[Federal Register Volume 69, Number 172 (Tuesday, September 7, 2004)]
[Rules and Regulations]
[Pages 54182-54191]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-20188]



[[Page 54181]]

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Part II





Securities and Exchange Commission





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17 CFR Parts 200 and 240



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

  Federal Register / Vol. 69, No. 172 / Tuesday, September 7, 2004 / 
Rules and Regulations  

[[Page 54182]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 200 and 240

[Release No. 34-50295; File No. S7-34-02]
RIN 3235-AI61


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

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

ACTION: Final rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is 
adopting amendments to the formula for determination of customer 
reserve requirements of broker-dealers under the Securities Exchange 
Act of 1934 to address issues related to customer margin for security 
futures products. The amendments permit a broker-dealer to include 
margin related to security futures products written, purchased, or sold 
in customer securities accounts required and on deposit with a 
registered clearing agency or a derivatives clearing organization as a 
debit item in calculating its customer reserve requirement under 
specified conditions. The amendments are intended to help ensure that a 
broker-dealer is not required to fund its customer reserve requirements 
with proprietary assets. In addition, the Commission is adopting a rule 
amendment delegating authority to the Director of the Division of 
Market Regulation to provide relief, under certain circumstances, from 
the conditions under which margin related to customer security futures 
products margin may be included as a debit item.

DATES: Effective October 7, 2004.

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

I. Introduction

    The Commission published proposed amendments to Rule 15c3-3a \1\ 
for comment in the Federal Register on September 23, 2002 (the 
``Proposal'').\2\ The Proposal delineated the method for calculating 
broker-dealer customer reserve requirements in light of enactment of 
the Commodity Futures Modernization Act of 2000 (``CFMA'')\3\ and the 
commencement of trading in security futures products. The Commission 
now is adopting the final rule amendments described below.
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    \1\ 17 CFR 240.15c3-3a.
    \2\ Exchange Act Release No. 46492 (Sept. 12, 2002), 67 FR 59747 
(Sept. 23, 2002).
    \3\ Pub. L. 106-554, 114 Stat. 2763 (2000).
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A. Background

    The CFMA, which became law on December 21, 2000, amended the 
Commodity Exchange Act (``CEA'') and the Securities Exchange Act of 
1934 (``Exchange Act'') to permit the trading of single stock and 
narrow-based index futures (``security futures'') and established a 
framework for the regulation of security futures products 
(``SFPs'').\4\ An SFP is both a security and a future.\5\ Thus, a 
customer who wishes to buy or sell an SFP must conduct the SFP 
transaction through a person registered both with the Commodity Futures 
Trading Commission (``CFTC'') as either a futures commission merchant 
(``FCM'') or an introducing broker (``IB'') and with the Commission as 
a broker-dealer.
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    \4\ The term ``security futures product'' includes both a 
security future and any option or privilege on a security future. 
CEA section 1a(32) (7 U.S.C. 1a(32)) and Exchange Act section 
3(a)(56) (15 U.S.C. 78c(a)(56)).
    \5\ Exchange Act sections 3(a)(10) and (11) (15 U.S.C. 
78c(a)(10) and (11)).
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B. Protection of Customer Funds Related to SFP Transactions in Customer 
Securities Accounts

    The term ``customer,'' as defined in Exchange Act Rule 15c3-3, 
includes a person who holds an SFP in a securities account.\6\ The 
Commission adopted Rule 15c3-3 in 1972, in part, to ensure that a 
broker-dealer in possession of customers' funds either deployed those 
funds ``in safe areas of the broker-dealer's business related to 
servicing its customers'' or, if not deployed in such areas, deposited 
the funds in a reserve bank account to prevent commingling of customer 
and firm funds.\7\ Rule 15c3-3 requires a broker-dealer to calculate 
what amount, if any, it must deposit on behalf of customers in the 
reserve bank account, entitled ``Special Reserve Bank Account for the 
Exclusive Benefit of Customers'' (``Reserve Bank Account''), under the 
formula set forth in Rule 15c3-3a (``Reserve Formula'').\8\ Generally, 
the Reserve Formula requires a broker-dealer to calculate any amounts 
it owes its customers and the amount of funds generated through the use 
of customer securities, called credits, and compare this amount to any 
amounts its customers owe it, called debits.\9\ If credits exceed 
customer debits, the broker-dealer must deposit that net amount in the 
Reserve Bank Account.\10\
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    \6\ See 17 CFR 240.15c3-3(a)(1) (definition of ``customer''), 
which was amended in 2002. See also Exchange Act Release No. 46473 
(Sept. 9, 2002), 67 FR 58284.
    \7\ Exchange Act Release No. 9856 (Nov. 10 1972), 37 FR 25224; 
17 CFR 240.15c3-3(e).
    \8\ 17 CFR 240.15c3-3(e)(1) and (2).
    \9\ 17 CFR 240.15c3-3(e)(2).
    \10\ 17 CFR 240.15c3-3(e)(2).
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C. Clearance and Settlement of SFPs

    A broker-dealer may clear and settle an SFP transaction through a 
clearing agency registered with the Commission (``Clearing Agency'') 
\11\ or through a derivatives clearing organization (``DCO'') \12\ 
registered with the CFTC.\13\ Section 17A does not require a DCO to 
register as a Clearing Agency with the Commission if the only 
securities it clears are SFPs.\14\ Similarly, a Clearing Agency is not 
required to register as a DCO with the CFTC if the only futures it 
clears are SFPs.\15\
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    \11\ Exchange Act section 17A (15 U.S.C. 78q-1).
    \12\ CEA section 1a(9) (7 U.S.C. 1a(9)).
    \13\ CEA sections 5b (a), (b) and (c) (7 U.S.C. 7a-1(a), (b) and 
(c)).
    \14\ Exchange Act section 17A(b)(7)(A) (15 U.S.C. 78q-
1(b)(7)(A)).
    \15\ CEA section 7a-1(a)(2) (7 U.S.C. 7a-1(a)(2)).
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    As part of the clearance and settlement process for customer SFP 
transactions, a Clearing Agency or DCO (collectively, a ``Clearing 
Organization''), under its rules, will require the broker-dealer 
carrying customer SFP accounts to post margin at the Clearing 
Organization. The Clearing Organization requires this margin to protect 
itself if a broker-dealer defaults on its obligations to the Clearing 
Organization related to SFPs. The broker-dealer, in turn, must collect 
margin from the customer who engages in the SFP transaction.\16\ 
Customer margin protects the broker-dealer if the customer defaults on 
its obligations under an SFP transaction.
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    \16\ 17 CFR 240.400 et seq.
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II. The Proposed Amendments

