Joint Proposed Rule:
Customer Margin Rules Relating to Security Futures

After evaluating these considerations, the CFTC has determined to propose the rules discussed above. The CFTC invites public comment on the application of the cost-benefit provision of Section 15(a) of the CEA in regard to the proposed rules. Commenters are also invited to submit any data that they may have quantifying the costs and benefits of the proposed rules.

B. SEC

Section 7 of the Exchange Act, which governs the amount of credit that may be initially extended and subsequently maintained on any security (other than an exempted security), was amended by the CFMA to add provisions related to margin for securities futures. On March 6, 2001, the Federal Reserve Board delegated its authority under Section 7(c)(2) of the Exchange Act to establish margin requirements for security futures to the SEC and CFTC. The SEC is proposing new Rules 400 through 404 under the Exchange Act to establish such margin requirements.

Specifically, the CFMA amended Section 7(c) of the Exchange Act to require that the rules preserve the financial integrity of markets trading security futures products, prevent systemic risk, and to require that: (1) the margin requirements for a security future be consistent with the margin requirements for comparable option contracts traded on any exchange registered pursuant to Section 6(a) of the Exchange Act;¹⁴⁵ and (2) the initial and maintenance margin levels for a security future not be lower than the lowest level of margin, exclusive of premium, required for any comparable option contract traded on any exchange registered pursuant to Section 6(a) of the Exchange Act, other than an option on a security future, and to ensure that the margin requirements (other than levels of margin), including the type, form, and use of collateral for security futures, are and remain consistent with the requirements established by the Federal Reserve Board under Regulation T.

The SEC requests comments on all aspects of this cost-benefit analysis, including identification of any additional costs and/or benefits of the proposed rules. The SEC encourages commenters to identify and supply any relevant data, analysis and estimates concerning the costs and benefits of the proposed rules.

1. Costs

There would likely be various administrative costs to brokers, dealers, and members of national securities exchanges attributable to Proposed SEC Rules 400 through 404. Further, brokers, dealers, and members of national securities exchanges that choose to effect transactions for customers involving, or carrying an account for a customer containing, a security future are responsible for assuring compliance with these proposed rules and thus would incur various costs. While the SEC is unable at this time to estimate the extent of the costs that the proposed rules engender, it has identified below areas where the proposed rules may impose costs.

a. Compliance with Regulation T

Proposed SEC Rule 400(b)(1) would apply Regulation T to financial relations between brokers, dealers, and members of national securities exchanges and their customers with respect to transactions in security futures and any related securities or futures contracts that are used to offset positions in such security futures, to the extent consistent with the proposed rules.¹⁴⁶

Under this proposed rule, security futures transactions would be recorded in a Margin Account. The proposed margin level requirements represent a performance bond to guarantee contract performance by both the buyer and seller of such contract. Any settlement variation would be credited to (or debited from) the Margin Account.¹⁴⁷ The application of Regulation T provisions by brokers, dealers, or members of national securities exchanges to their customers' security futures positions would require these entities to incur certain costs, such as making systems changes, and hiring personnel, in adhering to Regulation T provisions.

The SEC requests comments, data, and estimates on all aspects of the costs of implementing Regulation T provisions pertaining to security futures.

b. Levels of Margin

Proposed SEC Rule 402(b)(1) sets the level of margin at 20 percent of current market value. The 20 percent level of margin is necessary to fulfill the statutory requirement that the margin requirements for security futures be consistent with the margin requirements for comparable options contracts traded on any national securities exchange registered under Section 6(a) of the Exchange Act.¹⁴⁸

The SEC notes that the 20 percent margin level may appear to be high when compared to margining methodologies currently used for futures other than security futures. A potential cost of these higher margin requirements is that they may lead to reduced interest in trading security futures and, therefore, foregone hedging opportunities.

However, while margin requirements on non-security futures contracts generally range from 2-10 percent,¹⁴⁹ SEC staff, based on its analysis, estimates that applying traditional futures risk-based margining methods to security futures would require margin of greater than 10 percent.¹⁵⁰ Further, economic research has thus far not been able to establish a strong relationship between futures margin levels and interest in the product.¹⁵¹ On the other hand, SEC staff estimates that the proposed margin levels would reduce the chances that a margin account would not contain sufficient funds to cover a given day's price movement from approximately 5 percent using traditional risk-based futures margining to 0.3 percent.¹⁵² Therefore, while the margin levels proposed for security futures may impose a cost, the SEC believes that the proposed margin levels would lower chances of customer default and therefore lower systemic risk to the markets. For these reasons, and the statutory mandate that requires comparability between security futures margin and options margin, the SEC preliminarily believes that the proposed margin levels would be appropriate.

The SEC requests comments, data, and estimates on all aspects of the costs associated with the margin level described in Proposed SEC Rule 402(b)(1).

c. Computation of Margin

Proposed SEC Rule 402(b)(1) would require that brokers, dealers, and national securities exchange members compute and ensure, on a daily basis, that the initial and maintenance margin levels for each customer's security future carried or held by such entity are 20 percent of the current market value of such contract. This requirement is designed to assure contract performance and the integrity of the marketplace.¹⁵³ In addition, all market participants pay or receive daily settlement variation payments (i.e., the daily net gain or loss on a security future) as a result of all open futures positions being marked to current market value by the clearing organization.

The SEC believes that the daily required computation of the initial and maintenance margin requirements and the collection and disbursement of daily settlement variation for security futures by brokers, dealers, or national securities exchanges members would require these entities to program or reprogram their computer systems to implement the margin computations and the settlement variation procedures for securities futures. These entities may also incur additional data storage costs and resource costs associated with these calculations. The SEC requests comments, data, and estimates on all aspects of the costs associated with the proposed calculations for margin on security futures, including whether Proposed SEC Rule 402(b)(1) under the Exchange Act is likely to require these entities mentioned above to increase the number of staff, or result in additional resource burdens, to perform and implement the required calculations.

d. Notification Requirements Regarding Exempted Borrowers

Proposed SEC Rule 400(b)(3)(iv)(A) would exclude from the proposed margin regulation margin arrangements between a creditor and a borrower with respect to the borrower's financing of proprietary positions in security futures, based on the creditor's good faith determination that the borrower is an "exempted borrower."¹⁵⁴

Proposed SEC Rule 402(e) would provide that once a broker, dealer, or a member of a national securities exchange ceases to qualify as an exempted borrower, it must notify the creditor (i.e., the broker, dealer, or a national securities exchange member holding the position) of this fact before establishing any new security future positions because any new security future positions would be subject to the proposed rules.

The notification requirement under Proposed SEC Rule 402(e) is likely to result in various minor costs, including personnel time for preparing the notification by any means of communication, and sending such notification by a broker, dealer, or member of a national securities exchange that is required to send a notification to its creditor because it has ceased be an exempted borrower. The SEC requests comments and estimates on the costs associated with this notification requirement.

e. Time Limits for Collection of Margin

Proposed SEC Rules 403(a) and (b) together would require that the amount of initial and maintenance margin required by the proposed rules be obtained as promptly as possible and, in any event, within three business days after the position is established, or within such shorter time period as may be imposed by applicable regulatory authority rules approved by the SEC in accordance with Section 19(b)(2) of the Exchange Act. The SEC believes that the brokers, dealers, or national securities exchange members that are effecting transactions in security futures will need to gather information to determine for each customer's account involving security futures when margin on such position must be obtained from its customers. The SEC requests comments, data, and cost estimates relating to the time limits for collection of margin requirements.

2. Benefits

The benefits of Proposed SEC Rules 400 through 404 are related to the benefits that will accrue as a result of the enactment of the CFMA. By repealing the ban on single stock futures and futures on narrow-based security indexes, the CFMA will enable a greater variety of financial products to be traded that potentially could facilitate price discovery and the ability to hedge. Investors will benefit by having a wider choice of financial products to buy and sell, and markets and market participants will benefit by having the ability to trade these products. These rules are a prerequisite to the commencement of trading in the new products, and therefore, they are also a prerequisite to any benefits that may derive from the availability of these products.

a. Benefits to Brokers, Dealers, and Members of National Securities Exchanges

Proposed SEC Rule 402(b)(1) would provide that the minimum initial and maintenance margin levels for each security future would be 20 percent of the current market value of such contract. Moreover, Proposed SEC Rule 404(a) would provide that a broker, dealer or member of a national securities exchange may accept as collateral cash, margin securities, exempted securities, or other collateral permitted under Regulation T to satisfy a margin deficiency in the margin account.¹⁵⁵ Proposed SEC Rule 404(b) further provides that a regulatory authority may prescribe margin collateral requirements (other than margin levels) including the type, form, and use of collateral for security futures, that are consistent with the requirements under Regulation T.¹⁵⁶

The SEC preliminarily believes that the margin levels and other margin requirements proposed would provide sound protection from customer default by reducing chances of depletion of margin accounts, and therefore reduce systemic risk associated with the trading of these new products.

b. Benefits to Customers

Additionally, Proposed SEC Rule 402(d) would provide that customers be permitted to offset positions involving security futures with certain related securities or futures.¹⁵⁷ Such offsets would be proposed by regulatory authority rules that would be approved by the SEC pursuant to Section 19(b)(2) of the Exchange Act if such offsets were consistent with the Exchange Act, including the requirement that margin requirements for security futures be no less restrictive than those imposed on options. These offsets likely would provide benefits to customers because such rules would recognize the hedged nature of the certain specified combined strategies and would permit lower margin requirements that better reflect the true risk of those strategies. Because security futures are new products, however, the SEC is unable at this time to quantify these benefits and therefore requests comments, data, and estimates regarding these benefits.

c. Regulatory Benefits

Proposed SEC Rule 400(b)(1) would provide, to the extent consistent with the proposed rules, that Regulation T applies to financial relations, including margin arrangements, between a creditor and a customer with respect to security futures and any related securities or futures contracts that are used to offset positions in security futures. This provision is designed to ensure that existing and future Federal Reserve Board interpretations of Regulation T would apply and that, therefore, margin requirements for security futures would remain consistent without further action by the Commissions.

