[Federal Register Volume 63, Number 4 (Wednesday, January 7, 1998)]
[Notices]
[Pages 899-900]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-291]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39497; File No. SR-NYSE-97-28]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the New York Stock Exchange, Inc. Amending Exchange Rule 431 
to Establish Margin and Net Capital Requirements for Joint Back Office 
Arrangements

December 29, 1997.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on October 2, 1997, the New 
York Stock Exchange, Inc. (``Exchange'' or ``NYSE'') filed with the 
Securities and Exchange Commission (``Commission'') the proposed rule 
change, as described in Items I, II, and III below, which Items have 
been prepared by the Exchange. The Commission is publishing this notice 
to solicit comments on the proposed rule change from interested 
parties.
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    \1\ 15 U.S.C. 78s(b)(1).
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange seeks to amend Exchange Rule 431, ``Margin 
Requirements.'' The modifications relate to: (a) joint back office 
(``JBO'') arrangements, (b) margin requirements for broker-dealer 
accounts, (c) margin requirements for specialists' and market makers' 
accounts, and (d) control and restricted securities.
    The text of the proposed rule change is available at the Office of 
the Secretary, the Exchange, 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 Exchange 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. The Exchange 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
    In April, 1996, the Exchange established the Rule 431 Committee 
(``the Committee'') to review all aspects of Rule 431 and make 
recommendations to the Exchange in the wake of recent changes to 
federal margin regulations and changing industry conditions. The 
Committee created various subcommittees to review specific provisions 
of Rule 431 utilizing the expertise of industry representatives 
knowledgeable in the application of Rule 431. As a result of the 
efforts of the ``Control Stock'' and ``Joint Back Office'' 
subcommittees, and reviews by the Committee and Exchange staff, the 
Exchange Board approved amendments to Rule 431 as set forth below.
(a) JBO Arrangements
    Regulation T, issued by the Board of Governors of the Federal 
Reserve System (``FRB''), permits a broker-dealer to ``effect or 
finance transactions of any of its owners if the [broker-dealer] is a 
clearing and serving broker or dealer owned jointly or individually by 
other [broker-dealers].'' \2\ The proposed rule change would provide 
certain regulatory requirements for establishing and maintaining such 
JBO arrangements. Carrying/clearing broker-dealer forming a JBO would 
be required to: (i) provide written notification to the Exchange prior 
to establishing a JBO, (ii) maintain minimum tentative net capital \3\ 
of $25 million, or maintain minimum net capital of $10 million if 
engaged in the primary business of clearing options market-maker 
accounts,\4\ (iii) maintain a written risk analysis methodology for 
assessing the amount of credit extended to participating broker-
dealers, and (iv) deduct from net capital, the ``haircut'' requirements 
pursuant to the Commission's Net Capital Rule (``Rule 15c3-1'') \5\ in 
excess of the equity maintained in the accounts of participating 
broker-dealers.
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    \2\ 12 CFR 220.11. Regulation T is titled ``Credit By Brokers 
and Dealers'' and was issued by the FRB pursuant to the Act.
    \3\ As discussed in the Exchange's Interpretation Handbook, the 
term ``tentative net capital'' generally refers to net capital 
before the application of ``haircuts'' (infra note 5) and undue 
concentration charges on securities and options positions. See NYSE 
Interpretation Handbook, Section I(c)(2)(vi)(M)(04), ``Tentative net 
Capital.''
    \4\ Under the proposed rule change, clearance of option market 
maker accounts would be deemed a broker-dealer's primary business if 
a minimum of 60% of the aggregate deductions in the ratio of gross 
options market maker deductions to net capital (including gross 
deductions for JBO participant accounts) are options market maker 
deductions.
    \5\ 17 CFR 240.15c3-1 et seq., ``Net Capital Requirements for 
Brokers or Dealers.'' Rule 15c3-1 requires a broker-dealer to reduce 
its net worth by certain percentages, known as ``haircuts,'' of the 
market value of its securities positions.
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    Furthermore, under the proposal JBO participants must be registered 
broker-dealers subject to Rule 15c3-1, and will be required to maintain 
an ownership interest in the JBO pursuant to Regulation T. Exclusive of 
their ownership interest in the JBO arrangement, JBO participants must 
maintain a minimum liquidating equity of $1 million. If the liquidating 
equity falls below $1 million, the JBO participant must eliminate the 
deficiency within five business days or become subject to the margin 
requirements under other provisions of Exchange Rule 431.\6\
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    \6\ The Exchange believes that in order to establish an 
effective, industry-wide regulatory scheme for JBO arrangements, the 
other self-regulatory organizations should adopt the requirements in 
the proposed rule change that relate to JBO arrangements.
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(b) Margin Requirements for Broker-Dealer Accounts
    Currently, the amount of any deficiency between the equity 
maintained in the proprietary account carried for another broker-dealer 
and the maintenance margin required by Exchange Rule 431(c)(1) (i.e., 
25% of the current market value of securities ``long'' in the account) 
is deducted in computing the net capital of the carrying member 
organization. In order for introducing broker-dealers to receive the 
same treatment as proposed for JBO