    The Proposal would have permitted a broker-dealer to include margin 
related to SFPs written, purchased, or sold in customer securities 
accounts required and on deposit with a Clearing Organization as a 
debit item in calculating its customer reserve requirement, subject to 
the conditions set forth in Note G of the Proposal. Note G would have 
helped to ensure that a Clearing Organization maintained sufficient 
financial resources and creditworthiness to protect customer SFP margin 
on deposit. The standards set forth in Note G of the Proposal are 
discussed below in detail.

[[Page 54183]]

III. Overview of the Comments Received

    The Commission requested not only general comments, but also 
solicited comments on each aspect of the Proposal. The Commission 
received five comment letters, two from The Options Clearing 
Corporation (``OCC''), a Clearing Agency and DCO; and one each from 
Chicago Mercantile Exchange Inc. (``CME''), a designated contract 
market \17\; the Futures Industry Association (``FIA''), and The 
Steering Committee on Securities Futures of the Futures Industry 
Association and Securities Industry Association (``FIA/SIA Steering 
Committee''). All of the commenters supported the Commission's 
determination to permit a broker-dealer to treat margin related to SFPs 
written, purchased, or sold in customer securities accounts required 
and on deposit with a Clearing Organization as a debit item in 
calculating its reserve requirement under the Reserve Formula. The 
commenters noted, among other things, that Clearing Organizations hold 
funds that the broker-dealer already has set aside to satisfy customer 
claims. Thus, inclusion of the debit in the Reserve Formula reduces the 
amount that a broker-dealer must deposit in its Reserve Bank Account on 
behalf of customers.
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    \17\ A ``contract market'' is ``a board of trade designated by 
the [Commodity Futures Trading] Commission as a contract market 
under the Commodity Exchange Act or in accordance with'' 17 CFR 
1.3(h).
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    The OCC and the FIA, however, generally opposed the requirements 
set forth in proposed Note G. OCC and FIA questioned the need for the 
conditions and OCC expressed concerns about the costs and burdens of 
compliance. The FIA/SIA Steering Committee expressed concerns that 
broker-dealer might face liquidity problems if a Clearing Organization 
no longer could meet the requirements of proposed Note G. The FIA/SIA 
Steering Committee also objected that broker-dealers could not easily 
determine if a Clearing Organization could meet the requirements of 
proposed Note G.
    Finally, we note that in its second letter, OCC requests the 
Commission to amend the Reserve Formula to allow for a debit related to 
what it describes as ``customer cross-margining accounts.'' \18\ The 
requested amendment, however, is being addressed in another context 
and, in any event, is outside of the scope of these final amendments.
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    \18\ Letter from William H. Navin, The Options Clearing 
Corporation to Mr. Jonathan G. Katz, Secretary, Securities and 
Exchange Commission (``OCC Letter''), dated Jan. 21, 2003, pp. 1-2.
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    We address the comments in greater detail below in the discussion 
of the final amendments.

IV. Final Amendments

A. General

    The Commission has reviewed carefully the comments received and is 
adopting final amendments to Rule 15c3-3a, with certain modifications 
in response to comments received. Specifically, the final amendments 
redesignate Item 14 as Item 15, add a new Item 14 and new Note G, amend 
Note B and amend newly redesignated Item 15, as described below.
    Generally, these final amendments permit a broker-dealer to include 
the amount of customer SFP margin required and on deposit at a Clearing 
Organization as a debit in the Reserve Formula.\19\ The Reserve Formula 
requires a broker-dealer that clears and carries SFPs in securities 
accounts on behalf of customers to include cash that it receives from 
the customer as a credit item in calculating the customer reserve 
requirement.\20\ Before we adopted these amendments, however, the 
Reserve Formula would not have permitted a broker-dealer that clears 
and carries SFPs in securities accounts on behalf of customers to 
record an offsetting debit for customer SFP margin that it posts with a 
Clearing Organization. Without the amendments to Rule15c3-3a, the 
broker-dealer would be required to fund its customer reserve 
requirement at least in part with proprietary assets, which would 
require the broker-dealer to maintain two reserves to cover the same 
customer property, one reserve in the Reserve Bank Account and the 
second with the Clearing Organization.
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    \19\ The final amendments provide customer SFP margin required 
and on deposit at a Clearing Organization with similar debit 
treatment under the Reserve Formula as customer options margin 
required and on deposit with OCC. To receive debit treatment under 
the Reserve Formula, the collateral posted at a Clearing 
Organization as customer SFP margin must be the same type of 
collateral posted at OCC as customer options margin
    \20\ 17 CFR 240.15c3-3, Item 1.
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B. Item 14

    Proposed new Item 14 would have permitted the broker-dealer to 
include a debit in its Reserve Formula computation to the extent of 
customer SFP margin required and on deposit with a Clearing 
Organization, subject to the conditions contained in Note G. The 
Commission did not receive any comments on proposed new Item 14 and 
adopts new Item 14 as proposed.