C. Request for Comments

To assist the SEC and the CFTC in their evaluation of the costs and benefits that may result from the proposed rulemaking, commenters are requested to provide analysis and data relating to the anticipated costs and benefits associated with the proposed rules. Specifically, the SEC and the CFTC request commenters to address whether the proposed rules would generate the anticipated benefits or impose additional costs on U.S. investors or others.

VII. CONSIDERATION OF BURDEN ON COMPETITION, PROMOTION OF EFFICIENCY, AND CAPITAL FORMATION

Section 3(f) of the Exchange Act¹⁵⁸ requires the SEC, whenever it is engaged in rulemaking and is required to consider or determine whether an action is necessary or appropriate in the public interest, to consider whether the action will promote efficiency, competition, and capital formation. In addition, Section 23(a)(2) of the Exchange Act requires the SEC, in adopting rules under the Exchange Act, to consider the impact on competition of any rules it adopts.¹⁵⁹ Section 23(a)(2) of the Exchange Act further provides that the SEC may not adopt a rule that would impose a burden on competition not necessary or appropriate in furtherance of the purposes of the Exchange Act.¹⁶⁰ The rules proposed today would impose initial and maintenance margin requirements on brokers, dealers and members of national securities exchanges that collect customer margin for security futures. The SEC has considered the proposed rules in light of the standards set forth in Sections 3(f)¹⁶¹ and 23(a)(2)¹⁶² of the Exchange Act.

The SEC preliminarily believes that the proposed rules should promote efficiency by setting forth clear guidelines for brokers, dealers, and members of national securities exchanges when collecting customer margin related to security futures. Further, the SEC believes that the proposed rules will provide sound protection from customer default by reducing chances of depletion of margin accounts, and therefore reduce system risk associated with the trading of these new products.

The SEC also preliminarily believes that the proposed rules would not impose any significant burden on competition. The proposed rules serve only to set forth margin requirements for security futures, including establishing margin levels and margin collateral requirements. Lastly, the SEC preliminarily believes that the proposed rules would not have any impact on capital formation because the proposed rules would merely establish rules governing the collection of customer margin. The SEC notes that these proposed margin requirements would protect brokers, dealers, and members of national securities exchanges from customers' default, thus encouraging participation by these market participants in the trading of futures contracts on both single stocks and narrow-based indexes. Therefore, the SEC preliminarily believes that there could be an increased demand for the underlying securities, resulting in increased capital formation. Nevertheless, the SEC believes that the benefits to the capital formation process principally flow from the CFMA itself, which lifts the ban on trading of single stock futures and narrow-based index stock futures.

The SEC requests comments on the impact of the proposed rules on competition, efficiency and capital formation.

VIII. REGULATORY FLEXIBILITY ACT CERTIFICATIONS

A. CFTC

The Regulatory Flexibility Act ("RFA")¹⁶³ requires that federal agencies, in promulgating rules, consider the impact of those rules on small entities. The proposed rules would affect designated contract markets, registered DTFs, and FCMs. The CFTC has previously established certain definitions of "small entities" to be used by the CFTC in evaluating the impact of its rules on small entities in accordance with the RFA.¹⁶⁴

In its previous determinations, the CFTC has concluded that contract markets are not small entities for purposes of the RFA, based on the vital role contract markets play in the national economy and the significant amount of resources required to operate as SROs.¹⁶⁵ Recently, the CFTC determined that notice-designated contract markets are not small entities for purposes of the RFA.¹⁶⁶ In addition, the CFTC has determined that other trading facilities subject to its jurisdiction, including registered DTFs, are not small entities for purposes of the RFA.¹⁶⁷

The CFTC also has previously determined that FCMs are not small entities for purposes of the RFA, based on the fiduciary nature of FCM-customer relationships as well as the requirements that FCMs meet certain minimum financial requirements.¹⁶⁸ The CFTC is proposing to determine that notice-registered FCMs,¹⁶⁹ for the reasons applicable to FCMs registered in accordance with Section 4f(a)(1) of the CEA,¹⁷⁰ are not small entities for purposes of the RFA. Brokers or dealers that carry customer accounts and receive or hold funds for those customers, and are notice-registered as FCMs for the purpose of trading security futures, similarly have a fiduciary relationship with their customers and must meet analogous minimum financial requirements.¹⁷¹

Additionally, the CFTC notes that Congress mandated that customer margin for security futures be consistent with the margin requirements for comparable option contracts traded on any exchange registered pursuant to Section 6(a) of the Exchange Act.¹⁷² In proposing these rules, the Commissions have striven to fulfill this requirement in the least burdensome way possible.

Accordingly, the Acting Chairman, on behalf of the CFTC, certifies pursuant to 5 U.S.C. 605(b), that the proposed rules will not have a significant economic impact on a substantial number of small entities. The CFTC invites the public to comment on this finding and on its proposed determination that notice-registered FCMs are not small entities for purposes of the RFA.

B. SEC

Section 3(a) of the RFA¹⁷³ requires the SEC to undertake an initial regulatory flexibility analysis of the proposed rules on the small entities unless the Chairman certifies that the rule, if adopted, would not have a significant economic impact on small entities.¹⁷⁴ Proposed Rules 400 through 404 would apply to brokers, dealers and members of national securities exchanges.

Introducing brokers ("IBs") and FCM may register as broker-dealers by filing Form BD-N. However, because IBs cannot collect customer margin they are not subject to these rules.¹⁷⁵ In addition, the CFTC has concluded that FCMs are not considered small entities for the purposes of the RFA.¹⁷⁶ Accordingly, there are no FCMs or IBs that are small entities that would be affected by the proposed rules.

The proposed rules would also apply to broker-dealers and members of national securities exchanges. With one exception, all members of national securities exchanges registered under Section 6(a) of the Exchange Act are registered broker-dealers. The SEC believes that some small broker-dealers could be affected by the proposals, but that the proposals will not have a significant impact on a substantial number of small broker-dealers.

In addition, national securities exchanges registered under Section 6(g) of the Exchange Act may have members who are floor brokers or floor traders who are not registered broker-dealers. Floor brokers and floor traders, however, are not eligible to clear securities transactions or collect customer margin, and thus would not be subject to the proposed rules.¹⁷⁷

Accordingly, the Chairman of the SEC has certified that the proposed rules, if adopted, would not have a significant economic impact on a substantial number of small entities. This certification is attached as Appendix A to this notice.

The SEC invites commenters to address whether the proposed rules would have a significant economic impact on a substantial number of small entities, and if so, what would be the nature of any impact on small entities. The SEC requests that commenters provide empirical data to support the extent of such impact.

IX. STATUTORY BASIS AND TEXT OF PROPOSED RULES

The SEC is proposing Rules 400 through 404 pursuant to the Exchange Act, particularly Sections 3(b), 6, 7(c), 15A and 23(a). Further, these rules are proposed pursuant to the authority delegated jointly to the SEC, together with the CFTC, by the Federal Reserve Board in accordance with Exchange Act Section 7(c)(2)(A). See Appendix B.

List of Subjects

17 CFR Part 41

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

17 CFR Part 242

Brokers and Securities.

Commodity Futures Trading Commission

In accordance with the foregoing, Title 17, chapter 1 of the Code of Federal Regulations is proposed to be amended as follows:

1. The authority citation for Part 41 is revised to read as follows:

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

2. Part 41 is amended by adding §§ 41.43 through 41.48 to read as follows:

§ 41.43 Customer margin -- authority, purpose and scope.

(a) Authority and purpose. This Regulation is issued jointly by the Securities and Exchange Commission ("SEC") and the Commodity Futures Trading Commission ("CFTC") pursuant to authority delegated by the Board of Governors of the Federal Reserve System under Section 7(c)(2)(A) of the Securities Exchange Act of 1934 (the "Exchange Act") (15 U.S.C. 78g(c)(2)(A)). Its principal purpose is to regulate margin collected by brokers, dealers, and members of national securities exchanges relating to customers' transactions in security futures and imposes, among other requirements, minimum customer initial and maintenance margin levels for such security futures positions.

(b) Scope of section.

(1) Regulation T shall apply to financial relations, including margin arrangements, between a creditor and a customer with respect to security futures and any related securities or futures contracts that are used to offset positions in such security futures, to the extent consistent with this part.

(2) This part does not preclude a regulatory authority or creditor from imposing additional margin requirements on security futures, including higher margin levels and risk-sensitive criteria, consistent with this part, or from taking appropriate action to preserve its financial integrity.

