\276\ See, e.g. David Easley, Maureen O'Hara & P. S. Srinivas,
Option Volume and Stock Prices: Evidence on Where Informed Traders
Trade, 53 J. FIN. 431 (1998) and Jun Pan & Allen Poteshman, The
Information in Option Volume for Future Stock Prices, 19 REV. FIN.
STUD. 871 (2006) (both showing that equity options trading provide
valuable information for equity markets).
---------------------------------------------------------------------------

b. Systemic Considerations
    The final rule amendments may also impact efficiency through their
impact on risk management. As discussed above, broker-dealers likely
weigh the costs associated with customer defaults against the benefits
of lower margin requirements when setting margin requirements for their
customers. Although such private considerations would produce market-
determined margin levels that were optimal from a broker-dealer's
perspective, market imperfections could lead broker-dealers to impose
margin requirements on customers that are not efficient for the
financial system as a whole. The relevant market imperfections in the
context of margin requirements relate to

externalities on financial stability arising from excessive
leverage.\277\
---------------------------------------------------------------------------

    \277\ The SEC acknowledges that other market imperfections
(e.g., asymmetric information, adverse selection) may also play a
role, although the SEC believes these to be less relevant to this
context. Asymmetric information about market participants' quality
can lead privately negotiated margin levels to be inefficient. For
example, competition among broker-dealers may lead to a ``race to
the bottom'' in margin requirements when customers' ``quality'' is
not perfectly observable. See e.g., Tano Santos & Jose A.
Scheinkman, Competition among Exchanges, 116 Q. J. ECON. 1027
(2001). Alternatively, problems of adverse selection (e.g.,
potential to re-invest customer margin in risky investments) or
moral hazard (e.g., expectations of government rescue) may also
create incentives for broker-dealers to offer margin requirements
that are too low. Asymmetric information about broker-dealer quality
may make it impossible for customers to provide sufficient market
discipline, leading to a problem similar to that faced by bank
depositors. See Mathias Dewatripont & Jean Tirole, Efficient
Governance Structure: Implications for Banking Regulation, in
CAPITAL MARKETS AND FINANCIAL INTERMEDIATION 12 (Colin Mayer &
Xavier Vives eds., 1993).
---------------------------------------------------------------------------

    Historically, a key aspect of the rationale for regulatory margin
requirements on securities transactions was the belief that such
requirements could improve efficiency by limiting stock market
volatility resulting from ``pyramiding credit.'' \278\ Leveraged
exposures built up during price run-ups could lead to the collapse of
prices when a small shock triggers initial and maintenance margin calls
and a cascade of de-leveraging. The utility of such margin requirements
in limiting such ``excess'' volatility and the contribution of
derivatives markets to such volatility have been a perennial topic of
debate in the academic literature, rekindled periodically by crisis
episodes.\279\ Most recently, the 2007-2008 financial crisis saw
similar concerns (i.e., procyclical leverage, margin call-induced
selling spirals) raised in the securitized debt markets.\280\ While
lower margin requirements can increase the risk and severity of market
dislocations--given the current limited scale of the security futures
markets and the limited role played by SEC registrants in these
markets--the adopted reductions to minimum margin requirements are
unlikely to present a material financial stability concern.
---------------------------------------------------------------------------

    \278\ See Thomas Gale Moore, Stock Market Margin Requirements,
74 J. POL. ECON. 158 (1966).
    \279\ See id. See also Stephen Figlewski, Futures Trading and
Volatility in the GNMA Market, 36 J. FIN. 445 (1981). See also
Franklin R Edwards, Does Futures Trading Increase Stock Market
Volatility?, 44 FIN. ANALYSTS J. 63 (1988). See also Paul H Kupiec,
Margin Requirements, Volatility, and Market Integrity: What Have We
Learned Since the Crash?, 13 J. FIN. SERVICES RES. 231 (1998).
    \280\ See e.g., Tobias Adrian & Hyun Song Shin, Liquidity and
Leverage, 19 J. FIN. INTERMEDIATION 418 (2010).
---------------------------------------------------------------------------

    One commenter expressed concern that the criteria for prescribing
margin requirements under the Exchange Act to preserve the financial
integrity of markets trading security futures products and preventing
systemic risk appear to indicate potential significant risks to the
capital markets and investors by lowering margin requirements.\281\
This commenter noted that the 2019 Proposing Release specifically
acknowledged that margin requirements are a critical component of any
risk management program for cleared financial products and that higher
margin levels imply lower leverage, which reduces risk.\282\ As
described in the baseline, the vast majority of security futures
positions were held in futures accounts at CFTC-regulated entities,
and, consequently, only a small fraction of the security futures
accounts were subject to the SEC's margin rules. Therefore, even if
trading in security futures resumes and participation in security
futures markets were to increase modestly as a result of the final rule
amendments, the adopted reductions to minimum margin requirements are
unlikely to have a significant impact on the financial integrity of the
security futures market and are unlikely to lead to systemic risk.\283\
---------------------------------------------------------------------------

    \281\ See CII Letter at 2.
    \282\ See CII Letter at 2.
    \283\ See 2019 Proposing Release, 84 FR at 36438, and 36449-50.
---------------------------------------------------------------------------

ii. Competition
    The SEC has considered the potential impact of the final rule
amendments on competition. This section discusses those impacts in
detail and considers the views of commenters on the extent to which
reducing minimum margin requirements for certain accounts introduces or
eliminates competitive disparities between markets for different types
of financial instruments and markets in different jurisdictions.
a. Competition Among Related Markets
    The 2019 Proposing Release stated that the proposed initial and
maintenance margin requirements would establish a more level playing
field between options exchanges and security futures exchanges, and
between broker-dealers/securities accounts and FCMs/futures
accounts.\284\ Although the SEC continues to expect the final rule
amendments to place these exchanges and account types on a more level
footing, some commenters took issue with this view. One commenter
argued that the final rule amendments would give unhedged security
futures a competitive advantage over exchange-traded equity options
when held outside a Portfolio Margining Account.\285\ This commenter
suggested that subjecting security futures and exchange-traded equity
options to different margin requirements in this way may disrupt the
regulatory parity that currently exists between security futures and
exchange-traded equity options as the proposal would create
preferential margin levels for unhedged security futures held outside
of a Portfolio Margin Account.\286\ This commenter also believed that
the proposal implies that exchange-traded equity options and security
futures are not competing products, stating that currently there is
significant trading in option spread positions that ``replicate long
and short security futures'' outside Portfolio Margin Accounts.\287\
---------------------------------------------------------------------------

    \284\ See 2019 Proposing Release, 84 FR at 36451.
    \285\ See Cboe/MIAX Letter at 6-8.
    \286\ See Cboe/MIAX Letter at 2.
    \287\ See Cboe/MIAX Letter at 6-8.
---------------------------------------------------------------------------

    The SEC agrees that security futures and exchange-traded equity
options can have similar economic uses. Nevertheless, for the reasons
discussed in section II.A.2 of this release, reducing the margin levels
for an unhedged security future held outside of a Portfolio Margin
Account to 15% is unlikely to result in a competitive disadvantage for
exchange-traded equity options in practice if trading in security
futures resumes.
    The SEC acknowledges that because the adopted margin requirements
apply only to unhedged security futures positions held outside
Portfolio Margining Accounts, the final rule amendments may result in
different margin requirements across security futures positions and
exchange-traded equity options positions held in this type of account.
To the extent some investors view a security futures position and an
option spread position that replicates the contractual payoffs of the
security futures position as close substitutes, the final rule
amendments may result in different costs for these positions when held
outside of a Portfolio Margining Account and may cause these investors
to prefer the security futures position to the option spread position.
From this perspective, the final rule amendments may potentially have
an adverse competitive effect on exchange-traded equity options if
trading in security futures resumes in the U.S. However, this potential
adverse competitive impact likely would be small as a substantial
portion of exchange-traded equity options are traded in Portfolio
Margin Accounts where the margin requirement for an unhedged exchanged-
traded option on a

narrow-based index or single-equity is 15%.\288\
---------------------------------------------------------------------------

    \288\ See 2019 Proposing Release, 84 FR 36450.
---------------------------------------------------------------------------

    OneChicago disagreed with the notion that security futures and
exchange-traded equity options strategies could be comparable, noting
that because security futures provide an investor with 100% exposure
(i.e., delta one exposure) to the underlying security, security futures
should instead be compared to other financial instruments that offer
delta one exposure, such as uncleared OTC equity swaps and cleared OTC
stock loans.\289\
---------------------------------------------------------------------------

    \289\ OneChicago Letter.
---------------------------------------------------------------------------

