[Federal Register Volume 67, Number 184 (Monday, September 23, 2002)]
[Proposed Rules]
[Pages 59748-59754]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-24027]



[[Page 59747]]

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Part V





Securities and Exchange Commission





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17 CFR Part 240



Rule 15c3-3 Reserve Requirements for Margin Related to Security Futures 
Products; Proposed Rule

  Federal Register / Vol. 67, No. 184 / Monday, September 23, 2002 / 
Proposed Rules  

[[Page 59748]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-46492; File No. S7-34-02]
RIN 3235-AI61


Rule 15c3-3 Reserve Requirements for Margin Related to Security 
Futures Products

AGENCY: Securities and Exchange Commission (the ``Commission'').

ACTION: Proposed rule.

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SUMMARY: The Commission is proposing for comment amendments to the 
formula for determination of customer reserve requirements of broker-
dealers under the Securities Exchange Act of 1934 in response to the 
anticipated trading of security futures products. The proposed 
amendments would permit a broker-dealer to include margin related to 
security futures products written, purchased or sold in customer 
securities accounts required and on deposit with a registered clearing 
agency or a derivatives clearing organization as a debit item in 
calculating its customer reserve requirement.

DATES: Comments must be received on or before October 23, 2002.

ADDRESSES: To help us process and review your comments more 
efficiently, comments should be sent by one method only.
    Comments should be submitted in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, 
Washington, DC 20549-0609. Comments also may be submitted 
electronically at the following e-mail address: [email protected]. 
All comments should refer to File No. S7-34-02; this file number should 
be included on the subject line if e-mail is used. All comments 
received will be available for public inspection and copying in the 
Commission's Public Reference Room, 450 Fifth Street, NW, Washington, 
DC 20549 and on the SEC's Internet web site (http://www.sec.gov). The 
SEC does not edit personal identifying information, such as names or e-
mail addresses, from electronic submissions. Submit only the 
information you wish to make publicly available.

FOR FURTHER INFORMATION CONTACT: Michael A. Macchiaroli, Associate 
Director, at (202) 942-0132; Thomas K. McGowan, Assistant Director, at 
(202) 942-4886; Bonnie L. Gauch, Attorney, at (202) 942-0765; or 
Matthew B. Comstock, Attorney, at (202) 942-0156, Division of Market 
Regulation, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-1001.

I. Introduction

    The Commission is proposing amendments to Rule 15c3-3a.\1\ The 
amendments delineate how a broker-dealer would calculate its customer 
reserve requirement in light of enactment of the Commodity Futures 
Modernization Act of 2000 (``CFMA'')\2\ and the expected trading of 
security futures products.
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    \1\ 17 CFR 240.15c3-3a.
    \2\ Pub. L. No. 106-554, 114 Stat. 2763 (2000).
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A. Background

    The CFMA, which became law on December 21, 2000, amended the 
Commodity Exchange Act (``CEA'') and the Securities Exchange Act of 
1934 (``Exchange Act'') to permit the trading of single stock and 
narrow-based index futures (``securities futures'') and established a 
framework for the regulation of security futures products 
(``SFPs'').\3\ SFPs are both a security and a future.\4\ Thus, a 
customer who wishes to buy or sell an SFP must conduct the SFP 
transaction through a person registered both with the Commodity Futures 
Trading Commission (``CFTC'') as a futures commission merchant 
(``FCM'') or as an introducing broker (``IB'') and with the Commission 
as a broker-dealer. The CFTC and the Commission issued joint final 
rules under which either the firm or the customer, if the firm so 
permits, may choose whether customer funds would be protected under the 
CFTC's segregation rules or the Commission's Rule 15c3-3\5\ and the 
Securities Investor Protection Act of 1970 (``SIPA'').\6\
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    \3\ The term ``security futures product'' includes both a 
security future and any option or privilege on a security future. 
CEA section 1a(32) (7 U.S.C. 1a(32)) and Exchange Act section 
3(a)(56) (15 U.S.C. 78c(a)(56)).
    \4\ Exchange Act sections 3(a)(10) and (11) (15 U.S.C. 
78c(a)(10) and (11)).
    \5\ Exchange Act Release No. 46473 (Sept. 9, 2002).
    \6\ 15 U.S.C. 78aaa et seq.
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B. Protection of Customer Funds Related to SFP Transactions in Customer 
Securities Accounts

