\148\ 2019 Proposing Release, 84 FR 36437, at n.40.
    \149\ Derivatives Clearing Organization General Provisions and
Core Principles, 85 FR at 4812.
    \150\ CFTC Letter No. 12-08 (Sept. 14, 2012) at 10, available at
https://www.cftc.gov/csl/12-08/download.
---------------------------------------------------------------------------

III. Paperwork Reduction Act

A. CFTC

    The Paperwork Reduction Act of 1995 (``PRA'') \151\ 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 final rule amendments do not
require a new collection of information on the part of any entities
subject to these rules. Accordingly, the requirements imposed by the
PRA are not applicable to these rules.
---------------------------------------------------------------------------

    \151\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

B. SEC

    The PRA \152\ 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
final rule amendments do not contain a ``collection of information''
requirement within the meaning of the PRA. Accordingly, the PRA is not
applicable.
---------------------------------------------------------------------------

    \152\ Id.
---------------------------------------------------------------------------

IV. CFTC Consideration of Costs and Benefits and SEC Economic Analysis
(Including Costs and Benefits) of the Proposed Amendments

A. CFTC

1. Introduction
    These final rule amendments will permit customers in security
futures to pay a lower minimum margin level for an unhedged security
futures position. The final rules set required initial margin for each
long or short position in a security future at 15% of the current
market value. In connection with this change, the Strategy-Based Offset
Table will be restated so that it is consistent with the reduction in
the minimum initial margin.
    Section 15(a) of the CEA requires the CFTC to consider the costs
and benefits of its actions before promulgating a regulation under the
CEA or issuing certain orders.\153\ Section 15(a) further specifies
that the costs and benefits shall be evaluated in light of five broad
areas of market and public concern: (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. The CFTC considers the costs and benefits resulting
from its discretionary determinations with respect to the Section 15(a)
factors below. Where reasonably feasible, the CFTC has endeavored to
estimate quantifiable costs and benefits. Where quantification is not
feasible, the CFTC identifies and describes costs and benefits
qualitatively.
---------------------------------------------------------------------------

    \153\ 7 U.S.C. 19(a).
---------------------------------------------------------------------------

    The CFTC requested comments on all aspects of the costs and
benefits associated with the proposed rule amendments. In particular,
the CFTC requested that commenters provide data and any other
information upon which the commenters relied to reach their conclusions
regarding the CFTC's proposed considerations of costs and
benefits.\154\ The Commissions received comments that indirectly
address the costs and benefits of the proposed amendments. Relevant
portions of the comments are discussed in the analysis below.
---------------------------------------------------------------------------

    \154\ The CFTC sought ``estimates and views regarding the
specific costs and benefits for a security futures clearing
organization, exchange, intermediary, or trader that may result from
the adoption of the proposed rule amendment.'' 2019 Proposing
Release, 84 FR at 36446-47.
---------------------------------------------------------------------------

    The CFTC's consideration of costs and benefits includes a brief
description of the economic baseline against which to compare the rule
amendments, a summary of the amendments, and separate, detailed
discussions of the costs and benefits of the amendments. Then, the CFTC
examines alternatives offered by commenters. Finally, the CFTC
considers each of the section 15(a) factors under the CEA.
2. Economic Baseline
    The CFTC's economic baseline for this analysis is the twenty
percent margin requirement on security futures positions that was
adopted in 2002 and exists today in CFTC Rule 41.45(b)(1), along with
the offsetting positions table under CFTC Rule 41.45(b)(2) (Strategy-
Based Offset Table). In the 2002 Adopting Release, the Commissions
finalized a set of security futures margin rules that complied with the
statutory

requirements under Section 7(c)(2)(B) of the Exchange Act. The rules
state that, ``the required margin for each long or short position in a
security future shall be twenty (20) percent of the current market
value of such security future.'' \155\ The rules also allow SRAs to set
margin levels lower than the 20% minimum requirement for customers with
``an offsetting position involving security futures and related
positions.'' \156\ In addition, the rules that were finalized under the
2002 Adopting Release permit certain customers to take advantage of
exclusions to the minimum margin requirement for security futures.
---------------------------------------------------------------------------

    \155\ CFTC Rule 41.45(b)(1), 17 CFR 41.45(b)(1). See CFTC Rule
41.43(a)(4), 17 CFR 41.43(a)(4) (defining the term ``current market
value.'').
    \156\ CFTC Rule 41.45(b)(2), 17 CFR 41.45(b)(2).
---------------------------------------------------------------------------

    The CFTC has considered the costs and benefits of the rule
amendments as compared with the baseline of the current minimum initial
and maintenance margin levels for unhedged security futures, which is
20% of the current market value of such security future. The CFTC notes
that OneChicago, the only exchange listing security futures in the
U.S., discontinued all trading operations on September 21, 2020. At
this time, there are no security futures contracts listed for trading
on U.S. exchanges. This release considers the costs and benefits that
would occur if OneChicago were to resume operations or another exchange
were to launch security futures contracts.
3. Summary of the Final Rules
    The final rules lower the required initial and maintenance margin
levels for an unhedged security futures position from 20% to 15% of the
current market value of such a security futures position. In addition,
the final rules make certain revisions to the Strategy-Based Offset
Table in line with the revised margin requirement. These amendments to
the security futures margin rules bring margin requirements for
security futures held in futures accounts, or securities accounts that
are not Portfolio Margin Accounts, into alignment with the required
margin level for unhedged security futures held in Portfolio Margin
Accounts. The final rules do not make any other changes to the security
futures margin requirement regime.
4. Description of Costs
    As a general matter, the CFTC believes that if security futures
trading resumes, the final rules will reduce costs relative to existing
CFTC Rule 41.45(b)(1) because the final rules decrease the level of
margin required for an unhedged security futures position from 20% to
15%. The CFTC has determined that, because there is no security futures
trading at this time, there may be new startup costs such as
operational or technology costs associated with calculating security
futures customer margin if a new exchange were to launch security
futures trading. Such costs would be less significant for OneChicago,
if it were to resume operations, given that the infrastructure for
calculating such margin already exists and would not require major
reprogramming or changes beyond costs that would be incurred to
relaunch security futures contracts. One commenter noted that the final
rules' ``margin requirements will be simpler to administer and risk
manage for intermediaries that facilitate trading in the market, and
better aligns with customer use of these products.'' \157\ The
Commissions received no other comments regarding this cost.
---------------------------------------------------------------------------

    \157\ See FIA Letter at 2.
---------------------------------------------------------------------------

    As set forth in the 2019 Proposing Release, the CFTC identified a
number of risk-related costs that could result from the final rules and
discusses each below.
i. Risk-Related Costs for Security Futures Intermediaries and Customers
    One risk-related cost to consider, if security futures trading
resumes, is the potential cost to security futures intermediaries and
their customers that would result from a default of either an
intermediary or a customer.\158\ Reducing margin requirements for
security futures could expose security futures intermediaries and their
customers to losses in the event that margin collected is insufficient
to protect against market moves. Pursuant to the OCC's bylaws, any
security futures intermediary that is a clearing member of OCC grants a
security interest to OCC for any account it establishes and maintains,
and therefore a customer's assets may be obligated to OCC upon
default.\159\ As a result, security futures intermediaries that are
FCMs could be exposed to a loss if the 15% margin rate for security
futures is insufficient, to offset losses associated with a customer
default. However, this risk is mitigated by the fact that if the FCM
determines that a 15% margin level is insufficient to cover the
inherent risk of the customer position, the FCM has the authority to
collect additional margin from its customers, in excess of the minimum
requirement, in order to protect its financial integrity.\160\
Moreover, the FCM has an incentive to manage the risk of a customer's
default and could collect additional margin to do that.
---------------------------------------------------------------------------

    \158\ In this context, an intermediary default describes a
clearing member that experiences a default event under the terms of
a clearinghouse's rules and procedures. Such default events
generally include a failure to deliver funds in a timely manner
(e.g., failure to satisfy a margin call). See OCC Rule 1102(a)--
Suspension, and OCC's Clearing Member Default Rules and Procedures,
available at https://ncuoccblobdev.blob.core.windows.net/media/theocc/media/risk-management/default-rules-and-procedures.pdf.
    \159\ See OCC Bylaws, Article VI--Clearance of Confirmed Trades,
Section 3--Maintenance of Accounts, Interpretations and Policies
.07, adopted September 22, 2003, available at https://www.theocc.com/components/docs/legal/rules_and_bylaws/occ_bylaws.pdf.
    \160\ See CFTC Rule 41.42(c)(1); SEC Rule 400(c)(1).
---------------------------------------------------------------------------

    If security futures trading resumes, a similar risk-related cost
might arise where an FCM collects only the minimum margin required from
customers in order to maintain or expand its customer business, when it
has determined or should have determined that additional margin is
required to cover the inherent risk of the customer position. Lower
margin requirements might facilitate an FCM permitting its customers to
take on additional risk in their positions in order to increase
business for the FCM. Such additional risks could put the FCM at risk
if one of its customers defaulted on its payment obligations, and other
customers of the FCM could face losses if the FCM or one of its fellow
customers defaulted.
    Another risk-related cost could stem from the possibility of
increased leverage among security futures customers. Customers posting
less initial margin to cover security futures positions might be able
to increase their overall market exposure and thereby increase their
leverage. Increased leverage in the security futures markets could
increase risks to overall financial stability and result in costs to
the broader financial markets insofar as security futures customers,
security futures intermediaries, and DCOs participate in financial
markets other than security futures.
    As discussed in the proposal, the CFTC considered two final
potential risk-related costs (incentives for FCMs to collect less
margin and increased leverage at the customer level). The Commissions
received no comments regarding these costs. The CFTC believes these
theoretical costs are mitigated, to some degree, by regulations that
apply to security futures intermediaries that are registered as FCMs.
For example, FCMs are subject to capital requirements under CFTC
regulations,\161\ and in instances where

the security futures intermediary is jointly registered with the SEC as
a broker-dealer FCM, the SEC's capital rules also apply.\162\ In
addition, FCMs are required to establish a system of risk management
policies and procedures pursuant to CFTC Rule 1.11.\163\ This risk
management program is designed to incentivize the FCM to protect itself
and its customers against a variety of risks, including the risk of
inadequate margin coverage and increased leverage. The regulatory
regime to which FCMs are subject is designed to require them to fully
account for the potential future exposures of their customers' security
futures positions in the form of initial and maintenance margin.
---------------------------------------------------------------------------

    \161\ See CFTC Rule 1.17, 17 CFR 1.17.
    \162\ See SEC Rule 240.15c3-1, 17 CFR 240.15c3-1.
    \163\ Under CFTC Rule 1.11, FCMs are required to establish risk
management programs that address market, credit, liquidity, capital
and other applicable risks, regardless of the type of margining
offered. See also NFA Rule 2-26 FCM and IB Regulations, which states
that any member or associate who violates CFTC Rule 1.11 (and other
rules) shall be deemed to have violated an NFA requirement.
---------------------------------------------------------------------------

    Finally, as explained in the 2019 Proposing Release, risk-related
costs to the security futures intermediary have been further mitigated
by the fact that the vast majority of OneChicago's open interest was
held by eligible contract participants (``ECPs''), as defined in
Section 1a(18) of the CEA.\164\ OneChicago provided data to support
this statement prior to the issuance of the 2019 Proposing Release.
Generally speaking, ECPs are financial entities or individuals with
significant financial resources or other qualifications that make them
appropriate persons for certain investments.\165\ The CFTC believes
that because ECPs are well capitalized investors, they may be less
likely to default and transmit risks throughout the financial system.
According to the data provided by OneChicago, over 99% of the notional
value of OneChicago's products was held by ECPs as of March 1, 2016,
and March 1, 2017.\166\ The Commissions received no comments regarding
this data. However, the CFTC notes that an exchange that, in the
future, launches security futures may decide to market such contracts
to retail customers that are not ECPs.
---------------------------------------------------------------------------

