[Federal Register Volume 63, Number 148 (Monday, August 3, 1998)]
[Notices]
[Pages 41310-41312]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 98-20559]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40266; File No. SR-NYSE-98-16]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Partial Accelerated Approval of a Proposed Rule Change and 
Amendment No. 1 to the Proposed Rule Change by the New York Stock 
Exchange, Inc., Relating to Margin Requirements for Exempted Borrowers 
and Good Faith Accounts

July 27, 1998.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on June 30, 1998, the New York Stock Exchange, Inc. (``NYSE'' or 
``Exchange'') filed with the Securities Exchange Commission (``SEC'' or 
``Commission'') a proposed rule change to amend NYSE Rule 431, ``Margin 
Requirements,'' to accommodate certain recent changes to the federal 
margin requirements. The proposal, which is described in Items I, II, 
and III below, which Items have been prepared by the NYSE, originally 
was approved by the Commission on a temporary basis until July 27, 
1998.\3\ On July 24, 1998, the NYSE amended its proposal to request 
that the Commission approve the NYSE's proposal for six months on an 
accelerated bases.\4\ The Commission is publishing this notice and 
order to solicit comments from interested persons on the proposed rule 
change and to grant accelerated approval to the portion of the proposal 
that requests an extension of the proposal for six months, until 
January 27, 1999, or until the Commission approves the proposal 
permanently, whichever occurs first.\5\
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 39813 (March 27, 
1998), 63 FR 16849 (April 6, 1998) (order approving File No. SR-
NYSE-98-08) (``March Approval Order'').
    \4\ See Letter from James E. Buck, Senior Vice President and 
Secretary, NYSE, to Richard C. Strasser, Assistant Director, 
Division of Market Regulation, Commission, dated July 23, 1998 
(``Amendment No. 1''). In addition, Amendment No. 1 modifies the 
proposal to: (1) clarify that the proposal amends the definition of 
``customer'' in NYSE Rule 431(a)(2) to codify the Exchange's 
position that exempted borrowers will remain exempt from the 
provisions of NYSE Rule 431; and (2) correct a reference in NYSE 
Rule 431(a)(2) to the Board of Governors of the Federal Reserve 
System (``FRB'').
    \5\ The NYSE confirmed that the Exchange is seeking to extend 
the changes to NYSE Rule 431 that were approved in the March 
Approval Order for six months or until the Commission approves the 
changes on a permanent basis, whichever occurs first. Telephone 
conversation between Mary Anne Furlong, Attorney, NYSE, and Yvonne 
Fraticelli, Attorney, Division of Market Regulation, Commission, on 
July 27, 1998 (``July 27 Conversation'').
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    On March 27, 1998, the Commission approved until July 27, 1998, an 
NYSE proposal to apply the maintenance margin requirements of NYSE Rule 
431 to good faith accounts and to provide that the proprietary accounts 
of introducing broker-dealers that are ``exempted borrowers'' as that 
term is defined in Regulation T \6\ will continue to be subject to NYSE 
Rule 431(e)(6) as applicable.\7\ The NYSE requests permanent approval 
of the changes to NYSE Rule 431 that were approved on a temporary basis 
in the March Approval Order. In addition, the NYSE requests that the 
Commission extend the changes to NYSE Rule 431 that were approved in 
the March Approval Order for six months, until January 27, 1999, or 
until the Commission approves the changes to NYSE Rule 431 on a 
permanent basis, whichever occurs first.\8\
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    \6\ 12 CFR 220. Regulation T, ``Credit by Brokers and Dealers,'' 
is administered by the FRB pursuant to section 7 of the Act.
    \7\ See March Approval Order, supra note 3.
    \8\ See Amendment No. 1, supra note 4, and July 27 Conversation, 
supra note 5.
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    Copies of the proposed rule change are available at the NYSE 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 NYSE included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposal. The text of these 
statements maybe examined at the places specified in Item V below. The 
NYSE has prepared summaries, set forth in Section 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

