[Federal Register Volume 85, Number 227 (Tuesday, November 24, 2020)]
[Rules and Regulations]
[Pages 75112-75147]
[FR Doc No: 2020-24353]

Vol. 85

Tuesday,

No. 227

November 24, 2020

Part II

Commodity Futures Trading Commission

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17 CFR Part 41

Securities and Exchange Commission

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17 CFR Part 242

Customer Margin Rules Relating to Security Futures; Final Rule

Federal Register / Vol. 85 , No. 227 / Tuesday, November 24, 2020 /
Rules and Regulations

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COMMODITY FUTURES TRADING COMMISSION

17 CFR Part 41

RIN 3038-AE88

SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 242

[Release No. 34-90244; File No. S7-09-19]
RIN 3235-AM55

Customer Margin Rules Relating to Security Futures

AGENCY: Commodity Futures Trading Commission and Securities and
Exchange Commission.

ACTION: Joint final rule.

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SUMMARY: The Commodity Futures Trading Commission (``CFTC'') and the
Securities and Exchange Commission (``SEC'') (collectively, the
``Commissions'') are adopting rule amendments to lower the margin
requirement for an unhedged security futures position from 20% to 15%
and adopting certain conforming revisions to the security futures
margin offset table.

DATES: This rule is effective December 24, 2020.

FOR FURTHER INFORMATION CONTACT:
    CFTC: Melissa A. D'Arcy, Special Counsel and Sarah E. Josephson,
Deputy Director, Division of Clearing and Risk, at<PHONE_NUMBER>; and
Michael A. Penick, Economist at<PHONE_NUMBER>, and Ayla Kayhan,
Economist at<PHONE_NUMBER>, Office of the Chief Economist, Commodity
Futures Trading Commission, Three Lafayette Centre, 1155 21st Street
NW, Washington, DC 20581.
    SEC: Michael A. Macchiaroli, Associate Director, at<PHONE_NUMBER>;
Thomas K. McGowan, Associate Director, at<PHONE_NUMBER>; Randall W.
Roy, Deputy Associate Director, at<PHONE_NUMBER>; Sheila Dombal
Swartz, Senior Special Counsel, at<PHONE_NUMBER>; or Abraham Jacob,
Special Counsel, at<PHONE_NUMBER>; Division of Trading and Markets,
Securities and Exchange Commission, 100 F Street NE, Washington, DC
20549-7010.

SUPPLEMENTARY INFORMATION:
I. Background
II. Final Rule Amendments
    A. Lowering the Minimum Margin Level From 20% to 15%
    1. The Commissions' Proposal
    2. Comments and Final Amendments
    B. Conforming Revisions to the Strategy-Based Offset Table
    1. The Commissions' Proposal
    2. Comments and the Re-Published Strategy-Based Offset Table
    C. Other Matters
III. Paperwork Reduction Act
    A. CFTC
    B. SEC
IV. CFTC Consideration of Costs and Benefits and SEC Economic
Analysis (Including Costs and Benefits) of the Proposed Amendments
    A. CFTC
    1. Introduction
    2. Economic Baseline
    3. Summary of the Final Rules
    4. Description of Costs
    5. Description of Benefits Provided by the Final Rules
    6. Discussion of Alternatives
    7. Consideration of Section 15(a) Factors
    B. SEC
    1. Introduction
    2. Baseline
    3. Considerations of Costs and Benefits
    4. Effects on Efficiency, Competition, and Capital Formation
    5. Reasonable Alternatives Considered
V. Regulatory Flexibility Act
    A. CFTC
    B. SEC
VI. Other Matters
VII. Anti-Trust Considerations
VIII. Statutory Basis

I. Background

    A security future is a futures contract on a single security or on
a narrow-based securities index.\1\ The Commodity Futures Modernization
Act of 2000 (``CFMA'') lifted the ban on trading security futures and
established a framework for the joint regulation of these products by
the Commissions.\2\ Among other things, the CFMA amended Section 7 of
the Securities Exchange Act of 1934 (``Exchange Act'') to establish a
margin program for security futures. Section 7(c)(2)(A) of the Exchange
Act provides that it shall be unlawful for any broker, dealer, or
member of a national securities exchange \3\ to, directly or
indirectly, extend or maintain credit to or for, or collect margin from
any customer on, any security future unless such activities comply with
the regulations prescribed by: (1) The Board of Governors of the
Federal Reserve System (``Federal Reserve Board''); or (2) the
Commissions jointly pursuant to authority delegated by the Federal
Reserve Board.
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    \1\ See Section 1a(44) of the Commodity Exchange Act (``CEA'')
and Section 3(a)(55) of the Exchange Act (both defining the term
``security future''). A ``security future'' is distinguished from a
``security futures product,'' which is defined to include a security
future as well as any put, call, straddle, option, or privilege on a
security future. See Section 1a(45) of the CEA and Section 3(a)(56)
of the Exchange Act (both defining the term ``security futures
product''). Under Section 2(a)(1)(D)(iii)(II) of the CEA and Section
6(h)(6) of the Exchange Act, the Commissions may, by order, jointly
determine to permit the listing of options on security futures. The
Commissions have not exercised this authority. The amendments being
adopted in this release relate to margin requirements for security
futures and not for options on security futures. Most of the
discussion in this release relates to security futures. The term
``security futures products'' will be used when discussing security
futures and options on security futures.
    \2\ See Appendix E of Public Law 106-554, 114 Stat. 2763 (2000).
Futures on security indexes that are not narrow-based are subject to
the exclusive jurisdiction of the CFTC.
    \3\ A futures commission merchant (``FCM'') (as defined in
Section 1(a)(28) of the CEA) may be a member of a national
securities exchange, a clearing member of a clearinghouse, or a
customer of a clearing member of a clearinghouse.
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    Section 7(c)(2)(B) of the Exchange Act provides that the customer
margin requirements for security futures products adopted by the
Federal Reserve Board or jointly by the Commissions, ``including the
establishment of levels of margin (initial and maintenance),'' must
satisfy four requirements. First, they must preserve the financial
integrity of markets trading security futures products.\4\ Second, they
must prevent systemic risk.\5\ 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; \6\ 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 options.\7\ Fourth, excluding margin levels,
they must be, and remain consistent with, the margin requirements
established by the Federal Reserve Board under 12 CFR part 220
(``Regulation T'').\8\
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    \4\ See Section 7(c)(2)(B)(i) of the Exchange Act.
    \5\ See Section 7(c)(2)(B)(ii) of the Exchange Act.
    \6\ See Section 7(c)(2)(B)(iii)(I) of the Exchange Act. In this
release, this provision of the statute is sometimes referred to as
the ``consistent with restriction.''
    \7\ See Section 7(c)(2)(B)(iii)(II) of the Exchange Act. In this
release, this provision of the statute is sometimes referred to as
the ``not lower than restriction.''
    \8\ See Section 7(c)(2)(B)(iv) of the Exchange Act.
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    On March 6, 2001, the Federal Reserve Board delegated its authority
under Section 7(c)(2)(A) of the Exchange Act to the Commissions.\9\
Pursuant to that delegation, the Commissions adopted rules in 2002
establishing a margin program for security futures.\10\

These rules require security futures intermediaries to collect margin
from their customers.\11\ A security futures intermediary is a
creditor, as defined under Regulation T, with respect to its financial
relations with any person involving security futures, and includes
registered entities such as brokers-dealers and FCMs.\12\
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    \9\ See Letter from Jennifer J. Johnson, Secretary of the Board,
Federal Reserve Board, to James E. Newsome, Acting Chairman, CFTC,
and Laura S. Unger, Acting Chairman, SEC (Mar. 6, 2001) (``FRB
Letter''); see also Customer Margin Rules Relating to Security
Futures, Exchange Act Release No. 44853 (Sep. 26, 2001), 66 FR 50720
(Oct. 4, 2001) (``2001 Proposing Release'') (reprinting the FRB
Letter in Appendix B).
    \10\ See Customer Margin Rules Relating to Security Futures,
Exchange Act Release No. 46292 (Aug. 1, 2002), 67 FR 53146 (Aug. 14,
2002) (``2002 Adopting Release''). See also 17 CFR 41.41 through
41.49 (CFTC regulations, hereinafter referred to as ``CFTC Rule
41.42'', ``CFTC Rule 41.43'' et seq.) and 17 CFR 242.400 through
242.406 (SEC regulations, hereinafter referred to as ``SEC Rule
400'', ``SEC Rule 401'' et seq.). CFTC regulations referred to
herein are found at 17 CFR chapter I, and SEC regulations referred
to herein are found at 17 CFR chapter II.
    \11\ See CFTC Rule 41.45 and SEC Rule 403. See also CFTC Rule
41.43(a)(29) and SEC Rule 401(a)(1)(29) (both defining the term
``security futures intermediary'' to include a broker-dealer and an
FCM). The term ``security futures intermediary'' includes FCMs that
are clearing members or customers of clearing members. As of
September 18, 2020, the Options Clearing Corporation (``OCC'') was
the only clearinghouse for U.S. exchange-traded security futures.
    \12\ Because a security future is both a security and a future,
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 introducing broker (``IB'') and with the SEC as a
broker-dealer.
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    The Commissions' rules include requirements governing: Account
administration; type, form, and use of collateral; calculation of
equity; withdrawals from accounts; and the treatment of undermargined
accounts. The Commissions stated that ``the inclusion of these
provisions in the final rules satisfies the statutory requirement that
the margin rules for security futures be consistent with Regulation
T.'' \13\
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    \13\ See 2002 Adopting Release, 67 FR at 53155. As indicated
above, Section 7(c)(2)(B)(iv) of the Exchange Act requires that
margin requirements for security futures (other than levels of
margin), including the type, form, and use of collateral, must be
consistent with the requirements of Regulation T.
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    The Commissions' rules contemplate that all security futures
intermediaries will pay to or receive from their customers a daily
variation settlement (i.e., the daily net gain or loss on a security
future) as a result of all open security futures positions being marked
to current market value by the clearing organization where the security
futures are cleared.\14\ In addition, the Commissions' rules establish
minimum initial and maintenance margin levels for unhedged security
futures equal to 20% of their ``current market value.'' \15\
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    \14\ See CFTC Rules 41.43(a)(32), 41.46(c)(1)(vi) and
(c)(2)(iii), and 41.47(b)(1), and SEC Rules 401(a)(32),
404(c)(1)(vi) and (c)(2)(iii), and 405(b)(1).
    \15\ See CFTC Rule 41.45(b)(1) and SEC Rule 403(b)(1). See also
CFTC Rule 41.43(a)(4) and SEC Rule 401(a)(4) (defining the term
``current market value'').
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    The Commissions' rules permit a ``self-regulatory authority''
(``SRA''),\16\ as that term is defined in the rules, to set initial and
maintenance margin levels lower than 20% of the current market value
for certain strategy-based offsetting positions involving security
futures and one or more related securities or futures.\17\ The SRA
rules must meet the four criteria set forth in Section 7(c)(2)(B) of
the Exchange Act and must be effective in accordance with Section
19(b)(2) of the Exchange Act and, as applicable, Section 5c(c) of the
CEA.\18\ In connection with these provisions governing SRA rules, the
Commissions published a table identifying offsets for security futures
that were consistent with the offsets permitted for comparable
exchange-traded options (``Strategy-Based Offset Table'').\19\ SRAs
have adopted margin rules that permit strategy-based offsets between
security futures and related positions based on the Strategy-Based
Offset Table.\20\
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    \16\ The Commissions' rules define the term ``self-regulatory
authority'' to mean a national securities exchange registered under
Section 6 of the Exchange Act, a national securities association
registered under Section 15A of the Exchange Act, a contract market
registered under Section 5 of the CEA or Section 5f of the CEA, or a
derivatives transaction execution facility registered under Section
5a of the CEA. See CFTC Rule 41.43(a)(30) and SEC Rule 401(a)(30).
The term ``SRA'' as used in this release refers to self-regulatory
organizations (``SROs'') registered under the Exchange Act and self-
regulatory authorities registered under the CEA. The term
``securities SRO'' as used in this release refers only to SROs
registered under the Exchange Act.
    \17\ See CFTC Rule 41.45(b)(2) and SEC Rule 403(b)(2). See also
2002 Adopting Release, 67 FR at 53158-61. The initial margin level
is the required amount of margin that must be posted when the trade
is executed. The maintenance margin level is the required amount of
margin that must be maintained while the contract is open.
    \18\ Section 19(b)(2) of the Exchange Act governs SRA rulemaking
with respect to SEC registrants, and Section 5c(c) of the CEA
governs SRA rulemaking with respect to CFTC registrants.
    \19\ See 2002 Adopting Release, 67 FR at 53158-61.
    \20\ See, e.g., FINRA Rule 4210(f)(10) and Cboe Rule 10.3(k).
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    The Commissions' rules also enumerate specific exclusions from the
margin requirements for security futures, and those exclusions will
continue under the final rule amendments.\21\ For example, margin
requirements that derivatives clearing organizations (``DCOs'') or
clearing agencies impose on their clearing members are not subject to
the 20% margin level requirement.\22\
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    \21\ See CFTC Rule 41.42(c)(2)(i) through (v) and SEC Rule
400(c)(2)(i) through (v).
    \22\ See CFTC Rule 41.42(c)(2)(iii) and SEC Rule 400(c)(2)(iii).
The OCC is registered with the SEC as a clearing agency pursuant to
Section 17A of the Exchange Act and registered with the CFTC as a
DCO pursuant to Section 5b of the CEA.
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    There also is an exclusion providing that the required 20% initial
and maintenance margin levels do not apply to financial relations
between a customer and a security futures intermediary to the extent
that they comply with a portfolio margining system under rules that
meet the four criteria set forth in Section 7(c)(2)(B) of the Exchange
Act and that are effective in accordance with Section 19(b)(2) of the
Exchange Act and, as applicable, Section 5c(c) of the CEA.\23\
Subsequent to the adoption of the Commissions' rules, and consistent
with this exclusion, two securities SROs implemented portfolio
margining rules that permit a broker-dealer to combine certain of a
customer's securities and security futures positions in a securities
account in order to compute the customer's margin requirements
(``Portfolio Margin Rules'').\24\ As discussed in more detail below,
the Portfolio Margin Rules established a 15% margin level for unhedged
exchange-traded options on an equity security or narrow-based equity
index (sometimes referred to herein as ``exchange-traded equity
options'').\25\ The 15% margin level also applies to unhedged security
futures held in a securities account that is subject to Portfolio
Margin Rules. There is no comparable portfolio margining system for
security futures held in a futures account.\26\ These same unhedged
security futures positions, if held in a futures account, are subject
to the required 20% initial and maintenance margin levels set forth in
the Commissions' rules.
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    \23\ CFTC Rule 41.42(c)(2)(i) and SEC Rule 400(c)(2)(i).
    \24\ See FINRA Rule 4210(g) and Cboe Rule 10.4. The broker-
dealer would need to be registered with the CFTC (as an FCM) to
include security futures in the securities account. See also 2019
Proposing Release, 84 FR 36437, n.36. FINRA Rule 4210 (Margin
Requirements) was adopted as part of a new consolidated rulebook
effective permanently on December 2, 2010, after the pilot program
was approved and made available on August 1, 2008. Cboe rules on
portfolio margining became effective permanently on July 8, 2008,
after they were approved under a pilot program on April 2, 2007.
    \25\ The amendments adopted in this release were motivated, in
part, by changes made to margin requirements for certain exchange-
traded options pursuant to securities SRO pilot programs offering
risk-based portfolio margining rules. Those pilot programs were
later made permanent after review and approval by the SEC. See 2019
Proposing Release, 84 FR 36437, n.34-36.
    \26\ For purposes of this rulemaking a ``futures account'' is an
account that is maintained in accordance with the requirements of
Sections 4d(a) and 4d(b) of the CEA. See also 17 CFR 1.3 (CFTC Rule
1.3).
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2019 Proposing Release