    OTC total return equity swaps and stock loans may compete with
security futures to provide delta one exposure at lower cost compared
to outright acquisition of the underlying security. From this
perspective, to the extent that security futures compete with these OTC
instruments, the final rule amendments would increase the
competitiveness of security futures relative to these OTC instruments.
However, this potential competitive effect is limited, because, as
OneChicago noted, under certain conditions, the costs of financing
delta one exposure through OTC equity swaps and stock loans can be
substantially smaller compared to the cost of security futures.\290\
---------------------------------------------------------------------------

    \290\ OneChicago Letter. In addition, as discussed in section
II.A. of this release, Section 7(c)(2)(B) of the Exchange Act
provides that the margin requirements for security futures must be
consistent with the margin requirements for comparable exchange-
traded options. The Exchange Act does not directly contemplate
comparisons with the margin requirements for the products and
markets identified by OneChicago. Rather, it requires comparisons to
comparable exchange-traded options.
---------------------------------------------------------------------------

    OneChicago further argued that the risk profile of a security
futures position cannot be replicated with exchange-traded equity
options, and on this basis challenged the argument that lower margin
requirements for security futures would reduce the competitiveness of
exchange-traded equity options.\291\ OneChicago stated that security
futures products are not comparable to exchange-traded equity options
because they have different risk profiles; exchange-traded equity
options are subject to dividend risk, pin risk, and early assignment
risk, while security futures are not.\292\ Further, OneChicago
challenged the concerns raised by other commenters that the proposed
margin requirements would result in ``regulatory arbitrage,'' arguing
that the many salient differences between security futures and
exchange-traded equity options make it virtually impossible to
replicate a security futures position using exchange-traded equity
options.\293\ OneChicago suggested that the comparison between a
security futures position and an option spread position that
``replicates'' the security futures cannot be limited to a comparison
between the contractual payoffs of these two positions. In particular,
this commenter argued that a proper comparison should include payoffs
that may occur throughout the life of the position, including payoffs
from the security future's daily settlement of variation margin (i.e.,
marking-to-market and paying or collecting variation margin) that
differs from initial and maintenance margin requirements in options
markets.\294\
---------------------------------------------------------------------------

    \291\ See OneChicago Letter; OneChicago Letter 2.
    \292\ OneChicago Letter at 2, 9; OneChicago Letter 2 at 1-2.
    \293\ See OneChicago Letter 2.
    \294\ See also OneChicago Letter (providing a more in depth
analysis of these issues together with some data that outlines
various payoff structures for different strategies based on
currently traded contracts).
---------------------------------------------------------------------------

    The SEC acknowledges that even if the contractual payoffs of a
security futures position could be perfectly replicated with the
payoffs of an option spread position,\295\ the risk profiles of the two
positions may still be different.\296\ For example, the daily variation
margin settlement of the security futures position may give rise to
payoffs throughout the life of the positions that could expose the
holders of the position to funding risk. Similarly, the exchange of
variation margin for the options spread position also exposes investors
to funding risk, but to a lesser degree compared to a security futures
position.\297\ As noted by OneChicago, unlike a security futures
position, an option spread position may be subject to a number of risks
that reflect potential strategic behavior that is commonplace in the
options markets, including dividend risk, assignment risk, and pin
risk.\298\ Because funding risks and the risks that reflect strategic
behavior in options markets may affect the security futures and the
option spread positions differently, the two positions may not have the
same risk profile.
---------------------------------------------------------------------------

    \295\ It is well known that in theory a long security futures
position can be perfectly replicated with an option spread position
consisting of a long European call and a short European put. Both
options have the same expiration, and each has a strike price equal
to the futures price. This result is also known as the put-call
parity. See, e.g. JOHN C. HULL, FUNDAMENTALS OF FUTURES AND OPTIONS
MARKETS, (Pearson Prentice Hall, 2017).
    \296\ A number of practical factors challenge the extent to
which security futures can be perfectly replicated using an options
spread position. First, most stock options currently trading are
American style rather than European style. American style options
typically sell at a premium relative to European style options
because of the value of exercising early. Second, if the strike
price of these options (which is set to equal the futures price)
falls outside the range currently trading, liquidity may be limited
and these options may sell at a premium (or at a discount if short).
Third, certain features of the futures and options markets may
introduce payoffs throughout the life of these positions that may
further complicate the replication strategy. For example, the daily
settlement process in the futures market may result in additional
payments or payouts to the holder of the futures position, relative
to the contractual payoffs of the position. Similarly, the practice
of exchanging variation margin in the options market may result in
additional payments/payouts to the holder of the options positions.
These additional payments generally help reduce the potential loss
due to a counterparty failure, but may also expose a counterparty to
funding risk. Finally, the option spread position may be subject to
a number of risks that reflect potential strategic behavior that is
commonplace in the options markets, including dividend risk,
assignment risk, and pin risk (for definitions of dividend risk,
assignment risk and pin risk, see OneChicago Letter 3, at n.23, 24,
and 25). The futures position may also be exposed to some of these
risks through the daily settlement process (for example, the price
of a futures contract on a dividend-paying stock would reflect an
unanticipated change in the dividend policy at the time when this
change in policy is made public). The factors outlined above point
to potential price disparities between the security futures and the
option spread positions that cannot be arbitraged away. The last two
factors also point to sources of potential risks, and therefore
sources of potential losses, that may impact the two positions
differently. In general, these factors may cause the risk profile of
the security futures and the risk profile of the option spread
positions to drift apart.
    \297\ The margin on the security futures position is calculated
on the current market value of the position, while the margin on the
option spread position is generally calculated on the value of the
short leg of the position, outside of a Portfolio Margin Account.
    \298\ See supra note 296 (describing what these risks are). See
also OneChicago Letter 3, at n.23-25.
---------------------------------------------------------------------------

    Notwithstanding these differences, under certain conditions, the
risk profiles of the two positions may be sufficiently similar for some
investors, and may be viewed by these investors as close (but not
necessarily perfect) substitutes. These strategies are economic
equivalents to a certain degree because both provide exposure to an
underlying equity security or narrow-based equity security index
outside the cash equity market.\299\ Thus, both strategies can be used
to hedge, at least partially, a long or short position in the
underlying equity security or narrow-based equity security index.
Similarly, each strategy can also be used to speculate on a potential
price movement of the underlying equity security or narrow-based equity
security index. Furthermore, both short security futures positions and
certain exchange-traded equity options strategies produce unlimited
downside risk. Investors in security futures and writers of options may
lose their initial and maintenance

margin on deposit and premium payments and be required to pay
additional funds in the event of a default of a broker-dealer or
clearinghouse.
---------------------------------------------------------------------------

    \299\ See supra note 117.
---------------------------------------------------------------------------

    In addition, a deep-in-the money call or put option on the same
security can have a delta approaching one if the underlying security
takes values in a certain range of outcomes. Over such a range of
outcomes, equity option contracts may be comparable to a security
futures contract. Further, as stated by one commenter, synthetic
futures strategies are an important segment of today's options markets
competing everyday with security futures.\300\
---------------------------------------------------------------------------

    \300\ See Cboe/MIAX Letter at 6-7.
---------------------------------------------------------------------------

    OneChicago provided empirical analyses to support its claim that
changes to security futures margin rates would not impact exchange-
traded equity options. In one analysis, OneChicago observed data
inconsistent with a statistically positive correlation between the E-
mini margin rates and either the ratio of SPX (S&P 500) options open
interest to E-mini S&P 500 futures open interest or the ratio of SPX
trading volume to E-mini trading volume.\301\ In another analysis,
OneChicago provided statistical data on the correlation in open
interest between security futures and exchange-traded equity options.
This analysis shows that there is no significant correlation between
the two types of open interest, and OneChicago saw this finding as
supporting their conclusion that market participants have discrete uses
for security futures and ``equity options and that the derivatives are
not interchangeable.'' \302\
---------------------------------------------------------------------------

    \301\ OneChicago Letter 3 at 12-15.
    \302\ OneChicago Letter 3 at 15.
---------------------------------------------------------------------------

    The SEC appreciates the empirical analyses provided by OneChicago,
while also noting that the inferences in these analyses are subject to
multiple limitations that make it difficult to conclude on the basis of
these analyses that reducing minimum initial and maintenance margin
requirements for security futures would not reduce the use of
comparable options strategies. It is unclear to what degree results
from the SPX options market and the E-mini futures market can be
generalized to exchange-traded equity options and security futures.
Unlike their single-stock counterparts, derivatives that are based on
broad-based indices can be used by a wide range of institutional and
retail investors for purposes broader than obtaining exposure to
individual equities or obtaining cash to finance other positions.
Participants in these markets may seek to efficiently hedge market risk
or express views on the direction or volatility of equity indices.
Moreover, the markets for futures and options that track the S&P 500
index or track an investable portfolio of S&P 500 equities include more
than just the products that OneChicago analyzed. This makes it
difficult to extrapolate results from these markets to the markets for
exchange-traded options and security futures. Furthermore, OneChicago's
analysis of security futures and exchange-traded equity options
compares security futures to all equity options contracts, without
focusing on those segments of the equity options market most comparable
to security futures, such as strategies that approximate delta one
exposure.
    The final rule amendments may improve the ability of security
futures intermediaries and exchanges to compete in the market for other
financial services. Certain analyses submitted by OneChicago to the
comment file support this view with evidence that security futures
would be used for different purposes than exchange-traded equity
options.\303\ For example, OneChicago compared trade size (number of
contacts and notional value) in security futures with trade size in
options markets and security future delivery rates with options
exercise rates,\304\ and concluded that the higher trade size and
higher delivery rates in security futures markets indicated that
investors use the security futures market for financing purposes. When
summarizing its findings, OneChicago stated that the delivery data
makes ``clear'' that the ``markets view and use the products
differently.'' \305\ OneChicago further asserted that certain security
futures strategies represent exchange-traded substitutes for securities
lending and equity repo transactions.\306\
---------------------------------------------------------------------------

