[Federal Register Volume 68, Number 134 (Monday, July 14, 2003)]
[Notices]
[Pages 41672-41676]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-17667]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-48133; File No. SR-NYSE-98-14]


Self-Regulatory Organizations; Notice of Filing of Amendment Nos. 
1, 2, and 3 to a Proposed Rule Change by the New York Stock Exchange, 
Inc. Relating to Margin Requirements

July 7, 2003.
    On April 28, 1998, the New York Stock Exchange, Inc. (``NYSE'' or 
``Exchange'') filed with the Securities and Exchange Commission 
(``SEC'' or ``Commission''), pursuant to section 19(b)(1) of the 
Securities Exchange Act of 1934 (``Exchange Act'')\1\ and Rule 19b-4 
thereunder,\2\ a proposal to amend NYSE Rule 431, ``Margin 
Requirements.'' The proposed rule change was published for comment in 
the Federal Register on August 5, 1998.\3\ The Commission received one 
comment regarding the proposal.\4\ The NYSE filed Amendment Nos. 1, 2, 
and 3 to the proposal on January 5, 1999, November 6, 2002, and May 12, 
2003, respectively. In addition, on March 6, 2000, the NYSE filed an 
Information Memo (``NYSE Information Memo'') that sets forth the 
general requirements for the written risk analysis methodology that 
members would be required to maintain in connection with good faith 
securities transactions in exempt accounts (which are discussed more 
fully below). The Commission is publishing this notice of Amendment 
Nos. 1 and 2 and the NYSE Information Memo to solicit comments on the 
proposed rule change, as amended, from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
    \3\ See Securities Exchange Act Release No. 40278 (July 29, 
1998), 63 FR 41882 (``1998 Notice'').
    \4\ See letter from Paul Saltzman, Senior Vice President and 
General Counsel, The Bond Market Association (``TBMA'') and Patricia 
Brigantic, Vice President and Senior Associate General Counsel, 
TBMA, to Jonathan Katz, Secretary, Commission, dated August 26, 1998 
(``TBMA Letter'').
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    Consolidated changes made to the proposed rule text as a result of 
Amendment Nos. 1, 2, and 3 appear below. The base text is taken from 
the proposal that the Commission published for comment in 1998. 
Additional language proposed by the NYSE in Amendment Nos. 1, 2, and 3 
is italicized; language deleted by Amendment Nos. 1, 2, and 3 is in 
brackets.

Rule 431

Margin Requirements

    Rule 431(a)(1) through (a)(2) unchanged.
    (a)(3) The term ``designated account'' means the account of (i) a 
bank (as defined in section 3(a)(6) of the Securities Exchange Act of 
1934), (ii) a savings association (as defined in section 3(b) of the 
Federal Deposit Insurance Act), the deposits of which are insured by 
the Federal Deposit Insurance Corporation, (iii) an insurance company 
(as defined in section 2(a)(17) of the Investment Company Act of 1940, 
(iv) an investment company registered with the Securities and Exchange 
Commission under the Investment Company Act of 1940, (v) a sate or a 
political subdivision thereof, or (vi) a pension or profit sharing plan 
subject to ERISA or of an agency of the United States or of a state or 
a political subdivision thereof.
    (a)(4) through (a)(8) unchanged.
    (a)(9) The term ``highly rated foreign sovereign debt securities'' 
means any debt securities (including major foreign sovereign debt 
securities) issued or guaranteed by the government of a foreign 
country, its provinces, states or cities, or a supranational entity, if 
at the time of the extension of credit the issue, the issuer or 
guarantor, or any other outstanding obligation of the issuer or 
guarantor ranked junior to or on a parity with the issue or the 
guarantee is assigned a rating (implicitly or explicitly) in one of the 
top two rating categories by at least one nationally recognized 
statistical rating organization.
    (a)(10) The term ``investment grade debt securities'' means any 
debt securities (including those issued by the government of a foreign 
country, its provinces, states or cities, or a supranational entity), 
if at the time of the extension of credit the issue, the issuer or 
guarantor, or any other outstanding obligation of the issuer or 
guarantor ranked junior to or on a parity with the issue or the 
guarantee is assigned a rating (implicitly or explicitly) in one of the 
top four rating categories by at least one nationally recognized 
statistical rating organization.
    (a)(11) The term ``major foreign sovereign debt securities'' means 
any debt securities issued or guaranteed by the government of a foreign 
country or a supranational entity, if at the time of the extension of 
credit the issue, the issuer or guarantor, or any other outstanding 
obligation of the issuer or guarantor ranked junior to or on a parity 
with the issue or the guarantee is assigned a rating (implicitly or 
explicitly) in the top rating category by at least one nationally 
recognized statistical rating organization.
    (a)(12) The term ``mortgage related securities'' means securities 
falling within the definition in section 3(a)(41) of the Securities 
Exchange Act of 1934.
    (a)(13) The term ``exempt account'' means
    (A) A member organization, non-member broker-dealer registered as a 
broker or dealer pursuant to the Securities Exchange Act of 1934, a 
``designated account'' or
    (B) Any person that
    (i) Has net worth of at least forty-five million dollars and 
financial assets of at

