[Federal Register Volume 63, Number 65 (Monday, April 6, 1998)]
[Notices]
[Pages 16849-16851]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-8924]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-39813; File No. SR-NYSE-98-08]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval to a Proposed Rule and Amendment No. 1 to 
the Proposed Rule Change by the New York Stock Exchange, Inc., Relating 
to Margin Requirements for Exempted Borrowers and Good Faith Accounts

March 27, 1998.
    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 March 11, 1998, the New York Stock Exchange, Inc. (``NYSE'' or 
``Exchange'') 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 he 
NYSE.\3\ The Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons. As discussed 
below, the Commission also is granting accelerated approval of the 
proposal for 120 days, until July 27, 1998.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ On March 23, 1998, the NYSE amended its proposal. See Letter 
from James E. Buck, Senior Vice President and Secretary, NYSE, to 
Richard C. Strasser, Division of Market Regulation, Commission, 
dated March 20, 1998 (``Amendment No. 1''). In Amendment No. 1, the 
NYSE modified its proposal to request temporary approval of the 
proposal for 120 days.
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I. Self Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The NYSE proposes to amend NYSE Rule 431, ``Margin Requirements,'' 
to apply the maintenance margin requirements of NYSE Rule 431 to good 
faith accounts and to provide that the proprietary accounts of 
introducing broker-dealers who are exempted borrowers under Regulation 
T \4\ will continue to be subject to NYSE Rule 431(e)(6). The NYSE has 
requested accelerated approval of the proposal for 120 days.\5\
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    \4\ 12 CFR 220. Regulation T, ``Credit by Brokers and Dealers,'' 
is administered by the Board of Governors of the Federal Reserve 
System (``FRB'') pursuant to Section 7 of the Act.
    \5\ See Amendment No. 1, supra note 3.
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    Proposed NYSE Rule 431, as amended, is attached as Exhibit A.

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 NYSE 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 V below. The NYSE 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 December 1997, the FRB adopted amendments to Regulation T, which 
governs initial extensions of credit to customers and broker-dealers. 
One significant Regulation T change established a ``good faith'' 
account which can be used for transactions in non-equity securities.\6\ 
Unlike transactions in a cash or margin account, transactions in the 
good faith account are not subject to the requirements of Regulation T 
with respect to initial margin and payment and liquidation time frames.
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    \6\ 12 CFR 220.6.
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    The NYSE believes that transactions in a good faith account raise 
the same safety and soundness concerns from a maintenance margin 
perspective as cash and margin account transactions. Accordingly, the 
NYSE proposes to amend NYSE Rule 431 so that transactions in all 
accounts of customers (except for cash accounts, as discussed below), 
including the new good faith account, will be subject to the current 
applicable maintenance margin requirements of NYSE Rule 431(c).\7\ As 
is currently the case, cash accounts subject to Regulation T will not 
be subject to the overall NYSE Rule 431 requirements, but in certain 
cases will be covered by specific rule provisions. In this regard, the 
NYSE notes that NYSE Rule 431 requirements currently apply to cash 
account transactions in exempted securities (NYSE Rule 341(e)(2)(F); 
for certain options (NYSE Rule 431(f)(2)(M)); and for ``when issued'' 
and ``when distributed'' securities (NYSE rule 341(f)(3)(B)).
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    \7\ NYSE Rule 431(c), as amended, will specify the margin that 
must be maintained in all customer accounts, except for cash 
accounts subject to Regulation T, unless a transaction in a cash 
account is subject to other provisions of NYSE Rule 431.

