[Federal Register Volume 67, Number 220 (Thursday, November 14, 2002)]
[Notices]
[Pages 69052-69059]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-28897]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-46782; File No. SR-NYSE-2002-53]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of a Proposed Rule Change and Amendment 
No. 1 Thereto on a Pilot Basis by the New York Stock Exchange, Inc. 
Amending NYSE Rule 431, Margin Requirements for Security Futures

November 7, 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 October 23, 2002, the New York Stock Exchange, Inc. (``NYSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission'') the proposed rule change as described in 
Items I, II, and III below, which Items have been prepared by the 
Exchange. On November 6, 2002, the NYSE filed an amendment to the 
proposed rule change.\3\ The Commission is publishing

[[Page 69053]]

this notice to solicit comments on the proposed rule change, as 
amended, from interested persons and to grant accelerated approval of 
the proposed rule change, as amended, on a pilot basis for sixty days 
beginning on the date of this order.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See letter from Darla C. Stuckey, Corporate Secretary, NYSE, 
to Nancy Sanow, Assistant Director, Division of Market Regulation, 
Commission, dated November 5, 2002 (``Amendment No. 1''). Amendment 
No. 1 replaced the original rule filing in its entirety. Amendment 
No. 1 also proposed that the changes be for a sixty-day pilot, and 
requested accelerated approval of the proposed rule change.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    The Exchange is proposing amendments to NYSE Rule 431 (``Margin 
Requirements'') to establish margin requirements for security futures 
contracts. The proposed amendments to the Exchange's existing margin 
rule are intended to be consistent with the customer margin rules 
already adopted by the SEC and the Commodity Futures Trading Commission 
(``CFTC''), and those filed by other self-regulatory organizations 
(``SROs'') regarding security futures.
    The proposed amendments would: (1) Permit customer margining of 
security futures contracts, and establish initial and maintenance 
margin levels for security futures contracts; (2) allow initial and 
maintenance margin levels for offsetting positions involving security 
futures contracts to be lower than would be required if margined 
separately; (3) allow for a Market Maker exclusion for proprietary 
trades of a Security Futures Dealer (``SFD'') and allow for ``good 
faith'' margin treatment for the accounts of approved options 
specialists, market makers, and other specialists; (4) provide 
definitions relative to security futures for the application of this 
rule; (5) provide that security futures contracts transacted in a 
futures account shall not be subject to any provisions of NYSE Rule 
431; (6) provide that money market mutual funds, as defined in Rule 2a-
7\4\ under the Investment Company Act of 1940 (the ``ICA''),\5\ may be 
used to satisfy margin requirements for security futures contracts 
provided that certain conditions are met; (7) require that security 
futures contracts transacted in a securities account be subject to all 
other provisions of NYSE Rule 431, in particular NYSE Rule 431(f)(8)(B) 
(``Day Trading''); and (8) permit members and member organizations for 
which the Exchange is the Designated Examining Authority (``DEA'') to 
participate in the trading of security futures contracts when trading 
commences. Below is the text of the proposed rule change. Proposed new 
language is italicized; proposed deletions are in brackets.
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    \4\ 17 CFR 270.2a-7.
    \5\ 15 U.S.C. 80a et seq.
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* * * * *

Rule 431 (``Margin Requirements'')

    Rule 431. (a) For purposes of this Rule, the following terms shall 
have the meanings specified below:
    (1) The term ``current market value'' means the total cost or net 
proceeds of a security on the day it was purchased or sold or at any 
other time the preceding business day's closing price as shown by any 
regularly published reporting or quotation service, except for security 
futures contracts (see Section (f)(10) (C)(ii)). If there is no closing 
price, a member organization may use a reasonable estimate of the 
market value of the security as of the close of business on the 
preceding business day.
    Rule 431 (a)(2) through (a)(3) unchanged.
    (4) The term ``equity'' means the customer's ownership interest in 
the account, computed by adding the current market value of all 
securities ``long'' and the amount of any credit balance and 
subtracting the current market value of all securities ``short'' and 
the amount of any debit balance. Any variation settlement received or 
paid on a security futures contract shall be considered a credit or 
debit to the account for purposes of equity.
    (5) The term ``exempted security'' or ``exempted securities'' has 
the meaning as in section 3(a)(12) of the Securities Exchange Act of 
1934 (the ``Exchange Act'' or ``SEA'').
    (6) The term ``margin'' means the amount of equity to be maintained 
on a security position held or carried in an account.
    (7) The term ``person'' has the meaning as in section 3(a)(9) of 
the [Securities Exchange Act of 1934] Exchange Act.
    (8) The term ``basket'' shall mean a group of stocks that the 
Exchange or any national securities exchange designates as eligible for 
execution in a single trade through its trading facilities and that 
consists of stocks whose inclusion and relative representation in the 
group are determined by the inclusion and relative representation of 
their current market prices in a widely-disseminated stock index 
reflecting the stock market as a whole.