    \164\ See also CFTC Rule 1.3, 17 CFR 1.3.
    \165\ For example, an individual can qualify as an ECP if the
individual has amounts invested on a discretionary basis, the
aggregate of which is in excess of: (i) $10,000,000; or (ii)
$5,000,000 if the individual also enters into an agreement,
contract, or transaction in order to manage the risk associated with
an asset owned or liability incurred, or reasonably likely to be
owned or incurred, by the individual.
    \166\ The CFTC sought comments on all aspects of its
considerations of costs and benefits in the 2019 Proposing Release.
In particular, the CFTC requested data and any other information and
did not receive any comments questioning this data, or updated data
from OneChicago. As a result, the CFTC continues to refer to the
data provided by OneChicago relating to time periods in 2016 and
2017.
---------------------------------------------------------------------------

ii. Appropriateness of Margin Requirements
    If security futures trading resumes, a possible risk-related cost
of lowering margin requirements for security futures is that a DCO may
not have sufficient margin on deposit to cover the potential future
exposure of cleared security futures positions. However, the risk
management expertise at security futures intermediaries and DCOs, as
well as the general applicability of CFTC Rule 39.13 to security
futures,\167\ supports the conclusion that DCOs and security futures
intermediaries will continue to manage the risks of these products
effectively even with lower minimum margin requirements.\168\
---------------------------------------------------------------------------

    \167\ As noted above and elsewhere, the general requirements of
CFTC Rule 39.13 (17 CFR 39.13) are applicable to security futures
intermediaries and DCOs with respect to security futures, however,
the specific provision of CFTC Rule 39.13(g)(8)(ii) relating to
customer initial margin requirements has been addressed separately
by CFTC Letter No. 12-08 and that remains unchanged by this final
rule.
    \168\ As discussed above, security futures intermediaries are
authorized to collect margin above the amounts required by the
Commissions. However, if security futures trading resumes, security
futures intermediaries could be incentivized to lower their margin
rates in order to compete for customer business as for-profit
entities. If security futures intermediaries were to engage in
competition for business based on margin pricing, it is possible
that security futures intermediaries would collect only the required
level of margin (i.e., 15% under the final rule change), regardless
of the market conditions, which could impair their ability to
protect against market risk and losses.
---------------------------------------------------------------------------

    If security futures trading resumes, the risk security futures
customers and/or intermediaries would face from reducing initial and
maintenance margin would be addressed at the clearinghouse level
because there are additional protections under CFTC regulations. For
example, CFTC Rule 39.13(g)(2)(i) requires a DCO to establish initial
margin requirements that are commensurate with the risks of each
product and portfolio.\169\ In addition, CFTC Rules 39.13(g)(2)(ii) and
(iii) require that initial margin models meet set liquidation time
horizons and have established confidence levels of at least 99%.\170\
These DCO initial margin requirements are distinct from the margin
requirements to which customers are subject pursuant to these final
rules and, along with other risk-reducing measures, serve to mitigate
the possibility that a DCO may default (possibly resulting in a
systemic event). In the event that a DCO were to determine that a 15%
margin level for security futures would be insufficient to satisfy a
DCO's obligation under CFTC Rule 39.13, the DCO would be required to
collect additional margin from its clearing members.\171\
---------------------------------------------------------------------------

    \169\ CFTC Rule 39.13(g)(2)(i) is not addressed in CFTC Letter
No. 12-08.
    \170\ CFTC Rules 39.13(g)(2)(ii) and (iii) are not addressed in
CFTC Letter No. 12-08. In accordance with these rules, OCC Rules
601(c) and 601(e) provide for initial margin for segregated futures
customer accounts to be calculated pursuant to the Standard
Portfolio Analysis of Risk (``SPAN'') on a gross basis, as well as
calculating on a net basis initial margin requirements for each
segregated futures accounts using STANS. OCC's scan ranges for the
SPAN margin models provide coverage for a minimum 99% confidence
level.
    \171\ The CFTC expects that any difference between the margin
charged at the DCO and the margin charged by the security futures
intermediary will be addressed by additional margin calls, if
necessary. The DCO can require additional margin from its clearing
members (which in some cases will be the security futures
intermediary), to cover changes in market positions. DCOs and
clearing members are familiar with margin call procedures and have
established rules to efficiently transfer funds when needed. If a
customer's account has insufficient funds to meet the margin call,
its clearing member may provide the amount to the DCO and collect it
from the customer at a later time. In this scenario, the clearing
member may take on a liability or additional risk on the customer's
behalf for a short period of time. The CFTC notes that this practice
is the same for security futures as it is for other products subject
to clearing and it does not view this temporary shifting of risk
between the clearing member and the customer as a unique source of
risk to security futures. Furthermore, this amendment lowering the
required margin from 20% to 15% does not alter the relationship
between DCOs and their clearing members, or the relationship between
clearing members and their customers. The CFTC acknowledges that it
is possible that DCOs and security futures intermediaries will
collect different levels of margin, but it is not necessarily a
result of the final rules. Moreover, the difference in margin
collected is not an unmitigated source of risk for the security
futures intermediaries because they have the authority to collect
additional funds from their customers in the event of a margin call
and can choose to set margin levels higher than the minimum level
required by the Commissions.
---------------------------------------------------------------------------

    The CFTC observes that customer margin requirements for security
futures held by security futures intermediaries are materially distinct
from initial margin requirements for DCOs. The initial margin
requirements used by DCOs typically are risk-based, and CFTC rules are
designed to permit DCOs to use risk-based margin models to determine
the appropriate level of margin to be collected, subject to CFTC
regulations in Part 39, as applicable.
    In addition to the initial margin requirements at the DCO level,
clearing members are required to satisfy certain financial resources
requirements, including a ``capital'' requirement, to demonstrate that
they can withstand certain risks under ``extreme but plausible market
conditions.'' \172\

Furthermore, the DCO is required to maintain its own financial
resources, which may include its own capital, guaranty fund deposits by
clearing members, default insurance, assessments for additional
guaranty fund contributions, and other financial resources, as
permitted.\173\ In combination, financial resource requirements for
clearing members, initial margin contributions, guaranty fund
contributions, and other resources provide additional protections at
the DCO level against the risk that a default by a customer or security
futures intermediary will create systemic risk.
---------------------------------------------------------------------------

    \172\ 17 CFR 39.12 (CFTC Rule 39.12(a)(2)) (defining the capital
requirement for clearing members with cross-references to the CFTC's
part 1 rules for FCMs and the SEC's rules for broker-dealers).
    \173\ See generally 17 CFR 39.11(a) through (e) (CFTC Rule
39.11(a) through (e)). See also 17 CFR 1.12 (CFTC Rule 1.12)
(setting forth minimum financial requirements for FCMs and IBs).
---------------------------------------------------------------------------

    In the event that a clearing member defaults on its obligations to
the DCO, the DCO has a number of ways to manage associated risks,
including transferring (or porting) the positions of the defaulted
clearing member and using the defaulting clearing member's margin and
other collateral on deposit to cover any losses. In order to cover the
losses associated with a clearing member default, the DCO would
typically draw from (in order): (1) The initial margin posted by the
defaulting clearing member; (2) the guaranty fund contribution of the
defaulting clearing member; (3) the DCO's own capital contribution; (4)
the guaranty fund contribution of non-defaulting clearing members; and
(5) an assessment on the non-defaulting clearing members. In the event
that a DCO could not transfer the positions of the defaulted clearing
member, it could liquidate those positions. Taken together, these
mutualized risk mitigation capabilities are largely unique to
clearinghouses, and help to ensure that they remain solvent when
dealing with defaults of their members, their members' customers, and/
or other periods of stressed market conditions.
    As noted in the 2019 Proposing Release, the CFTC reviewed data from
security futures markets under normal market conditions and concluded
that a 15% level of margin would be sufficient to cover daily price
moves in most instances (i.e., more than 99.5%).\174\ This is
consistent with what the CFTC expects from risk-based margin regimes at
DCOs. The Commissions received no comments regarding this data
analysis. In addition, no commenters provided any quantitative data in
support or refutation of the CFTC's risk analysis. Therefore, the CFTC
continues to believe that the final rules will not have a substantial
negative impact on (1) the protection of market participants or the
public, (2) the financial integrity of security futures markets in the
United States, if trading resumes, or (3) sound risk management
practices of DCOs or security futures intermediaries.
---------------------------------------------------------------------------

    \174\ Conducting a value-at-risk analysis of 74 of the most
liquid security futures contracts during a limited time-frame
(November 2002-June 2010), CFTC staff found that there were 195
instances where a 15% margin was insufficient and 99 instances where
a 20% margin was insufficient. For all observations, a 15% margin
was sufficient for 99.81% of all observations while a 20% margin was
sufficient for 99.91% of all observations. While the period covered
by this study does include the high volatility exhibited in 2008, it
does not include the comparably high volatility exhibited in early
spring 2020.
---------------------------------------------------------------------------

iii. Potential Costs Related to Competition and Market Arbitrage
    One commenter responded to the 2019 Proposing Release with concerns
that a change in margin requirements for security futures would provide
an advantage to security futures and create a competitive disadvantage
for exchange-traded equity options.\175\ This commenter explained that
exchange-traded equity options are regularly used to establish
synthetic long and short exposures that produce exposures that are
nearly identical to exposure created by security futures.\176\
According to this commenter, there exists the possibility that the
lower margin requirements for security futures could result in
customers shifting from trading in equity options to security futures,
which in turn, could result in decreased liquidity and less price
discovery in the equity options markets.
---------------------------------------------------------------------------

    \175\ Cboe/MIAX Letter at 2.
    \176\ Cboe/MIAX Letter at 6.
---------------------------------------------------------------------------

    However, another commenter argued there may be reason to doubt that
changes in trading behavior would be precipitated by the lower margin
levels set forth in these final rules. OneChicago provided data to
support its view that security futures (referred to as ``single stock
futures'' in OneChicago Letter 3) and equity options did not trade
interchangeably.\177\ The five analyses that OneChicago conducted were
valuable to the CFTC's consideration of costs and benefits.
---------------------------------------------------------------------------

    \177\ OneChicago Letter 3 at 2.
---------------------------------------------------------------------------

    In particular, OneChicago provided analysis comparing SPX (S&P 500)
options to E-mini S&P 500 futures contracts.\178\ This analysis
indicates that the products do not trade interchangeably and that the
ratios of SPX options open interest to E-mini futures open interest,
and SPX options volume to E-mini futures volume are not correlated with
the margin rate on the E-mini S&P 500 futures contracts.\179\ The CFTC
recognizes that there are many reasons why customers decide to trade in
one product over another (including tax ramifications), and that
security futures and equity options are not perfect substitutes. The
CFTC acknowledges that if security futures trading resumes, lower
margin requirements could increase trading in security futures above
their historical volumes (and some of that activity could be from
customers that previously traded equity options). However, a customer's
choice of trading instrument is not determined solely by margin
requirements.
---------------------------------------------------------------------------

    \178\ The CFTC notes that the E-mini futures contracts are not
security futures, but are futures regulated solely by the CFTC
(i.e., they are not jointly regulated by the CFTC and SEC). The
comparison between E-mini futures contracts and SPX options is still
helpful to understand the interplay between the futures and equity
options markets.
    \179\ According to OneChicago's analysis, there is a
statistically significant negative correlation between SPX options
and E-mini futures. OneChicago Letter 3 at 6.
---------------------------------------------------------------------------