C. Item 15

    The Commission proposed to amend Rule 15c3-3a to redesignate 
current Item 14 as proposed Item 15. Proposed Item 15 would have been 
amended to include a reference to proposed Item 14 relating to customer 
SFP margin in the computation of debits under the Reserve Formula.\21\ 
The Commission did not receive any comments on this section and adopts 
Item 15 in the final amendments as set forth in the Proposal.
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    \21\ Exchange Act Release No. 46492 (Sept. 12, 2002), 67 FR 
59747, at 59754 (Sept. 23, 2002).
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D. Note B

    The Commission proposed to amend Note B to extend to SFPs the same 
Reserve Formula treatment currently afforded a letter of credit 
collateralized by customer securities deposited with OCC for options 
margin purposes. Under current Note B to the Reserve Formula, a broker-
dealer that posts a letter of credit collateralized by customer 
securities at OCC as customer options margin must include the amount of 
that letter of credit as a credit item in its Reserve Formula 
computation, to the extent of the margin requirement. A broker-dealer 
records the credit because it uses customer assets to secure the letter 
of credit. A firm must include both the credit under Note B and the 
debit under Item 13 to set the customer reserve requirement at the 
appropriate level.
    The Commission did not receive any comments on the proposed 
amendments to Note B and adopts the amendments to Note B as proposed. 
The final amendments do not change the treatment, delineated in pre-
Proposal Note B, of letters of credit collateralized by securities used 
to meet customer options margin. Rather, under the final amendments, a 
broker-dealer that posts a letter of credit collateralized by customer 
securities at a Clearing Organization as customer SFP margin must 
include the amount of that letter of credit as a credit item in its 
Reserve Formula computation, to the extent of the margin requirement, 
just as it would for options margin deposited at OCC. As with options 
margin, the broker-dealer includes the credit because it uses customer 
assets to secure the letter of credit.\22\
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    \22\ 17 CFR 240.15c3-3a, Item 2, Note B.
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E. Note G

    Note G, as adopted, outlines the four conditions under which a 
broker-dealer may include customer SFP margin required and on deposit 
at a Clearing Organization as a debit in Item 14 of the

[[Page 54184]]

Reserve Formula.\23\ Specifically, the debit is includable only if a 
broker-dealer clears SFPs through a Clearing Organization that: (1) 
Meets certain minimum financial requirements; (2) deposits customer SFP 
margin in a bank account for the exclusive benefit of clearing members; 
(3) maintains safeguards for handling cash and securities, obtains 
fidelity bond coverage, and provides for period examinations by 
independent public accountants; and (4) in the case of DCOs, provides 
the Commission with an undertaking that permits representatives or 
designees of the Commission to examine it for compliance with Note G. 
The following sections explain Note G in detail.
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    \23\ The modifications to Note G are discussed below.
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1. The Conditions of Note G Generally
    In its comment letter, the FIA states generally that the Commission 
should permit a broker-dealer to include customer SFP margin required 
and on deposit with a Clearing Organization as a debit item in its 
Reserve Formula calculation, as set forth in Item 14, regardless of 
whether the Clearing Organization meets the criteria contained in 
proposed Note G.\24\ In support of its position, the FIA contends that 
as part of the Clearing Organization registration process, either the 
Commission or the CFTC necessarily determined that the Clearing Agency 
or DCO possessed sufficient financial and operational capacity to 
protect customer funds and securities.\25\
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    \24\ FIA Letter, p.2. OCC supports this position. See Letter 
from William H. Navin, The Options Clearing Corporation to Mr. 
Jonathan G. Katz, Secretary, Securities and Exchange Commission 
(``OCC Letter''), dated Oct. 23, 2002, pp. 5-6.
    \25\ Id.
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    The FIA and FIA/SIA Steering Committee also contend that the 
Proposal places an undue burden on a broker-dealer to determine if a 
Clearing Organization meets the conditions set forth in proposed Note 
G.\26\ Finally, the FIA/SIA Steering Committee asserts that the 
Proposal does not address the consequences for broker-dealers if a 
Clearing Organization no longer meets the criteria of Note G. 
Specifically, the FIA/SIA Steering Committee is concerned that if such 
an event occurs, customer SFP margin deposits at the Clearing 
Organization could pose liquidity risk to broker-dealers.\27\
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    \26\ FIA Letter, p.2; FIA/SIA Letter, p.2.
    \27\ FIA/SIA Letter, p.2.
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    The Commission believes the conditions set forth in Note G are 
necessary to protect customers. Generally, each debit permitted in the 
Reserve Formula effectively is fully secured. As noted above, the debit 
