[Federal Register Volume 84, Number 144 (Friday, July 26, 2019)]
[Proposed Rules]
[Pages 36434-36454]
[FR Doc No: 2019-15400]

Vol. 84

Friday,

No. 144

July 26, 2019

Part VI

Commodity Futures Trading Commission

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17 CFR Part 41

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Securities and Exchange Commission

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17 CFR Part 242

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Customer Margin Rules Relating to Security Futures; Proposed Rule

Federal Register / Vol. 84, No. 144 / Friday, July 26, 2019 /
Proposed Rules

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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. 34-86304; 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 proposed rules.

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SUMMARY: The Commodity Futures Trading Commission (``CFTC'') and the
Securities and Exchange Commission (``SEC'') (collectively, the
``Commissions'') are proposing amendments to regulations that establish
minimum customer margin requirements for security futures. More
specifically, the proposed amendments would lower the margin
requirement for an unhedged security futures position from 20% to 15%,
as well as propose certain revisions to the margin offset table
consistent with the proposed reduction in margin.

DATES: Comments should be received on or before August 26, 2019.

ADDRESSES: Comments should be sent to both agencies at the addresses
listed below.
    CFTC: You may submit comments, identified by RIN 3038-AE88, by any
of the following methods:
     CFTC Website: https://comments.cftc.gov. Follow the
instructions for submitting comments through the website.
     Mail: Christopher Kirkpatrick, Secretary of the
Commission, Commodity Futures Trading Commission, Three Lafayette
Centre, 1155 21st Street NW, Washington, DC 20581.
     Hand Delivery/Courier: Same as Mail above.
    Please submit your comments using only one method.
    All comments must be submitted in English, or if not, accompanied
by an English translation. Comments will be posted as received to
https://www.cftc.gov. You should submit only information that you wish
to make available publicly. If you wish for the CFTC to consider
information that you believe is exempt from disclosure under the
Freedom of Information Act, a petition for confidential treatment of
the exempt information may be submitted according to the procedures
established in CFTC Rule 145.9, 17 CFR 145.9.
    The CFTC reserves the right, but shall have no obligation, to
review, pre-screen, filter, redact, refuse, or remove any or all of
your submission from https://www.cftc.gov that it may deem to be
inappropriate for publication, such as obscene language. All
submissions that have been redacted or removed that contain comments on
the merits of the rulemaking will be retained in the public comment
file and will be considered as required under the Administrative
Procedure Act and other applicable laws, and may be accessible under
the Freedom of Information Act.
    SEC: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the SEC's internet comment form (http://www.sec.gov/rules/proposed.shtml); or
     Send an email to<EMAIL_ADDRESS>Please include
File Number S7-09-19 on the subject line.

Paper Comments

     Send paper comments to Secretary, Securities and Exchange
Commission, 100 F Street NE, Washington, DC 20549-1090.

All submissions should refer to File Number S7-09-19. This file number
should be included on the subject line if email is used. To help the
SEC process and review your comments more efficiently, please use only
one method. The SEC will post all comments on the SEC's website (http://www.sec.gov/rules/proposed.shtml). Comments are also available for
website viewing and printing in the SEC's Public Reference Room, 100 F
Street NE, Room 1580, Washington, DC 20549, on official business days
between the hours of 10:00 a.m. and 3:00 p.m. All comments received
will be posted without change. Persons submitting comments are
cautioned that the SEC does not redact or edit personal identifying
information from comment submissions. You should submit only
information that you wish to make publicly available.
    Studies, memoranda, or other substantive items may be added by the
SEC or staff to the comment file during this rulemaking. A notification
of the inclusion in the comment file of any such materials will be made
available on the SEC's website. To ensure direct electronic receipt of
such notifications, sign up through the ``Stay Connected'' option at
www.sec.gov to receive notifications by email.

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
    A. Applicable Statutory Framework
    B. Prior Regulatory Action by the Commissions
    C. Consideration of SROs' Risk-Based Portfolio Margining
Approaches
    D. Consideration of Statutory Requirements
II. Discussion
    A. Minimum Margin for Unhedged Positions
    1. Current Security Futures Margin Rules
    2. SRO Risk-Based Portfolio Margin Accounts May Hold Comparable
Exchange-Traded Options
    3. Minimum Levels of Margin Required for Security Futures
    4. The Commissions Have Authority To Determine Which Exchange-
Traded Options Are Comparable to Security Futures
    5. The Margin Requirements Are Consistent for Comparable
Exchange-Traded Options
    6. The Proposed Margin Rule Is Consistent With the Federal
Reserve's Regulation T
    7. The Proposed Margin Rule Permits Higher Margin Requirements
    8. Request for Comments
    B. Margin Offsets
III. Paperwork Reduction Act
    A. CFTC
    B. SEC
IV. Consideration of Costs and Benefits (CFTC) and Economic Analysis
(SEC) of the Proposed Amendments
    A. CFTC
    1. Introduction
    2. Economic Baseline
    3. Summary of Proposed Amendment
    4. Description of Possible Costs
    i. Risk-Related Costs for Security Futures Intermediaries and
Customers
    ii. Appropriateness of Margin Requirements
    iii. Costs Associated With Margin Offsets Table

    5. Description of Possible Benefits
    6. Consideration of Section 15(a) Factors
    i. Protection of Market Participants and the Public
    ii. The Efficiency, Competitiveness and Financial Integrity of
the Markets
    iii. Price Discovery
    iv. Risk Management
    v. Other Public Interest Considerations
    7. Request for Comment
    B. SEC
    1. Introduction
    2. Baseline
    i. The Security Futures Market
    ii. Regulation
    3. Analysis of the Proposals
    i. Benefits
    ii. Costs
    iii. Effects on Efficiency, Competition, and Capital Formation
    iv. Alternatives Considered
V. Regulatory Flexibility Act
    A. CFTC
    B. SEC
VI. Small Business Regulatory Enforcement Fairness Act
VII. Anti-Trust Considerations
VIII. Statutory Basis

    The CFTC is proposing to amend CFTC Rule 41.45(b)(1), 17 CFR
41.45(b)(1), and the SEC is proposing to amend SEC Rule 403(b)(1), 17
CFR 242.403(b)(1),\1\ under authority delegated by the Board of
Governors of the Federal Reserve System (``Federal Reserve Board'')
pursuant to Section 7(c)(2) of the Securities Exchange Act of 1934
(``Exchange Act'').\2\ The Commissions also are proposing to revise the
margin offset table, consistent with the proposed reduction in margin.
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    \1\ CFTC regulations referred to herein are found at 17 CFR Ch.
1; SEC regulations referred to herein are found at 17 CFR Ch. 2.
    \2\ 15 U.S.C. 78g(c)(2).
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I. Background

    The Commodity Futures Modernization Act of 2000 (``CFMA''),\3\
which became law on December 21, 2000, lifted the ban on trading
security futures \4\ and established a framework for the joint
regulation of security futures by the CFTC and the SEC. A security
future is a futures contract on a single security or on a narrow-based
security index.\5\
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    \3\ Appendix E of Public Law No. 106-554, 114 Stat. 2763 (2000).
    \4\ See Section 1a(31) of the Commodity Exchange Act (``CEA''),
7 U.S.C. 1a(44); and Section 3(a)(55) of the Exchange Act, 15 U.S.C.
78c(a)(55) (defining the term ``security future'').
    \5\ Id. A ``security future'' is distinguished from a ``security
futures product,'' which is defined to include security futures as
well as any put, call, straddle, option, or privilege on any
security future. See Section 1a(45) of the CEA, 7 U.S.C. 1a(45); and
Section 3(a)(56) of the Exchange Act, 15 U.S.C. 78c(a)(56) (defining
the term ``security futures product''). Futures on indexes that are
not narrow-based security indexes are subject to the exclusive
jurisdiction of the CFTC. This rule proposal applies only to margin
on security futures and not to margin on options on security
futures. For the purposes of this proposal, most discussion will
relate to security futures only. For the sake of clarity and
consistency, the term ``security futures products'' will be used
when discussing security futures and the options on security futures
together throughout this proposal. Under CEA Section
2(a)(1)(D)(iii)(II) and Exchange Act Section 6(h)(6), the CFTC and
SEC may, by order, jointly determine to permit the listing of
options on security futures; that authority has not been exercised.
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A. Applicable Statutory Framework

    As part of the statutory scheme for the regulation of security
futures, the CFMA provided for the issuance of regulations governing
customer margin for security futures. Customer margin for security
futures includes two types of margin, (i) initial margin, and (ii)
maintenance margin. Together, the initial and maintenance margin must
satisfy the required margin established by the Commissions.\6\
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    \6\ Initial margin must be deposited as collateral when a
customer makes an initial investment in security futures.
Maintenance margin is the minimum amount a customer must maintain in
its margin account while owning security futures. If a customer's
margin level falls below the maintenance margin amount, a customer
may be required to make an additional deposit. Maintenance margin
for security futures is different from variation settlement.
Variation settlement is a daily or intraday mark to market payment
for a security future. See CFTC Rule 41.43(a)(32), 17 CFR
41.43(a)(32); SEC Rule 401(a)(32), 17 CFR 242.401(a)(32).
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    The CFMA added a new subsection (2) to Section 7(c) of the Exchange
Act,\7\ which directs the Federal Reserve Board to prescribe
regulations establishing initial and maintenance customer margin
requirements imposed by brokers, dealers, and members \8\ of national
securities exchanges \9\ for security futures. In addition, Section
7(c)(2) provides that the Federal Reserve Board may delegate this
rulemaking authority jointly to the Commissions.
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    \7\ 15 U.S.C. 78g(c)(2).
    \8\ Futures commission merchants (as defined in Section 1(a)(28)
of the CEA), which may be members of national securities exchanges,
clearing members at clearinghouses, or customers of clearing members
at clearinghouses, are discussed in detail below.
    \9\ OneChicago, LLC (``OCX''), the only U.S. national securities
exchange currently listing security futures, filed a rulemaking
petition, dated August 1, 2008, requesting that the minimum required
margin for unhedged security futures be reduced from 20% to 15%.
Letter from Donald L. Horwitz, Managing Director and General
Counsel, OCX, to David Stawick, Secretary, CFTC, and Nancy M.
Morris, Secretary, SEC, dated Aug. 1, 2008, at 2 (``OCX Petition'').
OCX also is a designated contract market registered with the CFTC.
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    Section 7(c)(2)(B) of the Exchange Act provides that the customer
margin requirements, ``including the establishment of levels of margin
\10\ (initial and maintenance) for security futures products,'' must
satisfy four requirements. First, they must preserve the financial
integrity of markets trading security futures products. Second, they
must prevent systemic risk. Third, they must (1) be consistent with the
margin requirements for comparable options traded on any exchange
registered pursuant to Section 6(a) of the Exchange Act; \11\ and (2)
provide for initial and maintenance margin levels that are not lower
than the lowest level of margin, exclusive of premium, required for any
comparable exchange-traded options. Fourth, they must be, and remain
consistent with, the margin requirements established by the Federal
Reserve Board under Regulation T (``Regulation T'').\12\
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    \10\ The terms ``margin level'' and ``level of margin'', when
used with respect to a security futures product, mean the amount of
margin required to secure any extension or maintenance of credit, or
the amount of margin required as a performance bond related to the
purchase, sale, or carrying of a security futures product. 15 U.S.C.
78c(a)(57)(B).
    \11\ Given the statutory language, for the sake of clarity and
consistency, the term ``comparable exchange-traded options'' will be
used to describe single stock options throughout this proposal.
    \12\ 12 CFR 220 et seq.
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    With regard to the third requirement, there is limited legislative
history \13\ regarding how or why the comparison should be to exchange-
traded options. As discussed further below, under certain circumstances
the products behave similarly in terms of their overall risk profiles.
However, from the perspective of market participants, exchange-traded
options and security futures often serve two distinct economic
functions.
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    \13\ For example, earlier versions of the statutory language
stated that margin should be set at levels appropriate to ``prevent
competitive distortions between markets offering similar products'',
and the reasons given for instituting the margin requirements was
that ``[u]nder the bill, margin levels on these products would be
required to be harmonized with the options markets.'' See S. Report
106-390 (Aug. 25, 2000) at pp.5 and 39.
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    Exchange-traded options are tools for hedging and speculating on
the underlying equity markets. On the other hand, security futures are
``delta one derivatives'' \14\ that are more similar to total return
equity swaps insofar as they provide exposure to equities without
requiring ownership of the underlying instrument. Specifically,
security futures are used to (1) establish synthetic long or short
exposure to the underlying equity security or equity securities, and/or
(2) temporarily transfer securities, similar to securities

