[Federal Register Volume 65, Number 43 (Friday, March 3, 2000)]
[Notices]
[Pages 11620-11628]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-5188]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-42453; File Nos. SR-NYSE-97-28; SR-CBOE-97-58; SR-Phlx-
97-56; SR-PCX-97-49; SR-CHX-98-12; SR-Amex-99-26]


Self-Regulatory Organizations; New York Stock Exchange, Inc., 
Chicago Board Options Exchange, Incorporated, Philadelphia Stock 
Exchange, Inc., Pacific Exchange, Inc., Chicago Stock Exchange, 
Incorporated and American Stock Exchange LLC; Order Approving Proposed 
Rule Changes and Notice of Filing and Order Granting Accelerated 
Approval of Amendment to the Proposed Rule Changes That Adopt Capital 
and Equity Requirements for Joint Back Office Arrangements

February 24, 2000.

1. Introduction

    On October 2, 1997, the New York Stock Exchange, Inc. (``NYSE''), 
October 27, 1997, the Chicago Board Options Exchange, Incorporated 
(``CBOE''), November 7, 1997, the Philadelphia Stock Exchange, Inc. 
(``Phlx''), December 18, 1997, the Pacific

[[Page 11621]]

Exchange, Inc. (``PCX''), May 28, 1998, the Chicago Stock Exchange, 
Incorporated (``CHX''), and July 16, 1999, the American Stock Exchange 
LLC (``Amex'') (collectively the ``SROs'') submitted to the Securities 
and Exchange Commission (``Commission''), pursuant to section 19(b)(1) 
of the Securities Exchange Act of 1934 (``Exchange Act''),\1\ and Rule 
19b-4 thereunder,\2\ proposed rule changes to adopt capital and equity 
requirements for joint back office (``JBO'') arrangements. The NYSE, 
PCX and Amex also filed proposed rule changes to their maintenance 
margin requirements for specialist, market-maker and broker-dealer 
accounts. In addition, the NYSE proposed to amend its margin provisions 
relating to the concentration of control and restricted securities.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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    The proposed rule change filed by the NYSE was published for 
comment on January 7, 1998.\3\ On May 21, 1998, and September 28, 1998, 
the NYSE filed with the Commission Amendments Nos. 1 and 2 to the 
proposed rule change. Amendments Nos. 1 and 2 were published for 
comment on December 4, 1998.\4\ On July 19, 1999, the NYSE filed with 
the Commission Amendments Nos. 3 and 4 to the proposed rule change.
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    \3\ See Exchange Act Release No. 39497 (Dec. 29, 1997), 63 FR 
899 (``NYSE Original Filing'').
    \4\ See Exchange Act Release No. 40709 (Nov. 25, 1998), 63 FR 
67161 (``NYSE Amendments Nos. 1 and 2'').
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    The proposed rule change filed by the CBOE was published for 
comment on December 17, 1997.\5\ On July 27, 1998, the CBOE filed 
Amendment No. 1 to the proposed rule change. Amendment No. 1 was 
published for comment on December 4, 1998.\6\
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    \5\ See Exchange Act Release No. 39418 (Dec. 10, 1997), 62 FR 
66154 (``CBOE Original Filing'').
    \6\ See Exchange Act Release No. 40708 (Nov. 25, 1998), 63 FR 
67155.
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    The Phlx filed Amendment No. 1 to the proposed rule change on 
November 24, 1997. The proposed rule change and Amendment No. 1 were 
published for comment on December 17, 1997.\7\ On February 22, 1999, 
the Phlx filed Amendment No. 2 to the proposed rule change.
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    \7\ See Exchange Act Release No. 39419 (Dec. 10, 1997), 62 FR 
66169.
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    The proposed rule change filed by the PCX was published for comment 
on February 25, 1998.\8\ On October 8, 1998, the PCX filed Amendment 
No. 1 to the proposed rule change. Amendment No. 1 was published for 
comment on December 4, 1998.\9\ On March 15, 1999, the PCX filed 
Amendment No. 2 to the proposed rule change.
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    \8\ See Exchange Act Release No. 39680 (Feb. 18, 1998), 63 FR 
9622.
    \9\ See Exchange Act Release No. 40710 (Nov. 25, 1998), 63 FR 
67164.
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    CHX filed Amendment No. 1 to the proposed rule change on July 16, 
1998. The proposed rule change and CHX Amendment No. 1 were published 
for comment on September 9, 1998.\10\ On November 17, 1998, the CHX 
filed Amendment No. 2 to the proposed rule change. On January 28, 1999, 
and September 16, 1999, the CHX filed Amendments Nos. 3 and 4 to the 
proposed rule change.
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    \10\ See Exchange Act Release No. 40384 (Aug. 31, 1998), 63 FR 
48286.
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    The proposed rule change filed by the Amex was published for 
comment on November 22, 1999.\11\
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    \11\ See Exchange Act Release No. 42129 (Nov. 10, 1999), 64 FR 
63834.
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    The Commission received seven comment letters on the Self 
Regulatory Organization (``SRO'') proposed rule changes. All of the 
comment letters concerned the JBO rule changes and specifically related 
to the CBOE's proposal. This Order approves each of the SRO proposed 
rule changes, as amended. In addition, the Commission is publishing 
notice to solicit comments and is simultaneously approving, on an 
accelerated basis, NYSE Amendments Nos. 3 and 4, Phlx Amendment No. 2, 
PCX Amendment No. 2 and CHX Amendments Nos. 2, 3, and 4.

II. Description of the Proposals

A. Background

    Section 220.7(c) of Regulation T,\12\ which is promulgated by the 
Board of Governors of the Federal Reserve (``Federal Reserve 
Board''),\13\ allows special margin treatment for broker-dealers 
without clearing operations, known as ``JBO participants,'' who invest 
in a ``clearing and servicing'' \14\ broker-dealer, known as a ``JBO 
broker.'' Under Regulation T, the JBO participants are not treated as 
``customers'' \15\ of the JBO broker.
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    \12\ 12 CFR 220.7(c).
    \13\ The Federal Reserve Board promulgated Regulation T pursuant 
to Section 7(a) of the Exchange Act, which authorizes it to 
prescribe regulations relating to credit extensions on securities. 
See 15 U.S.C. 78g(a).
    \14\ Regulation T does not define the term ``clearing and 
servicing.'' However, the Regulation describes a JBO broker as a 
clearing and servicing firm.
    \15\ The term customer is defined in section 220.2 of Regulation 
T.
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    As part of a periodic review of its regulations, in 1995 the 
Federal Reserve Board proposed an amendment to Regulation T relating to 
JBO arrangements.\16\ The Federal Reserve Board stated that the 
proposed amendment was prompted by the concerns of several stock 
exchanges that JBO brokers were extending credit to JBO participants 
far in excess of their ownership interests in the JBO broker.\17\ Under 
the proposed amendment, the favorable margin treatment for a JBO 
arrangement would have been conditioned on the JBO participants' 
ownership interest in the JBO broker being related to the amount of 
business transacted through the JBO arrangement.
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    \16\ Board of Governors of the Federal Reserve System Docket No. 
R-0772 (June 21, 1995), 60 FR 33763 (June 29, 1995).
    \17\ Id.
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    After Congress enacted the National Securities Market Improvement 
Act of 1996 (NSMIA),\18\ the Federal Reserve Board stated that it 
decided not to adopt its proposed amendment to Regulation T relating to 
JBO arrangements.\19\ Instead, the Federal Reserve Board stated that it 
``believes it is appropriate to rely on the authority of the JBO's 
examining authority to ensure the reasonableness of JBO arrangements 
under its supervision.'' \20\
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    \18\ National Securities Markets Improvement Act of 1996, Pub. 
L. 104-290, 110 Stat. 3416 (Oct. 11, 1996).
    \19\ Board of Governors of the Federal Reserve System Docket No. 
R-0772 (Apr. 24, 1996), 61 FR 20386 (May 6, 1996).
    \20\ Id.
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    In April 1996, the SROs established committees to review and 
recommend changes to the SRO margin rules. These committees established 
subcommittees,\21\ which included experienced industry representatives 
on margin and credit matters, in order to review specific margin 
provisions. Based on the recommendations by the committees and the 
review by the SRO's staff, the SROs proposed the following amendments.
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    \21\ The subcommittees that were formed were entitled the 
``Control Stock,'' ``Joint Back Office,'' ``Good Faith Securities,'' 
``Options'' and ``Other'' subcommittees. NYSE Original Filing, supra 
note 3.
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B. JBO Proposals