represents an amount that a customer owes the broker-dealer. Thus, if a 
customer defaults on its obligation, the broker-dealer could liquidate 
the collateral to recover what it is owed.
    The debits associated with customer SFP margin required and on 
deposit at a Clearing Organization, however, are not secured. These 
debits represent SFP margin that a broker-dealer has posted with a 
Clearing Organization on behalf of customers. The Clearing 
Organization, however, does not post collateral with the broker-dealer. 
Consequently, if a Clearing Organization defaults on its obligation to 
return the collateral, the broker-dealer would be forced to obtain the 
margin through legal proceedings. The conditions set forth in Note G 
seek to ensure that a broker-dealer deposits customer SFP margin at a 
Clearing Organization that meets minimum standards for financial 
soundness and creditworthiness and that identifies, segregates, and 
protects customer funds and securities from outside liens. These 
conditions, therefore, aid in protecting unsecured customer SFP margin 
debits, consistent with the customer protection function of Rule 15c3-
3, so that the margin will be available to return to customers, even in 
times of severe market stress.
    The Commission is providing clarification in response to the FIA 
and FIA/SIA Steering Committee's comment on how a broker-dealer can 
determine if a Clearing Organization meets the conditions of Note G. We 
have added subparagraph (c) to Item 14, Note G to clarify that a 
broker-dealer must determine, at least annually, that the Clearing 
Organization meets the conditions of Item 14, Note G.\28\ To make the 
determination, a broker-dealer could obtain written representations 
consistent with subparagraph (c) of Item 14 from the Clearing 
Organization, either directly or through its designated examining 
authority. A designated examining authority could publish a list, 
updated at least annually, of the Clearing Organizations that have 
represented to the designated examining authority that they meet the 
conditions of this Note G. Of course, a broker-dealer must make any 
determination in good faith.
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    \28\ See paragraph (c) of Item 14, Note G.
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    Commenters also expressed concern about the consequences of a 
Clearing Organization's failure to meet the criteria of Note G on a 
continual basis. If a Clearing Organization no longer meets the 
conditions of Note G, the SRO or the Commission will consider promptly 
whether broker-dealers may continue to include related debits in the 
Reserve Formula under the relevant facts and circumstances.\29\
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    \29\ The Commission could utilize a number of approaches in 
determining how to address whether a broker-dealer may continue to 
include customer SFP margin as a debit item if a Clearing 
Organization no longer meets the criteria of Note G. For example, 
the Commission could use its exemptive authority to exempt 
temporarily a broker-dealer from utilizing a Clearing Organization 
that complies with Note G.
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2. Subparagraph (a) to Note G
    Under subparagraph (a) to proposed Note G, the range of customer 
SFP margin collateral acceptable for debit treatment would have 
consisted of cash, proprietary qualified securities, and letters of 
credit collateralized by customer securities. The CME argues that the 
Commission should expand the range of collateral acceptable for debit 
treatment in a broker-dealer's Reserve Formula calculation under 
subparagraph (a) to include money market mutual funds that meet 
specified requirements.\30\
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    \30\ Letter from James J. McNulty, President and Chief Executive 
Officer, Chicago Mercantile Exchange Inc. to Mr. Jonathan G. Katz, 
Secretary, Securities and Exchange Commission (``CME Letter''), 
dated Oct. 22, 2002, pp. 1-2.
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    The final amendments retain cash, proprietary qualified securities 
and letters of credit collateralized by customers' securities as the 
range of collateral acceptable for debit treatment. This collateral is 
identical to the collateral acceptable for debit treatment related to 
customer options margin required and on deposit at the OCC.\31\ 
Moreover, subparagraph (a) to Note G is consistent with Rule 15c3-3's 
requirement that a broker-dealer deposit cash or qualified securities 
to meet its deposit requirement under the Reserve Formula.\32\ Any 
expansion of that collateral is beyond the scope of this rulemaking.
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    \31\ See 17 CFR 240.15c3-3a, Note F.
    \32\ See 17 CFR 240.15c3-3(e)(1).
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3. Subparagraph (b)(1) to Note G
    As described more fully below, under proposed subparagraph (b)(1) 
to Note G, a broker-dealer could have included customer SFP margin as a 
debit item in the Reserve Formula if it cleared SFPs through a Clearing 
Organization that met certain criteria. Specifically, subparagraph 
(b)(1) would have permitted a broker-dealer to include customer SFP 
margin required and on deposit at a Clearing Organization as a debit 
item in its Reserve Formula calculation if that Clearing Organization 
met one of two alternative conditions evidencing the sufficiency of its