Initial Margin

    (b) For the purpose of effecting new securities transactions and 
commitments, the customer shall be required to deposit margin in cash 
and/or securities in the account which shall be at least the greater 
of:
    (1) The amount specified in Regulation T of the Board of Governors 
of the Federal Reserve System or Rules 400 through 406 of the Exchange 
Act or Rules 41.42 through 41.48 of The Commodity Exchange Act 
(``CEA''), or
    (2) The amount specified in section (c) of this Rule, or
    (3) Such greater amount as the Exchange may from time to time 
require for specific securities, or
    (4) Equity of at least $2,000 except that cash need not be 
deposited in excess of the cost of any security purchased (this equity 
and cost of purchase provision shall not apply to ``when distributed'' 
securities in a cash account). The minimum equity requirement for a 
``pattern day trader'' is $25,000 pursuant to paragraph 
(f)(8)(B)(iv)(1) of this Rule.
    Withdrawals of cash or securities may be made from any account 
which has a debit balance, ``short'' position or commitments, provided 
it is in compliance with Regulation T of the Board of Governors of the 
Federal Reserve System and Rules 400 through 406 of the Exchange Act 
and Rules 41.42 through 41.48 of the CEA and after such withdrawal the 
equity in the account is at least the greater of $2,000 ($25,000 in the 
case of ``pattern day traders'') or an amount sufficient to meet the 
maintenance margin requirements of this Rule.

Maintenance Margin

    (c) The margin which must be maintained in all accounts of 
customers, except for cash accounts subject to Regulation T unless a 
transaction in a cash account is subject to other provisions of this 
rule, shall be as follows:
    (1) 25% of the current market value of all securities except for 
security futures contracts, ``long'' in the account; plus
    (2) $2.50 per share or 100% of the current market value, whichever 
amount is greater, of each stock ``short'' in the account selling at 
less than $5.00 per share; plus
    (3) $5.00 per share or 30% of the current market value, whichever 
amount is greater, of each stock ``short'' in the account selling at 
$5.00 per share or above; plus
    (4) 5% of the principal amount or 30% of the current market value, 
whichever amount is greater, of each bond ``short'' in the account.
     (5) The minimum maintenance margin levels for security futures 
contracts, long and short, shall be 20% of the current market value of 
such contract. (See

[[Page 69054]]

paragraph (f) of this Rule for other provisions pertaining to security 
futures contracts.)
    Rule 431 (d) through (e)(5) unchanged.
    (e)(6)(A) Broker/Dealer Accounts.--A member organization may carry 
the proprietary account of another broker/dealer, which is registered 
with the Securities and Exchange Commission, upon a margin basis which 
is satisfactory to both parties, provided the requirements of 
Regulation T of the Board of Governors of the Federal Reserve System 
and Rules 400 through 406 under the Exchange Act and Rules 41.42 
through 41.48 under the CEA are adhered to and the account is not 
carried in a deficit equity condition. The amount of any deficiency 
between the equity maintained in the account and the haircut 
requirements pursuant to SEA Rule 15c3-1 (Net Capital) shall be 
deducted in computing the Net Capital of the member organization under 
the Exchange's Capital Requirements. However, when computing Net 
Capital deductions for transactions in securities covered by paragraphs 
(e)(2)(F) and (e)(2)(G) of this Rule, the respective requirements of 
those paragraphs may be used, rather than the haircut requirements of 
SEA Rule 15c3-1.
    Rule 431(e)(6)(B) unchanged.
    (e)(7) Nonpurpose Credit--In a nonsecurities credit account, a 
member organization may extend and maintain nonpurpose credit to or for 
any customer without collateral or on any collateral whatever, 
provided:
    (A) The account is recorded separately and confined to the 
transactions and relations specifically authorized by Regulation T of 
the Board of Governors of the Federal Reserve System;
    (B) The account is not used in any way for the purpose of evading 
or circumventing any regulation of the Exchange or of the Board of 
Governors of the Federal Reserve System and Rules 400 through 406 under 
the Exchange Act and Rules 41.42 through 41.48 under the CEA; and
    (C) The amount of any deficiency between the equity in the account 
and the margin required by the other provisions of this Rule shall be 
deducted by computing the Net Capital of the member organization under 
the Exchange's Capital Requirements.

(The term ``nonpurpose credit'' means an extension of credit other than 
``purpose credit,'' as defined in Section 220.2 of Regulation T of the 
Board of Governors of the Federal Reserve System.)

    Rule 431(e)(8) through (f)(9) unchanged.
    (f) (10) Customer Margin Rules Relating to Security Futures.
    (A) Applicability. No member or member organization may effect a 
transaction involving, or carry an account containing, a security 
futures contract with or for a customer in a margin account, without 
obtaining proper and adequate margin as set forth in this section.
    (B) Amount of customer margin.
    (i) General Rule. As set forth in sections (b) and (c) of this 
Rule, the minimum initial and maintenance margin levels for each 
security futures contract, long and short, shall be twenty (20) percent 
of the current market value of such contract.
    (ii) Excluded from the rules' requirements are arrangements between 
a member or member organization and a customer with respect to the 
customer's financing of proprietary positions in security futures, 
based on the member's or member organization's good faith determination 
that the customer is an ``Exempted Person'', as defined in Rule 
401(a)(9) under the Exchange Act, and Rule 41.43(a)(9) of the CEA, 
except for the proprietary account of a broker-dealer carried by a 
member organization pursuant to Section (e)(6)(A) of this Rule. Once a 
registered broker or dealer, or member of a national securities 
exchange ceases to qualify as an exempted person, it shall notify the 
member or member organization of this fact before establishing any new 
security futures positions. Any new security futures positions will be 
subject to the provisions of this part.
    (iii) Permissible Offsets.--Notwithstanding the minimum margin 
levels specified in paragraph (f)(10)(B)(i) of this Rule, customers 
with offset positions involving security futures and related positions 
may have initial or maintenance margin levels (pursuant to the offset 
table below) that are lower than the levels specified in paragraph 
(f)(10)(B)(i) of this Rule.

