[Federal Register Volume 68, Number 49 (Thursday, March 13, 2003)]
[Notices]
[Pages 12123-12130]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-6073]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-47460; File No. SR-NYSE-2003-05]


Self-Regulatory Organizations; Notice of Filing and Order 
Granting Accelerated Approval of a Proposed Rule Change by the New York 
Stock Exchange, Inc. To Adopt, on a Permanent Basis, Margin 
Requirements for Security Futures Contracts

March 6, 2003.
    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 March 5, 2003, the New York Stock Exchange, Inc. (``NYSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or the ``Commission'') the proposed rule change as described 
in Items I, II and III below, which Items have been prepared by the 
Exchange. The Commission is publishing this notice to solicit comments 
on the proposed rule change from interested persons and to grant 
accelerated approval of the proposed rule change.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    This Exchange proposes to adopt, on a permanent basis, the 
amendments to NYSE Rule 431 relating to margin requirements for 
Security Futures Contracts (``SFCs''), which were approved by the SEC 
on a pilot basis for sixty days (the ``Pilot'') on November 7, 2002,\3\ 
and the Pilot was extended for an additional sixty days, from January 
6, 2003 until March 6, 2003.\4\
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    \3\ See Securities Exchange Act Release No. 46782 (November 7, 
2002), 67 FR 69052 (November 14, 2002) (SR-NYSE-2002-53).
    \4\ See Securities Exchange Act Release No. 47129 (January 3, 
2003), 68 FR 2094 (January 15, 2003) (SR-NYSE-2003-01).
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    The Exchange believes that the proposed rule change would make its 
margin rule consistent with 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.
    Specifically, the proposed amendments would: (1) Permit customer 
margining of SFCs, and establish initial and maintenance margin 
requirements for SFCs; (2) allow for initial and maintenance margin 
levels for offsetting positions involving SFCs and related positions at 
lower levels than would be required if margined separately; (3) provide 
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 SFCs for 
application of this rule; (5) provide that SFCs transacted in a futures 
account shall not be subject to any provisions of Rule 431; (6) provide 
for money market mutual funds as defined under Rule 2a-7 \5\ of the 
ICA,\6\ to be used to satisfy margin requirements for SFCs provided 
certain conditions are met; (7) require that SFCs transacted in a 
securities account be subject to all other provisions of NYSE Rule 431, 
particularly 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 SFCs.
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    \5\ 17 CFR 270.2a-7.
    \6\ 15 U.S.C. 80a et seq.
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    Below is the text of the proposed rule change. Proposed new 
language is italicized; proposed deletions are in brackets. In 
addition, the table of offsets is new rule language.
* * * * *
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.

[[Page 12124]]

    (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 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

[[Page 12125]]

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.

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

[[Page 12126]]

 
12. Short security future and long  Individual stock or    The initial margin          5% of the current market
 position in the same security (or   narrow-based           required under Regulation   value, as defined in
 securities basket) underlying the   security index.        T for the long security     Regulation T, of the
 security future.                                           or securities.              long stock or stocks.
13. Short security future and long  Individual stock or    The initial margin          10% of the current market
 position in a security              narrow-based           required under Regulation   value, as defined in
 immediately convertible into the    security index.        T for the long security     Regulation T, of the
 same security underlying the                               or securities.              long stock or stocks.
 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 futures          narrow-based           value of the short          the aggregate exercise
 representing each component of a    security index.        security future, plus pay   price of the call, plus
 narrow-based securities index)                             for the call in full.       the aggregate call out-
 and Long call option or warrant                                                        of-the-money amount, if
 on the same underlying security                                                        any; or (2) 20% of the
 (or index).                                                                            current market value of
                                                                                        the short security
                                                                                        future.
15. Short security future, short    Individual stock or    20% of the current market   10% of the aggregate
 put option and long call option.    narrow-based           value of the short          exercise price, plus the
 The short security future, short    security index.        security future, plus the   aggregate put in-the-
 put and long call must be on the                           aggregate put in-the-       money amount, if any.
 same underlying security and the                           money amount, if any,
 put and call must have the same                            plus pay for the call in
 exercise price. (Reverse                                   full. Proceeds from put
 Conversion).                                               sale may be applied.
16. Long (short) a security future  Individual stock and   The greater of: (1) 3% of   The greater of: (1) 3% of
 and short (long) an identical       narrow-based           the current market value    the current market value
 security future traded on a         security index.        of the long security        of the short security
 different market.                                          future(s); or (2) 3% of     future(s); or (2) 3% of
                                                            the current market value    the current market value
                                                            of the short security       of the short security
                                                            future(s).                  future(s).
17. Long (short) a basket of        Individual stock and   The greater of: (1) 5% of   The greater of: (1) 5% of
 security futures that together      narrow-based           the current market value    the current market value
 tracks a narrow-based index and     security index.        of the short security       of the short security
 short (long) a narrow based index                          future(s); or (2) 5% of     future(s); or (2) 5% of
 future.                                                    the current market value    the current market value
                                                            of the short security       of the short security
                                                            future(s).                  future(s).
----------------------------------------------------------------------------------------------------------------
\7\ 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.

