[Federal Register Volume 63, Number 4 (Wednesday, January 7, 1998)]
[Notices]
[Pages 899-900]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 98-291]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-39497; File No. SR-NYSE-97-28]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the New York Stock Exchange, Inc. Amending Exchange Rule 431
to Establish Margin and Net Capital Requirements for Joint Back Office
Arrangements
December 29, 1997.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on October 2, 1997, the New
York Stock Exchange, Inc. (``Exchange'' or ``NYSE'') filed with the
Securities and Exchange Commission (``Commission'') the proposed rule
change, as described in Items I, II, and III below, which Items have
been prepared by the Exchange. The Commission is publishing this notice
to solicit comments on the proposed rule change from interested
parties.
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\1\ 15 U.S.C. 78s(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange seeks to amend Exchange Rule 431, ``Margin
Requirements.'' The modifications relate to: (a) joint back office
(``JBO'') arrangements, (b) margin requirements for broker-dealer
accounts, (c) margin requirements for specialists' and market makers'
accounts, and (d) control and restricted securities.
The text of the proposed rule change is available at the Office of
the Secretary, the Exchange, and at the Commission.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange has prepared summaries, set forth in
sections A, B, and C below, of the most significant aspects of such
statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
In April, 1996, the Exchange established the Rule 431 Committee
(``the Committee'') to review all aspects of Rule 431 and make
recommendations to the Exchange in the wake of recent changes to
federal margin regulations and changing industry conditions. The
Committee created various subcommittees to review specific provisions
of Rule 431 utilizing the expertise of industry representatives
knowledgeable in the application of Rule 431. As a result of the
efforts of the ``Control Stock'' and ``Joint Back Office''
subcommittees, and reviews by the Committee and Exchange staff, the
Exchange Board approved amendments to Rule 431 as set forth below.
(a) JBO Arrangements
Regulation T, issued by the Board of Governors of the Federal
Reserve System (``FRB''), permits a broker-dealer to ``effect or
finance transactions of any of its owners if the [broker-dealer] is a
clearing and serving broker or dealer owned jointly or individually by
other [broker-dealers].'' \2\ The proposed rule change would provide
certain regulatory requirements for establishing and maintaining such
JBO arrangements. Carrying/clearing broker-dealer forming a JBO would
be required to: (i) provide written notification to the Exchange prior
to establishing a JBO, (ii) maintain minimum tentative net capital \3\
of $25 million, or maintain minimum net capital of $10 million if
engaged in the primary business of clearing options market-maker
accounts,\4\ (iii) maintain a written risk analysis methodology for
assessing the amount of credit extended to participating broker-
dealers, and (iv) deduct from net capital, the ``haircut'' requirements
pursuant to the Commission's Net Capital Rule (``Rule 15c3-1'') \5\ in
excess of the equity maintained in the accounts of participating
broker-dealers.
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\2\ 12 CFR 220.11. Regulation T is titled ``Credit By Brokers
and Dealers'' and was issued by the FRB pursuant to the Act.
\3\ As discussed in the Exchange's Interpretation Handbook, the
term ``tentative net capital'' generally refers to net capital
before the application of ``haircuts'' (infra note 5) and undue
concentration charges on securities and options positions. See NYSE
Interpretation Handbook, Section I(c)(2)(vi)(M)(04), ``Tentative net
Capital.''
\4\ Under the proposed rule change, clearance of option market
maker accounts would be deemed a broker-dealer's primary business if
a minimum of 60% of the aggregate deductions in the ratio of gross
options market maker deductions to net capital (including gross
deductions for JBO participant accounts) are options market maker
deductions.
\5\ 17 CFR 240.15c3-1 et seq., ``Net Capital Requirements for
Brokers or Dealers.'' Rule 15c3-1 requires a broker-dealer to reduce
its net worth by certain percentages, known as ``haircuts,'' of the
market value of its securities positions.
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Furthermore, under the proposal JBO participants must be registered
broker-dealers subject to Rule 15c3-1, and will be required to maintain
an ownership interest in the JBO pursuant to Regulation T. Exclusive of
their ownership interest in the JBO arrangement, JBO participants must
maintain a minimum liquidating equity of $1 million. If the liquidating
equity falls below $1 million, the JBO participant must eliminate the
deficiency within five business days or become subject to the margin
requirements under other provisions of Exchange Rule 431.\6\
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\6\ The Exchange believes that in order to establish an
effective, industry-wide regulatory scheme for JBO arrangements, the
other self-regulatory organizations should adopt the requirements in
the proposed rule change that relate to JBO arrangements.
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(b) Margin Requirements for Broker-Dealer Accounts
Currently, the amount of any deficiency between the equity
maintained in the proprietary account carried for another broker-dealer
and the maintenance margin required by Exchange Rule 431(c)(1) (i.e.,
25% of the current market value of securities ``long'' in the account)
is deducted in computing the net capital of the carrying member
organization. In order for introducing broker-dealers to receive the
same treatment as proposed for JBO
[[Page 900]]
participants, the amendments would compute the deduction to the
carrying member organization's net capital based upon the haircut
requirements of Rule 15c3-1 (i.e., 15% of the market value for long
positions) \7\ rather than the currently required 25%.