(3) This part does not apply to:

(i) Financial relations between a customer and a creditor to the extent that they comply with a portfolio margining system under rules that have become effective in accordance with Section 19(b)(2) of the Exchange Act (15 U.S.C. 78s(b)(2)) and, as applicable, Section 5c(c) of the Commodity Exchange Act (the "Act") (7 U.S.C. 7a-2(c));

(ii) Financial relations between a foreign branch of a creditor and a foreign person involving foreign security futures;

(iii) Margin requirements that clearing agencies registered with the SEC or the CFTC impose on their members; and

(iv) Credit extended, maintained, or arranged by a creditor to or for a member of a national securities exchange or a registered broker or dealer if:

(A) Such creditor makes a good faith determination that the borrower is an exempted borrower;

(B) The borrower otherwise qualifies for exemption pursuant to Section 7(c)(3) of the Exchange Act (15 U.S.C. 78g(c)(3)); or

(C) The borrower is a member of a national securities exchange or a national securities association registered under Section 15A(a) of the Exchange Act (15 U.S.C. 78o-3(a)) and the borrower:

(1) Does not directly or indirectly accept or solicit orders from any customer or provide advice to any customer in connection with the trading of security futures; and

(2) Is registered with such exchange or such association as a security futures dealer, pursuant to regulatory authority rules that have become effective in accordance with Section 19(b)(2) of the Exchange Act (15 U.S.C. 78s(b)(2)) and, as applicable, Section 5c(c) of the Act (7 U.S.C. 7a-2(c)), that:

(i) Require such member to be registered as a floor trader or a floor broker with the CFTC under Section 4f(a)(1) of the Act (7 U.S.C. 6f(a)(1)), or as a dealer with the SEC under Section 15(b) of the Exchange Act (15 U.S.C. 78o(b));

(ii) Require such member to comply with applicable SEC or CFTC net capital requirements;

(iii) Require such member to maintain records sufficient to prove compliance with this paragraph and the rules of the exchange or association of which the borrower is a member;

(iv) Require such member to hold itself out as being willing to buy and sell security futures for its own account on a regular or continuous basis; and

(v) Provide for disciplinary action, including revocation of such member's registration as a security futures dealer, for such member's failure to comply with §§41.43 through 41.48 or the rules of the exchange or association.

§ 41.44 Customer Margin -- Definitions.

(a) For purposes of this part only, the following terms shall have the meanings set forth in this section.

(1) Contract multiplier means the number of units of a narrow-based security index expressed as a dollar amount, in accordance with the terms of the security future contract.

(2) On any day, current market value means with respect to a security future:

(i) If the instrument underlying such security future is a stock, the product of the daily settlement price of such security future as shown by any regularly published reporting or quotation service, and the applicable number of shares per contract; or

(ii) If the instrument underlying such security future is a narrow-based security index, as defined in Section 3(a)(55)(B) of the Exchange Act (15 U.S.C. 78c(a)(55)(B)), the product of the daily settlement price of such security future as shown by any regularly published reporting or quotation service, and the applicable contract multiplier.

(3) Examining authority with respect to a creditor means:

(i) The regulatory authority of which such creditor is a member, if such creditor is a member of only one regulatory authority;

(ii) The regulatory authority designated responsibility by the SEC pursuant to § 240.17d-1 of this title for examining such creditor for compliance with applicable financial responsibility rules, if a regulatory authority is so designated; or

(iii) The regulatory authority designated in accordance with § 1.52 of this chapter, if such creditor is a member of more than one regulatory authority and the SEC, pursuant to § 240.17d-1 of this title, has not designated responsibility for examining such creditor for compliance with applicable financial responsibility rules.

(4) Initial margin means the margin as defined in Section 3(a)(57)(A) of the Exchange Act (15 U.S.C. 78c(a)(57)(A)), that is required when a security future position is opened.

(5) Maintenance margin means the margin, as defined in Section 3(a)(57)(A) of the Exchange Act (15 U.S.C. 78c(a)(57)(A)), that is required to be maintained in a customer's securities account, as defined in § 1.3(ww) of this chapter, or futures account, as defined in § 1.3(vv) of this chapter, at the end of each trading day.

(6) Regulation T means Regulation T promulgated by the Board of Governors of the Federal Reserve System ("Federal Reserve Board"), 12 CFR Part 220.

(7) Regulatory authority means a self-regulatory organization that is registered as a national securities exchange under Section 6 of the Exchange Act (15 U.S.C. 78f) or a registered securities association under Section 15A of the Exchange Act (15 U.S.C. 78o-3).

(8) Daily settlement price means, with respect to a security future, the settlement price of such security future determined at the close of trading each day, under the rules of the applicable exchange or clearing organization.

(b) Terms used in this part and not otherwise defined in this section shall have the meaning set forth in Regulation T.

(c) Terms used in this part and not otherwise defined in this section or in Regulation T shall have the meaning set forth in the Exchange Act.

§ 41.45 Customer margin -- customer margin levels for security futures.

(a) Applicability. No broker, dealer or member of a national securities exchange may effect a transaction involving, or carry an account containing, a security future position with or for a customer, without obtaining proper and adequate margin as set forth in this section.

(b) Amount of customer margin.

(1) General rule. The minimum initial and maintenance margin levels for each security future contract shall be 20 percent of the current market value of such contract.

(2) Exceptions. Provided that such higher margin levels or calculation methods have become effective in accordance with Section 19(b) of the Exchange Act (15 U.S.C. 78s(b)), nothing in this section shall prevent a regulatory authority from:

(i) Requiring initial and/or maintenance margin levels that are higher than the minimum margin levels specified in paragraph (b)(1) of this section; or

(ii) Using a method for calculating required initial and/or maintenance margin that may result in margin levels that are higher than the minimum margin levels specified in paragraph (b)(1) of this section.

(c) Procedures for certain margin level adjustments. An exchange registered under Section 6(g) of the Exchange Act (15 U.S.C. 78f(g)), or a national securities association registered under Section 15A(k) of the Exchange Act (15 U.S.C. 78o-3(k)), may raise or lower the required margin level to a level not lower than that specified in this section, in accordance with Section 19(b)(7) of the Exchange Act (15 U.S.C. 78s(b)(7)).

(d) Offsetting positions. Notwithstanding the minimum margin levels specified in paragraph (b)(1) of this section, customers with offset positions involving security futures and one or more related securities or futures contracts may, pursuant to regulatory authority rules that have become effective in accordance with Section 19(b)(2) of the Exchange Act (15 U.S.C. 78s(b)(2)) and, as applicable, Section 5c(c) of the Act (7 U.S.C. 7a-2(c)), have initial or maintenance margin levels that are lower than the levels specified in paragraph (b)(1) of this section, provided that such margin levels are not lower than the lowest customer margin levels required for any comparable offset positions involving option contracts traded on any exchange registered pursuant to Section 6(a) of the Exchange Act (15 U.S.C. 78f(a)).

(e) Change in exempted borrower status. Once a broker, dealer, or a member of a national securities exchange ceases to qualify as an exempted borrower, it shall notify the creditor of this fact before establishing any new security future positions. Any new security future positions will be subject to the provisions of this part.

§ 41.46 Customer margin -- time limits for collection of margin.

(a) Initial margin. The amount of initial margin required or permitted by § 41.45 shall be obtained by the creditor as promptly as possible and in any event within three business days after the position is established, or within such shorter time period as may be imposed by applicable regulatory authority rules that have become effective in accordance with Section 19(b)(2) of the Exchange Act (15 U.S.C. 78s(b)(2)) and, as applicable, Section 5c(c) of the Act (7 U.S.C. 7a-2(c)).

(b) Maintenance margin. The amount of maintenance margin required or permitted by § 41.45 shall be obtained by the creditor as promptly as possible and in any event within three business days after the margin deficiency is created or increased, or within such shorter time period as may be imposed by applicable regulatory authority rules that have become effective in accordance with Section 19(b)(2) of the Exchange Act (15 U.S.C. 78s(b)(2)) and, as applicable, Section 5c(c) of the Act (7 U.S.C. 7a-2(c)).

(c) Extension of time limits. The time limits for collection of initial margin may be extended upon application by the creditor to its examining authority to the extent permitted by applicable regulatory authority rules that have become effective in accordance with Section 19(b)(2) of the Exchange Act (15 U.S.C. 78s(b)(2)) and, as applicable, Section 5c(c) of the Act (7 U.S.C. 7a-2(c)).

§ 41.47 Customer margin -- forms of collateral.

(a) A broker, dealer or a member of a national securities exchange may accept as margin collateral:

(1) Cash;

(2) Margin securities;

(3) Exempted securities as defined in Section 3(a)(12) of the Exchange Act (15 U.S.C. 78c(a)(12)); or

(4) Other collateral permitted under Regulation T to satisfy a margin deficiency in the margin account.

(b) Nothing in this section shall prevent a regulatory authority from prescribing margin collateral requirements (other than margin levels) including the type, form, and use of collateral for security futures, that are consistent with the requirements established by the Federal Reserve Board, pursuant to paragraphs (c)(1)(A) and (B) of Section 7 of the Exchange Act (15 U.S.C. 78g(c)(1)(A) and (B)), subject to approval by the SEC in accordance with Section 19(b)(2) of the Exchange Act (15 U.S.C. 78s(b)(2)) and, as applicable, subject to notice to the CFTC in accordance with Section 5c(c)of the Act (7 U.S.C. 7a-2(c)).