    A person who holds an SFP in a securities account would be a 
customer under Exchange Act Rule 15c3-3.\7\ As SIPA required,\8\ the 
Commission adopted Rule 15c3-3 in 1972, in part, to ensure that a 
broker-dealer in possession of customers' funds either deployed those 
funds ``in safe areas of the broker-dealer's business related to 
servicing its customers'' or, if not deployed in such areas, deposited 
the funds in a reserve bank account to prevent commingling of customer 
and firm funds.\9\ Under Rule 15c3-3, a broker-dealer must calculate 
what amount, if any, it must deposit on behalf of customers in the 
reserve bank account, entitled ``Special Reserve Bank Account for the 
Exclusive Benefit of Customers'' (``Reserve Bank Account''), according 
to the formula set forth in Rule 15c3-3a (``Reserve Formula'').\10\ 
Generally, under the Reserve Formula, a broker-dealer must calculate 
any amounts it owes to its customers and the amount of funds generated 
through the use of customer securities, called credits, and compare 
this amount to any amounts its customers owe it, called debits.\11\ If 
credits exceed customer debits, the broker-dealer must deposit that net 
amount in the Reserve Bank Account.\12\ Therefore, the Reserve Formula 
requires broker-dealers to maintain a reserve against customer funds 
and funds generated through the use of customer securities.
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    \7\ See 17 CFR 240.15c3-3(a)(1) (definition of ``customer'').
    \8\ Exchange Act section 15(c)(3) (15 U.S.C. 78o(c)(3)).
    \9\ Exchange Act Release No. 9856 (Nov. 10, 1972), 37 FR 25224; 
17 CFR 240.15c3-3(e).
    \10\ 17 CFR 240.15c3-3(e)(1) and (2).
    \11\ 17 CFR 240.15c3-3(e)(2).
    \12\ Id.
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    Rule 15c3-3 seeks to inhibit a broker-dealer's use of customer 
assets in its business by prohibiting the use of those assets except 
for designated purposes.\13\ The rule also aims to protect customers 
involved in a broker-dealer liquidation. If a broker-dealer holding 
customer property fails, Rule 15c3-3 seeks to ensure that the firm has 
sufficient reserves and possesses sufficient securities so that 
customers promptly receive their property and there is no need to use 
the Securities Investor Protection Corporation (``SIPC'') fund.\14\
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    \13\ Exchange Act Release No. 9856 (Nov. 10, 1972), 37 FR 25224.
    \14\ Id. SIPC may advance money from the SIPC fund to satisfy 
claims of customers of a failed broker-dealer, subject to certain 
limitations, under the Securities Investor Protection Act of 1970. 
15 U.S.C. 78fff-3.
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C. Clearance and Settlement of SFPs

    A clearing and carrying broker-dealer \15\ may clear and settle an 
SFP transaction through a clearing agency registered with the 
Commission (``Clearing Agency'') or through a derivatives clearing 
organization

[[Page 59749]]

(``DCO'') \16\ registered with the CFTC. \17\ A DCO is not required to 
register as a Clearing Agency with the Commission under section 17A 
solely because it clears SFPs.\18\ Similarly, a Clearing Agency is not 
required to register as a DCO with the CFTC solely because it clears 
SFPs.\19\
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    \15\ A clearing and carrying broker-dealer is an entity that may 
hold customer funds or securities under Exchange Act Rule 15c3-
1(a)(2)(i) (17 CFR 240.15c3-1(a)(2)(i)).
    \16\ CEA section 1a(9) (7 U.S.C. 1a(9)). The term ``derivatives 
clearing organization'' means a clearinghouse, clearing association, 
clearing corporation, or similar entity, facility, system, or 
organization that, with respect to an agreement, contract, or 
transaction--
    (i) enables each party to the agreement, contract, or 
transaction to substitute, through novation or otherwise, the credit 
of the derivatives clearing organization for the credit of the 
parties;
    (ii) arranges or provides, on a multilateral basis, for the 
settlement or netting of obligations resulting from such agreements, 
contracts, or transactions executed by participants in the 
derivatives clearing organization; or
    (iii) otherwise provides clearing services or arrangements that 
mutualize or transfer among participants in the derivatives clearing 
organization the credit risk arising from such agreements, 
contracts, or transactions executed by the participants.
    \17\ CEA section 7a-1(a), (b) and (c) (7 U.S.C. 7a-1(a), (b) and 
(c)).
    \18\ Exchange Act section 17A(b)(7)(A) (15 U.S.C 78q-
1(b)(7)(A)).
    \19\ CEA section 7a-1(a)(2) (7 U.S.C. 7a-1(a)(2)).
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    As part of the clearance and settlement process for customer SFP 
transactions, a Clearing Agency or DCO, pursuant to its rules, will 
require the broker-dealer carrying customer SFP accounts to post margin 
at the Clearing Agency or DCO. The Clearing Agency or DCO collects this 
margin to protect itself if a broker-dealer defaults on its obligations 
related to SFPs. The broker-dealer, in turn, must collect margin from 
the customer engaging in the SFP transaction.\20\ Customer margin 
protects the broker-dealer if the customer defaults on its obligations 
under an SFP transaction.
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    \20\ Exchange Act Release No. 46292 (Aug. 1, 2002), 67 FR 53145.
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II. Proposed Amendments