1. NYSE JBO Proposal
(a) Original Filing
    The NYSE proposed to amend NYSE Rule 431 \22\ to include proposed 
subparagraph (e)(6)(B). Under proposed subparagraph (e)(6)(B), broker-
dealers would be permitted to establish a JBO arrangement subject to 
specific requirements for JBO brokers and JBO participants. A JBO 
broker would be required to: (1) Provide written notification to the 
NYSE prior to establishing a JBO arrangement; (2)

[[Page 11622]]

maintain a minimum of $25 million of ``tentative net capital'' \23\ as 
computed under Exchange Act Rule 15c3-1 \24\ or maintain a minimum of 
$10 million in ``net capital'' \25\ if the JBO broker is engaged in the 
primary business of clearing options market-maker accounts, \26\ (3) 
maintain a written risk analysis methodology for assessing the amount 
of credit extended to each JBO participant; (4) deduct from its net 
capital each JBO participant's ``haircut'' \27\ requirment under 
Exchange Act Rule 15c3-1 in excess of the equity maintained in the JBO 
participant's account. In addition, a JBO broker would be permitted to 
establish a JBO arrangement if it either cleared and carried or carried 
customer accounts.\28\
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    \22\ NYSE Constitution and Rules, para.2431, NYSE Rule 431.
    \23\ The term ``tentative net capital'' generally refers to net 
capital before haircuts and undue concentration charges on 
proprietary securities and options positions. See NYSE 
Interpretation Handbook, Rule 15c3-1(c)(2)(vi)(M)/04.
    \24\ 17 CFR 240.15c3-1. This rule is referred to as the ``Net 
Capital Rule.''
    \25\ The term ``net capital'' is defined under Exchange Act Rule 
15c3-1 and is generally calculated by deducting illiquid assets from 
a firm's ``net worth,'' as determined under Generally Accepted 
Accounting Principles (GAAP), adding to that amount properly 
subordinated debt under Appendix D of the Rule and further deducting 
haircuts from securities held in the firm's proprietary accounts.
    \26\ Under the proposed amendments, the clearance of option 
market-maker accounts would be deemed a broker-dealer's primary 
business if a minimum of 60% of the aggregate deductions in its 
ratio of gross options market-maker deductions to net capital 
(including gross deductions for JBO participant accounts) are 
options market-maker deductions. Subparagraph (c)(2)(x) of Exchange 
Act Rule 15c3-1 limits the amount of specialist and market-maker 
options positions a firm may guarantee, endorse or carry to a ratio 
of 10 to 1 of options market-maker and specialist deductions to net 
capital. In addition, subparagraph (a)(6) of the Rule exempts an 
options market-maker and specialist from the haircut provisions of 
the Rule provided that, among other things, the firm maintains an 
account liquidating equity equal to the percentage described in 
subparagraph (a)(6)(iii)(A) of the Rule.
    \27\ Exchange Act Rule 15c3-1 requires a broker-dealer to reduce 
its net worth by certain percentages, or ``haircuts,'' of the market 
value of its proprietary securities.
    \28\ See Letter from Scott Holz, Counsel, Federal Reserve Board, 
to Raymond J. Hennessy, Vice President, NYSE, dated April 16, 1999 
(stating that a carrying firm may be considered a clearing and 
servicing firm within the meaning of the JBO provisions of 
Regulation T).
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    Under proposed subparagraph (e)(8)(B), a JBO participant would be 
required to be a registered broker-dealer subject to exchange Act Rule 
15c3-1 and would be required to maintain an ownership interest in its 
JBO broker in accordance with Regulation T. Further, a JBO participant 
would be required to maintain in the JBO arrangement a minimum of $1 
million in liquidating equity. This $1 million requirement would be 
exclusive of the JBO participant's required ownership interest in the 
JBO broker under Regulation T. If a JBO participant's liquidating 
equity would fall below $1 million, the firm would be required to 
deposit the deficiency within five business days or would become 
subject to the other margin requirements under NYSE Rule 431.
(b) NYSE Amendment No. 1
    NYSE Amendment No. 1 proposed to incorporate a related NYSE rule 
change (``Related Filing'') \29\ into proposed subparagraphs (e)(5)(A), 
(e)(5)(B), (e)(6)(A), and (e)(6)(B)(i)(3) of NYSE Rule 431. Under the 
Related Filing, a broker-dealer's maintenance margin requirement would 
be reduced below the haircut requirement under Exchange Act Rule 15c3-1 
for certain non-equity securities held in an ``exempt account.'' \30\ 
Under NYSE Amendment No. 1, a JBO broker would be permitted to 
alternatively deduct from its net capital the difference between a JBO 
participant's account equity and the maintenance margin requirement 
under the Related Filing,\31\ as opposed to the haircut requirement 
under Exchange Act Rule 15c3-1 originally proposed. The NYSE stated 
that this amendment would establish consistency by incorporating the 
most recent maintenance margin requirements of the Related Filing into 
the JBO filing.\32\
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    \29\ Exchange Act Release No. 40278 (July 29, 1998), 63 FR 41882 
(Aug. 5, 1998). To date, the Commission has not taken action on the 
Related Filing. Accordingly, this Order does not approve the Related 
Filing or its application to the margin amendments contained in this 
filing. However, upon Commission approval of the Related Filing, 
this Order would permit the Related filing's application as 
described in the Related Filing, as amended.
    \30\ The Related Filing proposed to adopt subparagraph (a)(13) 
to NYSE Rule 431 that would define an ``exempt account'' as a: (1) 
Member organization; (2) non-member broker-dealer; (3) ``designated 
account;'' or (4) person with at least a $40 million net worth. In 
addition, the Related Filing proposed to revise subparagraph (a)(3) 
of NYSE Rule 431 to define a ``designated account'' as the account 
of: (1) A bank; (2) a savings association; (3) an insurance company; 
(4) an investment company; (5) a state or political subdivision 
thereof; or (6) a pension or profit sharing plan.
    \31\ The alternative deduction under NYSE Amendment No. 1 would 
apply to securities covered by the Related Filing's proposed 
subparagraphs (e)(2)(F) and (e)(2)(G) to NYSE Rule 431. These 
securities include: exempted securities, mortgage related 
securities, major foreign sovereign debt securities, highly rated 
foreign sovereign debt securities, and investment grade debt 
securities. Generally, the maintenance margin requirement for these 
securities under the Related Filing would be less than the current 
maintenance margin requirement under NYSE Rule 431 and the haircut 
requirements under Exchange Act Rule 15c3-1.
    \32\ NYSE Amendments Nos. 1 and 2, supra note 4.
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    NYSE Amendment No. 1 also clarified that if the amount of equity in 
a JBO participant's account would fall below the $1 million minimum, it 
would lose its JBO participant status unless the deficiency is cured 
within five business days. In addition, unless the JBO participant 
would be an ``exempted borrower,'' \33\ it would be subject to the 
margin account requirements under Regulation T and the other 
maintenance margin requirements under NYSE Rule 431.
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    \33\ The term ``exempted borrower'' is defined in section 220.2 
of Regulation T. Subparagraph (a)(2) of NYSE Rule 431 specifically 
excludes an exempted borrower from its definition of ``customer.''
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(c) NYSE Amendment No. 2
    NYSE Amendment No. 2 proposed to lower the minimum net capital 
requirement for a JBO broker whose primary business is clearing options 
market-maker accounts to $7 million, instead of the $10 million 
originally proposed. The NYSE stated that this change was in response 
to the comments from CBOE members concerning the CBOE's original JBO 
proposal, which required a minimum of $10 million. \34\ In addition, 
the NYSE stated that it believes that the proposed $7 million minimum 
net capital requirement would be sufficient to satisfy the safety and 
soundness concerns related to JBO arrangements. \35\
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    \34\ NYSE Amendments Nos. 1 and 2, supra note 4. See infra text 
and accompanying notes 69 to 77 for a discussion of the comments 
relating to the additional net capital requirements for options 
market-maker clearing firms under the SRO JBO proposals.
    \35\ Id. 
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    NYSE Amendment No. 2 proposed to also require: (1) prompt written 
notification to the NYSE when a JBO broker's tentative net capital or 
net capital, whichever applies, would fall below the prescribed 
requirement; and (2) any net capital deficiency by a JBO broker be 
resolved within three business days. In addition, if a JBO broker would 
fail to correct a net capital deficiency within the required three 
business days, it would not be permitted to accept new transactions 
through the JBO arrangement. The NYSE stated that these requirements 
are consistent with the Exchange Act Rule 15c3-1 provisions dealing 
with net capital deficiencies. \36\
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    \36\ NYSE Amendments Nos. 1 and 2, supra note 4. Subparagraph 
(c)(2)(x) of Exchange Act Rule 15c3-1 requires an options market-
maker carrying firm's ratio of gross options market-maker deductions 
to net capital to not exceed a ratio of 10 to 1 for a period of more 
than three consecutive business days.
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(d) NYSE Amendments Nos. 3 and 4
    NYSE Amendment No. 3 proposed to permit a six month phase-in of the 
NYSE's rule changes relating to JBO