lending or equity repurchase agreements.\15\ However, while exchange-
traded options and security futures can serve distinct economic
functions, they generally share similar risk profiles for purposes of
assessing margin. For example, 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. As a result, the margin requirements for security
futures can be compared to margin practices for exchange-traded options
in order to determine appropriate margin levels.
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    \14\ 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.
    \15\ See e.g., OCX (describing trading strategies for security
futures), available at https://www.onechicago.com/?page_id=25157.
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    In comparison, security futures traded in Europe are subject to
risk-based margin calculations that differ from the margin requirements
that apply to security futures in the U.S. LCH Ltd. applies a Standard
Portfolio Analysis of Risk (``SPAN'') margin methodology for the
security futures it clears,\16\ and Eurex applies portfolio-based
margining through its new margin methodology, Eurex Clearing Prisma, to
its cleared security futures.\17\ As described below, in the U.S.,
security futures may be portfolio margined under current rules only if
they are held in a securities account.\18\
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    \16\ See LCH's discussion of ``London SPAN'', available at
https://www.lch.com/risk-collateral-management/group-risk-management/risk-management-ltd/ltd-margin-methodology/london.
    \17\ See Eurex Exchange's discussion of ``Risk parameters and
initial margins'', available at http://www.eurexchange.com/exchange-en/market-data/clearing-data/risk-parameters.
    \18\ See the Financial Industry Regulatory Authority, Inc.
(``FINRA'') Rule 4210(g) and the Cboe Exchange, Inc. (``CBOE'') Rule
12.4. See also Section 713 of the Dodd-Frank Wall Street Reform and
Consumer Protection Act (``Dodd-Frank Act''). Public Law 111-203,124
Stat. 1376 (2010). The Dodd-Frank Act provided the SEC and CFTC with
authority to facilitate portfolio margining by allowing cash and
securities to be held in a futures account, and futures and options
on futures and related collateral to be held in a securities
account, subject to certain conditions. See Exchange Act Section
15(c)(3)(C) and CEA Section 4d(h), 15 U.S.C. 78o(c)(3)(C), and 7
U.S.C. 6d(h).
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B. Prior Regulatory Action by the Commissions

    On March 6, 2001, the Federal Reserve Board delegated its authority
under Section 7(c)(2) to the Commissions.\19\ Pursuant to that
authority, the SEC and the CFTC adopted customer margin requirements
for security futures.\20\
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    \19\ 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''), reprinted as Appendix B to Customer Margin Rules Relating
to Security Futures, 66 FR 50720, 50741 (Oct. 4, 2001) (joint
proposed rulemaking by the Commissions) (``2001 Proposed Rules'').
    \20\ See Customer Margin Rules Relating to Security Futures, 67
FR 53146 (Aug. 14, 2002) (joint rulemaking by the Commissions,
hereinafter the ``2002 Final Rules''); 17 CFR 41.42-41.49 (CFTC
regulations); 17 CFR 242.400-242.406 (SEC regulations).
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    The 2002 Final Rules establish margin requirements for security
futures to be collected by security futures intermediaries from their
customers.\21\ 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 futures commission merchants
(``FCMs'').\22\ The amendments proposed today to CFTC regulation
41.45(b)(1) and SEC rule 242.403(b)(1) concern the minimum required
margin such entities would be required to collect from customers in
this context.
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    \21\ See CFTC Rule 41.45(a), 17 CFR 41.45(a); SEC Rule 403, 17
CFR 242.403.
    \22\ See CFTC Rule 41.43(a)(29), 17 CFR 41.43(a)(29); SEC Rule
401(a)(29), 17 CFR 242.401(a)(29). A security future is both a
security and a future, so customers who wish to buy or sell security
futures must conduct the transaction through a person registered
both with the CFTC as either an FCM or an introducing broker and the
SEC as a broker-dealer. The term ``security futures intermediary''
includes FCMs that are clearing members or customers of clearing
members of the Options Clearing Corporation (``OCC''), which is the
clearinghouse that clears security futures listed on OCX.
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    In the 2002 Final Rules, the Commissions established minimum
initial and maintenance margin levels for unhedged security futures at
20% of their ``current market value.'' \23\ In addition, the
Commissions' rules permit self-regulatory organizations and self-
regulatory authorities (together ``SROs''),\24\ to set margin levels
lower than 20% of current market value for customers with certain
strategy-based offset positions involving security futures and one or
more related securities or futures.\25\
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    \23\ See CFTC Rule 41.45(b)(1), 17 CFR 41.45(b)(1); SEC Rule
403(b)(1), 17 CFR 242.403(b)(1). See also CFTC Rule 41.43(a)(4), 17
CFR 41.43(a)(4); SEC Rule 401(a)(4), 17 CFR 242.401(a)(4) (defining
the term ``current market value'').
    \24\ For the sake of clarity and consistency, the defined term
``SRO'' will be used to describe self-regulatory organizations and
self-regulatory authorities throughout this proposal. ``Self-
regulatory authority'' is defined at CFTC Rule 41.43(a)(30), 17 CFR
41.43(a)(30) and SEC Rule 401(a)(30), 17 CFR 242.401(a)(30).
    \25\ See CFTC Rule 41.45(b)(2), 17 CFR 41.45(b)(2); SEC Rule
403(b)(2), 17 CFR 242.403(b)(2).
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    Neither the current regulations nor the proposed amendments
prohibit SROs or security futures intermediaries from establishing
higher initial or maintenance margin levels than the required margin or
from taking appropriate action to preserve their own financial
integrity.\26\ SROs and security futures intermediaries may determine
that higher margin levels are required for security futures under
certain market conditions. Similar to current regulations, the
Commissions are proposing to preserve this flexibility because it is
important for SROs and security futures intermediaries to be able to
manage their customers' risks appropriately.
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    \26\ See CFTC Rule 41.42(c)(1), 17 CFR 41.42(c)(1); SEC Rule
400(c)(1), 17 CFR 242.400(c)(1).
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    The Commissions enumerated specific exclusions from the margin rule
for security futures, and those exclusions would continue under the
proposed amendments.\27\ For example, margin requirements that
derivatives clearing organizations (``DCOs'') or clearing agencies
impose on their members are not subject to the 20% security futures
margin requirement, as this provides clearinghouses flexibility and
discretion in managing their members' exposures. In addition, Section
7(c)(2) of the Exchange Act does not confer authority over margin
requirements for clearing agencies and DCOs.\28\ The margin rules of
clearing agencies registered with the SEC are approved by the SEC
pursuant to Section 19(b)(2) of the Exchange Act.\29\ The CFTC has
authority to ensure compliance with core principles for DCOs registered
with the CFTC under Sections 5b and 5c of the CEA.\30\
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    \27\ See CFTC Rule 41.42(c)(2)(i)-(v), 17 CFR 41.42(c)(2)(i)-
(v); SEC Rule 400(c)(2)(i)-(v), 17 CFR 242.400(c)(2)(i)-(v).
    \28\ See CFTC Rule 41.42(c)(2)(iii), 17 CFR 41.42(c)(2)(iii);
SEC Rule 400(c)(2)(iii), 17 CFR 242.400(c)(2)(iii). See also 15
U.S.C. 78g(c)(2) and FRB Letter (``The authority delegated by the
[Federal Reserve 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.'').
    \29\ 15 U.S.C. 78s(b)(2).
    \30\ 7 U.S.C. 7a-1 and 7 U.S.C. 7a-2.
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    Another exclusion is for margin calculated by a portfolio margining
system under rules that meet the four criteria set forth in Section
7(c)(2)(B) of the Exchange Act \31\ and that have been approved by the
SEC and, as applicable, the CFTC.\32\ Subsequent to the adoption of
2002 Final Rules, and consistent with the exclusion, three SROs \33\
initiated