(c) For the purposes of this section, security futures are not margin securities.

§ 41.48 Customer margin -- filing proposed margin rule changes with the CFTC.

(a) Notification requirement for notice-registered contract markets. Any regulatory authority that is registered with the CFTC as a designated contract market under Section 5f of the Act (7 U.S.C.7b-1) shall, when filing a proposed rule change regarding customer margin for security futures with the SEC for approval in accordance with Section 19(b)(2) of the Exchange Act (15 U.S.C. 78s(b)(2)), concurrently provide to the CFTC a copy of such proposed rule change and any accompanying documentation filed with the SEC.

(b) Filing requirements under the Act. Any regulatory authority that is registered with the CFTC as a designated contract market or derivatives transaction execution facility under Section 5 of the Act (7 U.S.C. 7) shall, when filing a proposed rule change regarding customer margin for security futures with the SEC for approval in accordance with Section 19(b)(2) of the Exchange Act (15 U.S.C. 78s(b)(2)), notify the CFTC as follows:

(1) If the regulatory authority elects to request CFTC prior approval for the proposed rule change pursuant to Section 5c(c)(2) of the Act (7 U.S.C. 7a-2(c)(2)), it shall concurrently file the proposed rule change with the CFTC in accordance with § 40.5 of this chapter.

(2) If the regulatory authority elects to implement a proposed rule change by written certification pursuant to Section 5c(c)(1) of the Act (7 U.S.C. 7a-2(c)(1)), it shall concurrently provide to the CFTC a copy of the proposed rule change and any accompanying documentation filed with the SEC. Promptly after obtaining SEC approval for the proposed rule change, such regulatory authority shall file its written certification with the CFTC in accordance with § 40.6 of this chapter.

By the Commodity Futures Trading Commission.

Jean A. Webb
Secretary

September 26, 2001

Securities and Exchange Commission

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

1. The authority citation for part 242 is revised to read as follows:

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

2. Sections 242.400 through 242.404 are added to read as follows:

§ 242.400 Customer margin requirements for security futures - Authority, purpose and scope.

(a) Authority and purpose. This Regulation is issued jointly by the Securities and Exchange Commission ("Commission") and the Commodity Futures Trading Commission ("CFTC") pursuant to authority delegated by the Board of Governors of the Federal Reserve System under Section 7(c)(2)(A) of the Securities Exchange Act of 1934 ("Act") (15 U.S.C. 78g(c)(2)(A)). Its principal purpose is to regulate margin collected by brokers, dealers, and members of national securities exchanges relating to customers' transactions in security futures and imposes, among other requirements, minimum customer initial and maintenance margin levels for such security futures positions.

(b) Scope of section.

(1) Regulation T shall apply to financial relations, including margin arrangements, between a creditor and a customer with respect to security futures and any related securities or futures contracts that are used to offset positions in such security futures, to the extent consistent with this part.

(2) This part does not preclude a regulatory authority or creditor from imposing additional margin requirements on security futures, including higher margin levels and risk-sensitive criteria, consistent with this part, or from taking appropriate action to preserve its financial integrity.

(3) This part does not apply to:

(i) Financial relations between a customer and a creditor to the extent that they comply with a portfolio margining system under rules that have become effective in accordance with Section 19(b)(2) of the Act (15 U.S.C. 78s(b)(2)) and, as applicable, Section 5c(c) of the Commodity Exchange Act ("CEA") (7 U.S.C. 7a-2(c));

(ii) Financial relations between a foreign branch of a creditor and a foreign person involving foreign security futures;

(iii) Margin requirements that clearing agencies registered with the SEC or the CFTC impose on their members; and

(iv) Credit extended, maintained, or arranged by a creditor to or for a member of a national securities exchange or a registered broker or dealer if:

(A) Such creditor makes a good faith determination that the borrower is an exempted borrower;

(B) The borrower otherwise qualifies for exemption pursuant to Section 7(c)(3) of the Act (15 U.S.C. 78g(c)(3)); or

(C) The borrower is a member of a national securities exchange or national securities association registered pursuant to Section 15A(a) of the Act (15 U.S.C. 78o-3(a)) and the borrower:

(1) Does not directly or indirectly accept or solicit orders from any customer or provide advice to any customer in connection with the trading of security futures; and

(2) Is registered with such exchange or such association as a security futures dealer, pursuant to regulatory authority rules, approved by the SEC in accordance with Section 19(b)(2) of the Act (15 U.S.C. 78s(b)(2)), that:

(i) Require such member to be registered as a floor trader or a floor broker with the CFTC under Section 4f(a)(1) of the CEA (7 U.S.C. 6f(a)(1)), or as a dealer with the SEC under Section 15(b) of the Act (15 U.S.C. 78o(b));

(ii) Require such member to comply with applicable SEC or CFTC net capital requirements;

(iii) Require such member to maintain records sufficient to prove compliance with this subparagraph and the rules of the exchange or association of which the borrower is a member;

(iv) Require such member to hold itself out as being willing to buy and sell security futures for its own account on a regular or continuous basis; and

(v) Provide for disciplinary action, including revocation of such member's registration as a security futures dealer, for such member's failure to comply with §§400 through 404 or the rules of the exchange or association.

§ 242.401 Definitions.

(a) For purposes of this part only, the following terms shall have the meanings set forth in this section.

(1) Contract multiplier means the number of units of a narrow-based security index expressed as a dollar amount, in accordance with the terms of the security future contract.

(2) On any day, current market value means with respect to a security future:

(i) If the instrument underlying such security future is a stock, the product of the daily settlement price of such security future as shown by any regularly published reporting or quotation service, and the applicable number of shares per contract;

(ii) If the instrument underlying such security future is a narrow-based security index, as defined in Section 3(a)(55)(B) of the Act (15 U.S.C. 78c(a)(55)(B)), the product of the daily settlement price of such security future as shown by any regularly published reporting or quotation service, and the applicable contract multiplier.

(3) Examining authority with respect to a creditor means:

(i) The regulatory authority of which such creditor is a member, if such creditor is a member of only one regulatory authority;

(ii) The regulatory authority designated responsibility by the SEC pursuant to §240.17d-1 of this chapter for examining such creditor for compliance with applicable financial responsibility rules, if a regulatory authority is so designated; or

(iii) The regulatory authority designated in accordance with §1.52 of this title, if such creditor is a member of more than one regulatory authority and the SEC, pursuant to §240.17d-1 of this chapter, has not designated responsibility for examining such creditor for compliance with applicable financial responsibility rules.

(4) Initial margin means the margin as defined in Section 3(a)(57)(A) of the Act (15 U.S.C. 78c(a)(57)(A)), that is required when a security future position is opened.

(5) Maintenance margin means the margin, as defined in Section 3(a)(57)(A) of the Act (15 U.S.C. 78c(a)(57)(A)), that is required to be maintained in a customer's securities account or commodity interest account at the end of each trading day.

(6) Regulation T means Regulation T promulgated by the Board of Governors of the Federal Reserve System ("Federal Reserve Board"), 12 CFR Part 220.

(7) Regulatory authority means a self-regulatory organization that is registered as a national securities exchange under Section 6 of the Act (15 U.S.C. 78f) or a registered securities association under Section 15A of the Act (15 U.S.C. 78o-3).

(8) Daily settlement price means, with respect to a security future, the settlement price of such security future determined at the close of trading each day, under the rules of the applicable exchange or clearing organization.

(b) Terms used in this part and not otherwise defined in this section shall have the meaning set forth in Regulation T.

(c) Terms used in this part and not otherwise defined in this section or in Regulation T shall have the meaning set forth in the Act.

Section 242.402 Customer margin for security futures.

(a) Applicability. No broker, dealer or member of a national securities exchange may effect a transaction involving, or carry an account containing, a security future position with or for a customer, without obtaining proper and adequate margin as set forth in this section.

(b) Amount of customer margin.

(1) General rule. The minimum initial and maintenance margin levels for each security future contract shall be twenty (20) percent of the current market value of such contract.

(2) Exceptions. Provided that such higher margin levels or calculation methods have become effective in accordance with Section 19(b) of the Act (15 U.S.C. 78s(b)), nothing in this section shall prevent a regulatory authority from:

(i) Requiring initial and/or maintenance margin levels that are higher than the minimum margin levels specified in paragraph (b)(1) of this section; or

(ii) Using a method for calculating required initial and/or maintenance margin that may result in margin levels that are higher than the minimum margin levels specified in paragraph (b)(1) of this section.

(c) Procedures for certain margin level adjustments. An exchange registered under Section 6(g) of the Act (15 U.S.C. 78f(g)), or a national securities association registered under Section 15A(k) of the Act (15 U.S.C. 78o-3(k)), may raise or lower the required margin level to a level not lower than that specified in this section, in accordance with Section 19(b)(7) of the Act (15 U.S.C. 78s(b)(7)).