[[Page 41673]]

least forty million dollars for purposes of paragraphs (e)(2)(F) and 
(e)(2)(G), and (ii) either:
    (1) Has securities registered pursuant to section 12 of the 
Securities Exchange Act of 1934, has been subject to the reporting 
requirements of section 13 of the Exchange Act for a period of at least 
90 days and has filed all the reports required to be filed thereunder 
during the preceding 12 months (or such shorter period as it was 
required to file such reports), or
    (2) Has securities registered pursuant to the Securities Act of 
1933, has been subject to the reporting requirements of section 15(d) 
of the Securities Exchange Act of 1934 for a period of at least 90 days 
and has filed all the reports required to be filed thereunder during 
the preceding 12 months (or such shorter period as it was required to 
file such reports), or
    (3) If such person is not subject to section 13 or 15(d) of the 
Securities Exchange Act of 1934, is person with respect to which there 
is publicly available the information specified in paragraphs (a)(5)(i) 
to (xiv), inclusive, of Rule 15c2-11 under that Act, or
    (4) Furnishes information to the Securities and Exchange Commission 
as required by Rule 12g3-2(b) of the Securities Exchange Act of 1934, 
or
    (5) Makes available to the member organization such current 
information regarding such person's ownership, business operations and 
financial condition (including such person's current audited statement 
of financial condition, statement of income and statement of changes in 
stockholder's equity or comparable financial reports) as reasonably 
believed by the member organization to be accurate, sufficient for the 
purposes of performing a risk analysis in respect of such person.
    (a)(14) The term ``non-equity securities'' means any securities 
other than equity securities as defined in section 3(a)(11) of the 
Securities Exchange Act of 1934.
    (a)(15) The term ``listed non-equity securities'' means any non-
equity securities that:
    (i) are listed on a national securities exchange; or (ii) have 
unlisted trading privileges on a national securities exchange.
    (a)(16) The term ``other marginable non-equity securities'' means:
    (1) Any debt securities not traded on a national securities 
exchange meeting all of the following requirements:
    (i) At the time of the original issue, a principal amount of not 
less than $25,000,000 of the issue was outstanding;
    (ii) The issue was registered under section 5 of the Securities Act 
of 1933 and the issuer either files periodic reports pursuant to 
section 13(a) or 15(d) of the Securities Exchange Act of 1934 or is an 
insurance company which meets all of the conditions specified in 
section 12(g)(2)(G) of the Securities Exchange Act of 1934; and
    (iii) At the time of the extension of credit, the creditor has a 
reasonable basis for believing that the issuer is not in default on 
interest or principal payments; or
    (2) Any private pass-through securities (not guaranteed by an 
agency of the U.S. government) meeting all of the following 
requirements:
    (i) An aggregate principal amount of not less than $25,000,000 
(which may be issued in series) was issued pursuant to a registration 
statement filed with the Securities and Exchange Commission under 
Section 5 of the Securities Act of 1933.
    (ii) Current reports relating to the issue have been filed with the 
Securities and Exchange Commission; and