    (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 
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 (1) a member or member organization of a 
national securities

[[Page 12127]]

exchange or a national securities association registered pursuant to 
Section 15A(a) of the Exchange Act; (2) is registered with such 
exchange or such association as a security futures dealer pursuant to 
rules that are effective in accordance with Section 19(b)(2) of the 
Exchange Act and, as applicable, Section 5c(c) of the CEA, that: (1) 
requires such member or member organization to be registered as a floor 
trader or a floor broker with the CFTC under Section 4f(a)(1) of the 
CEA, or as a dealer with the Commission under Section 15(b) of the 
Exchange Act; (2) or requires such member or member organization to 
maintain records sufficient to prove compliance with the rules of the 
exchange or association of which it is a member; (3) requires such 
member or member organization to hold itself out as being willing to 
buy and sell security futures for its own account on a regular and 
continuous basis; and (4) provides for disciplinary action, including 
revocation of such member's or member organization's registration as a 
security futures dealer, for such member's or member organization's 
failure to comply with Rules 400 through 406 of the Exchange Act and 
Rules 41.42 through 41.49 of the CEA or the rules of the exchange or 
association of which the security futures dealer is a member or member 
organization.
    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;''
    (iii) 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 SEA 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 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 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 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

[[Page 12128]]

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 IV 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
    The Exchange proposes to make permanent the amendments to NYSE Rule 
431 regarding margin requirements for SFCs. The original proposed rule 
change to amend NYSE Rule 431 was approved by the Commission on a pilot 
basis for sixty days on November 7, 2002.\8\ On January 6, 2003, the 
Commission approved an extension to the Pilot for an additional sixty 
days, ending March 6, 2003.\9\
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    \8\ See supra note 3.
    \9\ See supra note 4.
---------------------------------------------------------------------------