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                                   Security underlying the         Initial margin          Maintenance margin
         Description of offset         security future              requirement                requirement
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    1  Long security future (or   Individual stock or        20% of the current market  The lower of: (1) 10% of
        basket of security         narrow-based security      value of the long          the aggregate exercise
        futures representing       index.                     security future, plus      price of the put plus
        each component of a                                   pay for the long put in    the aggregate put out-
        narrow-based securities                               full.                      of-the-money amount, if
        index) and long put                                                              any; or (2) 20% of the
        option on the same                                                               current market value of
        underlying security (or                                                          the long security
        index).                                                                          future.
    2  Short security future (or  Individual stock or        20% of the current market  20% of the current
        basket of security         narrow-based security      value of the short         market value of the
        futures representing       index.                     security future, plus      short security future,
        each component of a                                   the aggregate put in-the-  plus the aggregate put
        narrow-based securities                               money amount, if any.      in-the-money amount, if
        index) and short put                                  Proceeds from the put      any.
        option on the same                                    sale may be applied.
        underlying security (or
        index).
    3  Long security future and   Individual stock or        The initial margin         5% of the current market
        Short position in the      narrow-based security      required under             value as defined in
        same security (or          index.                     Regulation T for the       Regulation T of the
        securities basket)                                    short stock or stocks.     stock or stocks
        underlying the security                                                          underlying the security
        future.                                                                          future.
    4  Long security future (or   Individual stock or        20% of the current market  20% of the current
        basket of security         narrow-based security      value of the long          market value of the
        futures representing       index.                     security future, plus      long security future,
        each component of a                                   the aggregate call in-     plus the aggregate call
        narrow-based securities                               the-money amount, if       in-the-money amount, if
        index) and short call                                 any. Proceeds from the     any.
        option on the same                                    call sale may be applied.
        underlying security (or
        index).

[[Page 69055]]