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[[Page 16850]]

    The FRB also established a classification of exempted borrowers 
which are exempt from Regulation T. An ``exempted borrower,'' as 
defined in Regulation T, is a broker-dealer ``a substantial portion of 
whose business consists of transactions with persons other than brokers 
or dealers.'' \8\ The NYSE currently does not apply the requirements of 
NYSE Rule 431 to member organization accounts except for transactions 
in the proprietary accounts of broker-dealers which are carried by a 
member organization. Specifically, NYSE Rule 431(e)(6) states that a 
member organization may carry the proprietary account of another 
broker-dealer upon a margin basis which is satisfactory to both parties 
provided the requirements of Regulation T are adhered to and the 
account is not carried in a deficit equity condition.
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    \8\ 12 CFR 220.2.
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    The NYSE believes that exempted borrowers should remain exempt from 
the requirements of NYSE Rule 431. However, under the new Regulation T 
definition of exempted borrower, the proprietary transactions of an 
introducing organization that qualifies as an exempted borrower (i.e., 
an organization that conducts a substantial public business) will not 
be subject to Regulation T. The proposed amendments to NYSE Rule 
431(a)(2) will exclude exempted borrowers from the definition of 
customer. However, for safety and soundness purposes, proprietary 
accounts that are carried or cleared by a member organization will 
remain subject to the NYSE Rule 431 equity requirements. Accordingly, 
NYSE Rule 431(a)(2), as amended, will state that the term ``customer'' 
will not include an ``exempted borrower'' as defined in Regulation T, 
except for the proprietary account of a broker-dealer carried by a 
member organization pursuant to NYSE Rule 431(e)(6).
2. Statutory Basis
    The NYSE believes that the proposed rule change is consistent with 
the requirements of Section 6(b)(5) of the Act in that it is designed 
to promote just and equitable principles of trade and to protect the 
investing public. The NYSE believes that the proposed rule change also 
is consistent with the rules and regulations of the FRB in that it is 
designed to prevent the excessive use of credit for the purchase or 
carrying of securities, pursuant to Section 7(a) of the Act.

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

    The NYSE believes that the proposed rule change will not 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

    No written comments were solicited or received.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    The NYSE has requested that the Commission find good cause pursuant 
to Section 19(b)(2) of the Act for approving the proposed amendments to 
NYSE Rule 431 for 120 days \9\ prior to the 30th day after publication 
of the proposed rule change in the Federal Register. The NYSE states 
that accelerated approval of the proposal will ensure that the 
appropriate requirements under NYSE Rule 431 are in place when the 
Regulation T amendments become effective on April 1, 1998. According to 
the NYSE, approval of the proposed amendments to NYSE Rule 431 as of 
April 1, 1998, is necessary so that transactions in the new good faith 
account and in the proprietary accounts of non-carrying/clearing member 
organizations will be subject to NYSE Rule 431 margin requirements.
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    \9\ See Amendment No. 1, supra note 3.
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IV. Commission's Findings and Order Granting Accelerated Approval 
of the Proposed Rule Change

