[Federal Register Volume 64, Number 55 (Tuesday, March 23, 1999)]
[Notices]
[Pages 14032-14034]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-7091]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-41167; File No. SR-CHX-99-01]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Chicago Stock Exchange, Inc. Relating to the
Establishment of Net Capital Requirements for Specialists
March 12, 1999.
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 February 26, 1999, the Chicago Stock Exchange, Inc. (``CHX'' 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 CHX.
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).
\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 proposes to amend CHX Rule 3 of Article XI, and add
interpretation and policy .01 thereunder, to increase the minimum net
capital requirements for CHX. Below is the text of the proposed rule
change. Proposed new language is italicized; proposed deletions are in
brackets.
* * * * *
Article XI--Financial Responsibility and Reporting Requirements
Rule 3. Net Capital and Aggregate Indebtedness.
(a)(1) Except as otherwise provided below, [A] a member or member
organization shall at all times--
(i) maintain net capital not less than that prescribed by SEC 15c3-
1 (17 CFR 240.15c3-1) and
(ii) maintain subordinated cash borrowings and secured demand notes
equal to or greater than 50% of its total subordinated borrowings to
the extent that these subordinated borrowings are part of the debt
equity total.
(2) A member or member organization that is registered as a
specialist on the Exchange whose specialist transactions are effected
through and carried in a specialist account cleared by another broker
or dealer shall at all times--
(i) maintain, at a minimum, net capital that is the greater of (a)
$100,000, or (b) the amount prescribed by SEC 15c3-1 (17 CFR 240.15c3-
1), and
(ii) maintain subordinated cash borrowings and secured demand notes
equal to or greater than 50% of its total subordinated borrowings to
the extent that these subordinated borrowings are part of the debt
equity total.
(3) A member or member organization that is registered as a
specialist on the Exchange in less than 200 securities and that clears
its own specialist account(s) shall at all times--
(i) maintain, at a minimum, net capital that is the greater of (a)
$250,000, subject to the phase-in period set forth in Interpretation
and Policy, .01, below, or (b) the amount prescribed by SEC 15c3-1 (17
CFR 240.15c3-1) and,
(ii) maintain subordinated cash borrowings and secured demand notes
equal to or greater than 50% of its total subordinated borrowings to
the extent that these subordinated borrowings are part of the debt
equity total.
(4) A member or member organization that is registered as a
specialist on the Exchange in 200 or more securities and that clears
its own specialist account(s) shall at all times--
(i) maintain, at a minimum, net capital that is the greater of (a)
$350,000, subject to the phase-in period set forth in Interpretation
and Policy .01, below, or (b) the amount prescribed by SEC 15c3-1 (17
CFR 240.15c3-1), and
(ii) maintain subordinated cash borrowings and secured demand notes
equal to or greater than 50% of its total subordinated borrowings to
the extent that these subordinated borrowings are part of the debt
equity total.
(5) A member or member organization that clears the specialist
accounts of another member or member organization registered as a
specialist on the Exchange shall, at all times--
(i) maintain, at a minimum, net capital that is the greater of (a)
$500,000, subject to the phase-in period set forth in Interpretation
and Policy, .01, below, or (b) the amount prescribed by SEC 15c3-1 (17
CFR 240.15c3-1), and
(ii) maintain subordinated cash borrowings and secured demand notes
equal to or greater than 50% of its total subordinated borrowings to
the extent that these subordinated borrowings are part of the debt
equity total.
[(2)](6) A member or member organization shall promptly notify the
Exchange if it ceases to be in compliance with the requirements of
clauses (1), (2), (3), (4) or (5) (which ever is applicable) of this
paragraph (a) or if it becomes obligated to file monthly reports under
paragraph (b) of this Rule. A member or member organization shall also
promptly notify the Exchange of any material unsecured or partly
secured loan, drawing in excess of share of profits, or other
obligation owed to the member or member organization by (i) any person,
including a subordinated lender, having a capital interest in the
member or member organization, (ii) any partner, officer, director or
employee of the member or member organization, or (iii) any
corporation, firm or entity in which any partner, officer, director or
employee of the member or member organization holds office or has a
material financial interest. Such notification may show such
obligations owed to the member or member organization by category
[[Page 14033]]
without personal identification, except that personal identification
shall be made in respect to any person having such obligations equal to
five percent or more of the member or member organization's debt equity
total.
[(3)](7) The Exchange may at any time or from time to time with
respect to a particular member or member organization or all members or
member organizations or a new member or member organization prescribe
greater net capital or net worth requirements than those prescribed
under this Rule including more stringent treatment of items in
computing net capital or net worth.
Monthly Financial Statements
(a) No exchange in text.
Responsibility of Computations of Net Capital Requirements
(b) No change in text.
Restrictions on Operations
(c) No change in text.
Interpretations and Policies
.01 Phase-in Periods for Minimum Capital Standards for Self-
Clearing Specialists and Firms Clearing Specialist Accounts.
On [insert initial effective date], the Exchange adopted separate
minimum net capital standards for self-clearing specialists and firms
clearing other specialist accounts, as specified in subsections (a)(3),
(a)(4) and (a)(5) above. These minimum capital standards are to be
phased in over a 12 month period.
Registered as Specialist in Less Than 200 Securities; $250,000
Standard.
The amount specified in Rule 3(a)(3)(i)(a) above shall be: $150,000
effective on [insert initial effective date]; $200,000 effective on
[insert date six months from initial effective date]; and $250,000
effective on [insert date twelve months from initial effective date].