(d) Offsetting positions. Notwithstanding the minimum margin levels specified in paragraph (b)(1) of this section, customers with offset positions involving security futures and one or more related securities or futures contracts may, pursuant to regulatory authority rules approved by the Commission in accordance with Section 19(b)(2) of the Act (15 U.S.C. 78s(b)(2)), have initial or maintenance margin levels that are lower than the levels specified in paragraph (b)(1) of this section, provided that such margin levels are not lower than the lowest customer margin levels required for any comparable offset positions involving option contracts traded on any exchange registered pursuant to Section 6(a) of the Act (15 U.S.C. 78f(a)).

(e) Change in exempted borrower status. Once a broker, dealer, or a member of a national securities exchange ceases to qualify as an exempted borrower, it shall notify the creditor of this fact before establishing any new security future positions. Any new security future positions will be subject to the provisions of this part.

§ 242.403 Time limits for collection of margin.

(a) Initial margin. The amount of initial margin required or permitted by §242.402 shall be obtained by the creditor as promptly as possible and in any event within three (3) business days after the position is established, or within such shorter time period as may be imposed by applicable regulatory authority rules approved by the Commission in accordance with Section 19(b)(2) of the Act (15 U.S.C. 78s(b)(2)).

(b) Maintenance margin. The amount of maintenance margin required or permitted by §242.402 shall be obtained by the creditor as promptly as possible and in any event within three (3) business days after the margin deficiency is created or increased, or within such shorter time period as may be imposed by applicable regulatory authority rules approved by the SEC in accordance with Section 19(b)(2) of the Act (15 U.S.C. 78s(b)(2)).

(c) Extension of time limits. The time limits for collection of initial margin may be extended upon application by the creditor to its examining authority to the extent permitted by applicable regulatory authority rules approved by the Commission in accordance with Section 19(b)(2) of the Act (15 U.S.C. 78s(b)(2)).

§ 242.404 Forms of collateral.

(a) A broker, dealer or a member of a national securities exchange may accept as margin collateral:

(1) Cash;

(2) Margin securities;

(3) Exempted securities as defined in Section 3(a)(12) of the Act (15 U.S.C. 78c(a)(12)); or

(4) Other collateral permitted under Regulation T to satisfy a margin deficiency in the margin account.

(b) Nothing in this section shall prevent a regulatory authority from prescribing margin collateral requirements (other than margin levels) including the type, form, and use of collateral for security futures, that are consistent with the requirements established by the Federal Reserve Board, pursuant to paragraphs (c)(1)(A) and (B) Section 7 of the Act (15 U.S.C. 78g(c)(1)(A) and (B)), subject to approval by the Commission in accordance with Section 19(b)(2) of the Act (15 U.S.C. 78s(b)(2)) and, as applicable, subject to notice to the CFTC in accordance with Section 5c(c) of the CEA (7 U.S.C. 7a-2(c)).

(c) For the purposes of this section, security futures are not margin securities.

By the Securities and Exchange Commission.

Jonathan G. Katz
Secretary

September 26, 2001

[NOTE: Appendix A and B to the preamble will not appear in the Code of Federal Regulations.]

APPENDIX A

REGULATORY FLEXIBILITY ACT CERTIFICATION

I, Harvey L. Pitt, Chairman of the Securities and Exchange Commission (the "Commission"), hereby certify, pursuant to 5 U.S.C. § 605(b), that the rules proposed in Section 242.400, et seq., under the Securities Exchange Act of 1934 ("Exchange Act"), which would regulate margin collected by brokers, dealers, and members of national securities exchanges relating to customers' transactions in security futures and impose, among other requirements, minimum customer initial and maintenance margin levels for such security futures positions, would not, if adopted, have a significant economic impact on a substantial number of small entities.

The proposed rules would affect brokers, dealers, and members of national securities exchanges. Futures commission merchants ("FCMs") and introducing brokers ("IBs") may register as broker-dealers by filing Form BD-N. The Commodities Futures Trading Commission has concluded that FCMs are not considered small entities for the purposes of RFA.¹⁷⁸ In addition, because IBs cannot collect customer margin they are not subject to these rules. Accordingly, there are no FCMs or IBs that are small entities that would be affected by the proposed rules.

The proposed rules would also apply to broker-dealers and members of national securities exchanges. With one exception, all members of national securities exchanges registered under Section 6(a) of the Exchange Act are registered broker-dealers. The Commission believes that some small broker-dealers could be affected by the proposals, but that the proposals would not have a significant impact on a substantial number of small broker-dealers.

In addition, national securities exchanges registered under Section 6(g) of the Exchange Act may have members who are floor brokers or floor traders who are not registered broker-dealers. Floor brokers and floor traders, however, are not eligible to clear securities transactions or collect customer margin, and thus would not be subject to the proposed rules.

Accordingly, the proposed rules, if adopted, would not have a significant economic impact on a substantial number of small entities.

___/s/_Harvey L. Pitt________________
Harvey L. Pitt
Chairman

Dated: __09/25/01__

APPENDIX B

March 6, 2001

Mr. James E. Newsome
Acting Chairman
Commodity Futures Trading Commission
Three Lafayette Centre
21st Street, N.W.
Washington, D.C. 20581

Ms. Laura S. Unger
Acting Chairman
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549

Dear Acting Chairman Newsome and Acting Chairman Unger:

Section 206(b) of the Commodity Futures Modernization Act of 2000 (CFMA) amends the Securities Exchange Act of 1934 (SEA), in part by adding a new section 7(c)(2) to provide the Board of Governors of the Federal Reserve System with authority to prescribe margin regulations for brokers, dealers, and members of national securities exchanges extending credit to or collecting margin from customers on security futures products. The Board must prescribe regulations establishing initial and maintenance margin levels for these contracts or delegate the authority jointly to the Commodity Futures Trading Commission and the Securities Exchange Commission (the Commissions).

The Board has long taken the position that the regulatory authorities most familiar with the operation of the financial markets should play a key role in federal oversight of margin policy for these markets. In addition, the Board believes that the most important function of customer margin requirements should be prudential, that is, protection of lenders from credit losses. The Commissions have responsibility for regulating the securities and futures markets and will jointly oversee the exchanges trading security futures products. Furthermore, the Commissions are responsible for all other prudential supervision of the broker-dealers and exchange members covered by the new margin authority. These factors lead the Board to conclude that the Securities Exchange Commission and the Commodity Futures Trading Commission, jointly, are the most appropriate entities to exercise the functions assigned to the Board under section 7(c)(2) of the SEA.

Accordingly, the Board hereby delegates its authority under section 7(c)(2) of the SEA to the Commodity Futures Trading Commission and the Securities Exchange Commission, jointly, until further notice from the Board. The authority delegated by the Board is limited to customer margin requirements imposed by brokers, dealers, and members of national securities exchanges. It does not cover requirements imposed by clearing agencies on their members. Furthermore, the Board notes that section 7(c)(3) exempts the financing of proprietary positions of certain broker-dealers and members of securities exchanges as well as the financing of their market making and underwriting activities from the scope of federal margin regulation. Under the CFMA, futures commission merchants (FCMs), floor brokers, and floor traders who trade security futures products must become broker-dealers or members of a national securities exchange, and therefore, may be exempt under section 7(c)(3) from regulation pursuant to the delegated authority when they obtain credit. The exempt status of FCMs and floor brokers will depend upon whether a substantial portion of their business consists of transactions with persons other than broker-dealers. In the current open-outcry environment, the Board believes that floor traders act as market makers and therefore would be exempt. The Board expects to have further discussions with the Commissions to identify the conditions under which floor traders would act as market makers in an electronic trading environment.

The Board requests that the Commodity Futures Trading Commission and the Securities Exchange Commission, either jointly or severally, report to the Board annually on their experience exercising the delegated authority. In particular, the Board requests that the Commissions provide an assessment of progress toward adopting more risk-sensitive, portfolio-based approaches to margining security futures products. The Board has encouraged the development of such approaches by, for example, amending its Regulation T so that portfolio margining systems approved by the Securities Exchange Commission can be used in lieu of the strategy-based system embodied in the Board's regulation. The Board anticipates that the creation of security future products will provide another opportunity to develop more risk-sensitive, portfolio-based approaches for all securities, including security options and security futures products.

