[Federal Register Volume 63, Number 200 (Friday, October 16, 1998)]
[Notices]
[Pages 55667-55668]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-27823]



[[Page 55667]]

-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40529; File No. SR-NYSE-98-16]


Self-Regulatory Organizations; Order Approving a Proposed Rule 
Change by the New York Stock Exchange, Inc., Relating to Margin 
Requirements for Exempted Borrowers and Good Faith Accounts

October 7, 1998.

I. Introduction

    Pursuant to Section 19(b)(1)of the Securities Exchange Act of 1934 
(``Act''),1 and Rule 19b-4 thereunder,2 the New 
York Stock Exchange, Inc. (``NYSE'' or ``Exchange'') filed with the 
Securities and Exchange Commission (``SEC'' or ``Commission'') a 
proposal to amend NYSE rule 431, ``Margin Requirements,'' to 
accommodate certain recent changes to the federal margin requirements. 
In March 1998, the Commission originally approved the proposed changes 
on a temporary basis until July 27, 1998.3 The NYSE's 
current proposal request permanent approval of the changes the 
Commission approved on a temporary basis in the March Approval Order. 
On July 24, 1998, the NYSE amended its current proposal to request 
accelerated approval of the proposal for six months, or until the 
Commission approves the changes on a permanent basis.4 On 
July 27, 1998, the Commission approved the portion of the current 
proposal that requests accelerated approval of the proposal for six 
months, until January 22, 1999, or until the Commission approves the 
changes on a permanent basis, whichever occurs first.5 The 
Partial Approval Order, which appeared in the Federal Register on 
August 3, 1998, also solicited comment on the NYSE's request for 
permanent approval of the proposal. No comments were received regarding 
the proposal. This order approves the NYSE's proposal on a permanent 
basis.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 39813 (March 27, 
1998), 63 FR 16849 (April 6, 1998) (order approving File No. SR-
NYSE-98-08) (``March Approval Order'').
    \4\ See Letter from James E. Buck, Senior Vice President and 
Secretary, NYSE, to Richard C. Strasser, Assistant Director, 
Division of Market Regulation (``Division''), Commission, dated July 
23, 1998 (``Amendment No. 1''). In addition, Amendment No. 1 
modifies the proposal to: (1) clarify that the proposal amends the 
definition of ``customer'' in NYSE Rule 431(a)(2) to codify the 
Exchange's position that exempted borrowers will remain exempt from 
the provisions of NYSE Rule 431; and (2) correct a reference in NYSE 
Rule 431(a)(2) to the Board of Governors of the Federal Reserve 
System (``FRB'') Subsequently, the NYSE confirmed that the Exchange 
was seeking to extend the changes to NYSE rule 431 that were 
approved in the March Approval Order for six months or until the 
Commission approves the changes on a permanent basis, whichever 
occurs first. Telephone conversation between Mary Anne Furlong, 
Attorney, NYSE, and Yvonne Fraticelli, Attorney, Division, 
Commission, on July 27, 1998.
    \5\ See Securities Exchange Act Release No. 40266 (July 27, 
1998), 63 FR 41310 (August 3, 1998) (``Partial Approval Order'').
---------------------------------------------------------------------------

II. Description of the Proposal

    In January 1998 the FRB amended Regulation T, which governs initial 
extensions of credit to customers and broker-dealers.6 Among 
other things, these amendments established a ``good faith'' account, 
which can be used for transactions in non-equity 
securities.7 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.
---------------------------------------------------------------------------

    \6\ See Docket Nos. R-905, R-0923, and R-0944, 63 FR 2806 
(January 16, 1998).
    \7\ 12 CFR 220.6.
---------------------------------------------------------------------------

Good Faith Accounts

    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).\8\ As 
is currently the case, cash accounts subject to Regulation T will not 
be the subject to the overall NYSE Rule 431 requirements, but in 
certain cases will be covered by certain provisions of that rule. In 
this regard, as the NYSE notes, NYSE Rule 431 requirements will 
continue to apply to cash account transactions in exempted securities 
(NYSE Rule 431(e)(2)(F)); for certain options (NYSE Rule 431(f)(2)(M)); 
and for ``when issued'' and ``when distributed'' securities (NYSE Rule 
431(f)(3)(B)).
---------------------------------------------------------------------------

    \8\ 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.
---------------------------------------------------------------------------