    In July 2019, the Commissions proposed amending the security
futures margin rules to lower the required initial and maintenance
margin levels for an unhedged security futures position from 20% to 15%
of its current

market value.\27\ The Commissions sought to align margin requirements
for security futures held in futures accounts and customer securities
accounts that are not subject to the Portfolio Margin Rules with
security futures and exchange-traded options held in customer
securities accounts subject to the Portfolio Margin Rules (``Portfolio
Margin Account'').\28\ The Commissions also proposed certain conforming
revisions to the Strategy-Based Offset Table.\29\ Because the
Commissions' proposal solely related to the reduction in ``levels of
margin'' for security futures, the Commissions stated a preliminary
belief that they did not implicate the requirement of Section
7(c)(2)(B)(iv) of the Exchange Act that the Commissions' rules be
consistent with Regulation T.\30\
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    \27\ See Customer Margin Rules Relating to Security Futures,
Exchange Act Release No. 86304 (July 3, 2019), 84 FR 36434 (July 26,
2019) (``2019 Proposing Release''). OneChicago, LLC (``OneChicago'')
filed a rulemaking petition requesting that the minimum required
margin for unhedged security futures be reduced from 20% to 15%. See
Letter from Donald L. Horwitz, Managing Director and General
Counsel, OneChicago, to David Stawick, Secretary, CFTC, and Nancy M.
Morris, Secretary, SEC (Aug. 1, 2008) (``OneChicago Petition''), at
2.
    \28\ See 2019 Proposing Release, 84 FR at 36437.
    \29\ See 2019 Proposing Release, 84 FR at 36441-43.
    \30\ See 2019 Proposing Release, 84 FR at 36440. As discussed
above, Section 7(c)(2)(B)(iv) of the Exchange Act requires that
margin requirements for security futures (other than levels of
margin), including the type, form, and use of collateral, must be
consistent with the requirements of Regulation T (emphasis added).
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    The Commissions received a number of comment letters in response to
the proposal.\31\ As discussed below, after considering the comments,
the Commissions are adopting, as proposed, the amendments to the
security futures margin rules to lower the required initial and
maintenance margin levels for an unhedged security futures position
from 20% to 15%. The Commissions also are publishing a revised
Strategy-Based Offset Table as proposed.
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    \31\ The comment letters are available at https://www.sec.gov/comments/s7-09-19/s70919.htm and https://comments.cftc.gov/PublicComments/CommentList.aspx?id=3013. The Commissions address
these comments in section II below (discussing the final rule
amendments), and in section IV (including the CFTC's consideration
of the costs and benefits of the amendments and the SEC's economic
analysis (including costs and benefits) of the amendments).
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    Subsequent to the issuance of the 2019 Proposing Release,
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. The final rule amendments in this release, however,
would apply to customer margin requirements for security futures if an
exchange were to resume operations or another exchange were to launch
security futures contracts.

II. Final Rule Amendments

A. Lowering the Minimum Margin Level From 20% to 15%

1. The Commissions' Proposal
    As discussed above, the current minimum initial and maintenance
margin levels for an unhedged long or short position in a security
future are 20% of the current market value of the position,\32\ unless
an exclusion applies.\33\ For context, as discussed when adopting the
margin requirements for security futures in 2002, the 20% margin levels
were designed to be consistent with the margin requirements then in
effect for an unhedged short at-the-money exchange-traded option held
in a customer account where the underlying instrument is either an
equity security or a narrow-based index of equity securities.\34\ In
this case, the margin requirement was 100% of the exchange-traded
option proceeds, plus 20% of the value of the underlying equity
security or narrow-based equity index.\35\ This margin requirement on
options continues to apply if the exchange-traded option is held in a
securities account that is not subject to the Portfolio Margin
Rules.\36\
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    \32\ See CFTC Rule 41.45(b) and SEC Rule 403(b).
    \33\ See CFTC Rule 41.42(c)(2)(i) through (v) and SEC Rule
400(c)(2)(i) through (v).
    \34\ See 2002 Adopting Release, 67 FR at 53157 (``The
Commissions believe that a security future is comparable to a short,
at-the-money option . . .''); 2001 Proposing Release, 66 FR at
50725-26 (``The Commissions propose that the initial and maintenance
margin levels required of customers for each security future carried
in a long or short position be 20 percent of the current market
value of such security future because 20 percent is the uniform
margin level required for short, at-the-money equity options traded
on U.S. options exchanges.'') (footnote omitted). In 2002, the
margin requirement for a long exchange-traded equity option with an
expiration exceeding nine months was 75% of the contract's in-the-
money amount plus 100% of the amount, if any, by which the current
market value of the option exceeded its in-the-money amount,
provided the option is guaranteed by the carrying broker-dealer and
has an American-style exercise provision. Otherwise, long exchange-
traded options were not margin eligible and the customer needed to
pay 100% of the purchase price. These requirements remain in place
for long options contracts. See FINRA Rule 4210 and Cboe Rule 10.3.
    \35\ This release generally discusses security futures on
underlying equity securities and narrow-based equity security
indexes because, while permitted, no exchange has listed security
futures directly on one or more debt securities. See CFTC Rule
41.21(a)(2)(iii), 17 CFR 41.21(a)(2)(iii), and SEC Rule 6h-2, 17 CFR
240.6h-2 (both providing that a security futures may be based upon a
security that is a note, bond, debenture, or evidence of
indebtedness or a narrow-based security index composed of such
securities).
    \36\ See FINRA Rule 4210 and Cboe Rule 10.3.
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    However, as a result of the more recent Portfolio Margin Rules, an
unhedged short at-the-money exchange-traded equity option held in a
Portfolio Margin Account is now subject to a lower margin level. More
specifically, under the Portfolio Margin Rules, a broker-dealer can
group options, security futures, long securities positions, and short
securities positions in a customer's account involving the same
underlying security and stress the current market price for each
position at ten equidistant points along a range of positive and
negative potential future market movements using a theoretical option
pricing model that has been approved by the SEC.\37\ In the case of an
option on an equity security or narrow-based equity securities index,
the ten equidistant stress points span a range from -15% to +15% (i.e.,
-15%, -12%, -9%, -6%, -3%, +3%, +6%, +9%, +12%, +15%).\38\ The gains
and losses of each position in the portfolio are allowed to offset each
other to yield a net gain or loss at each stress point.\39\ The stress
point that yields the largest potential net loss for the portfolio is
used to determine the aggregate margin requirement for all the
positions in the portfolio.\40\
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    \37\ See FINRA Rule 4210(g) and Cboe Rule 10.4.
    \38\ This range of price movements (+/-) 15% is consistent with
the prescribed 15% haircut for most proprietary equity securities
positions under the SEC's net capital rule for broker-dealers. See
17 CFR 240.15c3-1(c)(2)(vi)(J).
    \39\ For example, at the -6% stress point, XYZ Company stock
long positions would experience a 6% loss, short positions would
experience a 6% gain, and XYZ Company options would experience gains
or losses depending on the features of the options. These gains and
losses are added up resulting in a net gain or loss at that point.
    \40\ Because options are part of the portfolio, the greatest
portfolio loss (or gain) would not necessarily occur at the largest
potential market move stress points ((+/-) 15%). This is because a
portfolio that holds derivative positions that are far out-of-the-
money would potentially realize large gains at the greatest market
move points as these positions come into the money. Thus, the
greatest net loss for a portfolio conceivably could be at any market
move stress point. In addition, the Portfolio Margin Rules impose a
minimum charge based on the number of derivative positions in the
account and that applies if the minimum charge is greater than the
largest stress point charge.
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    Under the Portfolio Margin Rules, the margin requirement for a
short at-the-money exchange-traded equity option generally would be 15%
if there were no other products in the account eligible to be grouped
with the option position to form a portfolio (i.e., an unhedged
position). Consequently, the Commissions proposed to lower the required
initial and maintenance margin levels for unhedged security futures