    The proposed amendments are being made to make the Exchange's 
margin rule consistent with margin rules already adopted by the SEC and 
the CFTC and those filed by other SROs regarding security futures.
    Specifically, the proposed amendments would: (1) Permit customer 
margining of SFCs, and establish initial and maintenance margin 
requirements for SFCs; (2) allow for initial and maintenance margin 
levels for offsetting positions involving SFCs and related positions at 
lower levels than would be required if margined separately; (3) provide 
for a Market Maker exclusion for proprietary trades of a 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 SFCs for application of this rule; (5) provide 
that SFCs transacted in a futures account shall not be subject to any 
provisions of NYSE Rule 431; (6) provide for money market mutual funds, 
as defined under Rule 2a-7\10\ of the Investment Company Act of 
1940,\11\ to be used to satisfy margin requirements for SFCs provided 
certain conditions are met; (7) require that SFCs transacted in a 
securities account be subject to all other provisions of NYSE Rule 431, 
particularly Rule 431(f)(8)(B) (``Day Trading''); and (8) permit 
members and member organizations for which the Exchange is the DEA to 
participate in the trading of SFCs.
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    \10\ 17 CFR 270.2a-7.
    \11\ 15 U.S.C. 80a et seq.
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Background
    The CFTC and SEC have adopted customer margin requirements for the 
trading of SFCs (``SEC/CFTC Margin Regulations'')\12\ pursuant to 
authority delegated to them by the Federal Reserve Board (``FRB'') 
under section 7(c)(2)(B) of the Act.\13\ As noted in the adopting 
release,\14\ new subsection (2) to section 7(c) provides that the 
customer margin requirements for SFCs must satisfy four requirements: 
(1) They must preserve the financial integrity of markets trading 
security futures products; (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 Exchange Act,\15\ 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.\16\ The regulations on customer margin 
for security futures became effective on September 13, 2002. Pursuant 
to these amendments the Exchange filed proposed amendments to NYSE Rule 
431, which were approved temporarily on a pilot basis by the 
Commission.
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    \12\ 17 CFR 240.400 through 406; 17 CFR 41.41 through 41.48.
    \13\ 15 U.S.C. 78g(c)(2)(B).
    \14\ See Securities Exchange Act Release No. 46292 (August 1, 
2002), 67 FR 53146 (August 14, 2002).
    \15\ 15 U.S.C. 78f.
    \16\ 12 CFR part 220.
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    Specifically, on October 23, 2002, the Exchange filed a proposed 
rule change with the Commission to amend NYSE Rule 431 with regard to 
SFCs.\17\ On November 6, 2002, the Exchange filed Amendment No. 1 to 
the proposed rule change.\18\ The proposed rule change was approved by 
the Commission as a sixty-day pilot on November 7, 2002,\19\ effective 
through January 6, 2003 (``Pilot'').
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    \17\ See SR-NYSE-2002-53.
    \18\ See letter from Darla C. Stuckey, Corporate Secretary, 
NYSE, to Nancy Sanow, Assistant Director, Division, Commission, 
dated November 5, 2002 (``Amendment No. 1''). Amendment No. 1 
replaced the original rule filing in its entirety (SR-NYSE-2002-53). 
Amendment No. 1 also proposed that the proposal be effective for a 
sixty-day pilot and requested accelerated approval of the proposed 
rule change.
    \19\ See Securities Exchange Act Release No. 46782 (November 7, 
2002), 67 FR 69052 (November 14, 2002) (SR-NYSE-2002-53).
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    Among the amendments approved, as part of the Pilot, was new NYSE 
Rule 431(f)(10) (``Customer Margin Rules Relating to Security 
Futures''), which provides that SFCs transacted in a securities account 
be subject to all other provisions of NYSE Rule 431, including Rule 
431(f)(8)(B) (``Day Trading'').
    Also approved as part of the Pilot were NYSE Rule 431(f)(10)(D) 
(``Security Futures Dealers'' Accounts''), Rule 431(f)(10)(E) 
(``Approved Options Specialists' or Market Makers' Accounts''), and 
Rule 431(f)(D)(F) (``Approved Specialists'' Accounts-others''). The 
rule permits ``good faith'' margin treatment for specified hedged 
offset positions carried in the accounts noted above. However, unlike 
the SFD rules of other SROs,\20\ the Exchange's

[[Page 12129]]

Pilot permitted member organizations to accord offset treatment in 
accounts carried for such specialists, market makers and SFDs only when 
their activity is limited to bona fide specialist or market making 
transactions. The limitations imposed were consistent with the 
Exchange's belief that market makers bear the primary responsibility 
and obligation to maintain fair and orderly markets, and provide 
liquidity to the marketplace.
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    \20\ See e.g., Securities Exchange Act Release No. 46555 
(September 26, 2002), 67 FR 61707 (October 1, 2002) (SR-OC-2002-01).
---------------------------------------------------------------------------

    On January 3, 2003, the Exchange filed a proposed rule change to 
extend the Pilot for an additional sixty days (from January 6, 2003 
until March 6, 2003) to allow the Pilot to continue in effect on an 
uninterrupted basis and to permit customers to continue trading SFCs in 
securities accounts while the Exchange considered the comments 
discussed below that it had received on the Pilot.\21\
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    \21\ See supra note .
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Discussion of Comments Received
    On December 9, 2002, the Chicago Board Options Exchange, 
Incorporated (``CBOE'') submitted a comment letter with regard to the 
Exchange's margin rules for SFCs.\22\ In its letter, the CBOE requested 
that the Commission not grant permanent approval of the amendments to 
NYSE Rule 431 as proposed and approved on a pilot basis, unless the 
Exchange amended the rule to exempt SFCs from its day trading 
provisions and deleted references to the term ``bona fide'' in 
connection with market maker or specialist transactions.
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    \22\ See letter from Edward J. Joyce, President and Chief 
Operating Officer, CBOE, to Jonathan G. Katz, Secretary, Commission, 
dated December 9, 2002.
---------------------------------------------------------------------------

