[Federal Register Volume 67, Number 49 (Wednesday, March 13, 2002)]
[Notices]
[Pages 11365-11367]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-5929]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-45511; File No. SR-ISE-2002-05]


Self-Regulatory Organizations; Notice of Filing and Immediate 
Effectiveness of Proposed Rule Change by the International Securities 
Exchange LLC, Relating to Requirements for Joint Back Office 
Arrangements

March 6, 2002.
    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 February 13, 2002, the International Securities Exchange LLC 
(``ISE'' 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. 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.
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I. Self-Regulatory Organization's Statement of the Terms of 
Substance of the Proposed Rule Change

    The ISE is proposing to adopt Rule 1303, ``Joint Back Office 
Arrangements,'' to establish margin and net capital requirements for 
ISE members participating in joint back office (``JBO'') 
arrangements.\3\ The text of the proposed rule change is available at 
the Office of

[[Page 11366]]

the Secretary, ISE, and at the Commission.
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    \3\ In February 2000, the Commission issued a single order 
approving substantially uniform requirements with respect to JBO 
arrangements submitted by the American Stock Exchange, the Chicago 
Board Options Exchange (``CBOE''), the Chicago Stock Exchange, the 
New York Stock Exchange (``NYSE''), the Pacific Exchange and the 
Philadelphia Stock Exchange. Securities Exchange Act Release No. 
42453 (Feb. 24, 2000), 65 FR 11620 (Mar. 3, 2000). In May 2000, the 
Commission approved JBO requirements submitted by the National 
Association of Securities Dealers. Securities Exchange Act Release 
No. 42858 (May 30, 2000), 65 FR 36194 (June 7, 2000). There were 
only minor differences between the proposals adopted by each of 
these SROs. The proposed ISE Rule is identical to the requirements 
adopted by the NYSE.
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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 ISE 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 ISE has prepared summaries, set forth in sections A, 
B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The Exchange proposes to adopt Exchange Rule 1303 to establish 
requirements for JBO arrangements.\4\ The proposed rule would provide 
certain regulatory requirements for establishing and maintaining such 
JBO arrangements.\5\ A broker-dealer that carries and clears, or 
carries JBO accounts would be required to: (i) Provide written 
notification to its Designated Examining Authority prior to 
establishing a JBO; (ii) maintain minimum tentative net capital\6\ of 
$25 million, or maintain minimum net capital of $7 million if engaged 
in the primary business of clearing options market maker accounts;\7\ 
(iii) provide prompt written notice when tentative net capital or net 
capital, whichever may apply, falls below the prescribed standard; (iv) 
take appropriate action within three business days to resolve any 
capital deficiency;\8\ (v) maintain a written risk methodology for 
assessing the amount of credit extended to participating broker-
dealers, and (vi) deduct from net capital, the ``haircut'' requirements 
pursuant to the Commission's Net Capital Rule (Rule 15c3-1)\9\ in 
excess of the equity maintained in the accounts of participating 
broker-dealers.
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    \4\ Regulation T, issued by the Board of Governors of the 
Federal Reserve System (``FRB''), permits a broker-dealer to 
``effect or finance transactions of any of its owners if the 
[broker-dealer] is a clearing and servicing broker or dealer owned 
jointly or individually by other [broker-dealers].'' 12 CFR 
220.7(c).
    \5\ Because all other SROs (other than the Cincinnati Stock 
Exchange) currently have the proposed requirements in their rules, 
and every ISE member is also a member of at least one of these SROs, 
the proposal will not place any requirements on ISE members to which 
they are not already subject.
    \6\ The term ``tentative net capital'' generally refers to net 
capital before the application of ``haircuts'' and undue 
concentration charges on securities and options positions.
    \7\ Under the proposed rule, clearance of options market maker 
accounts would be deemed a broker-dealers primary business if a 
minimum of 60% of the aggregate deductions in the ratio of gross 
options market maker deductions to net capital (including gross 
deductions for JBO participant accounts) are options market maker 
deductions.
    \8\ Under the proposed rule, failure to correct such 
deficiencies within the allotted period will preclude the JBO 
carrying and clearing, or carrying, member from accepting any new 
transactions pursuant to the JBO arrangement.
    \9\ 17 CFR 240.15c3-1 et seq., ``Net Capital Requirements for 
Brokers or Dealers.'' Rule 15c3-1 requires a broker-dealer to reduce 
its net worth by certain percentages, known as ``haircuts,'' of the 
market value of its securities position.
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    Furthermore, under the proposal JBO participants must be registered 
broker-dealers subject to Rule 15c3-1, and will be required to maintain 
an ownership interest in the JBO pursuant to Regulation T. Exclusive of 
their ownership interest in the JBO arrangement, JBO participants must 
maintain a minimum liquidating equity of $1 million. If the liquidating 
equity falls below $1 million, the JBO participant must eliminate the 
deficiency within five business days or become subject to the margin 
requirements for customers in Regulation T, and the maintenance margin 
requirements pursuant to the provisions of Exchange Rule 1202.\10\
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    \10\ Rule 1202 permits Members to elect to be bound by the 
margin rules of either the CBOE or the NYSE.
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2. Statutory Basis
    The ISE believes that the proposed rule change is consistent with 
Section 6(b) of the Act,\11\ in general, and furthers the objectives of 
Section 6(b)(5) \12\ in particular, which requires that an exchange 
have rules that are designed to prevent fraudulent and manipulative 
acts and practices, to promote just and equitable principles of trade, 
and, in general, to protect investors and the public interest. The 
Exchange also believes that the proposed rule is consistent with the 
rules and regulations promulgated by the FRB for the purpose of 
preventing the excessive use of credit for the purchase or carrying of 
securities, pursuant to Section 7(a) of the Act.\13\
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    \11\ 15 U.S.C. 78f(b).
    \12\ 15 U.S.C. 78f(b)(5).
    \13\ 15 U.S.C. 78g(a).
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b. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received from Members, Participants, or Others