    The Commission proposes to amend Rule 15c3-3a to delineate the 
treatment of customer margin deposited with a Clearing Agency or DCO 
related to SFPs for Reserve Formula purposes. Specifically, the 
Commission proposes to redesignate Item 14 as Item 15, add a new Item 
14 and new Note G, amend Item B and amend newly redesignated Item 15, 
as described below. Generally, these proposed changes would permit a 
broker-dealer to include the amount of customer SFP margin required and 
on deposit at a Clearing Agency or DCO as a debit in the Reserve 
Formula.\21\ The Reserve Formula would require a broker-dealer that 
clears and carries SFPs in securities accounts on behalf of customers 
to include SFP margin that it receives from the customer as a credit 
item in calculating the customer reserve requirement.\22\ The Reserve 
Formula, however, currently does not permit a broker-dealer that clears 
and carries SFPs in securities accounts on behalf of customers to 
record an offsetting debit for customer SFP margin that it posts with a 
Registered Clearing Agency or DCO. Without the proposed changes to 
Rule15c3-3a, the broker-dealer would be required to fund its customer 
reserve requirement at least in part with proprietary assets, which 
would require the broker-dealer to maintain two reserves to cover the 
same customer property, one reserve in the Reserve Bank Account and the 
second with the Clearing Agency or DCO.
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    \21\ The proposed changes would provide customer SFP margin 
required and on deposit at a Clearing Agency or DCO with similar 
debit treatment under the Reserve Formula as customer options margin 
required and on deposit with The Options Clearing Corporation 
(``OCC''). To receive debit treatment under the Reserve Formula, the 
collateral posted at a Clearing Agency or DCO as customer SFP margin 
must be the same type of collateral posted at OCC as customer 
options margin.
    \22\ 17 CFR 240.15c3-3, Item 1.
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    Proposed new Item 14 would permit the broker-dealer to include a 
debit in its Reserve Formula computation to the extent of customer SFP 
margin required and on deposit with a Clearing Agency or a DCO, subject 
to the conditions in proposed Note G. Recordation of the debit reflects 
the broker-dealer's use of firm assets for customer purposes.
    Subparagraph (b) of proposed Note G would permit a broker-dealer to 
include a debit for customer SFP margin required and on deposit at a 
Clearing Agency or DCO under Item 14 only if it uses a Clearing Agency 
or DCO that meets specified criteria. Under subparagraph (b)(1) of 
proposed Note G, a broker-dealer could include customer SFP margin as a 
debit item only if the Clearing Agency or DCO has sufficient financial 
resources, as set forth in the proposed rule. In particular, a broker-
dealer could include this debit only if the registered Clearing Agency 
or DCO either: (1) Maintains the highest investment-grade rating from a 
nationally recognized statistical rating organization (``NRSRO''), or 
(2) maintains security deposits from clearing members in connection 
with regulated options or futures transactions of least $500 million 
and retains additional assessment power over member firms of at least 
$1.5 billion.
    These standards for financial resources are consistent with the 
customer protection function of Rule 15c3-3 and are necessary because 
of the unsecured nature of the debits. Requiring the highest 
investment-grade rating from an NRSRO provides the strongest protection 
against losses to margin deposited at a Clearing Agency or DCO, 
regardless of changing market conditions. With a lower credit rating, a 
Clearing Agency or DCO may not have the financial ability to meet its 
obligations to broker-dealers during times of market stress, which may 
compromise investor protection. Similarly, setting the security deposit 
level at $500 million and the assessment power at $1.5 billion should 
help to ensure that a Clearing Agency or DCO maintains liquidity and 
financial resources sufficient to protect customer margin on deposit. 
The Commission set the rating requirement, the amount of the security 
deposit and the assessment power at these levels based upon the 
Commission staff's experience and their discussions with the industry.
    The term ``security deposits'' in subparagraph (b)(1) of Note G 
refers to a general fund consisting of cash or securities held by a 
Clearing Agency or DCO. The Clearing Agency or DCO may use this fund to 
secure its general obligations to creditors. The security deposit is in 
addition to, and separate from, performance bonds and margin deposited 
with the Clearing Agency or DCO. The term ``assessment power'' included 
in the proposed rule relates to a Clearing Agency or DCO's ability, 
under its rules, to assess its members in excess of amounts required 
for a security deposit to meet emergency funding needs.
    Under subparagraph (b)(2) of proposed Note G, a broker-dealer could 
include customer SFP margin as a debit in the Reserve Formula only if 
the Clearing Agency or DCO at which the margin is deposited in turn 
deposits the margin in a bank, as that term is defined under section 
3(a)(6) of the Exchange Act. Furthermore, a broker-dealer could include 
the debit only if the Clearing Agency or DCO with which the customer 
SFP margin is deposited obtains certification from the bank, in 
writing, that the bank, or any person claiming through the bank, cannot 
place a lien against, or otherwise attach, the customer margin. The 
purpose of these conditions is to prevent the commingling of customer 
property with non-customer property and, thus, help to ensure that 
customer property is readily available to each customer if a Clearing 
Agency or DCO fails.
    Furthermore, a broker-dealer could include a debit item in the 
Reserve Formula for customer SFP margin required and on deposit with a 
Clearing Agency or DCO only if that clearing house, in compliance with 
Rule 15c3-

[[Page 59750]]

3, establishes, documents and maintains: (1) A system to safeguard the 
handling, transfer and delivery of cash and securities; (2) provisions 
for fidelity bond coverage of its employees and agents; and (3) 
provisions for periodic examination by independent public accountants. 
This proposed requirement is designed to protect customers' cash and 
securities by limiting the debit treatment under the Reserve Formula to 
customer SFP margin deposited at a Clearing Agency or DCO that 
addresses internal risk. Implementation of the proposed rule's 
requirements would assist these entities in monitoring whether customer 
margin is protected from both default and use in other areas of the 
entities' business.
    Under subparagraph (b)(4) of proposed Note G, a broker-dealer could 
include a debit in the Reserve Formula for customer SFP margin 
deposited at a DCO not otherwise registered with the Commission only if 
the DCO has provided an undertaking to the Commission. In the 
undertaking, the DCO would agree to examination by the Commission for 
compliance with proposed subparagraphs (b)(1) through (b)(3) of 
proposed Note G. With the undertaking, the Commission is assured of 
having the ability to examine a DCO to determine if customer property 
is protected in the manner that Rule 15c3-3 requires.
    The Commission also proposes other, related amendments to Rule 
15c3-3a. First, based upon existing criteria in Note F, proposed 
subparagraph (a) of Note G would harmonize the type of collateral 
acceptable for deposit as customer SFP margin for purposes of proposed 
Item 14 with the type of collateral acceptable for deposit as customer 
options margin under Note F for purposes of Item 13. Note F currently 
permits inclusion of a debit in the Reserve Formula under Item 13 only 
if a broker-dealer deposits cash, proprietary qualified securities or 
letters of credit with OCC as customer options margin.\23\ Subparagraph 
(a) of proposed Note G would permit inclusion of a debit in the Reserve 
Formula under proposed Item 14 only if a broker-dealer deposits the 
same type of collateral set forth in Note F with a Clearing Agency or a 
DCO as customer SFP margin.
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    \23\ 17 CFR 240.15c3-3a, Item 13, Note F.
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    Second, the Commission proposes to amend Note B to extend to SFPs 
the same Reserve Formula treatment currently afforded a letter of 
credit collateralized by customer securities deposited with OCC for 
options margin purposes. Under current Note B to the Reserve Formula, a 
broker-dealer that posts a letter of credit collateralized by customer 
securities at OCC as customer options margin must include the amount of 
that letter of credit as a credit item in its Reserve Formula 
computation, to the extent of the margin requirement. Recordation of 
the credit reflects the broker-dealer's use of customer assets to 
secure the letter of credit. A firm must include both the credit under 
Note B and the debit under Item 13 to set the customer reserve 
requirement at the appropriate level.
    Similarly, the proposed amendment to Note B would require a broker-
dealer to include a letter of credit collateralized by customer 
securities deposited with a Clearing Agency or DCO as customer SFP 
margin as a credit item in its Reserve Formula calculation. As with 
options margin, inclusion of the credit reflects use of customer assets 
to secure the letter of credit.\24\
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    \24\ 17 CFR 240.15c3-3a, Item 2, Note B.
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    Third, the Commission proposes to amend Rule 15c3-3a to redesignate 
current Item 14 as proposed Item 15. Proposed Item 15 would be amended 
to include proposed Item 14 relating to customer SFP margin in the 
computation of debits under the Reserve Formula.