from 20% to 15%.\41\ In doing so, the Commissions preliminarily viewed
unhedged exchange-traded equity options as comparable to security
futures that may be held alongside the exchange-traded equity options
in a Portfolio Margin Account.\42\ The Commissions stated that Congress
did not instruct the Commissions to set the margin requirement for
security futures at the exact level as the margin requirements for
exchange-traded equity options. Rather, pursuant to Section 7(c)(2)(B)
of the Exchange Act, the Commissions must establish margin requirements
that are ``consistent'' with the margin requirements for ``comparable''
exchange-traded equity options and set initial and maintenance margin
levels that are not lower than the lowest level of margin for the
comparable exchange-traded equity options.
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    \41\ See 2019 Proposing Release, 84 FR at 36438-40.
    \42\ See 2019 Proposing Release, 84 FR at 36439 (``The
Commissions are proposing to decrease the margin requirement for
unhedged security futures from 20% to 15% in order to reflect the
comparability between unhedged security futures and exchange-traded
options that are held in risk-based portfolio margin accounts.'').
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    Under the proposal, unhedged security futures held in futures
accounts and securities accounts that are not Portfolio Margin Accounts
would be subject to the same initial and maintenance margin levels as
unhedged security futures held in Portfolio Margin Accounts (i.e.,
15%). Thus, the proposed 15% initial and maintenance margin levels for
unhedged security futures would bring security futures held in futures
accounts and securities accounts that are not Portfolio Margin Accounts
into alignment with the required margin level for unhedged security
futures held in Portfolio Margin Accounts. At the same time, the
amendments would not lower the required margin levels for unhedged
security futures below the lowest required margin level for unhedged
exchange-traded equity options (i.e., 15%). As discussed below, margin
levels for exchange-traded equity options are prescribed in rules
promulgated by securities SROs.\43\
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    \43\ See 12 CFR 220.12(f); FINRA Rule 4210; Cboe Rule 10.3. See
also infra note 56 and accompanying text (noting securities SROs
typically set margin levels for exchange-traded equity options
through rule filings with the SEC under Section 19(b) of the
Exchange Act).
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2. Comments and Final Amendments
    One commenter stated that the proposed amendments would harmonize
margin requirements, be simpler to administer and risk manage, and
better align with customer use of security futures.\44\ This commenter
stated that it has long supported securities portfolio margining and
has found the 15% margin level for unhedged positions sufficiently
robust for intermediaries to risk manage their customer positions.\45\
Other commenters, however, raised concerns with the proposal, as
discussed below.
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    \44\ Letter from Walt Lukken, President & Chief Executive
Officer, Futures Industry Association (Aug. 26, 2019) (``FIA
Letter'') at 2.
    \45\ FIA Letter at 2.
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Addressing Commenters' Concerns That the Proposal Is Inconsistent With
Section 7(c)(2)(B) of the Exchange Act

    When proposing these amendments, the Commissions stated a
preliminary belief that they would be consistent with Section
7(c)(2)(B) of the Exchange Act.\46\ The Commissions noted that, under
that section, customer margin requirements, including the establishment
of levels of margin (initial and maintenance) for security futures,
must be consistent with the margin requirements for comparable options
traded on any exchange registered pursuant to Section 6(a) of the
Exchange Act.\47\ The Commissions stated a preliminary belief that
``[c]ertain types of exchange-traded options, no matter what type of an
account they are in, are comparable to security futures'' and therefore
the ``margin requirements for comparable exchange-traded options and
security futures must be consistent.'' \48\ Finally, the Commissions--
in proposing to lower the margin level for security futures from 20% to
15%--used the margin level for an unhedged exchange-traded equity
option held in a Portfolio Margin Account to ``establish a consistent
margin level for security futures held outside'' of a Portfolio Margin
Account.\49\
---------------------------------------------------------------------------

    \46\ See 2019 Proposing Release, 84 FR at 36439-40.
    \47\ Id.
    \48\ Id.
    \49\ Id. at 36440.
---------------------------------------------------------------------------

    Some commenters stated that the 15% margin level in a Portfolio
Margin Account is prudent, given the requirements for these accounts
(e.g., risk management, account approval process, and minimum equity
required).\50\ However, these commenters stated that minimum margin
levels for security futures held outside of a Portfolio Margin Account
do not govern the levels of margin applicable for security futures held
in a Portfolio Margin Account and, similarly, that the rules governing
levels of margin for exchange-traded equity options held outside of a
Portfolio Margin Account do not govern the levels of margin for
exchange-traded equity options held in a Portfolio Margin Account. In
the commenters' view, Section 7(c)(2)(B) of the Exchange Act requires
initial and maintenance margin levels for security futures held outside
of a Portfolio Margin Account to remain at 20% because the initial and
maintenance margin levels for exchange-traded equity options held
outside a Portfolio Margin Account are 20%.
---------------------------------------------------------------------------

    \50\ Letter from Angelo Evangelou, Chief Policy Officer, Cboe
Global Markets, Inc. and Shelly Brown, EVP, Strategic Planning &
Operations, MIAX Exchange Group (Aug. 26, 2019) (``Cboe/MIAX
Letter'') at 4-7.
---------------------------------------------------------------------------

    Some commenters stated that the proposal ``may not be in line with
the spirit or letter'' of the CFMA and asked the Commissions to outline
how the proposal to lower the required initial and maintenance margin
levels from 20% to 15% is consistent with the CFMA.\51\
---------------------------------------------------------------------------

    \51\ Letter from the Honorable Mike Bost and Rodney Davis, U.S.
Congress (Nov. 13, 2019) (``Bost/Davis Letter'') at 1.
---------------------------------------------------------------------------

    Other commenters, while fully supportive of harmonizing margin
requirements, urged the Commissions to reconsider the proposal or
provide for a corresponding change to margin levels for exchange-traded
equity options to ensure any final rule is consistent with Section
7(c)(2)(B) of the Exchange Act.\52\ In making these comments, these
commenters agreed with (or did not state a disagreement with) the
Commissions' view that security futures are comparable to exchange-
traded equity options in terms of their risk characteristics and uses.
---------------------------------------------------------------------------

    \52\ Letter from the Honorable Jerry Moran, Thom Tillis, and M.
Michael Rounds, U.S. Senate (Nov. 22, 2019) (``Moran/Tillis/Rounds
Letter'') at 1-2.
---------------------------------------------------------------------------

    After considering these comments, the Commissions continue to
believe that it is appropriate to seek to align the required margin
levels for unhedged security futures held in a futures account (or in a
securities account that is not subject to Portfolio Margin Rules) with
the 15% margin level for unhedged exchange-traded equity options held
in a Portfolio Margin Account.\53\ The primary benefit to customers of
holding positions in a Portfolio Margin Account is the lower margin
requirements (i.e., margin levels less than 15%) that can result from
grouping and recognizing the risk-reducing offsets between positions
involving the same underlying equity security or narrow-based equity
securities index. These lower margin requirements also can increase the
amount of leverage available to customers who use Portfolio Margin

Accounts to trade equity positions. To address the lower margin
requirements and increased leverage that may result from grouping risk
reducing equity positions, Portfolio Margin Accounts are subject to
additional requirements, as compared to non-Portfolio Margin
Accounts.\54\
---------------------------------------------------------------------------

    \53\ See 2019 Proposing Release, 84 FR at 36439.
    \54\ For example, in order to open a Portfolio Margin Account, a
customer must be approved for writing uncovered options and meet
minimum equity requirements (generally ranging from $100,000 to
$500,000). In addition, Portfolio Margin Accounts are subject to
enhanced risk management procedures and additional customer
disclosure requirements. See FINRA Rule 4210(g) and Cboe Rule 10.4;
see also FINRA Portfolio Margin FAQ, available at www.finra.org.
---------------------------------------------------------------------------

    An exchange-traded equity option that cannot be grouped with any
other risk reducing offsetting equity positions in a Portfolio Margin
Account (i.e., an unhedged position) does not receive the benefit of a
lower margin requirement and is subject to a 15% margin level.
Therefore, the greater leverage that can be achieved by grouping
offsetting positions is not available to the customer in the case of an
unhedged position. Given the absence of risk-reducing offsetting
positions, the risk of the unhedged position held in a Portfolio Margin
Account generally is no different than if the unhedged position was
held outside of a Portfolio Margin Account. The same is true with
respect to an unhedged security futures position held in a Portfolio
Margin Account as compared to an unhedged security futures position
held outside of a Portfolio Margin Account.
    Moreover, there is no comparable portfolio margin system for
security futures held in a futures account. Therefore, an unhedged
security futures position held in a futures account is subject to the
required 20% margin level even though the risk of the position is
generally no different than if the position was held in a Portfolio
Margin Account, given the absence of risk-reducing offsetting
positions. In addition, as discussed above, in 2002, securities SROs
had not yet proposed portfolio margin rules for exchange-traded
options. With the adoption of the Portfolio Margin Rules, the lower 15%
margin level for unhedged security futures and exchange-traded options
held in Portfolio Margin Accounts became available as an alternative.
    For these reasons, it is appropriate to use the margin level for an
unhedged exchange-traded equity option held in a Portfolio Margin
Account to establish a consistent margin level for security futures
held outside of a Portfolio Margin Account.
    In addition, as discussed above, Section 7(c)(2)(B) of the Exchange
Act provides that: (1) The margin requirements for security futures
must be consistent with the margin requirements for comparable options
traded on any exchange registered pursuant to Section 6(a) of the
Exchange Act; and (2) the initial and maintenance margin levels for
security futures must not be lower than the lowest level of margin,
exclusive of premium, required for any comparable exchange-traded
options. The statute requires that the Commissions establish customer
margin requirements that are ``consistent'' with the margin
requirements for ``comparable'' exchange-traded options. This provides
the Commissions with some flexibility in establishing the margin levels
for security futures, provided those margin requirements do not set
initial and maintenance margin levels for security futures lower than
the lowest level of margin, exclusive of premium, required for any
comparable exchange-traded options.
    Further, Section 7(c)(2)(B)(iii)(II) of the Exchange Act provides
that the initial and maintenance margin levels for security futures
must not be lower than the lowest level of margin required for any
comparable exchange-traded option. It does not specify that the initial
and maintenance margin levels must not be lower than the lowest level
of margin required with respect to a given type of account. Therefore,
it is appropriate to consider the lowest level of margin for an
unhedged exchange-traded equity option held in a Portfolio Margin
Account when setting initial and maintenance margin levels for security
futures held outside of a Portfolio Margin Account (i.e., held in a
futures account or a securities account that is not a Portfolio Margin
Account).
    As discussed above, commenters requested that the Commissions
provide for a corresponding change to margin levels for exchange-traded
equity options to ensure any final rule is consistent with Section
7(c)(2)(B) of the Exchange Act. This comment is outside the scope of
this rulemaking, which is focused on margin levels for security
futures. Margin levels for exchange-traded equity options are set forth
in securities SRO rules.\55\ Securities SROs typically set margin
levels for exchange-traded equity options through rule filings with the
SEC under Section 19(b) of the Exchange Act.\56\
---------------------------------------------------------------------------

    \55\ See 12 CFR 220.12(f); FINRA Rule 4210; Cboe Rule 10.3.
    \56\ Under Section 19(b) of the Exchange Act, securities SROs
generally must file proposed rule changes with the SEC for notice,
public comment, and SEC approval, prior to implementation. 15 U.S.C.
78s(b). Section 19(b)(1) of the Exchange Act requires each
securities SRO to file with the SEC ``any proposed rule or any
proposed change in, addition to, or deletion from the rules of . . .
[a] self-regulatory organization.'' 15 U.S.C. 78s(b)(1).
---------------------------------------------------------------------------

    Some commenters that raised concerns about the proposal's
consistency with Section 7(c)(2)(B) of the Exchange Act also stated
that the proposal would create a competitive advantage for security
futures over exchange-traded equity options through preferential margin
treatment for security futures held outside of a Portfolio Margin
Account.\57\
---------------------------------------------------------------------------

    \57\ Cboe/MIAX Letter at 6.
---------------------------------------------------------------------------