    In January 1998 the FRB amended Regulation T, which governs initial 
extensions of credit to customers and broker-dealers.\9\ Among other 
things, these amendments established a ``good faith'' account, which 
can be used for transactions in non-equity securities.\10\

[[Page 41311]]

Unlike transactions in a cash or margin account, transactions in the 
good faith account are not subject to the requirements of Regulation T 
with respect to initial margin and payment and liquidation time frames.
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    \9\ See Docket Nos. R-905, R-0923, and R-0944, 63 FR 2806 
(January 16, 1998).
    \10\ 12 CFR 220.6.
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    The NYSE believes that transactions in a good faith account raise 
the same safety and soundness concerns from a maintenance margin 
perspective as cash and margin account transactions. Accordingly, the 
NYSE proposes to amend NYSE Rule-431 so that transactions in all 
accounts of customers (except for cash accounts, as discussed below), 
including the new good faith account, will be subject to the current 
applicable maintenance margin requirements of NYSE Rule 431(c).\11\ As 
is currently the case, cash accounts subject to Regulation T will not 
be subject to the overall NYSE Rule 431 requirements, but in certain 
cases will be covered by specific rule provisions. In this regard, the 
NYSE notes that NYSE Rule 431 requirements currently apply to cash 
account transactions in exempted securities (NYSE Rule 431(e)(2)(F)); 
for certain options (NYSE Rule 431(f)(2)(M)); and for ``when issued'' 
and ``when distributed'' securities (NYSE Rule 431(f)(3)(B)).
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    \11\ NYSE Rule 431(c), as amended, will specify the margin that 
must be maintained in all customer accounts, except for cash 
accounts subject to Regulation T, unless a transaction in a cash 
account is subject to other provisions of NYSE Rule 431.
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    In the Regulation T amendments adopted in January 1998, the FRB 
also established a class of borrowers that is exempt from Regulation T. 
An ``exempted borrower,'' as defined in Regulation T, is a broker-
dealer '' a substantial portion of whose business consists of 
transactions with persons other than brokers or dealers.'' \12\ The 
NYSE historically has not applied the requirements of NYSE Rule 431 to 
member organization accounts, except for transactions in the 
proprietary accounts of registered broker-dealers that are carried by a 
member organization. In this regard, NYSE Rule 431(e)(6) provides that 
a member organization may carry the proprietary account of another 
registered broker-dealer upon a margin basis that is satisfactory to 
both parties, provided the requirements of Regulation T are adhered to 
and the account is not carried in a deficit equity condition. In 
addition, NYSE Rule 431(e)(6) requires that the amount of any 
deficiency between the equity in the proprietary account and the margin 
required under NYSE Rule 431 be deducted in computing the net capital 
of the member carrying the proprietary account.
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    \12\ 12 CFR 220.2.
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    The NYSE believes that exempted borrowers would remain exempt from 
the requirements of NYSE Rule 431, and the Exchange proposes to amend 
the definition of ``customer'' in NYSE Rule 431(a)(2) to codify the 
Exchange's position that such borrowers are exempt from NYSE Rule 
431.\13\ Specially, the NYSE proposes to amend NYSE Rule 431(a)(2) to 
exclude from the definition of ``customer'' and ``exempted borrower'' 
as defined by Regulation T of the FRB, except for the proprietary 
accounts of a broker-dealer carried by a member pursuant to NYSE Rule 
431(e)(6).\14\
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    \13\ See Amendment No. 1, supra note 3.
    \14\ Specifically, NYSE Rule 431(a)(2), as amended, excluded 
from the definition of ``customer'' (a) a broker or dealer from whom 
a security has been purchased or to whom a security has been sold 
for the account of the member organization or its customers, or (b) 
an ``exempted borrower'' as defined by Regulation T, except for the 
proprietary account of a broker-dealer carried by a member 
organization pursuant to NYSE Rule 431(e)(6).
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    Under the new Regulation T definition of exempted borrower, the 
proprietary transactions of an introducing organization that qualifies 
as an exempted borrower (i.e., an organization that conducts a 
substantial public business) will not be subject to Regulation T. 
Accordingly, the requirement in NYSE Rule 431(e)(6) that member adhere 
to the requirements of Regulation T will not apply to the proprietary 
accounts of exempted borrowers. However, for safety and soundness 
purposes, the proprietary account of a broker-dealer that are carried 
or cleared by another broker-dealer member organization will remain 
subject to the NYSE Rule 431(e)(6) equity requirements, which prohibit 
a member from carrying a proprietary account in a deficit equity 
condition and require that the amount of any deficiency between the 
equity maintained in the proprietary account and the margin required by 
NYSE Rule 431 be deducted in computing the net capital of the member 
carrying the proprietary account.
2. Statutory Basis
    The NYSE believes that the proposed rule change is consistent with 
the requirements of Section 6(b)(5) of the Act in that it is designed 
to promote just and equitable principles of trade and to protect the 
investing public. The NYSE believes that the proposed rule change also 
is consistent with the rules and regulations of the FRB in that it is 
designed to prevent the excessive use of credit for the purchase or 
carrying of securities, pursuant to Section 7(a) of the Act.