    Another reason to doubt the negative competitive impact of these
final rules on exchange-traded equity options is that the 2008 adoption
of Portfolio Margin Rules for exchange-traded equity options did not
cause security futures customers to migrate their positions to those
products, even though it arguably provided those options with a
competitive advantage over security futures because of the lower
minimum margin rate.\180\ Moreover, the vast majority of security
futures customers would have been eligible for lower margin
requirements but did not move their positions from futures accounts to
Portfolio Margin Accounts, which were margined under the Portfolio
Margin Rules (i.e., margin required was equal to 15% for an unhedged
position). The CFTC believes that, if trading in security futures
resumes, the final rules' amendments are unlikely to create a
competitive disadvantage for exchange-traded equity options, as the 15%
margin rate is already in effect for positions held in a Portfolio
Margin Account.
---------------------------------------------------------------------------

    \180\ A competitive advantage for options may have existed
because options are held in a securities account by default. In
contrast, most security futures positions were held in futures
accounts, and in order for a trader to take advantage of the lower
margin rate for a security futures position, such a trader would
have to move those positions into a different type of account (i.e.,
from a futures account to a securities account) with associated
costs.
---------------------------------------------------------------------------

    OneChicago's closure after years of much lower trading activity
than in exchange-traded equity options suggests that security futures
in the U.S. may

have been operating at a competitive disadvantage to related markets.
However, based on publicly available Eurex volume data,\181\ security
futures trading on U.S. stocks in other jurisdictions is lower than
trading in security futures on European companies, even on the Eurex
exchange in Germany where margin requirements are calculated using
risk-based methodologies.\182\ Therefore, factors other than margin
requirements may be influencing demand for security futures (e.g., tax
ramifications or availability of competing products). Nonetheless, the
CFTC expects that lowering the security futures margin requirement to
15% from 20% will help mitigate this competitive disadvantage and could
encourage a resumption of security futures trading in the U.S.
---------------------------------------------------------------------------

    \181\ See Eurex statistics published daily, available at https://www.eurexchange.com/exchange-en/data/statistics.
    \182\ Trading by U.S. persons in security futures contracts
listed on Eurex is subject to certain conditions under an SEC order
and a CFTC staff advisory. Provided that a number of conditions are
met, only qualified U.S. persons are permitted to trade security
futures on a single security issued by a foreign private issuer or a
narrow-based security index that is listed on a non-U.S. exchange
that is not required to register with the SEC. See SEC's Order under
Section 36 of the Securities Exchange Act of 1934 Granting an
Exemption from Exchange Act Section 6(h)(1) for Certain Persons
Effecting Transactions in Foreign Security Futures and under
Exchange Act Section 15(a)(2) and Section 36 Granting Exemptions
from Exchange Act Section 15(a)(1) and Certain Other Requirements,
Exchange Act Release No. 60194 (June 30, 2009), 74 FR 32200 (Jul. 7,
2009), and Division of Clearing and Intermediary Oversight Advisory
Concerning the Offer and Sale of Foreign Security Futures Products
to Customers Located in the United States, available at<EMAIL_ADDRESS>(June 8, 2010).
---------------------------------------------------------------------------

iv. Costs and Benefits Associated With Requested Changes to the Margin
Offsets Table
    The Commissions are updating and restating the table of offsets for
security futures to reflect the new (15%) minimum margin requirement.
The CFTC believes that if security futures trading resumes, lowering
the margin requirements for certain offsets will not increase costs to
customers, security futures intermediaries, or DCOs. The categories of
permissible offsets will remain the same and there is no change to the
inputs used to calculate the offset, other than to decrease the initial
and maintenance margin on all security futures from 20% to 15%.
Moreover, the same risk to the customers and security futures
intermediaries will exist if the Commissions decrease the margin
required for security futures trading combinations eligible for offsets
as it will with security futures without an offset.
    As discussed above, OneChicago suggested that the Commissions make
a number of changes to the Strategy-Based Offset Table.\183\ OneChicago
asked that the Offset Table be amended to account for customers holding
delta-neutral positions (e.g., a customer holds an equal and opposite
position in stock and/or a security future).\184\ Although the CFTC
agrees that it would make sense to account for a neutral position when
setting margin levels, the CFTC believes the revised margin offset
table included in this release balances the efficiencies of offsetting
positions against the outstanding risks associated with these financial
products in light of the fact that equity markets and security futures
markets are subject to separate regulatory oversight. In addition, as
explained above, the Commissions determined that lowering the offset
table requirements further is inconsistent with current securities SRO
rules, and thus would be inconsistent with the Exchange Act. For this
reason, the Commissions are not adopting OneChicago's requested
amendments to the Strategy-Based Offset Table.
---------------------------------------------------------------------------

    \183\ OneChicago Letter at 15-17.
    \184\ According to OneChicago's suggestion, margin for delta-
neutral positions should be equal to the lower of: (1) The total
calculated by multiplying $0.375 for each position by the
instrument's multiplier, not to exceed the market value in the case
of long positions, or (2) 2% of the current market value of the
security futures contract. OneChicago Letter at 15.
---------------------------------------------------------------------------

    OneChicago also asked that the Commissions add total return equity
swaps to the Strategy-Based Offset Table.\185\ Total return equity
swaps serve a similar, if not identical, economic function to security
futures contracts as commonly used at OneChicago. Providing an offset
for swaps could incentivize customers to trade in either product, or
this combination of products, and could result in increased liquidity.
Adding a new product to the offset table would provide a benefit to
customers trading in total return equity swaps and security futures
because those customers would be subject to lower margin requirements.
However, as stated above, the Commissions have determined that adding a
total return swap offset to the Strategy-Based Offset Table would be
inconsistent with securities SRO rules at this time and thus would be
inconsistent with the Exchange Act. For this reason, the Commissions
are not adopting this suggested change to the Strategy-Based Offset
Table.
---------------------------------------------------------------------------

    \185\ OneChicago Letter at 16.
---------------------------------------------------------------------------

    In addition, OneChicago recommended that the Commissions reduce the
maintenance margin required for certain types of positions from 10% to
7.5%.\186\ A lower margin requirement under the offset table would
provide an individual customer with an offsetting position a small
benefit. However, as stated above, the Commissions have determined that
lowering the margin requirement for certain strategies from 10% to 7.5%
in the Strategy-Based Offset Table would be inconsistent with
securities SRO rules at this time and thus would be inconsistent with
the Exchange Act. For this reason, the Commissions are not adopting
this suggested change to the Strategy-Based Offset Table.
---------------------------------------------------------------------------

    \186\ OneChicago Letter at 16. As suggested by OneChicago, the
reduction in margin from 10% to 7.5% would apply to items 2, 8, 9,
11, 12, 14, 15, and 16 in the Strategy-Based Offset Table.
---------------------------------------------------------------------------

    Finally, OneChicago requested that the Commissions simplify the
Strategy-Based Offsets Table overall by replacing the table with a
rule. The CFTC has not identified specific benefits associated with
adopting a rule rather than updating the Strategy-Based Offsets Table.
However, the CFTC believes that any structural change to the offset
table that is adopted for the security futures regime but not for the
equity options regime could introduce uncertainty and confusion in the
markets, and could inhibit customers seeking the reduced margin
benefits of offsetting positions. OneChicago stated that the rule
change it identified would not result in margin levels that are lower
than margin levels required under the Strategy-Based Offset Table for
exchange-traded equity options under Portfolio Margin Rules. As stated
above, the Commissions have determined that replacing the Strategy-
Based Offsets Table with a rule would be inconsistent with the
securities SRO rules at this time and thus would be inconsistent with
the Exchange Act. For this reason, the Commissions are not adopting
this suggested change to the Strategy-Based Offset Table.
    Although the Commissions are not revising the Strategy-Based Offset
Table as requested by OneChicago, the CFTC believes the offsets
described in this release will, if security futures trading resumes,
offer certain benefits and will not increase costs by materially
decreasing protections or increasing risks. Again, as added assurance
that there are multiple levels of risk protection for security futures,
the CFTC notes that security futures intermediaries and customers will
continue to be required to comply with daily mark-to-market and
variation

settlement procedures applied to security futures, as well as the large
trader reporting regime that applies to futures accounts.\187\
---------------------------------------------------------------------------

    \187\ Under the CFTC's large trader reporting regime, clearing
members and FCMs (as well as foreign brokers) file reports with the
CFTC containing futures and options position information for traders
that have positions at or above certain reporting thresholds. See
part 17 of the CFTC's regulations and 17 CFR 15.03(b) (CFTC Rule
15.03(b)).
---------------------------------------------------------------------------

5. Description of Benefits Provided by the Final Rules
    The CFTC believes that the final rules will, if security futures
trading resumes, produce significant benefits by reducing minimum
margin requirements for security futures positions to levels equal to
margin levels for exchange-traded options. The amendment to CFTC Rule
41.45(b)(1) will align customer margin requirements for security
futures held in a futures or a securities account with those that are
held in a Portfolio Margin Account. The CFTC believes this alignment
may increase competition by establishing a level playing field between
security futures carried in a Portfolio Margin Account and security
futures carried in a futures account or a securities account that is
not subject to Portfolio Margin Rules should OneChicago begin offering
these products again or new market entrants emerge.
    This benefit is expected to apply most directly to customers with
security futures positions held in futures accounts because they cannot
be margined under Portfolio Margin Rules. According to OneChicago,
because of operational issues, almost all security futures positions
were carried in futures accounts.\188\ As a result, almost all, if not
all, security futures were held in futures accounts and subject to the
CFTC's customer account requirements. Therefore, any reduction in
customer initial and maintenance margin requirements, if security
futures trading resumes, would be expected to benefit all or close to
all security futures customers because they historically held positions
in futures accounts and did not benefit from Portfolio Margin Rules.
---------------------------------------------------------------------------

    \188\ See OneChicago Petition at 2.
---------------------------------------------------------------------------

    Additionally, the reduced minimum margin level could, if security
futures trading resumes, facilitate more trading in security futures
than would otherwise occur, which could enhance the likelihood a
revival would succeed and increase market liquidity to the benefit of
market participants and the public.\189\ Increased liquidity could
contribute to the financial integrity of security futures markets
overall. For example, market liquidity may be particularly beneficial
in the context of a customer default at an FCM, when the FCM must
manage the defaulting customer's security futures positions through
transferring or liquidating those positions.\190\
---------------------------------------------------------------------------

    \189\ OneChicago represented that one of its customers (Jurrie
Reinders, Societe General) believed that the ``uncompetitive''
margin requirements for security futures have reduced trading
volumes. OneChicago Letter at 29.
    \190\ As noted above, the FIA Letter stated that the final rules
would help FCMs manage their risk. See FIA Letter, at 2. See also
discussion of CFTC rules under parts 1 and 39, above.
---------------------------------------------------------------------------

    The lower minimum margin requirement also could, if security
futures trading resumes, decrease the direct cost of trading in
security futures. In response to the Commissions' request for comments
providing data, OneChicago estimated that for the time period between
September 1, 2018, and August 1, 2019, the notional value of margin
collected on OneChicago positions would be reduced by $130 million if
the lower 15% margin requirement had been in place.\191\ This would
have represented significant savings in the amount of margin required
to be paid by and collected from customers in satisfaction of the
CFTC's part 41 margin requirements. A decrease in trading costs,
through lower minimum margin requirements should OneChicago begin
offering these products again or new market entrants emerge, also may
increase capital efficiency because additional funds would be available
for other uses.
---------------------------------------------------------------------------

    \191\ OneChicago estimated that between September 1, 2018, and
August 1, 2019, the notional value of margin collected on OneChicago
positions was approximately $540 million (under a 20% minimum margin
requirement) compared to $410 million that would have been collected
under the final rules (under a 15% minimum margin requirement).
OneChicago Letter at 14.
---------------------------------------------------------------------------

    As noted above, the final rules may have beneficial competitive
effects vis-[agrave]-vis domestic markets. In addition, lowering the
minimum margin requirement may enable a U.S. security futures exchange
to better compete in the global marketplace, where security futures
traded on foreign exchanges are subject to risk-based margin model
requirements that are generally lower than those applied to security
futures traded in the U.S.\192\ Apart from OneChicago's letters and a
comment from one of its customers, the Commissions received no comments
regarding benefits associated with increased domestic or global
competition.
---------------------------------------------------------------------------