pilot programs for risk-based portfolio margining rules that permit a
security futures intermediary to combine certain of a customer's
securities and futures positions in a securities portfolio margin
account to compute the customer's margin requirements based on the net
market risk of all the customer's positions in the account.\34\ As
discussed in more detail below, these SRO risk-based portfolio margin
rules established a margin requirement for unhedged exchange-traded
options and security futures of 15% (i.e., a valuation point range of
+/- 15%).\35\ In proposed rule filings seeking to make the pilots
permanent, the SROs noted that they did not encounter any problems or
difficulties relating to such pilot programs.\36\ These SRO risk-based
portfolio margining rules--originally adopted as a pilot program--
became permanent in 2008. These SRO rules require 15% margin (i.e., a
valuation point range of +/- 15%) for an unhedged exchange-traded
option on an equity security or narrow-based index.\37\
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    \31\ 15 U.S.C. 78g(c)(2)(B).
    \32\ See CFTC Rule 41.42(c)(2)(i), 17 CFR 41.42(c)(2)(i); SEC
Rule 400(c)(2)(i), 17 CFR 242.400(c)(2)(i).
    \33\ The three SROs that proposed pilot programs are FINRA, the
New York Stock Exchange LLC (``NYSE'') and CBOE (formerly known as
Chicago Board Options Exchange, Inc.). The SEC has regulatory
authority over all three SROs. In 2010, the CBOE conducted a
restructuring transaction in which CBOE became a wholly-owned
subsidiary of CBOE Holdings, Inc. The CFTC regulates the Cboe
Futures Exchange, LLC (a wholly-owned subsidiary of CBOE Holdings,
Inc.) as a designated contract market under Section 5 of the CEA.
    \34\ See Exchange Act Release No. 55471 (Mar. 14, 2007), 72 FR
13149 (Mar. 20, 2007) (SR-NASD-2007-013, relating to the National
Association of Securities Dealers' (now known as FINRA) rule change
to permit members to adopt a portfolio margin methodology on a pilot
basis); Exchange Act Release No. 54918 (Dec. 12, 2006), 71 FR 75790
(Dec. 18, 2006) (SR-NYSE-2006-13, relating to further amendments to
the NYSE's portfolio margin pilot program); Exchange Act Release No.
54919 (Dec. 12, 2006), 71 FR 75781 (Dec. 18, 2006) (SR-CBOE 2006-14,
relating to amendments to CBOE's portfolio margin pilot program to
include security futures); Exchange Act Release No. 54125 (Jul. 11,
2006), 71 FR 40766 (Jul. 18, 2006) (SR-NYSE-2005-93, relating to
amendments to the NYSE's portfolio margin pilot program to include
security futures); Exchange Act Release No. 52031 (Jul. 14, 2005),
70 FR 42130 (Jul. 21, 2005) (SR-NYSE-2002-19, relating to the NYSE's
original portfolio margin pilot proposal); Exchange Act Release No.
52032 (Jul. 14, 2005), 70 FR 42118 (Jul. 21, 2005) (SR-CBOE-2002-03,
relating to the CBOE's original portfolio margin pilot proposal).
    \35\ See discussion in section I.C. below.
    \36\ See Exchange Act Release No. 58251 (Jul. 30, 2008), 73 FR
45506 (Aug. 5, 2008) (SR-FINRA-2008-041, relating to the FINRA's
proposal to make the portfolio margin pilot program permanent under
NASD Rule 2520(g) and Incorporated NYSE Rule 431(g)); Exchange Act
Release No. 58243 (Jul. 29, 2008), 73 FR 45505 (Aug. 5, 2008) (SR-
CBOE-2008-73, relating to the CBOE's proposal to make the portfolio
margin pilot program permanent); and Exchange Act Release No. 58261
(Jul. 30, 2008), 73 FR 46116 (Aug. 7, 2008) (SR-NYSE-2008-66,
relating to the NYSE's proposal to make the portfolio margin pilot
program permanent). FINRA Rule 4210 (Margin Requirements) became
effective December 2, 2010. See Exchange Act Release No. 62482 (July
12, 2010) 75 FR 41562 (July 16, 2010) (SR-FINRA-2010-024, relating
to FINRA's proposal to adopt FINRA Rule 4210 (Margin Requirements)
as part of the process of developing a consolidated FINRA rulebook)
and FINRA Regulatory Notice 10-45. As of February 14, 2019, of the
3,777 broker-dealers registered with the SEC, FINRA is the
designated examining authority for 3,654 firms (96.7%).
    \37\ Id.
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    Subsequent to the adoption of 2002 Final Rules, each Commission
adopted rules to enhance core principles and standards for the
operation and governance of DCOs and covered clearing agencies that, as
discussed below, also are generally applicable to the clearance and
settlement of security futures. In 2011, the CFTC issued regulations
applicable to DCOs, including CFTC Rule 39.13, which concerns margin--
both initial and variation margin--that is required to be collected by
a DCO from its clearing members.\38\ Any DCO clearing security futures
is subject to CFTC Rule 39.13,\39\ and most of the requirements under
CFTC Rule 39.13 apply broadly to all transactions cleared by the DCO,
but in some cases security futures transactions are excluded.\40\ Any
of a DCO's clearing members that are FCMs and that are clearing
security futures on behalf of customers would be subject to CFTC Rule
41.45(b)(1).\41\
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    \38\ See DCO General Provisions and Core Principles, 76 FR
69334, 69364-69379 (Nov. 8, 2011).
    \39\ The CFTC adopted enhanced risk management requirements for
all registered DCOs in 2011. See id.
    \40\ For example, CFTC Rule 39.13(g)(8)(ii) (requiring DCOs to
collect customer initial margin, for non-hedge positions, at a level
that is greater than 100% of the DCO's initial margin requirements)
does not apply to initial margin collected for security futures
positions. In September 2012, the CFTC's Division of Clearing and
Risk issued an interpretive letter regarding CFTC Rule
39.13(g)(8)(ii) to provide clarifications to DCOs complying with the
rule. CFTC Letter No. 12-08 (Sept. 14, 2012). CFTC Letter No. 12-08
states that the customer margin rule under CFTC Rule 39.13(g)(8)(ii)
``does not apply to customer initial margin collected as performance
bond for customer security futures positions.'' CFTC Letter No. 12-
08 is limited in its discussion to CFTC Rule 39.13(g)(8)(ii) only
and, accordingly, the remaining provisions of CFTC Rule 39.13
continue to apply to DCOs clearing security futures.
    \41\ Currently, the OCC is the only clearinghouse in the United
States that clears security futures. 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.
---------------------------------------------------------------------------

    In 2016, the SEC adopted final rules applicable to clearing
agencies registered with the SEC, including SEC Rule 17Ad-22(e)(6), to
establish enhanced standards for the operation and governance of
registered clearing agencies that meet the definition of ``covered
clearing agency.\42\ This rule requires a covered clearing agency that
provides central clearing services to establish, implement, maintain,
and enforce written policies and procedures reasonably designed to, as
applicable, cover its credit exposures to its participants by
establishing a risk-based margin system that meets certain minimum
standards prescribed in the rule.\43\ OCC, as a covered clearing
agency, is subject to these rules, and its broker-dealer clearing
members that clear security futures are subject to SEC Rule
403(b)(1).\44\
---------------------------------------------------------------------------

    \42\ See Standards for Covered Clearing Agencies, Exchange Act
Release No. 78961 (Sept. 28, 2016), 81 FR 70786 (Oct. 13, 2016).
    \43\ 17 CFR 240.17Ad-22(e)(6).
    \44\ 17 CFR 242.403(b)(1).
---------------------------------------------------------------------------

C. Consideration of SROs' Risk-Based Portfolio Margining Approaches

    As discussed below, the Commissions are proposing to amend the
customer margin requirements for security futures that are held outside
of risk-based portfolio margining accounts. This amended margin
requirement would equal the level of margin required to be collected
for security futures under risk-based portfolio margining
methodologies. The amended margin requirement also would equal the
margin requirement for an unhedged exchange-traded option held in a
securities portfolio margin account. Security futures and exchange-
traded options held in securities accounts are permitted to take
advantage of SRO risk-based portfolio margining, and the Commissions
are seeking to align the margin requirement for security futures not
held in portfolio margin accounts (by lowering their overall margin
rate) with security futures and exchanged-traded options held in these
securities accounts.
    Under the SRO risk-based portfolio margining rules, the minimum
initial and maintenance margin on a customer's entire portfolio,
including an unhedged position in a security future or exchange-traded
option, shall be the greater of: (i) The amount of any of the ten
equidistant valuation points representing the largest theoretical loss
in the portfolio as calculated under the rule,\45\ or (ii) 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.\46\
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    \45\ The actual percentage used to stress a financial instrument
will depend on the financial instrument. For example, the up/down
market move (high and low valuation points) is +6%/-8% for high
capitalization, broad-based market indexes; +/-10% for non-high
capitalization, broad-based market indexes; and +/-15% for any other
eligible product that is, or is based on, an equity security or a
narrow-based index. See FINRA Rule 4210(g)(2)(F) and CBOE Rule
12.4(a)(11). Portfolio types containing volatility indexes are
subject to market moves of +/-20% for 30-day implied volatility, and
+/-40% for 9-day implied volatility. See CBOE Rule 12.4(a)(11).
    \46\ See FINRA Rule 4210(g)(7) and CBOE Rule 12.4(e).
---------------------------------------------------------------------------

    The SRO risk-based portfolio margining system approved by the SEC
is a methodology for determining a customer's margin requirement by
calculating the greatest theoretical loss on a portfolio of financial
instruments at ten equidistant points along a range representing a
potential percentage increase and decrease in the value of the
instrument or underlying instrument in the case of a derivative.
Theoretical gains and losses for each instrument in the portfolio are
netted at each valuation point along the range to derive a potential
portfolio-wide gain or loss for the point. Under current SRO risk-based
portfolio margining rules, the range of theoretical gains and losses
for portfolios of security futures and exchange-traded options that are
based on a single equity security or narrow-based index is a market
increase of 15% and a decrease of 15% (i.e., the valuation points would
be +/- 3%, 6%, 9%, 12%, and 15%).\47\
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    \47\ A theoretical options pricing model is used to derive
position values at each valuation point for the purpose of
determining the gain or loss. See FINRA Rule 4210(g)(2)(F) (defining
the term ``theoretical gains and losses''). For example, assuming
that the 15% market move creates the largest theoretical loss in the
portfolio and that security futures have a linear function (i.e., a
price movement in the underlying instrument will translate into a
specific dollar value change in the security future), the initial
and maintenance margin for a security future will equal close to 15%
of the overall unhedged security futures portfolio.
---------------------------------------------------------------------------

    In addition to requiring a 15% margin for unhedged security futures
and exchange-traded options, as a pre-condition to offering portfolio
margining to customers under the SRO risk-based portfolio margining
system, security futures intermediaries are required to establish a
comprehensive, written risk analysis methodology to assess the
potential risk to the security futures intermediary's capital over a
specified range of possible market movements for positions held in a
securities portfolio margin account.\48\
---------------------------------------------------------------------------

    \48\ See FINRA Rule 4210(g)(1) and CBOE Rule 15.8A. See also
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).
---------------------------------------------------------------------------

D. Consideration of Statutory Requirements

    As noted above, in Section 7(c)(2)(B)(iii) of the Exchange Act \49\
Congress provided that the margin requirements for security futures
must be consistent with the margin requirements for comparable
exchange-traded options, and that the initial and maintenance margin
levels for security futures may not be lower than the lowest level of
margin, exclusive of premium, required for any comparable exchange-
traded option.
---------------------------------------------------------------------------

    \49\ 15 U.S.C. 78g(c)(2)(B)(iii).
---------------------------------------------------------------------------

    As noted above, despite some distinct economic uses for exchange-
traded options and security futures, both products share similar risk
profiles. Accordingly, the Commissions are proposing to apply margin
requirements to security futures that are consistent with the margin
requirements for comparable exchange-traded options.
    In summary, as discussed in detail below, because unhedged
exchange-traded options and security futures in SRO risk-based
portfolio margining programs were permitted to be margined at a lower
15% rate as early as 2008, when the SRO risk-based portfolio margining
programs became permanent,\50\ the Commissions are proposing to amend
their joint margin rules relating to security futures to reduce the
minimum required margin for unhedged security futures from 20% to 15%,
reflecting the current margin requirements available for comparable
exchange-traded options.\51\
---------------------------------------------------------------------------

