[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]


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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.
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    \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.
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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\
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    \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.
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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\
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    \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).
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    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\
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    \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.
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(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.
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    \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).
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    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.
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    \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.
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    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
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    \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.
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    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.
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    \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.
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    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.
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    \2\0See supra note 6.
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    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.
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    \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.
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    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).
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    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