    (iii) At the time of the credit extension, the creditor has a 
reasonable basis for believing that mortgage interest, principal 
payments and other distributions are being passed through as required 
and that the servicing agent is meeting its material obligations under 
the terms of the offering.
    (b)(1) through (e)(1) unchanged.
    (e)(2) Exempted Securities, Non-equity Securities and Baskets
(A) Obligations of the United States and Highly Rated Foreign Sovereign 
Debt Securities
    On net ``long'' or net ``short'' positions in obligations 
(including zero coupon bonds, i.e., bonds with coupons detached or non-
interest bearing bonds) issued or guaranteed as to principal or 
interest by the United States Government or by corporations in which 
the United States has a direct or indirect interest as shall be 
designated for exemption by the Secretary of the Treasury, or in 
obligations that are highly rated foreign sovereign debt securities, 
the margin to be maintained shall be the percentage of the current 
market value of such obligations as specified in the applicable 
category below:
    (i) Less than one year to maturity, 1%
    (ii) One year but less than three years to maturity, 2%
    (iii) Three years but less than five years to maturity, 3%
    (iv) Five years but less than ten years to maturity, 4%
    (v) Ten years but less than twenty years to maturity, or 5%
    (vi) Twenty years or more to maturity. 6%
    Notwithstanding the above, on zero coupon bonds with five years or 
more to maturity the margin to be maintained shall not be less than 3% 
of the principal amount of the obligation.
    When such obligations other than United States Treasury bills are 
due to mature in thirty calendar days or less, a member organization, 
at its discretion, may permit the customer to substitute another such 
obligation for the maturing obligation and use the margin held on the 
maturing obligation to reduce the margin required on the new 
obligation, provided the customer has given the member organization 
irrevocable instructions to redeem the maturing obligation.
(B) All Other Exempted Securities
    On any positions in exempted securities other than obligations of 
the United States, the margin to be maintained shall be 7% of the 
current market value.
(C) Non-Equity Securities
    On any positions in non-equity securities the margin to be 
maintained (except where a lesser requirement is imposed by other 
provisions of this Rule) shall be:
    (i) 10% of the current market value in the case of investment grade 
debt securities; and
    (ii) 20% of the current market value or 7% of the principal amount, 
whichever amount is greater, in the case of all other listed non-equity 
securities, and all other marginable non-equity securities as defined 
in paragraph (a)(16) of this Rule.
    431(e)(2)(D) through (E) unchanged.
(F) Transactions With Exempt Accounts Involving Certain ``Good Faith'' 
Securities
    On any position resulting from a transaction involving exempted 
securities, mortgage related securities, or major foreign sovereign 
debt securities made for or with an ``exempt account'', no margin need 
be required and any marked to the market loss on such position need not 
be collected. However, the amount of any uncollected marked to the 
market loss shall be deducted in computing the Net Capital of the 
member organization under the Exchange's Capital Requirements, subject 
to the limits in paragraph (e)(2)(H) below.

[[Page 41674]]