    \50\ See supra note 36.
    \51\ See 2001 Proposed Rules, 66 FR at 50726 (``Pending adoption
of such [portfolio margin] systems by regulatory authorities,
however, the 20 percent level is consistent with the current
requirements for comparable equity options.'').
---------------------------------------------------------------------------

    With regard to the other three statutory requirements, the
Commissions preliminarily believe this proposed action is consistent
with preserving the financial integrity of the security futures market,
is unlikely to lead to systemic risk, and is consistent with the margin
requirements established by the Federal Reserve Board under Regulation
T.\52\
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    \52\ As discussed in the CFTC's Consideration of Costs and
Benefits and the SEC's Economic Analysis, in sections IV.A and B,
respectively, the Commissions believe that margin coverage is
sufficient and tailored to preserve financial integrity and prevent
systemic risk in the security futures market.
---------------------------------------------------------------------------

II. DISCUSSION

A. Minimum Margin for Unhedged Positions

1. Current Security Futures Margin Rules
    Under existing CFTC and SEC regulations, the current minimum
initial and maintenance margin levels required of customers for each
unhedged long or short position in security futures is 20% of the
current market value of such a security future.\53\ This margin level
was based on the margin requirements for an unhedged short, at-the-
money exchange-traded option in 2002.\54\ Currently, the margin
requirement for an unhedged short, at-the-money exchange-traded option
held in a customer account that is not subject to SRO risk-based
portfolio margining, where the underlying instrument is either an
equity security or a narrow-based index of equity securities, is 100%
of the exchange-traded option proceeds, plus 20% of the value of the
underlying security or narrow-based index.\55\
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    \53\ See CFTC Rule 41.45(b), 17 CFR 41.45(b); SEC Rule 403(b),
17 CFR 242.403(b).
    \54\ See 2002 Final Rules, 67 FR at 53157.
    \55\ See generally FINRA Rule 4210 and CBOE Rule 12.3. For long,
exchange-traded options, the purchaser is generally required to pay
the full amount of the contract.
---------------------------------------------------------------------------

2. SRO Risk-Based Portfolio Margin Accounts May Hold Comparable
Exchange-Traded Options
    When the Commissions adopted the 2002 Final Rules, market
participants had no opportunity to margin short exchange-traded options
on an equity security or a narrow-based index, at a rate lower than
20%. Therefore, according to Section 7(c)(2)(B)(iii)(II) of the
Exchange Act, the Commissions could not establish a margin level for
security futures that was lower than the 20% margin level applicable to
exchange-traded options. Now, after the adoption of the SRO risk-based
portfolio margining for securities customer accounts, market
participants may choose to hold their exchange-traded options in
accounts that are margined at levels of 15% or lower.\56\
---------------------------------------------------------------------------

    \56\ As stated above, SRO risk-based portfolio margin rules
permit a security futures intermediary to combine certain of a
customer's securities positions to compute margin requirements. In
cases where a customer holds hedged positions (such as options) on
the same underlying security, the portfolio margin requirement may
be less than 15%. For purposes of the analysis of the proposed rule
amendments, however, the Commissions are determining whether the
proposed 15% margin requirement for an unhedged security future held
outside a securities portfolio margin account is comparable to a 15%
margin requirement for unhedged exchanged-traded options held in a
securities portfolio margin account.
---------------------------------------------------------------------------

    At the time of the 2002 Final Rules, the SROs had not yet proposed
portfolio margining rules for exchange-traded options. As of the
publication of the 2002 Final Rules, all short exchange-traded options
on an equity security or a narrow-based index were required to satisfy
a 20% margin rate and it was the Commissions' view that security
futures should be subject to the same margin rate for those comparable
exchange-traded options.
    Today, there is an alternative margin methodology for exchange-
traded options that are held in a securities

margin account and subject to permanent portfolio margin requirements
implemented successfully by market participants. The Commissions
preliminarily believe that they have satisfied the third prong of the
Exchange Act's margin requirements to determine that the margin rate
for security futures should be consistent with the margin rate for
those exchange-traded options. The Commissions preliminarily believe
there is sufficient basis to make that determination at this time, and
are proposing that the margin rate for unhedged security futures be
consistent with, and the same as, the margin rate for unhedged
exchange-traded options held in a risk-based portfolio margining
account.
3. Minimum Levels of Margin Required for Security Futures
    Congress stated explicitly that the margin level for a security
future should not be lower than the lowest level of margin for any
comparable exchange-traded option,\57\ but it did not state a specific
amount that the Commissions would be required to set as a minimum
margin requirement. Today, there are exchange-traded options based on
an equity security or narrow-based index that are margined at 15%, or
lower, as a result of portfolio margining that is now being offered by
a number of SROs. Congress intended for the Commissions to set a margin
level for a security future that was not lower than the margin rate
required for comparable exchange-traded options, which is to say that
the Commissions cannot set a margin rate for security futures lower
than 15%. The margin required for an unhedged exchange-traded option in
a risk-based portfolio margin account, calculated using the SROs'
current rules, will equal 15% or less of the underlying equity
security's value, because the largest theoretical loss produced by
shocking the portfolio will not be more than 15%.
---------------------------------------------------------------------------

    \57\ 15 U.S.C. 78g(c)(2)(B)(iii)(II).
---------------------------------------------------------------------------

    Because the current SRO required margin levels for unhedged
exchange-traded options held in a portfolio margin account are set at a
level based on shocking the portfolio at 15% price movements, the
Commissions preliminarily believe that the unhedged security futures
margin rate should not be lower than 15%. Therefore, the Commissions'
proposal to lower the margin requirement for security futures complies
with the statutory requirement that the margin level for a security
future be consistent with the margin for any comparable exchange-traded
option.
4. The Commissions Have Authority to Determine Which Exchange-Traded
Options Are Comparable to Security Futures
    In this proposal, the Commissions seek to align the margin rate for
security futures with the lower portfolio-based margin rate for
exchange-traded options because the Commissions view exchange-traded
options held in portfolio margin accounts as comparable to security
futures that may be held alongside the exchange-traded options.
    Congress did not instruct the Commissions to set the margin
requirement for security futures at the same exact level as the margin
requirements for exchange-traded options. The Commissions are required
to establish a margin requirement that is ``consistent'' with the
margin requirements for ``comparable'' exchange-traded options. Because
the Commissions have some flexibility in establishing the margin rate
for security futures, the Commissions are making the determination that
establishing the margin rate for unhedged security futures at the same
rate as the margin rate for exchange-traded options that are held
alongside security futures inside a portfolio margin account subject to
an SRO's portfolio margining rules will provide the most consistent
result for security futures.
    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. The SRO
portfolio margining rules, upon which this change is based, are
discussed in more detail below.
    The Commissions explained in the 2001 proposing release for
customer margin for security futures that ``the Federal Reserve Board
has expressed the view that `more risk-sensitive, portfolio-based
approaches to margining security futures products' should be adopted
[citing the FRB Letter]. Pending adoption of such systems by regulatory
authorities, however, the 20% level is consistent with the current
requirements for comparable equity options.'' \58\
---------------------------------------------------------------------------

    \58\ See 2001 Proposed Rules, 66 FR at 50726.
---------------------------------------------------------------------------

    With the adoption of the SRO securities risk-based portfolio
margining rules--including portfolio margining for security futures--
the Commissions have preliminarily determined that a proposed minimum
margin level of 15% meets the comparability standard of Section 7(c)(2)
of the Exchange Act.\59\ Under the SROs' securities risk-based
portfolio margining rules, a security futures intermediary may combine
a customer's related products and calculate margin for a group of
similar products on a portfolio margin basis. Each group of products
may be subject to a different margin calculation, depending on its risk
profile.\60\ Portfolios containing exchange-traded options and security
futures based on the same underlying security, such as an individual
equity or narrow-based index are grouped together.\61\ SRO rules
calculate the margin requirement for these exchange-traded options and
security futures by exposing the instruments to market moves that are
+/-15%. The Commissions are proposing to allow security futures
intermediaries to margin security futures held outside of these
portfolios the same as security futures held inside of the portfolios
with other instruments. As a result of this change, security futures
held in futures accounts and strategy-based securities margin accounts
would be subject to the same margin requirements as unhedged security
futures held in securities portfolio margin accounts. The Commissions
are proposing to require 15% margin for unhedged security futures
because it would bring security futures held outside of a securities
portfolio margin account into alignment with the margin requirements
for unhedged security futures held within a securities account using
risk-based portfolio margining.
---------------------------------------------------------------------------

    \59\ See 15 U.S.C. 78g(c)(2).
    \60\ Each of the SROs has different portfolio types that will be
margined according to the portfolio's risk profile. These portfolio
types include: (i) High capitalization, broad-based market index
(margin required is calculated using +6/-8% market moves), (ii) non-
high capitalization, broad-based market index (margin required is
calculated using +/-10% market moves), (iii) narrow-based index
(margin required is calculated using +/-15% market moves), (iv)
individual equity (margin required is calculated using +/-15% market
moves), (v) volatility index (30-day implied) (margin required is
calculated using +/-20% market moves), and (vi) volatility index (9-
day implied) (margin required is calculated using +/-40% market
moves). See, e.g., FINRA Rule 4210(g)(2)(F) and CBOE Rule
12.4(a)(11).
    \61\ Certain portfolios are allowed offsets such that, at the
same valuation point, for example, 90% of a gain in one portfolio
may reduce or offset a loss in another portfolio. These offsets
would be allowed between portfolios within the narrow-based index
group, but not for class groups containing different individual
equity securities or eligible products (such as options and security
futures) as the underlying security.
---------------------------------------------------------------------------

5. The Margin Requirements Are Consistent for Comparable Exchange-
Traded Options
    Under the statutory requirement, 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. As noted above, the
Commissions believe that certain types of exchange-traded options, no
matter what type of an account they are in, are comparable to security
futures. The margin requirements for comparable exchange-traded options
and security futures must be consistent.
    Under this proposal, the Commissions are using a stress level
percentage set out for unhedged exchange-traded options based on an
equity security or narrow-based index in a portfolio margin account
(e.g., +/-15%) to establish a consistent margin level for security
futures held outside of a securities portfolio margin account, which
use a fixed-rate percentage of market value to set margin.\62\ While
these two regimes reflect certain differences (in that portfolio margin
calculates margin on a portfolio or net basis for securities with the
same underlying position, and outside a securities portfolio margin
account, margin is calculated on a position-by-position basis), the
Commissions believe that these two regimes are consistent when
comparing unhedged security futures with comparable exchange-traded
options.
---------------------------------------------------------------------------

