[Federal Register Volume 59, Number 142 (Tuesday, July 26, 1994)]
[Unknown Section]
[Page 0]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 94-18134]
[[Page Unknown]]
[Federal Register: July 26, 1994]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-34409; File No. SR-CHX-94-10]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of Proposed Rule Change by the Chicago
Stock Exchange, Inc., Relating to its Net Capital Requirements
July 20, 1994.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on April 6,
1994, the Chicago Stock Exchange, Inc. (``CHX'' or ``Exchange'') filed
with the Securities and Exchange Commission (``Commission'' or ``SEC'')
the proposed rule change as described in Items I, II and III below,
which Items have been prepared by the self-regulatory organization. On
May 17, 1994, the CHX submitted to the Commission Amendment No. 1 to
the proposed rule change.\1\ On July 19, 1994, the CHX submitted to the
Commission Amendment No. 2 to the proposed rule change.\2\ The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested persons.
---------------------------------------------------------------------------
\1\See letter from David T. Rusoff, Attorney, Foley & Lardner,
to Louis A. Randazzo, Attorney, Office of Derivative and Exchange
Oversight, SEC, dated May 13, 1994. Amendment No. 1 made certain
clarifying changes to the proposal.
\2\See letter from David T. Rusoff, Attorney, Foley & Lardner,
to Louis A. Randazzo, Attorney, SEC, dated July 19, 1994. Amendment
No. 2 requested accelerated approval of the proposed rule change.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The CHX proposes to amend Rule 3 of Article XI, Rule 15 of Article
XXXIV, Rule 1(d) of Article I and Interpretation and Policy .01 under
Rule 3 of Article XXXVI of the Exchange's Rules relating to net capital
and aggregate indebtedness.\3\ The Exchange requested accelerated
approval of the proposed rule change.\4\
---------------------------------------------------------------------------
\3\The term ``net capital,'' as used in the CHX proposal, means
net capital as defined by Commission Rule 15c3-1. Rule 15c3-1
defines net capital as the net worth of a broker or dealer, adjusted
by certain adjustments prescribed in Rule 15c3-1. See 17 CFR
240.15c3-1(c)(2) (1994).
\4\See Amendment No. 2, supra note 2.
---------------------------------------------------------------------------
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 self-regulatory organization
included statements governing 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 self-regulatory organization 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
Pursuant to recent amendments to Commission Rule 15c3-1,\5\ on
April 1, 1994, the Exchange's specialists became subject to the
Commission's net capital rule.\6\ Accordingly, effective April 1, 1994,
these specialists must have a minimum net capital of $100,000 ($75,000
until July 1, 1994) under the aggregate indebtedness method and,\7\
under the alternative method, equal to a minimum of $250,000 ($200,000
until July 1, 1994).\8\
---------------------------------------------------------------------------
\5\17 CFR 240.15c3-1 (1994).
\6\See Securities Exchange Act Release No. 32737 (August 11,
1993), 58 FR 43555 (August 17, 1993).
\7\The aggregate indebtedness standard under Rule 15c3-1 states
that no broker or dealer, other than one that elects the Alternative
Standard, shall permit its aggregate indebtedness to all other
persons to exceed 1500 percent of its net capital (or 800 percent of
its net capital for 12 months after commencing business as a broker
or dealer). See 17 CFR 240.15c3-1(a)(1)(i) (1994).
\8\Rule 15c3-1(a)(1)(ii) contains the alternative standard,
which states in part, that a broker or dealer shall not permit its
net capital to be less than the greater of $250,000 or 2 percent of
aggregate debit items computed in accordance with Exhibit A to Rule
15c3-3. See 17 CFR 240.15c3-1(a)(1)(ii) (1994).
---------------------------------------------------------------------------
Prior to the Commission's recent amendments to the net capital
rule, the only capital requirements applicable to specialists or market
makers were Exchange rules, specifically, Article XI, Rule 3(b).
Because the Commission has now set forth a requirement that, in most
cases, is higher than the Exchange's current requirements, the Exchange
is filing this proposed rule change to delete its rules relating to
specialist and market maker capital requirements (Article XI, Rule
3(b)) and to delete appropriate cross references to this Rule.