(G) Transactions With Exempt Accounts Involving Highly Rated Foreign 
Sovereign Debt Securities and Investment Grade Debt Securities
    On any position resulting from a transaction made for or with an 
``exempt account'' (other than a position subject to paragraph 
(e)(2)(F)), the margin to be maintained on highly rated foreign 
sovereign debt and investment grade debt securities shall be, in lieu 
of any greater requirements imposed under this Rule, (i) 0.5% of 
current market value in the case of highly rated foreign sovereign debt 
securities and (ii) 3% of current market value in the case of all other 
investment grade debt securities. The member organization need not 
collect any such margin; provided the amount equal to the margin 
required shall be deducted in computing the Net Capital of the member 
organization under the Exchange's Capital Requirements. In computing 
the margin required, any marked to market losses included as a 
deduction to Net Capital shall be subject to the provisions in 
paragraph (e)(2)(H) below.
(H) Limits on Net Capital Deductions for Exempt Accounts
    (i) Member organizations shall maintain a written risk analysis 
methodology for assessing the amount of credit extended to exempt 
accounts pursuant to paragraphs (e)(2)(F) and (e)(2)(G) which shall be 
made available to the Exchange upon request.
    (ii) In the event that the Net Capital deductions taken by a member 
organization as a result of marked to the market losses incurred under 
paragraphs (e)(2)(F) and (e)(2)(G) (exclusive of the percentage 
requirements established thereunder) exceed:
    [(i)] (1) On any one account or group of commonly controlled 
accounts, 5% of the member organization's Tentative Net Capital (Net 
Capital before deductions on securities); or
    [(ii)] (2) On all accounts combined, 25% of the member 
organization's Tentative Net Capital (Net Capital before deductions on 
securities); then, unless such excess no longer exists on the fifth 
business day after it was incurred, the member organization (1) shall 
give prompt written notice to the Exchange and (2) shall not enter into 
any new transaction(s) subject to the provisions of paragraphs 
(e)(2)(F) or (e)(2)(G) that would result in an increase in the amount 
of such excess under, as applicable, subparagraph (i) or (ii) above.

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 NYSE included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. The NYSE has prepared summaries, set forth in Sections 
A, B, and C below, of the most significant aspects of such statements.

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

(1) Purpose

Background

    NYSE Rule 431 prescribes minimum margin requirements for customer 
accounts held by member organizations. In April 1996, the NYSE 
established a Rule 431 Committee (the ``Committee'') to asses the 
adequacy of NYSE Rule 431 on an ongoing basis, review margin 
requirements, and make recommendations for change. A number of proposed 
amendments resulting from the Committee's recommendations have been 
approved by the NYSE's Board of Directors since the Committee was 
established.
    Rule 15c3-1 under the Exchange Act (the ``Net Capital Rule'') \5\ 
provides, in part, that at all times every broker or dealer shall 
maintain net capital of no less than the minimum required by the Net 
Capital Rule. Further, it requires brokers or dealers to take certain 
prescribed haircuts from proprietary positions to reflect actual 
economic and market risk inherent in maintaining such positions. These 
haircuts are generally lower than the margin required for comparable 
securities. Accordingly, the Committee recommended that margin 
requirements for transactions in certain non-equity securities in the 
most creditworthy accounts be amended to reflect the actual economic 
risk inherent in those securities. The proposed amendments discussed 
below have been recommended by the Committee.
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    \5\ 17 CFR 240.15c3-1.
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    In December 1997, the Board of Governors of the Federal Reserve 
System amended Regulation T,\6\ which establishes initial margin 
requirements, to provide that transactions in non-equity securities are 
subject to ``good faith'' requirements when transacted in a ``good 
faith'' account, in lieu of a margin or cash account. The term ``good 
faith'' within this context means generally that such transactions are 
subject to the requirements of the self-regulatory organization with 
regulatory authority over the transactions and such requirements shall 
be applicable for initial and maintenance purposes. Accordingly, the 
maintenance margin requirements of NYSE Rule 431 provide ongoing safety 
and soundness levels for such positions maintained in customer 
accounts.
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    \6\ 12 CFR 220 et seq.
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Initial Filing

