[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