[[Page 11623]]

arrangements. The NYSE stated that a six month phase-in would allow 
sufficient time for firms to comply with the capital and risk analysis 
requirements for JBO arrangements and for firms to implement new or 
make changes to their existing systems.
    NYSE Amendment No. 4 clarified the current citation to the 
provisions of Regulation T relating to JBO arrangements. \37\
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    \37\ Prior to the filing of NYSE Amendment No. 4, the NYSE's JBO 
proposal contained the Regulation T citation for JBO arrangements of 
section 220.11. Subsequently, the Federal Reserve Board changed the 
citation to section 220.7(c). See Board of Governors of the Federal 
Reserve System Docket Nos. R-0905, R-0923 and R-0944 (Jan. 8, 1998), 
63 FR 2806 (Jan. 16, 1998).
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(e) Impact of the NYSE JBO Filing on Other SROs
    Generally, the other SRO JBO filings were similar to the NYSE's 
filing. However, some of the SRO filings contained different 
requirements. For example, the other SRO filings did not incorporate 
the alternative deduction for certain non-equity securities covered by 
the NYSE's Related Filing. If a firm is a dual member of the NYSE and 
another SRO, however, the firm may nevertheless be permitted to elect 
to be bound by the NYSE's margin rules. \38\ By making this election, 
the firm would be permitted to take advantage of the NYSE's proposed 
alternative deduction.
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    \38\ For example, CBOE Rule 12.11 specifies that in lieu of 
meeting the CBOE's margin requirements, a firm may elect to be bound 
by the initial and maintenance margin requirements of the NYSE. CBOE 
Constitution and Rules, para. 2381, Rule 12.11.
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2. PCX JBO Filing
    The PCX and the NYSE JBO filings are substantially similar, as 
amended. However, unlike the NYSE's filing, the PCX filing would 
require a JBO broker to provide immediate telegraphic or facsimile 
notice to the PCX if its tentative net capital or net capital, 
whichever applies, would fall below the prescribed minimum levels. The 
PCX filing would also subject a JBO broker to the equity capital 
withdrawal restrictions of paragraph (e) of Exchange Act Rule 15c3-1 
and the prohibitions against the reduction, prepayment, and repayment 
of subordination debt of paragraph (b) of Appendix D of Exchange Act 
Rule 15c3-1, as if the firm's net capital would be below the minimum 
standards specified by those sections. In addition, the PCX filing 
would prohibit a JBO broker that was only a carrying firm.\39\
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    \39\ The PCX's original proposal was similar to the NYSE's, 
which permits a JBO broker to clear and carry or carry customer 
accounts.
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3. CBOE, Phlx, CHX and Amex JBO Filings
    The CBOE, Phlx, CHX, and Amex all had similar JBO filings as the 
NYSE's filing, as amended. However, unlike the NYSE filing, these SROs 
would require a JBO broker to comply with the PCX's additional 
requirements and also establish and maintain written ownership 
standards for JBO accounts. In addition, a JBO participant would be 
required to employ or have access to a qualified Series 27 principal 
and would not be eligible to operate under subparagraph (b)(1) of 
Exchange Act Rule 15c3-1.\40\ Lastly, the Phlx JBO proposal would 
permit foreign currency options participants to be JBO participants.
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    \40\ Subparagraph (b)(1) of Exchange Act Rule 15c3-1 exempts 
certain broker-dealers, satisfying enumerated conditions, from the 
requirements of the Rule.
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C. Reduced Margin Proposal for Specialist, Market-Maker and Broker-
Dealer Accounts