    \303\ OneChicago Letter at 2-3.
    \304\ OneChicago Letter 3 at 9-12.
    \305\ OneChicago Letter 3 Summary at 1.
    \306\ OneChicago Letter 3, at 22.
---------------------------------------------------------------------------

b. Foreign Markets for Security Futures
    Finally, OneChicago noted that U.S. security futures markets faced
competition from foreign markets that rely on risk-based initial margin
that, in contrast to Portfolio Margin Accounts, do not have a strategy-
based floor and in which ``naked positions are margined at risk-based
levels.'' \307\ OneChicago supplied initial margin requirements for
security futures written on Dow Jones Industrial Average components at
Eurex on July 25, 2019, ranging from 6.64% to 14.71%. The SEC
acknowledges that other jurisdictions may choose to implement initial
margin requirements for security futures under local legal regimes that
differ from those of the United States. To the extent that customers
may access a number of different markets, higher initial margin
requirements in one jurisdiction may place intermediaries and exchanges
regulated by that jurisdiction at a competitive disadvantage relative
to others.\308\ However, as discussed above, the SEC is not persuaded
by arguments that implementing a risk model approach to calculating
margin for security futures would at this time be permitted under U.S.
law and, furthermore, notes that the final rule amendments may reduce
the degree of competitive disadvantage if trading resumes in the U.S.,
at least insofar as foreign markets would draw away customers that
would otherwise trade security futures outside of Portfolio Margin
Accounts.\309\
---------------------------------------------------------------------------

    \307\ OneChicago Letter, at n.54 and accompanying text.
    \308\ OneChicago submitted a customer letter supporting this
point. See OneChicago Letter, Appendix C.
    \309\ See supra note 182 in section IV.A.4. (CFTC--Description
of Costs) (noting that 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).
---------------------------------------------------------------------------

iii. Capital Formation
    As discussed above, the potential benefits to investors that flow
from the final rule amendments including a lower cost of obtaining
underlying securities, the opportunity to take on more leverage
(relative to the baseline), and the potential increase in price
competitiveness, may increase investor demand for access to security
futures contracts. To the extent security futures trading resumes in
the U.S., and investor participation causes the market for security
futures to grow, the final rule amendments would have an impact on
capital formation. An active security futures market can reduce the
frictions associated with shorting equity exposures (making it easier
for negative information about a firm's fundamentals to be incorporated
into security prices) or financing securities exposures. This could
promote more efficient capital allocations by facilitating the flow of
financial resources to their most productive uses.
5. Reasonable Alternatives Considered
    In the 2019 Proposing Release, the SEC stated it did not believe
there are reasonable alternatives to the proposal to reduce minimum
margin levels for unhedged security futures.\310\ Two

commenters took issue with this observation and suggested several
alternatives for the SEC to consider.\311\ One commenter suggested two
alternatives: (1) Reduce the size of security futures contracts; and
(2) rule-based margin with flexible settlement intervals.\312\ The
other commenter suggested two additional alternatives: (1) Risk-based
margins for all security futures products; and (2) risk-based margins
for select security futures products involving STARS transactions.\313\
---------------------------------------------------------------------------

    \310\ 2019 Proposing Release, 84 FR at 36451.
    \311\ See CII Letter at 4; OneChicago Letter.
    \312\ See CII Letter at 4; see also Commissioner Jackson's
Statement.
    \313\ See OneChicago Letter; OneChicago Letter 2; OneChicago
Letter 3; see also Ianni Letter; La Botz Letter.
---------------------------------------------------------------------------

    The SEC addresses the suggested alternatives below. The 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.
i. Reduce the Size of the Security Futures Contract
    One commenter suggested that an alternative to lowering the margin
on security futures could be to reduce the size of a security futures
contract.\314\ This commenter noted that a similar reduction in the
size of the S&P e-mini futures contract that led to the creation of S&P
micro e-mini futures could increase access to single-stock futures for
the most popular securities and improve efficiency.\315\ The SEC
acknowledges that one way to reduce the dollar value of margin required
for a position in a given contract is to reduce the size of the
contract. However, an investor is more likely to determine her optimal
exposure in terms of notional value or as a proportion of her available
financial resources, rather than as a number of contracts. This
alternative would not change the amount of margin that would be
assessed on such an investor's optimal exposure. For example, if the
size of the contract were reduced by half, so would the value of margin
required, subject to certain caveats,\316\ but the investor would need
twice as many contracts to establish her optimal exposure. Thus, the
total margin for this exposure would not change significantly from the
baseline. However, a reduction in contract size is known to encourage
market participation, and therefore, this alternative may spur demand
for security futures.\317\
---------------------------------------------------------------------------

    \314\ See CII Letter at 4; see also Commissioner Jackson's
Statement.
    \315\ See CII Letter at 4.
    \316\ There may be other factors that may affect whether the
margin scales up or down with the size of the contract, in a linear
fashion.
    \317\ See, e.g., Lars Nord[eacute]n, Does an Index Futures Split
Enhance Trading Activity and Hedging Effectiveness of the Futures
Contract, 26 J. FUTURES MARKETS 1169 (2006).
---------------------------------------------------------------------------

ii. Rule-Based Margins With Flexible Margin Settlement Intervals
    The same commenter suggested another alternative that would
maintain the current minimum margin requirements and reduce margins by
changing the margin settlement intervals for security futures.\318\
This alternative is based on the findings of one study, which
quantifies the extent to which current margin requirements overmargin
or undermargin a futures position relative to a risk-based margin
requirement (e.g., traditional futures).\319\ This study finds that
current margin requirements are overly conservative, and that
increasing the length of the margin settlement interval may help
alleviate the problem. The study further suggested that exchanges
should be allowed to set the length of the margin settlement interval
as a means of competing with one another.
---------------------------------------------------------------------------

    \318\ See CII Letter at 4.
    \319\ Hans R. Dutt & Ira L. Wein, On the Adequacy of Single-
Stock Futures Margining Requirements, 10 J. FUTURES MARKETS 989
(2003).
---------------------------------------------------------------------------

    While changing the length of the margin settlement interval may
provide another way of reducing margins, it is not clear how feasible
this method would be in practice. Allowing exchanges to set different
margin settlement intervals for different products and update these
over time would increase complexity and potentially impose operation
costs on market participants. Because this alternative is not used
currently in any equity markets (to the SEC's knowledge), and because
there is uncertainty about how to calibrate the mechanism to deliver
margin requirements in this context, the operational costs of this
alternative could be large.
    Moreover, the SEC recognizes that daily margin settlement is an
important risk management tool in the markets for security futures,
especially in light of recent market volatility. OneChicago--the only
exchange trading security futures at the time the rule amendments were
proposed--also cited risk management concerns, arguing that such an
approach would remove a critical protection in futures markets.\320\
---------------------------------------------------------------------------

    \320\ OneChicago Letter at 6.
---------------------------------------------------------------------------

    Finally, the Commissions are adopting the final rules because they
produce a desired policy outcome of aligning the minimum margin levels
for security futures held in non-Portfolio Margin Accounts with the
margin levels for security futures in a Portfolio Margin Account, for
the reasons discussed in section II.A. above. Modifying margin
settlement intervals would not accomplish this policy outcome.
    For these reasons, the SEC is not adopting an approach that
includes rules-based margin requirements with flexible settlement
intervals in this release.
iii. Risk-Based Margin for All Security Futures Products
    OneChicago suggested the alternative of using risk-based margin
requirements for security futures products. OneChicago stated that
risk-based margin requirements would give security futures the best
chance to compete with other products that provide delta one exposure
to an underlying security, including products traded in overseas
markets and that are subject to similar risk-based margin
requirements.\321\ According to OneChicago's analysis, the Commissions'
proposal to lower the required margin levels from 20% to 15% would have
resulted in a 25% reduction in the value of initial margin collected
(from $540 million to $410 million); whereas using a risk-based margin
model would have resulted in a 61% reduction (from $540 million to $210
million).\322\ This suggests that the margin savings to investors from
risk-based margin requirements may be economically significant.
---------------------------------------------------------------------------