Very truly yours,

Jennifer J. Johnson
Secretary of the Board

Footnotes

1	All references to the Exchange Act are to 15 U.S.C. 78a et seq.
2	Appendix E of Pub. L. No. 106-554, 114 Stat. 2763 (2000).
3	15 U.S.C. 78g(c)(2).
4	See 15 U.S.C. 78g(c)(2)(A).
5	See 15 U.S.C. 78g(c)(2)(B).
6	Id.
7	See Letter from Jennifer J. Johnson, Secretary of the Board, Federal Reserve Board, to Mr. James E. Newsome, Acting Chairman, CFTC, and Ms. Laura S. Unger, Acting Chairman, SEC, March 6, 2001, reprinted as Appendix B to this proposal.
8	Because Section 6(h)(6) of the Exchange Act provides that options on security futures may not be traded for at least three years after the enactment of the CFMA, the Commissions are not currently proposing margin requirements for options on security futures. 15 U.S.C. 78f(h)(6).
9	15 U.S.C. 78f(a).
10	The proposed rules recognize that security futures can compete with, and be an economic substitute for, equity securities, such as equity options. Specifically, a synthetic futures contract may be created by two option contracts based on the same underlying instrument. To create a synthetic long (short) futures contract, an investor would buy (sell) a call option and sell (buy) a put option on the same underlying security, with the same expiration date and strike price.
11	12 CFR 220 et seq. Regulation T governs the initial margin requirements imposed by brokers, dealers, and members of national securities exchanges for all securities, other than exempted securities and security futures products. The rules of self-regulatory organizations ("SROs") govern, among other things, maintenance margin requirements. Regulation T, among other things, establishes the securities that may be purchased on margin, sets the time frames within which initial margin requirements must be met, establishes and defines the types of accounts in which broker-dealers may record securities transactions, including the Margin Account, Cash Account, Special Memorandum Account ("SMA"), the Good Faith Account, and the Broker-Dealer Credit Account, and specifies the maximum loan value (i.e., the maximum amount that may be loaned) of certain non-exempted equity securities, not including security futures products, that may be extended by brokers, dealers or members of national securities exchanges.
12	The Commissions propose to define "current market value" in Proposed CFTC Rule 41.44(a)(2) and Proposed SEC Rule 401(a)(2), discussed infra notes 62-67 and accompanying text.
13	The term "regulatory authority" means an SRO that is registered as a national securities exchange under Section 6 of the Exchange Act (15 U.S.C. 78f) or as a securities association under Section 15A of the Exchange Act (15 U.S.C. 78o-3). See Proposed CFTC Rule 41.44(a)(7) and Proposed SEC Rule 401(a)(7).
14	The term "creditor" is used in this release and in the proposed rules to refer to brokers, dealers, and members of a national securities exchange that would be subject to the margin requirements for security futures. The use of this term and other terms, such as "borrower," is not intended to indicate that there is an extension of credit involved in the margining of security futures. Rather, such terms are proposed to be used as a means to fulfill the statutory requirement that the margin requirements for security futures are and remain consistent with Regulation T. Regulation T uses the term "creditor" to refer to brokers, dealers and members of a national securities exchange that are subject to Regulation T requirements for customers' securities positions, including options positions. Margin requirements for short options positions represent a performance bond, as do the margin requirements proposed today for security futures.
15	See 15 U.S.C. 78g(c)(2)(B)(iv).
16	See Proposed CFTC Rule 41.43(b)(1); Proposed SEC Rule 400(b)(1).
17	12 CFR 220.4.
18	12 CFR 220.5.
19	12 CFR 220.6.
20	12 CFR 220.7.
21	12 CFR 220.8.
22	See 12 CFR 220.4(a)(1).
23	The following entries represent credits to the SMA balance: (1) dividend and interest payments; (2) Regulation T excess (the amount by which a customer's equity exceeds the initial Regulation T requirement); (3) deposits not needed to meet Regulation T margin calls; (4) deposits of securities (other than security futures) that carry loan value in the margin account; and (5) cash made available when a liquidation transaction releases funds for withdrawal from the margin account. See 12 CFR 220.5(b)(1) - (4).
24	12 CFR 220.5(b).
25	12 CFR 220.7.
26	12 CFR 220.6(e).
27	15 U.S.C. 78o(b)(1).
28	See Proposed CFTC Rule 41.43(a); Proposed SEC Rule 400(a).
29	See Proposed CFTC Rule 41.45(a); Proposed SEC Rule 402(a).
30	15 U.S.C. 78o(b).
31	15 U.S.C. 78o(b)(11).
32	See Securities Exchange Act Release No. 44730 (August 21, 2001), 66 FR 45138 (August 27, 2001) (SEC Release adopting amendments to its broker-dealer registration requirements for notice-registered broker-dealers and adopting Form BD-N).
33	15 U.S.C. 78f(g).
34	See Proposed CFTC Rule 41.45; Proposed SEC Rule 402(a).
35	See Proposed CFTC Rule 41.43(b)(3); Proposed SEC Rule 400(b)(3). The Commissions note that there may be some factual circumstances that will satisfy the criteria of more than one exclusion.
36	15 U.S.C. 78g(c)(2)(B)(iii).
37	12 CFR 220.1(b)(3)(i).
38	12 CFR 220.12(f)(1).
39	See Proposed CFTC Rule 41.43(b)(3)(i); Proposed SEC Rule 400(b)(3)(i).
40	15 U.S.C. 78s(b)(2); 7 U.S.C. 7a-2(c). Pursuant to Sections 19(b)(1) and 6(g)(4)(B)(ii) of the Exchange Act (15 U.S.C. 78s(b)(1) and 15 U.S.C. 78f(g)(4)(B)(ii), respectively), rules implementing portfolio margining for security futures must be submitted to the SEC for approval in accordance with Section 19(b)(2) of the Exchange Act. Designated contract markets registered under Section 5 of the CEA and registered derivatives transaction execution facilities ("DTFs") also must seek prior approval from the CFTC or provide notice by written certification to the CFTC, pursuant to Section 5c(c) of the CEA (7 U.S.C. 7a-2(c)). See infra notes 110-140 and accompanying text.
41	The CFTC also has approved SPAN margining for all options on futures contracts. Developed in 1988, the SPAN margining system currently is used on more than 30 exchanges and clearing organizations worldwide, including the London International Financial Futures Exchange, which trades single stock futures contracts.
42	See Securities Exchange Act Release No. 23167 (April 22, 1986), 51 FR 16127 (April 30, 1986).
43	See Securities Exchange Act Release No. 28928 (March 1, 1991), 56 FR 9995 (March 8, 1991).
44	To date, the Commissions have approved cross-margining programs between The OCC and the following futures clearing organizations: The Intermarket Clearing Corporation (1988); Chicago Mercantile Exchange ("CME") (1989); Board of Trade Clearing Corporation ("BTCC") (1991); Kansas City Board of Trade Clearing Corporation (1992); and Comex Clearing Association (1992). The Commissions also have approved cross-margining programs between the Government Securities Clearing Corporation and the following futures clearing organizations: the New York Clearing Corporation (1999); BTCC (2001); and CME (2001). For further discussion of cross-margining programs, see "Eighth Annual Report to the Board of Governors of the Federal Reserve System on the Review of Stock Index Futures and Option Margining Systems by the Commodity Futures Trading Commission" (June 2001), note 7 and accompanying text (available from the CFTC Office of the Secretariat).
45	The pilot program currently being developed by the CBOE, The OCC, the NYSE, AMEX, CBOT and CME is contemplated to be available for (1) any registered broker or dealer registered with the SEC pursuant to Section 15(b)(1) of the Exchange Act; (2) any affiliate of a self-clearing Exchange Act Section 15(b)(1) registered broker-dealer; (3) any registered futures floor trader to the extent that listed index options positions hedge the trader's index futures and options positions; and (4) any person or entity that has or, establishes and maintains equity of at least five million dollars across all securities and futures accounts under his/her/its common ownership.
46	This pilot program would likely take a two-prong approach: (1) it would adopt a portfolio margining system that sets margin requirements for portfolios in a securities account consisting of positions in products based on U.S. domestic broad-based market indexes, including securities index options, securities index warrants, and marginable index Unit Investment Trusts ("UITs") based on the greatest projected net loss of all positions in a "class group" or "product group" as determined by an options pricing model covering a specified range of market moves; and (2) it would adopt a cross-margining system that would apply a portfolio margining system to portfolios consisting of positions in products based on U.S. domestic broad-based market indexes, including securities index options and warrants, UITs, and index futures and options on index futures. The two prongs of the pilot are severable, and only the approval of the first prong -- a portfolio margining system -- is a precondition for using portfolio margining, rather than strategy-based margining, for security futures. Before approving the cross-margining system, the Commissions would need to ensure that any such accounts are adequately protected against insolvency risks; in particular, relief from applicable securities and commodities customer protection regimes is necessary to facilitate cross-margining.
