Bernard E. Klein
3002 Stirling Road
Hollywood, FL 33021
December 18, 2001
Jonathan G. Katz, Secretary
United States Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549-0609
Ms. Jean Webb
Office of the Secretary
Commodity Futures Trading Commission
Three Lafayette Centre
1155 21st Street, NW
Washington, DC 20581
Re: File No. S7-16-01; Customer Margin for Security Futures
Dear Mr. Katz and Ms. Webb:
My concerns deal with liquidity, and ways to improve the ability to roll out positions in single stock futures.
Particularly on the last trading day of a cycle for regular options trading in the underlying security, or the last trading day for a particular single stock future, I think the usual margin rules should be relaxed.
Existing margin rules for listed options do not make any exception on the last trading day of an option and this causes illiquidity (margin requirements are too high for the day or hours remaining, so the options are often overpriced). The new single stock futures markets give us an opportunity to address this while creating a better market.
When an investor uses futures to take a portfolio position, the regulations should allow that investor to (a) use his equity to roll out further, (b) anticipate accepting delivery after the close (for long positions), (c) anticipate making delivery after the close (for short positions), or (d) to hedge with other instruments or securities valuing the single stock future positions the same as the underlying securities.
I propose a Customer Election to (a) have higher margin requirements than whatever minimum you adopt, while holding the securities in a futures account, and then (b) get to use the margin value proposed in the prior paragraph, and otherwise (c) be subject to the standard margin requirements. This will encourage broader participation and better markets, as some who wouldn't use the minimum margin available would want to choose the market that provides the best price and liquidity for a particular security transaction.
I think the level of margin requirement as proposed is logical and consistent, but would prefer when you intend "20%" that it be set at 40% of the Regulation T margin level, and as otherwise subject to SRO requirements (except as noted in the next paragraph), so that it could automatically change when equity margin levels change.
Price Level Requirements
Just as 50 cent stocks can have open $5.00 options, I do not think the single stock futures should have restrictions based merely on price. Providing that the overall market cap, average trading volume, and other liquidity criteria are met for any particular security, I would like to see the single stock futures for that security available regardless of the price of the underlying security.
I hope you take the time to do this right, the way these markets should work, and you won't be overly concerned with programming, operational, or compliance expense issues, or even delays. It's time for all security firms to calculate margin requirements in real time.
Bernard E Klein