[Federal Register Volume 65, Number 16 (Tuesday, January 25, 2000)]
[Notices]
[Pages 4005-4007]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-1699]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42343; File No. SR-NYSE-99-47]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the New York Stock Exchange, Inc. To Amend NYSE Rule 431 
(``Margin Requirements'')

January 14, 2000.
    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 December 13, 1999, the New York Stock Exchange, Inc. (``NYSE'' 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 
Exchange. The Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons.
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------

I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The NYSE proposes to amend NYSE Rule 431, ``Margin Requirements,'' 
to establish margin requirements for day trading in customer accounts 
of member organizations. The text of the proposal is below. Deletions 
are in brackets, and additions are in italics.

Rule 431--Margin Requirements

    No change to 431(a) through (b)(3).
    (b)(4) equity of at least $2,000 except that cash need not be 
deposited in excess of the cost of any security purchased (this 
equity and cost of purchase provision shall not apply to ``when 
distributed'' securities in a cash account). The minimum equity 
requirement for a ``pattern day trader'' is $25,000 pursuant to 
paragraph (f)(8)(B)(iv)(1) of this Rule.
    Withdrawals of cash or securities may be made from any account 
which has a debit balance, ``short'' position or commitments, 
provided it is in compliance with Regulation T of the Board of 
Governors of the Federal Reserve System and after such withdrawal 
the equity in the account is at least the greater of $2,000 ($25,000 
in the case of ``pattern day traders'') or an amount sufficient to 
meet the maintenance margin requirements of this Rule.
    No change to 431(c) through (f)(8)(A)(iii).
    (f)(8)(B) Day Trading.
    (i) The term ``day trading'' means the purchasing and selling or 
the selling and purchasing of the same security on the same day in a 
margin account except for:
    (a) a long security position held overnight and sold the next 
day prior to any new purchases of the same security, or
    (b) a short security position held overnight and purchased the 
next day prior to any new sales of the same security.
    (ii) [A ``day trader'' is any customer whose trading shows a 
pattern of day trading.] The term ``pattern day trader'' means any 
customer who executes four (4) or more day trades within five (5) 
business days. However, if the number of day trades is 6% or less of 
total trades for the five (5) business day period, the customer will 
no longer be considered a pattern day trader and the special 
requirements under paragraph (f)(8)(B)(iv) of this Rule will not 
apply.
    (iii) The term ``day trading buying power'' means the equity in 
a customer's account at the close of business of the previous day, 
less any maintenance margin requirement as prescribed in paragraph 
(c) of this Rule, multiplied by four, for equity securities.
    Whenever day trading occurs in a customer's margin account the 
[margin to be maintained] special maintenance margin required for 
the day trades in equity securities shall be [the margin on the 
``long'' or ``short'' transaction, whichever occurred first, as 
required pursuant to the other provisions of this Rule. When day 
trading occurs in the account of a ``day trader'' the margin to be 
maintained shall be the margin on the ``long'' or ``short'' 
transaction, whichever occurred first, as required by Regulation T 
of the Board of Governors of the Federal Reserve System or as 
required pursuant to the other provisions of this Rule, whichever 
amount is greater.] 25% of the cost of all the day trades made 
during the day. For non-equity securities, the special maintenance 
margin shall be as required pursuant to the other provisions of this 
Rule. Alternatively, when two or more day trades occur on the same 
day in the same customer's account, the margin required may be 
computed utilizing the highest (dollar amount) open position during 
that day. To utilize the highest open position computation method, a 
record showing the ``time and tick'' of each trade must be 
maintained to document the sequence in which each day trade was 
completed.
    (iv) Special Requirements for Pattern Day Traders
    (1) Minimum Equity Requirement for Pattern Day Traders--The 
minimum equity required for the accounts of customers deemed to be 
pattern day traders shall be $25,000. This minimum equity must be 
maintained in the customer's account at all times (see Supplementary 
Material .40 of this Rule).
    (2) Pattern day traders cannot trade in excess of their day 
trading buying power as defined in paragraph (f)(8)(B)(iii) above. 
In the event a pattern day trader exceeds its day trading buying 
power which creates a special maintenance margin deficiency, the 
following actions will be taken by the member organization.
    (a) The account will be margined based on the cost of all the 
day trades made during the day, and
    (b) The customer's day trading buying power will be limited to 
the equity in the customer's account at the close of business of the 
previous day, less the maintenance margin required in paragraph (c) 
of this Rule, multiplied by two, for equity securities.

