[Federal Register Volume 63, Number 233 (Friday, December 4, 1998)]
[Notices]
[Pages 67161-67163]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-32328]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-40709; File No. SR-NYSE-97-28]


Self-Regulatory Organizations; Notice of Filing of Amendment Nos. 
1 and 2 to Proposed Rule Change by the New York Stock 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 May 21, 1998, and September 28, 1998, the New York Stock Exchange, 
Inc. (``Exchange'' or ``NYSE'') filed with the Securities and Exchange 
Commission (``Commission'') Amendment Nos. 1 and 2, respectively, 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 Nos. 1 and 2 to 
the proposed rule change for interested parties.
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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 Exchange Rule 431, ``Margin 
Requirements,'' to establish margin and net capital requirements for 
Joint Back Office (``JBO'') arrangements among broker-dealers. The 
proposed rule change also relates to: (i) net capital computations for 
members carrying proprietary accounts of other broker-dealers; (ii) net 
capital computations for members carrying the accounts of approved 
specialists or market makers; and (iii) control and restricted 
securities.
    The text of the proposed rule change, as amended, is available at 
the Office of the Secretary, the Exchange, and at the Commission.

[[Page 67162]]

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
    On October 2, 1997, the Exchange filed its JBO proposal with the 
Commission. Notice of the proposal was issued on December 29, 1997.\3\ 
The Exchange submitted Amendment No. 1 to the JBO filing on May 21, 
1998, and Amendment No. 2 on September 28, 1998.
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    \3\ See Securities Exchange Act Release No. 39497 (Dec. 29, 
1997), 63 FR 899 (Jan. 7, 1998).
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    a. The Original JBO Filing. The Exchange's proposed rule change 
would amend Exchange Rule 431 to establish capital, margin, and other 
requirements for JBO arrangements among broker-dealers. 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 servicing 
broker or dealer owned jointly or individually by other [broker-
dealers].'' \4\ The Exchange's proposal would provide regulatory 
requirements for such JBO arrangements.
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    \4\ See 12 CFR 220.7(c). Regulation T is entitled ``Credit By 
Brokers and Dealers'' and was issued by the FRB pursuant to the Act.
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    Under the Exchange's original proposal, a member organization 
carrying and clearing, or carrying JBO accounts would be required to: 
(i) provide written notification to the Exchange prior to establishing 
a JBO arrangement, (ii) maintain minimum tentative net capital \5\ of 
$25 million, or maintain minimum net capital of $10 million if engaged 
in the primary business of clearing options market-maker accounts,\6\ 
(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 (Exchange Act Rule 15c3-1) \7\ in excess 
of the equity maintained in the accounts of participating broker-
dealers.
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    \5\ As discussed in the Exchange's Interpretation Handbook, the 
term ``tentative net capital'' generally refers to net capital 
before the application of ``haircuts'' and undue concentration 
charges on securities and options positions. See NYSE Interpretation 
Handbook, Section I(c)(2)(vi)(M)(04), ``Tentative Net Capital.''
    \6\ 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 IBO participant accounts) are options market maker 
deductions.
    \7\ See 17 CFR 240.15c3-1, ``Net Capital Requirements for 
Brokers or Dealers.''
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    Furthermore, JBO participants would be required to be registered 
broker-dealers subject to Exchange Act Rule 15c3-1, and would 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 would be required to maintain a minimum 
liquidating equity of $1 million. If the liquidating equity fell below 
$1 million, the JBO participant would be required to eliminate the 
deficiency within five business days or would become subject to the 
margin requirements under other provisions of Exchange Rule 431.
    b. Amendment No. 1. Amendment No. 1 proposes revisions that are 
designed to incorporate certain proposed maintenance margin 
requirements for non-equity securities, which are the subject of 
another recent Exchange filing, SR-NYSE-98-14 (``Related Filing'').\8\ 
The Exchange's proposed rule change, as originally filed, requires that 
the Commission's net capital rule haircuts be used when a member 
organization computes its capital charges for Rule 431 purposes. 
However, in the Related Filing, the Exchange proposes margin 
requirements for non-equity securities for broker-dealer proprietary 
accounts which are less than the Commission's net capital rule haircut 
requirements. The Exchange believes it is necessary to maintain 
consistency between the Exchange's JBO filing and the Related Filing by 
incorporating into the JBO filing the most recently proposed margin 
requirements. Therefore, Amendment No. 1 incorporates the requirements 
proposed in the Related Filing.
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    \8\ The Commission has published notice of the Related Filing 
but has not taken any dispositive action on the proposal. See 
Securities Exchange Act Release No. 40278 (July 29, 1998), 63 FR 
41882 (Aug. 5, 1998).
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    The Exchange's JBO filing specifies certain regulatory requirements 
for establishing and maintaining JBO arrangements. Among them is the 
requirement that each JBO participant maintain in its account minimum 
net liquidating equity of $1 million. Amendment No. 1 clarifies the 
margin requirements that become operative when the equity in the 
account of a JBO participant falls below the prescribed levels. 
Specifically, if the amount of equity in a JBO participant's account 
drops below the $1 million minimum, the participant no longer will be 
an eligible JBO participant unless the necessary minimum equity is 
reestablished in the JBO account within the required number of days 
(i.e., 5 business days). Amendment No. 1 clarifies that JBO 
participants who lose their JBO eligibility would not be considered 
``exempted borrowers'' (as defined in Regulation T) and therefore would 
be subject to the margin account requirements for customers set forth 
in Regulation T. In addition, such participants would be subject to the 
maintenance requirements pursuant to the other provisions of Rule 431.
    Amendment No. 1 also requests that the revisions relating to 
Control and Restricted Securities be subject to separate consideration 
and review by the Commission, apart from the broader proposal relating 
to JBO arrangements and broker-dealer accounts, as well as the changes 
proposed in Amendment No. 1. The Exchange believes that bifurcating the 
consideration of the revisions regarding Control and Restricted 
Securities, on which no comments were received, would allow them to 
become effective more quickly than if they were considered together 
with all of the other modifications proposed in the JBO filing and 
Amendment No. 1.
    c. Amendment No. 2. The Exchange notes that the Chicago Board 
Options Exchange, Incorporated (``CBOE'') has also submitted a proposed 
rule change to establish margin and net capital requirements for JBO 
clearing firms and participants.\9\ The CBOE's proposal, which is 
similar to the Exchange's JBO filing, originally proposed capital 
requirements of $25 million and $10 million. In response to the 
publication of the CBOE's JBO filing in the Federal Register, the 
Commission received several comment letters from members