1. NYSE Proposal
(a) Original Filing
    The NYSE proposed to amend subparagraphs (e)(5) and (e)(6) of NYSE 
Rule 431. Subparagraphs (e)(5) and (e)(6) require a carrying broker-
dealer to deduct from its net capital the difference between the equity 
maintained in the account of a specialist, market-maker and broker-
dealer and the required maintenance margin under NYSE Rule 431. Under 
the proposed amendments, a broker-dealer would instead deduct from its 
net capital the difference between the equity maintained in the account 
of a specialist, market-maker and broker-dealer and the required 
haircut in accordance with Exchange Act Rule 15c3-1.\41\ The NYSE 
stated that this rule change would provide ``equitable treatment'' for 
the maintenance margin requirements of broker-dealer accounts with the 
proposed treatment for JBO participants.\42\
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    \41\ For example, in the case of a long position in an equity 
security the proposed amendments would require a JBO broker to 
compute its net capital deduction for deficient specialist, market-
maker and broker-dealer accounts based on the 15% haircut 
requirement of Exchange Act Rule 15c3-1(c)(2)(vi)(J), rather than 
the 25% maintenance margin requirement of NYSE Rule 431(c)(1).
    \42\ NYSE Amendments Nos. 1 and 2, supra note 4.
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(b) NYSE Amendment No. 1
    NYSE Amendment No. 1 proposed to incorporate the Related Filing 
into the amendments to subparagraphs (e)(5) and (e)(6) of NYSE Rule 431 
that were proposed in the NYSE's original filing. Under NYSE Amendment 
No. 1, for certain non-equity securities covered by the Related Filing, 
a carrying broker-dealer would be permitted to alternative deduct from 
its net capital the difference between the equity maintained in the 
account of a specialist, market-maker and broker-dealer and the 
maintenance margin requirement under the Related Filing, as opposed to 
the haircut requirement under Exchange Act Rule 15c3-1 as originally 
proposed. \43\
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    \43\ See supra text and accompanying notes 29 to 32 for a 
discussion of the application of the NYSE's Related Filing to its 
JBO filing.
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2. PCX and Amex Proposals

    The PCX and Amex included provisions to permit a clearing firm to 
carry the proprietary account of another registered broker-dealer on a 
mutually satisfactory margin basis, provided that the firms comply with 
Regulation T and do not maintain the account in an equity deficit. The 
PCX and Amex did not include a provision incorporating the alternative 
deduction for certain non-equity securities covered by the NYSE's 
Related Filing.

D. NYSE's Concentration Reduction Proposal for Control and Restricted 
Securities

    The NYSE proposed to amend subparagraph (e)(8)(C)(iv) of NYSE Rule 
431.\44\ Subparagraph (e)(8)(C)(iv) sets forth the conditions that 
determine if a customer's account contains a concentration of control 
and restricted securities for purposes of computing a broker-dealer's 
net capital deduction under NYSE Rule 325 \45\ for a customer margin 
deficiency under subparagraph (e)(8)(B)(i).\46\ Specifically, 
subparagraph (e)(8)(c)(iv) currently provides that a concentration 
exists whenever a customer's aggregate position of control

[[Page 11624]]

and restricted securities in one security exceeds either: (1) 10% of 
the security's outstanding shares; or (2) 100% of the security's 
average weekly volume during the preceding three months.
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    \44\ The NYSE proposed this amendment in its original filing 
with the Commission, along with its broader proposal relating to JBO 
arrangements. Subsequently, in Amendment No. 1 the NYSE requested 
that these amendments be subject to separate Commission review. The 
NYSE stated that by bifurcating the proposed rule changes the 
proposals would become effective more expeditiously than if they 
were considered by the Commission together. However, the Commission 
decided not to bifurcate the NYSE's proposals and is issuing this 
Order to cover each of the proposed amendments in the NYSE's 
original filing. NYSE Amendments Nos. 1 and 2, supra note 4.
    \45\ NYSE Constitution and Rules, para. 2325, Rule 325. NYSE 
Rule 325 requires a firm to comply with additional net capital 
requirements than those imposed by Exchange Act Rule 15c3-1.
    \46\ Subparagraph (e)(8)(B)(i) of NYSE Rule 431 provides that a 
broker-dealer must, in computing net capital under NYSE Rule 325, 
deduct ``any margin deficiencies in customers' accounts based upon a 
margin requirement as specified in subparagraph (e)(8)(C)(iv)'' for 
control and restricted securities.
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    Under the proposed amendments to subparagraph (e)(8)(C)(iv), in 
determining if a concentration exists, a broker-dealer would deduct 
from its customer's aggregate position of control and restricted 
securities ``excess securities,'' which would be defined as the amount 
of securities by which the aggregate position in control and restricted 
securities of any one issue exceeds the aggregate amount of securities 
that would be required to support the aggregate credit extended on 
those securities, assuming a 50% margin requirement. The NYSE stated 
that this proposal would correct an anomaly of subparagraph 
(e)(8)(C)(iv), which effectively imposes stricter requirements on 
accounts that have more control and restricted securities than 
necessary to collateralize a credit extension.\47\ By limiting the 
determination of whether a concentration of control and restricted 
securities exists to two times the credit extension, the proposed 
amendments would subject these securities to a greater margin 
requirement based only on financed control and restricted securities.
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    \47\ NYSE Amendments Nos. 1 and 2, supra note 4. Currently, the 
NYSE interpretations to subparagraph (e)(8)(B) encourages a firm to 
require its customers to deposit with it all their control and 
restricted securities on which the firm extends credit. See NYSE 
Interpretation Handbook, Rule 431(e)(8)(B)/01.
    \48\ The term ``then saleable'' refers to where all the 
conditions under Securities Act Rule 144 have been satisfied and, 
the securities are thus immediately saleable within the parameters 
of SEC Rules 144 and 145(d) under the Securities Act. See NYSE 
Interpretation Handbook, Rule 431(e)(8)(C)(iv)/02. Generally, 
Securities Act Rule 144 provides a safe harbor for the resale of 
restricted securities, which includes volume limitations, manner of 
sale and notice requirements.
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    The NYSE further proposed to amend subparagraph (e)(8)(D) of NYSE 
Rule 431, which exempts from the requirements of subparagraph (e)(8) 
control and restricted securities satisfying the following conditions: 
(1) The securities are considered ``then saleable \48\ under Securities 
Act Rule 144(k),\49\ Securities Act Rule 145(d)(2) \50\ or Securities 
Act rule 145(d)(3): \51\ and (2) the issuer is current in its filings 
pursuant to the continuous disclosure system under the Exchange Act; 
\52\ and (3) the securities are owned by a ``non-affiliate'' \53\ of 
the issuer. Under the proposed amendments, the exemption of 
subparagraph (e)(8)(D) would also include control and restricted 
securities held by an affiliate, provided that the securities otherwise 
satisfy the other requirements for the exemption. The NYSE stated that 
it believes that the maintenance margin requirements under NYSE rule 
431 for an affiliate that satisfied the time conditions of Securities 
Act Rule 144(k) for control and restricted securities should be the 
same as a non-affiliate because the Commission's interpretations under 
Securities Act Rule 144(k) permit a broker-dealer to sell control and 
restricted securities of an affiliate in default without regard to the 
volume and other restrictions imposed on affiliates.\54\ In addition, 
subparagraph (d)(3)(iv) of Securities Act Rule 144 permits a broker-
dealer to ``tack'' the ownership period of an affiliate in default to 
its own for purposes of determining if the time conditions of SEC Rule 
144(k) are met.\55\
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    \47\ NYSE Amendments Nos. 1 and 2, supra note 4. Currently, the 
NYSE interpretations to subparagraph (e)(8)(B) encourages a firm to 
require its customers to deposit with it all their control and 
restricted securities on which the firm extends credit. See NYSE 
Interpretation Handbook, Rule 431(e)(8)(B)/01.
    \48\ The term ``then saleable'' refers to where all the 
conditions under Securities Act Rule 144 have been satisfied and, 
the securities are thus immediately saleable within the parameters 
of SEC Rules 144 and 145(d) under the Securities Act. See NYSE 
Interpretation Handbook, Rule 431(e)(8)(C)(iv)/02. Generally, 
Securities Act Rule 144 Provides a safe harbor for the resale of 
restricted securities, which includes volume limitations, manner of 
sale and notice requirements.
    \49\ 17 CFR 230.144(k).
    \50\ 17 CFR 230.145(d)(2).
    \51\ 17 CFR 230.145(d)(3).
    \52\ See 15 U.S.C. 78m and 78o(d).
    \53\ An affiliate of an issuer is ``a person that directly, or 
indirectly through one or more intermediaries, controls, or is 
controlled by, or is under common control with'' the issuer. 17 CFR 
230.144(a).
    \54\ Letter from James E. Buck, Senior Vice President and 
Secretary, NYSE, to Richard Strasser, Assistant Director, dated May 
28, 1999.
    \55\ See Securities Act Release No. 6862 (Apr. 23, 1990), 55 FR 
17933 (Apr. 30, 1990).
---------------------------------------------------------------------------