    These commenters noted that the Commissions recognized in 2001 that
security futures can compete with, and be an economic substitute for,
equity securities, such as equity options, and stated that the CFMA was
specifically designed to avoid regulatory arbitrage between security
futures and exchange-traded options.\58\ These commenters believed that
the proposal implies that exchange-traded options and security futures
are not competing products and that the analysis in the proposal
unfairly underestimates the utility of options.\59\ They also stated
that synthetic futures strategies are an important segment of today's
options market, and could be used to compete with security futures.
They stated that in June 2019 there were over 700,000 contracts traded
on their exchanges that replicate long and short security futures.\60\
---------------------------------------------------------------------------

    \58\ Cboe/MIAX Letter at 6. See also 2001 Proposing Release, 66
FR 50721 at n.10.
    \59\ Cboe/MIAX Letter at 6.
    \60\ Cboe/MIAX Letter at 7.
---------------------------------------------------------------------------

    The Commissions acknowledge that security futures and exchange-
traded equity options can have similar economic uses.\61\ However,
reducing the margin level for an unhedged security future held outside
of a Portfolio Margin Account to 15% should not result in a competitive
disadvantage for exchange-traded equity options, if security futures
trading resumes. First, reducing the required margin levels for
unhedged security futures to 15% will result in more consistent margin
requirements between futures and securities accounts. Second, subject
to certain requirements, customers may hold exchange-traded equity
options in a Portfolio Margin Account, in which case the margin level
for an unhedged position is 15%.
---------------------------------------------------------------------------

    \61\ For example, commenters noted that to create a synthetic
long (short) futures contract, which requires two options, an
investor would buy (sell) a call option and sell (buy) a put option
on the same underlying security with the same expiration date and
strike price. Cboe/MIAX Letter at 6-7.
---------------------------------------------------------------------------

    Finally, customers can hold security futures in a Portfolio Margin
Account, in which case the required margin level is 15% for an unhedged
position. Nonetheless, the vast majority of

security futures traded in the U.S. were held in futures accounts
subject to required initial and maintenance margin levels of 20% for
unhedged positions.\62\ Therefore, the relative advantage of a required
15% margin level as compared to a required 20% margin level did not
cause customers to migrate their security futures trading to Portfolio
Margin Accounts.
---------------------------------------------------------------------------

    \62\ In its petition, OneChicago stated that ``because of
operational issues at the securities firms, almost all security
futures positions are carried in a futures account regulated by the
CFTC and not in a securities account. The proposed joint rulemaking
would permit customers carrying security futures in futures accounts
to receive margin treatment consistent with that permitted under the
[portfolio] margining provisions of CBOE.'' See OneChicago Petition
at 2 and 2019 Proposing Release 84 FR at 36440, n.67.
---------------------------------------------------------------------------

    Some commenters that opposed lowering the required margin levels
from 20% to 15% stated that industry solutions and rule changes that
optimize the portfolio margining of security futures and exchange-
traded equity options, including the portfolio margining of security
futures in both securities and futures accounts, would be a more
appropriate solution.\63\
---------------------------------------------------------------------------

    \63\ Cboe/MIAX Letter at 5. More specifically, to the extent
securities accounts are not operationally optimal for security
futures, the options exchanges support industry efforts to make
improvements. Id.
---------------------------------------------------------------------------

    As discussed above, lowering the required margin levels from 20% to
15% is appropriate, consistent with Section 7(c)(2)(B) of the Exchange
Act, and should not disadvantage exchange-traded equity options markets
if security futures trading resumes. Moreover, the Commissions remain
committed to continuing to coordinate on issues related to harmonizing
portfolio margining rules and requirements, as well as increasing
efficiencies in the implementation of portfolio margining. Further, to
the extent securities accounts are not operationally suited for holding
security futures, the Commissions support industry efforts to address
this issue. Finally, the realization of any potential harmonization
efforts or operational improvements with respect to portfolio margining
will depend on firms offering such programs to their customers.

Response to Commenters' Request To Use Risk Models To Calculate Margin

    In response to the Commissions' request for comments in the 2019
Proposing Release,\64\ some commenters stated that the Commissions'
rules should permit the use of risk models to calculate required
initial and maintenance margin levels for security futures \65\--
similar to how DCOs calculate margin requirements for futures and the
OCC calculates margin requirements for its clearing members.\66\ One of
these commenters--OneChicago--believed that the required margin levels
for security futures and the proposal to modify them were too
conservative.\67\ OneChicago characterized the Commissions' proposal
as--``at best''--``a first-step towards the risk-based margining that
is needed in the [security futures] marketplace.'' \68\ It further
stated that 92% of the security futures traded on its exchange were
``margined at a level greater than is set by the clearinghouse for
comparable products, which are equity swaps'' and that, under the
proposal, 84% would still be margined at a greater level.\69\ 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 margin collected (from $540 million to $410
million) for the period between September 1, 2018, and August 1, 2019;
whereas using a margin model would have resulted in a 61% reduction
(from $540 million to $210 million).\70\
---------------------------------------------------------------------------

    \64\ The Commissions asked, ``[a]re there any other risk-based
margin methodologies that could be used to prescribe margin
requirements for security futures? If so, please identify the margin
methodologies and explain how they would meet the comparability
standards under the Exchange Act.'' 2019 Proposing Release, 84 FR at
36441.
    \65\ For purposes of this final rule, any references to using
``risk models'' or a ``risk model approach'' to calculate required
initial margin levels is intended to mean the same thing. While
there are different risk-based margin models, a key component of all
such margin regimes is the use of modeling to generate expected
potential future exposures that adjust over time in response to
market conditions, credit risk, and other inputs.
    \66\ Letter from Thomas G. McCabe, Chief Regulatory Officer,
OneChicago (Aug. 26, 2019) (``OneChicago Letter''); Letter from
Thomas G. McCabe, Chief Regulatory Officer, OneChicago (Oct. 7,
2019) (``OneChicago Letter 2''); Letter from Thomas G. McCabe, Chief
Regulatory Officer, OneChicago (Apr. 27, 2020) (``OneChicago Letter
3''); OneChicago, April 27, 2020 OneChicago Comment Letter Summary
(``OneChicago Letter 3 Summary''); Letter from Mike Ianni,
individual (Aug. 29, 2019) (``Ianni Letter''); Letter from Scott A.
La Botz, individual (Dec. 4, 2019) (``La Botz Letter'').
    \67\ OneChicago Letter at 1.
    \68\ OneChicago Letter at 1.
    \69\ OneChicago Letter at 1. In this release, the term
``clearinghouse'' may refer to a clearing organization or a clearing
agency.
    \70\ OneChicago Letter at 14. However, as discussed in more
detail in section IV of this release, it is possible that under
certain circumstances the margin requirement under a risk-based
margin model may exceed the 15% of the current market value that is
required under the final rules.
---------------------------------------------------------------------------

    OneChicago believed that the ``margin regime in place today and the
proposed margin regime incentivizes market participants to transact in
other environments.'' \71\ OneChicago stated that the trading volume on
its exchange ``has been plummeting in recent years.'' \72\ In the
exchange's view, these issues would be addressed if the Commissions
adopted a risk model approach to calculate required margin levels for
security futures. As a more limited alternative, OneChicago suggested
the Commissions could adopt a risk model approach for a class of
security futures paired transactions executed on its exchange and known
as ``securities transfer and return spreads'' (``STARS'').\73\
---------------------------------------------------------------------------

    \71\ OneChicago Letter at 2.
    \72\ OneChicago Letter at 14.
    \73\ 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.
---------------------------------------------------------------------------

    Risk models calculate margin requirements by measuring potential
future exposures based on statistical correlations between positions in
a portfolio. For example, the OCC's risk model--known as the System for
Theoretical Analysis and Numerical Simulations (``STANS'')--calculates
a clearing member's margin requirement based on full portfolio Monte
Carlo simulations.\74\ The margin requirements in place today for
exchange-traded equity options do not use risk models to calculate
margin requirements for customer positions.\75\ Rather, current rules
prescribe margin requirements as a percent of a value or other amount
of a single position or combinations of offsetting positions or, in the
case of the Portfolio Margin Rules, stress groups of related positions
across a preset range of potential percent market moves (e.g., market
moves of -15%, -12%, -9%, -6%, -3%, +3%, +6%, +9%, +12%, +15% in the
case of exchange-traded equity options).
---------------------------------------------------------------------------

    \74\ More information about the OCC's STANS model is available
at https://www.theocc.com/risk-management/Margin-Methodology/.
    \75\ See, e.g., FINRA Rule 4210 and Cboe Rule 10.3.
---------------------------------------------------------------------------

    The Commissions' required initial and maintenance margin levels for
security futures (i.e., 20% of the current market value) are based on
the margin requirements for exchange-traded equity options and are
designed to be consistent with those requirements in accordance with
Section 7(c)(2)(B) of the Exchange Act.\76\ Consequently, implementing
a risk model approach to calculate required margin levels for security
futures would substantially alter how the required margin is calculated
(or would be calculated under these amendments) and would substantially
deviate from how customer margin requirements are calculated for
exchange-traded equity options. It also could result in required

initial and maintenance margin levels for unhedged security futures
that are significantly lower than the 20% margin level for unhedged
exchange-traded equity options held outside a Portfolio Margin Account
as well as the 15% margin level for unhedged exchange-traded equity
options held in a Portfolio Margin Account.
---------------------------------------------------------------------------

    \76\ See 2002 Adopting Release, 67 FR at 53156-61.
---------------------------------------------------------------------------

    For these reasons, 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 that: (1) The margin requirements for security futures
must be consistent with the margin requirements for comparable options
traded on any exchange registered pursuant to Section 6(a) of the
Exchange Act; 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 options.\77\
---------------------------------------------------------------------------

    \77\ In this adopting release, the Commissions are considering
OneChicago's proposed alternative risk model approach for margining
security futures. However, as the discussion herein reflects, this
alternative is not a viable one because the Commissions are not
persuaded that it would satisfy the requirements of Section
7(c)(2)(B) of the Exchange Act at this time.
---------------------------------------------------------------------------

    To address the conflict between a risk model approach and Section
7(c)(2)(B) of the Exchange Act, OneChicago argued that the Commissions
could adopt a risk model approach because Section 7(c)(2)(B) of the
Exchange Act can be read to require that the level of protection
provided to the marketplace by the margin requirements for security
futures must be consistent with the level of protection provided by the
margin requirements for exchange-traded options.\78\ Similarly,
OneChicago argued that the statute can be construed to require that the
level of protection provided by the margin requirements for security
futures (rather than the margin levels) must not be lower than the
lowest level of protection provided by the margin requirements for
exchange-traded options.
---------------------------------------------------------------------------

    \78\ See OneChicago Letter at 30-35.
---------------------------------------------------------------------------

    OneChicago pointed out that Section 7(c)(2)(B)(iii)(I) of the
Exchange Act provides that ``margin requirements'' for a security
future product must be consistent with the margin requirements for
comparable option contracts traded on any exchange registered under the
Exchange Act. OneChicago further noted that Section 7(c)(2)(B)(iv) of
the Exchange Act also uses the phrase ``margin requirements'' but then
qualifies it by excluding ``levels of margin'' from its provisions
regarding consistency with Regulation T. Thus, OneChicago concluded
that the phrase ``margin requirements'' in Section 7(c)(2)(B)(iii)(I)
of the Exchange Act can be read to mean all aspects of margin
requirements, including margin levels and the type, form, and use of
collateral for security futures products.
    OneChicago also argued that futures-style margining includes daily
pay and collect variation margining, and options-style margining--in
its view--does not include variation margining.\79\ Consequently,
OneChicago believed that, if Section 7(c)(2)(B)(iii)(I) of the Exchange
Act is read to relate to levels of margin, the Commissions would be
required to implement a daily pay and collect variation margin feature
for options (or to eliminate this feature from the security futures
margin requirements) in order to achieve the consistency required by
the statute. OneChicago argued that this does not make sense and,
therefore, the better reading of the statute is that it requires the
level of protection provided by the security futures margin
requirements to be consistent with and not lower than the lowest level
of protection provided by the margin requirements for comparable
exchange-traded options. And, according to OneChicago, in analyzing the
level of protection provided by futures-style margining, the
Commissions can consider the daily pay and collect variation margin
feature to find that a risk model approach to calculating margin would
be consistent with Section 7(c)(2)(B)(iii) of the Exchange Act.
---------------------------------------------------------------------------