    \192\ OneChicago stated that the Eurex exchange lists futures on
U.S. stocks with risk-based margins that are lower than the 20%
margin for futures on the same stocks that were listed at OneChicago
(OneChicago Letter at 13). However, based on publicly available
data, the volume on Eurex for futures on U.S. stocks is much lower
than occurred at OneChicago even as security futures volume is high
for stocks in European companies.
---------------------------------------------------------------------------

    The final rules restate the table of offsets for security futures
to reflect the proposed 15% minimum margin requirement. As discussed in
detail above, these offsets will, if security futures trading resumes,
provide the benefits of capital efficiency to customers because offsets
recognize the unique features of certain specified combined strategies
and would permit margin requirements that better reflect the risk of
these strategies. Moreover, the same benefits of lowering margin costs
for customers and increasing business in security futures could result
from lowering margin requirements for offsetting security futures
positions.
6. Discussion of Alternatives
    Although the CFTC did not identify any alternatives in the
proposal,\193\ commenters suggested a number of alternative security
futures margin options, along with other suggestions for the
Commissions to consider. This discussion of those alternatives includes
certain commenter proposals that the Commissions still do not believe
are viable at this time for the reasons discussed by the Commissions in
more detail above.
---------------------------------------------------------------------------

    \193\ See 2019 Proposing Release, 84 FR at 36446. In the
proposal, the CFTC stated that it did not believe that there were
any reasonable alternatives to consider given statutory constraints
tied to current practices in the exchange-traded equity options
market. Id. at n. 92.
---------------------------------------------------------------------------

i. Reducing Contract Sizes for Security Futures
    One commenter, citing a statement by SEC Commissioner Jackson,
indicated that the Commissions failed to consider reasonable
alternatives such as reducing the contract size for security
futures.\194\ According to Commissioner Jackson's Statement, ``reducing
contract size could also increase access to single-stock futures for
the most popular securities and improve efficiency.'' \195\ The CFTC
agrees that changing the contract size for security futures might make
the products more attractive to a wider group of market participants,
resulting in increased liquidity,\196\ but

would not change the overall amount of margin required for a given
position. Thus, the CFTC believes that this alternative would be less
effective at increasing liquidity than lowering margin requirements.
Reducing the security futures contract size would lower the initial
capital expenditure for a customer and could attract wider
participation, but could possibly increase transaction costs, as a
percentage of overall initial costs in putting on the position.\197\ As
explained above, the Commissions anticipate that these final rules may
produce greater liquidity in security futures, as well as create more
efficient capital distribution. Market participants will be able to
reallocate funds that are saved on lower margin levels. Under this
alternative, market participants would not benefit from any increased
capital efficiencies. Because reducing contract sizes does not provide
the same capital efficiency opportunities to customers, the CFTC does
not believe it offers as many benefits as the final rules.
---------------------------------------------------------------------------

    \194\ Letter from the Jeffrey Mahoney, General Counsel, Council
of Institutional Investors (Aug. 26, 2019) (``CII Letter'') at 4.
See also Commissioner Robert J. Jackson Jr., Public Statement,
Statement on Margin for Security Futures (July 3, 2019), available
at https://www.sec.gov/news/public-statement/jackson-statement-margin-security-futures (``Commissioner Jackson's Statement'').
    \195\ Commissioner Jackson's Statement.
    \196\ A security futures exchange could change the contract size
for security futures by amending terms of the security futures
contract such that one security futures contract represents only 50
shares of the underlying stock instead of 100.
    \197\ The increase in transaction costs would be the result of
the fixed cost staying the same, but the initial expenditure being
lower.
---------------------------------------------------------------------------

ii. Rules-Based Margin With Flexible Margin Collection Intervals
    One commenter agreed with Commissioner Jackson's concern that the
proposal did not consider other reasonable alternatives such as a
rules-based margin regime that includes flexible margin collection, or
settlement intervals, which is an idea proposed by former SEC
economists.\198\ According to the economists' research paper on this
topic, security futures that are subject to strategy-based margining
may be less sensitive to changes in market conditions.\199\ The
economists analyzed different margin collection time periods to
determine whether risks to customers would be affected by the length of
time that passed between contract execution and settlement. The
economists found that a 1-day margin collection period (i.e., initial
and maintenance margins are required to be collected within 1 day of
the trade) likely would lead to higher margin requirements than would
otherwise be required under a risk-based margin regime. As a
comparison, they also studied a 4-day collection period (i.e., initial
and maintenance margins are required to be collected within 4 days of
the trade) and found that the additional time could lead to both
significant over- and under-margining relative to a risk-based margin
model regime.
---------------------------------------------------------------------------

    \198\ See Commissioner Jackson's Statement; see also CII Letter
at 4.
    \199\ Hans R. Dutt & Ira L. Wein, On the Adequacy of Single-
Stock Futures Margining Requirements, 10 J. FUTURES MARKETS 989
(2003).
---------------------------------------------------------------------------

    This research explores how changes in the date on which margin is
collected could provide different levels of protection for customer
positions in security futures.\200\ The paper suggests that such a rule
change could produce adequate margin coverage, if calibrated correctly,
to protect against default. On the other hand, one commenter opposed
the alternative of changing the margin collection period, arguing that
this could ``build up exposures'' and would remove one of the critical
futures market protections (e.g., paying and collecting margin to
prevent customers from accumulating large exposures).\201\
---------------------------------------------------------------------------

    \200\ The CFTC notes that this research paper was published in
2003, before significant changes to the CFTC's regulatory regime
were adopted pursuant to the Dodd-Frank Wall Street Reform and
Consumer Protection Act. It is uncertain whether the alternatives
considered and discussed in the research paper would comply with
current CFTC requirements. Additionally, there are no programs
offering this alternative, and whether such a program could comply
with the statutory constraints under the Exchange Act is uncertain.
    \201\ OneChicago Letter at 6.
---------------------------------------------------------------------------

    The CFTC has not analyzed a particular program offered by an
exchange or security futures intermediary, nor examined any rulebooks
outlining how such a program would be implemented. However, if such a
change were submitted for review, the CFTC would consider, among other
things, how a change in the date of margin collection would affect how
FCMs manage margin funds. CFTC rules govern FCM practices and require
that FCMs take certain precautions with customer funds.\202\ In some
cases, customers may benefit from a more prompt payment of margin funds
to FCMs because those funds will be subject to certain protections, and
FCMs would encourage prompt payment of margin funds to protect against
customer position risk. The CFTC also observes that changes to the
collection period would depend on changes in contractual provisions
between clearinghouses and their clearing members, and between the
clearing members and their customers, as well as rule changes for
exchange operating procedures.
---------------------------------------------------------------------------

    \202\ See 17 CFR 1.20 through 1.30 (CFTC Rules 1.20 through
1.30).
---------------------------------------------------------------------------

    The Commissions are adopting the final rules because they produce a
desired policy outcome of aligning the minimum margin requirements for
security futures held in non-Portfolio Margin Accounts with the margin
required for security futures in a Portfolio Margin Account, for the
reasons discussed above. The CFTC believes that any changes to the date
of margin collection period are distinct from this policy objective,
may not be uniformly adopted by security futures markets, and may
result in an accumulation of risk for customers and security futures
intermediaries. Accordingly, changing the margin collection period is
not a viable alternative to the final rules adopted in this release.
iii. Use of Risk-Based Margin Models
    In the 2019 Proposing Release, the Commissions specifically
requested comment on ``any other risk-based margin methodologies that
could be used to prescribe margin requirements for security futures.''
In response, a number of commenters expressed a preference for using
risk-based models to margin security futures and argued that such a
regime would be consistent with the Exchange Act.\203\ As discussed in
section II.A. above, implementing a risk model approach to calculate
margin for security futures would be inconsistent with how margin is
calculated for exchange-traded equity options at this time and may
result in margin levels for unhedged security futures positions that
are lower than the lowest level of margin applicable to unhedged
exchange-traded equity options (i.e., 15%). Consequently, because no
exchange-traded equity options are subject to risk-based margin
requirements, adopting a risk model approach at this time for security
futures would conflict with the requirements of Section 7(c)(2)(B) of
the Exchange Act.\204\
---------------------------------------------------------------------------

    \203\ See La Botz Letter (``I request the Commission to please
correct the margin discrepancy placed upon the [security futures]
products by going to a risk based margining as utilized by
clearinghouses on other [security futures] products worldwide.'').
See also Ianni Letter, and OneChicago Letter.
    \204\ See section II.A. above (discussing a risk model approach
and Section 7(c)(2)(B) of the Exchange Act).
---------------------------------------------------------------------------

    The CFTC is considering a risk-based model alternative solely for
purposes of analyzing the potential costs and benefits of the final
rules under a hypothetical future scenario. The CFTC has extensive
familiarity and experience with overseeing entities that use risk-based
margin model regimes for derivatives clearing.\205\ Risk-based margin
models produce efficiencies because the initial margin is calculated
using certain macro-economic risk factor inputs that change with market

conditions. DCOs successfully manage the initial margin requirements
for clearing members using risk-based margin models. Risk-based margin
model regimes also provide effective protection against default for
customers, intermediaries, and clearinghouses. While the CFTC is
broadly supportive of risk-based margin models and believes there are
benefits to those regimes, in the context of security futures, the
costs and benefits require careful attention.
---------------------------------------------------------------------------

    \205\ As a market regulator with jurisdiction over derivatives
clearinghouses, one of the CFTC's primary functions is to supervise
the derivatives clearing activities of DCOs, their clearing members,
and any entities using the DCOs' services. The CFTC supervisory
program takes a risk-based approach.
---------------------------------------------------------------------------

    As seen in some of the data provided by OneChicago, risk-based
margin does not necessarily mean that the margin collected will be
lower than under current margin requirements for security futures or
the amended final rules under part 41 of the CFTC's regulations. In
fact, there may be reason to believe that it could be higher.
OneChicago provided an example from the 2008-2010 financial crisis.
During that time period, margin requirements on SPX options remained
constant at 8% (the maximum initial margin), if held in a Portfolio
Margin Account.\206\ However, during that same time period, E-mini
futures contracts were charged margin at levels higher than 8% because
they were subject to risk-based margin and the volatility at the time
required greater margin levels.\207\ In this instance, the margin
required under a risk-based model would be higher than the maximum
initial margin that is set at a constant percentage rate. The CFTC
observes that this comparison is informative, but not dispositive.
---------------------------------------------------------------------------

    \206\ OneChicago Letter 3 at 3.
    \207\ As noted above, E-mini futures contracts are not jointly
regulated by the CFTC and SEC because they are broad-based equity
index futures and do not fall under the definition of ``security
futures'' under the CEA. However, for purposes of examining the
relationship between futures contracts and options, the comparison
may be relevant.
---------------------------------------------------------------------------

    Importantly, because the security futures margin regime includes a
minimum margin requirement only, it is less likely that there would be
an instance in which a risk-based model results in greater margin
levels than the margin charged to a customer under the final rules. As
the Commissions have emphasized throughout this release, FCMs and DCOs
may, if security futures trading resumes, charge additional margin
above the 15% minimum level required, if it would be prudent to protect
against increased risk. In practice, this means that in a period of
market volatility a risk-based model may require higher margin levels
to account for that volatility, but an FCM and/or DCO likely would
require higher margin during such periods of market volatility under
the current rules. Even under the initial and maintenance margin
requirements today, FCMs and DCOs provide a backstop for margin
purposes by being required to collect higher margins if market
conditions or other circumstances change.\208\ Use of a risk-based
margin model would sometimes result in higher margins than the 15%
minimum margin level adopted in this release, but it would not
necessarily change the margin amount posted by a customer.
---------------------------------------------------------------------------

