[Federal Register Volume 65, Number 34 (Friday, February 18, 2000)]
[Notices]
[Pages 8465-8467]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-3939]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42417; File No. SR-NYSE-99-46]


Self-Regulatory Organizations; Notice of Filing of Proposed Rule 
Change by the New York Stock Exchange, Inc. To Amend Exchange Rule 104 
(``Dealings by Specialists'')

February 11, 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 November 16, 1999, the New York Stock Exchange, Inc. (``NYSE'' 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 Exchange. On 
December 9, 1999, the NYSE submitted Amendment No. 1 to the proposed 
rule change.\3\ 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.
    \3\ See letter from James E. Buck, Senior Vice President and 
Secretary, NYSE, to Jack Drogin, Senior Special Counsel, Division of 
Market Regulation, Commission, dated November 24, 1999. In Amendment 
No. 1, the Exchange changed the implementation date of the proposed 
rule change (``Amendment No. 1'').
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The proposed rule change seeks approval of proposed Rules 104.21 
and 104.22 which would, respectively: (1) Increase capital requirements 
for specialist entities exceeding certain concentration-based criteria; 
and (2) prescribe additional capital requirements for specialist 
entities resulting from merger, acquisition, consolidation, or other 
combinations of specialist assets. In addition, the filing seeks 
approval of proposed Rule 104.23, which would permit the Exchange to 
provide a ``grace period,'' not to exceed 5 business days, during which 
specialist entities may operate despite noncompliance with the 
provisions of Rules 104.21 and 104.22.
    Further, the filing seeks approval of amendments to existing Rule 
104.20, which would clarify the definition of ``net liquid assets'' and 
allow the Exchange to determine the capital requirements for securities 
not specifically addressed by the Rule. Proposed new language is 
italicized; proposed deletions are in brackets.

Rule 104 (Dealings by Specialists)

    . Supplementary Material:
    Capital Requirements of Specialists (effective June 1, 1971.)
    .20 Regular specialists.--
    (1) A member registered as a regular specialist at an active post 
must be able to assume a position of 150 trading units in each common 
stock in which he is registered.
    (2) A member registered as a regular specialist at an active post 
must be able to assume a position of 30 trading units in each 
convertible preferred stock, of 1200 shares in each of the 100 share 
trading unit non-convertible preferred stocks and of 300 shares in each 
of the 10 share unit non-convertible preferred stocks in which he is 
registered.
    (3) The position which a member registered as a regular specialist 
at an active post must be able to assume, for each stock in which he is 
registered that is not included in (1) or (2) above, shall be 
determined by The Exchange. Such determinations shall be based upon the 
structure and characteristics of the security and shall be the amount 
prescribed in (1) or (2) above for the type of stock with the most 
similar structure and characteristics.
    (4)[(3)] A member registered as a regular specialist at the 
inactive Post must have, at all times, net liquid assets of at least 
$150,000.
    (5)[(4)] Notwithstanding .30 of this Rule, each member registered 
as a regular specialist at an active post must be able to establish 
that he can meet, with his own net liquid assets, a minimum capital 
requirement which shall be the greater of $1,000,000 or 25% of the 
position requirements as set forth in Paragraphs (1), [and] (2) and (3) 
above, except as determined by the Exchange in unusual circumstances.
    The [Market Surveillance and Evaluation] Division of Member Firm 
Regulation must be informed immediately by a specialist, in each 
instance, of his inability to comply with the provisions set forth in 
the above Paragraphs.
    [The term ``net liquid assets'' is defined as the excess of cash or 
readily marketable securities over liabilities for a specialist who 
neither carries nor services customers' accounts and who does no 
business with others than members and member organizations. The term 
for all other specialists refers to excess net capital computed in 
accordance with the provisions of Rule 325 except that capital accounts 
of partners, accounts of partners which are covered by agreements 
approved by The Exchange providing for the inclusion of equities 
therein as partnership property and borrowings covered by subordination 
agreements approved by The Exchange under Rule 326.13 may be considered 
``proprietary accounts'' and as such included in the computation of 
such excess net capital for purposes of this Rule, with ``haircuts'' 
restored in respect of long or excess short positions of securities for 
which he is registered as a specialist and for long positions of 
securities which he shall have deposited or pledged with a bank or 
member organization as collateral for funds borrowed to finance 
transactions or positions in such specialist securities.]
    (6) For those members registered as a regular specialist subject to 
the Net Capital Rule (SEA Rule 15c3-1), the term ``net liquid assets'' 
refers to excess net capital computed in accordance with the provisions 
of Rule 325 (``Capital Requirements'') with the following adjustments:
    (i) Additions for haircuts and undue concentration charges on 
specialty securities in dealer accounts;
    (ii) Additions for any other haircuts on long positions which are 
deposited or pledged as collateral for funds borrowed to finance dealer 
transactions or positions in specialist securities;
    (iii) Deductions for floor brokerage and/or commissions receivable;
    (iv) Deductions for clearing organization deposits; and
    (v) Deductions for any cash surrender value of life insurance 
policies allowable under the net capital rule.
    (7) For members registered as a regular specialist not subject to 
the Net Capital Rule, ``net liquid assets'' is defined as the excess of 
cash, net credit balances at clearing broker(s), and