B. Self-Regulatory Organization's Statement on Burden on Competition

    The NYSE believes that the purpose rule change will not impose any 
burden on competition that is not necessary or appropriate in 
furtherance of the purpose of the Act.

C. Self Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    No written comments were solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action.

    The NYSE has requested that the Commission find good cause pursuant 
to Section 19(b)(2) of the Act for approving the portion of the 
proposal that requests a six-month extension of the changes to NYSE 
Rule 431 that were approved in the March Approval Order prior to the 
30th day after publication of the proposed rule change in the Federal 
Register.\15\ Accelerated approval, until January 27, 1999, will ensure 
the uninterrupted effectiveness of the changes to NYSE Rule 431 that 
were approved in the March Approval Order, so that transactions in good 
faith accounts and in the proprietary accounts of non-carrying/clearing 
member organizations will continue to be subject to NYSE Rule 
431(e)(6).
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    \15\ See Amendment No. 1, supra note 4.
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    With regard to the portion of the proposal requesting permanent 
approval of the changes to NYSE Rule 431 that were approved in the 
March Approval Order, 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 reasons for so 
finding or (ii) as to which the self-regulatory organization consents, 
the Commission will by order approve such proposed rule change, or 
institute proceedings to determine whether the proposed rule change 
should be disapproved.

IV. Commission's Findings and Order Granting Partial Accelerated 
Approval of the Proposed Rule Change

    After careful review of the NYSE's proposal and for the reasons 
discussed below, the Commission finds that the portion of the current 
proposal that extends through January 27, 1999, the effectiveness of 
the changes to NYSE

[[Page 41312]]