    \79\ For purposes of this discussion, the Commissions understand
the phrase ``futures-style margining'' to refer to initial margin
requirements based on the use of risk models, as well as the daily
settlement of variation margin based on marking open positions to
market. ``Options-style margining'' will refer to initial and
maintenance margin requirements for exchange-traded equity options
under the Exchange Act.
---------------------------------------------------------------------------

    The Commissions agree with OneChicago that the phrase ``margin
requirements'' in Section 7(c)(2)(B)(iii)(I) of the Exchange Act refers
to all aspects of margin requirements, including margin levels and the
type, form, and use of collateral for security futures products.
However, the Commissions do not agree that the ``consistent with'' and
``not lower than'' restrictions in the statute do not apply to levels
of margin. Section 7(c)(2)(B)(iii)(II) of the Exchange Act states, in
pertinent part, that ``initial and maintenance margin levels for a
security future product [must] not be lower than the lowest level of
margin, exclusive of premium, required for any comparable option
contract traded on any exchange'' registered under the Exchange Act
(emphasis added).\80\
---------------------------------------------------------------------------

    \80\ The prefatory text of Sections 7(c)(2)(B)(iii)(I) and (II)
of the Exchange Act also uses the term ``levels of margin.'' In
particular, it provides that the Federal Reserve Board or the
Commissions, pursuant to delegated authority, shall prescribe
``regulations to establish margin requirements, including the
establishment of levels of margin (initial and maintenance) for
security futures products under such terms, and at such levels,'' as
the Federal Reserve Board or the Commissions deem appropriate
(emphasis added).
---------------------------------------------------------------------------

    Moreover, the legislative history of the CFMA includes an earlier
bill.\81\ In that earlier bill, the provisions governing the setting of
margin requirements for security futures did not include the
``consistent with'' and ``not lower than'' restrictions in Sections
7(c)(2)(B)(iii)(I) and (II) of the Exchange Act, respectively.\82\
Instead, the earlier bill would have required that the margin
requirements for security futures must ``prevent competitive
distortions between markets offering similar products.'' \83\ The
Senate Report on the earlier bill explained that ``[u]nder the bill,
margin levels on [security future] products would be required to be
harmonized with the options markets.'' \84\ Thus, while the text of the
earlier bill was not as explicit in terms of articulating the
``consistent with'' and ``not lower than'' restrictions, the Senate
Report indicates that the objective was to harmonize margin levels
between security futures and options to prevent competitive
distortions. This objective was clarified in the text of Section
7(c)(2)(B) of the Exchange Act, as enacted. In light of this statutory
text and the legislative history, the best reading of the statute is
that the ``consistent with'' and ``not lower than'' restrictions apply
to levels of margin.
---------------------------------------------------------------------------

    \81\ See S. Report 106-390 (Aug. 25, 2000).
    \82\ See id. at 39-40.
    \83\ Id. at 39.
    \84\ Id. at 5 (emphasis added).
---------------------------------------------------------------------------

    Consequently, the levels of margin for unhedged security-futures
must be consistent with the margin levels for comparable unhedged
exchange-traded equity options, and not lower than the lowest level of
margin for comparable unhedged exchange-traded equity options.
Currently, the margin levels for comparable unhedged exchange-traded

equity options are determined through a percent of a value. Therefore,
using a risk model approach for security futures would be inconsistent
with how margin levels are currently determined for comparable
exchange-traded equity options. Further, at this time, the lowest level
of margin for comparable unhedged exchange-traded equity options is
15%. Accordingly, the margin levels for unhedged security futures
cannot be lower than 15%.
    OneChicago also cited legislative history to support its reading of
the statute.\85\ First, OneChicago cited statements that it believed
demonstrated that ``Congress intended to prevent the market for
security futures from being ceded to overseas competitors'' and that
``Congress wanted to ensure that U.S. exchanges had the potential to
compete with these product offerings in overseas markets.'' \86\
However, these statements do not bear on whether Sections
7(c)(2)(B)(iii)(I) and (II) of the Exchange Act apply to levels of
margin. Rather, if OneChicago's view of Congressional intent is
correct, it would support the notion that the CFMA was designed to
establish a U.S. market for security futures to compete with overseas
markets.\87\ Further, Sections 7(c)(2)(B)(iii)(I) and (II) require a
comparison of security futures margin requirements to U.S. exchange-
traded option margin requirements--not to requirements of overseas
security futures markets. For these reasons, these statements do not
support OneChicago's reading of the statute or conflict with the
Commissions' reading of the statute.
---------------------------------------------------------------------------

    \85\ OneChicago Letter at 30-32.
    \86\ OneChicago Letter at 30. The Commissions address comments
relating to the competition with foreign securities markets in
section IV below (including the CFTC's consideration of the costs
and benefits of the amendments and the SEC's economic analysis,
including costs and benefits, of the amendments).
    \87\ The CFMA ended the prohibition on trading security futures
in the United States at a time when this product was traded in
overseas markets.
---------------------------------------------------------------------------

    Second, OneChicago cited statements that it believed demonstrated
``[t]here was concern, especially from options industry participants
that [security futures] would directly compete with options and
Congress wanted to make sure that participants did not migrate between
futures and options for regulatory reasons'' and that ``Congress wanted
to avoid regulatory arbitrage.'' \88\ It cited the following statements
in support of this view:
---------------------------------------------------------------------------

    \88\ OneChicago Letter at 30.

    [T]he bill requires that margin treatment of stock futures must
be consistent with the margin treatment for comparable exchange-
traded options. This ensures that margin levels will not be set
dangerously low and that stock futures will not have an unfair
competitive advantage vis-a-vis stock options.\89\
---------------------------------------------------------------------------

    \89\ See 146 Cong. Rec. H12497 (daily ed. Dec. 15, 2000)
(Commodity Futures Modernization Act of 2000, speech of Rep.
Dingell, Dec. 15, 2000) (emphasis added).
---------------------------------------------------------------------------

    Our bill would also provide for joint jurisdiction with each
agency maintaining its core authorities over the trading of single-
stock users. The legislation would further require that margin
levels on these products be harmonized with the options market.\90\
---------------------------------------------------------------------------

    \90\ See S. 2697--The Commodity Futures Modernization Act of
2000, Joint Hearing Before the Committee on Agriculture, Nutrition,
and Forestry United States Senate and the Committee on Banking,
Housing, and Urban Affairs, (June 21, 2000) (``Senate Hearing'') at
3, statement of Sen. Lugar (emphasis added).
---------------------------------------------------------------------------

    The SEC has always been charged with protecting investors and
providing full and fair disclosure of corporate market information
and preventing fraud and manipulation. The CFTC regulates commercial
and professional hedging and speculation in an institutional
framework. CFTC cannot regulate insider trading. Margin requirements
are different. I hate to see investors shopping as to which
instrument to use or to buy for that reason. So neither regulation
nor the lack of it should pick winners and losers among products or
exchanges and fair competition should.\91\
---------------------------------------------------------------------------

    \91\ See Senate Hearing at 28, statement of Sen. Schumer.

    OneChicago argued that these statements indicated that ``[b]ill
sponsors made a point to emphasize that they wanted market forces and
not margin levels to determine winners and losers'' and that ``[m]argin
needed to be set at a level that prevented it from impacting a market
participant's decision on what products to trade.'' \92\ However, the
Congressional concerns and statements identified by OneChicago--that
security futures should not have an unfair competitive advantage over
exchange-traded options--support a reading of Sections
7(c)(2)(B)(iii)(I) and (II) of the Exchange Act that is consistent with
the approach the Commissions are adopting here, namely that the margin
levels for security futures must be consistent with and not lower than
the lowest level of margin for comparable exchange-traded options.
---------------------------------------------------------------------------

    \92\ OneChicago Letter at 30-31.
---------------------------------------------------------------------------

    Contrary to OneChicago's view, the statute does not provide a
mechanism that would permit the Commissions to recalibrate margin
requirements for security futures to foster greater use of the product.
Rather, it contains restrictions that were designed to ensure that the
margin requirements for these products were consistent with the margin
requirements for comparable exchange-traded options, and not lower than
the lowest level of margin for comparable exchange-traded options. This
reading of the statute is supported by the following statement from the
legislative history of the CFMA that OneChicago did not cite:

    A provision in the bill directs that initial and maintenance
margin levels for a security future product shall not be lower than
the lowest level of margin, exclusive of premium, required for any
comparable option contract traded on any exchange registered
pursuant to section 6(a) of the Exchange Act of 1934. In that
provision, the term lowest is used to clarify that in the potential
case where margin levels are different across the options exchanges,
security future product margin levels can be based off the margin
levels of the options exchange that has the lowest margin levels
among all the options exchanges. It does not permit security future
product margin levels to be based on option maintenance margin
levels. If this provision were to be applied today, the required
initial margin level for security future products would be 20
percent, which is the uniform initial margin level for short at-the
money equity options traded on U.S. options exchanges.\93\
---------------------------------------------------------------------------

    \93\ See 146 Cong. Rec. E1879 (daily ed. Oct. 23, 2000)
(Commodity Futures Modernization Act of 2000, speech of Rep. Markey,
Oct. 19, 2000) (emphasis added). As discussed above, the Commissions
implemented the CFMA establishing 20% initial and maintenance margin
levels for security futures.

    Further, implementing a risk model approach in order to lower the
margin requirements to levels in the way OneChicago suggested could
create an incentive for market participants to trade security futures,
if security futures trading resumes, rather than exchange-traded
options precisely because of the more favorable margin treatment.
    Based on the text of Section 7(c)(2)(B) of the Exchange Act and the
legislative history (including the legislative history cited by
OneChicago), the better reading of the statute is that it applies to
levels of margin, and requires that initial and maintenance margin
levels for security futures be: (1) Consistent with margin levels for
comparable exchange-traded options; and (2) not lower than the lowest
level of margin for comparable exchange-traded options. Currently, the
lowest level of margin for an unhedged exchange-traded equity option is
15%. Consequently, a 15% margin level is the lowest level of margin
permitted for an unhedged security future.\94\
---------------------------------------------------------------------------

    \94\ OneChicago argued that the Commissions could compare
unhedged security futures to unhedged long option positions. See
OneChicago Letter at 35. In its view, the initial and maintenance
margin requirement for a long option is 0% and, therefore, a margin
level for security futures that is lower than 15% would be
appropriate. As discussed earlier, the margin level is 75% for
certain long unhedged options with maturities greater than 9 months.
However, this margin requirement relates to financing the purchase
of a long option position. Unlike the case with an unhedged short
option, the margin does not serve as a performance bond to secure
the customer's obligations if the option is assigned to be
exercised. Initial margin for a security future serves as a
performance bond. See, e.g., OneChicago Letter at 4. Long options
that do not meet the requirements to be subject to the 75% margin
level must be paid in full. Thus, from a financing perspective, they
have a 100% margin requirement (i.e., they cannot be purchased
through an extension of credit by the broker-dealer). For these
reasons, the margin requirements for unhedged long exchange-traded
options are not comparable to the margin requirements for security
futures.