    \208\ For example, OneChicago provided a sample dataset that
compares the margin level required under the current security
futures margin rule (20%), the new rule (15%), and under a risk-
based margin approach used by OCC. Out of the 20 security futures,
17 security futures would be subject to lower margin requirements
under risk-based margining. One contract would be subject to a 17.7%
margin requirement under the new rule and the risk-based model,
because that contract is exposed to higher market risks. One
contract would continue to be margined at a 20% level, even under
the new rule and risk-based margining. Finally, one contract would
continue to be margined at a 23% level regardless of the approach
taken to determine margin requirements. Thus, the idea that risk-
based margining would produce lower margin levels for all contracts
at all times is incorrect. OneChicago Letter at 27.
---------------------------------------------------------------------------

    The CFTC recognizes there may be savings that can accrue under
risk-based margin models for purposes of initial and maintenance
margin, but notes that variation margining practices will not change
for security futures.\209\ Taken together, the overall margin regime
for security futures under a risk-based margin model regime ultimately
may at various times be equal to, greater than, or less than, the
margin requirements set forth under the final rules.
---------------------------------------------------------------------------

    \209\ In the context of security futures, FCMs are required to
continue daily mark-to-market valuations and exchange of variation
margin.
---------------------------------------------------------------------------

    However, as discussed in section II.A. above, the CFTC is not
persuaded by commenters' arguments that, at this time, implementing a
risk model approach to calculating margin for security futures would be
permitted under Section 7(c)(2)(B) of the Exchange Act. Moreover,
implementing a risk model approach would substantially alter how the
required minimum initial and maintenance margin levels for security
futures are calculated. It also would be a significant deviation from
how margin is calculated for listed equity options and other equity
positions (e.g., long and short securities positions). It would not be
appropriate at this time to implement a different margining system for
security futures, given their relation to products that trade in the
U.S. equity markets. Further, implementing a different margining system
for security futures may result in substantially lower margin levels
for these products as compared with other equity products and could
have unintended competitive impacts. For this reason, the suggested
alternative to permit risk-based margin models to determine customer
margin requirements for security futures is not viable.
iv. Risk-Based Margin for STARS Transactions
    Recognizing that the Commissions may not be able to adopt risk-
based margin for all security futures, OneChicago asked the Commissions
to consider the alternative of adopting risk-based margin for its STARS
transactions only. The CFTC notes that OneChicago has shut down and is
no longer offering STARS transactions. For purposes of this discussion
of suggested alternatives, the CFTC will examine whether subjecting
STARS transactions or similar products that may be offered in the
future to risk-based margin requirements would provide additional costs
or benefits when compared to the final rules.
    STARS transactions represented a combination of two security
futures contracts that formed a spread position. After combining the
two legs of the spread in the customer's account, one leg expired, and
a single security future position remained in the account. A STARS
transaction resulted in a hedged transaction that involved two
customers transferring either a stock position or a security futures
position, and once the back leg of the transaction expired the parties
returned to their original positions. According to OneChicago, there
would be cost savings to structuring the transaction this way for
purposes of facilitating equity repo or stock loan transactions.
    As stated above, the Commissions have determined that because no
exchange-traded equity options are subject to risk-based margin
requirements, adopting a risk model approach at this time for STARS
transactions would conflict with the requirements of Section 7(c)(2)(B)
of the Exchange Act.\210\ For this reason, as well as the recent
announcements by OneChicago, this alternative is not viable.
---------------------------------------------------------------------------

    \210\ See section II.A. above (discussing a risk model approach
and Section 7(c)(2)(B) of the Exchange Act).
---------------------------------------------------------------------------

7. Consideration of Section 15(a) Factors
    This section analyzes the expected results of amending CFTC Rule
41.45(b)(1) to reduce the minimum initial and maintenance margin levels
for each security future from 20% to 15% of the current market value of
such contract, and adopting the Margin Offset Table changes as
proposed, in light of

the five factors under Section 15(a) of the CEA.
i. Protection of Market Participants and the Public
    The CFTC believes that the final rules maintain the protection of
market participants and the public from the risks of a default in the
security futures market, if trading in that market resumes. The CFTC
continues to believe that a 15% minimum initial and maintenance margin
requirement in combination with other protections, such as certain
provisions of CFTC Rule 39.13, applicable to DCOs that offer to clear
security futures products,\211\ will protect U.S. market participants,
including security futures customers and security futures
intermediaries, from the risk of a default in security futures markets.
---------------------------------------------------------------------------

    \211\ As discussed above, in response to the FIA Letter, under
CFTC Letter No. 12-08, the CFTC's Division of Clearing and Risk
interpreted certain sections of CFTC Rule 39.13 and stated that the
customer margin rule under CFTC Rule 39.13(g)(8)(ii) does not apply
to customer initial margin collected as a performance bond for
customer security futures positions. CFTC Letter No. 12-08 at 10
(Sept. 14, 2012). However, there are other aspects of CFTC Rule
39.13 that offer protections such as other risk controls like risk
limits that may prevent a clearing member from carrying positions
with potential exposures above certain thresholds. See CFTC Rule
39.13(h)(1).
---------------------------------------------------------------------------

    In addition, security futures intermediaries, such as FCMs, are
authorized to collect additional margin from their customers if the FCM
believes a customer's positions may pose unmanaged risk.\212\ In
addition, any DCOs offering to clear security futures are required to
maintain certain risk management procedures, which include measures to
prevent potential losses from clearing member defaults and methods to
limit risks to the DCO's financial resources.\213\ The objective is
that DCOs will always have sufficient financial resources to manage the
risks presented by security futures.
---------------------------------------------------------------------------

    \212\ See CFTC Rule 41.42(c)(1) and SEC Rule 400(c)(1). See 2019
Proposing Release, 84 FR at 36440.
    \213\ See CFTC Rule 39.13(f) and (h).
---------------------------------------------------------------------------

    One commenter expressed a concern that, based on the statutory
criteria prescribed in the Exchange Act for determining security
futures' margin requirements, lowering margin requirements for security
futures could result in ``potential significant risks to the capital
markets and investors.'' \214\ Further, this commenter cited to the
Commissions' discussions in the 2019 Proposing Release regarding
margin's role in risk mitigation and the potential costs associated
with reducing margin levels. As stated above, the CFTC continues to
believe that the reduction in margin requirements under the final rules
will not decrease the protection to market participants or the public
because, although margin requirements are a critical component of any
risk management program for cleared financial products, they are not
the only risk management technique in place for DCOs or their clearing
members.
---------------------------------------------------------------------------

    \214\ CII Letter at 2.
---------------------------------------------------------------------------

ii. Efficiency, Competitiveness, and Financial Integrity of the Markets
    The final rules are intended to enhance the efficiency and
competitiveness of the security futures market in the United States by
bringing the initial and maintenance margin requirements for security
futures in line with requirements for security futures subject to
Portfolio Margin Rules. Market participants trading in security futures
will benefit from lower margin requirements. Furthermore, a decrease in
initial and maintenance margin requirements from 20% to 15% of the
current market value of each security futures contract may increase the
attractiveness of security futures and help facilitate the revival of
the security futures markets, whether at OneChicago, or at another
exchange. However, even with lower margin requirements, customer
decisions to trade in security futures would still be influenced by
hedging demands and competition with substitutes or similar products.
    The final rules also are expected to improve the competitiveness of
security futures as compared to exchange-traded options. The final
rules' amendments to reduce margin requirements also may facilitate a
more competitive security futures market in the United States as
compared with international markets.\215\ Overall, the CFTC believes
that the final rules will have a positive effect on competition in the
U.S. security futures market without providing an undue competitive
advantage to security futures over comparable exchange-traded equity
options.\216\
---------------------------------------------------------------------------

    \215\ Data from OneChicago indicates that the risk-based
margining system applied by Eurex (a non-U.S. security futures
exchange), is consistently lower than the 15% margin requirement
adopted in the final rules. See e.g., Figure 2--Margin Levels for
Dow Components at Eurex and OneChicago. OneChicago Letter at 25.
    \216\ See also the CFTC's analysis of anti-trust considerations
in section VII. below. The CFTC has identified no anticompetitive
effects of the final rules.
---------------------------------------------------------------------------

    The CFTC continues to believe that a 15% margin requirement for
security futures will, if security futures trading resumes, be
sufficient to protect customers and DCOs against the risk of default in
greater than 99% of cases. According to economic data reviewed by CFTC
staff, the CFTC believes that a 15% margin requirement for security
futures will protect other customers and DCOs against most risks of
default.
    Furthermore, the final rules could enhance the financial integrity
of any potential security futures market in the United States. Lowering
the amount of initial and maintenance margin required for customers
trading in security futures may facilitate the revival of security
futures markets, and if that revival occurs, increase the number of
customers trading in security futures and/or increase the amount of
trading. An increase in the number of customers in the security futures
market also could increase the number of FCMs offering to clear for
such customers, which could lead to more efficient transfers of
customer positions by a DCO in the event of a clearing member or
customer default. Furthermore, a larger and more diversified customer
base could reduce risks in the security futures market overall. For all
of these reasons, enhanced liquidity would serve to strengthen the
financial integrity of the security futures market.
    Again, the CFTC notes that the DCOs that may clear security futures
would be subject to CFTC regulations requiring the DCO to maintain
adequate risk management policies and overall financial resources. DCOs
may require additional margin, in an amount that is greater than 15%,
on certain security futures positions or portfolios if the DCO notes
particular risks associated with the products or portfolios.
Accordingly, the CFTC believes that the final rules will maintain, or
possibly improve, the financial integrity of the security futures
markets in the U.S.
    The CFTC believes that the final rules effectively address the need
for market efficiency, competition, and financial integrity consistent
with the statutory requirements under Section 7(c)(2)(B)(iii) of the
Exchange Act. The CFTC also considered alternatives presented by
commenters, as discussed above, but does not believe that there are any
viable alternatives to the final rules at this time.
iii. Price Discovery
    The lower margin requirements adopted under the final rules may
facilitate the revival of security futures markets, and if that revival
occurs, could increase competition and result in some new customers
entering the security futures market along with increased trading by
previously existing customers. In addition, trading from foreign
markets could shift to the U.S. security futures market as a result of
the change in margin requirements. All

things being equal, this increased activity in the U.S. security
futures market could have a positive effect on price discovery in the
security futures market, if trading resumes. However, as the CFTC has
noted before, price discovery in security futures markets most likely
has occurred in the liquid and transparent security markets underlying
previously existing security futures contracts, rather than the
relatively low-volume security futures themselves.\217\
---------------------------------------------------------------------------

    \217\ See Position Limits and Position Accountability for
Security Futures Products, 84 FR 51020.
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    One commenter, citing to SEC Commissioner Jackson's Statement,
shared the view that a serious economic analysis would have considered
whether reducing margin requirements improves price discovery or,
instead, incentivizes a shift toward futures markets in order to seek
out leverage.\218\ SEC Commissioner Jackson's Statement noted that if
market participants shifted toward futures markets, it could result in
less liquidity in related markets (i.e., equity markets) without
contributing to any additional price discovery. Although some portion
of increased trading in security futures may be the result of customers
switching from equity markets to security futures markets, the lower
margin requirements for security futures may, if security futures
trading resumes, facilitate arbitrage between the underlying security
and security futures markets. This arbitrage between the two markets
may enhance price discovery and provide a benefit to customers.
---------------------------------------------------------------------------

    \218\ CII Letter at 4.
---------------------------------------------------------------------------

    The CFTC notes that changes in price discovery may be difficult to
measure.\219\ However, the CFTC believes that the final rules'
amendments are unlikely to harm price discovery and indeed may improve
price discovery in the security futures market in the United States if
security futures trading resumes.
---------------------------------------------------------------------------