 
    5  Long a basket of narrow-   Narrow-based security      20% of the current market  20% of the current
        based security futures     index.                     value of the long basket   market value of the
        that together tracks a                                of narrow-based security   long basket of narrow-
        broad based index and                                 futures, plus the          based security futures,
        short a broad-based                                   aggregate call in-the-     plus the aggregate call
        security index call                                   money amount, if any.      in-the-money amount, if
        option contract on the                                Proceeds from the call     any.
        same index.                                           sale may be applied.
    6  Short a basket of narrow-  Narrow-based security      20% of the current market  20% of the current
        based security futures     index.                     value of the short         market value of the
        that together tracks a                                basket of narrow-based     short basket of narrow-
        broad-based security                                  security futures, plus     based security futures,
        index and short a broad-                              the aggregate put in-the-  plus the aggregate put
        based security index put                              money amount, if any.      in-the-money amount, if
        option contract on the                                Proceeds from the put      any.
        same index.                                           sale may be applied.
    7  Long a basket of narrow-   Narrow-based security      20% of the current market  The lower of: (1) 10% of
        based security futures     index.                     value of the long basket   the aggregate exercise
        that together tracks a                                of narrow-based security   price of the put, plus
        broad-based security                                  futures, plus pay for      the aggregate put out-
        index and long a broad-                               the long put in full.      of-the-money amount, if
        based security index put                                                         any; or (2) 20% of the
        option contract on the                                                           current market value of
        same index.                                                                      the long basket of
                                                                                         security futures.
    8  Short a basket of narrow-  Narrow-based security      20% of the current market  The lower of: (1) 10% of
        based security futures     index.                     value of the short         the aggregate exercise
        that together tracks a                                basket of narrow-based     price of the call, plus
        broad-based security                                  security futures, plus     the aggregate call out-
        index and long a broad-                               pay for the long call in   of-the-money amount, if
        based security index                                  full.                      any; or (2) 20% of the
        call option contract on                                                          current market value of
        the same index.                                                                  the short basket of
                                                                                         security futures.
    9  Long security future and   Individual stock or        The greater of: (1) 5% of  The greater of: 5% of
        short security future on   narrow-based security      the current market value   the current market
        the same underlying        index.                     of the long security       value of the long
        security (or index).                                  future; or (2) 5% of the   security future; or (2)
                                                              current market value of    5% of the current
                                                              the short security         market value of the
                                                              future.                    short security future.
   10  Long security future,      Individual stock or        20% of the current market  10% of the aggregate
        long put option and        narrow-based security      value of the long          exercise price, plus
        short call option. The     index.                     security future, plus      the aggregate call in-
        long security future,                                 the aggregate call in-     the-money amount, if
        long put and short call                               the-money amount, if       any.
        must be on the same                                   any, plus pay for the
        underlying security and                               put in full. Proceeds
        the put and call must                                 from the call sale may
        have the same exercise                                be applied.
        price. (Conversion).
   11  Long security future,      Individual stock or        20% of the current market  The lower of: (1) 10% of
        long put option and        narrow-based security      value of the long          the aggregate exercise
        short call option. The     index.                     security future, plus      price of the put plus
        long security future,                                 the aggregate call in-     the aggregate put out-
        long put and short call                               the-money amount, if       of-the-money amount, if
        must be on the same                                   any, plus pay for the      any; or (2) 20% of the
        underlying security and                               put in full. Proceeds      aggregate exercise
        the put exercise price                                from call sale may be      price of the call, plus
        must be below the call                                applied.                   the aggregate call in-
        exercise price. (Collar).                                                        the-money amount, if
                                                                                         any.
   12  Short security future and  Individual stock or        The initial margin         5% of the current market
        long position in the       narrow-based security      required under             value, as defined in
        same security (or          index.                     Regulation T for the       Regulation T, of the
        securities basket)                                    long security or           long stock or stocks.
        underlying the security                               securities.
        future.
   13  Short security future and  Individual stock or        The initial margin         10% of the current
        long position in a         narrow-based security      required under             market value, as
        security immediately       index.                     Regulation T for the       defined in Regulation
        convertible into the                                  long security or           T, of the long stock or
        same security underlying                              securities.                stocks.
        the security future,
        without restriction,
        including the payment of
        money.
   14  Short security future (or  Individual stock or        20% of the current market  The lower of: (1) 10% of
        basket of security         narrow-based security      value of the short         the aggregate exercise
        futures representing       index.                     security future, plus      price of the call, plus
        each component of a                                   pay for the call in full.  the aggregate call out-
        narrow-based securities                                                          of-the-money amount, if
        index) and Long call                                                             any; or (2) 20% of the
        option or warrant on the                                                         current market value of
        same underlying security                                                         the short security
        (or index).                                                                      future.
   15  Short security future,     Individual stock or        20% of the current market  10% of the aggregate
        short put option and       narrow-based security      value of the short         exercise price, plus
        long call option. The      index.                     security future, plus      the aggregate put in-
        short security future,                                the aggregate put in-the-  the-money amount, if
        short put and long call                               money amount, if any,      any.
        must be on the same                                   plus pay for the call in
        underlying security and                               full. Proceeds from put
        the put and call must                                 sale may be applied.
        have the same exercise
        price. (Reverse
        Conversion).
   16  Long (short) a security    Individual stock and       The greater of: (1) 3% of  The greater of: (1) 3%
        future and short (long)    narrow-based security      the current market value   of the current market
        an identical \6\           index.                     of the long security       value of the long
        security future traded                                future(s); or (2) 3% of    security future(s); or
        on a different market.                                the current market value   (2) 3% of the current
                                                              of the short security      market value of the
                                                              future(s).                 short security
                                                                                         future(s).

[[Page 69056]]

 
   17  Long (short) a basket of   Individual stock and       The greater of: (1) 5% of  The greater of: (1) 5%
        security futures that      narrow-based security      the current market value   of the current market
        together tracks a narrow-  index.                     of the long security       value of the long
        based index and short                                 future(s); or (2) 5% of    security future(s); or
        (long) a narrow based                                 the current market value   (2) 5% of the current
        index future.                                         of the short security      market value of the
                                                              future(s).                 short security
                                                                                         future(s).
----------------------------------------------------------------------------------------------------------------

