[Federal Register Volume 63, Number 150 (Wednesday, August 5, 1998)]
[Notices]
[Pages 41882-41884]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-20870]


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SECURITIES AND EXCHANGE COMMISSION

[(Release No. 34-40278; File No. SR-NYSE-98-14)]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the New York Stock Exchange, Inc. Relating to Margin 
Requirements

July 29, 1998.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act''),\1\ notice is hereby given that on April 28, 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 the NYSE. 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).
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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 revise the margin requirements for non-equity securities and to 
expand the types of non-equity securities eligible for exempt account 
treatment. Specifically, the NYSE proposes to revise NYSE Rule 431 to: 
(1) provide that the margin requirement for highly rated foreign 
sovereign debt securities will be the amounts specified currently in 
NYSE Rule 431(e)(2)(A) for U.S. debt securities,\2\ (2) reduce the 
margin for exempted securities other than U.S. debt securities from 15% 
to 7% of the current market value (NYSE Rule 431(e)(2)(B)); and (3) 
reduce the margin for investment grade debt securities from 20% to 10% 
of the current market value (NYSE Rule 431(e)(2)(C)(i)). The margin for 
all other listed non-equity securities, and for all other marginable 
non-equity securities, will remain at 20% of the current market value 
or 7% of the principal amount, whichever is greater. In addition, the 
NYSE proposes several changes with regard to exempt accounts. 
Specifically, the NYSE proposes to: (1) modify the definition of 
``exempt account;'' (2) require no margin for exempt account 
transactions involving mortgage-related securities and major foreign 
sovereign debt securities (NYSE Rule 431(e)(2)(F)); and (3) require 
margin equal to 0.5% of current market value for exempt account 
transactions involving highly rated foreign debt securities and margin 
equal to 3% of current market value for exempt account transactions 
involving all other investment grade debt securities (proposed NYSE 
Rule 431(e)(2)(G)).\3\ The NYSE also proposes to adopt NYSE Rule 
431(e)(2)(H), which will limit the amount of uncollected marked to 
market losses which may be deducted from a member organization's net 
capital.
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    \2\ The margin required for U.S. government obligations under 
NYSE Rule 431(e)(2)(A) varies according to the length of time to 
maturity.
    \3\ The text of proposed NYSE Rule 431(e)(2)(G)(i) indicates 
that the required margin for exempt account transactions involving 
highly rated foreign sovereign debt will be .5% of current market 
value. However, in the portion of the filing describing the proposed 
rule change, the NYSE indicates that the proposed margin level for 
exempt account transactions involving highly rated foreign sovereign 
debt will be .05% of current market value. The NYSE clarified that 
the proposed margin requirement for these securities is .5% of 
current market value. Telephone conversation between Donald van 
Weezel, Managing Director, Regulatory Affairs, NYSE, and Yvonne 
Fraticelli, Attorney, Division of Market Regulation, Commission, on 
May 20, 1998.
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    Copies of the proposed rule change are available at the NYSE 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 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 IV below. The NYSE has prepared summaries, set forth in Sections 
A, B, the 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
    The NYSE proposes to amend NYSE Rule 431 to revise the margin 
requirements for non-equity securities and to expand the types of non-
equity securities eligible for exempt account treatment. According to 
the NYSE, Regulation T of the Board of Governors of the Federal Reserve 
System (``FRB''), which establishes initial margin requirements, 
currently provides that transactions in non-equity securities are 
subject to ``good faith'' requirements when done in a margin account 
and have no FRB margin requirements when done in a ``good faith'' 
account. Therefore, the maintenance margin requirements of NYSE Rule 
431 are particularly important because they provide ongoing safety and 
soundness levels for positions maintained in customers' accounts.
    The NYSE proposes to revise NYSE Rule 431 to: (1) provide that the 
margin for highly rated foreign sovereign debt securities \4\ will 
equal the margin required for U.S. debt secuties under NYSE Rule 
431(e)(2)(A); \5\ (2) reduce the margin for exempted securities other 
than U.S. debt securities from 15% to 7% of the current market value 
(NYSE Rule 431(e)(2)(B)); and (3) reduce the margin for investment 
grade debt securities \6\ from 20% to 10% of the