    \321\ See OneChicago Letter at 12-13.
    \322\ OneChicago Letter at 14.
---------------------------------------------------------------------------

    OneChicago also supported its position that the Commissions should
permit risk-based margin for security futures, presenting analysis that
estimated that 92% of OneChicago products were ``overmargined'' (in the
sense that the minimum margin requirement was greater than the level
that would result from a risk-based margin calculation) at a 20%
minimum margin requirement and 84% of OneChicago products would be
``overmargined'' at a 15% minimum margin requirement. This analysis
suggests that the final rule amendments would set margin requirements
for 8% of OneChicago products equal to the margin levels that would
arise from risk-based margining but that a substantial majority of
OneChicago products would have minimum margin requirements above risk-
based levels, if security

futures trading at OneChicago resumes.\323\
---------------------------------------------------------------------------

    \323\ Id.
---------------------------------------------------------------------------

    The SEC acknowledges that risk-based initial margin requirements
may result in more efficient levels of margin being collected compared
with margin requirements based on fixed margin levels. Moreover, moving
to risk-based margin requirement would likely achieve a larger
reduction in competitive frictions between security futures and
alternative means of financing delta one exposure (e.g., use of OTC
equity swaps and stock loans) than the final rules.
    However, as discussed in section II.A. above, the SEC is not
persuaded by OneChicago's arguments that, at this time, implementing a
risk model approach to calculating initial margin for security futures
would be permitted under Section 7(c)(2)(B) of the Exchange Act given
that such risk-based margin models are not currently used to set
initial margin for customers in the equity options markets. 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 these reasons, this suggested
alternative to permit risk-based margin models to determine customer
margin requirements for security futures is not viable.
iv. Risk-Based Margin for a Subset of Security Futures Products
    OneChicago suggested the alternative of using risk-based margin
requirements for STARS transactions.\324\ OneChicago stated that risk-
based margin requirements would allow STARS transactions to compete
with other transactions that market participants currently use to
finance their activities.
---------------------------------------------------------------------------

    \324\ OneChicago Letter at 19; see also Memorandum from the
SEC's Division of Trading and Markets regarding a July 16, 2019,
meeting with representatives of OneChicago.
---------------------------------------------------------------------------

    The SEC's consideration of this alternative is similar to the
alternative of permitting risk-based initial margin requirements for
all security futures transactions. While the SEC acknowledges that
risk-based initial margin requirements may be more efficient than
margin requirements based on fixed margin levels, the SEC is not
persuaded by OneChicago's arguments that, at this time, implementing a
risk model approach to calculating initial margin for STARS
transactions would be permitted under Section 7(c)(2)(B) of the
Exchange Act. For this reason, as well as the recent announcements by
OneChicago, this suggested alternative for STARS transactions is not
viable.

V. Regulatory Flexibility Act

A. CFTC

    The Regulatory Flexibility Act (``RFA'') requires that Federal
agencies, in promulgating rules, consider the impact of those rules on
small entities.\325\ The final rules would affect designated contract
markets, FCMs, and customers who trade in security futures, if security
futures trading resumes. The CFTC has previously established certain
definitions of ``small entities'' to be used by the CFTC in evaluating
the impact of its rules on small entities in accordance with the
RFA.\326\
---------------------------------------------------------------------------

    \325\ 5 U.S.C. 601 et seq.
    \326\ Policy Statement and Establishment of Definitions of
``Small Entities'' for Purposes of the Regulatory Flexibility Act,
47 FR 18618, 18618-21 (Apr. 30, 1982).
---------------------------------------------------------------------------

    In its previous determinations, the CFTC has concluded that
contract markets are not small entities for purposes of the RFA, based
on the vital role contract markets play in the national economy and the
significant amount of resources required to operate as SROs.\327\ The
CFTC also has determined that notice-designated contract markets are
not small entities for purposes of the RFA.\328\
---------------------------------------------------------------------------

    \327\ Id. at 18619.
    \328\ Designated Contract Markets in Security Futures Products:
Notice-Designation Requirements, Continuing Obligations,
Applications for Exemptive Orders, and Exempt Provisions, 66 FR
44960, 44964 (Aug. 27, 2001).
---------------------------------------------------------------------------

    The CFTC has previously determined that FCMs are not small entities
for purposes of the RFA, based on the fiduciary nature of FCM-customer
relationships as well as the requirements that FCMs meet certain
minimum financial requirements.\329\ In addition, the CFTC has
determined that notice-registered FCMs,\330\ for the reasons applicable
to FCMs registered in accordance with Section 4f(a)(1) of the CEA,\331\
are not small entities for purposes of the RFA.\332\
---------------------------------------------------------------------------

    \329\ Supra note 326 at 18619.
    \330\ A broker or dealer that is registered with the SEC and
that limits its futures activities to those involving security
futures products may notice register with the CFTC as an FCM in
accordance with Section 4f(a)(2) of the CEA (7 U.S.C. 6f(a)(2)).
    \331\ 7 U.S.C. 6f(a)(1).
    \332\ 2002 Adopting Release, 67 FR at 53171.
---------------------------------------------------------------------------

    Finally, the CFTC notes that according to data from OneChicago, 99%
of all customers that transacted in security futures as of March 1,
2016, and March 1, 2017, qualified as ECPs. The CFTC has found that
ECPs should not be considered small entities for the purposes of the
RFA.\333\ Based on this information, an overwhelming majority of the
customers that traded security futures in the past were ECPs and not
small entities. Although it is possible that an exchange that launches
security futures trading in the future may market these contracts to
retail customers that are not ECPs, the CFTC believes that it is still
unlikely that the final rules will affect small entities. Therefore, a
change in the margin level for security futures is not anticipated to
affect small entities.
---------------------------------------------------------------------------

    \333\ Opting Out of Segregation, 66 FR 20740, 20743 (Apr. 25,
2001).
---------------------------------------------------------------------------

    Accordingly, the CFTC Chairman, on behalf of the CFTC, hereby
certifies pursuant to 5 U.S.C. 605(b), that the final rules will not
have a significant economic impact on a substantial number of small
entities.

B. SEC

    The RFA requires that Federal agencies, in promulgating rules,
consider the impact of those rules on small entities.\334\ Section 3(a)
\335\ of the RFA generally requires the SEC to undertake a regulatory
flexibility analysis of all proposed rules to determine the impact of
such rulemaking on small entities unless the SEC certifies that the
rule amendments, if adopted, would not have a significant economic
impact on a substantial number of small entities.\336\
---------------------------------------------------------------------------

    \334\ 5 U.S.C. 601 et seq.
    \335\ 5 U.S.C. 603.
    \336\ 5 U.S.C. 605(b). The final rule amendments are discussed
in detail in section II. above. The SEC discusses the economic
consequences of the amendments in section IV. (Economic Analysis)
above. As discussed in section III. (Paperwork Reduction Act) above,
the final rule amendments do not contain a ``collection of
information'' requirement within the meaning of the PRA.
---------------------------------------------------------------------------

    Pursuant to Section 605(b) of the RFA,\337\ the SEC certified in
the 2019 Proposing Release, that the proposed amendments to reduce the
required margin for security futures from 20% to 15% would not have a
significant economic impact on any ``small entity'' for purposes of the
RFA.\338\ The SEC solicited comment on the RFA analysis

in the 2019 Proposing Release.\339\ The SEC received no comments in
response to this request. The SEC is adopting the amendments in this
release, as proposed.
---------------------------------------------------------------------------

    \337\ See 5 U.S.C. 605(b).
    \338\ See 2019 Proposing Release, 84 FR at 36452.
    \339\ Id.
---------------------------------------------------------------------------

    For purposes of SEC rulemaking in connection with the RFA,\340\ a
small entity includes a broker-dealer that had total capital (net worth
plus subordinated liabilities) of less than $500,000 on the date in the
prior fiscal year as of which its audited financial statements were
prepared pursuant to 17 CFR 240.17a-5(d),\341\ or, if not required to
file such statements, a broker-dealer with total capital (net worth
plus subordinated liabilities) of less than $500,000 on the last day of
the preceding fiscal year (or in the time that it has been in business,
if shorter); and is not affiliated with any person (other than a
natural person) that is not a small business or small
organization.\342\ The final rule amendments will reduce the required
margin for security futures from 20% to 15%. The final rule amendments
will affect brokers, dealers, and members of national securities
exchanges, including FCMs required to register as broker-dealers under
Section 15(b)(11) of the Exchange Act, relating to security
futures.\343\
---------------------------------------------------------------------------