    \62\ While the Commissions are using a single unhedged option
for comparison, the Commissions note that a long (short) security
future position can be replicated by a portfolio containing one long
(short) at-the-money call and one short (long) at-the-money put.
This options portfolio creates a synthetic security futures
position. The margin requirement applicable to the options
portfolio, under approved SRO portfolio margin system rules, is also
15%. In addition, a very deep-in-the-money call or put on the same
security (with a delta of one) is an option contract comparable to a
security futures contract that will also result in a consistent 15%
margin level.
---------------------------------------------------------------------------

    As stated above, the Commissions noted in the 2001 Proposed Rules
that ``[p]ending adoption of such [portfolio margining] systems by
regulatory authorities, however, the 20% level is consistent with the
current requirements for comparable equity options.'' \63\ Since the
adoption of the SRO risk-based portfolio margin rules, subsequent to
the adoption of the 2002 Final Rules, unhedged exchanged-traded options
based on an equity security or a narrow-based index and unhedged
security futures held in a securities portfolio margin account may be
margined at 15%. As a result of these developments, the Commissions are
proposing to reduce the margin requirement for an unhedged security
future held outside of a securities portfolio margin account from 20%
to 15%. Consequently, the Commissions preliminarily believe that the
proposed level of margin is consistent with the margin requirements for
comparable options traded on any exchange registered pursuant to
Section 6(a) of the Exchange Act.
---------------------------------------------------------------------------

    \63\ 2001 Proposed Rules, 66 FR at 50726.
---------------------------------------------------------------------------

6. The Proposed Margin Rule Is Consistent With the Federal Reserve's
Regulation T
    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.\64\ In the 2002 Final Rules,
while the Commissions determined not to apply Regulation T in its
entirety to margin requirements for security futures, the Commissions
adopted final rules which included certain provisions that govern
account administration, type, form, and use of collateral, calculation
of equity, withdrawals from accounts, and the treatment of
undermargined accounts. In the 2002 Final Rules, 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.'' \65\ Because the proposed amendments
today solely relate to a reduction in the ``levels of margin'' for
security futures, which are not required under the Exchange Act to be
consistent with Regulation T, the Commissions preliminarily believe
that the margin requirements for security futures as proposed to be
amended would continue to be consistent with Regulation T.
---------------------------------------------------------------------------

    \64\ 15 U.S.C. 78g(c)(2)(B)(iv).
    \65\ 2002 Final Rules, 67 FR at 53155.
---------------------------------------------------------------------------

7. The Proposed Margin Rule Permits Higher Margin Requirements
    Again, under this proposal, the joint margin regulations will
continue to permit SROs and security futures intermediaries to
establish higher margin levels and to take appropriate action to
preserve their own financial integrity.\66\ The proposed minimum margin
requirement of 15% would apply to an unhedged position in a security
future, whether the position is held in a securities account or a
futures account.\67\ The 15% margin requirement for unhedged security
futures would not preclude the use of an existing portfolio margining
system, such as SPAN, by an FCM for security futures held in a futures
account, so long as the portfolio margining system is modified to
produce results that comply with the margin requirements for security
futures.\68\
---------------------------------------------------------------------------

    \66\ See CFTC Rule 41.42(c)(1), 17 CFR 41.42(c)(1); SEC Rule
400(c)(1), 17 CFR 242.400(c)(1).
    \67\ In its petition, OCX 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 OCX Petition at 2.
    \68\ For example, a SPAN risk-based portfolio margining
methodology can be used to compute required initial or maintenance
margin that results in margin levels that are equal to or higher
than the margin levels required by the proposed rules. In this
regard, for example, the minimum margin requirement for unhedged
security futures under the proposed rules would be 15%, and SPAN
could not recognize any offset for combination positions that is not
permitted under SRO rules, as provided in CFTC Rule 41.45(b)(2), 17
CFR 41.45(b)(2); SEC Rule 403(b)(2), 17 CFR 242.403(b)(2). See also
note 27 in the 2002 Final Rules, 67 FR at 53148.
---------------------------------------------------------------------------

8. Request for Comments
    In summary, the Commissions propose that the required minimum
margin for each long or short position in a security future shall be
15% of the current market value of such security future. The
Commissions request comment on all aspects of the proposed amendment to
reduce the margin requirement to 15%. In addition, the Commissions
request comment, including empirical data in support of the comments,
on the following questions related to the proposal:
     As discussed above, the Commissions believe that because
the margin requirement for a comparable option held in a portfolio
margin account is calculated by exposing the option to market moves
that are + /-15%, the margin methodologies for security futures and
comparable exchange-traded options are consistent. Is the Commissions'
belief correct? If not, why not?
     Is the proposed reduction in margin for security futures
to 15% consistent with the margin requirements for comparable exchange-
traded option contracts based on an equity security or narrow-based
index held in a securities portfolio margin account? Is it appropriate
to compare the proposed margin requirement for an unhedged security
futures position held outside a portfolio margin account to an unhedged
exchange-traded option held in a securities portfolio margin account
for purposes of the comparability standard in Section
7(c)(2)(B)(iii)(I) of the Exchange Act?

     Are there any other comparisons or methodologies for
comparison that the Commissions should consider in determining whether
the proposed reduction in margin to 15% for security futures meets the
standards in Section 7(c)(2)(B)(iii) of the Exchange Act with respect
to comparing the margin requirements for security futures with the
margin requirements for comparable exchange-traded options? For
example, should the comparison or methodologies for comparable options
be based on a specific option position (or positions) held in a
securities portfolio margin account, such as a deep in-the-money
options position or matched pairs of long-short options positions? If
so, please identify the position or positions and explain how they
would meet the comparability standards under the Exchange Act.
     Are 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.

B. Margin Offsets

    The Commissions' joint margin rules permit SROs \69\ to establish
margin levels for offsetting positions involving security futures,
which are lower than the required margin levels for unhedged
positions.\70\ Thus, an SRO may adopt rules that set the required
initial or maintenance margin level for an offsetting position
involving security futures and related positions at a level lower than
the level that would be required if the positions were margined
separately. Such rules must meet the criteria set forth in Section
7(c)(2)(B) of the Exchange Act \71\ and must be effective in accordance
with Section 19(b)(2) of the Exchange Act \72\ and, as applicable,
Section 5c(c) of the CEA.\73\
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    \69\ As noted above, for the sake of clarity and consistency,
the defined term ``SRO'' is used to describe both self-regulatory
organizations and self-regulatory authorities throughout this
proposal.
    \70\ See CFTC Rule 41.45(b)(2), 17 CFR 41.45(b)(2); SEC Rule
403(b)(2), 17 CFR 242.403(b)(2).
    \71\ 15 U.S.C. 78g(c)(2)(B).
    \72\ 15 U.S.C. 78s(b)(2).
    \73\ 7 U.S.C. 7a-2(c).
---------------------------------------------------------------------------

    In issuing the 2002 Final Rules, the Commissions published a table
of offsets for security futures that the Commissions had identified as
consistent with those permitted for similar offsetting positions
involving exchange-traded options and that would qualify for reduced
margin levels.\74\ The Commissions are proposing to re-publish the
table of offsets to reflect the proposed 15% minimum margin
requirement.
---------------------------------------------------------------------------

    \74\ See 2002 Final Rules, 67 FR at 53159. The offset table was
published in the 2002 Final Rules. It is not part of the Code of
Federal Regulations. See also FINRA Rule 4210(f)(10)(B)(iii), CBOE
Rule 12.3(k)(6), OCX Rule 515(m), and Schedule A to Chapter 5 of the
OneChicago Exchange Rulebook.
---------------------------------------------------------------------------

    As compared to the offsets identified at the time of the adoption
of the joint margin rules, certain offsets would reflect a 15% minimum
margin requirement for certain offsetting positions (as opposed to the
current 20% requirement) and would retain the same percentages for all
other offsets.\75\ There are no additional adjustments to the offsets
table, other than minor footnote edits.
---------------------------------------------------------------------------

    \75\ The 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.
---------------------------------------------------------------------------

    The Commissions preliminarily believe that the offsets identified
in the following re-stated table are consistent with the strategy-based
offsets permitted for comparable offset positions involving exchange-
traded options. SROs seeking to permit trading in security futures
generally should modify their rules that impose levels of required
margin for offsetting positions involving security futures in
accordance with the margin percentages identified in the following
table of offsets.

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

7. Short a basket of narrow-based     Narrow-based security    15% of the current        15% of the current
 security futures that together        index.                   market value of the       market value of the
 tracks a broad-based security                                  short basket of narrow-   short basket of narrow-
 index\1\ and short a broad-based                               based security futures,   based security
 security index put option contract                             plus the aggregate put    futures, plus the
 on the same index.                                             in-the-money amount, if   aggregate put in-the-
                                                                any. Proceeds from the    money amount, if any.
                                                                put sale may be
                                                                applied.
8. Long a basket of narrow-based      Narrow-based security    15% of the current        The lower of: (1) 10%
 security futures that together        index.                   market value of the       of the aggregate
 tracks a broad-based security index                            long basket of narrow-    exercise price of the
 \1\ and long a broad-based security                            based security futures,   put, plus the
 index put option contract on the                               plus pay for the long     aggregate put out-of-
 same index.                                                    put in full.              the-money amount, if
                                                                                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 security    15% of the current        The lower of: (1) 10%
 security futures that together        index.                   market value of the       of the aggregate
 tracks a broad-based security index                            short basket of narrow-   exercise price of the
 \1\ and long a broad-based security                            based security futures,   call, plus the
 index call option contract on the                              plus pay for the long     aggregate call out-of-
 same index.                                                    call in full.             the-money amount, if
                                                                                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 greater of: (1) 5%
 security future on the same           narrow-based security    the current market        of the current market
 underlying security (or index).       index.                   value of the long         value of the long
                                                                security future; or (2)   security future; or
                                                                5% of the current         (2) 5% of the current
                                                                market value of the       market value of the
                                                                short security future.    short security future.
11. Long security future, long put    Individual stock or      15% of the current        10% of the aggregate
 option and short call option. The     narrow-based security    market value of the       exercise price, plus
 long security future, long put and    index.                   long security future,     the aggregate call in
 short call must be on the same                                 plus the aggregate call   the money amount, if
 underlying security and the put and                            in-the-money amount, if   any.
 call must have the same exercise                               any, plus pay for the
 price. (Conversion)                                            put in full. Proceeds
                                                                from the call sale may
                                                                be applied.
12. Long security future, long put    Individual stock or      15% of the current        The lower of: (1) 10%
 option and short call option. The     narrow-based security    market value of the       of the aggregate
 long security future, long put and    index.                   long security future,     exercise price of the
 short call must be on the same                                 plus the aggregate call   put plus the aggregate
 underlying security and the put                                in-the-money amount, if   put out-of-the-money
 exercise price must be below the                               any, plus pay for the     amount, if any; or (2)
 call exercise price. (Collar).                                 put in full. Proceeds     15% of the aggregate
                                                                from call sale may be     exercise price of the
                                                                applied.                  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
 position in the same security (or     narrow-based security    required under            market value, as
 securities basket \1\) underlying     index.                   Regulation T for the      defined in Regulation
 the security future.                                           long stock or stocks.     T, of the long stock
                                                                                or stocks.
14. Short security future and long    Individual stock or      The initial margin        10% of the current
 position in a security immediately    narrow-based security    required under            market value, as
 convertible into the same security    index.                   Regulation T for the      defined in Regulation
 underlying the security future,                                long security.            T, of the long
 without restriction, including the                                                       security.
 payment of money.
15. Short security future (or basket  Individual stock or      15% of the current        The lower of: (1) 10%
 of security futures representing      narrow-based security    market value of the       of the aggregate
 each component of a narrow-based      index.                   short security future,    exercise price of the
 securities index \1\) and long call                            plus pay for the call     call, plus the
 option or warrant on the same                                  in full.                  aggregate call out-of-
 underlying security (or index).                                                          the-money amount, if
                                                                                any; or (2) 15% of the
                                                                                current market value
                                                                                of the short security
                                                                                future.
16. Short security future, Short put  Individual stock or      15% of the current        10% of the aggregate
 option and long call option. The      narrow-based security    market value of the       exercise price, plus
 short security future, short put      index.                   short security future,    the aggregate put in-
 and long call must be on the same                              plus the aggregate put    the-money amount, if
 underlying security and the put and                            in-the-money amount, if   any.
 call must have the same exercise                               any, plus pay for the
 price. (Reverse Conversion)                                    call in full. Proceeds
                                                                from put sale may be
                                                                applied.
17. Long (short) a basket of          Narrow-based security    5% of the current market  5% of the current
 security futures, each based on a     index.                   value of the long         market value of the
 narrow-based security index that                               (short) basket of         long (short) basket of
 together tracks the broad-based                                security futures.         security futures.
 index \1\ and short (long) a broad
 based-index future.