    The NYSE further proposed to amend subparagraph (e)(8)(C)(ii) of 
NYSE Rule 431. Subparagraph (e)(8)(C)(ii) requires a broker-dealer to 
incur a net capital charge by the amount of aggregate credit it agrees 
to extend to its customers on control and restricted securities that 
exceeds 10% of its ``excess net capital'' \56\ for purposes of 
determining its status under NYSE Rule 326.\57\ Under the proposed 
amendments to subparagraph (e)(8)(C)(ii), a broker-dealer would be 
required to have a written agreement to extend credit to a customer for 
control and restricted securities. In addition, a firm would incur a 
net capital charge under subparagraph (e)(8)(C)(ii) of NYSE Rule 431 
based on the greater of the aggregate credit agreed to in writing and 
the credit actually extended.\58\
---------------------------------------------------------------------------

    \56\ The term ``excess net capital'' generally refers to a 
firm's net capital in excess of its prescribed requirements under 
Exchange Act Rule 15c3-1.
    \57\ NYSE Constitution and Rules, para. 2326(a)-(d), Rule 326. 
NYSE Rule 326 generally limits the activities of a broker-dealer if 
the firm's net capital falls below certain prescribed percentages.
    \58\ Currently, a broker-dealer is required to comply with this 
requirement under the NYSE's interpretation of NYSE Rule 431. See 
NYSE Interpretation Handbook, NYSE Rule 431(e)(8)(C)(ii)/01.
---------------------------------------------------------------------------

E. Comment Summary

    The Commission received seven comment letters on the SRO proposed 
rule changes. All of the comments concerned the JBO proposed rule 
changes and specifically related to the CBOE's proposal. The following 
is a summary of the comments.
1. Comments Concerning the $7 Million Net Capital Requirement for 
Options Specialists and Market-Maker Clearing Firms
    The original JBO proposals would have required options market-maker 
clearing firms to maintain $10 million in net capital. At the time the 
proposals were filed with the Commission, some of these firms did not 
need to maintain $10 million of net capital to finance their 
business.\59\ However, the Committees established to review and 
recommend changes to the SRO margin rules believed that these firms 
would eventually need this amount by the time the Commission would 
approve the JBO proposals.\60\ Accordingly, the SROs originally 
proposed a $10 million net capital requirement for options market-maker 
clearing firms.
---------------------------------------------------------------------------

    \59\ CBOE Original Filing, supra note 5.
    \60\ Id.
---------------------------------------------------------------------------

    Although the capital needs for options market-maker clearing firms 
have in fact increased,\61\ several comment letters expressed 
opposition to the $10 million net capital requirement originally 
proposed.\62\ Since receiving these

[[Page 11625]]

comments, the SROs have amended their JBO proposals to reduce the 
requirement to $7 million.
---------------------------------------------------------------------------

    \61\ Id.
    \62\ See Letter from William M. Cousins, President, AB Financial 
LLC, to Jonathan G. Katz, Secretary, Commission, dated January 6, 
1998 (``AB Financial Letter''); Letter from William C. Floersch, 
President and CEO, O'Connor & Company LLC, to Jonathan G. Katz, 
Secretary, Commission, dated January 7, 1998 (``O'Connor Letter''); 
Letter from Ray Woods to Jonathan Katz, Secretary, Commission, dated 
January 6, 1998 (``Woods Letter''); Letter from Lee E. Tenzer, 
Chairman, Lee E. Tenzer Trading Company, to Jonathan G. Katz, 
Secretary, Commission, dated January 6, 1998 (``LETCO Letter''); 
Letter from Phyllis M. Wyse, Senior Vice President, Sage-Clearing, 
to Jonathan Katz, Secretary, Commission, dated January 6, 1998 
(``Sage Letter''); Letter from Timothy Mullen, Chairman and CEO, LIT 
Clearing Services, Inc., to Jonathan G. Katz, Secretary, Commission, 
dated February 13, 1998 (``LIT Letter''); and Letter from Timothy 
Mullen, Chairman and CEO, First Options, to Jonathan G. Katz, 
Secretary, Commission, dated February 13, 1998 (``First Options 
Letter'').
---------------------------------------------------------------------------

    Four of the seven commenters believed that $10 million in net 
capital was excessive.\63\ These commenters noted that the minimum 
dollar net capital requirement under Exchange Act Rule 15c3-1 for 
clearing firms is $250,000,\64\ which is far below the $10 million net 
capital requirement originally proposed. Indeed, one commenter pointed 
out that a $10 million net capital requirement equals 40 times the 
minimum amount required under Exchange Act Rule 15c3-1 and 10 times the 
$1 million minimum required by the Options Clearing Corporation 
(``OCC'').\65\
---------------------------------------------------------------------------

    \63\ AB Financial Letter, O'Connor Letter, LETCO Letter and Sage 
Letter, supra note 62.
---------------------------------------------------------------------------

    These four commenters stated that a $10 million requirement is 
arbitrary and without basis under Exchange Act Rule 15c3-1. These 
commenters noted that Exchange Act Rule 15c3-1's minimum dollar net 
capital requirements are nominal and that a firm's overall minimum net 
capital requirement increases based on the size of its business.\66\ By 
the JBO proposals requiring a minimum of $10 million in net capital, 
one of these commenters argued that the requirement would ``represent 
an entirely new and unprecedented type of capital test.'' \67\
---------------------------------------------------------------------------

    \64\ Exchange Act Rule 15c3-1 imposes minimum dollar net capital 
requirements based on the type of business a firm conducts.
    \65\ O'Connor Letter, supra note 62.
    \66\ In addition to the minimum dollar requirements, Exchange 
Act Rule 15c3-1 requires a firm's overall minimum net capital 
requirement to increase based on either a percentage of its 
liabilities, or alternatively, a percentage of its customer debits. 
Further, subparagraph (c)(2)(x) of the Rule requires an options 
market-maker carrying firm's ratio of gross options market-maker 
deductions to net capital to not exceed a ratio of 10:1.
    \67\ Id.
---------------------------------------------------------------------------

    In addition, two of these four commenters argued that the risk 
management practices currently in place \68\ reduce the need for 
additional net capital requirements.\69\ One of the two commenters 
stated ``setting capital requirements without regard to the size or 
risk of the business engaged in essentially ignores all risk management 
techniques established over the past ten years.'' \70\
---------------------------------------------------------------------------