III. Request for Comments

    We invite interested persons to submit written comments on all 
aspects of the proposed amendments, in addition to the specific 
requests for comments included in the release. Further, we invite 
comment on other matters that might have an effect on the proposals 
contained in the release, including any competitive impact.
    We invite comments on proposed Note G to the Reserve Formula. A 
broker-dealer may include customer SFP margin required and on deposit 
at a Clearing Agency or DCO as a debit in the Reserve Formula only if 
the clearing house: (1) Either maintains the highest investment-grade 
rating from an NRSRO, or (2) maintains security deposits from clearing 
members of at least $500 million and assessment power over member firms 
of $1.5 billion. Are these conditions necessary to help ensure the 
creditworthiness of those entities? Should we consider different or 
additional criteria to determine creditworthiness?
    We also invite comment on subparagraph (b)(2) of proposed Note G. 
Specifically, is the requirement that customer margin be deposited in a 
bank as defined in section 3(a)(6) of the Act a sufficient means to 
segregate customer margin from non-customer property? Should we permit 
a broker-dealer to include customer SFP margin as a debit in the 
Reserve Formula if a Clearing Agency or DCO holds that margin in places 
other than in a bank as defined under section 3(a)(6) of the Act? 
Should customer SFP margin represented by securities be held in a 
location different from customer SFP margin represented by cash?
    Furthermore, we invite comment on subparagraph (b)(3) of proposed 
Note G. To include a debit in the Reserve Formula for customer SFP 
margin, a broker-dealer must use a Clearing Agency or DCO that 
establishes, documents and maintains: (1) A system to safeguard the 
handling, transfer and delivery of cash and securities; (2) provisions 
for fidelity bond coverage of its employees and agents; and (3) 
provisions for periodic examination by independent public accountants. 
Would these conditions protect customer assets that a broker-dealer 
deposits at a Clearing Agency or DCO by aiding the clearing house in 
addressing internal risk? Should we consider other or additional tools 
to measure this risk? Are any of these criteria unnecessary?
    We also invite comment on the requirement in proposed subparagraph 
(b)(4) that a broker-dealer obtain an undertaking from a DCO not 
otherwise registered with the Commission. The undertaking will clarify 
that representatives of, or designees to, the Commission may examine 
the DCO for compliance with the requirements of Rule 15c3-3a. Is the 
undertaking an appropriate means to help protect customers under Rule 
15c3-3?

IV. Paperwork Reduction Act

    Certain provisions of the proposed amendments to Rule 15c3-3a 
contain ``collection of information requirements'' within the meaning 
of the Paperwork Reduction Act of 1995.\25\ The Commission has 
submitted the proposed amendment to the Office of Management and Budget 
(``OMB'') for review in accordance with 44 U.S.C. 3507(d) and 5 CFR 
1320.11. The Commission is revising the collection of information 
entitled ``Customer Protection--Reserves and Custody of Securities (17 
CFR 240.15c3-3)'', OMB Control Number 3235-0078. An agency may not 
conduct or sponsor, and a person is not required to respond to, a 
collection of information unless it displays a currently valid control 
number.
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    \25\ 44 U.S.C. 3501.

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[[Page 59751]]

A. Collection of Information Under These Amendments

    As discussed, the proposed amendments to Rule 15c3-3a would permit 
a broker-dealer that clears and carries customer SFPs in securities 
accounts on behalf of customers to include certain credits and debits 
in its Reserve Formula calculation relating to SFP margin required and 
on deposit with a Clearing Agency or a DCO. The amendments would permit 
a broker-dealer to include as a debit the amount of customer SFP margin 
required and on deposit with a Clearing Agency or DCO only if that 
entity: maintains sufficient liquid capital; deposits customer SFP 
margin in a Reserve Bank Account to ensure the ready availability of 
those funds; and maintains a system for safeguarding the handling, 
transfer and delivery of SFPs. In addition, the amendments require a 
broker-dealer to obtain from a DCO not otherwise registered with the 
Commission an executed undertaking in which the DCO agrees to 
examination by the Commission to monitor the DCO's compliance with the 
applicable conditions set forth in the amendments to Rule 15c3-3a.

B. Proposed Use of Information

    The Commission, self-regulatory organizations (``SROs'') and other 
securities regulatory authorities would use the information collected 
under the proposed amendments to Rule 15c3-3a to determine whether a 
broker-dealer is in compliance with Rule 15c3-3 and with other, related 
customer protection requirements. The Commission, SROs and other 
securities regulatory authorities also would use this information to 
monitor whether a Clearing Agency or DCO properly has safeguarded 
customer funds.