[[Page 8466]]

readily marketable securities over all liabilities.
    In the event that two or more specialists are associated with each 
other and deal for the same specialist account, the above requirements 
shall apply to such specialists as one unit, rather than to each 
specialist individually.
    [Specialists must be able to meet the above requirements without 
taking into consideration the capital required to carry or finance 
investment accounts.]
    .21 Concentration Measure Requirements
    Notwithstanding the provisions of (1) through (5) in rule 104.20 
above, if a regular specialist entity's market share exceeds 5% of any 
of the following concentration measures:
    (1) All listed common stock (current):
    (2) The 250 most active listed common stocks (over the previous 12 
months);
    (3) The total share volume of stock trading on the Exchange (over 
the previous 12 months); or
    (4) The total dollar value of stock trading on the Exchange (over 
the previous 12 months)
such entity shall maintain net liquid assets equivalent to the 
following applicable requirements:
    (i) $4 million for each specialist security contained in the DJIA
    (ii) $2 million for each specialist security contained in the S&P 
100, not contained in (i)
    (iii) $1 million for each specialist security contained in the S&P 
500, not contained in (i) or (ii)
    (iv) $500 thousand for each specialist common stock, excluding bond 
funds, not contained in (i), (ii) or (iii)
    (v) $100 thousand for each specialist security not included in (i) 
through (iv), excluding warrants.
    .22 Combinations of Specialist Entities
    A specialist entity resulting from the merger, consolidation, 
acquisition, or other combination of specialist assets:
    (i) subject to the concentration measure requirements of Rule 
104.21, shall maintain net liquid assets in accordance with those 
provisions, or equivalent to the aggregate net liquid assets of the 
specialist entities prior to their combination, whichever is greater;
    (ii) not subject to the concentration measure requirements of Rule 
104.21, shall maintain net liquid assets according to the provisions of 
Rule 104.20, or equivalent to the aggregate net liquid assets of the 
specialist entities prior to their combination, whichever is greater.
    .23 Maintaining a Fair and Orderly Market
    Solely for the purpose of maintaining a fair and orderly market, 
the Exchange may, for a period not to exceed 5 business days, allow a 
specialist entity to continue to operate despite such specialist 
entity's non-compliance with the provisions of Rules 104.21 and 104.22.
    [.23] .24 Relief Specialists.--
    no change