In addition, the Exchange is amending Interpretation and Policy .01
to Rule 3 of Article XXXVI relating to the capital requirement of the
Designated Primary Market Maker (``DPM'') of the Chicago Basket
(``CXM'').\9\ This amendment is needed because of the increase in
required regulatory capital levels. The Exchange believes that the
DPM's capital requirement should not fluctuate based on these changes
to the Commission's net capital rule, however, the rule should be
flexible in the event that the Commission increases specialists'
capital requirements at a future date.\10\ Thus, the Exchange is
imposing a capital requirement on the DPM of the greater of (i)
$150,000 or (ii) the capital requirement imposed by Commission Rule
15c3-1. Under both alternatives, ``capital'' should be calculated using
Commission Rule 15c3-1 for specialists.\11\
---------------------------------------------------------------------------
\9\The following language is proposed to be added to
Interpretation and Policy .01 to Rule 3: The DPM capital requirement
(as the term ``capital'' or ``net capital'' is defined for
specialists in SEC Rule 15c3-1) shall be the greater of (i) $150,000
or (ii) the capital requirement imposed on specialists by SEC Rule
15c3-1.
\10\On August 11, 1993, the Commission amended Rule 15c3-1, to
among other things, make the Commission's net capital rule
applicable to certain specialists that are currently exempt from the
rule (the amended Rule makes the Commission's net capital rule
applicable to all specialists other than certain options market
makers). See Securities Exchange Act Release No. 32737, supra note
6.
\11\As a result of the amendments to the Commission's net
capital rule that became effective April 1, 1994, Exchange equity
specialists are required to comply generally with the provisions of
the Commission's early warning notification procedures as codified
in Section 17a-11 under the Act.
---------------------------------------------------------------------------
(2) Statutory Basis
The Exchange believes that the proposed rule change is consistent
with Section 6(b)(5) of the Act in that it is designed to promote just
and equitable principles of trade, to remove impediments and to perfect
the mechanism of a free and open market and a national market system,
and in general, to protect investors and the public interest by
amending Exchange Rules to correspond to the Commission's amendments to
Rule 15c3-1.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition that is not necessary or appropriate
in furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
Written comments on the proposed rule change were neither solicited
nor received.
III. 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, NW., Washington, DC 20549.
Copies of the submission, 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 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 at the
Commission's Public Reference Room, 450 Fifth Street, NW., Washington,
DC 20549. Copies of the filling will also be available for inspection
and copying at the principal office of the CHX. All submissions should
refer to File No. SR-CHX-94-10 and should be submitted by [insert date
21 days from date of publication].
Commission's Findings and Order Granting Accelerated Approval of
Proposed Rule Change
The CHX has requested the Commission grant accelerated approval to
its proposal because the Commission has already implemented its changes
to its net capital rule (SEC Rule 15c3-1).\12\ The Commission finds
that the CHX's amendments to its net capital requirements for
specialists are consistent with the requirements of the Act and the
rules and regulations thereunder applicable to a national securities
exchange, and in particular, with the requirements of Sections 6(b)(5)
and 11(b) of the Act.\13\ The Commission believes that the CHX's
amendments are consistent with the Section 6(b)(5) requirement that the
rules of an exchange be designed to promote just and equitable
principles of trade, and, in general, to protect investors and the
public interest. The Commission also believes that the rule change is
consistent with Section 11(b) of the Act, and Rule 11b-1
thereunder,\14\ which allow securities exchanges to promulgate rules
relating to specialists in order to maintain fair and orderly markets.
The rule change is consistent with the Rule 11b-1(a)(2)(i) requirement
that the rules of a national securities exchange that permit a member
to register as a specialist and to act as a dealer include, among other
things, adequate minimum capital requirements in view of the markets
for securities on such exchange.
---------------------------------------------------------------------------
\12\See Amendment No. 2, supra note 2.
\13\15 U.S.C. 78f(b)(5) and 78k(b) (1988).
\14\17 CFR 240.11b-1 (1994).
---------------------------------------------------------------------------
The rules of the CHX, in addition to the rules set forth under this
Act, impose certain obligations upon specialists, including, but not
limited to, the maintenance of fair and orderly markets.\15\
Specialists play a crucial role in providing stability, liquidity, and
continuity to the trading of stocks on the Exchange. Generally,
specialists are under an affirmative obligation to trade for their own
accounts when such transactions are necessary to the public interest to
minimize an actual or reasonably anticipated imbalance between supply
and demand in the Exchange market, and contribute to continuity and
depth in their specialty stocks.\16\ To ensure that specialists fulfill
these obligations, it is important that they maintain an adequate
amount of capital.
---------------------------------------------------------------------------
\15\See generally Article XXX, Rule 1, Paragraph II(C)(6) of the
CHX Rules. See also Rule 11b-1 under the Act.