Exempted Borrowers

    In the Regulation T amendments adopted in January 1998, the FRB 
also established a class of borrowers that is 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.'' \9\ The NYSE 
historically has not applied the requirements of NYSE Rule 431 to 
member organization accounts, except for transactions in the 
proprietary accounts of registered broker-dealers that are carried by a 
member organization. In this regard, NYSE Rule 431(e)(6) provides that 
a member organization may carry the proprietary account of another 
registered broker-dealer upon a margin basis that 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. In 
addition, NYSE Rule 431(e)(6) requires that the amount of any 
deficiency between the equity in the proprietary account and the margin 
required under NYSE Rule 431 be deducted in computing the net capital 
of the member carrying the proprietary account.
---------------------------------------------------------------------------

    \9\ 12 CFR 220.2.
---------------------------------------------------------------------------

    The NYSE believes that exempted borrowers would remain exempt from 
the requirements of NYSE Rule 431, and the Exchange proposes to amend 
the definition of ``customer'' in NYSE Rule 431(a)(2) to codify the 
Exchange's position that such borrowers are exempt from NYSE Rule 
431.\10\ Specifically, the NYSE proposes to amend NYSE Rule 431(a)(2) 
to exclude from the definition of ``customer'' an ``exempted borrower'' 
as defined by Regulation T of the FRB, except for the proprietary 
account of a broker-dealer carried by a member pursuant to NYSE Rule 
431(e)(6).\11\
---------------------------------------------------------------------------

    \10\ See Amendment No. 1, supra note 4.
    \11\ Specifically, NYSE Rule 431(a)(2), as amended, excludes 
from the definition of ``customer'' (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, except for the 
proprietary account of a broker-dealer carried by a member 
organization pursuant to NYSE Rule 431(e)(6).
---------------------------------------------------------------------------

    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. 
Accordingly, the requirement in NYSE Rule 431(e)(6) that members adhere 
to the requirements of Regulation T will not apply to the proprietary 
accounts of exempted borrowers. However, for safety and soundness 
purposes, the proprietary accounts of a broker-dealer that are carried 
or cleared by another broker-dealer member organization will remain

[[Page 55668]]

subject to the NYSE Rule 431(e)(6) equity requirements, which prohibit 
a member from carrying a proprietary account in a deficit equity 
condition and require that the amount of any deficiency between the 
equity maintained in the proprietary account and the margin required by 
NYSE Rule 431 be deducted in computing the net capital of the member 
carrying the proprietary account.

III. Discussion

    After careful review, the Commission finds that the proposed rule 
change is consistent with the Act and the rules and regulations 
thereunder applicable to a national securities exchange and, in 
particular, Section 6(b)(5) of the Act,\12\ in that it is 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.\13\
---------------------------------------------------------------------------

    \12\ 15 U.S.C. 78f(b)(5).
    \13\ In approving this portion of the proposal, the Commission 
has considered the proposal's impact on efficiency, competition, and 
capital formation. 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

    Specifically, the Commission finds, as it has concluded 
previously,\14\ 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 adopted under Regulation 
T. Although 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, 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.
---------------------------------------------------------------------------

    \14\ See March Approval Order, supra note 3, and Partial 
Approval Order, supra note 5.
---------------------------------------------------------------------------

    In addition, the Commission believes that it is appropriate for the 
NYSE to revise the definition of ``customer'' in NYSE Rule 431(a)(2) to 
codify the Exchange's position that exempt borrowers will remain exempt 
from the requirements of NYSE Rule 431, except for the proprietary 
account of a broker-dealer carried by a member pursuant to NYSE Rule 
431(e)(6). The Commission believes that it is appropriate for the NYSE 
to continue to apply the equity requirements of NYSE Rule 431(e)(6) to 
the proprietary accounts of introducing broker-dealers that qualify as 
``exempted borrowers'' under Regulation T if these accounts are carried 
by another Exchange member. By continuing to apply the equity 
requirements of NYSE Rule 431(e)(6) to these proprietary accounts, the 
Commission believes that the proposal will help to ensure that these 
accounts contain adequate margin, thereby protecting investors and the 
public interest.

IV. Conclusion

    It is therefore, ordered, pursuant to Section 19(b)(2) of the 
Act,\15\ that the proposed rule change (SR-NYSE-98-16) is approved on a 
permanent basis.

    \15\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\16\
---------------------------------------------------------------------------

    \16\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-27823 Filed 10-15-98; 8:45 am]
BILLING CODE 8010-01-M