    \68\ For instance, CBOE Rule 15.8 requires options market-maker 
clearing firms to establish and maintain written procedures for 
assessing and monitoring the potential risks of market-maker 
positions to a firm's capital. CBOE Constitution and Rules, para. 
2448, Rule 15.9.
    \69\ O'Connor Letter and Sage Letter, supra note 62.
    \70\ O'Connor Letter, supra note 62.
---------------------------------------------------------------------------

    These four commenters stated that a $10 million requirement would 
be ``anti-competitive'' and lead to a concentration of JBO business in 
fewer firms. As a result, these commenters cautioned that systemic risk 
would increase in the financial markets. One of these commenters 
elaborated that, as a result of the increased costs of maintaining 
additional net capital,\71\ smaller firms would have to decide whether 
to raise the required net capital or exit the JBO clearing 
business.\72\ If these firms would opt to abandon the JBO business, the 
commenter predicted ``larger firms will be clearing more of the JBO 
business and thereby concentrating this type of account among fewer 
firms.'' \73\
---------------------------------------------------------------------------

    \71\ A clearing firm's net capital may fluctuate due to the 
changes of the daily net deductions for its customers. In order to 
cover these fluctuations, many clearing firms maintain revolving 
subordinated loan arrangements. According to the CBOE, there is a 
one time charge to establish a facility of approximately $10,000 per 
$1 million (1%). The cost to maintain such a facility, undrawn, 
approximates $10,000 per year per $1 million (1%), or $28 per day. 
The cost to draw down such a facility approximates $95,000 per year 
per $1 million of drawn funds (at 1% over an 8\1/2\% prime), or $264 
per day. However, the CBOE stated that it believes these costs are 
not excessively burdensome. CBOE Original Filing, supra note 5.
    \72\ AB Financial Letter, supra note 62.
    \73\ Id.
---------------------------------------------------------------------------

    Two of these four commenters criticized the JBO proposals' 
distinction between options market-maker clearing firms, which under 
the original JBO filings would have been required to maintain $10 
million in net capital, and other JBO brokers, which are required under 
the JBO proposals to maintain $25 million in tentative net capital.\74\ 
One of the two commenters stated that a JBO broker that is required to 
maintain $25 million in tentative net capital would not be required to 
consider its haircuts on proprietary positions, even though ``it is 
conceivable that a broker-dealer could have tentative net capital in 
excess of $25 million but net capital less than $10 million.'' \75\ 
Further, the JBO broker would not be subject to the 10:1 ratio of gross 
options market-maker deductions to net capital, which effectively 
imposes minimum net capital requirements on a firm based on the amount 
of business it conducts.
---------------------------------------------------------------------------

    \74\ AB Financial Letter and Sage Letter, supra note 62.
    \75\ AB Financial Letter, supra note 62.
---------------------------------------------------------------------------

    In addition, the same commenter noted that maintenance margin 
requirements for broker-dealer accounts are permitted to be the same as 
JBO participant accounts. As a result, the commenter argued that a 
minimum dollar requirement on a JBO broker would present ``an uneven 
playing field.'' \76\
---------------------------------------------------------------------------

    \76\ Id.
---------------------------------------------------------------------------

    The same commenter proposed that the JBO net capital requirements 
should include the 10:1 ratio requirement for all JBO brokers, and that 
the proposals should eliminate any minimum dollar net capital 
requirements. The commenter also suggested that a JBO broker should be 
able to satisfy its net capital requirements through undrawn and 
available subordinated debt. \77\
---------------------------------------------------------------------------

    \77\ Paragraph (b) of Appendix D of Exchange Act Rule 15c3-1 
sets forth the minimum requirements for debt under a subordination 
agreement to be considered net capital. Under paragraph (b), 
generally a subordination agreement must have a minimum term of one 
year, except for certain temporary subordination agreements under 
subparagraph (c)(5) of Appendix D.
---------------------------------------------------------------------------

2. Comments Concerning the $1 Million Equity Requirement for JBO 
Participants
    The JBO filings require a JBO participant to maintain account 
equity of $1 million, which is exclusive of its ownership interest in 
the JBO broker required under Regulation T.
    Two commenters stated that it is unreasonable to require a JBO 
participant to maintain $1 million account equity, and thereby be 
subject to margin calls for a deficiency.\78\ The two commenters stated 
that due to temporary market fluctuations, JBO participants would be 
subject to frequent calls on the $1 million equity requirement. 
Accordingly, the two commenters proposed to require an initial minimum 
equity amount, and a call amount of 50% to 60% of the initial minimum.
---------------------------------------------------------------------------

    \78\ Woods Letter and LETCO Letter, supra note 62.
---------------------------------------------------------------------------

    The two commenters also stated that the proposed requirement that a 
JBO broker deduct from its net capital each JBO participant's haircut 
requirement under Exchange Act Rule 15c3-1 in excess of the equity 
maintained in the JBO participant's account, is inconsistent with 
current margin rules that apply to broker-dealer accounts. In addition, 
the two commenters noted that it is unclear from the JBO proposals that 
the $1 million equity requirement would also be subject to a net 
capital charge. Accordingly, the two commenters proposed to instead 
require a JBO broker's net capital charge to be the lesser of: (1) The 
sum of each JBO participant's haircut charges and any deficiency of the 
$1 million account equity requirement; and (2) the maintenance margin 
requirement of the JBO participant.
    The two commenters also stated that the term ``equity'' is vague. 
The two commenters noted that under Exchange Act Rule 15c3-1, the term 
equity includes each account of a JBO participant. However, for margin

[[Page 11626]]

purposes the term equity refers to each individual account. 
Accordingly, the two commenters believes that more clarification is 
needed in defining the term equity.
    In regard to the definition of equity under the JBO proposals, 
several commenters proposed to define equity as all cash and other 
assets (including the amount paid by the JBO participant for its share 
of the JBO and the value of the CBOE memberships owned by the JBO 
participant, if applicable) plus all positions minus all short 
positions. Two commenters stated that it is appropriate to include in 
the $1 million account equity requirement a JBO participant's ownership 
interest in the JBO broker because ``it is often a significant amount 
of money and adds to the financial stability of the JBO as a whole.'' 
\79\
---------------------------------------------------------------------------

    \79\ LIT Letter and First Options Letter, supra note 62.
---------------------------------------------------------------------------

B. Comments Concerning the Written Risk Analysis Requirement

    Under the JBO proposals, a JBO broker must maintain a written risk 
analysis methodology for assessing the amount of credit extended to 
each JBO participant. One commenter criticized this requirement as not 
being ``entirely clear.'' \80\
---------------------------------------------------------------------------

    \80\ Woods Letter, supra note 62.
---------------------------------------------------------------------------

C. Comments Concerning the Written Ownership Requirement

    Some of the JBO filings would require a JBO broker to establish and 
maintain written ownership standards for JBO accounts. One commenter 
criticized this requirement as not having provided guidance regarding 
the minimum standards.\81\ In addition, the commenter stated that under 
the CBOE filing, the CBOE would have discretion to determine what is an 
appropriate ownership standard. As a result, the commenter argued that 
JBO brokers, would have an incentive to ``establish overly restrictive 
ownership standards.'' \82\
---------------------------------------------------------------------------

