[Federal Register Volume 63, Number 233 (Friday, December 4, 1998)]
[Notices]
[Pages 67164-67165]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-32327]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40710; File No. SR-PCX-97-49]


Self-Regulatory Organizations; Notice of Filing of Amendment No. 
1 to Proposed Rule Change by the Pacific Exchange, Inc. Relating to 
Capital and Margin Requirements for Joint Back Office Arrangements

November 25, 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 October 8, 1998, the Pacific Exchange, Inc. (``Exchange'' or 
``PCX'') filed with the Securities and Exchange Commission 
(``Commission'') Amendment No. 1 to 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 Amendment No. 1 to 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

    The Exchange seeks to amend its proposed rule change regarding 
Joint Back Office (``JBO'') arrangements to: (i) reduce the net capital 
requirements for certain member organizations carrying and clearing, or 
carrying JBO accounts from $10 million to $7 million; (ii) add 
notification requirements for JBO clearing firms in the event their 
tentative net capital or net capital fall below prescribed levels; and 
(iii) require member organizations carrying JBO accounts to margin such 
accounts in accordance with customer margin requirements if the JBO 
participants fail to maintain minimum liquidating equity of $1 million 
in their JBO accounts for more than five business days.
    The text of the proposed rule change, as amended, 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
    a. Background. On December 18, 1997, the Exchange filed with the 
Commission a proposal establishing margin and net capital requirements 
for member organizations that carry and clear, or carry JBO accounts. 
Notice of the Exchange's proposal was issued on February 18, 1998.\3\ 
Under the proposal, a member organization that carries and clears, or 
carries JBO accounts would be required to maintain minimum tentative 
net capital of $25 million, except that a member organization whose 
primary business consisted of the clearance of options market-maker 
accounts could carry JBO accounts provided that it maintained minimum 
net capital of $10 million.
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    \3\ See Securities Exchange Act Release No. 39680 (Feb. 18, 
1998), 63 FR 9622 (Feb. 25, 1998).
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    The Exchange notes that its JBO rule filing is similar to the JBO 
rule filings submitted to the Commission by the New York Stock Exchange 
(``NYSE'') and the Chicago Board Options Exchange (``CBOE'').\4\ The 
NYSE and CBOE recently submitted amendments to their JBO rule filings 
which propose to reduce the capital requirements for JBO clearing firms 
from $10 million to $7 million; add notification requirements for JBO 
clearing firms in the event their tentative net capital or net capital 
falls below prescribed levels; and require the application of customer 
margin requirements to JBO participants if such participants do not 
maintain

[[Page 67165]]

sufficient equity in their JBO accounts.\5\ Amendment No. 1 to the 
Exchange's proposal is consistent with these revisions proposed by the 
NYSE and CBOE.
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    \4\ The NYSE's JBO filing, SR-NYSE-97-28, was filed with the 
Commission on October 2, 1997, and notice of its filing was issued 
on December 29, 1997. See Securities Exchange Act Release No. 39497 
(Dec. 29, 1997), 63 FR 899 (Jan. 7, 1998). The CBOE's JBO filing, 
SR-CBOE-97-58, was filed with the Commission on October 27, 1997, 
and notice of its filing was issued on December 10, 1997. See 
Securities Exchange Act Release No. 39418 (Dec. 10, 1997), 62 FR 
66154 (Dec. 17, 1997).
    \5\ The NYSE filed Amendment No. 1 to its JBO filing on May 21, 
1998, and Amendment No. 2 on September 28, 1998. Notice of Amendment 
Nos. 1 and 2 was issued on November 25, 1998. See Securities 
Exchange Act Release No. 40709 (Nov. 25, 1998). The CBOE filed 
Amendment No. 1 to its JBO filing on July 27, 1998. Notice of 
Amendment No. 1 was issued on November 25, 1998. See Securities 
Exchange Act Release No. 40708 (Nov. 25, 1998).
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    b. Amendment No. 1. The Exchange seeks to amend its JBO rule filing 
to allow a member organization to carry and clear, or carry JBO 
accounts provided that the member organization's net capital, as 
computed pursuant to Exchange Act Rule 15c3-1,\6\ does not fall below 
$7 million for a period in excess of three consecutive business days. 
This revision modifies the Exchange's original proposal which required 
a carrying and clearing, or carrying member organization to maintain 
minimum net capital of $10 million.
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    \6\ The Commission's net capital rule, ``Net Capital 
Requirements for Brokers or Dealers,'' is designated as Commission 
Rule 15c3-1. See 17 CFR 240.15c3-1.
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    The Exchange further proposes to require JBO clearing members to 
provide immediate telegraphic or facsimile notice to the Exchange if 
the clearing member determines that its tentative net capital or net 
capital has fallen below the prescribed levels. In addition, such 
clearing member will be subject to the prohibitions against withdrawal 
of equity capital set forth in Exchange Act Rule 15c3-1(e), and must 
observe the prohibitions against reduction, prepayment, and repayment 
of subordination agreements set forth in Exchange Act Rule 15c3-1d(b), 
as if such member's net capital were below the minimum standards 
specified by each of those sections.
    Finally, the Exchange proposes to require carrying member 
organizations to margin JBO accounts in accordance with the customer 
margin requirements of Regulation T \7\ when such JBO accounts lack 
sufficient minimum liquidating equity (i.e., $1 million) for a period 
of more than five business days.
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    \7\ Regulation T is entitled ``Credit by Brokers and Dealers'' 
and was issued by the Board of Governors of the Federal Reserve 
System pursuant to the Act. See 12 CFR 220.
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2. Statutory Basis
    The Exchange believes the proposed rule change, as amended, is 
consistent with Section 6(b) of the Act,\8\ in general, and further, 
the objectives of Section 6(b)(5),\9\ in particular, in that it is 
designed to perfect the mechanisms of a free and open market, and to 
protect investors and the public interest.
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    \8\ 15 U.S.C. 78F(B).
    \9\ 15 U.S.C. 78F(B)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes 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

    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 reasons 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 Amendment No. 1, including whether the proposed 
rule change, as modified by Amendment No. 1, 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 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 Pubic 
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-PCX-97-49 and should be submitted by December 28, 1998.
    For the Commission, by the Division of Market Regulation, pursuant 
to delegated authority.\10\
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    \10\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-32327 Filed 12-3-98; 8:45 am]
BILLING CODE 8010-01-M