     
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    \6\ Two security futures contracts will be considered 
``identical'' for this purpose if they are issued by the same 
clearing agency or cleared and contracts guaranteed by the same 
derivatives clearing organization, have identical specifications, 
and would offset each other at the clearing level.
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    (C) Definitions. For the purposes of section (f)(10) of this Rule 
and the offset table noted above, with respect to the term ``security 
futures contracts,'' the following terms shall have the meanings 
specified below:
    (i) The term ``security futures contract'' means a ``security 
future'' as defined in Section 3(a)(55) of the Exchange Act.
    (ii) The term ``current market value'' has the same meaning as it 
is as defined in Rule 401(4) under the Exchange Act and Rule 
41.43(a)(4) of the CEA.
    (iii) The term ``underlying security'' means, in the case of 
physically settled security futures contracts, the security that is 
delivered upon expiration of the contract, and, in the case of cash 
settled security futures contracts, the security or securities index 
the price or level of which determines the final settlement price for 
the security futures contract upon its expiration.
    (iv) The term ``underlying basket'' means, in the case of a 
securities index, a group of security futures contracts where the 
underlying securities as defined in paragraph (iii) above include each 
of the component securities of the applicable index and which meets the 
following conditions: (1) The quantity of each underlying security is 
proportional to its representation in the index, (2) the total market 
value of the underlying securities is equal to the aggregate value of 
the applicable index, (3) the basket cannot be used to offset more than 
the number of contracts or warrants represented by its total market 
value, and (4) the security futures contracts shall be unavailable to 
support any other contract or warrant transaction in the account.
    (v) The term ``underlying stock basket'' means a group of 
securities which includes each of the component securities of the 
applicable index and which meets the following conditions: (1) The 
quantity of each stock in the basket is proportional to its 
representation in the index, (2) the total market value of the basket 
is equal to the underlying index value of the index options or warrants 
to be covered (3) the securities in the basket cannot be used to cover 
more than the number of index options or warrants represented by that 
value, and (4) the securities in the basket shall be unavailable to 
support any other option or warrant transaction in the account.
    (vi) The term ``variation settlement'' has the same meaning as it 
is defined in Rule 401(a) of the Exchange Act and Rule 41.43(a)(32) of 
the CEA.
    (D) Security Futures Dealers' Accounts. Notwithstanding the other 
provisions of this section (f)(10), a member organization may carry and 
clear the market maker permitted offset positions (as defined below) of 
one or more security future dealers in an account which is limited to 
bonafide market maker transactions, upon a ``Good Faith'' margin basis 
which is satisfactory to the concerned parties, provided the ``Good 
Faith'' margin requirement is not less than the Net Capital haircut 
deduction of the member organization carrying the transaction pursuant 
to Rule 325. In lieu of collecting the ``Good Faith'' margin 
requirement, a carrying member organization may elect to deduct in 
computing its Net Capital the amount of any deficiency between the 
equity maintained in the account and the ``Good Faith'' margin 
required.
    For the purpose of this paragraph (f)(10)(D), the term ``security 
futures dealer'' means a security futures dealer as defined in Rule 400 
(c)(2)(v) of the Exchange Act and Rule 41.42(c)(2)(v) of the CEA.
    For purposes of this paragraph (f)(10)(D), a permitted offset 
position means in the case of a security futures contract in which a 
security futures dealer makes a market, a position in the underlying 
asset or other related assets, or positions in options overlying the 
asset or other related assets. Accordingly, a security futures dealer 
may establish a long or short position in the assets underlying the 
security futures contracts in which the security futures dealer makes a 
market, and may purchase or write options overlying those assets, if 
the account holds the following permitted offset positions:
    (i) A long position in the security futures contract or underlying 
asset offset by a short option position which is ``in or at the 
money'';
    (ii) A short position in the security futures contract or 
underlying asset offset by a long option position which is ``in or at 
the money'';
    (ii) A position in the underlying asset resulting from the 
assignment of a market-maker short option position or making delivery 
in respect of a short security futures contract;
    (iv) A position in the underlying asset resulting from the 
assignment of a market-maker long option position or taking delivery in 
respect of a long security futures contract;
    (v) A net long position in a security futures contract in which a 
security futures dealer makes a market or the underlying asset;
    (vi) A net short position in a security future contract in which a 
security futures dealer makes a market or the underlying asset; or
    (vii) An offset position as defined in SEC Rule 15c3-1, including 
its appendices, or any applicable SEC staff interpretation or no-action 
position.
    (E) Approved Options Specialists' or Market Makers' Accounts. 
Notwithstanding the other provisions of (f)(10) and (f)(2)(j), a member 
organization may carry and clear the market maker permitted offset 
positions (as defined below) of one or more approved options 
specialists or market makers in an account which is limited to bonafide 
approved options specialist or market maker transactions, upon a ``Good 
Faith'' margin basis which is satisfactory to the concerned parties, 
provided the ``Good Faith'' margin requirement is not less than the Net 
Capital haircut deduction of the member organization carrying the 
transaction pursuant to Rule 325. In lieu of collecting the ``Good 
Faith'' margin requirement, a carrying member organization may elect to 
deduct in computing its Net Capital the amount of any deficiency 
between the equity maintained in the account and the ``Good Faith'' 
margin required. For the purpose of this paragraph (f)(10)(E), the term 
``approved options specialist or market maker'' means a specialist, 
market maker, or registered trader in

[[Page 69057]]