    As noted above, in April 1998 the NYSE filed with the Commission 
proposed amendments to NYSE Rule 431 which, among other things, would 
revise the margin requirements for investment grade non-equity 
securities and expand the types of such securities eligible for exempt 
account treatment. The proposed amendments recognized that in certain 
instances, margin requirements should be adjusted to reflect both the 
quality of the securities as well as the creditworthiness of the 
customer.
    The proposed amendments to NYSE Rule 431 would provide for margin 
requirements on non-equity securities that the Exchange believes are 
commensurate with the risks associated with positions in such 
securities held by customers. For example, margin percentages for 
investment grade debt securities and municipal securities would as 
proposed be calculated by taking the highest haircut percentages under 
the Net Capital Rule for proprietary positions in similar securities, 
instead of the current 20% and 15% respective margin requirements. For 
other listed non-convertible debt securities, the margin requirement 
would remain at 20%.
    Proposed amendments to NYSE Rule 431(a)(3) also would narrow the 
definition of ``designated account'' to include specifically designated 
institutions such as banks, other broker-dealers, savings associations, 
insurance companies, investment companies, states or political 
subdivisions thereof, and ERISA pension and profit sharing plans.
    Further, proposed NYSE Rule 431(a)(13) would create a new 
definition of ``exempt account,'' to include the designated accounts 
noted above and the following: a member organization, non-member 
broker-dealer and any person having net worth of at least $40 million. 
The proposed amendments increased the financial threshold for a 
customer to be considered an exempt account from $16 to $40 million in 
net

[[Page 41675]]

worth. In addition, the proposed amendments would provide lower margin 
requirements for exempt account transactions in investment grade 
foreign sovereign debt and other investment grade non-equity 
securities. For transactions in these types of securities, member 
organizations would be required to take either a net capital charge 
equal to marked to market losses or collect margin equal to the 
percentage requirements under the Rule. In this instance, the NYSE 
believes that the enhanced creditworthiness of both the customer and 
the security transacted would justify the imposition of lower margin 
requirements.
Amendment No. 1
    In January 1999, the NYSE filed Amendment No. 1 to the Initial 
Filing. Amendment No. 1 sought to clarify and amend the following with 
regard to the original filing: (1) Amend NYSE Rule 431(a)(13) to 
clarify that non-member brokers or dealers that are considered exempt 
accounts must be registered with the Commission; (2) amend NYSE Rule 
431(a)(13) to require that for a person to be considered an exempt 
account, at least $45 million of net worth and at least $40 million of 
financial assets are required; and (3) amend NYSE Rule 431(e)(2)(H)(i) 
to require member organizations to maintain written risk analysis 
procedures for assessing the amount of credit extended to exempt 
accounts. The NYSE believes that increasing the net worth requirement 
from $40 to $45 million, and including indicia of a person's liquidity 
($40 in financial assets) in that total, provides a better indicator of 
a person's creditworthiness when extending credit for transactions in 
non-equity securities in exempt accounts.
    In addition, the NYSE states that Amendment No. 1 would require 
that, as a good business practice and for safety and soundness 
considerations, member organizations maintain written procedures for 
assessing credit extended to exempt accounts. Although the requirement 
for member organizations can be found in interpretations to NYSE Rule 
401, ``Business Conduct,'' it is proposed to be codified in NYSE Rule 
431.

Information Memo

    As noted above, the NYSE has submitted to the Commission a draft 
Information Memo that it would circulate to its members upon approval 
of the proposed rule change. The Information Memo would provide 
guidelines for members to satisfy the requirement to maintain written 
risk analysis procedures under proposed NYSE Rule 431(e)(2)(H)(i). 
Specifically, the Information Memo would provide that a member's 
written risk methodology for assessing credit extended to exempt 
accounts should include the following:
    [sbull] Procedures for obtaining and reviewing the appropriate 
customer account documentation and the customer financial information 
necessary to determine exempt account status for the extension of 
credit under the rule.
    [sbull] Procedures and guidelines for the determination, review and 
approval of credit limits to customers and across all customers who 
qualify as exempt accounts under the rule.
    [sbull] Procedures and guidelines for monitoring credit risk 
exposure to the organization relating to exempt account customers.
    [sbull] Procedures and guidelines for the use of stress testing of 
exempt accounts in order to monitor market risk exposure from exempt 
accounts individually and in the aggregate.
    [sbull] Procedures providing for the regular review and testing of 
these risk management procedures by an independent unit such as 
internal audit, risk management, or other comparable group.