    \340\ Although Section 601 of the RFA defines the term ``small
entity,'' the statute permits agencies to formulate their own
definitions. The SEC has adopted definitions for the term ``small
entity'' for the purposes of SEC rulemaking in accordance with the
RFA. Those definitions, as relevant to this rulemaking, are set
forth in SEC Rule 0-10 (under the Exchange Act), 17 CFR 240.0-10.
See Statement of Management on Internal Accounting Control, Exchange
Act Release No. 18451 (Jan. 28, 1982), 47 FR 5215 (Feb. 4, 1982).
    \341\ SEC Rule 17a-5(d) (under the Exchange Act).
    \342\ See 17 CFR 240.0-10(c).
    \343\ See SEC Rule 400(a), 17 CFR 242.400(a).
---------------------------------------------------------------------------

    IBs and FCMs may register as broker-dealers by filing Form BD-
N.\344\ However, because such IBs may not collect customer margin they
are not subject to these rules. In addition, the CFTC has concluded
that FCMs are not considered small entities for purposes of the
RFA.\345\ Accordingly, there are no IBs or FCMs that are small entities
for purposes of the RFA that would be subject to the final rule
amendments.
---------------------------------------------------------------------------

    \344\ These notice-registered broker-dealers are not included in
the 873 small broker-dealers discussed below, because they are not
required to file FOCUS Reports with the SEC. See SEC Rule 17a-
5(m)(4), 17 CFR 240.17a-5(m)(4).
    \345\ See 47 FR 18618, 18618-21 (Apr. 30, 1982). See also 66 FR
14262, 14268 (Mar. 9, 2001).
---------------------------------------------------------------------------

    In addition, all members of national securities exchanges
registered under Section 6(a) of the Exchange Act are registered
broker-dealers.\346\ The SEC estimates that as of December 31, 2019,
there were approximately 873 broker-dealers that were ``small'' for the
purposes of SEC Rule 0-10. Of these, the SEC estimates that there are
approximately ten broker-dealers that are carrying broker-dealers
(i.e., can carry customer margin accounts and extend credit).\347\
However, based on December 31, 2019, FOCUS Report data, none of these
small carrying broker-dealers carried debit balances.\348\ This means
these ``small'' carrying firms are not extending margin credit to their
customers, and therefore, the final rule amendments likely will not
apply to them. Finally, OneChicago was the only U.S. national
securities exchange listing security futures until it discontinued all
trading operations on September 21, 2020. Therefore, while some small
broker-dealers could be affected by the final rule amendments, the
amendments will not have a significant impact on a substantial number
of small broker-dealers.
---------------------------------------------------------------------------

    \346\ National securities exchanges registered under Section
6(g) of the Exchange Act--notice registration of security futures
product exchanges--may have members who are floor brokers or floor
traders who are not registered broker-dealers; however, these
entities cannot clear securities transactions or collect customer
margin, and, therefore, the final rule amendments will not apply to
them.
    \347\ These small broker-dealers file a FOCUS Report Part II on
a monthly basis, which is required to be filed by broker-dealers
that clear transactions or carry customer accounts and do not use
models to calculate net capital. See 17 CFR 240.17a-5(a)(2)(ii).
    \348\ In addition, based on December 31, 2019, FOCUS Report
data, none of these small broker-dealers posted margin to a clearing
agency/DCO related to security futures positions written, purchased
or sold in customer accounts (FOCUS Report, Line 4467).
---------------------------------------------------------------------------

    Accordingly, the SEC certifies that the final rule amendments will
not have a significant economic impact on a substantial number of small
entities for purposes of the RFA.

VI. Other Matters

    Pursuant to the Congressional Review Act,\349\ the Office of
Information and Regulatory Affairs has designated these rules as not a
``major rule,'' as defined by 5 U.S.C. 804(2).
---------------------------------------------------------------------------

    \349\ 5 U.S.C. 801 et seq.
---------------------------------------------------------------------------

    If any of the provisions of these final rules, or the application
thereof to any person or circumstance, is held to be invalid, such
invalidity shall not affect other provisions or application of such
provisions to other persons or circumstances that can be given effect
without the invalid provision or application.

VII. Anti-Trust Considerations

    Section 15(b) of the CEA requires the CFTC to take into
consideration the public interest to be protected by the antitrust laws
and endeavor to take the least anticompetitive means of achieving the
purposes of the CEA, in issuing any order or adopting any CFTC rule or
regulation (including any exemption under Section 4(c) or 4c(b)), or in
requiring or approving any bylaw, rule, or regulation of a contract
market or registered futures association established pursuant to
section 17 of the CEA.\350\ The CFTC believes that the public interest
to be protected by the antitrust laws is generally to protect
competition.
---------------------------------------------------------------------------

    \350\ 7 U.S.C. 19(b).
---------------------------------------------------------------------------

    The CFTC has determined that the final rules are not
anticompetitive and have no anticompetitive effects. In the proposal,
the CFTC requested comment on whether there are less anticompetitive
means of achieving the relevant purposes of the CEA. The objective of
the proposal was to 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.
    One commenter argued that the final rules could create a
competitive disadvantage for exchange-traded equity options.\351\ As
explained in more detail above, if security futures trading resumes,
these final rules will reduce the margin level for an unhedged security
future held outside of a Portfolio Margin Account to 15% and should not
result in a competitive disadvantage for exchange-traded equity
options, as the 15% margin rate is already in effect for exchange-
traded options held in a Portfolio Margin Account.
---------------------------------------------------------------------------

    \351\ Cboe/MIAX Letter at 2 and 6.
---------------------------------------------------------------------------

    A different commenter argued that the current strategy-based margin
regime does not level the playing field with options, but rather, acts
as a barrier to entry for competition and puts security futures at a
competitive disadvantage.\352\ The CFTC notes that, given the statutory
constraints that require the margin requirements for security futures
to be consistent with the margin requirements for comparable exchanged-
traded equity options, the CFTC has not identified any less
anticompetitive means of achieving the purposes of the CEA.
---------------------------------------------------------------------------

    \352\ OneChicago Letter at 2.
---------------------------------------------------------------------------

VIII. Statutory Basis

    The SEC is amending SEC Rule 403(b)(1) pursuant to the Exchange
Act, particularly Sections 3(b), 6, 7(c), 15A and 23(a). Further, these
amendments are adopted pursuant to the authority

delegated jointly to the SEC, together with the CFTC, by the Federal
Reserve Board in accordance with Exchange Act Section 7(c)(2)(A).

List of Subjects

17 CFR Part 41

    Brokers, Margin, Reporting and recordkeeping requirements, Security
futures products.

17 CFR Part 242

    Brokers, Confidential business information, Reporting and
recordkeeping requirements, Securities.

COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 41

    For the reasons discussed in the preamble, the Commodity Futures
Trading Commission amends 17 CFR part 41 as set forth below:

PART 41--SECURITY FUTURES PRODUCTS

0
1. The authority citation for part 41 continues to read as follows:

    Authority:  Sections 206, 251 and 252, Pub. L. 106-554, 114
Stat. 2763, 7 U.S.C. 1a, 2, 6f, 6j, 7a-2, 12a; 15 U.S.C. 78g(c)(2).

0
2. In Sec.  41.45, republish paragraph (b) heading and revise paragraph
(b)(1) to read as follows:

Sec.  41.45  Required margin.

* * * * *
    (b) Required margin--(1) General rule. The required margin for each
long or short position in a security future shall be fifteen (15)
percent of the current market value of such security future.
* * * * *

SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 242

    In accordance with the foregoing title 17, chapter II, part 242 of
the Code of Federal Regulations is amended as follows:

PART 242--REGULATIONS M, SHO, ATS, AC, NMS, AND SBSR AND CUSTOMER
MARGIN REQUIREMENTS FOR SECURITY FUTURES

0
3. The authority citation for part 242 continues to read as follows:

    Authority: 15 U.S.C. 77g, 77q(a), 77s(a), 78b, 78c, 78g(c)(2),
78i(a), 78j, 78k-1(c), 78l, 78m, 78n, 78o(b), 78o(c), 78o(g),
78q(a), 78q(b), 78q(h), 78w(a), 78dd-1, 78mm, 80a-23, 80a-29, and
80a-37.

0
4. Section 242.403 is amended by revising paragraph (b)(1) to read as
follows:

Sec.  242.403  Required margin.

* * * * *
    (b) * * *
    (1) General rule. The required margin for each long or short
position in a security future shall be fifteen (15) percent of the
current market value of such security future.
* * * * *

    By the Securities and Exchange Commission.

    Dated: October 22, 2020.
Vanessa A. Countryman,
Secretary.
    Issued in Washington, DC, on October 29, 2020, by the Commodity
Futures Trading Commission.
Christopher Kirkpatrick,
Secretary of the Commission.

    Note: The following appendices will not appear in the Code of
Federal Regulations.

CFTC Appendices to Customer Margin Rules Relating to Security Futures--
Commission Voting Summary and Commissioners' Statements

Appendix 1--CFTC Voting Summary

    On this matter, Chairman Tarbert and Commissioners Quintenz,
Behnam, Stump, and Berkovitz voted in the affirmative. No
Commissioner voted in the negative.