[[Page 900]]

participants, the amendments would compute the deduction to the 
carrying member organization's net capital based upon the haircut 
requirements of Rule 15c3-1 (i.e., 15% of the market value for long 
positions) \7\ rather than the currently required 25%.
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    \7\ 17 CFR 240.15c3-1(c)(2)(vi)(J).
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(c) Margin Requirements for Specialists' and Market Makers' Accounts
    Likewise, the amount of any deficiency between the equity in the 
account carried for an ``approved specialist or market maker'' \8\ and 
the 25% maintenance margin required by Exchange Rule 431(c)(1) is 
deducted in computing the net capital of the carrying member 
organization. Similar to the contemplated amendments relating to the 
margin requirements for broker-dealer accounts, the proposed rule 
change would compute the deduction to the carrying member 
organization's net capital based upon the haircut requirements of Rule 
15c3-1 (i.e., 15%) rather than the presently mandated 25%.
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    \8\ Exchange Rule 431(e)(5)(A) defines the term ``approved 
specialist or market maker'' as either: (1) a specialist or market 
maker, who is deemed a specialist for all purposes under the 
Securities Exchange Act of 1934 and who is registered pursuant to 
the rules of a national securities exchange; or (ii) an OTC market 
maker or third market maker, who meets the requirements of Section 
220.12(d) of Regulation T.
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    The same modification would be made to the margin provision 
governing joint accounts carried by member organizations in which the 
member organizations participate. If the equity maintained in the 
account by the other participants is deficient, the proposal would 
require the carrying member organization to compute the deduction to 
its net capital based upon the haircut requirements of Rule 15c3-1 
(i.e., 15%) rather than the margin requirements of Exchange Rule 
431(c)(1).
(d) Control and Restricted Securities
    Currently, Exchange Rule 431(e)(8)(C)(iv) sets forth a 
``Concentration Reduction'' formula that establishes margin 
requirements for control and restricted securities based upon the 
percent of outstanding shares or the percent of average weekly volume. 
The Exchange believes the Concentration Reduction provision has the 
effect of imposing higher margin requirements on accounts that have 
greater collateral deposited. To eliminate what the Exchange views as 
an anomalous result, the proposed rule change would exclude ``excess 
securities'' \9\ from the calculations.
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    \9\ The term ``excess securities'' would be defined as the 
amount of securities, if any, by which the aggregate position in 
control and restricted securities of any one issue exceeds the 
aggregate amount of securities that would be required to support the 
aggregate credit extended on such control and restricted securities 
if the applicable margin requirement was 50%.
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    In addition, the proposed rule change would except from Exchange 
Rule 431(e)(8) all restricted securities saleable pursuant to Rule 
144(k),\10\ Rule 145(d)(2),\11\ or Rule 145(d)(3) \12\ under the 
Securities Act of 1933. Currently, only those restricted securities 
saleable by non-affiliates of the issuer pursuant to Rule 144(k), Rule 
145(d)(2), or Rule 145(d)(3) are excepted from Exchange Rule 431(e)(8). 
As a result, broker-dealers would be permitted to sell certain 
restricted securities in the event of a customer default pursuant to 
Rule 144(k) without being subject to the requirements of Exchange Rule 
431. Accordingly, those customer-owned, restricted securities saleable 
under Rule 144(k) would be subject to the same maintenance margin 
requirements that presently apply to ordinary stock (25%).
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    \10\ 17 CFR 230.144(k).
    \11\ 17 CFR 230.144(d)(2).
    \12\ 17 CFR 230.144(d)(3).
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    Finally, the proposed rule change would alter the calculation of a 
member firm's net capital with regard to extending credit to customers 
on control and restricted securities. The proposal would amend Exchange 
Rule 431(e)(8)(C)(ii) to provide that the ``greater of the aggregate 
credit agreed, in writing to be or actually extended to all customers 
on control and restricted securities of any one issue that exceeds 10% 
of the member organization's excess net capital shall be deducted from 
net capital for purposes of determining a member organization's status 
under Rule 326.''
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with the requirements of Section 6(b)(5) of the Act \13\ in that it is 
designed to promote just and equitable principles of trade, and to 
protect investors and the public interest. The Exchange further 
believes that the proposed rule change is consistent with the rules and 
regulations promulgated by the FRB for the purpose of preventing the 
excessive use of credit for the purchase or carrying of securities, 
pursuant to Section 7(a) of the Act.\14\
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    \13\ 15 U.S.C. 78f(b)(5).
    \14\ 15 U.S.C. 78g(a).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any inappropriate burden on competition.

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

    The Exchange did not solicit or receive written comments with 
respect to the proposed rule change.

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 reason for so finding, or (ii) as to 
which the Exchange consents, the Commission will:
    (A) By order approve the 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 submissions, 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 persons, 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 Section, 450 Fifth Street, N.W., 
Washington, D.C. 20549. Copies of such filing will also be available 
for inspection and copying at the principal office of the Exchange. All 
submissions should refer to File No. SR-NYSE-97-28 and should be 
submitted by January 28, 1998.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\15\
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    \15\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-291 Filed 1-6-98; 8:45 am]
BILLING CODE 8010-01-M