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\7\ 17 CFR 240.15c3-1(c)(2)(vi)(J).
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(c) Margin Requirements for Specialists' and Market Makers' Accounts
Likewise, the amount of any deficiency between the equity in the
account carried for an ``approved specialist or market maker'' \8\ and
the 25% maintenance margin required by Exchange Rule 431(c)(1) is
deducted in computing the net capital of the carrying member
organization. Similar to the contemplated amendments relating to the
margin requirements for broker-dealer accounts, the proposed rule
change would compute the deduction to the carrying member
organization's net capital based upon the haircut requirements of Rule
15c3-1 (i.e., 15%) rather than the presently mandated 25%.
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\8\ Exchange Rule 431(e)(5)(A) defines the term ``approved
specialist or market maker'' as either: (1) a specialist or market
maker, who is deemed a specialist for all purposes under the
Securities Exchange Act of 1934 and who is registered pursuant to
the rules of a national securities exchange; or (ii) an OTC market
maker or third market maker, who meets the requirements of Section
220.12(d) of Regulation T.
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The same modification would be made to the margin provision
governing joint accounts carried by member organizations in which the
member organizations participate. If the equity maintained in the
account by the other participants is deficient, the proposal would
require the carrying member organization to compute the deduction to
its net capital based upon the haircut requirements of Rule 15c3-1
(i.e., 15%) rather than the margin requirements of Exchange Rule
431(c)(1).
(d) Control and Restricted Securities
Currently, Exchange Rule 431(e)(8)(C)(iv) sets forth a
``Concentration Reduction'' formula that establishes margin
requirements for control and restricted securities based upon the
percent of outstanding shares or the percent of average weekly volume.
The Exchange believes the Concentration Reduction provision has the
effect of imposing higher margin requirements on accounts that have
greater collateral deposited. To eliminate what the Exchange views as
an anomalous result, the proposed rule change would exclude ``excess
securities'' \9\ from the calculations.
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\9\ The term ``excess securities'' would be defined as the
amount of securities, if any, by which the aggregate position in
control and restricted securities of any one issue exceeds the
aggregate amount of securities that would be required to support the
aggregate credit extended on such control and restricted securities
if the applicable margin requirement was 50%.
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In addition, the proposed rule change would except from Exchange
Rule 431(e)(8) all restricted securities saleable pursuant to Rule
144(k),\10\ Rule 145(d)(2),\11\ or Rule 145(d)(3) \12\ under the
Securities Act of 1933. Currently, only those restricted securities
saleable by non-affiliates of the issuer pursuant to Rule 144(k), Rule
145(d)(2), or Rule 145(d)(3) are excepted from Exchange Rule 431(e)(8).
As a result, broker-dealers would be permitted to sell certain
restricted securities in the event of a customer default pursuant to
Rule 144(k) without being subject to the requirements of Exchange Rule
431. Accordingly, those customer-owned, restricted securities saleable
under Rule 144(k) would be subject to the same maintenance margin
requirements that presently apply to ordinary stock (25%).
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\10\ 17 CFR 230.144(k).
\11\ 17 CFR 230.144(d)(2).
\12\ 17 CFR 230.144(d)(3).
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Finally, the proposed rule change would alter the calculation of a
member firm's net capital with regard to extending credit to customers
on control and restricted securities. The proposal would amend Exchange
Rule 431(e)(8)(C)(ii) to provide that the ``greater of the aggregate
credit agreed, in writing to be or actually extended to all customers
on control and restricted securities of any one issue that exceeds 10%
of the member organization's excess net capital shall be deducted from
net capital for purposes of determining a member organization's status
under Rule 326.''
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with the requirements of Section 6(b)(5) of the Act \13\ in that it is
designed to promote just and equitable principles of trade, and to
protect investors and the public interest. The Exchange further
believes that the proposed rule change is consistent with the rules and
regulations promulgated by the FRB for the purpose of preventing the
excessive use of credit for the purchase or carrying of securities,
pursuant to Section 7(a) of the Act.\14\
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\13\ 15 U.S.C. 78f(b)(5).
\14\ 15 U.S.C. 78g(a).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any inappropriate burden on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received from Members, Participants or Others
The Exchange did not solicit or receive written comments with
respect to the proposed rule change.
III. Date of Effectiveness of the Proposed Rule Change and Timing
for Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) as the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reason for so finding, or (ii) as to
which the Exchange consents, the Commission will:
(A) By order approve the proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule
change should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549.
Copies of the submissions, all subsequent amendments, all written
statements with respect to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission and any persons, other than those
that may be withheld from the public in accordance with the provisions
of 5 U.S.C. 552, will be available for inspection and copying in the
Commission's Public Reference Section, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies of such filing will also be available
for inspection and copying at the principal office of the Exchange. All
submissions should refer to File No. SR-NYSE-97-28 and should be
submitted by January 28, 1998.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\15\
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\15\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-291 Filed 1-6-98; 8:45 am]
BILLING CODE 8010-01-M