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing 
for Commission Action

    The proposed rule change has been filed by the Exchange as a ``non-
controversial'' rule change pursuant to Section 19(b)(3)(A)(iii) of the 
Act \14\ and Rule 19b-4(f)(6) thereunder.\15\ Because the foregoing 
proposed rule change: (1) Does not significantly affect the protection 
of investors or the public interest, (2) does not impose any 
significant burden on competition, and (3) by its terms does not become 
operative for 30 days after February 13, 2002, the date on which it was 
filed, or such shorter time as the Commission may designate, and the 
Exchange provided the Commission with written notice of its intent to 
file the proposed rule change at least five business days prior to the 
filing date, it has become effective pursuant to Section 
19(b)(3)(A)(iii) \16\ of the Act and Rule 19b-4(f)(6) \17\ thereunder. 
At any time within 60 days of the filing of the proposed rule change, 
the Commission may summarily abrogate such rule change if it appears to 
the Commission that such action is necessary or appropriate in the 
public interest, for the protection of investors, or otherwise in 
furtherance of the purposes of the Act.
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    \14\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \15\ 17 CFR 240.19b-4(f)(6).
    \16\ 15 U.S.C. 78s(b)(3)(A)(iii).
    \17\ 17 CFR 240.19b-4(f)(6).
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IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street, 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

[[Page 11367]]

available for inspection and copying at the Commission's Public 
Reference Room. Copies of such filing also will be available for 
inspection and copying at the principal office of the ISE. All 
submissions should refer to File No. SR-ISE-2002-05 and should be 
submitted by April 3, 2002.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\18\
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    \18\ 17 CFR 200.30-3(a)(12).
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J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 02-5929 Filed 3-12-02; 8:45 am]
BILLING CODE 8010-01-M