November 18, 2015.
On September 22, 2015, Chicago Board Options Exchange, Incorporated (“Exchange” or “CBOE”) filed with the Securities and Exchange Commission (“Commission”), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (“Act”) 
and Rule 19b-4 thereunder,
a proposed rule change relating to margin requirements. The proposed rule change was published for comment in the Federal Register on October 8, 2015.
The Commission received no comments on the proposed rule change. This order grants approval of the proposed rule change.
II. Description of the Proposed Rule Change
CBOE proposes to amend its rules related to margin requirements. Rule 12.3 sets forth margin requirements, and certain exceptions to those requirements, applicable to security positions of Trading Permit Holders' customers. Rule 12.3(c)(5)(C)(2) currently requires no margin for covered calls and puts. Specifically, that rule provides the following:
- No margin need be required in respect of an option contract, stock index warrant, currency index warrant or currency warrant carried in a short position which is covered by a long position in equivalent units of the Start Printed Page 73253underlying security in the case of a call (covered call), or a short position in equivalent units of the underlying security in the case of a put (covered put).
- An underlying stock basket 
may serve as cover for an option contract or warrant on a market index carried short (subject to the same requirements for computing margin).
- No margin is required in respect of a call option on a Standard and Poor's 500 (S&P 500) market index carried in a short position where there is carried for the same account a long position in an underlying open-end index mutual fund (which will be specifically designated by the Exchange) having an aggregate market value at least equal to the underlying value of the S&P 500 contracts to be covered.
According to CBOE, the proposed rule change makes some nonsubstantive changes to Rule 12.3(c)(5)(C)(2). CBOE represents, the proposed rule change letters the provisions listed in the first two bulleted paragraphs above to become subparagraphs (2)(a) and (b) and moves part of the provision in the first bulleted paragraph to proposed subparagraph (2)(c) (as discussed below, the proposed rule change deletes the third bulleted paragraph above). CBOE further represents, the proposed rule change revises the language to be consistent throughout these provisions, including clarifying that the underlying security or one of the other permissible offsets must be carried in the same account as the option position. CBOE notes, the proposed rule change also makes the language more plain English, eliminates repetitive language, and inserts a missing space in proposed subparagraph (b).
CBOE states, the proposed rule change adds circumstances in which covered calls and puts require no margin. According to CBOE, the proposed rule change applies the provision in proposed subparagraph (b) to index mutual funds, index portfolio receipts (“IPRs”),
and index portfolio shares (“IPSs”),
in addition to underlying stock baskets, based on the same index underlying the index option and having a market value at least equal to the aggregate current index value.
IPRs and IPSs are commonly referred to as exchange-traded funds (“ETFs”). CBOE notes, the proposed rule change also deletes the provision that provides no margin is required in respect of options on a Standard and Poor's 500 (S&P 500) market index carried in a short position where there is carried for the same account a long position in the underlying open-end index mutual fund having an aggregate market value at least equal to the underlying value of the S&P 500 contracts to be covered.
CBOE further notes, proposed subparagraph (b) extends the same margin exception to any index option offset by a position in a mutual fund based on the same underlying index, making this current provision duplicative.
CBOE states that index ETFs and mutual funds function in a similar manner to underlying stock baskets, as they are intended to replicate the performance of their underlying market indexes. CBOE believes, the types and diversity of products available on the market that track indexes continues to increase and provide additional investment and hedging opportunities. CBOE also believes while an ETF or mutual fund may not meet the definition of an underlying stock basket (for example, some ETFs have a sampling of the securities that comprise the underlying index), it essentially has the same purpose as an underlying stock basket for investors. Therefore, CBOE represents, it closely tracks an underlying index, and thus can function as an offsetting position to an index option overlying the same index in the same way as an underlying stock basket.
According to CBOE, the Board of Governors of the Federal Reserve System (“FRB”) previously indicated that no margin would be required if an index option (on a broad-based stock index with at least a 99% correlation with the S&P 500 index) is covered by an offsetting position in S&P Index Depositary Receipts (SPDRS), but rather such SPDR positions would be treated as cover in accordance with Section 220.5(c)(3) of Regulation T.
CBOE and another exchange later afforded the same margin treatment to options on the Dow Jones Industrial Average (DJIA) Start Printed Page 73254covered by units of the DIAMONDS Trust held in the same account.
CBOE notes, based on this previous guidance from the FRB and the Commission, and in conjunction with the Exchange's current rules, CBOE has applied this margin treatment to short index option positions where there are offsetting positions in an ETF that tracks the same underlying index held in the same margin account (which treatment the Exchange has announced in Regulatory Circulars).
CBOE believes the proposed rule change is consistent with these previous findings and applies this margin treatment generally to all ETFs and mutual funds that overly market indexes, in the same manner that the rules currently apply to underlying stock baskets. Given that the Exchange regularly lists new products, including index options, the Exchange believes it is appropriate to have a more general rule related to margin on these index option products that applies in the same manner rather than identifying this margin treatment in Regulatory Circulars.
III. Discussion and Commission Findings
The Commission finds that the proposed rule change is consistent with the requirements of the Act and the rules and regulations thereunder applicable to a national securities exchange.
Specifically, the Commission finds that the proposed rule change is consistent with Section 6(b)(5) of the Act,
which requires, among other things, that the rules of a national securities exchange be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, to remove impediments to and perfect the mechanism of a free and open market and a national market system and, in general, to protect investors and the public interest. Specifically, the Commission believes that providing for a specific margin treatment related to covered puts and calls to apply to all index options in the same manner will promote just and equitable principles of trade because stock baskets, ETFs and mutual funds that trade a reference index can generally provide the same economic function as a security underlying an option.
Finally, the Commission believes the non-substantive technical changes will benefit investors by offering more clarity with respect to the margin rules by providing for more consistent and plain English language in the rule.
It is therefore ordered, pursuant to Section 19(b)(2) of the Act,
that the proposed rule change (SR-CBOE-2015-077) be, and hereby is, approved.
For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.17
Robert W. Errett,
[FR Doc. 2015-29842 Filed 11-23-15; 8:45 am]
BILLING CODE 8011-01-P