[Federal Register Volume 62, Number 22 (Monday, February 3, 1997)]
[Notices]
[Pages 5063-5064]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-2559]


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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38211; File No. SR-CSE-96-05]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change and Amendment No. 1 Thereto by the Cincinnati Stock Exchange 
Relating to Day Trading Margin Requirements

January 28, 1997.
    On August 15, 1996, the Cincinnati Stock Exchange (``CSE'' or 
``Exchange'') submitted to the Securities and Exchange Commission 
(``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Act''),\1\ and Rule 16b-4 
thereunder,\2\ a proposed rule change to implement Rule 6.2, Day 
Trading Margin. Notice of the proposed rule change was published for 
comment and appeared in the Federal Register on September 12, 1996.\3\ 
One comment letter was received on the proposal.\4\ In response to the 
comment letter, the Exchange filed Amendment No. 1 to the proposal 
which was published in the Federal Register on December 19,

[[Page 5064]]

1996.\5\ No additional comment letters were received regarding the 
proposal. This order approves the CSE proposal as amended.
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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. 37653 (September 6, 
1996), 61 FR 48185 (September 12, 1996).
    \4\ See letter from James E. Buck, Senior Vice President and 
Secretary, New York Stock Exchange, Inc. (``NYSE''), to Jonathan G. 
Katz, Secretary, Commission, dated October 10, 1996.
    \5\ In Amendment No. 1 the Exchange adds proposed Rule 6.1(c), 
which sets forth specific required maintenance margin for margin 
accounts. In addition, Amendment No. 1 amends Rule 6.1(b) to make 
clear that the Exchange is only permitted to grant extensions of 
time under Regulation T of the Board of Governors of the Federal 
Reserve System for those firms for which the Exchange is the 
designated examining authority. See Securities Exchange Act Release 
No. 38046 (December 13, 1996), 61 FR 67086 (December 19, 1996) 
(Notice of Filing of Amendment No. 1).
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I. Description of the Proposal

    The Exchange is proposing to adopt Rule 6.2 (``Day Trading 
Margin''), make a conforming amendment to Rule 6.1(b), and adopt Rule 
6.1(c). The CSE has stated that the purpose of the proposed rules is to 
enhance the financial protections and therefore the integrity of the 
Exchange's markets by ensuring that customers maintain adequate margin 
reserves in their accounts. More specifically, the proposed rule 
changes, as amended by Amendment No. 1, require day traders \6\ to 
maintain margin on the ``long'' or ``short'' transaction, whichever 
occurred first, in the same amount as required for initial margin by 
Regulation T of the Board of Governors of the Federal Reserve System 
(``Regulation T''),\7\ or as required pursuant to Exchange Rule 
6.1(c),\8\ whichever amount is greater. By contrast, when day trading 
occurs in the margin account of a ``non-day trader,'' proposed Rule 
6.2(b) provides that the margin to be maintained shall be the margin on 
the ``long'' or ``short'' transaction, whichever occurred first, as 
required pursuant to Exchange Rule 6.1(c). Accordingly, with respect to 
maintenance margin, the ``non-day trader'' never will be subject to the 
margin level of Regulation T, which in some instances is higher than 
that required by proposed Rule 6.1(c).\9\
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    \6\ Pursuant to proposed Rule 6.2(a), the term ``day trading'' 
means the purchasing and selling of the same security on the same 
day. A ``day trader'' is any customer whose trading shows a pattern 
of day trading. This definition of day trader is identical to that 
used by the NYSE in Rule 431(f)(8)(B).
    \7\ 12 CFR 220.1-220.18.
    \8\ Proposed CSE Rule 6.1(c) provides that the margin which must 
be maintained in margin accounts of customers shall be as follows: 
(1) 25% of the current market value of all securities ``long'' in 
the account; plus (2) $2.50 per share or 100% of the current market 
value, whichever amount is greater, of each stock ``short'' in the 
account selling at less than $5.00 per share; plus (3) $5.00 per 
share or 30% of the current market value, whichever amount is 
greater, of each stock ``short'' in the account selling at $5.00 per 
share or above; plus (4) 5% of the principal amount or 30% of the 
current market value, whichever amount is greater, of each bond 
``short'' in the account.
    \9\ See note 8, supra.
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    In addition, Amendment No. 1 revises the Exchange's margin rules to 
conform with more recent amendments to Regulation T. Specifically, 
Amendment No. 1 amends Rule 6.1(b) to make clear that the Exchange is 
only permitted to grant extensions of time under Regulation T for those 
firms for which the Exchange is the designated examining authority.\10\
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    \10\ The Commission notes that presently there are no firms for 
which the CSE is the designated examining authority.
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II. Comment Letter

    As mentioned above, the NYSE filed a written comment to the 
proposed rule change by letter dated October 10, 1996.\11\ The NYSE 
comment letter sated that proposed CSE Rule 6.2 was deficient because 
the CSE's rules did not contain any maintenance margin requirements. 
The NYSE further contended that absent specific maintenance margin 
requirements, the CSE rule would be unenforceable.
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    \11\ See note 4, supra.
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III. Discussion

    The Commission finds that, as amended, the proposed rule changes 
are consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities exchange, 
and, in particular, the requirements of Section 6(b)(5)\12\ in that 
they are designed to facilitate transactions in securities, promote 
just and equitable principles of trade, and protect investors and the 
public interest. Specifically, the Commission finds that the new 
maintenance margin requirements set forth in CSE Rule 6.1(c)\13\ are 
appropriate levels at which to require additional cash (or securities 
as collateral) to replenish a margin account when the value of the 
existing collateral is declining.\14\ In this regard, the maintenance 
margin levels should help to reduce credit risk, and, thereby, provide 
stability to the CSE's markets by ensuring that customers maintain 
adequate margin reserves in their accounts. Additionally, the 
Commission believes that distinguishing between ``day traders'' and 
``non-day traders'' for purposes of required maintenance margin levels 
is reasonable and consistent with the Act in light of the greater 
credit risks associated with frequent day trading.\15\
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    \12\ 15 U.S.C. 78f(b)(5).
    \13\ See note 8, supra.
    \14\ The Commission notes that the CSE's new maintenance margin 
levels are identical to those of the NYSE. See NYSE Rule 431(c).
    \15\ The Commission notes that the NYSE makes this same 
distinction between day traders and non-day traders for purposes of 
required maintenance margin. See NYSE rule 431(f)(B)(8).
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    Moreover, the Commission believes that the amendment to CSE Rule 
6.1(b) conforms the rule to recent amendments to Regulation T and, 
therefore, is appropriate. With respect to new CSE Rule 6.2(c), which 
prohibits a customer from making a practice of paying for a security by 
selling the same security on an intra-day basis (i.e. ``free riding''), 
the Commission finds that the Rule serves to provide further stability 
to the market and, as such, is consistent with the Act.
    Finally, with regard to the NYSE comment letter, the Commission 
finds that Amendment No. 1 adequately addresses the concerns raised by 
the NYSE. As noted above, Amendment No. 1 added specific maintenance 
margin levels into the CSE's Rules, and these levels are identical to 
those set forth in NYSE Rule 431(c). Further, Amendment No. 1 was 
published for the full statutory comment period, and the Commission has 
received no additional comment letters. Accordingly, the Commission 
believes the NYSE's concerns have been addressed.
    It therefore is ordered, pursuant to Section 19(b)(2) of the 
Act,\16\ that the proposed rule change (SR-CSE-96-05) is approved.
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    \16\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\17\
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    \17\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-2559 Filed 1-31-97; 8:45 am]
BILLING CODE 8010-01-M