options as referenced in paragraph (f)(2)(j) of this Rule, who is 
deemed a specialist for all purposes under the Exchange Act and who is 
registered pursuant to the rules of a national securities exchange.
    For purposes of this paragraph (f)(10)(E), a permitted offset 
position means a position in the underlying asset or other related 
assets. Accordingly, a specialist or market maker may establish a long 
or short position in the assets underlying the options in which the 
specialist or market maker makes a market, or a security futures 
contract thereon, if the account holds the following permitted offset 
positions:
    (i) A long position in the underlying instrument or security 
futures contract offset by a short option position which is ``in or at 
the money'';
    (ii) A short position in the underlying instrument or security 
futures contracts offset by a long option position which is ``in or at 
the money'';
    (iii) A stock position resulting from the assignment of a market 
maker short option position or delivery in respect of a short security 
futures contract;
    (iv) A stock position resulting from the exercise of a market maker 
long option position or taking delivery in respect of a long security 
futures contract;
    (v) A net long position in a security (other than an option) in 
which a market maker makes a market;
    (vi) A net short position in a security (other than an option) in 
which the market maker makes a market; or
    (vii) An offset position as defined in SEC Rule 15c3-1, including 
the appendices, or any applicable SEC staff interpretation or no-action 
position.
    For purposes of paragraphs (f)(10)(D) and (E), the term ``in or at 
the money'' means the current market price of the underlying security 
is not more than the two standard exercise intervals below (with 
respect to a call option) or above (with respect to a put option) the 
exercise price of the option; the term ``in the money'' means the 
current market price of the underlying asset or index is not below 
(with respect to a call option) or above (with respect to a put option) 
the exercise price of the option; and the term ``overlying option'' 
means a put option purchased or a call option written against a long 
position in an underlying asset; or a call option purchased or a put 
option written against a short position in an underlying asset.
    Securities, including options and security futures contracts, in 
such accounts shall be valued conservatively in the light of current 
market prices and the amount which might be realized upon liquidation. 
Substantial additional margin must be required or excess Net Capital 
maintained in all cases where the securities carried: (i) Are subject 
to unusually rapid or violent changes in value including volatility in 
the expiration months of options or security futures products, (ii) do 
not have an active market, or (iii) in one or more or all accounts, 
including proprietary accounts combined, are such that they cannot be 
liquidated promptly or represent undue concentration of risk in view of 
the carrying member or member organization's Net Capital and its 
overall exposure to material loss.
    (F) Approved Specialists' Accounts--others. Notwithstanding the 
other provisions of (f)(10) and (f)(2)(j), a member organization may 
carry the account of an ``approved specialist,'' which account is 
limited to bonafide specialist transactions including hedge 
transactions with security futures contracts upon a margin basis which 
is satisfactory to both parties. The amount of any deficiency between 
the equity in the account and haircut requirements pursuant to SEA Rule 
15c3-1 (Net Capital) shall be deducted in computing the Net Capital of 
the member organization under the Exchange's Capital Requirements.
    For purposes of this paragraph F (10)(F) the term ``approved 
specialist'' means a specialist who is deemed a specialist for all 
purposes under the Exchange Act and who is registered pursuant to the 
rules of a national securities exchange.
    .70 Money market mutual funds, as defined under Rule 2a-7 of the 
Investment Company Act of 1940, can be used for satisfying margin 
requirements under this subsection (f)(10), provided that the 
requirements of Rule 404(b) of the Exchange Act and Rule 46(b)(2) under 
the CEA are satisfied.
    .80 Day-trading of security futures is subject to the minimum 
requirements of this Rule. If deemed a pattern day-trader, the customer 
must maintain equity of $25,000. The 20% requirement, for security 
futures contracts, should be calculated based on the greater of the 
initial or closing transaction and any amount exceeding NYSE excess 
must be collected. The creation of a customer call subjects the account 
to all the restrictions contained in Rule 431(f)(8)(B).
    .90 The use of the ``time and tick'' method is based on the 
member's or member organization's ability to substantiate the validity 
of the system used. Lacking this ability dictates the use of the 
aggregate method.
    .100 Security futures contracts transacted or held in a futures 
account shall not be subject to any provision of this Rule.
* * * * *

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

    In its filing with the Commission, the Exchange included statements 
concerning the purpose of, and basis for, the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item III below and is set forth in Sections A, B, and C below.

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

1. Purpose

Background

    The CFTC and SEC have adopted customer margin requirements for the 
trading of futures on narrow-based indices and single stocks 
(collectively referred to as ``security futures contracts'' or 
``SFCs'') (``SEC/CFTC Margin Regulations'')\7\ pursuant to authority 
delegated to them by the Federal Reserve Board (``FRB'') under Section 
7(c)(2)(B) of Act.\8\ As noted in the adopting release,\9\ Section 
7(c)(2) of the Act provides that the customer margin requirements for 
SFCs must satisfy four requirements: (1) They must preserve the 
financial integrity of markets trading security futures contracts; (2) 
they must prevent systemic risk; (3) they must (a) be consistent with 
the margin requirements for comparable options traded on an exchange 
registered pursuant to Section 6(a) of the Act,\10\ and (b) provide for 
initial and maintenance margin that are not lower than the lowest level 
of margin, exclusive of premium, required for comparable exchange 
traded options; and (4) they must be and remain consistent with the 
margin requirements established by the FRB under Regulation T.\11\ The 
regulations on customer margin for security futures became effective on 
September 13, 2002. The Exchange believes that the proposed amendments 
discussed below

[[Page 69058]]

conform NYSE margin rules to these new requirements.
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    \7\ 17 CFR 240.400 through 406; 17 CFR 41.41 through 41.48.
    \8\ 15 U.S.C. 78g(c)(2)(B).
    \9\ See Securities Exchange Act Release No. 46292 (August 1, 
2002), 67 FR 53146 (August 14, 2002).
    \10\ 15 U.S.C. 78f.
    \11\ 12 CFR 220.
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Proposed Amendments

