Chicago Mercantile Exchange Inc.

Mr. Phupinder S. Gill
Managing Director and President

October 21, 2002

Mr. Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0609

Re: File No. SR-NYSE-2002-19 (67 Fed. Reg. 62843, dated October 8, 2002)
Proposed Rule Change by the New York Stock Exchange, Inc.
Relating to Customer Portfolio and Cross-Margining Requirements.

Dear Mr. Katz:

Chicago Mercantile Exchange Inc. ("CME" or the "Exchange") is pleased to offer comments on proposed rule changes by the New York Stock Exchange, Inc. ("NYSE") relating to customer portfolio and cross-margining requirements.

CME generally applauds the NYSE's efforts to expand the use of portfolio margining systems - as opposed to strategy-based systems - as an enlightened and decidedly forward looking policy. However, the Exchange respectfully suggests that the proposed rules be adjusted to ... (1) recognize the possibility that theoretical pricing models in addition to the Option Clearing Corporation's ("OCC") TIMSTM (or Theoretical Intermarket Margining System) system be approved as qualifying models pursuant to the Commission's Net Capital Rule; and (2) avoid prescriptions that might require revision of established futures account management policies.

SPAN System - The Exchange maintains an interest in these matters to the extent that it has been a pioneer in the development of, and remains a world leader in, portfolio margining systems. In particular, Chicago Mercantile Exchange (CME) developed SPAN® (Standard Portfolio Analysis of Risk) system for calculating margin requirements.

SPAN was the first futures industry margining system to compute requirements exclusively on the basis of overall portfolio risk. In the years since its inception, SPAN has become the industry standard; the program is now the official margining mechanism of virtually every registered futures exchange and clearing organization in the United States, as well as many such entities worldwide.

SPAN calculates margin requirements for clearing firms, exchange members and customers. Although SPAN was originally designed to measure the risk associated with futures and futures options, the product had subsequently been expanded and is applied in actual practice with respect to stock options and other options. In fact, SPAN is capable of assessing the risks associated with portfolios comprised of most any type of financial instrument and derivatives thereon available today.

Because SPAN is portfolio-driven, it evaluates all products which share a common or similar underlying instrument. Thus, SPAN may aggregate the risks associated with portfolios including futures, options on futures options, stock options, etc. For example, the program may be applied to portfolios including S&P 500 futures, options on S&P 500 futures, and options on the S&P 500 Index.

SPAN is currently deployed by thirty-eight (38) exchanges and clearing organizations worldwide - located in nations including the United States, Australia, China, Canada, England, France, India, Japan, Hungary, Norway and Singapore. Eight (8) exchanges currently deploy SPAN in the context of single stock futures; eight (8) deploy SPAN for equity options; and, SPAN is used in the context of four (4) CME cross-margining programs.

Explicit OCC TIMS References - We note that the following proposed rules contain explicit references to OCC or incorporate unattributed references to TIMS operating parameters - Rules 431(g)(2)(H), 431(g)(3), 431(7), 726(d)6 and 726(d)9. Again, we respectfully request that NYSE revise these rules in a more generic fashion allowing for the possibility that other portfolio margining systems may become approved for use in this context, without necessitating subsequent rule amendments.

Further, we have respectfully requested the Commission and the New York Stock Exchange by letters dated October 18, 2002 to initiate steps necessary to designate SPAN as an Approved Theoretical Pricing Model per Rule 431(g)(3).

Sundry Issues -

  • Proposed Rule 726(d)(25) requires the application of "the same minimum margin requirement for every contract, including futures contracts" - which we interpret as a reference to the minimum margin requirements identified in proposed Rule 431(g)(7).

    While it is commonplace to apply a short option minimum margin requirement to options on futures, the application of such minimums to futures positions cannot readily be accommodated per existing bookkeeping systems in common usage within the futures industry without significant time, expense and labor. Thus, we respectfully suggest that this rule be adjusted to reflect practices prevailing within the futures industry.

  • Proposed Rule 726(d)27 requires that futures positions be "transferred out of the portfolio margin account (including a portfolio margin account dedicated to cross-margining) and into a futures account if, for more than ten business days and for any reason, the offsetting securities options and/or other eligible securities no longer remain in the account." The proposed rule further requires that "[i]f the transfer ... causes the futures account to be undermargined, a margin call will be issued or positions will be liquidated to the extent necessary to eliminate the deficit."

    We respectfully suggest that policies surrounding the liquidation of undermargined futures accounts should generally be considered as beyond the purview of the NYSE. Thus, we suggest that the final sentence in proposed Rule 726(d)27 be stricken and that futures accounts remain subject to ordinary futures account management policies.

  • Proposed Rule 726(d)29 requires that cross-margining "be conducted in a portfolio margin account." Proposed Rule 726(d)31 specifies that "portfolio margin accounts are securities accounts" and are, therefore, "not subject to the customer protection rules under the segregation provisions of the Commodity Exchange Act and the Rules of the CFTC." Yet, the status of futures and option on futures positions held in a securities account per the Securities Investor Protection Corporation ("SIPC") remain undefined. We respectfully suggest that this apparent protection gap be rectified such that futures and options on futures held in a securities account be specifically recognized as falling under the protections otherwise offered by SIPC.

Thank you for the opportunity to comment on the proposed rules. If any questions arise during your review of this letter, please do not hesitate to contact John W. Labuszewski, Director, Clearing Development, Chicago Mercantile Exchange Inc. at 312-466-7469.

Respectfully submitted,

Chicago Mercantile Exchange