[[Page 54185]]

financial resources and its creditworthiness.
    In the Proposal, the Commission requested comments on the 
creditworthiness standards contained in subparagraph (b)(1) to Note G. 
Specifically, the Commission asked if the conditions contained in 
subparagraph (b)(1) were necessary to help ensure that a broker-dealer 
conducted business with creditworthy Clearing Organizations. The 
Commission also asked if it should consider ``different or additional 
criteria to determine creditworthiness.''
    In response to comments received, the final amendments add two 
alternative conditions, which are discussed below. One condition 
permits a showing of sufficiency of financial resources and 
creditworthiness based upon the amount of margin deposits that a 
Clearing Organization holds. The other alternative condition permits 
the Commission, upon written application, to exempt a Clearing 
Organization from the requirements of subparagraph (b)(1), upon such 
terms as are appropriate under the relevant facts and circumstances, 
after consideration of whether the exemption is necessary or 
appropriate in the public interest, and consistent with the protection 
of investors. The final amendments delegate the authority to grant the 
exemption to the Director of the Division of Market Regulation.
a. Subparagraph (b)(1)(i)
    Subparagraph (b)(1)(i) of proposed Note G would have permitted a 
broker-dealer to include customer SFP margin deposited with a Clearing 
Organization as a debit item in the Reserve Formula if the Clearing 
Organization maintained the highest investment-grade rating from a 
nationally recognized statistical rating organization (``NRSRO'').\33\ 
OCC objects to this alternative financial sufficiency test arguing 
that, to some degree, a Clearing Organization cannot control its credit 
rating.\34\ According to OCC, it operated safely for a number of years 
without the highest investment-grade rating from an NRSRO and other, 
sound Clearing Organizations currently operate without such a 
rating.\35\
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    \33\ Exchange Act Release No. 46492 (Sept. 12, 2002), 67 FR 
59747, at 59749 (Sept. 23, 2002).
    \34\ OCC Letter, p. 3.
    \35\ OCC Letter, p. 3.
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    The final amendments retain subparagraph (b)(1)(i) to Note G as one 
means for broker-dealers to comply with subparagraph (b)(1). This 
alternative is consistent with the customer protection function of Rule 
15c3-3 and is necessary because of the unsecured nature of the customer 
SFP margin debit. A rating from an NRSRO is an indication from an 
independent source both of the long-term financial strength of a 
Clearing Organization and its general creditworthiness.
b. Subparagraph (b)(1)(ii)
    Subparagraph (b)(1)(ii) to proposed Note G would have provided a 
second alternative to the investment-grade rating standard of 
subparagraph (b)(1)(i). Subparagraph (b)(1)(ii) would have permitted a 
broker-dealer to include customer SFP margin required and on deposit 
with a Clearing Organization as a debit item if, among other things, 
the Clearing Organization maintained security deposits from clearing 
members in connection with regulated options or futures transactions of 
at least $500 million and assessment power over member firms of at 
least $1.5 billion.
    OCC objects to subparagraph (b)(1)(ii) as an alternative to the 
highest investment-grade rating test. OCC asserts that it might not be 
able to maintain security deposits of at least $500 million because of 
a proposed rule change pending before the Commission that would affect 
the manner in which it calculates its clearing fund.\36\ Even if 
deposits remained above $500 million, OCC asserts that making the 
security deposit available to general creditors, as proposed 
subparagraph (b)(1) to Note G requires, conflicts with its bylaws.\37\
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    \36\ See File No. SR-OCC-2002-03 (Jan. 29, 2002). The letter 
states the OCC's proposed rule change does not contain a $500 
million minimum. Under the proposed rule chnage, the size of the 
fund would be related to risk margin and could vary substantially 
over time, possibly falling below $500 million. OCC also believes 
that such an occurrence would not reflect any reduction it its 
creditworthiness, ``but would instead reflect a reduction in the 
size of the potential obligations that the clearing fund might be 
called upon to satisfy.'' Members of the Commission staff currently 
are reviewing the proposal. OCC Letter, pp. 3-4.
    \37\ Id.
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    OCC also comments that the Commission should not set the financial 
resource standards at $500 million in security deposits and $1.5 
billion in assessment power.\38\ As noted, OCC believes that as part of 
the Clearing Organization registration process, either the Commission 
or the CFTC necessarily determined that the Clearing Organization 
possessed sufficient financial capacity to protect customer funds and 
securities. Moreover, OCC does not believe that the Commission intended 
to approve a financial standard under which a Clearing Organization 
that maintains $500 million in security deposits and $1.5 billion in 
assessment power would meet the standard, but a Clearing Organization 
that maintains a total of $2 billion in resources, but not the 
requisite amount of security deposits and assessment power, would 
not.\39\
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    \38\ OCC Letter, p. 5. The term ``assessment power'' included in 
the final amendments to Rule 15c3-3a relates to a Clearing 
Organizations's ability, under its rules, to assess its members in 
excess of amounts required for a security deposit to meet emergency 
funding needs.
    \39\ Id.
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    In response to certain of OCC's comments, the Commission has 
revised the second alternative. The final amendments retain the $500 
million security deposits requirement of proposed subparagraph 
(b)(1)(ii) to Note G. This requirement helps ensure that a Clearing 
Organization maintains liquidity and financial resources sufficient to 
protect customer margin on deposit, which is unsecured. Moreover, the 
Commission established the amount of the security deposit based upon 
the Commission staff's experience and their discussions with the 
industry.
    The final rule amendments also define the term ``security 
deposits'' in subparagraph (b)(1)(ii) of Note G. Although the 
Commission did not propose a definition of this term, it did explain 
what it meant by the term and invited comments. Security deposits, as 
described in the Proposal, referred to a fund that a Clearing 
Organization could use to secure its general obligations to creditors. 
Commenters, however, expressed concerns that the explanation contained 
in the Proposal conflicted with the purposes for which Clearing 
Organizations could use their clearing funds.\40\ In response, the 
Commission has modified the explanation of ``security deposits'' to 
address these concerns and incorporated this modified explanation as a 
definition in the rule text for purposes of clarity. As adopted, the 
term ``security deposits,'' as defined in subparagraph (b)(1)(ii) of 
Note G, refers to a general fund that consists of cash or securities 
held by a Clearing Organization. The Clearing Organization may use this 
fund to protect participants and the Clearing Organization: (1) from 
the defaults of participants, and (2) from clearing agency losses (not 
including day-to-day operating expenses), such as losses of securities 
not covered by insurance or other resources of the Clearing 
Organization. The security deposit is in addition to, and separate 
from, margin deposited with the Clearing Organization.
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    \40\ Clearing Organizations have indicated that they are likely 
to use their clearing funds as security deposits.
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    In response to the OCC's comments, the Commission revised 
subparagraph

[[Page 54186]]

(b)(1)(ii) to Note G to allow a broker-dealer to include a debit for 
customer SFP margin on deposit with a Clearing Organization that, among 
other requirements, maintains security deposits and assessment power 
that equal a combined total of at least $2 billion, at least $500 
million of which is in the form of security deposits. This requirement 
protects customers by helping to ensure that broker-dealers utilize 
Clearing Organizations that maintain a ready pool of liquid assets. It 
also provides additional flexibility by permitting broker-dealers to 
utilize a Clearing Organization that maintains any combination of at 
least $500 million in security deposits and assessment power that 
equals at least $2 billion.\41\
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    \41\ OCC asserts that a clearing member could withdraw its 
membership, rather than meet an obligation to pay an additional 
assessment. OCC Letter, p. 5. A Clearing Organization, however, need 
only possess the assessment authority. Moreover, a Clearing 
Organization may meet the entire $2 billion requirement of 
(b)(1)(ii) through maintenance of security deposits.
---------------------------------------------------------------------------

c. Subparagraph (b)(1)(iii) to Note G
    As noted above, the Commission solicited comments on the 
creditworthiness standards contained in subparagraph (b)(1) to proposed 
Note G. OCC expressed concern that although it currently meets at least 
one of the conditions in subparagraph (b)(1) as set forth in the 
Proposal, it might not be able to meet them in the future, even though 
it might generally be creditworthy for purposes of clearing SFP 
transactions.\42\
---------------------------------------------------------------------------

    \42\ See OCC Letter, p. 4.
---------------------------------------------------------------------------