[[Page 4006]]

    (3) Pattern day traders who fail to meet their special 
maintenance margin calls as required within five business days from 
the date the margin deficiency occurs will be permitted to execute 
transactions only a cash available basis for 90 days or until the 
special maintenance margin call is met.
    (4) Pattern day traders are restricted from utilizing the 
guaranteed account provision pursuant to paragraph (f)(4) of this 
Rule for meeting the requirements of paragraph (f)(8)(B).
    (5) Funds, deposited into a day trader's account to meet the 
minimum equity or maintenance margin requirements of this Rule 
431(f)(8)(B) cannot be withdrawn for a minimum of two business days 
following the close of business on the day of deposit.
    (f)(8)(C) When the equity in a customer's account, after giving 
consideration to the other provisions of this Rule, is not 
sufficient to meet the requirements of paragraph (f)(8)(A) or (B) 
additional cash or securities must be received into the account to 
meet any deficiency within [seven] five business days of the trade 
date.
    In addition, on the sixth business day only, member 
organizations are required to deduct from net Capital the amount of 
unmet maintenance margin calls pursuant to SEA Rule 15c3-1.
* * * * *

Supplementary Material

    .10-.20 No change.
    .30  In the event that the organization at which a customer 
seeks to open an account knows or has a reasonable basis to believe 
that the customer will engage in pattern day trading, then the 
minimum equity required under paragraph (f)(8)(B)(iv)(1) above 
($25,000) must be deposited in the account prior to commencement of 
day trading.
    .40  When a customer engages in pattern day trading, the minimum 
equity required under paragraph (f)(8)(B)(iv)(1) above ($25,000) 
must be deposited in the account before such customer may continue 
day trading.
    .50  For purposes of paragraph (f)(8)(B)(iv)(2)(a) above, ``time 
and tick'' (i.e., calculating margin utilizing each trade in the 
sequence that it is executed, using the highest open position during 
the day) may not be used for a pattern day trader who exceeds their 
day trading buying power.
    .60  For purposes of paragraph (f)(8)(B)(iii) and (iv)(2)(b), 
the day trading buying power for non-equity securities may be 
computed using the applicable special maintenance margin 
requirements pursuant to other provisions of this Rule.
* * * * *

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 NYSE 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 NYSE 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 Exchange proposes to amend NYSE Rule 431 to implement specific 
requirements for day trading in customer accounts of member 
organizations. The primary purpose of the proposal is to require that 
minimum levels of equity and margin be deposited and maintained in day 
trading accounts sufficient to support the risks associated with day 
trading activities.
    NYSE Rule 431 prescribes the minimum margin amount required to be 
maintained in customer accounts of member organizations. As a result of 
recent amendments to federal margin regulations and a rapidly changing 
industry environment, the Exchange established, in April 1996, a Rule 
431 Committee (the ``Committee'') to review margin requirements and 
make recommendations for change. The Committee established 
subcommittees to review specific provisions of NYSE Rule 431. A special 
subcommittee was formed recently to address the risks associated with 
day trading in customer accounts. The Exchange's Board of Directors has 
approved a number of proposed amendments resulting from Committee 
recommendations.
    This proposal amends NYSE Rule 431 to establish special maintenance 
margin requirements for customers that engage in day trading, and 
specific minimum equity requirements and buying power limitations for 
customers that demonstrate a pattern of day trading.
    According to the Exchange, the recent growth and advances in 
technology have contributed to a dramatic increase in day trading by 
customers and in the establishment of broker-dealers whose primary 
business is to provide customers with direct links to the securities 
markets by allowing them to trade their own portfolios on-line. In this 
environment, day traders attempt to make profits on intra-day price 
movements of stock in the securities markets.
    The proposed amendments to NYSE Rule 431(f)(8)(B) define ``day 
trading'' as ``the purchase and sale of the same security in the same 
day in a margin account.'' An exception to the definition is provided 
when: (1) a long security position is carried in the account overnight, 
and sold the next day prior to any new purchases of that security; or 
(2) a short security position is carried overnight and purchased the 
next day prior to any new sales of that security, (i.e., closing 
transactions to wrap-up the prior day's activities prior to any new 
purchases or sales of the same security). While such transactions would 
not fall within the definition of day trading, any further commitments 
with respect to that security (i.e., any subsequent purchase or sale) 
would be deemed day trading.
    A customer will be deemed as a ``pattern day trader'' if there are 
four or more day trades within five business days in an account, 
provided that the number of day trades is more than 6% of total trades 
in the account for the five day period.\3\ The 6% criteria is proposed 
so that customers who engage in a large number of transactions overall 
are not inappropriately deemed a pattern day trader solely because they 
exceeded the ``more-than-four-trade'' standard. For example, a customer 
who transacts four day trades within five business days and who also 
has a total of 100 transactions in that time period would not be deemed 
a pattern day trader, because less than 6% of the total trades were day 
trades.
---------------------------------------------------------------------------