    After careful review of the NYSE's proposal and for the reasons 
discussed below, the Commission finds that the proposed rule change is 
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 Section 6(b) of the 
Act.\10\ Specifically, the Commission finds that the proposal is 
consistent with the Section 6(b)(5) requirements that the rules of an 
exchange be designed to remove impediments to and perfect the mechanism 
of a free and open market and a national market system, and, in 
general, to protect investors and the public interest.\11\
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    \10\ 15 U.S.C. 78f(b).
    \11\ In approving the rule, the Commission has considered the 
proposed rule's impact on efficiency, competition, and capital 
formation. 15 U.S.C. 78c(f).
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    Specifically, the Commission finds that it is appropriate for the 
NYSE to apply the existing maintenance margin requirements of NYSE Rule 
431(c) to transactions in the new ``good faith'' account permitted 
under Regulation T. The NYSE notes that the non-equity transactions 
permitted in the good faith account will not be subject to the initial 
margin requirements and payment and liquidation time frames of 
Regulation T. However, as the NYSE notes, transactions in the good 
faith account may raise the same safety and soundness concerns with 
regard to maintenance margin as do transactions in cash and margin 
accounts. Accordingly, the Commission believes that it is appropriate 
for the NYSE to apply the existing maintenance margin requirements 
specified in NYSE Rule 431(c) to transactions in the good faith 
account. The Commission believes that applying the maintenance margin 
requirements of NYSE Rule 431(c) to transactions in the good faith 
account will protect investors and the public interest and help to 
maintain fair and orderly markets by ensuring that good faith accounts 
contain adequate margin reserves.
    NYSE Rule 431(e)(6) states that a member may carry the proprietary 
account of another registered broker-dealer upon a margin basis 
satisfactory to both parties, provided the requirements of Regulation T 
are adhered to and the account is not carried in a deficit equity 
condition. The Commission believes that it is appropriate for the NYSE 
to amend the definition of ``customer'' in NYSE Rule 431(a)(2) so that 
NYSE Rule 431(e)(6) will continue to apply to the proprietary accounts 
of introducing broker-dealers that qualify as `'exempted borrowers'' 
under Regulation T. By continuing to apply NYSE Rule 431(e)(6) to these 
accounts, the Commission believes that the proposal will help to ensure 
that these accounts contain adequate margin, thereby protecting 
investors and the public interest.
    The Commission finds good cause for approving the proposed rule 
change prior to the thirtieth day after the date of publication of the 
notice thereof in the Federal Register in order to ensure that the 
proposed changes are effective by April 1, 1998, when the Regulation T 
amendments concerning good faith accounts and exempted borrowers become 
effective. The Commission believes that the proposed changes will help 
to ensure adequate margin requirements for good faith accounts and for 
introducing broker-dealers that qualify as exempted borrowers. 
Accordingly, the Commission finds that

[[Page 16851]]

it is consistent with Sections 6(b) and 19(b)(2) of the Act to approve 
the proposal on an accelerated basis.
    The Commission also finds good cause for approving Amendment No. 1 
to the proposal on an accelerated basis. In Amendment No. 1, the NYSE 
modified its proposal to provide that the proposal will be effective 
for 120 days. The Commission believes that it is appropriate to provide 
for temporary approval of the proposal for 120 days in order to provide 
for a full notice and comment period when the NYSE requests permanent 
approval of the changes to NYSE Rule 431. Therefore, the Commission 
believes that Amendments No. 1 is consistent with Sections 6(b) and 
19(b)(2) of the Act and Amendment No. 1 is approved on an accelerated 
basis.

V. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. 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. Sec. 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 
NYSE. All submissions should refer to File No. SR-HYSE-98-08 and should 
be submitted by April 27, 1998.

VI. Conclusion

    It Is Therefore Ordered, pursuant to Section 19(b)(2) of the 
Act,\12\ that the proposed rule change (SR-NYSE-98-08) is approved for 
120 days, until July 27, 1998.

    \12\ 15 U.S.C. 78s(b)(2).
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    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\13\
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    \13\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.

Exhibit A

    Additions are italicized; deletions are bracketed.

Proposed Amendments to NYSE Rule 431

    Rule 431(a)(1) unchanged.
    (a)(2) The term ``customer'' means any person for whom securities 
are purchased or sold or to whom securities are purchased or sold 
whether on a regular way, when issued, delayed or future delivery 
basis. It will also include any person for whom securities are held or 
carried and to or for whom a member organization extends, arranges or 
maintains any credit. The term will not include the following: (a) a 
broker or dealer from whom a security has been purchased or to whom a 
security has been sold for the account of the member organization or 
its customers[.], or (b) an ``exempted borrower'' as defined by 
Regulation T of the Board of Governors of the Federal Reserve Board 
(``Regulation T''), except for the proprietary account of a broker-
dealer carried by a member organization pursuant to Section (e)(6) of 
this Rule.
    (a)(3) through (b)(4) unchanged.
    (c) Maintenance Margin.
    The margin which must be maintained in [margin] all accounts of 
customers, except for cash account subject to Regulation T unless a 
transaction in a cash account is subject to other provisions of this 
rule, 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 
among 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, or 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.

[FR Doc. 98-8924 Filed 4-3-98; 8:45 am]
BILLING CODE 8010-01-M