    In response to OCC's comments, the final amendments add new 
subparagraph (b)(1)(iii) to Note G, which was not part of the Proposal. 
Under subparagraph (b)(1)(iii), a broker-dealer may include customer 
SFP margin required and on deposit with a Clearing Organization as a 
debit in the Reserve Formula if, among other things, the Clearing 
Organization maintains at least $3 billion in margin deposits. The 
margin deposits may be a combination of proprietary and customer 
assets. The Commission believes, based upon discussions between 
Commission staff and the industry, that the significant level of margin 
deposits indicates that a Clearing Organization has sufficient 
financial resources to hold unsecured debits and, therefore, should be 
an alternative to the other options in subparagraph (b)(1). Moreover, 
the addition of subparagraph (b)(1)(iii) provides broker-dealers with 
greater flexibility in complying with Note G.
d. Subparagraph (b)(1)(iv) to Note G
    In response to OCC's comments, the final amendments also add new 
subparagraph (b)(1)(iv) to Note G, which was not part of the Proposal. 
Subparagraph (b)(1)(iv) establishes procedures for the Commission, in 
its sole discretion, to provide an exemption that would enable a 
broker-dealer to utilize a Clearing Organization that does not meet the 
requirements of subparagraphs (b)(1)(i)-(iii) of Item 14, Note G to 
Rule 15c3-3a. The Commission may approve an exemption under 
subparagraph (b)(1)(iv), subject to such conditions as are appropriate 
under the circumstances, if the exemption and the conditions are 
necessary or appropriate in the public interest, and is consistent with 
the protection of investors. For example, a broker-dealer or a Clearing 
Organization, for the benefit of a broker-dealer, may demonstrate in 
writing that an exemption under subparagraph (b)(1)(iv) is necessary or 
appropriate in the public interest, and is consistent with the 
protection of investors by showing that the Clearing Organization 
possesses sufficient financial resources or is sufficiently 
creditworthy to hold unsecured debits. Moreover, as with subparagraph 
(b)(1)(iii), the addition of subparagraph (b)(1)(iv) provides broker-
dealers with greater flexibility in complying with Note G.
4. Subparagraph (b)(2) to Note G
    Under proposed subparagraph (b)(2) to Note G, a broker-dealer could 
have included customer SFP margin as a debit if it utilized a Clearing 
Organization that deposited the margin in a bank, as section 3(a)(6) of 
the Exchange Act defines the term.\43\ Proposed subparagraph (b)(2) 
would have required the bank to agree in writing to refrain from 
placing a lien or otherwise attaching the account that contained 
customer margin.\44\
---------------------------------------------------------------------------

    \43\ Exchange Act Release No. 46492 (Sept. 12, 2002), 67 FR 
59747, at 29749 (Sept. 23, 2002).
    \44\ Id.
---------------------------------------------------------------------------

    OCC states that proposed subparagraph (b)(2) would force it to 
change substantially the manner in which it handles clearing member 
margin deposits for non-futures accounts. OCC does not maintain 
separate bank or custodian accounts for customer, proprietary, or 
market maker margin.\45\ Furthermore, OCC contends that it cannot 
deposit customer SFP margin in a Reserve Bank Account because it does 
not calculate customer SFP margin separately from other types of 
customer margin.\46\ Rather, OCC determines margin requirements based 
upon the net risk of a portfolio of positions that includes other 
derivatives products.\47\
---------------------------------------------------------------------------

    \45\ OCC Letter, p. 7.
    \46\ OCC states that it will continue compliance with the 
Commoddity Exchange Act's segregation requirements with respect to 
funds deposited with the OCC as margin in a segregated futures 
account. OCC Letter, p. 7.
    \47\ Id. at p. 8.
---------------------------------------------------------------------------

    The final amendments alter the requirements of proposed 
subparagraph (b)(2) in response to the comments received. Unlike the 
Proposal, the final amendments to subparagraph (b)(2) do not require 
customer margin to be segregated from clearing member proprietary and 
market maker margin deposited at a bank. Under amended subparagraph 
(b)(2), a broker-dealer may include customer SFP margin as a debit item 
if it utilizes a Clearing Organization that obtains from a bank 
specific, written notification related to margin deposited at that bank 
or held at that bank and pledged to the Clearing Organization. In the 
written notification, the bank must acknowledge that any funds or 
securities deposited with it as margin, or held by it and pledged to a 
Clearing Organization as margin, are for the exclusive benefit of 
clearing members of the Clearing Organization, subject to the Clearing 
Organization's interest in the margin. The written notification also 
must state that the bank will hold such funds and securities in an 
account separate from any other accounts that the Clearing Organization 
maintains. Furthermore, the written notification must provide that the 
bank will not use cash or securities deposited or pledged as margin as 
security for a loan to the Clearing Organization, and agree not to 
encumber the cash and securities in any way. Subparagraph (b)(2), 
however, permits the Clearing Organization to pledge clearing member 
cash and securities to a bank for any purpose that Commission or 
Clearing Organization rules otherwise permit.
    Subparagraph (b)(2), as adopted, will protect customer cash and 
securities, consistent with Rule 15c3-3. First, customer SFP margin 
will be segregated from Clearing Organization proprietary funds under 
subparagraph (b)(2). Consequently, a clearing member more easily could 
retrieve customer SFP margin from the Clearing Organization, if 
necessary. Second, subparagraph (b)(2) is intended to prevent the use 
of customer property for non-customer purposes because it requires 
identification of SFP margin, including customer SFP margin, and 
segregation of that margin from a Clearing Organization's proprietary 
funds and

[[Page 54187]]

securities. Rule 15c3-3 prohibits use of customer property to support 
non-customer activities.\48\ Third, subparagraph (b)(2) prevents the 
bank at which a Clearing Organization holds funds and securities as SFP 
margin, including customer SFP margin, from utilizing that property for 
its own purposes.
---------------------------------------------------------------------------

    \48\ Exchange Act Release No. 46019 (June 3, 2002), 67 FR 39642 
(June 10, 2002).
---------------------------------------------------------------------------

5. Subparagraph (b)(3) to Note G
    Subparagraph (b)(3) of proposed Note G would have required a 
broker-dealer to utilize a Clearing Organization that established, 
documented, and maintained safeguards with respect to the handling, 
transfer, and delivery of cash and securities; fidelity bond coverage 
for its employees and agents; and provisions for periodic examination 
from independent public accountants.\49\
---------------------------------------------------------------------------

    \49\ Exchange Act Release No. 46492 (Sept. 12, 2002), 67 FR 
59748, at 59754 (Sept. 23, 2002).
---------------------------------------------------------------------------

    OCC objects to subparagraph (b)(3)(ii). It asserts that it cannot 
easily obtain fidelity bond coverage for all of its agents.\50\
---------------------------------------------------------------------------

    \50\ OCC Letter, p. 8.
---------------------------------------------------------------------------