    NYSE Rule 431 prescribes specific margin requirements for members 
and member organizations of the Exchange, which must be maintained in 
all accounts of their customers, based on the type of securities 
products held in such accounts.
    The Exchange proposes to amend NYSE Rule 431(b) and (c) to provide 
that the amount of initial and maintenance margin required for long and 
short SFCs held in a securities account must be 20% of the current 
market value of such SFC. The Exchange believes that this amendment 
would essentially make margin requirements for SFCs consistent with the 
margin requirements for comparable exchange-traded options contracts, 
which are premium plus 20% of the underlying securities.
    In addition, the Exchange proposes to amend NYSE Rule 431(e)(6)(A) 
(``Broker/Dealer Accounts'') to permit introducing broker-dealers 
trading SFCs to deduct from their proprietary accounts any deficiency 
between the equity in the account and the haircut requirements pursuant 
to Rule 15c3-1 of the Exchange Act (``Net Capital Rule'')\12\ in 
computing the net capital of the member or member organization, in lieu 
of collecting margin.
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    \12\ 17 CFR 240.15c3-1.
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    The Exchange is proposing a new provision, NYSE Rule 431(f)(10) 
(``Customer Margin Rules Relating to Security Futures'') to provide 
that SFCs transacted in a securities account will be subject to all 
other provisions of NYSE Rule 431, including NYSE Rule 
431(f)(8)(B)(``Day Trading''). Excluded from the Exchange's margin 
requirements are arrangements between a member or member organization 
and a borrower, whereby the borrower is defined as an ``Exempted 
Person,'' under Rule 401(a)(9) of the Act,\13\ and Rule 41.43(a)(9)\14\ 
of the Commodity Exchange Act. Further, SFCs transacted in a futures 
account would not be subject to NYSE Rule 431.
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    \13\ 17 CFR 240.401(a)(9).
    \14\ 17 CFR 41.43(a)(9).
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    NYSE Rule 431(f)(10)(B)(4) (``Permissible Offsets'') is also a new 
provision that permits margin requirements to be lower than the 20% 
general requirement, and recognizes the hedged nature of certain 
offsetting positions involving SFCs and related positions. Margin 
levels for offsetting positions involving SFCs and related positions 
would thus be lower than would be required if those positions were 
margined separately. Further, the Exchange believes that the proposed 
amendment makes the Exchange's rule consistent with the table of 
offsets included in the recently adopted SEC/CFTC margin regulations 
noted above.
    Proposed NYSE Rule 431(f)(10)(C) is a new provision that would 
provide certain definitions applicable specifically to SFCs, including, 
among other things, the definitions of ``security futures contract,'' 
``current market value,'' and ``underlying security.''
    Proposed NYSE Rule 431(f)(10)(D) (``Security Futures Dealers'' 
Accounts''), NYSE Rule 431(f)(10)(E) (``Approved Options Specialists'' 
or Market Makers' Accounts'') and NYSE Rule 431(f)(10)(F) (``Approved 
Specialists'' Accounts-others'') are new rule provisions. As proposed, 
the new provisions would permit ``good faith'' margin treatment for 
specified hedged offset positions carried in the accounts noted above. 
However, unlike the amendments proposed by other SROs on SFCs, \15\ the 
Exchange believes that its proposal will permit member organizations to 
accord offset treatment in accounts carried for such specialists, 
market makers and security futures dealers only when their activity is 
limited to bona fide specialist or market making transactions. 
According to the Exchange, the limitations imposed are consistent with 
its belief that market makers bear the primary responsibility and 
obligation to maintain fair and orderly markets, and provide liquidity 
to the marketplace. Were a revenue or other test substituted for the 
affirmative obligation standard proposed, the Exchange believes that 
entities other than qualified market makers would be permitted to act 
as market makers. The Exchange believes that this was not the intent of 
the Commission or CFTC when adopting margin regulations for security 
futures.
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    \15\ See e.g., Securities Exchange Act Release No. 46555 
(September 26, 2002), 67 FR 61707 (October 1, 2002) (SR-OC-2002-01).
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    Proposed .70 of NYSE Rule 431(f)(10) is a new provision that will 
permit money market mutual funds as defined in Rule 2a-7 under the ICA 
to be used for satisfying margin requirements for security futures 
contracts, provided that the requirements of Rule 404(b) under the 
Act,\16\ and Rule 41.46(b)(2) under the CEA \17\ are satisfied. 
Presently, money market mutual funds may be used as collateral to 
satisfy margin requirements under Regulation T in a securities margin 
account. The proposed amendments to NYSE Rule 431 permit the use of 
such funds as collateral for SFCs as is required by the new SEC/CFTC 
Margin Regulations described above.
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    \16\ 17 CFR 240.404(b).
    \17\ 17 CFR 41.46(b)(2).
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    Except as otherwise intended, the Exchange believes that these 
proposed amendments are consistent with other SRO rule amendments 
recently filed with the SEC for approval.
2. Statutory Basis
    The statutory basis for the proposed rule change is section 6(b)(5) 
of the Act,\18\ which requires, among other things, that the rules of 
the Exchange are designed to prevent fraudulent and manipulative acts 
and practices, to promote just and equitable principles of trade, to 
foster cooperation and coordination with persons engaged in regulating, 
clearing, settling, processing information with respect to, and 
facilitating transactions in securities, to remove impediments to 
perfect the mechanism of a free and open market and national market 
system, and in general to protect investors and the public interest.
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    \18\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition not necessary or appropriate in 
furtherance of the purposes of the Act.