Appendix 2--Statement of Support of CFTC Commissioner Brian Quintenz

    I am pleased to support today's final rule lowering the minimum
margin requirement to hold security futures, from 20% to 15% of a
position's market value.\1\ The lower margin requirement would apply
to security futures held in a futures account and to positions held
in a securities account not subject to portfolio margin rules. The
new margin requirement would be consistent with the current margin
requirements both for security futures positions held in a
securities account subject to portfolio margin rules and for
exchange-traded equity options.
---------------------------------------------------------------------------

    \1\ Amended CFTC regulation 41.45(b) and SEC rule 242.403(b).
---------------------------------------------------------------------------

    I note that today's final rule indicates that OneChicago, the
only exchange that has listed security futures in the United States,
has recently discontinued trading operations. This underscores the
determinative impact statutory provisions can have on the viability
of both products and whole business lines. The Securities Exchange
Act requires security futures to be margined comparably to options
traded on an exchange registered with the SEC.\2\ While the intent
of that provision is understandable, the economics underlying it
appear to be severely sub-optimal. Today's lowering of the required
minimum margin, consistent with the Securities Exchange Act, should
make trading this product more cost effective than it has been, but
it still may not be sufficiently cost effective to make the product
economically viable. From that perspective, I hope policy makers
revisit this provision, to ensure its ultimate effect is consistent
with its intent. I believe financial markets policy should
appropriately balance concerns of safety and soundness with
promoting a range of innovative products, and more can certainly be
done in that regard on this issue.
---------------------------------------------------------------------------

    \2\ Section 7(c)(2)(B) of the Securities Exchange Act.
---------------------------------------------------------------------------

    Finally, as I noted above, this rule serves as a positive
example of productive cooperation between the CFTC and the SEC, and
I hope that additional joint actions arise in the future.

Appendix 3--Statement of CFTC Commissioner Dawn D. Stump

    I am pleased to be a part of today's Joint Open Meeting of the
Commodity Futures Trading Commission (``CFTC'') and the Securities
and Exchange Commission (``SEC''). I commend:
     Chairmen Tarbert and Clayton for holding this Meeting
to provide transparency into our work in jointly addressing issues
of mutual interest to both our agencies;
     Commissioner Quintenz at the CFTC and Commissioner
Peirce at the SEC for laying the groundwork for this Joint Meeting
through their efforts to harmonize the regulatory regimes of the
agencies, as these harmonization efforts benefit not only those we
regulate, but also the public we all serve; and
     The staff of the agencies for putting before us a Joint
Final Rule that will lower the margin level for an unhedged security
futures position from 20% to 15%, which I firmly believe is sound
public policy.
    And yet, while I don't want to rain on today's parade, I
nevertheless feel compelled to express a few regrets.
    I regret, for example, that the Commissions did not take the
common-sense step of reducing the security futures margin level from
20% to 15% years ago. After all, OneChicago, the only U.S. exchange
that made a long-term effort to develop a market for security
futures, asked us to take this step 12 years ago in 2008. And the
self-regulatory organization rules establishing a 15% margin level
for unhedged security futures held in a securities portfolio margin
account (with which the action we are taking will align) have been
in effect for at least 10 years since 2010. I appreciate that the
global financial crisis and the ensuing regulatory focus on swaps
and other reforms diverted attention from security futures. But it
is nonetheless disappointing that it took the Commissions a decade
to take the step we take today--and even more disappointing given
that OneChicago did not survive to see it, as it discontinued all
trading operations about a month ago on September 21.
    I also regret that the adopting release does not recognize the
unique circumstances presented by the recent exit of OneChicago and
the fact that no U.S. exchange currently lists security futures for
trading, and thus issues opinions on hypothetical questions that I
do not believe we should be addressing here. By way of background,
when the Commissions proposed to reduce the margin level of an
unhedged security futures position from 20% to 15%, we also
requested comment on whether there are any other risk-

based margin methodologies that could be used to prescribe margin
requirements for security futures.\1\ In response, OneChicago urged
the Commissions to permit the use of risk-based margin models for
security futures--similar to what is done for other futures
contracts. I am in complete agreement that we should not adopt such
a sweeping change to the manner in which margin is calculated for
security futures based solely on the response to a single request
for comment in a proposal designed to address a wholly different
type of margin calculation rule.
---------------------------------------------------------------------------

    \1\ Customer Margin Rules Relating to Security Futures, 84 FR
36434, 36441 (July 26, 2019). The proposing release also asked
commenters, if their answer to this question was yes, to ``please
identify the margin methodologies and explain how they would meet
the comparability standards under the [Securities] Exchange Act [of
1934].'' Id.
---------------------------------------------------------------------------

    Unfortunately, though, the adopting release goes further, and
rejects OneChicago's arguments regarding the Commissions' authority
to adopt risk-based margining for security futures. Some of these
arguments are fact-based, and thus a future change in facts could
yield a different conclusion, which is appropriate.\2\ But the
adopting release also rejects OneChicago's interpretive arguments
that the Commissions can adopt risk-based margining for security
futures even absent a change in factual circumstances.\3\ I think
that is unfortunate, for three reasons.
---------------------------------------------------------------------------

    \2\ The Securities Exchange Act of 1934 (``Exchange Act'')
provides that margin levels for security futures must, among other
things, be: (i) Consistent with the margin requirements for
comparable options traded on any exchange registered pursuant to
Section 6(a) of the Exchange Act; and (ii) not lower than the lowest
level of margin, exclusive of premium, required for any comparable
exchange-traded options. See Sections 7(c)(2)(B)(iii)(I)-(II) of the
Exchange Act (emphasis added). The adopting release concludes that
risk-based margining for security futures is inappropriate, in part,
because it would substantially deviate from how margin requirements
are calculated for exchange-traded equity options at this time. If
risk-based margining were permitted for such equity options in the
future, then risk-based margining for security futures might follow,
too.
    \3\ OneChicago's interpretive arguments included that: (i) The
Commissions' reading of Sections 7(c)(2)(B)(iii)(I)-(II) of the
Exchange Act as focusing on margin levels is incorrect; and (ii)
security futures contracts are not ``comparable'' to equity options
and, therefore, the ``consistent with'' and ``not lower than''
margin restrictions in Sections 7(c)(2)(B)(iii)(I)-(II) of the
Exchange Act do not apply.
---------------------------------------------------------------------------

    First, I do not believe that we should be offering advisory
opinions on interpretive questions that, in light of the demise of
OneChicago, no CFTC- or SEC-registered exchange is currently asking.
In my view, these hypothetical questions are not material given the
circumstances before us, and should therefore be left to future CFTC
and SEC Commissioners, to be decided in the context of a live
request to list and trade security futures.
    Second, risk-based margining for security futures is permitted
in Europe, and while factors other than margin requirements may
influence demand for security futures, its rejection in the adopting
release creates a potential competitive disadvantage for U.S.
exchanges vs. their international counterparts. The Commodity
Exchange Act (``CEA'') specifies that one of its purposes is ``to
promote responsible innovation and fair competition among boards of
trade, other markets and market participants.'' \4\ The
interpretation in the adopting release fails to fulfill that
purpose.
---------------------------------------------------------------------------

    \4\ CEA section 3(b), 7 U.S.C. 5(b) (emphasis added).
---------------------------------------------------------------------------

    Third, it should be remembered that the trading of security
futures on U.S. exchanges before the year 2000 was prohibited due to
jurisdictional disputes over the treatment of products that have
attributes of both SEC-regulated securities and CFTC-regulated
derivatives. In the Commodity Futures Modernization Act of 2000
(``CFMA''), Congress repealed that prohibition and permitted
security futures to trade on U.S. exchanges pursuant to a framework
of joint regulation by the CFTC and the SEC.\5\ Yet, the rejection
of risk-based margining in the adopting release risks stifling the
very security futures market that the CFMA intended to promote.
---------------------------------------------------------------------------

    \5\ Commodity Futures Modernization Act of 2000, Public Law 106-
554, 114 Stat. 2763 (2000).
---------------------------------------------------------------------------

    Nevertheless, it is my sincere hope that while the reduction in
margin level for an unhedged security futures position from 20% to
15% may have come too late for OneChicago, it will incentivize
another U.S. exchange to launch security futures. And in that event,
it is my further hope that the Commissions will bring an open mind
to any interpretive arguments the exchange may advance if it
requests recognition of risk-based margining for its contracts.
    In the meantime, I support the Joint Final Rule that is before
us.