C. Respondents

    The proposed amendments to Rule 15c3-3a would apply only to those 
broker-dealers that clear and carry SFPs in securities accounts for the 
benefit of customers. Moreover, these provisions would apply only to 
broker-dealers that carry customer funds, securities or property and do 
not claim an exemption from Rule 15c3-3a. As of October 31, 2001, there 
were 412 clearing firms. As of March 31, 2001, 90 broker-dealers were 
registered with the CFTC as FCMs, 63 of which are clearing and carrying 
firms. Based upon conversations between the Commission and industry 
representatives about the number of firms that may conduct SFP 
business, the staff estimates that the number of firms likely to engage 
in this business, in addition to the broker-dealers already registered 
with the CFTC as FCMs, is 10% of the clearing and carry firms not 
presently registered with the CFTC.\26\ Thus, the staff estimates that 
approximately 98 firms (63 + ((412 - 63) x 10%)) will be required to 
comply with these proposed amendments to obtain the debit treatment.
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    \26\ These estimates are identical to those set forth in 
Exchange Act Release No. 46473 (Sept. 9, 2002).
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D. Total Annual Reporting and Recordkeeping Burden

    Under the proposed amendments to add new Item 14, amend and 
redesignate Item 15, amend Note B and add new Note G to Rule 15c3-3a, a 
broker-dealer that clears and carries SFPs in securities accounts for 
the benefit of customers may include customer SFP margin required and 
on deposit at a Clearing Agency or DCO as a debit item in the Reserve 
Formula. The Commission staff estimates that broker-dealers that engage 
in an SFP business will spend approximately 490 hours (or 5 hours each 
x 98 clearing broker-dealers) to modify software to accommodate changes 
in the calculation of the Reserve Formula pursuant to the proposed 
amendment to Note B and proposed new Item 14, and amended and 
redesignated Item 15. This will be a one-time burden. The Commission 
staff also estimates that broker-dealers will spend approximately 24.5 
hours per week (or 0.25 hours x 98 clearing broker-dealers), for a 
yearly total of 1,274 hours (24.5 hours x 52 weeks), to verify and 
input the information required under the proposed amendment to Note B 
and proposed new Item 14.
    Furthermore, broker-dealers that clear and settle SFP transactions 
through DCOs not otherwise registered with the Commission would spend 
time verify that the DCO has made the undertaking to the Commission 
under subparagraph (b) to Note G. The Commission staff estimates these 
broker-dealers will spend 24.5 hours (or 0.25 hours x 98 clearing 
broker-dealers) to obtain the undertakings. This will be a one-time 
burden unless a broker-dealer changes clearing DCOs.

E. Collection of Information Is Mandatory

    The collection of information is mandatory if a broker-dealer 
clears and carries SFPs in securities accounts on behalf of customers 
and wants to record customer margin required and on deposit with a 
Clearing Agency or DCO as a debit item in its Reserve Formula 
calculation.

F. Confidentiality

    The collection of information under the proposed amendments to Rule 
15c3-3a would be provided to the Commission and SROs, but not subject 
to public availability.

G. Record Retention Period

    Rule 17a-4(b)(8)(xiii) requires broker-dealers to preserve 
information related to possession and control requirements under Rule 
15c3-3 for three years, the first two years in an accessible place.

H. Request for Comment

    Under 44 U.S.C. 3506(c)(2)(B), the Commission solicits comments to:
    (i) Evaluate whether the proposed collection of information is 
necessary for the proper performance of the functions of the 
Commission, including whether the information would have practical 
utility;
    (ii) Evaluate the accuracy of the Commission's estimate of the 
burden of the proposed collection of information;
    (iii) Enhance the quality, utility, and clarity of the information 
to be collected; and
    (iv) Minimize the burden of the collection of information on those 
required to respond, including through the use of automated collection 
techniques or other forms of information technology.
    Persons who desire to submit comments on the collection of 
information requirements should direct them to the OMB, Attention: Desk 
Officer for the Securities and Exchange Commission, Office of 
Information and Regulatory Affairs, Washington, DC 20503, and should 
also send a copy of their comments to Jonathan G. Katz, Secretary, 
Securities and Exchange Commission, 450 Fifth Street, NW, Washington, 
DC 20549-0609, and refer to File No. S7-34-02. OMB is required to make 
a decision concerning the collections of information between 30 and 60 
days after publication of this document in the Federal Register; 
therefore, comments to OMB are best assured of having full effect if 
OMB receives them within 30 days of this publication. The Commission 
has submitted the proposed collections of information to OMB for 
approval. Requests for the materials submitted to OMB by the Commission 
with regard to these collections of information should be in writing, 
refer to File No. S7-34-02, and be submitted to the Securities and 
Exchange Commission, Records Management, Office of Filings and 
Information Services, 450 Fifth Street, NW, Washington, DC 20549.

