[Federal Register Volume 62, Number 68 (Wednesday, April 9, 1997)]
[Notices]
[Pages 17260-17261]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-8998]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-38463; File No. SR-NASD-97-14]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the National Association of Securities Dealers, Inc., 
Relating to the Amendment of its Margin Rules

April 1, 1997.
    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 February 26, 1997, NASD Regulation, Inc. (``NASD Regulation'') filed 
with the Securities and Exchange Commission (``SEC'' or ``Commission'') 
the proposed rule change as described in Items I, II, and III below, 
which Items have been prepared by NASD Regulation. The Commission is 
publishing this notice to solicit comments on the proposed rule change 
from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    NASD Regulation proposes to amend the margin rules, Rule 2520 of 
the Conduct Rules, of the National Association of Securities Dealers, 
Inc. (``NASD'' or ``Association''). Specifically, NASD Regulation is 
proposing to amend Rule 2520 (``old Rule 2520'') to: (1) Renumber 
paragraphs (a) and (b) as Rules 2521 and 2522, respectively; and 
renumber paragraph (c) as Rule 2520 (referred to herein as ``Rule 
2520'') to facilitate the use and comparison of the Rule in relation to 
the New York Stock Exchange's (``NYSE'') margin rule; (2) conform Rule 
2520 to recent amendments to Federal Reserve Board Regulation T; and 
(3) add margin requirements for various over-the-counter (``OTC'') 
options and interest rate composite securities. The text of the 
proposed rule change is attached to NASD Regulation's rule filing as 
Exhibit 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, NASD Regulation 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. NASD Regulation 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
    As a result of the Federal Reserve Board of Governor's recent 
amendments to Regulation T, which governs the extension of credit by 
broker/dealers, and the NYSE's recent proposed amendments to its margin 
rule, NYSE Rule 431,\3\ NASD Regulation is proposing to renumber old 
Rule 2520 to permit its members and others to more easily use and 
compare the provisions of the rule to NYSE Rule 431. In addition, NASD 
Regulation is proposing amendments to Rule 2520, the NASD's margin 
rule, to conform the NASD's margin requirements to Regulation T and 
NYSE Rule 431.
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    \3\ See Securities Exchange Act Release No. 38411 (March 17, 
1997) 62 FR 14174.
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    Numbering. At one time, former Article III, Section 30 of the NASD 
Rules of Fair Practice had substantially the same margin requirements 
as NYSE Rule 431.\4\ Several years ago Section 30 was amended to adopt 
the same numbering scheme as NYSE Rule 431 in order to facilitate the 
use and comparison of the two rules. For example, old Section 
30.3(f)(2) relates to margin requirements for puts, calls and other 
options. The same provisions appear in NYSE Rule 431(f)(2). Thus, any 
member could find the provisions in both the NASD and NYSE's rules 
under the same subsection number ``(f)(2).'' When the NASD Manual was 
reorganized in 1996, new rule numbering conventions were adopted that 
resulted in the renumbering of Article III, Section 30 as old Rule 
2520. Under the 1996 numbering scheme, old Section 303.(f)(2), for 
example, became old Rule 2520(c)(6)(B). As a result of these numbering 
changes, comparison between old Rule 2520 and NYSE Rule 431 became much 
more problematic.
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    \4\ There were a few minor differences in the two Rules related 
to the fact that the NASD regulates the over-the-counter market and 
that certain requirements in the respective rules relate only to 
exchange specialists or dealers.
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    NASD Regulation is proposing to renumber old Rule 2520 by: (1) 
Renumbering paragraphs (a) and (b) as Rules 2521 and 2522, 
respectively; and (2) renumbering paragraph (c) as Rule 2520. This 
renumbering will cause most of the paragraphs and subparagraphs of Rule 
2520 to have the same numbering as those of NYSE Rule 431, thereby 
facilitating comparison and use of the two rules. The renumbered Rule 
2520 is set forth in Exhibit 2 to the rule filing; however, the former 
numbering of each subsection is not shown.
    Amendments to Conform Rule 2520 to Regulation T. NASD Regulation is 
proposing two technical changes to Rule 2520 (as renumbered) to correct 
references to recently-repealed or renumbered provisions of Regulation 
T:
    1. Definition of OTC margin bond. Rule 2520 (e)(2)(C), referring to 
the definition of OTC margin bond as stated in Regulation T, Section 
220.2(t),\5\ is proposed to be amended to eliminate the ``(t).'' 
Section 220.2 has been amended to eliminate subsection numbering.
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    \5\ The definition of OTC margin bond in Regulation T, Section 
220.2 refers to several types of debt securities with specifically 
defined characteristics, all of which are sold or traded over-the-
counter, not on an exchange.
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    2. Cash equivalent. Rule 2520(f)(2)(H)(iv), referring to cash 
equivalents as ``those instruments referred to in Section 
220.8(a)(3)(ii) of Regulation T,'' is proposed to be amended to change 
the reference to Section 220.2 of Regulation T. When Regulation T was 
amended, Section