Registered as Specialist in 200 or More Securities; $350,000
Standard.
The amount specified in Rule 3(a)(4)(i)(a) above shall be: $200,000
effective on [insert initial effective date]; $275,000 effective on
[insert date six months from initial effective date]; and $350,000
effective on [insert date twelve months from initial effective date].
Firms Clearing Other Specialists Accounts; $500,000 Standard.
The amount specified in Rule 3(a)(5)(i)(a) above shall be: $350,000
effective on [insert initial effective date]; $425,000 effective on
[insert date six months from initial effective date]; and $500,000
effective on [insert date twelve months from initial effective date].
* * * * *
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 CHX 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 CHX 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
Speciaists play a very unique role in an auction market. They are
responsible to investors, other members, and the Exchange to
efficiently and accurately effect transactions in the securities in
which they are registered. While specialists often act as agents, they
are also required to act as principal at times to ensure that no
imbalance between supply and demand in the market occurs. They must
also make continuous two-sided quotations in the securities in which
they are registered. As such, it is important that specialists are
financially stable to fulfill their duties while withstanding regular
market fluctuations.
The purpose of the proposed rule change is to establish increased
net capital requirements for CHX specialists over and above those
currently contained in the SEC's Rule 15c3-1 (``Net Capital Rule'') \3\
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\3\ 17 CFR 240.15c3-1.
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Non-Clearing Specialists
Pursuant to the proposed rule change, non-clearing specialists will
be required to maintain at a minimum the greater of (i) net capital in
the amount of $100,000, or (ii) the amount prescribed by the Net
Capital Rule. Current rules only require specialist adherence to the
amount set forth in the Capital Rule which is $100,000 at this time.
Specialists will also have to continue to comply with the Exchange
requirement that subordinated cash borrowing and secured demand notes
equal or exceed 50% of their total subordinated borrowing (to the
extent that the borrowings are part of their debt equity total).
Specialists will continue to be subject to the provisions of CHX
Rule 3 including filing monthly financial statements (in certain
circumstances), submitting to regular annual field examinations, and
timely and accurately computing their net worth. These provisions must
be satisfied using the additional capital requirements imposed herein.
For example, CHX Rule 3(b)(1)(i) requires a member organization to file
a monthly financial statement for a period of three months if such
member organization fails to maintain net capital of at least 120% of
the new Exchange minimum requirements.
Self-Clearing Specialists
The proposing rule change will also require members and member
organizations registered as specialists that are self-clearing to
comply with additional net capital requirements prescribed by the
Exchange, depending on whether they are registered as a specialist in
less than 200 securities or 200 or more securities. Specifically, such
members and member organizations registered as specialists in less than
200 securities will be required to maintain at a minimum the greater of
(i) net capital in the amount of $250,000. or (ii) the amount
prescribed by SEC Rule 15c3-1.\4\ Such members and member organizations
registered as specialists in 200 or more securities will be required to
maintain at a minimum the greater of (i) net capital in the amount of
$350.000, or (ii) the amount prescribed by SEC Rule 15c3-1.\5\
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\4\ 17 CFR 240.15c3-1.
\5\ 17 CFR 240.15c3-1.
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Members That Clear the Accounts of Other CHX Specialists
Finally, the proposed rule change will require members and member
organizations that wish to carry the accounts of CHX specialists to
comply with additional net capital requirements prescribed by the
Exchange. Specifically, such members and member organizations will be
required to maintain at a minimum the greater of (i) net capital in the
account of $500,000, or (ii) the amount prescribed by SEC 15c3-1 (17
CFR 240.15c3-1). This requirement also applies to CHX specialists that
are ``self-clearing'' and that also clear the accounts of other CHX
specialists.
Phase-in Periods
The increases to the net capital standards set forth above will be
phased-in in three stages over a twelve
[[Page 14034]]
month period. The actual phase-in will be set forth in a Notice to
Members to be issued within 30 days of the SEC order approving this
proposed rule change. The initial phase-in date will be no loner than
60 days from the date of such Notice. The second and third phase-in
dates will be six months and twelve months from the initial phase-in
date.
The amounts of the phase-in will be as follows:
For non-clearing specialists, the $100,000 standard will
apply as of the initial phase-in date.
For self-clearing specialist registered in less than 200
securities, the CHX net capital standard for the initial, second and
third phase dates will be $150,000, $200,000, and $250,000
respectively.
For self-clearing specialists registered in 200 or more
securities, the CHX net capital standard for the initial, second and
third phase dates will be $200,000, $275,000 and $350,000 respectively.
For members that clear for other specialists, the CHX net
capital standard for the initial, second and third phase dates will be
$350,000, $425,000, and $500,000 respectively.
2. Statutory Basis
The proposed rule change is consistent with Section 6(b)(5) of the
Act \6\ in that it is designed to promote just and equitable principles
of trade, to foster cooperation and coordination with persons
regulating securities transactions, 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.
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\6\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
CHX does not believe that the proposed rule change will impose any
burden on competition.
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 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 self-regulatory organization consents, the Commission will:
(A) by order approve such 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 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-
0609. 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
CHX. All submissions should refer to File No. SR-CHX-99-01 and should
be submitted by April 13, 1999.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\7\
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\7\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-7091 Filed 3-22-99; 8:45 am]
BILLING CODE 8010-01-M