\16\See Article XXX, Rule 1, Paragraph II(B) of the CHX Rules.
---------------------------------------------------------------------------
The importance of specialists' net capital as it relates to the
quality of Exchange markets was highlighted during the October 1987
Market Break. In the Division of Market Regulation's (``Division'')
report on the 1987 Market Break, the Division reviewed, among other
things, specialists' ability to maintain fair and orderly markets and
minimum capital requirements imposed by the exchanges. During the 1987
Market Break, most exchange specialists were exempt from the
Commission's net capital rule, and therefore, were only required to
maintain a minimum amount of capital as determined by the rules of
their exchange. In this respect, the Division stated its concern that
the minimum capital requirements imposed by the exchanges on
specialists did not reflect the actual capital needed to ensure the
maintenance of fair and orderly markets in different types of
securities.17 Accordingly, as a result of the Division's concerns
regarding the availability of capital for specialists, today's more
volatile market conditions, and the state of the exchanges' specialist
surveillance and monitoring system, the Division began to examine the
ramifications of eliminating the specialist exemption from the SEC's
net capital rule and applying the net capital rule to all
specialists.18
---------------------------------------------------------------------------
\1\7See Division of Market Regulation, The October 1987 Market
Break, February 1988, at 4-66 to 4-67. See also Market Analysis of
October 13 and 16, 1989, A Report by the Division of Market
Regulation, U.S. Securities and Exchange Commission, December 1990,
at 4, 16 and 33.
\1\8See 1987 Market Break, supra note 17 at 4-68.
---------------------------------------------------------------------------
The Commission believes that amending Articles I, XI, XXXIV, and
XXXVI to delete outdated Exchange specialist capital requirements, and
thereby conform the CHX's rules to the SEC's net capital rules,19
and adopting a net capital requirement for DPMs that equals or exceeds
the SEC's net capital requirement is consistent with recent amendments
to SEC Rule 15c3-1 under the Act, as well as a positive step toward
procuring stronger capital foundations for specialists on the CHX
floor.
---------------------------------------------------------------------------
\1\9The Commission's net capital rule, as codified in SEC Rule
15c3-1, is applicable to all specialists, which includes equity
market makers, except options market makers.
---------------------------------------------------------------------------
The Commission believes that the amendments are consistent with
Section 6(b)(5) of the Act in that the increased reserves of specialist
net capital should help to ensure that Exchange specialists have
greater access to the capital necessary for the maintenance of fair and
orderly markets in their registered securities. In the Commission's
release amending the SEC's net capital rule to make the rule applicable
to certain specialists, the Commission stated that it did not believe
that sufficient reasons still exist to exempt specialists other than
options market makers from the capital rule and the overall uniform,
minimum financial responsibility which results from its application.
The Commission further stated that application of the net capital rule
to specialists other than options market makers is necessary to provide
reasonable assurance that specialists are maintaining minimum levels of
liquid capital. More significantly, the Commission believes that
application of the rule will provide significant monitoring and
consistent reporting benefits.20 By assuring that specialists have
capital sufficient to perform their market making responsibilities, the
proposal should provide additional protection for the Exchange, member
organizations, and public investors.
---------------------------------------------------------------------------
\2\0See supra note 6.
---------------------------------------------------------------------------
The Commission finds good cause for approving the proposed rule
change prior to the thirtieth day after the date of publication of
notice of filing thereof in the Federal Register. The Commission
believes that accelerated approval of the proposal is appropriate in
order to allow the CHX to amend the Exchange's current net capital rule
to conform to Rule 15c3-1 of the Act. In addition, the Commission
previously noticed for comment and approved similar filings of the
Pacific Stock Exchange, Inc. (``PSE''), and Philadelphia Exchange, Inc.
(``Phlx'').21 No comments were received on those proposals.
---------------------------------------------------------------------------
\2\1See Securities Exchange Act Release Nos. 34295 (July 1,
1994) and 33838 (March 30, 1994) approving similar changes with
respect to conforming exchange rules to the revised SEC net capital
requirements for the PSE and Phlx, respectively.
---------------------------------------------------------------------------
It is therefore ordered, pursuant to Section 19(b)(2)22 that
the proposed rule change as amended (SR-CHX-94-10) is hereby approved
on an accelerated basis.
\2\215 U.S.C. 78s(b)(2) (1988).
---------------------------------------------------------------------------
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 94-18134 Filed 7-25-94; 8:45 am]
BILLING CODE 8010-01-M