    \219\ One commenter shared SEC Commissioner Jackson's view that
the effects of a lower margin requirement on price discovery in
financial markets could be studied by looking at relevant data. CFTC
staff reviewed trading volume data at OneChicago to determine
whether a change to increase the default maximum level of equity
security futures products' position limits resulted in a change in
trading activity in security futures products, but without
additional data on related equity contracts it is not possible to
draw a definitive conclusion about effects on price discovery.
---------------------------------------------------------------------------

iv. Sound Risk Management Practices
    The final rules' amendments will lower the minimum initial and
maintenance margin required for security futures positions. If security
futures trading resumes, this may encourage potential hedgers or other
risk managers to increase their use of security futures for risk
management purposes. Moreover, a lower margin requirement could
encourage new market participants to enter the security futures markets
for potential hedging and risk management purposes. The final rules'
amendments are consistent with sound risk management practices,
especially to the extent that there is increased liquidity in
potentially revived security futures markets.
    In addition, as discussed in detail above, margin requirements are
a critical component of any risk management program for cleared
derivatives. Security futures have been risk-managed successfully
through central clearing and initial and maintenance margin
requirements for almost twenty years (including time periods of
historic market volatility).\220\ Current minimum margin requirements
for security futures (20%) are higher than minimum margin requirements
for comparable exchange-traded equity options held in a Portfolio
Margin Account.
---------------------------------------------------------------------------

    \220\ The CFTC staff notes that the VIX, which measures market
expectations of near term volatility as conveyed by stock index
option prices, has recently approached peak levels due to increased
market volatility in March 2020 (the VIX measurement on March 16,
2020, was close to 83). Previously high volatility was measured in
October and November 2008 during the financial crisis (when the VIX
measurement reached the 80s). See, e.g., VIX data available from the
Federal Reserve Bank of Saint Louis at https://fred.stlouisfed.org/series/VIXCLS.
---------------------------------------------------------------------------

    The CFTC recognizes the necessity of sound initial and maintenance
margin requirements for DCO and FCM risk management programs. Initial
and maintenance margin collected addresses potential future exposure,
and in the event of a default, such margin protects non-defaulting
parties from losses. The final rules maintain those protections. As
noted above, based on past data, the 15% margin level is likely to
cover more than 99% of the risks of default associated with security
futures positions, if trading resumes.
v. Other Public Interest Considerations
    The CFTC has not identified any additional public interest
considerations related to the costs and benefits of the final rules.

B. SEC

1. Introduction
    In the following economic analysis, the SEC considers the benefits
and costs, as well as the effects on efficiency, competition, and
capital formation that the SEC anticipates will result from the SEC's
final rules.\221\ The SEC evaluates these benefits, costs, and other
economic effects relative to a baseline, which the SEC takes to be the
current state of the markets for security futures products and the
regulations applicable to those markets. The economic effects the SEC
considered in adopting these rule amendments are discussed below and
have informed the policy choices described throughout this release.
---------------------------------------------------------------------------

    \221\ The Exchange Act states that when the SEC is engaging in
rulemaking under the Exchange Act and is required to consider or
determine whether an action is necessary or appropriate in the
public interest, the SEC shall consider, in addition to the
protection of investors, whether the action will promote efficiency,
competition, and capital formation. 15 U.S.C. 78c(f). In addition,
Exchange Act Section 23(a)(2) requires the SEC, when making rules or
regulations under the Exchange Act, to consider, among other
matters, the impact that any such rule or regulation would have on
competition and states that the SEC shall not adopt any such rule or
regulation which would impose a burden on competition that is not
necessary or appropriate in furtherance of the Exchange Act. See 15
U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    The final rule amendments will lower the required initial and
maintenance margin levels for unhedged security futures from the
current level of 20% to 15%. Furthermore, in connection with the SEC's
rules which permit an SRA to set margin levels that are lower than 15%
of the current market value of the security future in the presence of
an offsetting position involving security futures and related
positions, the SEC is re-publishing the Strategy-Based Offset Table
with the proposed revisions, to conform it to the adopted 15% required
margin levels.\222\
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    \222\ Conforming reductions to minimum margin percentages on
hedged security futures positions will be reflected in a restatement
of the table of offsets published in the 2002 Adopting Release. The
Strategy-Based Offset Table is not part of the Code of Federal
Regulations.
---------------------------------------------------------------------------

    The SEC received a number of comments on the proposal. Some
commenters supported the proposal,\223\ while other commenters raised
concerns.\224\ The SEC has considered these comments, as discussed in
detail in the sections that follow. This adopting release also revisits
the benefits, the costs, and other economic effects identified in the
2019 Proposing Release.\225\ Much of the discussion below on the costs,
benefits, and other effects is qualitative in nature. Wherever possible
the SEC has attempted to quantify potential economic effects,
incorporating data and other information provided by commenters in its
analysis of the economic effects of

the final rules. In addition to more detailed information on current
activity in the security futures market, the SEC considered information
supplied by commenters on the potential reduction in margin required to
support security futures positions based on current levels of market
activity and on the likelihood that investors migrated to the security
futures market from related markets. However the SEC generally lacks
the data necessary to estimate, among other things, the potential
impact of the final rule amendments on overall investor participation
in the security futures markets and bid-ask spreads in that market and
related markets.
---------------------------------------------------------------------------

    \223\ See FIA Letter.
    \224\ See OneChicago Letter; OneChicago Letter 2; OneChicago
Letter 3; Cboe/MIAX Letter; CII Letter; Bost/Davis Letter; Moran/
Tillis/Rounds Letter.
    \225\ See 2019 Proposing Release, 84 FR at 36447.
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2. Baseline
    The SEC evaluates the impact of final rules relative to a baseline
that includes the regulatory regime applicable to the markets for
security futures, as well as the current state of these markets. As
discussed above, the term ``security future'' refers to a futures
contract on a single security or on a narrow-based security index.\226\
More generally, ``security futures product'' refers to security futures
as well as any put, call, straddle, option, or privilege on a security
future.\227\
---------------------------------------------------------------------------

    \226\ See supra note 1.
    \227\ See Section 1a(45) of the CEA and Section 3(a)(56) of the
Exchange Act (both defining the term ``security futures product'').
---------------------------------------------------------------------------

    Unlike futures markets on commodities or ``broad-based'' equity
indexes, security futures have had a limited role in U.S. financial
markets, which may be due in part to uncertainty relating to tax
treatment \228\ and competition from the more developed equity, equity
swap, and options markets.\229\ Incentives to participate in the
security futures markets (rather than the markets for the underlying
security, options, or swap markets) may stem from reduced market
frictions (e.g., short sale constraints), lower cost of establishing a
short position compared to the equity market, and reduced counterparty
risk due to daily resettlement, relative to comparable OTC instruments
(e.g., equity swaps).
---------------------------------------------------------------------------

    \228\ Specifically, the proposition that exchange-for-physical
single stock security futures qualify for the same tax treatment as
stock loan transactions under Section 1058 of the Internal Revenue
Code has not been tested. See e.g., Exchange Act Release No. 71505
(Feb. 7, 2014).
    \229\ Security futures markets face competition from equity and
options markets because in principle, the payoff from a security
futures position is readily replicated using either the underlying
security, or through options on the underlying security.
---------------------------------------------------------------------------

    As with other types of futures, both the buyer and seller in a
security futures transaction can potentially default on his or her
respective obligation. Because of this, an intermediary to a security
futures transaction will typically require a performance bond
(``initial and maintenance margin'') from both parties to the
transaction. The clearing organization will also require such
performance bonds from its clearing members (i.e., the clearing
intermediary of the security futures transaction). Higher margin levels
imply lower leverage, which reduces risk. Private incentives encourage
a broker-dealer that intermediates security futures transactions to
require a level of margin that adequately protects its interests.
    However, in the presence of market frictions, private incentives
alone may lead to margin levels that are inefficient. For example,
intermediaries may set margin levels that, while privately optimal, do
not internalize the cost of the negative externalities caused by the
potential high leverage level associated with low margins. Moreover,
even when all parties are fully aware of the risks of leverage,
privately negotiated margin arrangements may be too low. For example,
the risk resulting from higher leverage levels can impose negative
externalities on financial system stability, the costs of which would
not be reflected in privately negotiated margin arrangements. To the
extent that such market failures are not ameliorated by existing market
institutions,\230\ they provide an economic rationale for regulatory
minimum margin requirements.\231\
---------------------------------------------------------------------------

    \230\ For centrally cleared markets, including the security
futures market, clearinghouses may impose membership and minimum
margin requirements that cause clearing members to internalize a
greater share of the costs associated with customers' higher
leverage.
    \231\ Monetary authorities may also rely on regulatory margin
requirements as a policy tool. The SEC does not consider such
motives here.
---------------------------------------------------------------------------

i. The Security Futures Market
    Security futures can provide a convenient means of obtaining delta
exposure to an underlying security.\232\ To effectively compete with
other venues for obtaining similar exposures (e.g., equity and equity
options markets), security futures markets must reduce market frictions
or provide more favorable regulatory treatment. Security futures
markets may reduce market frictions by providing a lower cost means of
financing equity exposures. They can simplify taking short positions by
eliminating the need to ``locate'' borrowable securities.\233\ Security
futures can also be used to create synthetic equity repurchase
agreements or equity loans, which carry similar terms as their over-
the-counter counterparts.\234\ Finally, security futures can also
provide an opportunity for customers to gain greater leverage through
lower margin requirements (relative to margin in securities or options
transactions).
---------------------------------------------------------------------------

    \232\ The derivative of the theoretical price of a futures
contract with respect to the price of the underlying (i.e., the
``delta'') is 1. For a $1 increase (decrease) in the price of an
underlying security, the theoretical price of its security future
increases (decreases) by $1.
    \233\ In these respects, a security future functions like a
cleared total return swap.
    \234\ This can be achieved by simultaneously entering into a
security futures position that expires at the end of the trading day
and another security futures position of the same size and on the
same underlying security but in the opposite direction and expiring
at a future date, compared to the other position. See also
Memorandum from the SEC's Division of Trading and Markets regarding
a July 16, 2019, meeting with representatives of OneChicago
(including OneChicago's presentation on STARS as synthetic equity
repos or equity loans).
---------------------------------------------------------------------------

    The one U.S. exchange that provided trading in security futures,
OneChicago, discontinued all trading operations on September 21, 2020.
As of the end of 2019, 13,792 security futures contracts \235\ on 1,638
symbols were traded on the exchange. Of these 13,792 contracts, 343 had
open interest at the end of the year. Total open interest at the end of
the year was 602,276 contracts. Annual trading volume in 2019 was close
to 7.4 million contracts, an increase of approximately 4% from the
prior year. At this time, however, no security futures contracts are
listed for trading on U.S. exchanges.
---------------------------------------------------------------------------

    \235\ The typical contract is written on 100 shares of
underlying equity.
---------------------------------------------------------------------------

    According to OneChicago, prior to the cessation of trading, almost
all security futures positions were carried in futures accounts of
CFTC-regulated FCMs.\236\ Consequently, the SEC believes only a small
fraction of security futures accounts previously fell under the SEC's
customer margin requirements for security futures. The SEC believes
that none of the accounts that were subject to the SEC's security
futures margin rules used the Portfolio Margin Rules.\237\ Therefore,
the SEC believes that all of the securities accounts that previously
fell under the SEC's margin rules would have been subject to the
general initial and maintenance margin requirement of 20% and the
associated Strategy-Based Offset Table.
---------------------------------------------------------------------------

    \236\ See OneChicago Petition.
    \237\ If security futures positions were held in a Portfolio
Margin Account they would be included in the risk-based portfolio
margin calculation and thus effectively subject to a lower (i.e.,
15%) margin requirement under the baseline. Based on an analysis of
FOCUS filings from year-end 2019, no broker-dealers had collected
margin for security futures accounts in a Portfolio Margin Account.