    In addition, as proposed, the Exchange's day trading margin 
requirements would apply to SFCs carried in securities accounts. The 
CBOE believed that day trading provisions should not apply to such 
accounts because it would create a disparity that the CFMA was designed 
to eliminate. In this regard, CBOE's letter stated that the SEC and 
CFTC did not impose day trading margin requirements to SFCs carried in 
futures and securities accounts. Since similar margin rules recently 
approved by the Commission do not impose day trading margin 
requirements on SFCs carried in futures account, the CBOE stated that 
permanent approval of the Exchange's proposed rule would lead to a 
regulatory disparity the CFMA was designed to prevent.
    The Exchange is now seeking to adopt, on a permanent basis, margin 
requirements for SFCs carried in securities accounts, with proposed 
text modifications from the Pilot based on the comments received and as 
discussed below.
    In proposing its rule amendment on the application of day trading 
margin requirements to SFCs carried in securities accounts, the 
Exchange did not intend to create a regulatory disparity with other 
SROs' rules. However, the Exchange notes that an SRO's rules can be 
more stringent than those of the Commission. In proposing rules, the 
Exchange is guided by Commission rules and has latitude to promulgate 
more stringent rules, which it believes are necessary for the 
protection of investors. In this regard, NYSE believes that the 
application of the day trading margin requirements of NYSE Rule 431 as 
applied to SFCs carried in a securities account is consistent with the 
treatment of all securities transacted in a margin account under this 
rule. Accordingly, the Exchange will propose to apply the day trading 
margin requirements to SFCs carried in a securities account.
    The CBOE also believes that the Exchange should delete the term 
``bona fide'' in connection with market maker or specialist 
transactions. CBOE commented that the Exchange does not define the term 
``bona fide'' nor does it use the term in relation to the other 
provisions of its margin rule relating to market maker and specialist 
transactions.
    In response to CBOE's comments, the Exchange is proposing to amend 
the rule text by deleting the term ``bona fide'' in connection with 
specialist or market maker transactions. In proposing such language 
under the pilot program, it was the Exchange's intent to permit good 
faith margin treatment for offsetting positions that were effected by 
specialists or market makers in discharging the primary 
responsibilities noted above in its original filing, rather than to 
permit persons other than qualified market makers to act in such a 
capacity--hence the term ``bona fide'' in connection with specialist 
and market making transactions. Upon consideration, and in order to be 
consistent with similar rules proposed by other SROs,\23\ the Exchange 
will not use the term ``bona fide'' in connection with specialist and 
market making transactions and instead the Exchange proposes to 
incorporate the definition of a SFD in Exchange Act Rule 400(c)(2)(v) 
\24\ to clarify what constitutes a SFD for purpose of the rule. 
Notwithstanding this amendment, the Exchange reiterates that good faith 
margin treatment be permitted for transactions effected by SFDs in 
discharging their responsibilities and obligations to maintain fair and 
orderly markets, and to provide liquidity to the marketplace.
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    \23\ See e.g., Securities Exchange Act Release No. 46711 
(November 5, 2002), 67 FR 68710 (November 12, 2002).
    \24\ 17 CFR 240.400(c)(2)(v).
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2. Statutory Basis
    The basis under the Exchange Act for this proposed rule change is 
section 6(b)(5) of the Act,\25\ which requires, among other things, 
that an exchange have rules that are designed to promote just and 
equitable principles of trade, to remove impediments to, and perfect 
the mechanism of, a free and open market and a national market system 
and, in general, to protect investors and the public interest. The 
Exchange believes that the proposed rule change is designed to 
accomplish these goals by permitting customers to trade SFCs in 
securities accounts.
---------------------------------------------------------------------------

    \25\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------

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 that is 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 notes that it received written comments on the 
original proposed rule change that was filed with the Commission on 
October 23, 2002, and thereafter amended on November 6, 2002. The 
Exchange has responded to such comments, and hereby amends its proposed 
rule change, which was approved by the Commission as a pilot program.

III. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Persons making written submissions 
should file six copies thereof with the Secretary, Securities and 
Exchange Commission, 450 Fifth Street NW., Washington, DC 20549-0609. 
Copies of the submission, all subsequent amendments, all written 
statements with respect to the proposed rule change that are filed with 
the Commission, and all written communications relating to the proposed 
rule change between the

[[Page 12130]]

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 
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 NYSE. All 
submissions should refer to File No. SR-NYSE-2003-05 and should be 
submitted by April 3, 2003.

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

    The NYSE has asked that the Commission approve the proposed rule 
change prior to the thirtieth day after publication of notice of the 
filing in the Federal Register to accommodate the continuance of 
trading of security futures in securities accounts pursuant to NYSE 
Rule 431 on an uninterrupted basis after the Pilot ends on March 6, 
2003. The Commission finds that the proposed rule change is consistent 
with the requirements of the Act and the rules and regulations 
thereunder applicable to a national securities exchange.\26\ In 
particular, the Commission believes that the proposed rule change is 
consistent with the requirements of section 6(b)(5) of the Act,\27\ 
which requires, among other things, that the rules of the Exchange be 
designed to promote just and equitable principles of trade and, in 
general, to protect investors and the public interest.\28\ In addition, 
the Commission believes that the proposed rule change is consistent 
with section 7(c)(2)(B) of the Act,\29\ 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 provide 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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    \26\ 15 U.S.C. 78s(b)(2).
    \27\ 15 U.S.C. 78f(b)(5).
    \28\ 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).
    \29\ 15 U.S.C. 78g(c)(2)(B).
---------------------------------------------------------------------------

    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 \30\ 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.
---------------------------------------------------------------------------

    \30\ 17 CFR 240.403(b)(2).
---------------------------------------------------------------------------

    In addition, 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. Moreover, as proposed, NYSE member 
organizations will accord ``good faith'' margin treatment to specified 
offsetting positions involving security futures, carried in a 
securities account for a SFD, consistent with the customer margin rules 
for security futures adopted by the Commission and the CFTC.
    After careful consideration of the commenter's concern about 
applying the NYSE's day trading margin requirements to SFCs, the 
Commission believes that it is reasonable for the NYSE to impose day 
trading margin requirements on its members with respect to SFCs carried 
in a securities account. As NYSE noted, an SRO may adopt more stringent 
requirements than those promulgated by the Commission.
    The Commission has also carefully considered the commenter's 
concern of using the term ``bona fide'' with respect to market maker or 
specialist transactions. The Commission notes that NYSE has deleted the 
term ``bona fide'' in reference to market maker or specialist 
transactions, and instead is incorporating the definition of an SFD in 
Rule 400(c)(2)(v) under the Act. The Commission believes that if it 
finds, in approving an SRO's rules for SFDs, that such rules are 
consistent with the definition of SFD in Rule 400(c)(2)(v), those rules 
would also be consistent with NYSE Rule 431(f)(10)(D). Therefore, the 
Commission believes this amendment should address the commenter's 
concerns that NYSE not impose a higher standard on transactions by 
market maker and specialist registered pursuant to rules of another SRO 
to qualify for favorable margin treatment.
    The Commission finds good cause for approving the proposed rule 
change 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 continue to trade SFCs in securities accounts on 
an uninterrupted basis. In addition, the Commission believes that 
granting accelerated approval to the proposed rule change should 
clarify NYSE members' obligations under NYSE Rule 431 with respect to 
their trading in SFCs. The Commission notes it approved NYSE's original 
filing 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. The NYSE has responded to the 
comments received, as described above. Accordingly, the Commission 
finds good cause, consistent with section 19(b)(2) of the Act, to 
approve the proposed rule change prior to the thirtieth day after 
publication if the notice of filing.

V. Conclusion

    It is therefore ordered, pursuant to section 19(b)(2) of the Act 
\31\, that the proposed rule change (File No. SR-NYSE-2003-05) be 
approved.
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    \31\ 15 U.S.C. 78s(b)(2).

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\32\
---------------------------------------------------------------------------

    \32\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-6073 Filed 3-12-03; 8:45 am]
BILLING CODE 8010-01-P