Amendment Nos. 2 and 3

    In Amendment Nos. 2 and 3, the NYSE proposes to require that 
persons qualifying for exempt account status satisfy requirements in 
addition to the net worth and financial assets standards described 
above. In this regard, the NYSE proposes to require that persons 
qualifying for exempt account status meet specific registration and 
reporting requirements under the federal securities laws, specifically 
the Securities Act of 1933 \7\ (``Securities Act'') and the Exchange 
Act, or make available to the member or member organization certain 
current information regarding the person's ownership, business, 
operations, and financial condition.
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    \7\ 15 U.S.C. 77a.
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    Specifically, in addition to meeting the $45/$40 million 
thresholds, persons qualifying for ``exempt account'' status also would 
have to satisfy one of the following requirements: (1) The person must 
have securities registered pursuant to section 12 of the Exchange Act 
\8\ and must have been subject to the reporting requirements of section 
13 of the Exchange Act; \9\ (2) the person must have securities 
registered pursuant to the Securities Act and must have been subject to 
the reporting requirements of section 15(d) of the Exchange Act; \10\ 
(3) if the person is not subject to section 13 or 15(d) of the Exchange 
Act, that person must make information available that is required 
pursuant to Rule 15c2-11 under the Exchange Act; \11\ or (4) the person 
must make available to the member organization such current information 
regarding the person's ownership, business, operations, and financial 
condition, including such person's audited statement of financial 
condition, statement of income, and statement of changes in 
stockholder's equity or comparable financial reports. In addition, a 
person that meets the financial threshold also could qualify for exempt 
account status if the person is eligible for an exemption from the 
Exchange Act reporting requirements because the person furnishes the 
Commission with information as required under Exchange Act Rule 12g3-
2(b).\12\
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    \8\ 15 U.S.C. 78l.
    \9\ 15 U.S.C 78m(a).
    \10\ 15 U.S.C. 78o(d).
    \11\ 17 CFR 240.15c2-11.
    \12\ 17 CFR 240.12g3-2(b). Amendment No. 3 revises proposed NYSE 
Rule 431(a)(13)(B)(ii)(4) to clarify that a person seeking exempt 
account status under that provision must furnish to the Commission 
the information required by Rule 12g3-2(b) under the Exchange Act.
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    Sections 13 and 15(d) of the Exchange Act require publicly held 
companies to furnish to the public on a continuous and ongoing basis 
certain information regarding their operations and financial condition. 
Companies subject to this obligation, among others, include: (1) 
Companies that have registered a class of securities under section 
12(b) of the Exchange Act \13\ for listing and trading on a national 
securities exchange; and (2) an issuer that has filed a registration 
statement pursuant to the Securities Act that has been declared 
effective.
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    \13\ 15 U.S.C. 78l(b).
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    Pursuant to Commission rules promulgated under Sections 13 and 
15(d) of the Exchange Act, companies are required to make the 
disclosures noted above on a quarterly (Form 10-Q),\14\ annual (Form 
10-K),\15\ and interim basis (Form 8-K).\16\ Requiring persons 
qualifying for ``exempt account'' status to meet the disclosure 
requirements mandated by these sections and rules of the Exchange Act 
should provide adequate and sufficient information for a member 
organization to perform a risk analysis of such persons.
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    \14\ 17 CFR 249.308b.
    \15\ 17 CFR 249.310b.
    \16\ 17 CFR 249.308.
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    Further, Rule 15c2-11 under the Exchange Act precludes a broker-
dealer from entering bid or asked quotations in

[[Page 41676]]

a security, i.e., market making, unless it has specified current 
information in its possession, such as a copy of a prospectus included 
in a registration statement filed under the Exchange Act, or a copy of 
an issuer's most recent annual report filed pursuant to Section 13 or 
15(d) of the Exchange Act.
    If a person seeking exempt account status is not subject to 
reporting requirements under the Act, the proposal would require that 
person to furnish to the member organization information similar to 
that mandated by these regulations. The financial requirements already 
proposed coupled with the new reporting requirements the Exchange seeks 
to impose are consistent with the purpose of NYSE Rule 431, which is to 
provide for extension of credit to financially sound customers and to 
minimize systemic risk to member organizations of the Exchange in that 
regard.
    Further, the NYSE is proposing non-substantive amendments to NYSE 
Rule 431(e)(2)(H)(ii) to correct the paragraph notations.