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

    OneChicago argued further that ``the margins have not been
harmonized and are not consistent'' because security futures ``have
variation pay/collect while options do not, which makes a strict
comparison of initial margin percentages inappropriate.'' \95\
OneChicago stated that the concept of daily variation margin plays a
critical role in the margin framework for security futures, and it
believed that the failure to take variation margin into account biases
the Commissions' margin rule against security futures.\96\ OneChicago
believed that variation margin rather than minimum initial and
maintenance margin levels more effectively protects customers.\97\
OneChicago argued that ``the level of initial and maintenance margin
should be considered not lower than comparable options when it provides
a level of protection against default that is not lower than comparable
options'' and that this ``reading would support the Commissions
considering variation margin when looking at the appropriate level of
initial margin.'' \98\
---------------------------------------------------------------------------

    \95\ OneChicago Letter at 31.
    \96\ OneChicago at 4-5; OneChicago Letter 2 at 5-6.
    \97\ OneChicago Letter at 7.
    \98\ OneChicago Letter at 34.
---------------------------------------------------------------------------

    The Commissions, when adopting the margin requirements for security
futures in 2002, modified the proposal to incorporate the concept of
daily pay and collect variation margining into the final rules.\99\
Variation settlement is any credit or debit to a customer account, made
on a daily or intraday basis, for the purpose of marking-to-market a
security future issued by a clearing agency or cleared and guaranteed
by a DCO.\100\ Therefore, in prescribing the required initial and
maintenance margin levels for security futures, the Commissions' rules
also account for daily variation margining.\101\
---------------------------------------------------------------------------

    \99\ See CFTC Rules 41.43(a)(32), 41.46(c)(1)(vi) and
(c)(2)(iii), and 41.47(b)(1), and SEC Rules 401(a)(32),
404(c)(1)(vi) and (c)(2)(iii), and 405(b)(1).
    \100\ See CFTC Rule 41.43(a)(32) and SEC Rule 401(a)(32).
    \101\ See 2002 Adopting Release, 67 FR at 53157. See also FRB
Letter (``The authority delegated by the Board is limited to
customer margin requirements imposed by brokers, dealers, and
members of national securities exchanges. It does not cover
requirements imposed by clearing agencies on their members.'') and
2019 Proposing Release, 84 FR at 36435 at n.6 (describing variation
settlement and maintenance margin).
---------------------------------------------------------------------------

    The variation margin component of the futures and security futures
margining regimes settles the mark-to-market gains or losses on the
positions on a daily basis with FCMs collecting payments from their
customers and DCOs collecting payments from FCMs. The margin
requirements for exchange-traded equity options also account for daily
mark-to-market gains or losses on an option position. In particular,
margin rules for exchange-traded equity options require that a customer
maintain a minimum level of equity in the account (i.e., an amount that
equals or exceeds the maintenance margin requirement). A mark-to-market
gain will increase account equity and a loss will decrease account
equity potentially generating a requirement for the customer to post
additional collateral to maintain the minimum account equity
requirement (i.e., the maintenance margin requirement). In this way,
the margin requirements for exchange-traded equity options cover the
broker-dealer's exposure to the credit risk that arises when the
customer's position incurs a mark-to-market loss, just as daily pay and
collect variation margining protects the security futures intermediary.
    Further, if a customer's security futures position has a mark-to-
market gain, the clearing agency or DCO will pay the amount of the gain
to the security futures intermediary. This is the pay feature of
futures-style variation margining. However, if that variation margin
payment remains in the customer's account at the security futures
intermediary, the customer continues to have credit risk exposure to
the intermediary. Similarly, if a customer's exchange-traded equity
option has a mark-to-market gain that results in the account having
equity above the maintenance margin requirement, the customer will have
credit exposure to the broker-dealer with respect to the excess equity
in the account.
    For these reasons, the Commissions do not believe that the
variation margin requirements for futures and security futures are a
unique feature that is absent from the margin requirements for
exchange-traded options insomuch as both requirements address mark-to-
market changes in the value of the positions.\102\ Further, there is no
basis to conclude that the variation settlement process for security
futures when coupled with a risk model approach to calculating required
initial and maintenance margin levels for security futures would be
consistent with the margin requirements for exchange-traded equity
options. The margin requirements for exchange-traded equity options
also account for changes in the mark-to-market value of the options,
but they do not use risk models to calculate initial and maintenance
margin levels.
---------------------------------------------------------------------------

    \102\ See, e.g., SEC, Self-Regulatory Organizations;
Philadelphia Stock Exchange, Inc.; Order Approving Proposed Rule
Change and Amendments Thereto, Exchange Act Release No. 22189 (June
28, 1985) at n.10 (``Maintenance margin in the securities industry
and variation margin in the commodities industry are basically
intended to serve the same purposes'').
---------------------------------------------------------------------------

    Moreover, as acknowledged by OneChicago, a risk model approach to
calculating required initial and maintenance margin levels for unhedged
security futures could result in margin levels that are significantly
lower than the 20% margin level for exchange-traded equity options held
outside a Portfolio Margin Account as well as the 15% margin level for
exchange-traded equity options held inside a Portfolio Margin
Account.\103\ Consequently, given the ``not lower than restriction'' of
Section 7(c)(2)(B)(iii)(II) of the Exchange Act, it would not be
appropriate to set initial and maintenance margin levels for security
futures using a risk model approach insofar as exchange-traded equity
options are not permitted to rely upon a risk model approach.
---------------------------------------------------------------------------

    \103\ See, e.g., OneChicago Letter at 1 and 14.
---------------------------------------------------------------------------

    As an alternative to the statutory construction argument discussed
above, OneChicago stated that ``the Commissions can recognize that the
concern at the time of the CFMA, that options and [security futures]
would trade interchangeably, was unfounded as options and [security
futures] are not comparable products.'' \104\ Consequently, Section
7(c)(2)(B)(iii)--in OneChicago's view--``was written into the Exchange
Act in case the products proved comparable; because they have proven to
not be comparable, it no longer needs to bind upon financial markets.''
\105\ Relatedly, OneChicago also argued that there are no exchange-
traded options that are comparable to security futures and, therefore,
the ``consistent with'' and ``not lower than'' restrictions of Section
7(c)(2)(B)(iii) of the Exchange Act are not implicated.
---------------------------------------------------------------------------

    \104\ See OneChicago Letter at 35.
    \105\ Id.
---------------------------------------------------------------------------

    The Commissions stated a preliminary belief when proposing the
reduction of the required margin levels from 20% to 15% that an
unhedged

security future was comparable to an unhedged exchange-traded equity
option held in a Portfolio Margin Account.\106\ This belief was
grounded on the Commissions' view--when adopting the margin
requirements for security futures--that an unhedged short at-the-money
exchange-traded equity option is comparable to a security future.\107\
---------------------------------------------------------------------------

    \106\ See 2019 Proposing Release, 84 FR at 36435, 36438-40.
    \107\ See 2002 Adopting Release, 67 FR at 53157; 2001 Proposing
Release 66 FR at 50725-26.
---------------------------------------------------------------------------

    OneChicago stated that security futures products are not comparable
to exchange-traded equity options because the latter have different
risk profiles than security futures, including dividend risk, pin risk,
and early assignment risk.\108\ Further, OneChicago stated that
security futures are used for different purposes than exchange-traded
equity options.\109\ In this regard, OneChicago noted that security
futures are delta one derivatives used in equity finance transactions
and that they compete with other delta one transactions such as total
return swaps, master security lending agreements, and master security
repurchase agreements.\110\ OneChicago commented that equity financing
transactions can be used to provide customers with synthetic (long)
exposure to a notional amount of a security, while the financing
counterparty pre-hedges the position by accumulating an equivalent
position in the underlying shares.\111\
---------------------------------------------------------------------------

    \108\ OneChicago Letter at 2, 9; OneChicago Letter 2 at 1-2.
    \109\ OneChicago Letter at 2-3.
    \110\ Delta one derivatives are financial instruments with a
delta that is close or equal to one. Delta measures the rate of
change in a derivative relative to a unit of change in the
underlying instrument. Delta one derivatives have no optionality,
and therefore, as the price of the underlying instrument moves, the
price of the derivative is expected to move at, or close to, the
same rate. See also 2019 Proposing Release, 84 FR 36435, at n.14.
    \111\ OneChicago Letter at 2.
---------------------------------------------------------------------------

    OneChicago also provided statistical data and analysis to support
its contention that security futures are not comparable to exchange-
traded equity options.\112\ In particular, OneChicago provided
statistical data comparing trade size (number of contacts and notional
value) between options and security futures and comparing security
futures delivery rates with options exercise rates.\113\ OneChicago
stated that the delivery data makes ``clear'' that the ``markets view
and use the products differently.'' \114\ OneChicago also provided
statistical data on correlations between open interest in security
futures and equity options.\115\ OneChicago stated that the data
results show no correlation between changes in open interest in
security futures and options.\116\
---------------------------------------------------------------------------

    \112\ The Commissions address the statistical data and analysis
provided by OneChicago in more detail in section IV of this release.
In addition to the statistical data and analysis discussed below,
OneChicago provided statistical data and analysis on possible
correlations between changes in price of the underlying security and
changes in trading activity in security futures and equity options
(i.e., sensitivity to underlying price moves). OneChicago Letter 3
at 12-13. OneChicago stated that the results of this analysis were
ambiguous. OneChicago Letter 3 Summary at 1.
    \113\ OneChicago Letter 3 at 9-11.
    \114\ OneChicago Letter 3 Summary at 1.
    \115\ OneChicago Letter 3 at 14-15.
    \116\ OneChicago Letter 3 Summary at 1.
---------------------------------------------------------------------------

    After considering these comments, the Commissions note that under
Section 7(c)(2)(b)(iii)(I) of the Exchange Act, customer margin
requirements for security futures must be consistent with the margin
requirements for comparable exchange-traded options. The Commissions
recognize that security futures may not be identical to exchange-traded
equity options and that there are differences between the products in
terms of their risk characteristics and how they are used by market
participants. However, the Commissions continue to believe that the
approach taken in this release, with respect to margin levels, is sound
because these products generally share similar risk profiles for
purposes of assessing margin insofar as both products provide exposure
to an underlying equity security or narrow-based equity security
index.\117\ Thus, both products can be used to hedge a long or short
position in the underlying equity security or narrow-based equity
security index. Each product also can be used to speculate on a
potential price movement of the underlying equity security or narrow-
based equity security index. Consequently, a financial intermediary's
potential exposure to a customer's unhedged security future or unhedged
exchange-traded equity option position is based on the market risk
(i.e., price volatility) of the underlying equity security or narrow-
based equity security index.
---------------------------------------------------------------------------

    \117\ Derivatives may be broadly described as instruments or
contracts whose value is based upon, or derived from, some other
asset or metric. See also Risk Disclosure Statement for Security
Futures Contracts, available at https://www.nfa.futures.org/members/member-resources/files/security-futures-disclosure.pdf and
Characteristics and Risks of Standardized Options, available at
https://www.theocc.com/about/publications/character-risks.jsp.
---------------------------------------------------------------------------

    In addition, both short security futures positions and certain
exchange-traded options strategies produce unlimited downside risk.
Investors in security futures and writers of options may lose their
margin deposits and premium payments and be required to pay additional
funds. In addition, a very deep-in-the money call or put option on the
same security (with a delta of one) is an option contract comparable to
a security futures contract. Further, as discussed above, one commenter
contends that synthetic futures strategies are an important segment of
today's options markets, that could compete with security futures, if
trading in security futures resumes.
    The margin requirements for security futures and short unhedged
exchange-traded equity options are designed to ensure that the customer
can perform on the contractual obligations imposed by these products.
For these reasons, security futures and short exchange-traded equity
options can be appropriately considered to be comparable products for
the purposes of setting appropriate margin levels for security futures
consistent with the provisions of Section 7(c)(2)(B) of the Exchange
Act.\118\ OneChicago also argued that the Commissions should compare
the customer margin requirements for security futures with the margin
requirements for over-the-counter total return swaps, equity index
futures, and security futures traded overseas.\119\ In response,
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 options traded on any exchange registered
pursuant to Section 6(a) of the Exchange Act. The statute 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.
---------------------------------------------------------------------------

    \118\ See 2019 Proposing Release, 84 FR at 36436.
    \119\ OneChicago Letter at 11.
---------------------------------------------------------------------------