    \81\ Id.
    \82\ Id.
---------------------------------------------------------------------------

5. Comments Concerning the Series 27 Principal Requirements
    Some of the JBO filings would require JBO participants to employ, 
or have access to, a Series 27 principal. One commenter criticized this 
requirement and stated that some broker-dealers who limit their 
activities to proprietary trading and do not transact business with 
non-broker-dealers are not currently required to employ a Series 27 
principal.\83\ In addition, the commenter believed that the requirement 
was vague and not relevant.
---------------------------------------------------------------------------

    \83\ LETCO Letter, supra note 62.
---------------------------------------------------------------------------

III. Discussion

    For the reasons discussed below, the Commission finds that the 
proposed rule changes are consistent with the Exchange Act and the 
rules and regulations under the Exchange Act applicable to a national 
securities exchange. In particular, the Commission believes that the 
proposed rule changes are consistent with Section 6(b)(5) of the 
Exchange Act,\84\ which requires that the rules of an exchange be 
designed to promote just and equitable principles of trade, prevent 
fraudulent and manipulative acts and practices, and protect investors 
and the public interest.\85\
---------------------------------------------------------------------------

    \84\ 15 U.S.C. 78f(b)(5).
    \85\ In approving these proposed rule changes, the Commission 
considered the proposals' impact on efficiency, competition and 
capital formation. 15 U.S.C. 78c(f).
---------------------------------------------------------------------------

A. Approval of JBO Provisions

    The Commission believes that each of the SROs has proposed 
reasonable capital and equity requirements for JBO brokers and JBO 
participants. The Commission also believes that the SRO requirements 
fulfill the Federal Reserve Board's mandate for the SROs to provide 
rules that ``ensure the reasonableness of JBO arrangements.'' \86\
---------------------------------------------------------------------------

    \86\ Board of Governors of the Federal Reserve System Docket No. 
R-0772 (Apr. 24, 1996), 61 FR 20386 (May 6, 1996).
---------------------------------------------------------------------------

    With respect to JBO brokers, the Commission believes that it is 
reasonable for SROs to require a JBO broker to: (1) Provide written 
notification to its designated examining authority (``DEA'') prior to 
establishing a JBO arrangement; (2) maintain a minimum of $25 million 
in tentative net capital or $7 million in net capital if the JBO 
broker's primary business is clearing options market-maker accounts 
and, for these firms, the Commission also believes that it is 
reasonable to deem a broker-dealer's primary business to be the 
clearance of options market-maker accounts if a minimum of 60% of its 
aggregate deductions in its ratio of gross options market-maker 
deductions to net capital (including gross deductions for JBO 
participant accounts) are options market-maker deductions; (3) provide 
prompt written notification to the SROs if its tentative net capital or 
net capital, whichever applies, would fall below the prescribed 
requirements; (4) resolve any net capital deficiency within three 
business days or not be permitted to accept additional transactions 
through the JBO arrangement; (5) maintain a written risk analysis 
methodology for assessing the amount of credit extended to each JBO 
participant; and (6) deduct from its net capital each JBO participant's 
haircut requirement in excess of the equity maintained in the JBO 
participant's account.\87\
---------------------------------------------------------------------------

    \87\ To date, the Commission has not taken action on the NYSE's 
Related Filing. Accordingly, this Order does not approve the Related 
Filing or its application to the margin amendments contained in this 
filing. However, upon Commission approval of the Related Filing, 
this Order would, for certain non-equity securities, permit a JBO 
broker to deduct from its net capital the difference between the 
equity maintained in the account of a JBO participant and the 
maintenance margin requirement specified in the Related Filing, as 
amended.
    Although the SROs, except for the NYSE, have not proposed a 
similar alternative deduction, the Commission recognizes that some 
SRO rules permit dual NYSE registered firms to elect to be bound by 
the NYSE's maintenance margin requirements. By making this election, 
these firms would be permitted to take advantage of this alternative 
deduction.
---------------------------------------------------------------------------

    The Commission believes that the $7 million net capital requirement 
for JBO brokers is a reasonable response to the need for a capital 
cushion for the fluctuations in net capital resulting from the daily 
changes in JBO participant accounts and would avoid unnecessary and 
inadvertent violations of the net capital requirements at the times 
when a firm's capital needs are more volatile, such as the week that 
options expire or during severe market stresses.
    In addition, for those SROs that would so require, the Commission 
believes that it is reasonable to require a JBO broker to establish and 
maintain written ownership standards for JBO accounts and to require a 
JBO broker to provide immediate telegraphic or facsimile notice to the 
SRO if its tentative net capital or net capital, whichever applies, 
would fall below the prescribed minimum levels. The Commission also 
believes that it is reasonable for a JBO broker to be subject to the 
equity capital withdrawal restrictions of paragraph (e) of Exchange Act 
Rule 15c3-1 and the prohibitions against the reduction, prepayment, and 
repayment of subordination debt of paragraph (b) of Appendix D of 
Exchange Act Rule 15c3-1, as if the firm's net capital would be below 
the minimum standards specified by those sections.
    The Commission believes that it is reasonable for the SROs to 
require a JBO broker to be either a clearing and carrying, clearing, or 
carrying firm in accordance with the requirements under Regulation T 
and the Federal Reserve Board's applicable interpretations.
    With respect to JBO participants, the Commission believes that it 
is

[[Page 11627]]

reasonable for the SROs to require a JBO participant to: (1) Be a 
registered broker-dealer subject to Exchange Act Rule 15c3-1; (2) 
maintain an ownership interest in the JBO broker in accordance with 
Regulation T; and (3) maintain a minimum liquidating equity of $1 
million in an account with the JBO broker. The Commission also believes 
that it is reasonable to require a JBO participant, whose liquidating 
equity would fall below the required $1 million, to deposit the 
deficiency within 5 business days or lose its JBO participant status 
and become subject to the customer margin account requirements under 
Regulation T and the other SRO maintenance margin requirements.
    The Commission believes that the requirement of $1 million equity 
in the account is not unreasonable, considering the lack of regular 
maintenance margin requirements and the substantial leverage that would 
be obtained by the JBO participant.
    In addition, for those SROs that would so require, the Commission 
believes that this is reasonable to require a JBO participant to employ 
or have access to a qualified Series 27 principal and to prohibit a JBO 
participant from operating under paragraph (b)(1) of Exchange Act Rule 
15c3-1. The Commission also believes that it is reasonable to permit a 
foreign currency option participant to be a JBO participant.
    The Commission believes that it is important for the SROs and the 
firms to be adequately prepared to implement and monitor the revised 
rules. Therefore, the Commission believes that it is appropriate to 
permit firms to allow a six-month phase-in of these new rules relating 
to JBO arrangements.

B. Approval of Reduced Margin for Specialist, Market-Maker and Broker-
Dealer Accounts

    The Commission believes that it is reasonable to require a broker-
dealer to deduct from its net capital the difference between the equity 
maintained in the account of a specialist, market-maker and broker-
dealer and the required haircut in accordance with Exchange Act Rule 
15c3-1. The Commission believes that it is appropriate and equitable 
for SROs to require the same maintenance margin requirements for 
specialist, market-maker and broker-dealer accounts as JBO participant 
accounts.
    In addition, the Commission believes that it is reasonable to 
permit SROs, which have not previously adopted these provisions, to 
allow a clearing firm to carry the proprietary account of another 
registered broker-dealer on a mutually satisfactory margin basis, 
provided that the firms comply with Regulation T and do not maintain 
the account in an equity deficit.