[[Page 67163]]

of the CBOE. The CBOE members contended that the proposed $10 million 
net capital requirement for certain JBO clearing firms, whose primary 
business consists of clearance of options market makers' accounts, was 
too high.
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    \9\ 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). 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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    As a result of discussions with other self-regulatory organizations 
such as the CBOE, as well as deliberations among the JBO subcommittee 
of the Exchange's Rule 431 Committee, the Exchange seeks to lower the 
proposed net capital requirement for member organizations carrying and 
clearing, or carrying JBO accounts from $10 million to $7 million. This 
modification is consistent with the revisions which the CBOE recently 
proposed for its JBO filing.\10\ Under Amendment No. 2, the $7 million 
net capital requirement only would be available to member organizations 
whose primary business consists of the clearance of options market 
maker accounts. Consequently, the proposal's $25 million tentative net 
capital requirement would continue to apply to all other member 
organizations carrying and clearing, or carrying JBO accounts. The 
Exchange believes the revised level of $7 million will continue to 
require capital sufficient to satisfy safety and soundness concerns.
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    \10\ Id.
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    Amendment No. 2 also includes new provisions relating to member 
organizations that carry and clear, or carry JBO accounts that will 
require: (i) prompt written notification to the Exchange when such a 
member organization's tentative net capital or net capital, whichever 
may apply, falls below prescribed standards; and (ii) that appropriate 
action be taken, within three business days, to resolve any such 
capital deficiency. Failure to correct such deficiencies within the 
allotted period will preclude the JBO carrying and clearing, or 
carrying member organization from accepting new transactions pursuant 
to the JBO arrangement. The Exchange believes these requirements are 
consistent with provisions of the Commission's net capital rule that 
generally deal with net capital deficiencies.
2. Statutory Basis
    The Exchange believes the proposed rule change, as amended, is 
consistent with the requirements of Section 6(b)(5) of the Act \11\ in 
that it is designed to promote just and equitable principles of trade, 
and protect the investing public. The Exchange further believes the 
proposed rule change is consistent with the rules and regulations of 
the Board of Governors of the Federal Reserve System that are intended 
to prevent the excessive use of credit for the purchase or carrying of 
securities, in accordance with Section 7(a) of the Act.\12\
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    \11\ 15 U.S.C. 78f(b)(5).
    \12\ 15 U.S.C. 78g(a).
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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. The Exchange notes, however, that 
the CBOE received written comments regarding its companion JBO filing. 
Item II(A)(1)(c) above includes the Exchange's response to the issues 
raised in the comment letters submitted to the CBOE.

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 Nos. 1 and 2, including whether the 
proposed rule change, as modified by Amendment Nos. 1 and 2, 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 
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 December 28, 
1998.

    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.
[FR Doc. 98-32328 Filed 12-3-98; 8:45 am]
BILLING CODE 8010-01-M