    In this context, an unhedged security future is comparable to an
unhedged exchange-traded equity option held in a Portfolio Margin
Account for the purposes of setting margin requirements under Section
7(c)(2)(B) of the Exchange Act.
    As an alternative to implementing a risk model approach for all
security futures, OneChicago suggested implementing it on a more
limited basis for security futures combinations that result in STARS
transactions.\120\ A STARS transaction combines two security futures to
form a spread position. The front leg of the spread expires on the date
of the STARS

transaction and the second (or back) leg expires at a distant date.
OneChicago believed that a STARS transaction would be a substitute for
an equity repo or stock loan transaction with the transfer of stock and
cash accomplished through a security future transaction.\121\
OneChicago suggested that it would be appropriate to margin STARS
transactions at risk-based levels since they are exclusively used for
equity finance transactions.\122\ OneChicago also argued that risk-
based margin treatment for a STARS transaction would be consistent with
the Exchange Act and argued that there are no comparable options that
trade as a spread on a segregated platform and no combinations of
options can replicate the mechanics of a STARS transaction.\123\
---------------------------------------------------------------------------

    \120\ OneChicago Letter at 19; see also Memorandum from the
Division of Trading and Markets regarding a July 16, 2019, meeting
with representatives of OneChicago (July 29, 2019).
    \121\ OneChicago Letter at 19-20. OneChicago noted that the
expiration of the front leg results in a transfer of securities for
cash on the next business day following the trade date (T+1). When
the back leg expires, OneChicago noted that a reversing transaction
takes place that returns both parties to their original positions.
OneChicago Letter at 19.
    \122\ OneChicago Letter at 19-20.
    \123\ OneChicago Letter at 36.
---------------------------------------------------------------------------

    The Commissions note that OneChicago has discontinued trading
operations and is no longer offering STARS transactions. However,
combining security futures into a STARS transaction does not change the
fundamental nature of the security futures involved in the
transaction--they remain security futures. In addition, as noted above,
the front leg of the spread expires on the date of the STARS
transaction, leaving only a single security future position in the
customer's account until the expiration of the back leg at a later
date. Consequently, for the reasons discussed above, it would not be
consistent with Section 7(c)(2)(B) of the Exchange Act to implement a
risk margin approach for security futures that are combined to create a
STARS transaction.
    To summarize, the Commissions are not persuaded by OneChicago's
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. 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.\124\ For these reasons, even if the Commissions
were persuaded at this time that OneChicago's interpretation was
permitted by the statute, the Commissions would not agree that it was
the appropriate interpretation.
---------------------------------------------------------------------------

    \124\ See sections IV.A.6. (CFTC--Discussion of Alternatives)
and IV.B.5. (SEC--Reasonable Alternatives Considered) (each
discussing the use of risk-based margin models as an alternative to
the final rule amendments in this release).
---------------------------------------------------------------------------

    Consequently, the Commissions are adopting the amendments to reduce
the required initial and maintenance margin levels for an unhedged
security futures position from 20% to 15%, as proposed.\125\
---------------------------------------------------------------------------

    \125\ The Commissions continue to believe that these
amendments--because they relate to levels of margin--do not
implicate the requirement in Section 7(c)(2)(B)(iv) of the Exchange
Act that margin requirements for security futures (other than levels
of margin), including the type, form, and use of collateral, must be
consistent with the requirements of Regulation T. The Commissions
did not receive any comments objecting to this view.
---------------------------------------------------------------------------

    The Commissions' margin requirements continue to permit SRAs and
security futures intermediaries to establish higher margin levels and
to take appropriate action to preserve their financial integrity.\126\
OneChicago advocated for two modifications to this provision of the
margin rules for security futures.\127\ First, it suggested that only
exchanges and clearinghouses that list and clear security futures
products be given the authority to set higher margin levels, because
they control the margin levels and thus the competitiveness of the
competing venues.\128\ In support of this suggestion, it identified an
exchange that has prescribed 20% margin levels for security futures
even though it does not list any security futures.\129\ Relatedly,
OneChicago recommended that the Commissions require that margin levels
be set higher than the proposed 15% minimum level if justified by the
risk of the security future and noted that while one SRA might set
higher levels based on risk, another SRA may maintain the 15%
levels.\130\
---------------------------------------------------------------------------

    \126\ See CFTC Rule 41.42(c)(1) and SEC Rule 400(c)(1). See 2019
Proposing Release, 84 FR at 36440.
    \127\ OneChicago Letter at 17.
    \128\ OneChicago Letter at 17.
    \129\ The NYSE has rules related to margin levels for security
futures, but it does not list any security futures.
    \130\ OneChicago Letter at 17.
---------------------------------------------------------------------------

    After considering these comments, the Commissions are not
incorporating OneChicago's suggested modifications regarding
establishing higher margin levels. The security futures margin rules
establish minimum levels and do not set any limitations as to maximum
levels. SRAs, including clearinghouses, and security futures
intermediaries are permitted to raise margin requirements above 15% if
justified by the risk of a security futures position. In addition,
security futures intermediaries also are subject to rules that require
them to raise margin requirements where appropriate to manage credit
risk in customer accounts.\131\ These rules provide SRAs and security
futures intermediaries important flexibility to manage risk as they
deem appropriate, including the ability to increase margin requirements
for specific positions or customer accounts. Limiting the ability to
increase margin requirements only to exchanges and clearinghouses that
list and clear security futures would be inconsistent with this
approach. For these reasons, it would not be appropriate to modify the
provisions in the security futures margin requirements permitting SRAs
and security futures intermediaries to set higher margin levels as
suggested by OneChicago.
---------------------------------------------------------------------------

    \131\ See e.g., FINRA Rule 4210(d) which requires FINRA members
to establish procedures to: (1) Review limits and types of credit
extended to all customers; (2) formulate their own margin
requirements; and (3) review the need for instituting higher margin
requirements, mark-to-markets and collateral deposits than are
required by FINRA's margin rule for individual securities or
customer accounts; see also FINRA Rule 4210(f)(8) (providing
authority for FINRA, if market conditions warrant, to implement
higher margin requirements). See e.g., 17 CFR 1.11 (CFTC Rule 1.11)
(requiring FCMs to establish risk management programs that address
market, credit, liquidity, capital and other applicable risks,
regardless of the type of margining offered). See also National
Futures Association (``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.
---------------------------------------------------------------------------

B. Conforming Revisions to the Strategy-Based Offset Table

1. The Commissions' Proposal
    The Commissions' rules permit an SRA to set margin levels that are
lower than 20% of the current market value of the security future in
the case of an offsetting position involving security futures and
related positions.\132\ The SRA rules must meet the four criteria set
forth in Section 7(c)(2)(B) of the Exchange Act and must be effective
in accordance with Section 19(b)(2) of the

Exchange Act and, as applicable, Section 5c(c) of the CEA.\133\ In
connection with these provisions governing SRA rules, the Commissions
published the Strategy-Based Offset Table.\134\
---------------------------------------------------------------------------

    \132\ See CFTC Rule 41.45(b)(2) and SEC Rule 403(b)(2). See also
2002 Adopting Release, 67 FR at 53158-61.
    \133\ Section 19(b)(2) of the Exchange Act governs SRA
rulemaking with respect to SEC registrants, and Section 5c(c) of the
CEA governs SRA rulemaking with respect to CFTC registrants.
    \134\ See 2002 Adopting Release, 67 FR at 53158-61.
---------------------------------------------------------------------------

    The Commissions stated the belief that the offsets identified in
the Strategy-Based Offset Table were consistent with the strategy-based
offsets permitted for comparable offsetting positions involving
exchange-traded options.\135\ The Commissions further stated the
expectation that SRAs seeking to permit trading in security futures
will submit to the Commissions proposed rules that impose levels of
required margin for offsetting positions involving security futures in
accordance with the minimum margin requirements identified in the
Strategy-Based Offset Table. SRAs have adopted rules consistent with
the Strategy-Based Offset Table.\136\
---------------------------------------------------------------------------

    \135\ Id. at 53159.
    \136\ See, e.g., FINRA Rule 4210(f)(10) and Cboe Rule 10.3(k).
---------------------------------------------------------------------------

    The Commissions proposed to re-publish the Strategy-Based Offset
Table to conform it to the proposed 15% required margin levels.\137\
The re-published Strategy-Based Offset Table would incorporate the 15%
required margin levels for certain offsetting positions (as opposed to
the current 20% levels) and would retain the same percentages for all
other offsets.
---------------------------------------------------------------------------

    \137\ See 2019 Proposing Release, 84 FR at 36441-36443.
---------------------------------------------------------------------------

2. Comments and the Re-Published Strategy-Based Offset Table
    OneChicago recommended several changes to the Strategy-Based Offset
Table, as proposed to be revised. First, OneChicago suggested reducing
the margin requirement for ``delta-neutral'' positions from 5% 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.\138\ These recommended changes would not
be appropriate. The 5% requirement was based on the minimum margin
required by rules of securities SROs for offsetting long and short
positions in the same security.\139\ The 5% margin requirement for this
strategy continues to exist in current securities SRO rules.\140\
Accordingly, lowering the requirement as recommended by OneChicago
would not be consistent with Section 7(c)(2)(B) of the Exchange Act.
---------------------------------------------------------------------------

    \138\ OneChicago Letter at 15. This recommendation would apply
to items 4, 10, 13, 17, 18, and 19 in the Strategy-Based Offset
Table, as proposed to be revised. See 2019 Proposing Release, 84 FR
at 36441-43.
    \139\ See 2002 Adopting Release, 67 FR at 53158, n.187.
    \140\ See, e.g., FINRA Rule 4210(e)(1).
---------------------------------------------------------------------------

    OneChicago also requested that the Commissions incorporate total
return equity swaps into the Strategy-Based Offset Table.\141\
OneChicago stated that total return equity swaps are an exact
substitute for security futures. OneChicago did not specify whether it
was referring to cleared or non-cleared total return equity swaps. In
either case, it would not be appropriate to include them in the
Strategy-Based Offset Table. Securities SRO margin rules for options do
not, at this time, recognize offsets involving these products.
Therefore, adding them to the Strategy-Based Offset Table would not be
consistent with Section 7(c)(2)(B) of the Exchange Act.
---------------------------------------------------------------------------

    \141\ OneChicago Letter at 16.
---------------------------------------------------------------------------

    OneChicago further requested that offset positions margined at 10%
should be lowered to 7.5% to mirror the magnitude of the reduction of
minimum required margin levels from 20% to 15% for unhedged security
futures.\142\ This would make the margin requirements for offsets
recognized in the Strategy-Based Offset Table lower than offsets for
exchange-traded options currently permitted by securities SRO margin
rules. Therefore, modifying the Strategy-Based Offset Table in this
manner would not be consistent with Section 7(c)(2)(B) of the Exchange
Act.
---------------------------------------------------------------------------

    \142\ OneChicago Letter at 16. 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, as proposed to be revised.
---------------------------------------------------------------------------

    Finally, OneChicago suggested that the Commissions could simplify
the Strategy-Based Offset Table by replacing it with an offset
rule.\143\ Under the suggested rule, offset positions would be margined
at the greater 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) 15% of the delta exposed
portion of the portfolio. As discussed above, the Strategy-Based Offset
Table is designed to permit offsets that are consistent with offsets
recognized for comparable exchange-traded options under the securities
SRO margin rules. For the reasons discussed above, the rule suggested
by OneChicago would not be consistent with the permitted offsets for
exchange-traded options and, consequently, would not be consistent with
Section 7(c)(2)(B) of the Exchange Act.
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    \143\ OneChicago Letter at 16-17.
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    For the foregoing reasons, the Commissions are re-publishing the
Strategy-Based Offset Table with the proposed revisions.\144\ The
Commissions expect that SRAs will submit to the Commissions proposed
rules that impose levels of required margin for offsetting positions
involving security futures in accordance with the minimum margin levels
identified in the Strategy-Based Offset Table.
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    \144\ Item 1 of the revised Strategy-Based Offset Table lists
the margin percentages for a long security future and a short
security future. These percentages are the baseline, not offsets,
but they are included in the table to preserve consistency with the
earlier offset table.