Appendix 4--Supporting Statement of CFTC Commissioner Dan M. Berkovitz

    I support today's final rule on customer margin requirements for
security futures (``Final Rule''), issued jointly with the
Securities and Exchange Commission (``SEC''). The Final Rule ensures
that margin requirements for unhedged security futures will be
consistent regardless of the type of customer account in which they
are held. The Final Rule presents no new risks to the financial
system, and is an overdue effort to align margin requirements for
security futures.\1\
---------------------------------------------------------------------------

    \1\ Congress established a framework for the trading and joint
regulation of security futures in the Commodity Futures
Modernization Act of 2000 (``CFMA''). Among other requirements, the
CFMA specified that customer margin requirements for security
futures products must be consistent with the margin requirements for
comparable options traded on a registered securities exchange, and
that 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 options.
---------------------------------------------------------------------------

    Unhedged security futures held in a ``portfolio margin'' account
have been subject to a 15 percent minimum margin amount since
certain securities self-regulatory organizations (``SROs'') launched
portfolio margining pilot programs starting in 2007.\2\ In contrast,
prior to this Final Rule, such unhedged security futures held in a
futures account or in a securities customer account that is not
subject to portfolio margining were subject to a 20 percent margin
requirement. This structure produced disparate treatment of security
futures based solely on the customer account class in which they
were held.
---------------------------------------------------------------------------

    \2\ Portfolio margining allows a broker-dealer to combine
certain of a customer's securities and security futures positions
held in a securities account for purposes of determining the margin
requirements for those positions. Such portfolio margining began
with a 2007 pilot program pursuant to the rules of CBOE Exchange.
The program became permanent in 2008. FINRA adopted its own
portfolio margining rules in 2010. Portfolio margining for security
futures is not available in a futures customer account. Thus, prior
to this Final Rule, the 15 percent treatment available to security
futures held in a portfolio margined account was unavailable to
security futures held in a futures account.
---------------------------------------------------------------------------

    The Final Rule addresses this disparate treatment with no
increased risks to the financial system. It brings all unhedged
security futures to the same 15 percent margin requirement,
consistent with existing margin requirements for security futures
and equity options held in portfolio margin accounts that have been
in place for over a decade.
    I support the two Commissions' efforts in today's Final Rule to
address one aspect of trading in security futures, consistent with
the CFMA's statutory requirements. Unfortunately, these efforts are
too late to be of any near-term benefit. Notably, the only U.S.
derivatives exchange that offered security futures products
discontinued trading in September, 2020.
    I look forward to continuing to work with staff and my fellow
Commissioners at both the CFTC and the SEC on a viable margin regime
for security futures going forward.
    I thank my fellow Commissioners at the CFTC and the SEC, as well
as staff of the two agencies, for their work on this Final Rule.

[FR Doc. 2020-24353 Filed 11-23-20; 8:45 am]
BILLING CODE 6351-01-8011-01-P


[Federal Register Volume 86, Number 137 (Wednesday, July 21, 2021)]
[Notices]
[Pages 38526-38528]
[FR Doc No: 2021-15522]

=======================================================================
-----------------------------------------------------------------------

DEPARTMENT OF TRANSPORTATION

National Highway Traffic Safety Administration

Petition for Exemption From the Federal Motor Vehicle Theft
Prevention Standard; BMW of North America, LLC

AGENCY: National Highway Traffic Safety Administration (NHTSA),
Department of Transportation (DOT).

ACTION: Grant of petition for exemption.

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

SUMMARY: This document grants in full the BMW of North America, LLC's
(BMW) petition for exemption from the Federal Motor Vehicle Theft
Prevention Standard (theft prevention standard) for its Toyota Supra
vehicle line beginning in model year (MY) 2022. The petition is granted
because the agency has determined that the antitheft device to be
placed on the line as standard equipment is likely to be as effective
in reducing and deterring motor vehicle theft as compliance with the
parts-marking requirements of the theft prevention standard. BMW also
requested confidential treatment for specific information in its
petition. Therefore, no confidential information provided for purposes
of this notice has been disclosed.

DATES: The exemption granted by this notice is effective beginning with
the 2022 model year.

FOR FURTHER INFORMATION CONTACT: Carlita Ballard, Office of
International Policy, Fuel Economy, and Consumer Programs, NHTSA, West
Building, W43-439, NRM-310, 1200 New Jersey Avenue SE, Washington, DC
20590. Ms. Ballard's phone number is<PHONE_NUMBER>. Her fax number is
(202) 493-2990.

SUPPLEMENTARY INFORMATION: Under 49 U.S.C. Chapter 331, the Secretary
of Transportation (and the National Highway Traffic Safety
Administration (NHTSA) by delegation) is required to promulgate a theft
prevention standard to provide for the identification of certain motor
vehicles and their major replacement parts to impede motor vehicle
theft. NHTSA promulgated regulations at part 541 (theft prevention
standard) to require parts-marking for specified passenger motor
vehicles and light trucks. Pursuant to 49 U.S.C. 33106, manufacturers
that are subject to the parts-marking requirements may petition the
Secretary of Transportation for an exemption for a line of passenger
motor vehicles equipped as standard equipment with an antitheft device
that the Secretary decides is likely to be as effective in reducing and
deterring motor vehicle theft as compliance with the parts-marking
requirements. In accordance with this statute, NHTSA promulgated 49 CFR
part 543, which establishes the process through which manufacturers may
seek an exemption from the theft prevention standard.
    49 CFR 543.5 provides general submission requirements for petitions
and states that each manufacturer may petition NHTSA for an exemption
of one vehicle line per model year. Among other requirements,
manufacturers must identify whether the exemption is sought under
section 543.6 or section 543.7. Under section 543.6, a manufacturer may
request an exemption by providing specific information about the
antitheft device, its capabilities, and the reasons the petitioner
believes the device to be as effective at reducing and deterring theft
as compliance with the parts-marking requirements. Section 543.7
permits a manufacturer to request an exemption under a more streamlined
process if the vehicle line is equipped with an antitheft device (an
``immobilizer'') as standard equipment that complies with one of the
standards specified in that section.
    Section 543.8 establishes requirements for processing petitions for
exemption from the theft prevention standard. As stated in section
543.8(a), NHTSA processes any complete exemption petition. If NHTSA
receives an incomplete petition, NHTSA will notify the petitioner of
the deficiencies. Once NHTSA receives a complete petition the agency
will process it and, in accordance with section 543.8(b), will grant
the petition if it determines that, based upon substantial evidence,
the standard equipment antitheft device is likely to be as effective in
reducing and deterring motor vehicle theft as compliance with the
parts-marking requirements of part 541.
    Section 543.8(c) requires NHTSA to issue its decision either to
grant or to deny an exemption petition not later than 120 days after
the date on which a complete petition is filed. If NHTSA does not make
a decision within the 120-day period, the petition shall be deemed to
be approved and the manufacturer shall be exempt from the standard for
the line covered by the petition for the subsequent model year.\1\
Exemptions granted under part 543 apply only to the vehicle line or
lines that are subject to the grant and that are equipped with the
antitheft device on which the line's exemption was based, and are
effective for the model year beginning after the model year in which
NHTSA issues the notice of exemption, unless the notice of exemption
specifies a later year.
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    \1\ 49 U.S.C. 33106(d).
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    Sections 543.8(f) and (g) apply to the manner in which NHTSA's
decisions on petitions are to be made known. Under section 543.8(f), if
the petition is sought under section 543.6, NHTSA publishes a notice of
its decision to grant or deny the exemption petition in the Federal
Register and notifies the petitioner in writing. Under section
543.8(g), if the petition is sought under section 543.7, NHTSA notifies
the petitioner in writing of the agency's decision to grant or deny the
exemption petition.
    This grant of petition for exemption considers BMW of North
America, LLC's (BMW) petition for its Toyota Supra vehicle line
beginning in MY 2022. BMW's petition is granted under 49 U.S.C. 33106
and 49 CFR 543.8(c), which state that if the Secretary of
Transportation (NHTSA, by delegation) does not make a decision about a
petition within 120 days of the petition submission, the petition shall
be deemed to be approved and the manufacturer shall be exempt from the
standard for the line covered by the petition for the subsequent model
year. Separately, based on the information provided in BMW's petition,
NHTSA has determined that the antitheft device to be placed on its
vehicle line as standard equipment is likely to be as effective in
reducing and deterring motor vehicle theft as compliance with the
parts-marking requirements of the theft prevention standard.

I. Specific Petition Content Requirements Under 49 CFR 543.6

    Pursuant to 49 CFR part 543, Exemption from Vehicle Theft
Prevention, BMW petitioned for an exemption for its specified vehicle
line from the parts-marking requirements of the theft prevention
standard, beginning in MY 2022. BMW petitioned under 49 CFR 543.6,
Petition: Specific content requirements, which, as described above,
requires manufacturers to provide specific information about the
antitheft device installed as standard equipment on all vehicles in the
line for which an exemption is sought, the antitheft device's
capabilities, and the reasons the petitioner believes the device to be
as effective at reducing and deterring theft as compliance with the
parts-marking requirements.