[[Page 59752]]

V. Costs and Benefits of the Proposed Amendments

A. Introduction

    Passage of the CFMA in December of 2000 permitted the trading of 
SFPs and established a framework for the Commission and CFTC to 
regulate SFPs jointly. This framework was necessary because the CFMA 
defined an SFP to be both a security and a future \27\ and, therefore, 
subject both to the CEA and the Exchange Act. Accordingly, both 
Clearing Agencies, which are regulated by the Commission, and DCOs, 
which are regulated by the CFTC, may clear SFPs. Consistent with these 
provisions, the Commission is proposing to amend Exchange Act Rule 
15c3-3a by redesignating Item 14 as Item 15, adding new Item 14 and new 
Note G, amending Item B and amending newly redesignated Item 15.
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    \27\ Exchange Act sections 3(a)(10) and (11) (15 U.S.C. 
78c(a)(10) and (11).
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B. Benefits

    The proposed amendments to Rule 15c3-3a would enhance the customer 
protection function of Rule 15c3-3. In particular, proposed Note G 
would help to protect customer property by requiring that a broker-
dealer, if it wishes to include customer SFP margin as a debit item in 
the Reserve Formula, use only a Clearing Agency or DCO that has 
significant financial resources to clear and settle its customer SFP 
transactions. Proposed Note G would further protect customer property 
by conditioning the debit treatment on requirement that a broker-dealer 
use only a Clearing Agency or DCO that deposits customer SFP margin in 
a Reserve Bank Account that is for the exclusive benefit of SFP 
customers. The Reserve Bank Account would protect customer property 
from being commingled with non-customer property. The internal risk 
management system contemplated under proposed Note G would protect a 
broker-dealer and its customers by helping its Clearing Agency or DCO 
to monitor whether customer margin is protected from both default and 
use in other areas of the entities' business. These proposed enhanced 
customer protections would make it less likely that there would be a 
need to use the SIPC fund.
    Proposed amended Note B, new Item 14 and new Note G are designed to 
help a broker-dealer that clears and carries SFPs in securities 
accounts on behalf of customers to calculate the appropriate customer 
reserve requirement under the Reserve Formula. Without amended Note B, 
a broker-dealer's Reserve Formula computation would not include a 
credit to reflect the firm's use of customer assets to secure a letter 
of credit, which is then used as customer SFP margin deposit with a 
Clearing Agency or DCO. Similarly, without proposed Item 14 and Note G, 
a broker-dealer's Reserve Formula computation would not include a debit 
to reflect the firm's use of assets for customer purposes to meet its 
customer SFP margin deposit requirements. In that case, a broker-
dealer's regulatory costs would be higher.
    Proposed amended Note B, new Item 14 and new Note G would permit a 
broker-dealer to include the amount of customer SFP margin required and 
on deposit at a Clearing Agency or DCO as a debit in the Reserve 
Formula. Without the proposed changes to Rule15c3-3a, the broker-dealer 
would be required to fund its customer reserve requirement at least in 
part with proprietary assets, which would require the broker-dealer to 
maintain two reserves to cover the same customer property, one reserve 
in the Reserve Bank Account and the second with the Clearing Agency or 
DCO. As a result, the costs of engaging in a customer SFP business 
would increase. Thus, proposed amended Note B, new Item 14 and new Note 
G lower the costs of clearing and carrying SFPs in customer securities 
accounts and potentially spur the growth of the SFP markets.

C. Costs

    The amendments were drafted to reduce the burden of the Reserve 
Formula on broker-dealers by allowing a broker-dealer to include the 
amount of customer SFP margin required and on deposit at a Clearing 
Agency or DCO as a debit in the Reserve Formula. This treatment would 
permit a broker-dealer that clears and carries SFPs in securities 
accounts on behalf of customers to calculate the appropriate customer 
reserve requirement.
    Proposed amended Note B would require broker-dealers to include 
certain customer SFP margin required and on deposit with a Clearing 
Agency or DCO as a credit item in the Reserve Formula. Proposed new 
Item 14 would permit broker-dealers to include customer SFP margin 
required and on deposit with a Registered Clearing Agency or DCO as a 
debit item. A broker-dealer would incur a one-time cost to re-program 
software that performs Reserve Formula calculations to include proposed 
Note B and Item 14 in those calculations. Based on the paperwork costs 
described above, the Commission staff preliminarily estimates total 
reprogramming costs would be $25,320.\28\
---------------------------------------------------------------------------

    \28\ Security Industry Association's (``SIA'') Report on 
Management and Professional Earnings in the Securities Industry 
2001, Tables 157 and 158. According to Table 157, the hourly cost of 
a programmer is approximately $46.78 and the hourly cost of a senior 
programmer is approximately $71.25. These hourly wage costs, and all 
other hourly wage costs in this document, include a 35% increase 
above the SIA wage figures to account for overhead costs. The staff 
estimates that a programmer would spend approximately 4 hours to 
modify software to meet the requirements of proposed Note B and 
Items 14 and 15. Further, the Staff estimates that a senior 
programmer would spend approximately 1 hour on the project. Total 
cost: (4 hours x $46.78 per hour x 98 broker-dealers) + (1 hour x 
$71.25 per hour x 98 broker-dealers)) = $25,320.36.
---------------------------------------------------------------------------

    Under proposed Note B and proposed Item 14, the broker-dealer also 
would incur minimal, annual costs to verify and input debit item 
amounts into its customer reserve requirement calculation. We estimate 
the yearly paperwork burden to be 1,274 hours to complete these tasks. 
Therefore, the Commission staff preliminarily estimates the annual 
paperwork cost to broker-dealers would be $53,508 (1274 hours x $42.00 
per hour for an operations specialist).\29\
---------------------------------------------------------------------------

    \29\ SIA's Report on Management and Professional Earnings in the 
Securities Industry 2001, Table 119.
---------------------------------------------------------------------------

    Moreover, a broker-dealer that clears SFP transactions through a 
DCO would incur costs to obtain an undertaking from the DCO as proposed 
Note G requires. The Commission staff estimates the paperwork cost to 
the broker-dealer of obtaining the undertaking required under Note G 
would be $3,822.\30\ The costs would be recurring only if the broker-
dealer decided to clear its transactions through a different DCO. Note 
that only clearing and carrying broker-dealers that engage in customer 
SFP transactions would incur any of the costs described above.
---------------------------------------------------------------------------