    \3\ ``Pattern day trading'' status is determined on a rolling 
five business day basis. Telephone conversation among Donald van 
Weezel, Managing Director, Regulatory Affairs, NYSE; Albert Lucks, 
Director, Credit Regulation, NYSE; and Nancy Sanow, Senior Special 
Counsel, Division of Market Regulation; Thomas McGowan, Assistant 
Director, Division of Market Regulation; Joseph Morra, Attorney; and 
Melinda Diller, Attorney, Commission, January 7, 2000.
---------------------------------------------------------------------------

    The proposal also defines ``day trading buying power'' to provide a 
maximum level of day trading allowed by ``pattern day traders'' without 
restrictions. For equity securities, buying power is the equity in the 
account at the close of the business day, less any maintenance margin, 
multiplied by four. For non-equity securities, buying power shall be 
computed using applicable special maintenance margin requirements 
pursuant to other provisions of the Rule.
    The proposed amendments require day traders to maintain special 
maintenance margin commensurate with their levels of day trading 
activity. For day trades in equity securities, the required special 
maintenance margin is 25% of the cost of all day trades during the day. 
For non-equity securities, margin required is the same as maintenance 
margin required pursuant to other provisions of NYSE Rule 431. However, 
when two or more day trades occur on the same day in the customer's 
account, the required margin may be based on the highest open position

[[Page 4007]]

during that day. This computation requires maintenance of ``time and 
tick'' records to document the sequence in which each day trade was 
completed.
    Further, under the amended Rule, the time frame for meeting day 
trading special maintenance margin calls will be reduced from seven 
business days to five business days. If the special maintenance margin 
call is not met within five business days from the date the special 
margin deficiency occurred, pattern day traders will be restricted to 
day trading on a cash available basis only for 90 days, or until the 
special call for additional funds is met. Member organizations will 
incur a one time capital charge for the amount of any unmet deficiency 
on the sixth business day.
    Currently, NYSE Rule 431 requires $2,000 minimum equity for a 
customer to open a margin account. The Exchange is proposing to require 
that a pattern day trader's account maintain a minimum equity of 
$25,000 at all times. In the event that a pattern day trader's account 
falls below the required minimum equity, no further day trades will be 
permitted until the requisite equity level is maintained. In addition, 
member organizations that have advance knowledge or reason to believe 
that a new account will pattern day trade must require the customer to 
deposit $25,000 minimum equity into the account prior to the 
commencement of day trading activity.
    The proposal will also restrict pattern day traders from trading in 
excess of their day trading buying power. If the day trading buying 
power is exceeded, and this results in a special maintenance margin 
deficiency, the following actions must be taken by member 
organizations: (i) the account will be margined based on the total cost 
of all day trade purchases for that day; and (ii) the customer's day 
trading buying power will be reduced by the maintenance margin amount 
required.
    To provide greater financial stability to such accounts, the 
proposal requires that a day trading customer deposit into the day 
trading account a sufficient amount of money to meet minimum equity and 
maintenance margin requirements. Such deposits will not be allowed to 
be withdrawn for at least two business days.
    In addition, pattern day traders will be prohibited from utilizing 
``cross guarantees'' otherwise permitted in margin accounts. These 
prohibitions are intended to address instances where margin calls in 
day trading accounts are met by cross-guarantees within different 
customer accounts at the same broker-dealer. The net effect of these 
prohibitions is to require that each pattern day trading account meets 
its requirements independently by utilizing funds actually on deposit 
in the account.
2. Statutory Basis
    The Exchange believes the proposed rule change is consistent with 
the requirements of Section 6(5)(b) of the Act,\4\ which requires that 
the rules of the Exchange be designed to promote just and equitable 
principles of trade and to protect the investing public.
---------------------------------------------------------------------------

    \4\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

    The Exchange believes that the proposed rule change is also 
consistent with Section 7(a) of the Act \5\ and with the rules and 
regulations of the Board of Governors of the Federal Reserve System, 
because it prevents the excessive use of credit for the purchase or 
carrying of securities.
---------------------------------------------------------------------------

    \5\ 15 U.S.C. 78g.
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange believes that 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 has neither solicited nor received written comments on 
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 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 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 at the 
Commission's Public Reference Room, 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-99-47 and should be submitted by 
February 15, 2000.

    For the Commission, by the Division of Market Regulation, pursuant 
to delegated authority.\6\
---------------------------------------------------------------------------

    \6\ 17 CFR 200.30-3(a)(12).

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-1699 Filed 1-24-00 8:45 am]
BILLING CODE 8010-01-M