    In response to comments received, the final amendments clarify the 
scope of paragraph (b)(3)(ii). First, a Clearing Organization must 
maintain fidelity bond coverage only for those employees or agents who 
handle customer funds or securities. Second, in the case of agents who 
handle customer funds or securities, the Clearing Organization must 
ensure only that the agent maintains fidelity bond coverage. The 
Clearing Organization itself need not maintain the coverage.\51\
---------------------------------------------------------------------------

    \51\ the Proposal would have required a Clearing Organization to 
make ``provisions for'' fidelity bond coverage. That phrase was 
meant to encompass both coverage that a Clearing Organization 
provides and coverage that an agent provides. The final amendments 
clarify that scope of fidelity bond coverage; therefore, the phrase 
is no longer necessary in the final rule test.
---------------------------------------------------------------------------

6. Subparagraph (b)(4) to Note G
    Under subparagraph (b)(3)(iv) \52\ of proposed Note G, a broker-
dealer could have included a debit in the Reserve Formula for customer 
SFP margin deposited at a DCO not otherwise registered with the 
Commission only if it utilized a DCO that had provided an undertaking 
to the Commission.\53\ In the undertaking, the DCO would have agreed to 
examination by the Commission for compliance with proposed 
subparagraphs (b)(1) through (b)(3) of proposed Note G.\54\
---------------------------------------------------------------------------

    \52\ Subparagraph (b)(3)(iv) has been redesignated as 
subparagraph (b)(4) in the final rules.
    \53\ 67 FR 59747 (Sept. 23, 2002), Exchange Act Release No. 
46492 (Sept. 12, 2002).
    \54\ Id.
---------------------------------------------------------------------------

    The Commission did not receive any comments on proposed 
subparagraph (b)(3)(iv) and will retain a modified undertaking 
requirement in the final rules. The Commission believes that an 
undertaking is necessary to protect customer SFP margin on deposit with 
a DCO because it allows the Commission to examine a DCO for compliance 
with Note G. Subparagraph (b)(4) of the final rules clarifies, however, 
that the obligation to obtain the undertaking from the DCO rests with 
the broker-dealer who wishes to utilize the DCO. A broker-dealer may 
comply with subparagraph (b)(4) if it utilizes a DCO that has provided 
the Commission with a written undertaking, in a form acceptable to the 
Commission, under which the DCO agrees to be examined by the Commission 
for compliance with subparagraphs (b)(1) through (b)(3) to Note G.

F. One Chicago

    In its first comment letter, OCC noted that its associate 
clearinghouse agreement with the Clearing Division of the CME, which 
relates to security futures traded on OneChicago, LLC, allows the CME 
to maintain only two clearing accounts with OCC, a proprietary account 
and a segregated futures account. If the CME were to carry customer 
security futures positions for its members in securities accounts as 
well as futures accounts, the CME would maintain security futures 
positions from both account types in its segregated futures account at 
OCC. Although this would result in a commingling of positions subject 
to CFTC customer protection and insolvency regimes with positions 
subject to SEC customer protection and SIPC insolvency regimes, we 
would not consider this commingling to be inconsistent with Note G. A 
broker-dealer that clears customer SFP transactions through the CME 
would include any related debit in the Reserve Formula for that 
customer SFP margin related to that transaction, if appropriate.

G. Amendment to Rule 30-3

    The Commission has adopted an amendment to Rule 30-3 of its Rules 
of Organization and Program Management governing delegations of 
authority to the Director of the Division of Market Regulation 
(``Director'').\55\ The amendment adds paragraph (a)(10)(iii). This 
paragraph contains a new delegation authorizing the Director to review 
and grant, unconditionally or subject to specified terms and 
conditions, written applications submitted under subparagraph 
(b)(1)(iv) of Item 14, Note G to Rule 15c3-3a for exemptions that would 
enable broker-dealers to utilize Clearing Organizations that do not 
meet the requirements of subparagraphs (b)(1)(i)-(b)(1)(iii) of Note G.
---------------------------------------------------------------------------

    \55\ 17 CFR 200.30-3.
---------------------------------------------------------------------------

    The delegation of authority to the Director is intended to conserve 
Commission resources by permitting the staff to review and act on 
applications under subparagraph (b)(1)(iv) of Item 14, Note G to Rule 
15c3-3a, if appropriate. Nevertheless, the staff may submit matters to 
the Commission for consideration, as it deems appropriate. Furthermore, 
the Commission retains discretionary authority under Section 4A(b) of 
the Exchange Act to review, upon its own initiative or upon application 
by a party adversely affected, any exemption granted or denied by the 
Division pursuant to delegated authority.
    The Commission finds, in accordance with the Administrative 
Procedure Act, 5 U.S.C. 553(b)(3)(A), that this amendment to Rule 30-3 
relates solely to agency organization, procedure, or practice. 
Accordingly, notice and opportunity for public comment, as well as 
publication 30 days before its effective date, are unnecessary. Because 
notice and comment are not required for this final rule, a regulatory 
flexibility analysis is not required under the Regulatory Flexibility 
Act.
    The amendment to Rule 30-3 does not contain any collection of 
information requirements as defined by the Paperwork Reduction Act of 
1995, as amended. In addition, it will not impose any costs on the 
public.

V. Paperwork Reduction Act

    As discussed in the Proposal, certain provisions of the final 
amendments to Rule 15c3-3a contain ``collection of information 
requirements'' within the meaning of the Paperwork Reduction Act of 
1995.\56\ The Commission submitted the amendments to the Office of 
Management and Budget (``OMB'') for review and approval in accordance 
with 44 U.S.C. 3507(d) and 5 CFR 1320.11. An agency may not conduct or 
sponsor, and a person is not required to respond to, a collection of 
information unless it displays a currently valid control number. The 
OMB approved a collection of information entitled, ``Customer 
Protection--Reserves and Custody of Securities (17 CFR 240.15c3-3),'' 
OMB Control Number 3235-0078. Because the amendments to Rule 15c3-3, as 
adopted, are substantially similar

[[Page 54188]]

to those proposed, the Commission continues to believe that the 
estimates published in the Proposal regarding the proposed collection 
of information burdens associated with the amendments to Rule 15c3-3 
are appropriate. We solicited, but did not receive, comments on the 
Paperwork Reduction analysis contained in the Proposal.
---------------------------------------------------------------------------