---------------------------------------------------------------------------

ii. Regulation
    In the U.S., a security future is considered both a security and a
future, so customers who wish to buy or sell security futures must
conduct the transaction through a person registered both with the CFTC
as either an FCM or an IB and the SEC as a broker-dealer.\238\ In
addition, an investor can trade security futures using either a futures
account or a customer securities account.
---------------------------------------------------------------------------

    \238\ See supra note 12.
---------------------------------------------------------------------------

    As discussed in section I, Section 7(c)(2)(B) of the Exchange Act
provides that the customer margin requirements must satisfy four
requirements. First, they must preserve the financial integrity of
markets trading security futures products.\239\ Second, they must
prevent systemic risk.\240\ Third: (1) They must be consistent with the
margin requirements for comparable options traded on any exchange
registered pursuant to Section 6(a) of the Exchange Act; \241\ and (2)
the initial and maintenance margin levels must not be lower than the
lowest level of margin, exclusive of premium, required for any
comparable exchange-traded equity options.\242\ Fourth, excluding
margin levels, they must be, and remain consistent with, the margin
requirements established by the Federal Reserve Board under Regulation
T.\243\
---------------------------------------------------------------------------

    \239\ See Section 7(c)(2)(B)(i) of the Exchange Act.
    \240\ See Section 7(c)(2)(B)(ii) of the Exchange Act.
    \241\ See Section 7(c)(2)(B)(iii)(I) of the Exchange Act.
    \242\ See Section 7(c)(2)(B)(iii)(II) of the Exchange Act.
    \243\ See Section 7(c)(2)(B)(iv) of the Exchange Act.
---------------------------------------------------------------------------

    Under existing SEC rules, the minimum initial and maintenance
margin requirement for a customer's unhedged security futures position,
not subject to an exemption is 20% of its current market value.\244\
SRAs may allow margin levels lower than 20% for accounts with
``strategy-based offsets'' (i.e., hedged positions).\245\ Strategy-
based offsets can involve security futures as well as one or more
related securities or security futures position, consistent with the
Strategy-Based Offset Table.\246\
---------------------------------------------------------------------------

    \244\ See SEC Rule 403(b)(1).
    \245\ See SEC Rule 403(b)(2).
    \246\ See section II.B. above (discussing the Strategy-Based
Offset Table).
---------------------------------------------------------------------------

    Accounts subject to the Portfolio Margin Rules are also exempt from
the customer margin requirements for security futures.\247\ Under
currently approved Portfolio Margin Rules, the effective margin
requirement for an unhedged security futures position or an exchange-
traded option on a narrow-based index or an individual equity is
15%.\248\ Under current rules, only customer securities accounts held
through SEC-regulated broker-dealers could potentially be subject to
the Portfolio Margin Rules; however, the SEC is not aware of any
broker-dealers offering such accounts. Margin requirements for security
futures positions of clearing members (i.e., their accounts at a
clearing agency or DCO) are also exempt from the security futures
margin requirements.\249\
---------------------------------------------------------------------------

    \247\ See CFTC Rule 41.42(c)(2)(i), 17 CFR 41.42(c)(2)(i); SEC
Rule 400(c)(2)(i), 17 CFR 242.400(c)(2)(i).
    \248\ This follows from the methodology of current SRO Portfolio
Margin Rules as applied to delta one securities. There is no
comparable portfolio margining system for security futures held in a
futures account and, therefore, these positions, if unhedged, are
subject to the required 20% initial and maintenance margin levels.
    \249\ See SEC Rule 400(c)(2)(i) through (v), 17 CFR
242.400(c)(2)(i) through (v). Clearing members are instead subject
to margin rules of the clearing organization as approved by the SEC
pursuant to Section 19(b)(2) of the Exchange Act, 15 U.S.C.
78s(b)(2).
---------------------------------------------------------------------------

3. Considerations of Costs and Benefits
    Under the final rule amendments being adopted in this release, the
initial and maintenance margin requirements for a security futures
position will be reduced from 20% to 15% of the current market value of
the position. This section discusses both the likely economic effects
of the final rule amendments conditional on the resumption of trading
in security futures, and the extent to which the final rule amendments
may affect the likelihood that trading in security futures contracts
resumes.
    One commenter expressed concern that the SEC did not present any
substantive analysis of the proposed amendment's possible
benefits.\250\ In response to this comment, as stated in the 2019
Proposing Release, the SEC cannot quantify the benefits to investors
from the potential effects of the final rule amendments on investor
demand, investor participation, price discovery and liquidity.\251\ As
discussed in more detail below, OneChicago provided information about
the likely reduction in initial margin requirements it expected from
the proposed rule amendments. Although this information supports the
SEC's view that the final rule amendments could increase investor
participation in the security futures market if trading resumes, it is
not possible to meaningfully estimate the magnitude of any such
increase, and related implications for the market for exchange-traded
equity options without additional information about investors'
sensitivity of demand for security futures and exchange-traded equity
options positions with respect to changes in margin levels.\252\ This
sensitivity is difficult to estimate because it requires historical
data on positions and associated margins from customer securities
accounts, which broker-dealers currently do not report to the SEC.\253\
While the SEC's analysis of the costs and benefits of the final rule
amendments are qualitative in nature, the inability to quantify certain
benefits and costs does not mean that the overall benefits and costs of
the final rule amendments are any less significant.
---------------------------------------------------------------------------

    \250\ See CII Letter at 3.
    \251\ See 2019 Proposing Release, 84 FR at 36449.
    \252\ This sensitivity is more formally known as the margin
elasticity of demand.
    \253\ While the minimum margin requirements are set by
regulation and therefore known, the actual margin associated with a
position is set by a broker-dealer and may be different from the
regulatory minimum.
---------------------------------------------------------------------------

    Security futures prices reflect the aggregate demand for security
futures of all participating investors, including those that are
subject to margin requirements and those that are not. Among other
things, this demand depends on the costs associated with margin
requirements, such as the opportunity cost of the margin collateral.
All else equal, higher margin levels may reduce individual demand
because of potential higher trading costs.
    As stated above, at the end of 2019, open interest in the U.S.
security futures markets was 602,276 contracts. SEC staff understands
that approximately 2% of these contracts were held in securities
accounts subject to SEC margin requirements.\254\ None of these
accounts is believed to have been subject to Portfolio Margin Rules.
This information, in combination with information supplied by
commenters, can be used to construct a hypothetical estimate of the
effect of the final rules on initial margin collected were security
futures to continue to trade at OneChicago. According to OneChicago,
the total reduction in margin collected (including margin collected on
security futures held in futures accounts,) would have been $130
million.\255\ Because the SEC estimates approximately 2% of these
contracts were held in securities accounts, the margin reduction
attributable to securities accounts would have been approximately $2.6
million.\256\ The SEC expects this may overestimate the impact of the
final rule, as broker-dealers may currently impose

initial margin requirements exceeding 20% on certain security futures
if they deem higher margin amounts necessary for risk management.\257\
---------------------------------------------------------------------------

    \254\ See 2019 Proposing Release, 84 FR at 36449.
    \255\ OneChicago Letter at 14.
    \256\ Calculated as $130 million x 0.02 = $2.6 million.
    \257\ See OneChicago Letter at 14 (stating that as of August 26,
2019, 92% of OneChicago security futures had a risk level above
20%).
---------------------------------------------------------------------------

i. Impact on Investor Participation
    By lowering the minimum margin requirement for unhedged security
futures positions held outside Portfolio Margining Accounts, the final
rule amendments may affect participation in the security futures
market, in the event that trading in security futures resumes in the
United States. Reducing the trading costs for investors that hold these
positions outside of Portfolio Margin Accounts may increase demand for
security futures and may benefit investors by reducing the costs of
taking on or laying off risk exposures.
    The potential trading cost savings associated with the final rule
amendments may also increase the competitiveness of security futures
relative to certain potential close substitutes that are not directly
affected by the margin requirements of the final rule amendments. As a
result, if security futures trading resumes, the final rule amendments
may encourage higher investor participation in the security futures
market relative to what was previously observed under current initial
margin requirements, to the benefit of financial intermediaries that
offer security futures to their customers and exchanges that list
security futures for trade, while potentially reducing fees earned by
intermediaries and exchanges from services provided in related markets.
    In addition to margin requirements, individual demand for security
futures depends on the availability of other financial instruments (or
strategies based on these instruments) that may be viewed by an
investor as close substitutes to security futures. For example, certain
OTC instruments that offer delta one exposure to the underlying
security and certain security futures positions may be viewed as close
substitutes.\258\ Furthermore, certain option spread positions and
certain futures positions may be viewed by some investors as close
substitutes.\259\ These potential substitutes exist on a continuum, and
some alternative strategies have risk profiles and cash flows more
similar to security futures than others.\260\ In the presence of these
alternatives, individual demand for a security futures position depends
on the relative cost of alternative strategies, including the cost of
financing the alternative position (e.g., margin requirements) and the
cost of bearing risk exposures that are incremental to the desired risk
exposure obtainable through security futures.
---------------------------------------------------------------------------

    \258\ See OneChicago Letter (describing these OTC instruments,
including equity swaps and stock loans).
    \259\ See section IV.B.4.ii.a infra (discussing comparability of
exchange-traded options and security futures).
    \260\ One commenter specifically argued that that single stock
futures and equity options are sufficiently distinct that they do
not trade interchangeably, and supplied data to support its claim.
See section IV.B.4.ii.a infra.
---------------------------------------------------------------------------

    The final rule amendments will also result in more consistent
margining for identical unhedged security futures positions held within
or outside Portfolio Margining Accounts. This will promote regulatory
parity of security futures margin requirements between Portfolio Margin
Accounts and securities accounts that do not offer portfolio margining,
as well as between securities and futures accounts. To the extent that
customers are currently unwilling to bear the costs of opening
Portfolio Margin Accounts, they may decline opportunities to
participate in the security futures market or may instead bear the
costs of holding security futures in their securities accounts. If
trading resumes, parity in margin requirements could result in
efficiencies for customers who might otherwise open separate accounts
to obtain security futures exposure in response to differing margin
requirements across account types.
ii. Impact on use of Leverage and Investor Behavior
    If security futures trading resumes, the final rule amendments may
provide investors with opportunities to take on additional leverage.
Because security futures allow investors to acquire 100% exposure in
the underlying security (also known as ``delta one'' exposure) for a
fraction of the cost of funding a position in the cash market, the
final rule amendments may reduce the cost of financing leveraged
exposures through security futures. In particular, the final rule
amendments may increase the attractiveness of security futures as means
to finance delta one exposure.
    Increased leverage can result in larger investor losses, and may
exacerbate the potential costs to investors from trading patterns that
reflect behavioral biases. For example, in equity markets, retail
investors may be subject to costs from certain trading patterns that
are consistent with the so-called ``disposition effect''--an aversion
to realize losses. To the extent that the final rule amendments lower
the cost that retail investors bear when they participate in the
security futures market and encourage more participation, the potential
costs associated with the ``disposition effect'' and other behavioral
biases could be exacerbated.
    However, the potential costs associated with retail investors'
behavioral biases are likely to be limited in aggregate, because (i)
under the baseline, retail investors are believed to represent a very
small fraction (less than 1%) of open interest in security futures; and
(ii) broker-dealers may still impose higher initial margin requirements
and other measures to manage risk exposures to their customers and meet
clearing organization requirements.
    One commenter noted that the daily variation settlement in the
futures market would counter the disposition effect as it relates to
security futures, while the current margining system in the options
markets exacerbate the effect.\261\ The SEC appreciates the analysis
provided by this commenter. However, contrary to the conclusion of this
analysis, both the margin on a futures position and the margin on an
options position move in the same direction (as compared to opposite
directions, as suggested by the commenter), because in the exchange-
traded equity options market, the initial and maintenance margin
generally applies to the short position only.\262\
---------------------------------------------------------------------------

    \261\ See OneChicago Letter, Appendix A.
    \262\ Thus, when the option position increases in value for the
long investor, the maintenance margin assessed to the short investor
(the seller of the position) increases proportionally. Customers who
buy long exchange-traded options generally must pay for them in
full. See supra note 94 (discussing margin requirements for long
exchange-traded options).
---------------------------------------------------------------------------

iii. Impact on Financial Intermediaries
    The final rule amendments may also provide benefits to financial
intermediaries that facilitate trading in security futures, thereby
providing incentives to list security futures. Broker-dealers and
exchanges generally charge fees for purchases and sales of listed
securities and derivatives contracts. To the extent that the final rule
amendments increase future participation in security futures markets if
trading resumes, security futures exchanges and broker-dealers that
offer customers the ability to trade security futures in securities
accounts may earn higher fees from security futures activity, than
would be the case in the absence of the final rule amendments, although
an increase in revenues in the security futures market may reduce fees
earned from activity in related markets.