Comment Received

    As noted above, the Commission received one comment letter 
regarding the proposal, from TBMA. The commenter generally supported 
the proposed rule change but sought clarification concerning: (1) 
Whether the proposal's definition of ``exempt account'' supersedes the 
definition of ``exempt account'' currently contained in NYSE Rule 
431(f)(2)(D)(iv), which defines ``exempt accounts'' for purposes of 
margin requirements for options on U.S. government securities; and (2) 
whether extensions of credit to accounts that met the $16 million 
threshold for ``designated'' or ``exempt'' account status under the 
NYSE's existing rules at the time of the extension of credit would be 
``grandfathered'' when the increased threshold for exempt account 
status becomes effective.\17\
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    \17\ Currently, NYSE Rule 431(e)(2)(C) provides a margin 
requirement of 5% of current market value for mortgage-related 
securities held in an ``exempt account.'' For purposes of current 
NYSE Rule 431(e)(2)(C), an ``exempt account'' is defined as a 
member, non-member broker-dealer, ``designated account,'' or any 
person having net tangible assets of at least $16 million. In 
addition, NYSE Rule 431(e)(2)(F) permits a broker-dealer to collect 
no margin or marked to the-market losses for transaction in exempted 
securities made with or for designated accounts. For purposes of 
current NYSE Rule 431(e)(2)(F), a ``designated account'' includes 
persons with net tangible assets of $16 million or more. See NYSE 
Handbook, Rule 431(e)(2)(F)/01.
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    The NYSE submitted a letter in response to TBMA Letter.\18\ The 
NYSE stated that: (1) The current proposal's definition of ``exempt 
account'' will not supersede the definition of ``exempt account'' in 
NYSE Rule 431(f)(2)(D)(iv); and (2) an account that met the $16 million 
financial threshold for designated or exempt account status at the time 
of the initial extension of credit would retain its status with regard 
to existing credit transactions, although the proposal's increased 
financial threshold would apply to new credit transactions or roll-
overs of existing credit extensions.
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    \18\ See James E. Buck, Senior Vice President and Secretary, 
NYSE, to Michael Walinskas, Deputy Associate Director, Division of 
Market Regulation, Commission, dated April 5, 1999.
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(2) Statutory Basis
    The NYSE believes that the proposed rule change, as amended, is 
consistent with the requirements of section 6(b)(5) of the Exchange 
Act, which requires, among other things, that the rules of the Exchange 
be 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 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. 
Further, the NYSE believes that the proposed rule change is also 
consistent with the rules and regulations of the Board of Governors of 
the Federal Reserve System for the purpose of preventing the excessive 
use of credit for the purchase or carrying of securities, pursuant to 
section 7(a) of the Act.\19\
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    \19\ 15 U.S.C. 78g(a).
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B. Self-Regulatory Organization's Statement on Burden on Competition

    The Exchange does not believe that the proposed rule change will 
impose any burden on competition that is not necessary or appropriate 
in furtherance of the purposes of the Exchange 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. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 35 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will by 
order approve such proposed rule change, or institute proceedings to 
determine whether the proposed rule change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views, and 
arguments concerning the foregoing, including whether Amendment Nos. 1 
and 2 and the Information Memo are 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 
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 number SR-NYSE-98-14 and should be 
submitted by August 4, 2003.

    For the Commission, by the Division of Market Regulation, 
pursuant to delegated authority.\20\

    \20\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-17667 Filed 7-11-03; 8:45 am]
BILLING CODE 8010-01-P