18. Long (short) a basket of          Individual stock and     The greater of: (1) 5%    The greater of: (1) 5%
 security futures that together        narrow-based security    of the current market     of the current market
 tracks a narrow-based index \1\ and   index.                   value of the long         value of the long
 short (long) a narrow based-index                              security future(s); or    security future(s); or
 future.                                                        (2) 5% of the current     (2) 5% of the current
                                                                market value of the       market value of the
                                                                short security            short security
                                                                future(s).                future(s).
19. Long (short) a security future    Individual stock and     The greater of: (1) 3%    The greater of: (1) 3%
 and short (long) an identical         narrow-based security    of the current market     of the current market
 security future traded on a           index.                   value of the long         value of the long
 different market \6\.                                          security future(s); or    security future(s); or
                                                                (2) 3% of the current     (2) 3% of the current
                                                                market value of the       market value of the
                                                                short security            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.

    The Commissions request comment on the re-stated table of offsets
to reflect the proposed 15% minimum margin requirement. In addition,
the Commissions request comment, including empirical data in support of
the comments, on the following questions related to the re-stated table
of offsets:
     In light of the proposed reduction in margin requirements
for unhedged security futures from 20% to 15%, should any of the other
percentages in the offsets table also be reduced? If so, would those
percentages still be consistent with the margin requirements for
comparable exchange-traded options?
     Are there offset positions in addition to those enumerated
in the above chart that are consistent with the margin requirements for
comparable exchange-traded options, and which the Commissions should
consider adding to the list of offsets?
     Are there offset positions included in the above chart
which the Commissions should delete from the list of offsets?

III. Paperwork Reduction Act

A. CFTC

    The Paperwork Reduction Act of 1995 (``PRA'') \76\ imposes certain
requirements on federal agencies (including the CFTC and the SEC) in
connection with their conducting or sponsoring any collection of
information as defined by the PRA. The proposed rules do not require a
new collection of information on the part of any entities subject to
these rules. Accordingly, the requirements imposed by the PRA are not
applicable to these rules.
---------------------------------------------------------------------------

    \76\ 44 U.S.C. 3501 et seq.
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B. SEC

    The PRA\77\ imposes certain requirements on federal agencies
(including the CFTC and the SEC) in connection with their conducting or
sponsoring any collection of information as defined by the PRA. The
proposed amendments do not contain a ``collection of information''
requirement within the meaning of the PRA. Accordingly, the PRA is not
applicable.
---------------------------------------------------------------------------

    \77\ Id.
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IV. Consideration of Costs and Benefits (CFTC) and Economic Analysis
(SEC) of the Proposed Amendments

A. CFTC

1. Introduction
    Section 15(a) of the CEA requires the CFTC to consider the costs
and benefits of its actions before promulgating a regulation under the
CEA or issuing certain orders.\78\ Section 15(a) further specifies that
the costs and benefits shall be evaluated in light of five broad areas
of market and public concern: (1) Protection of market participants and
the public; (2) efficiency, competitiveness, and financial integrity of
futures markets; (3) price discovery; (4) sound risk management
practices; and (5) other public interest considerations. The CFTC
considers the costs and benefits resulting from its discretionary
determinations with respect to the Section 15(a) factors below. Where
reasonably feasible, the CFTC has endeavored to estimate quantifiable
costs and benefits. Where quantification is not feasible, the CFTC
identifies and describes costs and benefits qualitatively.
---------------------------------------------------------------------------

    \78\ 7 U.S.C. 19(a).

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2. Economic Baseline
    The CFTC's economic baseline for purposes of considering the
proposed amendment is the security futures margin rule that exists
today. In the 2002 Final Rules, the Commissions adopted security
futures margin rules that complied with the statutory requirements
under Section 7(c)(2)(B) of the Exchange Act. The rules state that,
``the required margin for each long or short position in a security
future shall be twenty (20) percent of the current market value of such
security future.'' \79\ The 2002 Final Rules also allow SROs to set
margin levels lower than the 20% minimum requirement for customers with
``an offsetting position involving security futures and related
positions.'' \80\ In addition, the 2002 Final Rules permit certain
customers to take advantage of exclusions to the minimum margin
requirement for security futures.
---------------------------------------------------------------------------

    \79\ CFTC Rule 41.45(b)(1), 17 CFR 41.45(b)(1). See CFTC Rule
41.43(a)(4), 17 CFR 41.43(a)(4) (defining the term ``current market
value.'').
    \80\ CFTC Rule 41.45(b)(2), 17 CFR 41.45(b)(2).
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    The CFTC will consider the costs and benefits of this rule proposal
as compared with the baseline of the current minimum initial and
maintenance margin levels for unhedged security futures, which is set
at 20% of the current market value of such security future.
3. Summary of Proposed Amendment
    The proposed amendment would lower the minimum margin level for an
unhedged position in a security future from 20% of its current market
value to 15% of its current market value. In connection with this
change, the security futures margin offsets table would be restated so
that it is consistent with the proposed reduction in margin.
4. Description of Possible Costs
    The CFTC has preliminarily determined that, to the extent that
there are operational or technology costs associated with modifying
operational and administrative systems for calculating security futures
customer margin, such costs are not likely to be significant given that
the infrastructure for calculating such margin already exists and is
not likely to require major reprogramming.
i. Risk-Related Costs for Security Futures Intermediaries and Customers
    There are three types of risk-related costs that could result from
the adoption of the proposed amendment. The first risk-related cost is
reducing margin requirements for security futures that could expose
security futures intermediaries and their customers to losses in the
event that margin collected is insufficient to protect against market
moves and there is a default of a security futures intermediary or its
customer. Pursuant to OCC's bylaws, any security futures intermediary
that is a clearing member of OCC grants a security interest in any
account it establishes and maintains to OCC, and therefore a customer's
assets may be obligated to OCC upon default.\81\ As a result, FCMs
could be exposed to a loss if the 15% margin rate for security futures
is insufficient. However, this risk is mitigated by the fact that if a
15% margin level is determined to be insufficient, the security futures
intermediary has the authority to collect margin in an amount that
exceeds the minimum requirement in order to protect its financial
integrity.\82\
---------------------------------------------------------------------------

    \81\ See OCC Bylaws, Maintenance of Accounts, Section 3,
Interpretations and Policies .07, adopted September 22, 2003, last
accessed on January 3, 2018, available at https://www.theocc.com/components/docs/legal/rules_and_bylaws/occ_bylaws.pdf.
    \82\ See CFTC Rule 41.42(c)(1), 17 CFR 41.42(c)(1); SEC Rule
400(c)(1), 17 CFR 242.400(c)(1).
---------------------------------------------------------------------------

    A second type of risk-related cost might arise where an FCM
collects the minimum margin required from customers in order to
maintain or expand its customer business. Lower margin requirements
might facilitate an FCM permitting its customers to take on additional
risk in their positions in order to increase business for the FCM. Such
additional risks could put the FCM at risk if the customer were to
default, and other customers at the FCM could risk losses if the FCM or
one of its customers defaulted. A related third type of risk-related
cost stems from the possibility of increased leverage among security
futures customers. Customers posting less margin to cover security
futures positions might be able to increase their overall market
exposure and thereby increase their leverage.
    The second and third risk-related costs are mitigated, to some
degree, by regulations that apply to security futures intermediaries
that are registered as FCMs. For example, FCMs are subject to capital
requirements under CFTC regulations,\83\ and in instances where the
security futures intermediary is jointly registered as a broker-dealer
FCM, the SEC's capital rules also apply.\84\ In addition, FCMs are
required to establish a system of risk management policies and
procedures pursuant to CFTC Rule 1.11. This risk management program is
designed to protect the FCM and its customers against a variety of
risks, including the potential future exposure of a security futures
position that initial and maintenance margin is designed to address.
---------------------------------------------------------------------------

    \83\ See CFTC Rule 1.17, 17 CFR 1.17.
    \84\ See SEC Rule 240.15c3-1, 17 CFR 240.15c3-1.
---------------------------------------------------------------------------

    Lastly, risk-related costs to the security futures intermediary are
further mitigated by the fact that OCX represents that the vast
majority of its open interest is held by eligible contract participants
(``ECPs'') as defined in Section 1a(18) of the CEA.\85\ Generally
speaking, ECPs are financial entities or individuals with significant
financial resources or other qualifications, that make them appropriate
persons for certain investments.\86\ According to data provided by OCX,
over 99% of the notional value of OCX's products was held by ECPs as of
March 1, 2016 and March 1, 2017.
---------------------------------------------------------------------------

    \85\ See also CFTC Rule 1.3, 17 CFR 1.3.
    \86\ For example, an individual can qualify as an ECP if the
individual has amounts invested on a discretionary basis, the
aggregate of which is in excess of: (i) $10,000,000; or (ii)
$5,000,000 if the individual also enters into an agreement,
contract, or transaction in order to manage the risk associated with
an asset owned or liability incurred, or reasonably likely to be
owned or incurred, by the individual.
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ii. Appropriateness of Margin Requirements
    A possible risk-related cost of lowering margin requirements for
security futures is that a DCO may not have sufficient margin on
deposit to cover the potential future exposure of cleared security
futures positions. However, as explained above, a review of margin
coverage data for related options on futures supports the view that
decreasing margin requirements from 20% to 15% margin will not have a
significant effect on the safety and soundness of the security futures
intermediaries and DCOs. Moreover, the risk management expertise at
security futures intermediaries and DCOs, as well as the general
applicability of CFTC Rule 39.13 to security futures, supports a view
that DCOs and security futures intermediaries will continue to manage
the risks of these products effectively even with lower margin
requirements.\87\
---------------------------------------------------------------------------