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

    The Exchange has neither solicited nor received written comments on 
the proposed rule change.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change, as amended, 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 69059]]

available for inspection and copying in the Commission's Public 
Reference Room. Copies of such filing will also be available for 
inspection and copying at the principal office of the above-mentioned 
self-regulatory organization. All submissions should refer to File No. 
SR-NYSE-2002-53 and should be submitted by December 5, 2002.

IV. Commission's Findings and Order Granting Accelerated Approval of 
Proposed Rule Change

    The NYSE has asked the Commission to approve the proposed rule 
change and Amendment No. 1 thereto prior to the thirtieth day after the 
date of publication of notice of the filing to accommodate the 
timetable for the trading of security futures.
    The Commission finds that the proposed rule change, as amended, is 
consistent with the requirements of the Act and the rules and 
regulations thereunder applicable to a national securities 
exchange.\19\ In particular, the Commission believes that the proposed 
rule change is consistent with the requirements of section 6(b)(5) of 
the Act,\20\ which requires, among other things, to promote just and 
equitable principles of trade and, in general, to protect investors and 
the public interest.\21\ In addition, the Commission believes that the 
proposed rule change is consistent with section 7(c)(2)(B) of the 
Act,\22\ which provides, among other things, that the margin 
requirements for security futures must preserve the financial integrity 
of markets trading security futures, prevent systemic risk, be 
consistent with the margin requirements for comparable exchange-traded 
options, and provides that the margin levels for security futures may 
be no lower than the lowest level of margin, exclusive of premium, 
required for any comparable exchange-traded option.
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    \19\ 15 U.S.C. 78s(b)(2).
    \20\ 15 U.S.C. 78f(b)(5).
    \21\ In approving the proposed rule, the Commission has 
considered the proposed rule's impact on efficiency, competition, 
and capital formation. 15 U.S.C. 78c(f).
    \22\ 15 U.S.C. 78g(c)(2)(B).
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    The Commission believes that the rule change is generally 
consistent with the customer margin rules for security futures adopted 
by the Commission and the CFTC. In particular, the Commission notes 
that, consistent with Rule 403 under the Act, NYSE's proposed rule 
provides for a minimum margin level of 20% of current market value for 
all positions in security futures carried in a securities account. The 
Commission believes that 20% is the minimum margin level necessary to 
satisfy the requirements of section 7(c)(2)(B) of the Act. Rule 403 
under the Act \23\ also provides that a national securities exchange 
may set margin levels lower than 20% of the current market value of the 
security future for an offsetting position involving security futures 
and related positions, provided that an exchange's margin levels for 
offsetting positions meet the criteria set forth in section 7(c)(2)(B) 
of the Act. The offsets proposed by NYSE are consistent with the 
strategy-based offsets permitted for comparable offset positions 
involving exchange-traded options and therefore consistent with section 
7(c)(2)(B) of the Act.
---------------------------------------------------------------------------

    \23\ 17 CFR 240.403(b)(2).
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    The Commission also believes that the treatment proposed by NYSE 
for security futures dealers under Rule 431 is consistent with the Act, 
and Rule 400(c)(2)(v) thereunder.\24\ Specifically, the rule would 
permit NYSE member organizations to accord ``good faith'' margin 
treatment to specified offsetting positions involving security futures, 
carried in a securities account for a security futures dealer, 
consistent with the customer margin rules for security futures adopted 
by the Commission and the CFTC.
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    \24\ 17 CFR 200.400(c)(2)(v).
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    Finally, the Commission believes it is consistent with the Act for 
the NYSE to exclude from its margin requirements positions in SFCs 
carried in a futures account. The Commission believes that by choosing 
to exclude such positions from the scope of Rule 431, the NYSE's 
proposal will make compliance by members with the regulatory 
requirements of several SROs easier.
    The Commission finds good cause for approving the proposed rule 
change, as amended, prior to the thirtieth day after the date of 
publication of notice of filing thereof in the Federal Register. The 
Commission believes that accelerated approval of the proposed rule 
change should enable NYSE members to trade security futures in 
securities accounts from the outset of security futures trading.\25\ In 
addition, the Commission believes that granting accelerated approval to 
the proposed rule change and Amendment No. 1 thereto should clarify 
NYSE members' obligations under NYSE Rule 431 with respect to their 
trading in security futures. The Commission notes that the NYSE has 
filed the proposed rule change as a temporary pilot to give members of 
the public an opportunity to comment on the substance of the proposed 
rule change before it requests permanent approval.
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    \25\ The Commission understands that trading in security futures 
is scheduled to begin on November 8, 2002.
---------------------------------------------------------------------------

    Accordingly, the Commission finds good cause, consistent with 
section 19(b)(2) of the Act,\26\ to approve the proposed rule change, 
as amended, prior to the thirtieth day after publication of the notice 
of filing on a pilot basis for sixty days beginning on the date of this 
order.
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    \26\ 15 U.S.C. 78f(b)(5); 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------

V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the 
Act,\27\ that the proposed rule change, as amended (File No. SR-NYSE-
2002-53), be, approved until January 6, 2003.
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    \27\ 15 U.S.C. 78s(b)(2).

For the Commission, by the Division of Market Regulation, pursuant 
to delegated authority.\28\
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    \28\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-28897 Filed 11-13-02; 8:45 am]
BILLING CODE 8010-01-P