    \30\ SIA's Report on Management and Professional Earnings in the 
Securities Industry 2001, Tables 107 and 110. According to Table 
107, the hourly cost of an attorney is approximately $156. The Staff 
estimates that an attorney would spend approximately 15 minutes 
obtaining the undertaking. Total cost: (24.5 hours x $156 per hour) 
= $3,822.
---------------------------------------------------------------------------

VI. Consideration of Burden on Competition, and Promotion of 
Efficiency, Competition, and Capital Formation

    Section 3(f) of the Exchange Act \31\ requires the Commission, 
whenever it engages in rulemaking and must consider or determine if an 
action is necessary or appropriate in the public interest, to consider 
if the action will promote efficiency, competition, and capital 
formation. Section 23(a)(2) of the Exchange Act \32\ requires the

[[Page 59753]]

Commission, in making rules under the Exchange Act, to consider the 
impact that any such rule would have on competition. Exchange Act 
Section 23(a)(2) prohibits the Commission from adopting any rule that 
would impose a burden on competition not necessary or appropriate in 
furtherance of the purposes of the Exchange Act. The proposed 
amendments to Rule 15c3-3a are intended to clarify the treatment of 
customer SFP margin required and on deposit with a Clearing Agency or 
DCO for purposes of calculating a broker-dealer's customer reserve 
requirement under the Reserve Formula. We preliminarily believe that 
clarification of the debit treatment of customer SFP margin for Reserve 
Formula purposes serves as an efficient and cost-effective means for 
broker-dealers to determine how they will calculate their customer 
reserve requirements if they clear and carry SFPs in securities 
accounts for the benefit of customers. The proposed amendments to Rule 
15c3-3a should promote efficiency because firms still may use their 
present systems for computation of customer reserve requirements under 
the Reserve Formula, after they make the required adjustments, rather 
than build new Reserve Formula systems.
---------------------------------------------------------------------------

    \31\ 15 U.S.C. 78c(f).
    \32\ 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    Furthermore, the proposed amendments to Rule 15c3-3a are designed 
to help a broker-dealer avoid depositing proprietary assets 
unnecessarily in the Reserve Bank Account to meet its obligations under 
the Reserve Formula. We preliminarily believe that the proposals would 
permit broker-dealers to direct a greater portion of their assets to 
their businesses and, therefore, promote capital formation.
    As discussed, the proposed amendments to Rule 15c3-3a would permit 
a broker-dealer that clears and carries SFPs in securities accounts on 
behalf of customers to include customer SFP margin required and on 
deposit with a Clearing Agency or DCO as a debit item for purposes of 
calculating its customer reserve requirement under the Reserve Formula. 
Furthermore, we note that the proposed amendments would permit this 
treatment regardless of whether the broker-dealer clears customer SFP 
transactions through a Clearing Agency or DCO, provided the Clearing 
Agency or DCO meets certain minimum financial standards and segregates 
customer SFP margin funds. Thus, we preliminarily believe that the 
proposed amendments to Rule 15c3-3a do not impose any competitive 
burden that is not necessary and appropriate in furtherance of the 
purposes of the Exchange Act.
    The Commission requests comment on whether the proposed amendments 
are expected to promote efficiency, competition, and capital formation.

VII. Regulatory Flexibility Act Certification

    The Commission hereby certifies, pursuant to 5 U.S.C. Sec.  605(b), 
that the proposed amendments to Rule 15c3-3a, if adopted, would not 
have a significant economic impact on a substantial number of small 
entities. The proposed amendments to Rule 15c3-3a would apply only to 
broker-dealers that clear and carry SFPs in securities accounts for the 
benefit of customers. The Commission's Office of Economic Analysis has 
determined that as of March 31, 2001, 90 broker-dealers were also 
registered with the CFTC as FCMs. None of those broker-dealers is a 
small entity.\33\ The Commission estimates that an additional eight 
clearing and carrying broker-dealers may clear and carry customer SFPs. 
None of those broker-dealers is likely to be a small entity.
---------------------------------------------------------------------------

    \33\ See 17 CFR 240.0-10.
---------------------------------------------------------------------------

    The proposed amendments to Rule 15c3-3a would affect only those 
broker-dealers that clear and carry customer SFP transactions in 
securities accounts for the benefit of customers. The proposed 
amendment to Note B, proposed new Item 14 and proposed new Note G would 
permit a broker-dealer that clears and carries SFPs in customer 
securities accounts to include customer SFP margin required and on 
deposit with a Clearing Agency or DCO as a debit item for Reserve 
Formula purposes. As noted, these proposed amendments would allow a 
broker-dealer to calculate the appropriate level of the customer 
reserve requirement under the Reserve Formula. Thus, the proposed 
amendments to Rule 15c3-3, if adopted, actually would reduce the burden 
these entities face in meeting the customer protection requirements of 
the Exchange Act. Accordingly, we do not believe that the proposed 
amendments to Exhibit A to Exchange Act Rule 15c3-3 would have a 
significant economic impact on a substantial number of small entities.
    We encourage written comments regarding this certification. We 
request that commenters describe the nature of any impact on small 
entities and provide empirical data to support the extent of the 
impact.

