authority is so designated; or
(iii) The regulatory authority designated in accordance with § 1.52 of this chapter, if such creditor is a member of more than one regulatory authority and the SEC, pursuant to § 240.17d-1 of this title, has not designated responsibility for examining such creditor for compliance with applicable financial responsibility rules.
(4) Initial margin means the margin as defined in Section 3(a)(57)(A) of the Exchange Act (15 U.S.C. 78c(a)(57)(A)), that is required when a security future position is opened.
(5) Maintenance margin means the margin, as defined in Section 3(a)(57)(A) of the Exchange Act (15 U.S.C. 78c(a)(57)(A)), that is required to be maintained in a customer's securities account, as defined in § 1.3(ww) of this chapter, or futures account, as defined in § 1.3(vv) of this chapter, at the end of each trading day.
(6) Regulation T means Regulation T promulgated by the Board of Governors of the Federal Reserve System ("Federal Reserve Board"), 12 CFR Part 220.
(7) Regulatory authority means a self-regulatory organization that is registered as a national securities exchange under Section 6 of the Exchange Act (15 U.S.C. 78f) or a registered securities association under Section 15A of the Exchange Act (15 U.S.C. 78o-3).
(8) Daily settlement price means, with respect to a security future, the settlement price of such security future determined at the close of trading each day, under the rules of the applicable exchange or clearing organization.
(b) Terms used in this part and not otherwise defined in this section shall have the meaning set forth in Regulation T.
(c) Terms used in this part and not otherwise defined in this section or in Regulation T shall have the meaning set forth in the Exchange Act.
§ 41.45 Customer margin -- customer margin levels for security futures.
(a) Applicability. No broker, dealer or member of a national securities exchange may effect a transaction involving, or carry an account containing, a security future position with or for a customer, without obtaining proper and adequate margin as set forth in this section.
(b) Amount of customer margin.
(1) General rule. The minimum initial and maintenance margin levels for each security future contract shall be 20 percent of the current market value of such contract.
(2) Exceptions. Provided that such higher margin levels or calculation methods have become effective in accordance with Section 19(b) of the Exchange Act (15 U.S.C. 78s(b)), nothing in this section shall prevent a regulatory authority from:
(i) Requiring initial and/or maintenance margin levels that are higher than the minimum margin levels specified in paragraph (b)(1) of this section; or
(ii) Using a method for calculating required initial and/or maintenance margin that may result in margin levels that are higher than the minimum margin levels specified in paragraph (b)(1) of this section.
(c) Procedures for certain margin level adjustments. An exchange registered under Section 6(g) of the Exchange Act (15 U.S.C. 78f(g)), or a national securities association registered under Section 15A(k) of the Exchange Act (15 U.S.C. 78o-3(k)), may raise or lower the required margin level to a level not lower than that specified in this section, in accordance with Section 19(b)(7) of the Exchange Act (15 U.S.C. 78s(b)(7)).
(d) Offsetting positions. Notwithstanding the minimum margin levels specified in paragraph (b)(1) of this section, customers with offset positions involving security futures and one or more related securities or futures contracts may, pursuant to regulatory authority rules that have become effective in accordance with Section 19(b)(2) of the Exchange Act (15 U.S.C. 78s(b)(2)) and, as applicable, Section 5c(c) of the Act (7 U.S.C. 7a-2(c)), have initial or maintenance margin levels that are lower than the levels specified in paragraph (b)(1) of this section, provided that such margin levels are not lower than the lowest customer margin levels required for any comparable offset positions involving option contracts traded on any exchange registered pursuant to Section 6(a) of the Exchange Act (15 U.S.C. 78f(a)).
(e) Change in exempted borrower status. Once a broker, dealer, or a member of a national securities exchange ceases to qualify as an exempted borrower, it shall notify the creditor of this fact before establishing any new security future positions. Any new security future positions will be subject to the provisions of this part.
§ 41.46 Customer margin -- time limits for collection of margin.
(a) Initial margin. The amount of initial margin required or permitted by § 41.45 shall be obtained by the creditor as promptly as possible and in any event within three business days after the position is established, or within such shorter time period as may be imposed by applicable regulatory authority rules that have become effective in accordance with Section 19(b)(2) of the Exchange Act (15 U.S.C. 78s(b)(2)) and, as applicable, Section 5c(c) of the Act (7 U.S.C. 7a-2(c)).
(b) Maintenance margin. The amount of maintenance margin required or permitted by § 41.45 shall be obtained by the creditor as promptly as possible and in any event within three business days after the margin deficiency is created or increased, or within such shorter time period as may be imposed by applicable regulatory authority rules that have become effective in accordance with Section 19(b)(2) of the Exchange Act (15 U.S.C. 78s(b)(2)) and, as applicable, Section 5c(c) of the Act (7 U.S.C. 7a-2(c)).