[[Page 17261]]

220.8(a)(3)(ii) was amended to eliminate conditions relating to cash 
equivalents and Section 220.2 was amended by adding a definition of 
cash equivalents.
    Amendments to Conform Rule 2520 to Recent Amendments to NYSE Rule 
431. Option Products and Interest Rate Composites. The NYSE recently 
proposed amending its Rule 431 to establish new margin requirements for 
various OTC option products and interest rate campsite securities.\6\ 
Rule 2520, paragraphs (f)(2)(D) and (F), which currently requires 
customer margin for short OTC stock and index options of 100% of the 
option premium plus 45% of the current market value of the underlying 
security, are proposed to be amended by adding specific margin 
requirements for OTC options equal to a specific percentage of the 
current value of the underlying component to conform these paragraphs 
with the corresponding paragraphs of NYSE Rule 431. In addition, a new 
definition of the term ``underlying component'' is being added as 
paragraph 2522(a)(66) to replace more complex references to 
``underlying security or the product of the current index group value 
of the underlying index stock group.''
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    \6\ See supra note 3.
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    The principal amendments to Rule 2520, paragraphs (f)(2)(D) and (F) 
include new initial and maintenance margin requirements (including 
provisions for reduced margin requirements under certain circumstances) 
for:

--OTC options on stock and convertible corporate debt (30%), industry 
index stock groups (30%) and broad index stock groups (20%).
--OTC options on 30-year U.S. Treasury bonds and non-mortgage backed 
U.S. Government agency debt securities that qualify for exemption 
pursuant to SEC Rule 3a12-7 (3%).\7\
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    \7\ The text of the rule filing indicates that the initial and/
or maintenance margin for U.S. Government or U.S. Government Agency 
debt securities other than those exempted by Rule 3a12-7 under the 
Act is 5%.
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--OTC options on all other U.S. Government securities including agency 
debt (5%),\8\ and marginable corporate debt securities (15%). OTC 
options on all other securities including CMO's remain subject to the 
current 45% general OTC option margin requirement.
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    \8\ Id.
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--Interest rate contracts (10%) to be consistent with other 
exchanges.\9\

    \9\ There is currently no margin requirement for interest rate 
contracts in the Rule. The NYSE added the requirement to Rule 431 in 
order to be consistent with other exchanges.
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    In addition, the proposed amendments recognize certain spread and 
straddle positions for margin purposes between listed and OTC options 
when a customer's long and short positions are controlled by the same 
broker-dealer.
    Specialist and Market Maker Options Margin. The amendments to 
Regulation T that are scheduled to take effect on July 1, 1997, 
eliminate margin requirements for options transactions for customers 
and market markers/specialists and shift responsibility for setting 
such margin requirements to the self-regulatory organizations. The NYSE 
has proposed adding new provisions establishing such margin 
requirements to Rule 431,\10\ and NASD Regulation is proposing to make 
substantially identical changes to subparagraph (f)(2)(J) of Rule 2520.
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    \10\ See supra note 3.
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2. Statutory Basis
    The basis under the Act for this proposed rule change is the 
requirement under Section 15A(b)(6) \11\ that an association have rules 
that are designed to prevent fraudulent and manipulative acts and 
practices, to promote just and equitable principles of trade, to foster 
cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, to remove impediments to 
protect and perfect the mechanism of free and open market and a 
national market system, and in general, to protect investors and the 
public interest.
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    \11\ 15 U.S.C. 78o-3.
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    NASD Regulation believes that the proposed rule change is 
consistent with the provisions of Section 15A(b)(6) of the Act in that 
conforming the margin rules of the self-regulatory organizations will 
prevent inconsistent requirements from being imposed upon broker/
dealers who are members of more than one self-regulatory organization.

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

    NASD Regulation does not believe that the proposed rule change will 
result in any burden on competition that is not necessary or 
appropriate in furtherance of the purposes of the Act, as amended.

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

    Written comments were neither solicited nor received.

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 reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve such 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 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 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 
NASD Regulation. All submissions should refer to the file number SR-
NASD-97-14 and should be submitted by April 30, 1997.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-8998 Filed 4-8-97; 8:45 am]
BILLING CODE 8010-01-M