Rule 431 that originally were approved in the March Approval Order is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities exchange 
and, in particular, this portion of the proposal is consistent with 
Section 6(b)(5) of the Act,\16\ in that it is designed to remove 
impediments to and perfect the mechanism of a free and open market and 
a national market system, and, in general, to protect investors and the 
public interest.\17\
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    \16\ 15 U.S.C. 78f(b)(5).
    \17\ In approving this potion of the proposal, the Commission 
has considered the proposed rule's impact on efficiency, 
competition, and capital formation. 15 U.S.C. 78c(f).
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    Specifically, the Commission finds, as it has concluded 
previously,\18\ that it is appropriate for the NYSE to apply the 
existing maintenance margin requirements of NYSE Rule 431(c) to 
transactions in the new ``good faith'' account adopted under Regulation 
T. Although non-equity transactions permitted in the good faith account 
will not be subject to the initial margin requirements and payment and 
liquidation time frames of Regulation T, as the NYSE notes, 
transactions in the good faith account may raise the same safety and 
soundness concerns with regard to maintenance margin as do transactions 
in cash and margin accounts. Accordingly, the Commission believes that 
it is appropriate for the NYSE to apply the existing maintenance margin 
requirements specified in NYSE Rule 431(c) to transactions in the good 
faith account. The Commission believes that applying the maintenance 
margin requirements of NYSE rule 431(c) to transactions in the good 
faith account will protect investors and the public interest and help 
to maintain fair and orderly markets by ensuring that good faith 
accounts contain adequate margin reserves.
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    \18\ See March Approval Order, supra note 3.
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    In addition, the Commission believes that it is appropriate for the 
NYSE to revise the definition of ``customer'' in NYSE Rule 431(a)(2) to 
codify the Exchange's position that exempt borrowers will remain exempt 
from the requirements of NYSE Rule 431, except for the proprietary 
account of a broker-dealer carried by a member pursuant to NYSE Rule 
431(e)(6). The Commission believes that it is appropriate for the NYSE 
to continue to apply the equity requirements of NYSE Rule 431(e)(6) to 
the proprietary accounts of introducing broker-dealers that qualify as 
``exempted borrowers'' under Regulation T if these accounts are carried 
by another Exchange member. By continuing to apply the equity 
requirements of NYSE Rule 431(e)(6) to these proprietary accounts, the 
Commission believes that the proposal will help to ensure that these 
accounts contain adequate margin, thereby protecting investors and the 
public interest.\19\
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    \19\ As noted above, because exempted borrowers are exempt from 
Regulation T, the provision in NYSE Rule 431(e)(6) requiring 
adherence to Regulation T will not apply to the proprietary accounts 
of exempted borrowers.
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    The Commission finds good cause for approving the portion of the 
proposed rule change requesting approval for six months, until January 
27, 1999, of the changes to NYSE Rule 431 that were approved in the 
March Approval Order prior to the thirtieth day after the date of 
publication of notice in the Federal Register to ensure that the 
changes to NYSE Rule 431 that were approved in the March Approval Order 
remain in effect without interruption. The Commission continues to 
believe that the changes to NYSE rule 431 that were approved in the 
March Approval Order should help to ensure appropriate margin 
requirements for good faith accounts and for the proprietary accounts 
of introducing broker-dealers that qualify as exempted borrowers which 
accounts are carried by Exchange members. Accordingly, the Commission 
finds that it is consistent with Sections 6(b) and 19(b)(2) of the Act 
to grant accelerated approval to the portion of the NYSE's proposal 
that extends for six months, until January 27, 1999, or until the 
Commission approves the proposal permanently, whichever occurs first, 
the changes to NYSE Rule 431 that were approved in the March Approval 
Order.
    The Commission also finds good cause for approving Amendment No. 1 
to the proposal on an accelerated basis. In Amendment No. 1, the NYSE 
clarified several provisions in its proposal and requested accelerated 
approval of a six-month extension, through January 27, 1999, of the 
changes to NYSE Rule 431 that were approved in the March Approval 
Order. The Commission believes that it is appropriate to approve 
Amendment No. 1 on an accelerated basis to permit the changes to NYSE 
Rule 431 that were approved in the March Approval Order to continue to 
apply without interruption. Therefore, the Commission believes that 
Amendment No. 1 is consistent with Sections 6(b) and 19(b)(2) of the 
Act.

V. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549. 
Copies of the submission, all subsequent amendments, all written 
statements with request to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the Commission any any person, 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 Room. Copies of such filing will also be 
available for inspection and copying at the principal office of the 
NYSE. All submissions should refer to File No. SR-NYSE-98-16 and should 
be submitted by August 24, 1998.

VI. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\20\ that the portion of the NYSE's proposal (SR-NYSE-98-16), as 
amended, to extend the changes approved by the Commission in the March 
Approval Order on an accelerated basis until January 27, 1999, or until 
the Commission approves the proposal permanently, whichever occurs 
first, is approved.
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    \20\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, pursuant 
to delegated authority.\21\
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    \20\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-20559 Filed 7-31-98; 8:45 am]
BILLING CODE 8010-01-M