(c) Extension of time limits. The time limits for collection of initial margin may be extended upon application by the creditor to its examining authority to the extent permitted by applicable regulatory authority rules that have become effective in accordance with Section 19(b)(2) of the Exchange Act (15 U.S.C. 78s(b)(2)) and, as applicable, Section 5c(c) of the Act (7 U.S.C. 7a-2(c)).
§ 41.47 Customer margin -- forms of collateral.
(a) A broker, dealer or a member of a national securities exchange may accept as margin collateral:
(1) Cash;
(2) Margin securities;
(3) Exempted securities as defined in Section 3(a)(12) of the Exchange Act (15 U.S.C. 78c(a)(12)); or
(4) Other collateral permitted under Regulation T to satisfy a margin deficiency in the margin account.
(b) Nothing in this section shall prevent a regulatory authority from prescribing margin collateral requirements (other than margin levels) including the type, form, and use of collateral for security futures, that are consistent with the requirements established by the Federal Reserve Board, pursuant to paragraphs (c)(1)(A) and (B) of Section 7 of the Exchange Act (15 U.S.C. 78g(c)(1)(A) and (B)), subject to approval by the SEC in accordance with Section 19(b)(2) of the Exchange Act (15 U.S.C. 78s(b)(2)) and, as applicable, subject to notice to the CFTC in accordance with Section 5c(c)of the Act (7 U.S.C. 7a-2(c)).
(c) For the purposes of this section, security futures are not margin securities.
§ 41.48 Customer margin -- filing proposed margin rule changes with the CFTC.
(a) Notification requirement for notice-registered contract markets. Any regulatory authority that is registered with the CFTC as a designated contract market under Section 5f of the Act (7 U.S.C.7b-1) shall, when filing a proposed rule change regarding customer margin for security futures with the SEC for approval in accordance with Section 19(b)(2) of the Exchange Act (15 U.S.C. 78s(b)(2)), concurrently provide to the CFTC a copy of such proposed rule change and any accompanying documentation filed with the SEC.
(b) Filing requirements under the Act. Any regulatory authority that is registered with the CFTC as a designated contract market or derivatives transaction execution facility under Section 5 of the Act (7 U.S.C. 7) shall, when filing a proposed rule change regarding customer margin for security futures with the SEC for approval in accordance with Section 19(b)(2) of the Exchange Act (15 U.S.C. 78s(b)(2)), notify the CFTC as follows:
(1) If the regulatory authority elects to request CFTC prior approval for the proposed rule change pursuant to Section 5c(c)(2) of the Act (7 U.S.C. 7a-2(c)(2)), it shall concurrently file the proposed rule change with the CFTC in accordance with § 40.5 of this chapter.
(2) If the regulatory authority elects to implement a proposed rule change by written certification pursuant to Section 5c(c)(1) of the Act (7 U.S.C. 7a-2(c)(1)), it shall concurrently provide to the CFTC a copy of the proposed rule change and any accompanying documentation filed with the SEC. Promptly after obtaining SEC approval for the proposed rule change, such regulatory authority shall file its written certification with the CFTC in accordance with § 40.6 of this chapter.
By the Commodity Futures Trading Commission.
Jean A. Webb
Secretary
September 26, 2001
Securities and Exchange Commission
In accordance with the foregoing, Title 17, chapter II, part 242 of the Code of Federal Regulations is proposed to be amended as follows:
1. The authority citation for part 242 is revised to read as follows:
Authority: 15 U.S.C. 77g, 77q(a), 77s(a), 78b, 78c, 78g(c)(2), 78i(a), 78j, 78k-1(c), 78l, 78m, 78mm, 78n, 78o(b), 78o(c), 78o(g), 78q(a), 78q(b), 78q(h), 78w(a), 78dd-1, 80a-23, 80a-29, and 80a-37.
2. Sections 242.400 through 242.404 are added to read as follows:
§ 242.400 Customer margin requirements for security futures - Authority, purpose and scope.
(a) Authority and purpose. This Regulation is issued jointly by the Securities and Exchange Commission ("Commission") and the Commodity Futures Trading Commission ("CFTC") pursuant to authority delegated by the Board of Governors of the Federal Reserve System under Section 7(c)(2)(A) of the Securities Exchange Act of 1934 ("Act") (15 U.S.C. 78g(c)(2)(A)). Its principal purpose is to regulate margin collected by brokers, dealers, and memb