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
    During the last decade, there has been a significant decline in the 
number of specialist units operating on the Floor of the Exchange. For 
example, at the end of 1957 there were 136 specialist units with 348 
individual specialists registered in a total 1,077 common stocks. In 
contrast, by year-end 1986, there were 54 specialist units with 410 
individual specialists registered in 1,560 common stocks. Currently, 
there are 27 specialist units, with 491 specialists registered in 2,871 
common stocks.
    The trend in specialist consolidations has raised concerns over the 
number of stocks assigned to any one specialist entity and the impact 
that market volatility can have on special entities and the overall 
operation of the market. The adequate capitalization of the 
significantly larger specialist units is critical in dealing with 
volatile markets and in meeting specialist market maintenance 
obligations. Accordingly, new Rule 104.21 is being proposed to increase 
the minimum capital requirements of any specialist or specialist unit 
which exceeds certain concentration criteria.
    The new provision would require that any specialist or specialist 
unit, whose market share is greater than 5% of any of the following 
concentration measures, be subject to a revised method of calculating 
its ``net liquid asset'' requirement:
    (1) All listed common stock (current);
    (2) The 250 most active listed common stocks (over the previous 12 
months);
    (3) The total share volume of stock trading on the Exchange (over 
the previous 12 months);
    (4) The total dollar value of stock trading on the Exchange (over 
the previous 12 months).
    If the 5% threshold is exceeded, the specialist entity shall 
maintain, at minimum, net liquid assets equivalvent to the following 
applicable requirements:
    (1) $4 million for each specialist security contained in the DJIA;
    (2) $2 million for each specialist security contained in the S&P 
100, not contained in 1;
    (3) $1 million for each specialist security contained in the S&P 
500, not contained in 1 or 2;
    (4) $500 thousand for each specialist common stock, excluding bond 
funds, not contained in 1, 2, or 3;
    (5) $100 thousand for each specialist security not included in 1 
through 4, excluding warrants.
    In addition, proposed Rule 104.22 would require any new specialist 
entities resulting from merger, acquisition, consolidation, or other 
combination of specialist assets, to maintain net liquid assets 
equivalent to the greater of either:
    (1) The aggregate net liquid assets of the specialist entities 
prior to their combination, or
    (2) The capital requirements otherwise prescribed by Rule 104.
    The purpose of this requirement is to prevent specialist units from 
withdrawing capital, prior to or upon combination of their assets, 
resulting in the combined entity having less capital than its component 
parts.
    Given that proposed rules 104.21 and 104.22 may subject specialist 
entities to sudden and substantially increased capital requirements, 
Rule 104.23 is proposed to authorize the Exchange to allow a specialist 
entity to operate, for a period not to exceed 5 business days, despite 
such specialist entity's non-compliance with the provisions of Rules 
104.21 and 104.22. This limited discretionary authority would, under 
appropriate circumstances, permit the Exchange to determine a 
reasonable time period for the infusion of additional specialist 
capital without disrupting the maintenance of a fair and orderly 
market, particularly in volatile market situations. In addition, the 
time period would allow for the orderly reallocation of specialist 
securities in the event a specialist entity is unable to comply with 
the prescribed

[[Page 8467]]

requirements. It is important to note that this authority extends only 
to compliance with the heightened concentration/combination standards 
proposed in this filing; it does not apply to the Commission's net 
capital requirements \4\ or the net capital requirements prescribed by 
NYSE Rule 104.20.
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    \4\ 17 CFR 240.15c3-1.
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    These heightened requirements are in keeping with the Exchange's 
resolve to maintain high quality market performance in its listed 
securities. By minimizing the potential risk of financial problems that 
would have a significant adverse impact on the functioning of its 
markets, the overall effectiveness of the specialist system is 
strengthened.
    It is further proposed that the capital requirements for specialist 
securities not specifically addressed in the Rule (i.e., certain 
derivatives and structured products) be determined by the Exchange 
according to a comparison of the products' structure and 
characteristics relative to the existing standardized securities whose 
capital requirements are currently prescribed in the Rule. This 
provision is necessary given the potentially limitless variety of 
derivative and structured products, which are not easily categorized.
    In addition, it is proposed that Rule 104.20 be amended to clarify 
the definition of ``net liquid assets'' and distinguish its application 
to specialist units subject to the Commission's net capital rule from 
specialist units which are not.
    The effective date of the rule amendments will be no later than 
ninety (90) days from the date of Commission approval, but it may be 
earlier, i.e., thirty (30) days following written notice to the 
membership if the NYSE determines that specialist entities are ready to 
comply with the new requirements.
2. Statutory Basis
    The Exchange believes that the proposed rule change is consistent 
with Section 6(b)(5) \5\ of the Act in that it promotes just and 
equitable principles of trade, removes impediments to, and perfects the 
mechanism of a free and open market and, in general, protects investors 
and the public interest. These interests are served when the 
capitalization of specialist entities is adequate to maintain a fair 
and orderly market.
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    \5\ 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 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 data 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 NYSE. All 
submissions should refer to File No. SR-NYSE-99-46 and should be 
submitted by March 10, 2000.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\6\
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    \6\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-3939 Filed 2-17-00; 8:45 am]
BILLING CODE 8010-01-M