47	In its delegation letter, the Federal Reserve Board requested that "the Commissions provide an assessment of progress toward adopting more risk-sensitive, portfolio-based approaches to margining security futures products." It further stated that "The Board has encouraged the development of such approaches by, for example, amending its Regulation T so that portfolio margining systems approved by the [SEC] can be used in lieu of the strategy-based system embodied in the Board's regulation. The Board anticipates that the creation of security future products will provide another opportunity to develop more risk-sensitive, portfolio based approaches for all securities, including security options and security futures products." See Appendix B.
48	12 CFR 220.1(b)(3)(iv).
49	Regulation T defines the term "foreign person" to mean a person other than a United States person as defined in Section 7(f) of the Exchange Act. See 12 CFR 220.2.
50	15 U.S.C. 78g(c)(2).
51	See Appendix B.
52	15 U.S.C. 78s(b)(2).
53	7 U.S.C. 7a-1; 7 U.S.C. 7a-2.
54	12 CFR 220.2.
55	See 15 U.S.C. 78g(c)(3)(A); see also 12 CFR 220.2.
56	See 15 U.S.C. 78g(c)(3).
57	In its March 6, 2001 letter, the Federal Reserve Board stated that "[i]n the current open-outcry environment, the Board believes that floor traders act as market makers and therefore would be exempt [under Section 7(c)(3) of the Exchange Act]." See Appendix B.
58	15 U.S.C. 78g(c)(3).
59	15 U.S.C. 78o-3(a).
60	15 U.S.C. 78s(b)(2).
61	This provision incorporates the definition of "market maker" found in Section 3(a)(38) of the Exchange Act (15 U.S.C. 78c(a)(38)), which provides that a market maker is "any specialist permitted to act as a dealer, any dealer acting in the capacity of block positioner, and any dealer who, with respect to a security, holds himself out (by entering quotations in an inter-dealer communications system or otherwise) as being willing to buy and sell such security for his own account on a regular or continuous basis."
62	The option premium is the net sales proceeds of the option on the day the option is sold. See Amex Rule 462; CBOE Rule 12.3; and NYSE Rule 431.
63	Id.
64	Id.
65	Under Proposed CFTC Rule 41.44(a)(8) and Proposed SEC Rule 401(a)(8), the daily settlement price means, with respect to a security future, the settlement price of such security future determined at the close of trading each day, as determined by the rules of the applicable exchange or clearing organization. This daily settlement price is used for calculating daily margin requirements. For physical delivery contracts, the settlement price on the last trading day may also be used as the invoice price for delivery of the security. For cash settled contracts, the final settlement price of a security future is directly based on the market for the underlying stock or security and may differ from the daily settlement price on the last trading day. See Securities Exchange Act Release No. 44743 (August 24, 2001), 66 FR 45904 (August 30, 2001).
66	See Proposed CFTC Rule 41.44(a)(2)(i); Proposed SEC Rule 401(a)(2)(i).
67	See Proposed CFTC Rule 41.44(a)(2)(ii); Proposed SEC Rule 401(a)(2)(ii). Under Proposed CFTC Rule 41.44(a)(1) and Proposed SEC Rule 401(a)(1), the term contract multiplier means the number of units of a narrow-based security index expressed as a dollar amount, in accordance with the terms of the security future.
68	See Proposed CFTC Rule 41.45(b); Proposed SEC Rule 402(b).
69	15 U.S.C. 78g(c)(2).
70	See, e.g., Amex Rule 462; CBOE Rule 12.3; National Association of Securities Dealers ("NASD") Rule 2520; NYSE Rule 431; PCX Rule 2.16; and Philadelphia Stock Exchange Rule 722.
71	See Proposed CFTC Rule 41.45(b)(1); Proposed SEC Rule 402(b)(1).
72	See Proposed CFTC Rule 45.45(b)(2); Proposed SEC Rule 402(b)(2).
73	See Appendix B.
74	See Proposed CFTC Rule 41.45(d); Proposed SEC Rule 402(d).
75	See Securities Exchange Act Release Nos. 41658 (July 27, 1999), 64 FR 42736 (August 5, 1999) (order approving SR-CBOE-97-67 amending CBOE Rule 12.3); 42011 (October 14, 1999), 64 FR 57172 (October 22, 1999) (order approving SR-NYSE-99-03 amending NYSE Rule 431); 43582 (November 17, 2000), 65 FR 70854 (November 28, 2000) (order approving SR-Amex-99-27 amending Amex Rule 462); and 43581 (November 17, 2000), 65 FR 71151 (November 29, 2000) (order approving SR-NASD-00-15 amending NASD Rule 2520).
76	See, e.g., NYSE Rule 431(f)(2)(G). In addition to these hedging strategies that affect the maintenance margin requirement for the underlying stock, there are strategies involving covered calls (long the underlying security and a short call option position) and covered puts (short the underlying security and a short put option position) in which there are no initial or maintenance margin requirements for the option component. There are also hedging strategies involving option-to-option offsets with lower initial and maintenance margin requirements.
77	Regulation T requires that the initial margin for certain equity securities, other than exempted securities and security future products, be 50 percent of the current market value of the security. See 12 CFR 220.12(a).
78	See, e.g., NYSE Rule 431(f)(2)(C).
79	The maintenance margin for a short stock is calculated as either: (1) $2.50 per share or 100% of the current market value (as defined in Regulation T), whichever amount is greater, of each stock short in the account selling at less than $5.00 per share; or (2) $5.00 per share or 30% of the current market value (as defined in Regulation T), whichever amount is greater, of each stock short in the account selling at $5.00 per share or above. See, e.g., NYSE Rule 431(c).
80	A customer is required to have equity of at least $2,000, except that cash need not be deposited in excess of the cost of any security purchased. See, e.g., NYSE Rule 431(b).
81	See, e.g., NYSE Rule 431(f)(2)(G)(v).
82	15 U.S.C. 78s(b)(2). Implementation of such rules by designated contract markets registered under Section 5 of the CEA (7 U.S.C. 7) and registered DTFs also would be subject to the notice requirements of Section 5c of the CEA (7 U.S.C. 7a-2). See infra notes 110-121 and accompanying text.
83	See supra note 75.
84	Baskets of securities or security futures contracts must represent exactly the same securities that comprise the index, and in the same proportion.
85	Generally, for the purposes of these rules, unless otherwise specified, stock index warrants shall be treated as if they were index options.
86	"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. See, e.g., Amex Rules 900 and 900C; CBOE Rule 12.3; and NASD Rule 2522.
87	"Out-of-the-money" amounts must be 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. (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. See e.g., NYSE Rule 431 ( Exchange Act Release No. 42011 (October 14, 1999), 64 FR 57172 (October 22, 1999) (order approving SR-NYSE-99-03)); Amex Rule 462 (Exchange Act Release No. 43582 (November 17, 2000), 65 FR 71151 (November 29, 2000) (order approving SR-Amex-99-27)); CBOE Rule 12.3 (Exchange Act Release No. 41658 (July 27, 1999), 64 FR 42736 (August 5, 1999) (order approving SR-CBOE-97-67)); or NASD Rule 2520 (Exchange Act Release No. 43581 (November 17, 2000), 65 FR 70854 (November 28, 2000) (order approving SR-NASD-00-15)).
88	"In the-money" amounts must be 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. (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.
89	See Proposed CFTC Rule 41.45(b)(2)(i); Proposed SEC Rule 402(b)(2)(i).
90	See Proposed CFTC Rule 41.45(b)(2)(ii); Proposed SEC Rule 402(b)(2)(ii).
91	15 U.S.C. 78s(b).
92	15 U.S.C. 78f(g). New subsection 6(g) of the Exchange Act provides an expedited process for an exchange that lists or trades security futures products to register with the SEC as a national securities exchange if that exchange (1) is a board of trade that has been designated as a contract market or is registered as a DTF; and (2) does not act as a market place for transactions in securities other than security futures products. The SEC has adopted rules prescribing the requirements for designated contract markets and DTFs to register as national securities exchanges pursuant to Section 6(g) of the Exchange Act. See Securities Exchange Act Release No. 44692 (August 13, 2001), 66 FR 43721 (August 20, 2001).
93	15 U.S.C. 78o-3(k). A futures association registered under Section 17 of the CEA (7 U.S.C. 21) will be registered as a national securities association for the limited purpose of regulating the activities of brokers or dealers registered pursuant to Section 15(b)(11) of the Exchange Act (15 U.S.C. 78o(b)(11)) with respect to their activities in security futures products.
94	15 U.S.C. 78s(b)(2). See Proposed CFTC Rule 41.45(c); Proposed SEC Rule 402(c).
95	15 U.S.C. 78s(b)(7). See infra note 130 and accompanying text.
96	See Proposed CFTC Rule 41.46(a); Proposed SEC Rule 403(a).
97	See, e.g., CBOE Rule 12.2.
98	See Proposed CFTC Rule 41.46(a); Proposed SEC Rule 403(a).
99	15 U.S.C. 78s(b)(2). See Proposed CFTC Rule 41.46(b); Proposed SEC Rule 403(b).
100	"Examining authority" with respect to a creditor is proposed to mean: (1) The regulatory authority of which such creditor is a member, if such creditor is a member of only one regulatory authority; (2) The regulatory authority designated responsibility by the SEC pursuant to 17 CFR 240.17d-1 for examining such creditor for compliance with applicable financial responsibility rules, if a regulatory authority is so designated; or (3) The regulatory authority designated in accordance with 17 CFR 1.52, if such creditor is a member of more than one regulatory authority and the SEC, pursuant to 17 CFR 240.17d-1, has not designated responsibility for examining such creditor for compliance with applicable financial responsibility rules. See Proposed CFTC Rule 41.44(a)(3) and Proposed SEC Rule 401(a)(3).