[[Page 41883]]

current market value (NYSE Rule 431(e)(2)(C)(i)). The margin for all 
other listed non-equity securities,\7\ and for all other marginable 
non-equity securities \8\ will remain at 20% of the current market 
value or 7% of the principal amount, whichever is greater (NYSE Rule 
431(e)(2)(C)(ii).
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    \4\ The NYSE's proposal defines ``highly rated foreign sovereign 
debt securities'' as debt securities (including major foreign 
sovereign debt securities) issued or guaranteed by the government of 
a foreign country, its provinces, states or cities, or a 
supranational entity, if at the time of the extension of credit 
[regarding] (sic) the issue, the issuer or guarantor, or any other 
outstanding obligation of the issuer or guarantor ranked junior to 
or on a parity with the issue or the guarantee is assigned a rating 
(implicitly or explicitly) in one of the top two rating categories 
by at least one nationally recognized statistical rating 
organization. See proposed NYSE Rule 431(a)(9).
    \5\ NYSE Rule 431(e)(2)(A) establishes the following margin 
requirements for U.S. government debt: (1) 1% of the current market 
value for obligations with less than one year to maturity; (2) 2% of 
the current market value for obligations with one year but less than 
three years to maturity; (3) 3% of the current market value for 
obligations with three years but less than five years to maturity; 
(4) 4% of the current market value for obligations with five years 
but less ten years to maturity; (5) 5% of the current market value 
for obligations with ten years but less than 20 years to maturity; 
and (6) 6% of the current market value for obligations with 20 years 
or more to maturity.
    \6\ The proposal defines investment grade debt securities as any 
debt securities (including those issued by the government of a 
foreign country, its provinces, states or cities, or a supranational 
entity), if at the time of the extension of credit [regarding] (sic) 
the issue, the issuer or guarantor, or any other outstanding 
obligation of the issuer or guarantor ranked junior to or on a 
parity with the issue or the guarantee is assigned a rating 
(implicitly or explicity) in one of the top four rating categories 
by at least one nationally recognized statistical rating 
organization.
    \7\ The proposal defines listed non-equity securities to mean 
any non-equity securities that: (1) are listed on a national 
securities exchange; or (2) have unlisted trading privileges on a 
national securities exchange. See proposed NYSE Rule 431(a)(15).
    \8\The proposal defines other marginable non-equity secuities as 
(1) any debt securities not traded on a national securities exchange 
that meet all of the following requirements: (a) at the time of the 
original issue, a principal amount of not less than $25,000,000 of 
the issue was outstanding; (b) the issue was registered under 
Section 5 of the Securities Act of 1933 and the issuer either files 
periodic reports pursuant to the Act or is an insurance company 
under Section 12(g)(2)(G) of the Act; and (c) at the time of the 
extension of credit, the creditor has a reasonable basis for 
believing that the issuer is not in default on interest or principal 
payments; or (2) any private pass-through securities (not guaranteed 
by a U.S. government agency) that meet all of the following 
requirements: (a) an aggregate principal amount of not less than 
$25,000,000 was issued pursuant to a registration statement filed 
with the Commission under Section 5 of the Securities Act of 1933; 
(b) current reports relating to the issue have been filed with the 
Commission; and (c) at the time of the credit extension, the 
creditor has a reasonable basis for believing that mortgage 
interest, principal payments, and other distributions are being 
passed through as required and that the servicing agent is meeting 
its material obligations under the terms of the offering. See 
proposed NYSE Rule 431(a)(16).
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    The NYSE states that the proposed amendments to NYSE Rule 431 will 
provide for margin requirements on non-equity securities commensurate 
with the risks associated with positions in such securities held by 
customers. According to the NYSE, the proposed margin percentages for 
retail customers for investment grade debt securities and municipal 
securities will be comparable to the highest haircut percentages 
provided in the SEC's net capital rule \9\ for proprietary positions in 
similar securities.
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    \9\ See SEC Rule 15c3-1.
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    The NYSE notes that NYSE Rule 431 currently contains margin 
requirements specifically addressing transactions with exempt accounts 
involving exempt securities and mortgage-related securities. These 
requirements are lower than those applicable to transactions in such 
securities with accounts other than exempt accounts. In NYSE Rule 
431(a)(13), the NYSE proposes to define ``exempt account'' to mean a 
member organization, non-member broker-dealer, ``designated account,'' 
or any person having a net worth of at least $40 million. The proposal 
increases the financial threshold for a customer to be considered an 
exempt account from $16 to $40 million. The NYSE also proposes to 
revise its definition of designated account.\10\
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    \10\ Specifically, the NYSE proposes to revise the current 
definition of ``designated account'' in NYSE Rule 431(a)(3) to 
indicate that a designated account means the account of: (1) a bank, 
as defined in Section 3(a)(6) of the Act; (2) a savings association, 
as defined in Section 3(b) of the Federal Deposit Insurance Act, the 
deposits of which are insured by the Federal Deposit Insurance 
Corporation; (3) an insurance company, as defined in Section 
2(a)(17) of the Investment Company Act of 1940; (4) an investment 
company registered with the SEC under the Investment Company Act of 
1940; (5) a state or a political subdivision thereof; or (6) a 
pension or profit sharing plan subject to ERISA or of an agency of 
the United States or of a state or a political subdivision thereof. 
NYSE Rule 431(a)(3) currently defines ``designated account'' as the 
account of a bank, trust company, insurance company, investment 
trust, state or political subdivision thereof, charitable or 
nonprofit educational institution regulated under the laws of the 
United States or any state, or pension or profit sharing plan 
subject to ERISA or of an agency of the United States or of a state 
or a political subdivision thereof.
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    In proposed NYSE Rule 431(e)(2)(G), ``Transactions with Exempt 
Accounts Involving Highly Rated Foreign Sovereign Debt Securities and 
Investment Grade Debt Securities,'' the NYSE proposes to provide lower 
margin requirements for exempt account transactions in highly rated 
foreign sovereign debt, investment grade foreign sovereign debt, and 
other investment grade non-equity securities. According to the NYSE, 
the proposed margin requirements recognize both the quality of the 
securities and the creditworthiness of the customer and, accordingly, 
are intended to maintain reasonable safety and soundness standards. For 
transactions in these types of securities by exempt accounts, member 
organizations will be required to either take net capital charges or to 
collect margin equal to marked to market losses and any percentage 
requirements under the rule. The percentage requirements will be:

3% of current market value for all investment grade corporate debt and 
for foreign sovereign debt in the lower two investment grade 
categories; and
.5% of current market value for foreign sovereign debt in the second 
highest investment grade category (i.e., highly rated foreign sovereign 
debt securities).

    Under revised NYSE Rule 431(e)(2)(F), ``Transactions with Exempt 
Accounts Involving Certain `Good Faith' Securities,'' the highest grade 
foreign sovereign debt security (i.e., major foreign sovereign debt 
securities) \11\ and mortgage-related securities will be accorded the 
same treatment as U.S. Government securities in that no margin will be 
required and marked to the market losses need not be collected, subject 
to the limits in proposed NYSE Rule 431(e)(2)(H), ``Limits on Net 
Capital Deductions for Exempt Accounts.'' Currently, investment grade 
foreign sovereign debt is treated the same as marginable corporate 
debt, which requires 20% margin.
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    \11\ The proposal defines ``major foreign sovereign debt 
securities'' a any debt securities issued or guaranteed by the 
government of a foreign country or a supranational entity, if, at 
the time of the extension of credit [regarding] (sic) the issuer or 
guarantor, or any other outstanding obligation of the issuer or 
guarantor ranked junior to or on a parity with the issue or the 
guarantee is assigned a rating (implicitly or explicitly) in one of 
the top four rating categories by at least one nationally recognized 
statistical rating organization. See proposed NYSE Rule 431(a)(11).
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    Proposed NYSE Rule 431(e)(2)(H) will impose limitations on the 
amount of any uncollected marked to market losses which are being 
deducted from a member organizations' net capital under proposed NYSE 
Rule 431(e)(2)(F) and 431(e)(2)(G). The limits will be established at 
5% of Tentative Net Capital (Net Capital before deductions on 
securities) for each exempt account, and 25% of Tentative Net Capital 
for all exempt accounts combined. When marked to market losses 
exceeding these limits continue to exist on the fifth business day 
after they were incurred, the member organization must provide the 
Exchange with written notification and may not enter into any new 
transactions that would result in an increase in the amount of the 
excess.
    Finally, the NYSE's proposal contains a new definition section, 
which, among other things, specifically defines the following types of 
non-equity securities:

``highly rated foreign sovereign debt securities'' (proposed NYSE Rule 
431(a)(9));
``investment grade debt securities'' (proposed NYSE Rule 431(a)(10));
``major foreign sovereign debt securities'' (proposed NYSE Rule 
431(a)(11));
``listed non-equity securities'' (proposed NYSE Rule 431(a)(15)); and
``other marginable non-equity securities'' (proposed NYSE Rule 
431(a)(16)).

    The defined terms categorize certain types of non-equity securities 
for purposes of prescribing the applicable margin requirements.
(2) Statutory Basis
    The NYSE believes that the proposed rule change is consistent with 
the requirements of Section 6(b)(5) of the Act, which provides that the 
rules of the

[[Page 41884]]

Exchange must be designed to promote just and equitable principles of 
trade and to protect the investing public. The NYSE believes that the 
proposed rule change is also consistent with the rules and regulations 
of 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.

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

    The Exchange believes that the proposed rule change will not impose 
any burden on competition that is not necessary or appropriate in 
furthermore 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

    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 by 
order approve such proposed rule change, or 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, 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, 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 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 submission should refer to file number SR-NYSE-98-14 and 
should be submitted by August 26, 1998.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\12\
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    \12\ 17 CFR 200.30-(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-20870 Filed 8-4-98 8:45am]
BILLING CODE 8010-01-M