    More specifically, section 543.6(a)(1) requires petitions to
include a statement that an antitheft device will be installed as
standard equipment on all vehicles in the line for which the exemption
is sought. Under section 543.6(a)(2), each petition must list each
component in the antitheft system, and include a diagram showing the
location of each of those components within the vehicle. As required by
section 543.6(a)(3), each petition must include an explanation of the
means and process by which the device is activated and functions,
including any aspect of the device designed to: (1) Facilitate or
encourage its activation by motorists; (2) attract attention to the
efforts of an unauthorized person to enter or move a vehicle by means
other than a key; (3) prevent defeating or circumventing the device by
an unauthorized person attempting to enter a vehicle by means other
than a key; (4) prevent the operation of a vehicle which an
unauthorized person has entered using means other than a key; and (5)
ensure the reliability and durability of the device.\2\
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    \2\ 49 CFR 543.6(a)(3).
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    In addition to providing information about the antitheft device and
its functionality, petitioners must also submit the reasons for their
belief that the antitheft device will be effective in reducing and
deterring motor vehicle theft, including any theft data and other data
that are available to the petitioner and form a basis for that
belief,\3\ and the reasons for their belief that the agency should
determine that the antitheft device is likely to be as effective as
compliance with the parts-marking requirements of part 541 in reducing
and deterring motor vehicle theft. In support of this belief, the
petitioners should include any statistical data that are available to
the petitioner and form the basis for the petitioner's belief that a
line of passenger motor vehicles equipped with the antitheft device is
likely to have a theft rate equal to or less than that of passenger
motor vehicles of the same, or a similar, line which have parts marked
in compliance with part 541.\4\
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    \3\ 49 CFR 543.6(a)(4).
    \4\ 49 CFR 543.6(a)(5).
---------------------------------------------------------------------------

    The following sections describe BMW's petition information provided
pursuant to 49 CFR part 543, Exemption from Vehicle Theft Prevention.
To the extent that specific information in BMW's petition is subject to
a properly filed confidentiality request, that information was not
disclosed as part of this notice.\5\
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    \5\ 49 CFR 512.20(a).
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    In a petition dated November 9, 2020, BMW requested an exemption
from the parts-marking requirements of the theft prevention standard
for the Toyota Supra vehicle line beginning with MY 2022.
    In its petition, BMW provided a detailed description and diagram of
the identity, design, and location of the components of the antitheft
device for its Toyota Supra vehicle line. Under 543.6(a)(3), BMW stated
that its Toyota Supra vehicle line will be installed with a passive,
electronically-coded, vehicle immobilizer system (EWS) as standard
equipment that will prevent the vehicle from being driven away under
its own engine power. Key features of the antitheft device will include
a remote-control w/high frequency (HF) receiver, mechanical keys, low
frequency antenna (LF), radio frequency remote control w/transponder,
engine control unit (DME) with encoded start release input,
transmission control unit (EGS) and an EWS (BDC) control unit. BMW
stated that it will not offer an audible or visible alarm feature on
the proposed device.
    Pursuant to section 543.6(a)(3), BMW explained the means and
process by which the immobilizer device is activated and functions. BMW
stated that activation of its antitheft device occurs automatically
when the engine is shut off and the vehicle key is removed from the
ignition system. BMW stated that a transponder (transmitter/receiver)
in the radio frequency remote control communicates with the EWS (BDC)
control unit providing the interface to the HF receiver, LF antenna and
ring antenna, engine control unit and starter. After an initial
starting value, the authentication uses the challenge response
technique with symmetric secret key. BMW further stated that when the
control unit identifies the correct release signal, the ignition signal
and fuel supply are released allowing operation of the vehicle. BMW
stated that deactivation may not be carried out with the mechanical
key, but rather must occur by electronic means.
    BMW also stated that the vehicle is equipped with a central-locking
system that can be operated to lock and unlock all doors or to unlock
only the driver's door, preventing forced entry into the vehicle
through the passenger doors. BMW further stated that the vehicle can be
further secured by locking the doors and hood using either the key-lock
cylinder on the driver's door or the remote frequency remote control.
BMW stated that the frequency for the remote control constantly changes
to prevent an unauthorized person from opening the vehicle by
intercepting the signals of its remote control.
    As required in section 543.6(a)(3)(v), BMW provided information on
the reliability and durability of its proposed device. To ensure
reliability and durability of its device, BMW stated that it conducted
tests on the antitheft device which complied with its own specific
standards. BMW further stated that its antitheft device fulfills the
requirements of the January 1995 European vehicle insurance companies.
In further addressing the reliability and durability of its device, BMW
provided information on the uniqueness of its mechanical keys to be
used on the Toyota Supra vehicle line. Specifically, BMW stated that
the vehicle's mechanical keys are unique because they require a special
key blank, cutting machine and a unique vehicle code to allow for key
duplication. BMW further stated that the new keys will only be issued
to authorized persons and will incorporate special guide-way millings,
making the locks almost impossible to pick and the keys impossible to
duplicate on the open market.
    BMW further stated that all of its vehicles are currently equipped
with antitheft devices as standard equipment, including its Toyota
Supra vehicle line. BMW compared the effectiveness of its antitheft
device with devices which NHTSA has previously determined to be as
effective in reducing and deterring motor vehicle theft as would
compliance with the parts-marking requirements of Part 541. BMW stated
that its antitheft system on the Toyota Supra vehicle line is the same
system employed on its existing 2 series vehicle line. BMW also stated
that the agency's most recent theft rate data for MY/CY 2014 indicate a
minor decrease and downward trend for those vehicles installed with its
antitheft device which have been granted parts-marking exemptions by
the agency.

III. Decision To Grant the Petition

    Pursuant to 49 U.S.C. 33106 and 49 CFR 543.8(b), the agency grants
a petition for exemption from the parts-marking requirements of part
541, either in whole or in part, if it determines that, based upon
substantial evidence, the standard equipment antitheft device is likely
to be as effective in reducing and deterring motor vehicle theft as
compliance with the parts-marking requirements of part 541, or if
deemed approved under 49 U.S.C. 33106(d). As discussed above, in this
case, BMW's petition is granted under 49 U.S.C. 33106(d).
    However, separately, NHTSA also finds that BMW has provided
adequate reasons for its belief that the antitheft device for its
vehicle line is likely to be

as effective in reducing and deterring motor vehicle theft as
compliance with the parts-marking requirements of the theft prevention
standard. This conclusion is based on the information BMW provided
about its antitheft device. NHTSA believes, based on BMW's supporting
evidence, that the antitheft device described for its vehicle line is
likely to be as effective in reducing and deterring motor vehicle theft
as compliance with the parts-marking requirements of the theft
prevention standard.
    The agency concludes that BMW's antitheft device will provide the
four of the five types of performance features listed in section
543.6(a)(3): Promoting activation; preventing defeat or circumvention
of the device by unauthorized persons; preventing operation of the
vehicle by unauthorized entrants; and ensuring the reliability and
durability of the device.
    The agency notes that 49 CFR part 541, Appendix A-1, identifies
those lines that are exempted from the theft prevention standard for a
given model year. 49 CFR 543.8(f) contains publication requirements
incident to the disposition of all part 543 petitions. Advanced
listing, including the release of future product nameplates, the
beginning model year for which the petition is granted and a general
description of the antitheft device is necessary in order to notify law
enforcement agencies of new vehicle lines exempted from the parts-
marking requirements of the theft prevention standard.
    If BMW decides not to use the exemption for its requested vehicle
line, the manufacturer must formally notify the agency. If such a
decision is made, the line must be fully marked as required by 49 CFR
541.5 and 541.6 (marking of major component parts and replacement
parts).
    NHTSA notes that if BMW wishes in the future to modify the device
on which this exemption is based, the company may have to submit a
petition to modify the exemption. Section 543.8(d) states that a part
543 exemption applies only to vehicles that belong to a line exempted
under this part and equipped with the antitheft device on which the
line's exemption is based. Further, section 543.10(c)(2) provides for
the submission of petitions ``to modify an exemption to permit the use
of an antitheft device similar to but differing from the one specified
in the exemption.''
    The agency wishes to minimize the administrative burden that
section 543.10(c)(2) could place on exempted vehicle manufacturers and
itself. The agency did not intend in drafting part 543 to require the
submission of a modification petition for every change to the
components or design of an antitheft device. The significance of many
such changes could be de minimis. Therefore, NHTSA suggests that if BMW
contemplates making any changes, the effects of which might be
characterized as de minimis, it should consult the agency before
preparing and submitting a petition to modify.
    For the foregoing reasons, the agency hereby grants in full BMW's
petition for exemption for the Toyota Supra vehicle line from the
parts-marking requirements of 49 CFR part 541, beginning with its MY
2022 vehicles.

    Issued under authority delegated in 49 CFR 1.95 and 501.8.
Raymond R. Posten,
Associate Administrator for Rulemaking.
[FR Doc. 2021-15522 Filed 7-20-21; 8:45 am]
BILLING CODE 4910-59-P