101	15 U.S.C. 78s(b)(2). The Commissions expect such regulatory authority rules for security futures to be consistent with those rules currently in place for securities. See, e.g., NYSE Rule 434; and NASD Rule 2520.
102	15 U.S.C. 78g(c)(2)(B)(iv).
103	Regulation T defines "margin deficiency" as "the amount by which the required margin exceeds the equity in the margin account." 12 CFR 220.2. The "required margin" for a position in securities (other than security futures) is based on the "current market value" of the securities and determined in accordance with Section 220.12 of Regulation T. 12 CFR 220.12.
104	12 CFR 220.4(c).
105	Regulation T defines "payment period" as "the number of business days in the standard securities settlement cycle in the United States, as defined in paragraph (a) of Exchange Act Rule 15c6-1 (17 CFR 240.15c6-1(a)), plus two business days." 12 CFR 220.2. Currently, the standard securities settlement cycle under Rule 15c6-1 of the Exchange Act is three business days, resulting in a payment period under Regulation T of five business days.
106	12 CFR 220.4(c).
107	Under Regulation T, margin securities include: (1) any security registered or having unlisted trading privileges on a national securities exchange; (2) any security listed on the Nasdaq Stock Market; (3) any nonequity security; (4) any security issued by either an open-end investment company or unit investment trust which is registered under Section 8 of the Investment Company Act of 1940; (5) any foreign margin stock; and (6) any debt security convertible into a margin security. 12 CFR 220.2.
108	15 U.S.C. 78c(a)(12).
109	15 U.S.C. 78s(b)(2).
110	A notice-designated contract market is a national securities exchange registered pursuant to Section 6(a) of the Exchange Act (15 U.S.C. 78f(a)), a national securities association registered pursuant to Section 15A(a) of the Exchange Act (15 U.S.C. 78o-3(a)), or an alternative trading system ("ATS") as defined in Section 1a(1) of the CEA (7 U.S.C. 1a(1)) that is designated as a contract market pursuant to Section 5f of the CEA (7 U.S.C. 7b-1).
111	15 U.S.C. 78s(b).
112	7 U.S.C. 7a-2(c). Notice-designated contract markets are exempt from the requirements of Section 5c of the CEA pursuant to Section 5f(b)(1)(D) of the CEA (7 U.S.C. 7a-2(b)(1)(D)).
113	See also 66 FR 42256 (August 10, 2001) (CFTC rules implementing these procedures, codified in a new Part 40 of Title 17, Rules 40.5 and 40.6).
114	7 U.S.C. 7a-2(c)(1).
115	7 U.S.C. 7a-2(c)(2).
116	15 U.S.C. 78s(b)(2).
117	The copy may be submitted to the CFTC electronically, by facsimile, or by delivery of a hard copy.
118	7 U.S.C. 7a-2.
119	7 U.S.C. 7a-2(c).
120	7 U.S.C. 7a-2(c)(2).
121	7 U.S.C. 7a-2(c)(1).
122	15 U.S.C. 78f(a).
123	15 U.S.C. 78o-3(a).
124	15 U.S.C. 78s(b)(1).
125	See supra note 92.
126	See supra note 93.
127	15 U.S.C. 78s(b)(1) and (b)(2). See Sections 6(g)(4)(B)(ii) and 15A(k)(3)(B) of the Exchange Act (15 U.S.C.78f(g)(4)(B)(ii) and 15 U.S.C. 78o-3(k)(3)(B), respectively). Proposed rule changes filed under Sections 19(b)(1) and (b)(2) of the Exchange Act are submitted pursuant to Rule 19b-4 and Form 19b-4. See 17 CFR 240.19b-4; 17 CFR 249.819.
128	Section 19(b)(3) of the Exchange Act sets forth the categories of proposed rule changes that may take effect upon filing with the SEC. 15 U.S.C. 78s(b)(3).
129	15 U.S.C. 78s(b)(2).
130	15 U.S.C. 78s(b)(7). See Sections 6(g)(4)(B)(i) and 15A(k)(3)(A) of the Exchange Act (15 U.S.C. 78f(g)(4)(B)(i) and 15 U.S.C. 78o-3(k)(3)(A), respectively). Section 19(b)(7) of the Exchange Act grants to the SEC the authority to adopt rules regarding the filing of proposed rule changes by Security Futures Product Exchanges and Limited Purpose National Securities Associations. 15 U.S.C. 78s(b)(7). The SEC has adopted Rule 19b-7 and Form 19b-7 to establish procedures for filing proposed rule changes pursuant to Section 19(b)(7) of the Exchange Act. See Rule 19b-7, 17 CFR 240.19b-7, and Form 19b-7, 17 CFR 249.822; Securities Exchange Act Release No. 44692 (August 13, 2001), 66 FR 43721 (August 20, 2001).
131	7 U.S.C. 7a-2(c). Pursuant to Section 5c(c)(1) of the CEA (7 U.S.C. 7a-2(c)(1)), a registered entity may elect to approve and implement any new rule or rule amendment by providing the CFTC with a written certification that the new rule or rule amendment complies with the CEA.
132	Pursuant to Section 5c(c)(2) of the CEA (7 U.S.C. 7a-2(c)(2)), a registered entity may elect to seek prior approval of the CFTC for any new rule or rule amendment.
133	15 U.S.C. 78s(b)(7)(B). Pursuant to this section, SEC action to abrogate a rule change will not affect the validity or force of the rule change during the period it was in effect.
134	See Section 19(b)(7)(C) of the Exchange Act (15 U.S.C. 78s(b)(7)(C)). The SEC notes that it currently exercises similar authority pursuant to Section 19(b)(3)(C) of the Exchange Act (15 U.S.C. 78s(b)(3)(C)) with respect to proposed rule changes filed by the existing SROs, which are immediately effective upon filing pursuant to Section 19(b)(3)(A) of the Exchange Act (15 U.S.C. 78s(b)(3)(A)).
135	15 U.S.C. 78f(g)(4)(B)(iii).
136	15 U.S.C. 78o-3(k)(3)(C).
137	15 U.S.C. 78s(b)(1).
138	15 U.S.C. 78s(b)(7)(D)(i).
139	15 U.S.C. 78s(b)(7)(D)(ii).
140	15 U.S.C. 78s(b)(1).
141	44 U.S.C. 3501 et seq.
142	7 U.S.C. 19(a).
143	15 U.S.C. 78f(a).
144	See Paul H. Kupiec and A. Patricia White, Regulatory Competition and the Efficiency of Alternative Derivative Product Margining Systems, 16 The Journal of Futures Markets 943 (1996).
145	15 U.S.C. 78f(a).
146	For discussion on Regulation T, and the accounts established thereunder, see supra notes 15-27 and accompanying text.
147	Broker-dealers registered with the SEC under Section 15(b)(1) of the Exchange Act may journal any margin excess to the SMA. 15 U.S.C. 78o(b)(1).
148	15 U.S.C. 78g(c)(2)(B)(iii).
149	Catrath, A., Adrangi, B and Alleder, M. (2001), The Impact of Margins in Futures Markets: Evidence from the Gold and Silver Markets, The Quarterly Review of Economics and Finance, 279.
150	The SEC staff examined all securities with average daily trading volume greater than 50,000, using data from 2000 from the Center for Research in Security Prices ("CRSP"). Based on this data, the SEC staff calculated the daily price returns and the 30-day historical price volatility for each of the securities examined. Based on the assumption that cash and futures prices typically move together, the SEC staff conducted a preliminary simulation, using actual security price movements as estimates for would be futures price movements. Based upon these security futures' price estimates, the staff determined the margin requirements for each of these security futures under both the 20 percent strategy-based approach and the traditional risk-based futures approach. The staff examined how often the funds attributable to margin requirements are insufficient to cover the daily price movements of these security futures. This is relevant to the examination of systemic risk because a necessary condition for customer default to occur is the depletion of the funds attributable to margin requirements (assuming no market risk to close out such position).
151	For further details on these issues, see Fishe, R. P. H., Goldberg, L.G., (1986), The Effects of Margins on Trading in Futures Markets, Journal of Futures Markets, 261; Fishe, P.H., Goldberg, L.A., Gosnell, T.F. and Sinha, S. (1990), Margin Requirement in Futures Markets: Their Relationship to Price Volatility, The Journal of Futures Markets, 541.
152	See supra note 150.
153	For an in depth discussion of how margin would be computed under the proposed rules, see supra notes 62-88 and accompanying text.
154	For a discussion of who is considered an "exempted borrower," see supra notes 54-55 and accompanying text.
155	For discussion on forms of collateral, see supra notes 102-109 and accompanying text.
156	Such requirements would be proposed by regulatory authority rules approved by the SEC pursuant to Section 19(b)(2) of the Exchange Act, and as applicable, subject to notice to the CFTC in accordance with Section 5c(c) of the CEA.
157	For an in depth discussion on offsets, see supra notes 74-88 and accompanying text.
158	15 U.S.C. 78c(f).
159	15 U.S.C. 78w(a)(2).
160	Id.
161	15 U.S.C. 78c(f).
162	15 U.S.C. 78w(a)(2).
163	5 U.S.C. 601 et seq.
164	47 FR 18618-21 (April 30, 1982).
165	Id. at 18619.
166	66 FR 44960, 44964 (August 27, 2001).
167	66 FR 42256, 42268 (August 10, 2001).
168	47 FR at 18619.
169	A broker or dealer that is registered with the SEC and that limits its futures activities to those involving security futures products, may notice register with the CFTC as an FCM in accordance with Section 4f(a)(2) of the CEA (7 U.S.C. 6f(a)(2)).
170	7 U.S.C. 6f(a)(1).
171	See Exchange Act Rule 15c3-1(a)(2), 17 CFR 240.15c3-1(a)(2).
172	15 U.S.C. 78f(a).
173	5 U.S.C. 603(a).
174	5 U.S.C. 605(b).
175	See 7 U.S.C. 1(a)(23).
176	See 47 FR 18618, 18618-21 (April 30, 1982). See also 66 FR 14262, 14268 (March 9, 2001).
177	7 U.S.C. 1(a)(16) and (17).
178	See 47 FR 18618, 18618-21 (April 30, 1982). See also 66 FR 14262, 14268 (March 9, 2001).

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