    \87\ As discussed above, security futures intermediaries are
authorized to collect margin above the amounts required by the
Commissions. However, as for-profit entities, security futures
intermediaries may be incentivized to lower their margin rates in
order to compete for customer business. If security futures
intermediaries engage in competition for business based on margin
pricing, it is possible that security futures intermediaries will
collect only the required level of margin (i.e., 15% under the
proposed rule change), regardless of the market conditions, which
could impair their ability to protect against market risk and
losses.
---------------------------------------------------------------------------

    The CFTC has reviewed the security futures markets under normal
market

conditions and observed that a 15% level of margin would be sufficient
to cover daily price moves in most instances (i.e., more than
99.5%).\88\ Therefore, the CFTC preliminarily believes that the
proposed amendment will not have a substantial negative impact on (1)
the protection of market participants or the public, (2) the financial
integrity of security futures markets, or (3) sound risk management
practices of DCOs or security futures intermediaries.
---------------------------------------------------------------------------

    \88\ Conducting a value-at-risk analysis of 74 of the most
liquid security futures contracts during a limited time-frame
(November 2002-June 2010), CFTC staff found that there were 195
instances where a 15% margin was insufficient and 99 instances where
a 20% margin was insufficient. For all observations, a 15% margin
was sufficient for 99.81% of all observations while a 20% margin was
sufficient for 99.91% of all observations. CFTC staff notes that
this period covers the fall of 2008, one of the most volatile
quarters in history. The CFTC staff also notes that since 2010,
volatility in the equity markets has typically been lower (e.g., as
measured by the Chicago Board Options Exchange Volatility Index
(``VIX'')) than in the 2002 to 2010 period. In particular, the VIX,
which measures market expectations of near term volatility as
conveyed by stock index option prices, has, at its highest levels
since June 2010, never reached levels higher than 48 (as compared to
almost 90 at the peak during the financial crisis). It is therefore
reasonable to conclude that a 15% margin would be sufficient for
almost all days since 2010. See, e.g., VIX data available from the
Federal Reserve Bank of Saint Louis at https://fred.stlouisfed.org/series/VIXCLS.
---------------------------------------------------------------------------

    The risk customers and/or intermediaries face from reducing margin
for security futures is addressed at the clearinghouse level because
there are additional protections under CFTC regulations. For example,
CFTC Rule 39.13 requires a DCO to establish initial margin requirements
that are commensurate with the risks of each product and portfolio. In
addition, CFTC Rule 39.13 requires that initial margin models meet set
liquidation time horizons and have established confidence levels of at
least 99%. These DCO initial margin requirements are distinct from the
margin requirements that are the subject of this proposal and serve to
mitigate the possibility that a DCO may default (resulting in a
systemic event). In the event that a DCO determined that a 15% margin
level for security futures is insufficient to satisfy a DCO's
obligation under CFTC Rule 39.13, the DCO would be required to collect
additional margin from its clearing members.\89\
---------------------------------------------------------------------------

    \89\ The CFTC expects that any difference between the margin
charged at the DCO and the margin charged by the security futures
intermediary will be addressed by additional margin calls, if
necessary. The DCO can require additional margin from its clearing
members (which in some cases will be the security futures
intermediary), to cover changes in market positions. DCOs and
clearing members are familiar with margin call procedures and have
established rules and policies to efficiently transfer funds when
needed. If a customer's account has insufficient funds to meet the
margin call, its clearing member may provide the amount to the DCO
and collect it from the customer at a later time. In this scenario,
the clearing member may take on a liability or additional risk on
the customer's behalf for a short period of time. The CFTC notes
that this practice is the same for security futures as it is for
other products subject to clearing and it does not view this
temporary shifting of risk between the clearing member and the
customer as a unique source of risk to security futures.
Furthermore, this proposed change in required margin from 20% to 15%
would not alter the relationship between DCOs and their clearing
members, or between clearing members and their customers. The CFTC
acknowledges that it is possible that DCOs and security futures
intermediaries will collect different levels of margin, but it is
not necessarily a result of this proposed rule change. Moreover, the
difference in margin collected is not an unmitigated source of risk
for the security futures intermediaries because they have the
authority to collect additional funds from their customers in the
event of a margin call and can choose to set margin levels higher
than the minimum level required by the Commissions.
---------------------------------------------------------------------------

    The CFTC observes that the current and proposed margin requirements
for security futures are materially distinct from initial margin
requirements for DCOs. The initial margin requirements for DCOs are
risk-based and designed to permit DCOs to use risk-based margin models
to determine the appropriate level of margin to be collected, subject
to the CFTC's minimum requirements under CFTC regulations in Part 39.
The current and proposed margin requirements for security futures do
not incorporate risk-based strategies or calculations. Despite
proposing a non-risk-based margin requirement for security futures, the
CFTC continues to support the use of risk-based margin models for all
derivatives because use of such models are a sound way for DCOs to
manage their clearing risks appropriately.
iii. Costs Associated With Margin Offsets Table
    The Commissions are proposing to restate the table of offsets for
security futures to reflect the proposed 15% minimum margin
requirement. The CFTC does not believe that lowering the margin
requirements for certain offsets will increase costs to customers,
security futures intermediaries, or DCOs. The categories of permissible
offsets will remain the same and there will be no change to the inputs
used to calculate the offset, other than to decrease the initial and
maintenance margin on all security futures from 20 to 15%. Moreover,
the same risk to the customers and security futures intermediaries will
exist if the Commissions decrease the margin required for security
futures trading combinations eligible for offsets as it will with
security futures without an offset.
    Finally, the CFTC notes that security futures intermediaries and
customers will continue to be required to comply with daily mark-to-
market and variation settlement procedures applied to security futures,
as well as the large trader reporting regime that applies to futures
accounts.
5. Description of Possible Benefits
    The CFTC has preliminarily determined that there are significant
benefits associated with the proposed amendment. The proposed
amendments would align customer margin requirements for security
futures held in a futures or securities account with those that are
held in a securities risk-based portfolio margin account. The CFTC
believes that it would increase competition by establishing a level
playing field between security futures carried in the SRO securities
risk-based portfolio margining account and security futures carried in
a futures account or a securities account.
    Additionally, the reduced minimum margin level could facilitate
more trading in security futures, which would increase market liquidity
to the benefit of market participants and the public. Increased
liquidity could contribute to the financial integrity of security
futures markets, particularly in the event an FCM finds that it must
manage the default of a customer's security futures positions.
    The lower minimum margin requirement also might decrease the direct
cost of trading in security futures and increase capital efficiency
because more funds would be available for other uses. Lowering the
minimum margin requirement also could enable the one U.S. security
futures exchange to better compete in the global marketplace, where
security futures traded on foreign exchanges are subject to risk-based
margin requirements that are generally lower than those applied to
security futures traded in the U.S.
    The proposal restates the table of offsets for security futures to
reflect the proposed 15% minimum margin requirement. These offsets
would continue to provide the benefits of capital efficiency to
customers because offsets recognize the unique features of certain
specified combined strategies and would permit margin requirements that
better reflect the risk of these strategies. Moreover, the same
benefits of lowering margin costs for customers and increasing business
in security futures could result from lowering margin requirements for
offsetting security futures positions.

6. Consideration of Section 15(a) Factors
    This section will discuss the expected results of the proposal to
amend CFTC Rule 41.45(b)(1) to reduce the minimum initial and
maintenance margin levels for each security future to 15% of the
current market value of such contract from the current requirement of
20% in light of the five factors under Section 15(a) of the CEA, as
itemized above.
i. Protection of Market Participants and the Public
    The proposed amendment continues to protect market participants and
the public from the risks of a default in the security futures market.
As discussed above, the CFTC believes that a 15% minimum initial and
maintenance margin requirement in combination with other protections,
such as the general applicability of CFTC Rule 39.13 to DCOs that offer
to clear security futures products, will protect U.S. market
participants, including security futures customers and security futures
intermediaries, from the risk of a default in security futures. In
addition, security futures intermediaries, such as FCMs, are authorized
to collect additional margin from their customer if the FCM believes a
customer's positions may pose excessive risk.
    The existence of separate margin requirements at the DCO level
provides assurance to the CFTC that lowering the minimum margin level
for security futures will not present a risk to the financial
system.\90\ In cases where the 15% margin level as determined by the
security futures intermediary is insufficient to satisfy a DCO's
obligation under CFTC Rule 39.13, the DCO would be required to collect
additional margin from its clearing members. As a result, DCOs will
always have adequate margin to manage risks presented by security
futures.
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    \90\ See CFTC Rule 39.13, 17 CFR 39.13.
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    Finally, the CFTC staff has reviewed market activity in security
futures and found that a 15% level of margin would be sufficient to
cover daily price moves in a significant number of instances (i.e.,
more than 99.5%).\91\
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    \91\ See supra note 88.
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ii. The Efficiency, Competitiveness and Financial Integrity of the
Markets
    This proposal is intended to enhance the efficiency and
competitiveness of the security futures market in the U.S. by bringing
the initial and maintenance margin requirements for security futures in
line with requirements for security futures subject to an SRO risk-
based portfolio margining program.\92\ Market participants trading in
security futures will benefit from lower margin requirements, that more
accurately reflect their risk exposures, and they will be able to use
their capital more efficiently in other investment opportunities.
Furthermore, a decrease in initial and maintenance margin requirements
from 20% to 15% of the current market value of each security futures
contract may increase the attractiveness of the U.S. security futures
market and may increase the competitiveness of the U.S. security
futures market with international markets. The proposal also improves
the competitiveness of security futures as compared to exchange-traded
options. For example, it would help to re-establish a level playing
field between options exchanges and the security futures exchange, and
between broker-dealers/securities accounts and FCMs/futures accounts.
Overall, the CFTC preliminarily believes that this proposal will have a
positive effect on competition in the U.S. security futures market.\93\
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    \92\ The CFTC preliminarily believes that this proposal
effectively balances the need for greater efficiency with the
statutory requirements under Section 7(c)(2)(B)(iii) of the Exchange
Act, which prevents the CFTC from considering any alternatives to
this proposal that would reduce the minimum initial margin and
maintenance margin levels for unhedged security futures below 15%.
The CFTC worked to identify alternatives, but it does not believe
that there are any reasonable alternatives to this proposal.
    \93\ See also the CFTC's analysis of anti-trust considerations
in section VII. below. The CFTC has preliminarily identified no
anticompetitive effects of this proposal.
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    Furthermore, this proposal could enhance the financial integrity of
the security futures market in the U.S. Lowering the amount of initial
and maintenance margin required for customers trading in security
futures may increase the number of customers trading in security
futures and/or increase the amount of trading. Either an increase in
the number of customers or trades in security futures market would
strengthen the financial integrity of the security futures market by
enhancing its liquidity.
    The CFTC preliminarily believes that a 15% margin requirement will
be sufficient to protect against the risk of default in greater than
99% of cases. After examining the economic data, the CFTC believes that
a 15% margin requirement for security futures will protect other
customers and DCOs against most risks of default.
    Again, the CFTC notes that the DCOs clearing security futures are
subject to CFTC regulations requiring the DCO to maintain adequate risk
management policies, including initial margin requirements. DCOs may
require additional margin, in an amount that is greater than 15%, on
certain security futures positions or portfolios if the DCO notes
particular risks associated with the products or portfolios.
Accordingly, the proposed rule amendment would maintain or possibly
improve the financial integrity of the security futures markets in the
U.S.
iii. Price Discovery
    As discussed above, the CFTC preliminarily believes that the
proposed amendment is expected to have a positive effect on
competition, which may result in some new customers entering the
security futures market and increased trading by existing customers. In
addition, trading from foreign markets may shift to the U.S. security
futures market. This increased activity in the U.S. security futures
market may have a positive effect on price discovery in the security
futures market. While changes in price discovery may be difficult to
measure, this proposal is unlikely to harm price discovery and indeed
may improve price discovery in the security futures market in the U.S.
iv. Risk Management
    As discussed further above, margin requirements are a critical
component of any risk management program for cleared financial
products. Security futures have been risk-managed through central
clearing and initial and maintenance margin requirements for over
fifteen years. The CFTC recognizes the necessity of sound initial and
maintenance margin requirements for DCO and FCM risk management
programs. Initial and maintenance margin collected addresses potential
future exposure, and in the event of a default, such margin protects
non-defaulting parties from losses.
v. Other Public Interest Considerations
    The CFTC has not identified any additional public interest
considerations related to the costs and benefits of this proposal.
7. Request for Comment
    The CFTC requests comment on all aspects of the costs and benefits
associated with the proposed rule amendments, specifically, with regard
to all Section 15(a) risk factors. In particular, the CFTC requests
that commenters provide data and any other information or data upon
which the commenters relied to reach any conclusions regarding the
proposal. Finally, the CFTC seeks estimates and

