[Federal Register Volume 64, Number 245 (Wednesday, December 22, 1999)]
[Notices]
[Pages 71835-71836]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-33177]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42239; File No. SR-CHX-99-20]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the Chicago Stock Exchange, Inc. Relating to Minimum Net 
Capital and Excess Net Capital Requirements for Members

December 15, 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 September 24, 1999, the Chicago Stock Exchange, Inc. (``CHX'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``Commission'') the proposed rule change as described in Items I, II, 
and III below, which Items have been prepared by the CHX. On December 
8, 1999, the CHX submitted Amendment No. 1 to the proposed rule 
change.\3\ The Commission is publishing the 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
    \3\ In Amendment No. 1, the CHX clarified Interpretation .01 to 
Rule 3 of Article XI and made technical amendments to the proposed 
rule language. See letter from Kathleen M. Boege, Associate General 
Counsel, CHX, to Jack Drogin, Senior Special Counsel, Division of 
Market Regulation, Commission, dated December 7, 1999.
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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 Article XI, Rule 3 of the Exchange's 
rules to modify the minimum net capital and excess net capital 
requirements applicable to members of the Exchange who are specialists 
or who carry accounts of specialists. Below in the text of the proposed 
rule change. Proposed new language is italicized; proposed deletions 
are in brackets.

Article XI--Financial Responsibility and Reporting Requirements

* * * * *

Net Capital and Aggregate Indebtedness

    Rule 3. (a)(1) Except as otherwise provided below, 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 borrowing 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 time--
    (i) maintain[,] (A) at a minimum, net capital that is equal to the 
greater of (1)[a] $100,000 [$250,000, subject to the phase-in period 
set forth in Interpretation and Policy .01, below] or (2)[(b)] the 
amount prescribed by SEC 15c3-1 (17 CFR 240.15c3-1); and (B) excess net 
capital equal to the greater of (1) $500,000 (or the minimum amount 
required by National Securities Clearing Corporation (``NSCC'') for 
such direct participants), subject to the phase-in-period set forth in 
Interpretation and Policy .01, below or (2) the amount prescribed by 
SEC 15c3-1.
* * * * *
    [(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 borrowing are part of the debt 
equity total.]
    (4) [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[,] (A) at a minimum, net capital that is equal to the 
greater of (1)[a] $250,000 [$500,000, subject to the phase-in period 
set forth in Interpretation and Policy .01, below] or (2)[(b)] the 
amount prescribed by SEC 15c3-1 (17 CFR 240.15c3-1); and (B) excess net 
capital equal to the greater of (1) $1,000,000 (or the minimum amount 
required by NSCC for such direct participants), subject to the phase-in 
period set forth in Interpretation and Policy .01, below or (2) the 
amount prescribed by SEC 15c3-1.
* * * * *
    (5) [6] * * *
    (6) [7] * * *

Interpretations and Policies

    .01  Phase-In Periods for Minimum Capital Standards for Self-
Clearing Specialists and Firms Clearing Specialist Accounts.
    On [May 31, 1999] (insert date 30 days after date of SEC approval 
order), the Exchange adopted separate minimum net capital and excess 
net capital standards for self-clearing specialists and firms clearing 
other specialist accounts, as specified in subsections (a)(3) and 
(a)(4) [and (a)(5) above. These minimum capital standards are to be 
phased in over a 12 month (or other time period based on date of SEC 
approval order) period.
    Self-Clearing Specialists [Registered as Specialist in Less Than 
200 Securities: $250,000 Standard]
    The amount specified in Rule 3(a)(3)(i)(B)(1) above shall be 
[$150,000 effective on May 31, 1999;] $200,000 effective on November 
30, 1999; [and $250,000] $350,000 effective on May 31, 2000; and 
$500,000 effective on June 30, 2000.
    [Registered as a 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 May 31, 1999; $275,000 effective on November 30, 1999; and 
$350,000 effective on May 31, 2000.]
    Firms Clearing Other Specialist Accounts: [$500,000 Standard].
    The amount specified in Rule 3(a)(4)(i)(B)(1) above shall be 
[$350,000 effective on May 31, 1999;] $425,000 effective on November 
30, 1999; [and] $500,000 effective on May 31, 2000; and $1,000,000 
effective on June 30, 2000.

[[Page 71836]]

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
    The purpose rule change is intended to ensure that the Exchange's 
members who are specialists or who carry accounts of specialists meet 
the financial responsibility requirements imposed by qualified clearing 
agencies \4\ as well as the Commission. The Exchange's current rules, 
and the rules of the MCC, permit floor members of the Exchange to 
establish `'sponsored accounts'' pursuant to which the MCC provides 
sponsored participants with access to clearance, settlement and 
delivery via a qualified clearing agency such as the National 
Securities Clearing Corporation (``NSCC''). The Exchange in turn 
provides a guaranty to the NSCC (and through the NSCC to the Depository 
Trust Company (``DTC'')) from time to time to guarantee the obligations 
of the MCC with respect to liabilities that could be generated in 
sponsored accounts.\5\ In order to minimize the Exchange's exposure 
through sponsored accounts and in keeping with capital requirements 
imposed by the Act, the Exchange's rules governing members' financial 
responsibility and reporting requirements contain provisions 
establishing minimum net capital requirements for specialists and those 
who carry accounts of specialists.\6\
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    \4\ See Midwest Clearing Corporation (``MCC'') Rules, Art. XI, 
Rule 1.
    \5\ See CHX Rules, Art. XXI, Rule 14.
    \6\ See CHX Rule, Art. XI, Rule 3.
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    The Exchange and the MCC have determined to discontinue the 
sponsored account program, effective June 30, 2000, after which time 
the MCC will be dissolved and the Exchange will no longer guarantee the 
MCC's obligations to qualified clearing agencies. Accordingly, it will 
be necessary for all current sponsored participants to become direct 
participants in qualified clearing agencies such as NSCC and DTC. The 
Exchange thus proposes to amend Article XI, Rule 3 to incorporate the 
minimum net capital and excess net capital requirements currently 
required for direct participation in NSCC, subject to the amended 
phase-in periods set forth in Interpretation and Policy .01 to the 
amended rule. It is anticipated that the proposed phase-in periods will 
ameliorate any financial burden that might otherwise be placed on 
members who are specialists or who carry accounts of specialists.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b)(5) \7\ of the Act in that it is designed to promote 
just and equitable principles of trade, to remove impediments and to 
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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    \7\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange 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.

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 
is consistent with the Act. Persons making written submissions should 
file six copies thereof with the Secretary, Securities and Exchange 
Commission, 450 Fifth Street, NW., Washington, DC 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-99-20 and should be 
submitted by January 12, 2000.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\8\
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    \8\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-33177 Filed 12-21-99; 8:45 am]
BILLING CODE 8010-01-M