C. Approval of the Proposed Changes to the Concentration Provisions for 
Control and Restricted Securities

    The Commission believes that it is reasonable for the NYSE to 
permit a firm to deduct the amount of its customers' excess control and 
restricted securities in determining if a concentration of control and 
restricted securities exists for purposes of deducting from its net 
capital any margin deficiencies in a customer's account under of 
subparagraph (e)(8)(c)(i) of NYSE Rule 431. Excess securities includes 
securities by which a customer's aggregate position in control and 
restricted securities of any one issue exceeds the aggregate amount of 
securities that would be required to support the aggregate credit 
extended on those securities, assuming a 50% margin requirement.
    The Commission notes that the current concentration provisions for 
control and restricted securities appear to be inappropriate because 
they impose stricter requirements on accounts that have more control 
and restricted securities than necessary to collateralize a credit 
extension. By limiting the determination of whether a concentration of 
control and restricted securities exists to two times the credit 
extension, the proposal would subject these securities to a greater 
margin requirement based only on financed control and restricted 
securities. The Commission believes that this is a reasonable and 
appropriate margin requirement.
    The Commission believes that it is reasonable for the NYSE and 
other SROs to exempt affiliate securities from the margin provisions 
relating to control and restricted securities provided that the 
securities otherwise meet the requirements of subparagraph (e)(8)(D), 
including that: (1) The securities are considered then saleable under 
Securities Act Rule 144(k), Securities Act Rule 145(d)(2) or Securities 
Act Rule 145(d)(3); and (2) the issuer is current in its filings 
pursuant to the continuous disclosure system under the Exchange Act.
    The Commission notes that its interpretations under Securities Act 
Rule 144(k) may, under certain circumstances, permit a broker-dealer to 
sell control and restricted securities of an affiliate in default 
without regard to the volume and other restrictions imposed on 
affiliates. In addition, subparagraph (d)(3)(iv) of Securities Act Rule 
144 permits a broker-dealer to ``tack'' the ownership period of an 
affiliate in default to its own for purposes of determining if the time 
conditions of Securities Act Rule 144(k) are met. Accordingly, the 
Commission believes that it is appropriate for affiliate securities, 
which otherwise meet the requirements of subparagraph (c)(8)(D), to be 
exempt from the maintenance margin rules for control and restricted 
securities.
    The Commission believes that it is reasonable for the NYSE to 
require a broker-dealer to incur a net capital charge by the amount of 
aggregate credit it agrees to extend to its customers on control and 
restricted securities that exceed 10% of its excess net capital for 
purposes of determining its status under NYSE Rule 326. The Commission 
believes that it is reasonable for the NYSE to require a broker-dealer 
to have a written agreement to extend credit to a customer for control 
and restricted securities and require a firm to incur a net capital 
charge based on the greater of the aggregate credit agreed to in 
writing and the credit actually extended. The Commission notes that 
this rule change is currently required under the NYSE's interpretation 
of NYSE Rule 431.

D. Accelerated Approvals

    The Commission finds good cause for approving NYSE Amendments Nos. 
3 and 4 prior to the thirtieth day after the date of publication of 
notice of filing thereof in the Federal Register. NYSE Amendment No. 3 
proposed to permit a six-month phase-in of the NYSE's rule changes 
relating to JBO arrangements. NYSE Amendment No. 4 clarified the 
current citation to the provisions of Regulation T relating to JBO 
arrangements. The Commission believes that NYSE Amendment No. 3 is 
necessary because it is important for the NYSE and its members to be 
adequately prepared to implement and monitor the new rules relating to 
JBO arrangements. The Commission believes that NYSE Amendment No. 4 is 
necessary to reflect the current citation of Regulation T. Accordingly, 
the Commission finds it is consistent with Section 19(b) of the 
Exchange Act to approve NYSE Amendments Nos. 3 and 4 on an accelerated 
basis.
    The Commission finds good cause for approving Phlx Amendment No. 2 
and CHX Amendments Nos. 2, 3 and 4 prior to the thirtieth day after the 
date of publication of notice of filing thereof in the Federal 
Register. These amendments generally proposed to: (1) Lower the minimum 
net capital

[[Page 11628]]

requirement for a JBO broker whose primary business is clearing options 
market-maker accounts to $7 million, instead of the $10 million 
originally proposed; (2) require a JBO broker to provide immediate 
telegraphic or facsimile notice to the SRO if its tentative net capital 
or net capital, whichever applies, would fall below the prescribed 
minimum levels; and (3) subject a JBO broker to the equity capital 
withdrawal restrictions of paragraph (e) of Exchange Act Rule 15c3-1 
and the prohibitions against the reduction, prepayment, and repayment 
of subordination debt of paragraph (b) of Appendix D of Exchange Act 
Rule 15c3-1, as if the firm's net capital would be below the minimum 
standards specified by those sections. These amendments also clarified 
the requirement that if a JBO participant's liquidating equity would 
fall below the required $1 million it must deposit the deficiency 
within 5 business days or lose its JBO participant status and become 
subject to the margin account requirements under Regulation T and the 
other SRO maintenance margin requirements.
    Furthermore, these amendments clarified the current citation to the 
relevant provisions of Regulation T, and proposed to prohibit a JBO 
broker to be only a carrying firm. The Commission believes that these 
amendments are reasonable and are consistent with some of the other 
SROs' JBO requirements. Accordingly, the Commission finds it is 
consistent with Section 19(b) of the Exchange Act to approve Phlx 
Amendment No. 2 and CHX Amendments Nos. 2, 3, and 4 on an accelerated 
basis.
    The Commission finds good cause for approving PCX Amendment No. 2 
prior to the thirtieth day after the date of publication of notice of 
filing thereof in the Federal Register. PCX Amendment No. 2 would 
prohibit a JBO broker to be only a carrying firm. The PCX's original 
filing would have permitted a JBO broker to carry and clear or carry 
customer accounts. The Commission believes that PCX Amendment No. 2 is 
reasonable and is consistent with some of the other SROs' JBO 
requirements. Accordingly, the Commission finds it is consistent with 
Section 19(b) of the Exchange Act to approve PCX Amendment No. 2 on a 
accelerated basis.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing SRO amendments not previously 
published in the Federal Register, including whether the proposed rule 
changes, as modified by the amendments, are consistent with the 
Exchange 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 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 in the Commission's Public 
Reference Section, 450 Fifth Street, NW, Washington, DC 20549. Copies 
of such filing will also be available for inspection and copying at the 
principal offices of the SROs. All submissions should appropriately 
refer to SR-NYSE-97-28; SR-CBOE-97-58; SR-Phlx-97-56; SR-PCX-97-49; SR-
CHX-98-12 and should be submitted by March 24, 2000.

V. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Exchange Act,\88\ that the proposed rule changes (SR-NYSE-97-28; SR-
CBOE-97-58; SR-Phlx-97-49; SR-CHX-98-12; SR-Amex-99-26), as amended, 
are approved.

    \88\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\89\
---------------------------------------------------------------------------

    \89\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-5188 Filed 3-2-00; 8:45 am]
BILLING CODE 8010-01-M