views regarding the specific costs and benefits for a security futures
clearing organization, exchange, intermediary, or trader that may
result from the adoption of the proposed rule amendment.
    The CFTC seeks estimates of the costs and benefits that may result
from the adoption of the proposed rule amendments to reduce the minimum
margin requirement to 15% of current market value or the application of
permitted margin offsets.

B. SEC

1. Introduction
    In the following economic analysis, the SEC considers the benefits
and costs, as well as the effects on efficiency, competition, and
capital formation that would result from the SEC's proposed amendments.
\94\ The SEC evaluates these benefits, costs, and other economic
effects relative to a baseline, which the SEC takes to be the state of
the markets for security futures products and the regulations
applicable to those markets at the time of this proposal.
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    \94\ The Exchange Act states that when the SEC is engaging in
rulemaking under the Exchange Act and is required to consider or
determine whether an action is necessary or appropriate in the
public interest, the SEC shall consider, in addition to the
protection of investors, whether the action will promote efficiency,
competition, and capital formation. 15 U.S.C. 78c(f). In addition,
Exchange Act Section 23(a)(2) requires the SEC, when making rules or
regulations under the Exchange Act, to consider, among other
matters, the impact that any such rule or regulation would have on
competition and states that the SEC shall not adopt any such rule or
regulation which would impose a burden on competition that is not
necessary or appropriate in furtherance of the Exchange Act. See 15
U.S.C. 78w(a)(2).
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    The amendments that the SEC is proposing would reduce minimum
margin requirements for security futures positions held in customer
accounts of broker-dealers \95\ not subject to an approved portfolio
margining system. As a result of the SEC's proposed amendments, the
minimum margin requirements on customers' unhedged security futures
positions would be lowered to 15%.\96\ Similarly, the SEC's guidance on
minimum margin requirements for certain hedged security futures
positions would also be lowered in a conforming manner.\97\ The SEC's
proposed amendments would make minimum margin requirements on security
futures positions held in securities accounts not eligible for
portfolio margining consistent with the minimum margin requirements
that would currently apply to those positions were they to be held in
separate \98\ accounts eligible for portfolio margining.\99\
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    \95\ The 2002 Final Rules established margin requirements for
customers' security futures accounts held through ``security futures
intermediaries'', including registered entities such as brokers,
dealers, and FCMs. The SEC's proposed amendments affect broker-
dealers. See supra note 22 and accompanying text.
    \96\ See proposed SEC Rule 403(b)(1).
    \97\ Conforming reductions to minimum margin percentages on
hedged security futures positions would be reflected in a
restatement of the table of offsets published in the 2002 Final
Rules. This table of offsets is not part of the Code of Federal
Regulations. See 2002 Final Rules, 67 FR at 53159.
    \98\ The presence of other (related) securities in the portfolio
margin account (e.g., positions in the underlying) could affect the
required margin for the security futures position.
    \99\ See supra note 47 and accompanying text.
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    As discussed below, the SEC believes that the proposed rule
amendments will primarily benefit broker-dealers offering security
futures trading accounts that are not eligible for portfolio margining,
their customers who trade (or wish to trade) security futures at higher
levels of leverage than currently permitted, and exchanges that offer
trading in security futures products.\100\ The SEC does not believe
that the proposed rule amendments will impose any direct costs on
market participants.
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    \100\ See infra sections IV.B.3.i. and ii.
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    Although the SEC believes that the proposed rule amendments will
not impose any direct costs, they could nonetheless impose various
indirect costs. Most importantly, lower minimum margin requirements are
likely to facilitate greater leverage, which can harm financial
stability, imposing costs on the broader financial system. However,
because of the very small size of the U.S. security futures markets and
their insignificance to the broader U.S. financial markets, the SEC
does not believe the proposed amendments will have material impact on
financial stability.\101\ In addition, the greater leverage permitted
under the proposed rule amendments may result in customers taking on
additional risk. Customers who are not aware of these risks may suffer
unexpected losses as a result.\102\
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    \101\ See infra section IV.B.2.
    \102\ See infra sections IV.B.3.i. and ii.
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    The SEC believes that the proposed rule amendments will improve
competition among providers of customer security futures accounts
(i.e., FCMs and broker-dealers), and increase the potential for
competition across security futures, options, and other related
markets. The SEC also believes that their impact on economic efficiency
and capital formation will be minimal.\103\
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    \103\ See infra section IV.B.3.iii.
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    Many of the costs, benefits, and other effects the SEC discusses
are difficult to quantify. Therefore, much of the discussion is
qualitative in nature. The SEC's inability to quantify certain costs,
benefits, and effects does not imply that such costs, benefits, or
effects are less significant. The lack of a quantitative analysis is
largely due to the SEC's lack of data on the markets for security
futures.\104\ The SEC requests that commenters provide relevant data
and information to assist the SEC in analyzing the economic
consequences of the proposed amendments. More generally, the SEC
requests comment on all aspects of this initial economic analysis,
including on whether the analysis has: (1) Identified all benefits and
costs, including all effects on efficiency, competition, and capital
formation; and (2) given due consideration to each benefit and cost,
including each effect on efficiency, competition, and capital
formation. The SEC also requests comment on any reasonable alternatives
to the proposed rule amendments.
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    \104\ See infra sections IV.B.2. and IV.B.3.i.
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2. Baseline
    The SEC evaluates the impact of rules relative to specific
baselines. Here, the SEC takes the baseline to be the regulatory regime
applicable to the markets for security futures as well as the state of
these markets as of the end of 2017. As discussed above, the term
``security futures'' refers to futures on a single security and futures
on narrow-based security indexes.\105\ More generally, ``security
futures product'' refers to security futures and options on security
futures. Unlike futures markets on commodities or ``broad-based''
equity indexes, the U.S. market for security futures is currently small
and does not play a significant role in the U.S. financial system.\106\
The limited role of security futures markets is likely due to their
short history,\107\ uncertainty relating to tax treatment,\108\ and
competition from the more developed equity and options markets.\109\
Incentives to participate in the security futures markets (rather than
the markets

for the underlying or the options markets) arise either from reduced
market frictions (e.g., short sale constraints, pin risk) or from a
regulatory advantage (e.g., lower margin requirements).
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    \105\ See supra section I.
    \106\ See infra section IV.B.2.i.
    \107\ Trading in security futures became possible only after the
passage of CFMA in 2000. See supra notes 4 and 5, and accompanying
text.
    \108\ Specifically, the proposition that exchange-for-physical
single stock security futures qualify for the same tax treatment as
stock loan transactions under Section 1058 of the Internal Revenue
Code has not been tested. See e.g., Exchange Act Release No. 71505
(Feb. 7, 2014).
    \109\ Security futures markets face competition from equity and
options markets because in principle, the payoff from a security
futures position is readily replicated using either the underlying
security, or through options on the underlying security.
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    As with other types of futures, both the buyer and seller in a
security futures transaction can potentially default on his or her
respective obligation. Because of this, an intermediary to a security
futures transaction will typically require a performance bond
(``margin'') from both parties to the transaction. Higher margin levels
imply lower leverage, which reduces risk. Private incentives encourage
a counterparty that intermediates security futures transactions to
require a level of margin that adequately protects its interests.
However, in the presence of market failures, private incentives alone
may lead to margin levels that are inefficient. For example, margin
levels set by intermediaries may allow investors who do not fully
understand the risk of security futures products to take highly
leveraged positions that may result in unexpected losses. Moreover,
even when all parties are fully aware of the risks of leverage,
privately-negotiated margin arrangements may be too low. For example,
the risk resulting from higher leverage levels can impose negative
externalities on financial system stability, the costs of which would
not be reflected in privately-negotiated margin arrangements. Such
market failures provide an economic rationale for regulatory minimum
margin requirements.\110\
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    \110\ Monetary authorities may also rely on regulatory margin
requirements as a policy tool. The SEC does not consider such
motives here.
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i. The Security Futures Market
    The security futures markets provide a convenient means of
obtaining delta exposure to an underlying security.\111\ To effectively
compete with other venues for obtaining similar exposures (i.e., equity
and options markets), security futures markets must reduce market
frictions or provide more favorable regulatory treatment.\112\ Security
futures markets may reduce market frictions by providing lower cost
means of financing equity exposures. They can simplify taking short
positions by eliminating the need to ``locate'' borrowable
securities.\113\ They can also provide an opportunity for customers to
gain greater leverage through lower margin requirements (relative to
margin in security or options transactions). The SEC does not currently
have data on participants in the security futures markets or their
trading motives.
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    \111\ The derivative of the theoretical price of a futures
contract with respect to the price of the underlying (i.e., the