In turn, opportunities to earn higher fees from enabling transactions
in security futures may encourage exchanges to list security futures.
As a result, the final rule amendments could incrementally increase the
likelihood that trading in security futures contracts resumes.
    Lowering the regulatory minimum margin requirements for security
futures margin could also impose costs on broker-dealers, their
customers, and counterparties. To the extent that lower regulatory
margin requirements cause some broker-dealers to impose lower margin
requirements on customers if trading resumes, the final rule amendments
could increase the default risk of the broker-dealer, and a broker-
dealer default would likely impact the defaulting broker-dealer's
customers and counterparties. However, broker-dealers participating in
security futures markets would be subject to clearing organizations'
margin requirements and the SEC's broker-dealer financial
responsibility rules (including minimum capital requirements).\263\
Such requirements are reasonably designed to mitigate the risk of a
broker-dealer's default. In addition, in the event of such a default,
the SEC's customer protection rule would protect customers' assets held
in a securities account.\264\
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    \263\ 17 CFR 240.15c3-1.
    \264\ 17 CFR 240.15c3-3. The SEC acknowledges that any security
futures held in futures accounts would benefit from the CFTC's
customer protection rules found in part 1 of the CFTC's regulations.
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iv. Resumption of Trading in the U.S. Security Futures Market
    The final rule amendments may increase investors' willingness to
participate in the security futures markets to an extent that is
sufficient to result in resumption in exchange trading of security
futures in the U.S. Although we expect the final rule amendments to
have, at most, an incremental effect on the likelihood that trading
resumes, the potential revitalization of the U.S. security futures
market could produce economic consequences for investors,
intermediaries, and financial markets.
    A liquid U.S. security futures market could result in both costs
and benefits for investors. Access to security futures could benefit
investors by reducing the costs that investors incur to obtain risk
exposures or finance other transactions. As discussed earlier, security
futures can allow investors to obtain low-cost exposure to underlying
securities.\265\ In particular, security futures can simplify the
process of taking short positions by eliminating the need to locate
borrowable securities. Moreover, security futures can be combined to
produce synthetic equity loans or equity repurchase agreements.\266\
These activities, however, have attendant risks. As discussed above, an
investor that uses security futures to obtain leveraged exposure to
underlying securities also is exposed to the risk of larger losses.
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    \265\ See section IV.B.2.i.
    \266\ Id.
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    Resumption of trade in the U.S. security futures market could
permit intermediaries to earn additional revenues by serving investors
that participate in the security futures market. Whether revenues from
transaction services increase depends on whether investors transact in
security futures in addition to cash market securities rather than
simply reallocating their cash market activities to security futures
markets.
v. Effects of Revisions to Strategy-Based Offset Table
    As discussed in section II.B. above, the revised Strategy-Based
Offset Table is being re-published as proposed.\267\ The re-published
Strategy-Based Offset Table incorporates the 15% required margin levels
for certain offsetting positions and retains the same percentages for
all other offsets. The revisions to the Strategy-Based Offset Table
would promote consistency with the lower margin levels on unhedged
security futures positions of the final rule amendments. If security
futures trading resumes, the revisions would generally benefit
investors from the lower cost of carrying offset positions. The SEC
also expects any additional costs incurred by broker-dealers to
incorporate the revised Strategy-Based Offset Table into their existing
policies and procedures to be similarly insubstantial.
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    \267\ See 2019 Proposing Release, 84 FR at 36441-43.
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4. Effects on Efficiency, Competition, and Capital Formation
    In addition to the specific costs and benefits discussed above, the
reductions to minimum margin requirements on unhedged security futures
that the SEC is adopting may have broader effects on efficiency,
competition, and capital formation.
i. Efficiency
    Should trading in security futures resume, the SEC expects the
final rule amendments to result in incremental improvements in
efficiency to the extent that they permit investors to obtain the risk
exposures they desire at lower cost. The final rule amendments may also
improve liquidity in the security futures market and impact the
informational efficiency of security futures prices, as well as the
prices for related financial instruments. Reducing minimum margin
requirements could also impact the financial system more broadly
though, as discussed below, we do not expect such effects to be
substantial.
a. Efficiency and Transactions Costs
    Under the current minimum margin requirements two identical
security futures positions may be subject to different margin levels
because they are held in different types of accounts. A potential
concern with the current margin requirements in these situations, and
more generally, is whether they can result in price distortions or
introduce inefficiencies in how investors allocate funds.
    Current margin requirements may not necessarily result in price
distortions. This is because certain participating investors, such as
market makers,\268\ are exempt from the current margin requirements
(which would still apply to any positions held on behalf of a
customer), and they may step in to become the ``marginal investor'' in
situations where current margin requirements might otherwise distort
prices.\269\ For example, if security futures trading resumes investors
trading from outside a Portfolio Margin Account, who are not exempt
from margin requirements, would face trading costs associated with
margin requirements that may hinder their ability to trade with each
other. A seller and a buyer who agree on the value of a security
futures product may nevertheless fail to agree on a transaction price
because the buyer demands a discount to compensate herself for the cost
of meeting margin requirements, while the seller demands a premium to
compensate herself for the same costs. On their own, these distortions
would result in wider bid-ask spreads in security futures markets.
However, because market participants such as market makers, who are
exempt from margin requirements, bear minimal costs to transact, these
investors have the ability to provide quotes that are

generally more competitive than the quotes provided by other types of
investors, reducing uncertainty in the value of security futures.
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    \268\ Market makers are subject to exemptions from margin
requirements. See CFTC Rule 41.42(c)(2)(v); SEC Rule 400(c)(2)(v).
    \269\ A market participant or investor is considered
``marginal'' if they are willing to buy or sell security futures
even for small deviations between the price of a security futures
contract and the contract's fundamental value and thus sets the
price of the contract. Such activities may be more profitable for
market makers if they encounter lower trading frictions (including
margin requirements) relative to other market participants.
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    Nevertheless, current margin requirements may result in potential
allocative inefficiencies. Trading costs associated with the current
margin requirements may impact investor demand, and therefore
willingness to take on or lay off risk exposures using security
futures. In particular, risk sharing under the regulatory minimum
margin requirements may be different relative to the case where margin
levels are optimally determined to reflect the risks of security
futures positions. The difference between the allocation of financial
risk that result from current margin requirements and the allocation
associated with the margin requirements that are optimally determined
may be viewed as an allocative inefficiency. Allocative inefficiency
may also manifest if trading costs in security futures drive investors
to use alternative products to obtain financing or manage risk, which
are less suited to their needs.
    If security futures trading resumes, certain investors could reduce
these potential allocative inefficiencies by trading out of a Portfolio
Margin Account,\270\ where margin requirements can result in much lower
margin levels compared to those that apply outside such accounts.
However, as of the fourth quarter of 2019, no investors appeared to be
trading in security futures out of Portfolio Margin Accounts, despite
the fact that they did trade significantly in exchange-traded equity
options out of these accounts. This observation may indicate that
investors that qualify for Portfolio Margin Accounts have not traded
security futures.\271\ Alternatively, such investors may have chosen to
trade security futures outside of Portfolio Margin accounts, implying
that the costs they faced as a result of the current margin
requirements were not sufficiently large to discourage their
participation or to persuade them to open a Portfolio Margin Account.
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    \270\ Not all investors are eligible to open a Portfolio Margin
Account. See Cboe/MIAX Letter at 4.
    \271\ With the exception of investors that are exempt from
margin requirements, the investors that hold or are eligible to open
a Portfolio Margin Account are best positioned to trade security
futures at margin levels that could be substantially below the
current minimum margin requirements. The extent to which they face
low margin levels on a new security futures position depends on any
offsetting positions--either security futures or exchange-traded
options positions--that they hold in their Portfolio Margin Account
at that time when they seek to enter the new security future
position.
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    Nevertheless, because opening Portfolio Margin Accounts entails
costs, not all investors can trade out of these accounts,\272\
therefore some investors may face barriers to participation in the
security futures market, if trading resumes. The potential
inefficiencies associated with these barriers arise when the margin
levels associated with current minimum margin requirements for security
futures are larger than the margin levels associated with margin
requirements that are optimally determined, and not because similar
positions are margined differently in other markets.
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    \272\ See Cboe/MIAX Letter (describing potential costs and
requirements associated with opening a Portfolio Margining Account).
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    The final rule amendments will lower the minimum initial margin
requirements for certain security futures positions, and in turn reduce
the trading costs for these positions. To the extent trading costs
result in inefficiencies, the final rule amendments, by lowering
trading costs, may reduce potential inefficiencies associated with the
current initial margin requirements.
    Furthermore, as discussed above, lower trading costs in certain
security futures positions may increase investor demand for security
futures, and may encourage greater market participation in this market
if trading in security futures resumes. Greater participation may
increase competition over prices, which in turn may result in improved
price discovery and liquidity in the security futures market. However,
the effect of the final rule amendments on price discovery and
liquidity may be limited because, as discussed above, the marginal
participant in this market is likely one that is currently exempt from
the customer margin requirements for security futures and therefore,
able to supply liquidity at relatively low cost.
    One commenter stated that the lower minimum margin requirements
combined with investors' search for sources of leverage, may increase
liquidity in the security futures market while simultaneously reducing
liquidity and price efficiency in other related markets.\273\ The SEC
acknowledges that the final rule amendments may encourage resumption of
trading in the U.S. security futures market and, if trading resumes,
may encourage arbitrageurs to rely more on the security futures market
to take advantage of potential mispricing compared to other markets, or
may increase the risk of adverse selection in equity markets if it
encourages less-informed investors to migrate to the security futures
market to obtain leveraged equity exposure at low cost.\274\ However,
the SEC does not believe that the resumption of trading in security
futures or heightened focus on the security futures market would
necessarily reduce informational efficiency or liquidity in aggregate
across related markets. Markets that support trade in financial
instruments that reference the same underlying security tend to be
interconnected to a high degree.\275\ Furthermore, investors may access
security futures quotes and post-trade information. As such, even if
trading in security futures resumes and the final rule amendments shift
price discovery from related markets to the security futures market,
information impounded in security futures prices may inform trading in
those related markets.\276\
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    \273\ See CII Letter at 3.
    \274\ See Stewart Mayhew, Atulya Sarin & Kuldeep Shastri, The
Allocation of Informed Trading Across Related Markets: An Analysis
of the Impact of Changes in Equity-Option Margin Requirements, 50 J.
FIN. 1635 (1995) (showing that a reduction in options margin
requirements decreased options market bid/ask spreads and increased
option market depth-of-book, while increasing equity market bid/ask
spreads and decreasing equity market depth-of-book).
    \275\ See, e.g. Sugato Chakravarty, Huseyin Gulen & Stewart
Mayhew, Informed Trading in Stock and Option Markets, 59 J. FIN.
1253 (2004) (showing that price discovery takes place both in the
equity market and the equity options market, with the latter
contributing by about 17%). Similarly, another study documents
informational flows between credit default swap markets, equity
options markets and equity markets. See Antje Berndt & Anastaysia
Ostrovnaya, Do Equity Markets Favor Credit Market News over Options
Market News?, 4(2) Q. J. FIN. 1 (2014).