VIII. Consideration of Impact on the Economy

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996, or ``SBREFA,''\34\ we must advise the Office of Management 
and Budget as to whether the proposed regulation constitutes a 
``major'' rule. Under SBREFA, a rule is considered ``major'' where, if 
adopted, it results or is likely to result in:
---------------------------------------------------------------------------

    \34\ Pub. L. No. 104-121, Title II, 110 Stat. 857 (1996) 
(codified in various sections of 5 U.S.C. 15 U.S.C. and as a note to 
5 U.S.C. 601).
---------------------------------------------------------------------------

    [sbull] An annual effect on the economy of $100 million or more 
(either in the form of an increase or a decrease);
    [sbull] A major increase in costs or prices for consumers or 
individual industries; or
    [sbull] Significant adverse effect on competition, investment or 
innovation.
    If a rule is ``major,'' its effectiveness will generally be delayed 
for 60 days pending Congressional review. We request comment on the 
potential impact of the proposed regulation on the economy on an annual 
basis. Commenters are requested to provide empirical data and other 
factual support for their view to the extent possible.

IX. Statutory Authority

    The Commission is proposing amendments to Rule 15c3-3a under the 
Exchange Act pursuant to the authority conferred by the Exchange Act, 
including Sections 15 and 17.\35\
---------------------------------------------------------------------------

    \35\ 15 U.S.C. 78o and 78q.
---------------------------------------------------------------------------

Text of Proposed Rule Amendments

List of Subjects in 17 CFR Part 240

    Brokers, Reporting and recordkeeping requirements, Securities.

    In accordance with the foregoing, the Commission hereby proposes 
that Title 17, Chapter II of the Code of Federal Regulation be amended 
as follows.

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

    1. The authority citation for Part 240 continues to read, in part, 
as follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 
78j, 78j-l, 78k, 78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 
78w, 78x, 78ll, 78mm, 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-37, 80b-
3, 80b-4 and 80b-11, unless otherwise noted.
* * * * *
    2. Section 240.15c3-3a is amended by:
    a. In the chart, redesignating Item No. 14 as Item No. 15;
    b. Adding new Item No. 14;
    c. Revising newly redesignated Item No. 15;
    d. Revising Note B; and
    e. Adding Note G
    The revisions and additions read as follows:

[[Page 59754]]

Sec.  240.15c3-3a  Exhibit A--formula for determination reserve 
requirement of brokers and dealers under Sec.  240.15c3-3.

* * * * *

------------------------------------------------------------------------
                                         Credits             Debits
------------------------------------------------------------------------
14. Margin related to security     ..................  XXX
 futures products written,
 purchased or sold in customer
 accounts required and on deposit
 with a clearing agency
 registered with the Commission
 under section 17A of the Act (15
 U.S.C. 17A) or a derivatives
 clearing organization registered
 with the Commodity Futures
 Trading Commission under section
 5b of the Commodity Exchange Act
 (7 U.S.C. 5b). (See Note G).
    Total Credits................  ..................  .................
    Total Debits.................  ..................  .................
15. Excess of total credits (sum   ..................  XXX
 of items 1-9) over total debits
 (sum of items 10-14) required to
 be on deposit in the ``Reserve
 Bank Account'' (Sec.   240.15c3-
 3(e)). If the computation is
 made monthly as permitted by
 this section, the deposit shall
 be not less than 105 percent of
 the excess of total credits over
 total debits.
------------------------------------------------------------------------

* * * * *

    Note B. Item 2 shall include the amount of options-related or 
security futures product-related Letters of Credit obtained by a 
member of a registered clearing agency or a derivatives clearing 
organization which are collateralized by customers' securities, to 
the extent of the member's margin requirement at the registered 
clearing agency or derivatives clearing organization.

* * * * *

    Note G. (a) Item 14 shall include the amount of margin required 
and on deposit with a clearing agency registered with the Commission 
under section 17A of the Act (15 U.S.C. 17q-1) or a derivatives 
clearing organization registered with the Commodity Futures Trading 
Commission under section 5b of the Commodity Exchange Act (7 U.S.C. 
5b) for customer accounts to the extent that the margin is 
represented by cash, proprietary qualified securities, and letters 
of credit collateralized by customers' securities.

    (b) Item 14 shall apply only if:
    (1) The registered clearing agency or derivatives clearing 
organization maintains:
    (i) The highest investment-grade rating from a nationally 
recognized statistical rating organization; or
    (ii) Security deposits from clearing members in connection with 
regulated options or futures transactions of at least $500 million and 
retains assessment power over member firms of at least $1.5 billion; 
and
    (2) The registered clearing agency or derivatives clearing 
organization deposits customer margin in a bank as defined in section 
3(a)(6) of the Act (15 U.S.C. 78c(a)(6)) in an account designated as a 
``Special Account for the Exclusive Benefit of Securities Customers.'' 
The bank must acknowledge in writing that the customer margin on 
deposit is not subject to any right, charge, security interest, lien or 
claim of any kind in favor of the bank or any person claiming through 
the bank; and
    (3) The registered clearing agency or derivatives clearing 
organization establishes, documents, and maintains:
    (i) Safeguards in the handling, transfer and delivery of cash and 
securities;
    (ii) Provisions for fidelity bond coverage of the employees and 
agents of the registered clearing organization or derivatives clearing 
organization or other subsidiary organization; and
    (iii) Provisions for periodic examination by independent public 
accountants; and
    (iv) The derivatives clearing organization, if it is not otherwise 
registered with the Commission, has provided the following undertaking 
to the Commission:
    With respect to the clearance and settlement of the customer 
security futures products of [BD], the undersigned hereby undertakes to 
permit representatives or designees of the Securities and Exchange 
Commission to examine it for compliance with the requirements set forth 
in Rule 15c3-3a, Note G. (b)(1) through (3) at any time or from time to 
time during business hours, and promptly to furnish to the Commission 
or its designees all information that the Commission reasonably deems 
necessary to determine that compliance.

    Dated: September 12, 2002.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-24027 Filed 9-20-02; 8:45 am]
BILLING CODE 8010-01-P