----------------------------------------------------------------------------------------------------------------
                                     Security underlying                                   Maintenance margin
       Description of offset         the security future   Initial margin requirement         requirement
----------------------------------------------------------------------------------------------------------------
1. Long security future or short    Individual stock or    15% of the current market   15% of the current market
 security future.                    narrow-based           value of the security       value of the security
                                     securities index.      future.                     future.
2. Long security future (or basket  Individual stock or    15% of the current market   The lower of: (1) 10% of
 of security futures representing    narrow-based           value of the long           the aggregate exercise
 each component of a narrow-based    securities index.      security future, plus pay   price \3\ of the put
 securities index \1\) and long                             for the long put in full.   plus the aggregate put
 put option \2\ on the same                                                             out-of-the-money \4\
 underlying security (or index).                                                        amount, if any; or (2)
                                                                                15% of the current
                                                                                market value of the long
                                                                                security future.
3. Short security future (or        Individual stock or    15% of the current market   15% of the current market
 basket of security futures          narrow-based           value of the short          value of the short
 representing each component of a    securities index.      security future, plus the   security future, plus
 narrow-based securities index                              aggregate put in-the-       the aggregate put in-the-
 \1\) and short put option on the                           money amount, if any.       money amount, if any.\5\
 same underlying security (or                               Proceeds from the put
 index).                                                    sale may be applied.

4. Long security future and short   Individual stock or    The initial margin          5% of the current market
 position in the same security (or   narrow-based           required under Regulation   value as defined in
 securities basket \1\) underlying   securities index.      T for the short stock or    Regulation T of the
 the security future.                                       stocks.                     stock or stocks
                                                                                underlying the security
                                                                                future.
5. Long security future (or basket  Individual stock or    15% of the current market   15% of the current market
 of security futures representing    narrow-based           value of the long           value of the long
 each component of a narrow-based    securities index.      security future, plus the   security future, plus
 securities index \1\) and short                            aggregate call in-the-      the aggregate call in-
 call option on the same                                    money amount, if any.       the-money amount, if
 underlying security (or index).                            Proceeds from the call      any.
                                                            sale may be applied.
6. Long a basket of narrow-based    Narrow-based           15% of the current market   15% of the current market
 security futures that together      securities index.      value of the long basket    value of the long basket
 tracks a broad based index \1\                             of narrow-based security    of narrow-based security
 and short a broad-based security                           futures, plus the           futures, plus the
 index call option contract on the                          aggregate call in-the-      aggregate call in-the-
 same index.                                                money amount, if any.       money amount, if any.
                                                            Proceeds from the call
                                                            sale may be applied.
7. Short a basket of narrow-based   Narrow-based           15% of the current market   15% of the current market
 security futures that together      securities index.      value of the short basket   value of the short
 tracks a broad-based security                              of narrow-based security    basket of narrow-based
 index \1\ and short a broad-based                          futures, plus the           security futures, plus
 security index put option                                  aggregate put in-the-       the aggregate put in-the-
 contract on the same index.                                money amount, if any.       money amount, if any.
                                                            Proceeds from the put
                                                            sale may be applied.
8. Long a basket of narrow-based    Narrow-based           15% of the current market   The lower of: (1) 10% of
 security futures that together      securities index.      value of the long basket    the aggregate exercise
 tracks a broad-based security                              of narrow-based security    price of the put, plus
 index \1\ and long a broad-based                           futures, plus pay for the   the aggregate put out-of-
 security index put option                                  long put in full.           the-money amount, if
 contract on the same index.                                                            any; or (2) 15% of the
                                                                                current market value of
                                                                                the long basket of
                                                                                security futures.
9. Short a basket of narrow-based   Narrow-based           15% of the current market   The lower of: (1) 10% of
 security futures that together      securities index.      value of the short basket   the aggregate exercise
 tracks a broad-based security                              of narrow-based security    price of the call, plus
 index \1\ and long a broad-based                           futures, plus pay for the   the aggregate call out-
 security index call option                                 long call in full.          of-the-money amount, if
 contract on the same index.                                                            any; or (2) 15% of the
                                                                                current market value of
                                                                                the short basket of
                                                                                security futures.
10. Long security future and short  Individual stock or    The greater of: 5% of the   The greater of: (1) 5% of
 security future on the same         narrow-based           current market value of     the current market value
 underlying security (or index).     securities index.      the long security future;   of the long security
                                                            or (2) 5% of the current    future; or (2) 5% of the
                                                            market value of the short   current market value of
                                                            security future.            the short security
                                                                                future.
11. Long security future, long put  Individual stock or    15% of the current market   10% of the aggregate
 option and short call option. The   narrow-based           value of the long           exercise price, plus the
 long security future, long put      securities index.      security future, plus the   aggregate call in the
 and short call must be on the                              aggregate call in-the-      money amount, if any.
 same underlying security and the                           money amount, if any,
 put and call must have the same                            plus pay for the put in
 exercise price. (Conversion).                              full. Proceeds from the
                                                            call sale may be applied.
12. Long security future, long put  Individual stock or    15% of the current market   The lower of: (1) 10% of
 option and short call option. The   narrow-based           value of the long           the aggregate exercise
 long security future, long put      securities index.      security future, plus the   price of the put plus
 and short call must be on the                              aggregate call in-the-      the aggregate put out-of-
 same underlying security and the                           money amount, if any,       the-money amount, if
 put exercise price must be below                           plus pay for the put in     any; or (2) 15% of the
 the call exercise price. (Collar).                         full. Proceeds from the     aggregate exercise price
                                                            call sale may be applied.   of the call, plus the
                                                                                aggregate call in-the-
                                                                                money amount, if any.
13. Short security future and long  Individual stock or    The initial margin          5% of the current market
 position in the same security (or   narrow-based           required under Regulation   value, as defined in
 securities basket \1\) underlying   securities index.      T for the long stock or     Regulation T, of the
 the security future.                                       stocks.                     long stock or stocks.
14. Short security future and long  Individual stock or    The initial margin          10% of the current market
 position in a security              narrow-based           required under Regulation   value, as defined in
 immediately convertible into the    securities index.      T for the long security.    Regulation T, of the
 same security underlying the                                                           long security.
 security future, without
 restriction, including the
 payment of money.
15. Short security future (or       Individual stock or    15% of the current market   The lower of: (1) 10% of
 basket of security futures          narrow-based           value of the short          the aggregate exercise
 representing each component of a    securities index.      security future, plus pay   price of the call, plus
 narrow-based securities index                              for the call in full.       the aggregate call out-
 \1\) and long call option or                                                           of-the-money amount, if
 warrant on the same underlying                                                         any; or (2) 15% of the
 security (or index).                                                                   current market value of
                                                                                the short security
                                                                                future.
16. Short security future, Short    Individual stock or    15% of the current market   10% of the aggregate
 put option and long call option.    narrow-based           value of the short          exercise price, plus the
 The short security future, short    securities index.      security future, plus the   aggregate put in-the-
 put and long call must be on the                           aggregate put in-the-       money amount, if any.
 same underlying security and the                           money amount, if any,
 put and call must have the same                            plus pay for the call in
 exercise price. (Reverse                                   full. Proceeds from the
 Conversion).                                               put sale may be applied.
17. Long (short) a basket of        Narrow-based           5% of the current market    5% of the current market
 security futures, each based on a   securities index.      value of the long (short)   value of the long
 narrow-based securities index                              basket of security          (short) basket of
 that together tracks the broad-                            futures.                    security futures.
 based index \1\ and short (long)
 a broad based-index future.
18. Long (short) a basket of        Individual stock and   The greater of: (1) 5% of   The greater of: (1) 5% of
 security futures that together      narrow-based           the current market value    the current market value
 tracks a narrow-based index \1\     securities index.      of the long security        of the long security
 and short (long) a narrow based-                           future(s); or (2) 5% of     future(s); or (2) 5% of
 index future.                                              the current market value    the current market value
                                                            of the short security       of the short security
                                                            future(s).                  future(s).
19. Long (short) a security future  Individual stock and   The greater of: (1) 3% of   The greater of: (1) 3% of
 and short (long) an identical       narrow-based           the current market value    the current market value
 security future traded on a         securities index.      of the long security        of the long security
 different market \6\.                                      future(s); or (2) 3% of     future(s); or (2) 3% of
                                                            the current market value    the current market value
                                                            of the short security       of the short security
                                                            future(s).                  future(s).
----------------------------------------------------------------------------------------------------------------
\1\ Baskets of securities or security futures contracts replicate the securities that compose the index, and in
  the same proportion.
\2\ Generally, unless otherwise specified, stock index warrants are treated as if they were index options.
\3\ ``Aggregate exercise price,'' with respect to an option or warrant based on an underlying security, means
  the exercise price of an option or warrant contract multiplied by the numbers of units of the underlying
  security covered by the option contract or warrant. ``Aggregate exercise price'' with respect to an index
  option means the exercise price multiplied by the index multiplier.

\4\ ``Out-of-the-money'' amounts are determined as follows: (1) For stock call options and warrants, any excess
  of the aggregate exercise price of the option or warrant over the current market value of the equivalent
  number of shares of the underlying security; (2) for stock put options or warrants, any excess of the current
  market value of the equivalent number of shares of the underlying security over the aggregate exercise price
  of the option or warrant; (3) for stock index call options and warrants, any excess of the aggregate exercise
  price of the option or warrant over the product of the current index value and the applicable index
  multiplier; and (4) for stock index put options and warrants, any excess of the product of the current index
  value and the applicable index multiplier over the aggregate exercise price of the option or warrant.
\5\ ``In-the-money'' amounts are determined as follows: (1) For stock call options and warrants, any excess of
  the current market value of the equivalent number of shares of the underlying security over the aggregate
  exercise price of the option or warrant; (2) for stock put options or warrants, any excess of the aggregate
  exercise price of the option or warrant over the current market value of the equivalent number of shares of
  the underlying security; (3) for stock index call options and warrants, any excess of the product of the
  current index value and the applicable index multiplier over the aggregate exercise price of the option or
  warrant; and (4) for stock index put options and warrants, any excess of the aggregate exercise price of the
  option or warrant over the product of the current index value and the applicable index multiplier.
\6\ Two security futures are considered ``identical'' for this purpose if they are issued by the same clearing
  agency or cleared and guaranteed by the same derivatives clearing organization, have identical contract
  specifications, and would offset each other at the clearing level.

C. Other Matters

    One commenter urged the Commissions to make clear, where
appropriate, that margin rules of general applicability do not apply to
security futures.\145\ Specifically, this commenter requested
clarification about the intersection of the security futures rules and
CFTC general margin requirements under part 39 of the CFTC's
regulations for DCOs.\146\ The commenter cited to a CFTC rule proposal
related to customer initial margin requirements as an example of a rule
of general applicability that should be addressed by the Commissions.
Earlier this year, the CFTC adopted changes to the DCO core principles,
including 17 CFR 39.13(g)(8)(ii) (CFTC Rule 39.13(g)(8)(ii)) relating
to customer initial margin requirements.\147\ As the CFTC noted in the
2019 Proposing Release \148\ and in the final rule adopting changes to
DCO core provisions,\149\ the CFTC's Division of Clearing and Risk
issued an interpretative letter in September 2012 stating that the
specific initial margin requirements under CFTC Rule 39.13(g)(8)(ii) do
not apply to security futures positions.\150\ CFTC Letter No. 12-08 is
still in effect and may be relied upon by market participants. The CFTC
believes that CFTC Letter No. 12-08 addresses the commenter's concerns,
and the CFTC will not be revising the position taken by the CFTC's
Division of Clearing and Risk in this rulemaking.
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    \145\ See FIA Letter at 2.
    \146\ See FIA Letter at 2; see also CFTC Letter No. 12-08 (Sept.
14, 2012); 2019 Proposing Release, 84 FR 36437, at n.40.
    \147\ See Derivatives Clearing Organization General Provisions
and Core Principles, 85 FR 4800 (Jan. 27, 2020) (amending certain
CFTC regulations applicable to registered DCOs).