[Federal Register Volume 65, Number 155 (Thursday, August 10, 2000)]
[Notices]
[Pages 49044-49046]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-20258]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-43098; File No. SR-NYSE-99-46]


Self-Regulatory Organizations; Order Approving Proposed Rule 
Change by the New York Stock Exchange, Inc. to Amend Exchange Rule 104 
(``Dealings by Specialists'')

July 31, 2000.

I. Introduction

    On November 16, 1999, the New York Stock Exchange, Inc. (``NYSE'' 
or

[[Page 49045]]

``Exchange'') submitted to the Securities and Exchange Commission 
(``Commission''), pursuant to section 19(b)(1) of the Securities 
Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4 \2\ thereunder, a 
proposed rule change. In its proposal, the NYSE seeks to increase 
capital requirements for specialist entities exceeding certain 
concentration-based criteria, and prescribe additional capital 
requirements for specialist entities resulting from merger, 
acquisition, consolidation, or other combinations of specialist assets. 
The proposed rule change was published for comment in the Federal 
Register on February 18, 2000.\3\ The Commission received no comments 
on the proposed rule change, and this order approves the proposal.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 42417 (February 11, 
2000), 65 FR 8465.
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II. Description of the Proposal

    During the last decade, there has been a significant decline in the 
number of specialist units operating on the floor of the Exchange. 
Currently, there are 27 specialist units, with 491 specialists 
registered in 2,871 common stocks. The trend in specialist 
consolidations has raised concerns at the NYSE over the number of 
stocks assigned to any one specialist entity and the impact that market 
volatility can have on specialist entities and the overall operation of 
the market. The NYSE believes that adequate capitalization of the 
significantly larger specialist units is critical in dealing with 
volatile markets and in meeting specialist market maintenance 
obligations. Accordingly, the NYSE proposed Rule 104.21 to increase the 
minimum capital requirements of any specialist or specialist unit that 
exceeds certain concentration criteria.
    The new provision would apply to any specialist or specialist unit 
whose market share is greater than 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);
    (4) The total dollar value of stock trading on the Exchange (over 
the previous 12 months).
If the 5% threshold is exceeded, the new provision requires that the 
specialist entity maintain, at a minimum, net liquid assets equivalent 
to the following applicable requirements:
    (1) $4 million for each specialist security contained in the Dow 
Jones Industrial Average;
    (2) $2 million for each specialist security contained in the 
Standard & Poor's 100, not contained in 1;
    (3) $1 million for each specialist security contained in the 
Standard & Poor's 500, not contained in 1 or 2;
    (4) $500,000 for each specialist common stock, excluding bond 
funds, not contained in 1, 2, or 3;
    (5) $100,000 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. 
According to the Exchange, 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.
    Because the proposal may subject specialist entities to sudden and 
substantially increased capital requirements, the proposal would grant 
the Exchange the discretion to allow a specialist entity to operate, 
for a period not to exceed 5 business days, despite the specialist 
entity's non-compliance with the provisions mentioned above. The 
Exchange believes that 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 disruption the maintenance of a fair and orderly 
market, particularly in volatile market situations. The Exchange also 
believes that 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 requirements. The NYSE notes 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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    Further, the Exchange proposed that the capital requirements of 
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. The NYSE 
believes that this provision is necessary given the potentially 
limitless variety of derivative and structured products, which are not 
easily categorized. In addition, the NYSE proposes 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 Exchange proposed that 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.

III. Discussion

    After careful review, the Commission finds that the proposed rule 
change is consistent with the requirements of the Act.\5\ In 
particular, the Commission finds the proposal is consistent with 
Section 6(b)(5) \6\ of the Act in that it addresses concerns about 
capitalization, operational efficiency, and risk management. Section 
6(b)(5) requires, among other things, that the rules of an exchange be 
designed to promote just and equitable principles of trade and to 
protect investors and the public interest.
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    \5\ In reviewing this proposal pursuant to Section 3(f) of the 
Act, the Commission has considered the proposed rule's impact on 
efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
    \6\ 15 U.S.C. 78f(b)(5).
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    The Commission believes that these new requirements are appropriate 
because they help ensure that specialist units have sufficient, 
separately dedicated capital with which to meet their market making 
responsibilities. Specialists occupy a unique position at the NYSE, and 
under NYSE rules, specialists are charged with the responsibility of 
maintaining fair and orderly markets.\7\ The proposal increases capital 
requirements for specialist entities exceeding certain concentration-
based criteria. In times of market volatility, specialist entities that 
meet these concentration criteria could

[[Page 49046]]

potentially be subject to financial risk. This proposal helps ensure 
that these specialists are adequately capitalized and can meet their 
obligation of maintaining fair and orderly markets.
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    \7\ See Exchange Rule 104.
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    The Commission also believes that it is appropriate to place 
additional capital requirements on specialists units that are 
combining. The combined entity will be larger than either of the two 
(or more) original entities, responsible for more securities, and 
financially exposed to a larger degree. The potential impact of the 
financial failure of a large-sized specialist unit upon the NYSE would 
be proportionately greater in comparison to the failure of either 
original unit. Thus, imposing more stringent capitalization 
requirements upon the new unit should decrease the probability of any 
such failure, and minimize any subsequent detrimental impact upon the 
market place.

IV. Conclusion

    It is therefore ordered, pursuant to Section 19(b)(2) of the 
Act,\8\ that the proposed rule change (SR-NYSE-99-46) is approved.
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    \8\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\9\
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    \9\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-20258 Filed 8-9-00; 8:45 am]
BILLING CODE 8010-01-M