    \56\ 44 U.S.C. 3501.
---------------------------------------------------------------------------

A. Collection of Information Under These Amendments

    As discussed, the final amendments to Rule 15c3-3a permit a broker-
dealer that clears and carries \57\ customer SFPs in securities 
accounts on behalf of customers to include certain credits and debits 
in its Reserve Formula calculation relating to SFP margin required and 
on deposit with a Clearing Organization. The amendments permit a 
broker-dealer to include as a debit the amount of customer SFP margin 
required and on deposit with a Clearing Organization only if that 
entity maintains sufficient liquid capital; obtains written 
notification from a bank that customer SFP margin deposited at, or held 
by, the bank is held unencumbered, solely for the benefit of customer, 
and is segregated from non-customer property; and maintains a system 
for safeguarding the handling, transfer and delivery of cash and SFPs. 
In addition, the amendments require a broker-dealer to obtain from a 
DCO not otherwise registered with the Commission an executed 
undertaking in which the DCO agrees to examination by the Commission to 
monitor the DCO's compliance with the applicable conditions set forth 
in the amendments to Rule 15c3-3a, Note G, subparagraphs (b)(1) through 
(3).
---------------------------------------------------------------------------

    \57\ A clearing and carrying broker-dealer is an entity that may 
hold customer funds or securities.
---------------------------------------------------------------------------

B. Proposed Use of Information

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

C. Respondents

    The final amendments to Rule 15c3-3a apply only to those broker-
dealers that clear and carry SFPs in securities accounts for the 
benefit of customers. Moreover, these provisions apply only to broker-
dealers that carry customer funds, securities, or property and do not 
claim an exemption from Rule 15c3-3a. As of the end of 2003, there were 
607 clearing firms. At that time, there were 46 broker-dealers that 
were clearing and carrying firms and also registered with the CFTC as 
FCMs.\58\ Based upon conversations between the Commission staff and 
industry representatives about the number of firms that may conduct SFP 
business, the staff estimates that the number of firms likely to engage 
in this business, in addition to the broker-dealers already registered 
with the CFTC as FCMs, is 10% of the clearing and carry firms not 
presently registered with the CFTC.\59\ Thus, the staff estimates that 
approximately 102 firms (46 + ((607 - 46) x 10%)) will be required to 
comply with these final amendments to obtain the debit treatment.
---------------------------------------------------------------------------

    \58\ The final amendments contain changes in the number of 
clearing and carrying firms, including changes in the number of 
clearing and carrying firms registered as FCMs. These new numbers 
represent the latest statistics available from the Securities 
Industry Association.
    \59\ These estimates are identical to those set forth in 
Exchange Act Release No. 46473 (Sept. 9, 2002).
---------------------------------------------------------------------------

D. Total Annual Reporting and Recordkeeping Burden

    Under the final amendments to add new Item 14, amend and 
redesignate Item 15, amend Note B and add new Note G to Rule 15c3-3a, a 
broker-dealer that clears and carries SFPs in securities accounts for 
the benefit of customers may include customer SFP margin required and 
on deposit at a Clearing Organization as a debit item in the Reserve 
Formula. The Commission staff revised the burden hour estimates 
contained in the Proposal to reflect the latest statistics available 
from the Securities Industry Association (``SIA''). The staff now 
estimates that broker-dealers that engage in an SFP business will spend 
approximately 510 hours (or 5 hours each x 102 clearing broker-dealers) 
to modify software to accommodate changes in the calculation of the 
Reserve Formula pursuant to the final amendment to Note B and new Item 
14, and amended and redesignated Item 15. This will be a one-time 
burden. The Commission staff also estimates that broker-dealers will 
spend approximately 25.5 hours per week (or 0.25 hours x 102 clearing 
broker-dealers), for a yearly total of 1,326 hours (25.5 hours x 52 
weeks), to verify and input the information required under the final 
amendments to Note B and new Item 14.
    Furthermore, broker-dealers that clear and settle SFP transactions 
through DCOs not otherwise registered with the Commission will spend 
time to verify that the DCO has made the undertaking to the Commission 
under subparagraph b to Note G. The Commission staff estimates these 
broker-dealers will spend 25.5 hours (or 0.25 hours x 102 clearing 
broker-dealers) to obtain the undertakings. This will be a one-time 
burden unless a broker-dealer changes clearing DCOs.
    Finally, under subparagraph (c) to Note G, broker-dealers will 
spend time to verify that Clearing Organizations through which they 
clear SFP transactions meet the conditions of Note G. The Commission 
staff estimates that these broker-dealers will spend 25.5 (0.25 hours x 
102 clearing broker-dealers) to make this verification. Only clearing 
and carrying broker-dealers that engage in customer SFP transactions 
will incur any of the costs described above.

E. Collection of Information Is Mandatory

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

F. Confidentiality

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

G. Record Retention Period

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

H. Request for Comment

    In the Proposal, the Commission solicited comments to:
    (i) Evaluate whether the proposed collection of information is 
necessary for the proper performance of the functions of the 
Commission, including whether the information would have practical 
utility;
    (ii) Evaluate the accuracy of the Commission's estimate of the 
burden of the proposed collection of information;
    (iii) Enhance the quality, utility, and clarity of the information 
to be collected; and
    (iv) Minimize the burden of the collection of information on those

[[Page 54189]]

required to respond, including through the use of automated collection 
techniques or other forms of information technology. The Commission did 
not receive any comments on Paperwork Reduction Act issues.

VI. Costs and Benefits of the Proposed Amendments

A. Introduction

    Passage of the CFMA in December of 2000 permitted the trading of 
SFPs and established a framework for the Commission and CFTC to 
regulate SFPs jointly. This framework was necessary because the CFMA 
defined an SFP as both a security and a future \60\ and, therefore, 
subject both to the CEA and the Exchange Act. Accordingly, both 
Clearing Agencies, which are regulated by the Commission, and DCOs, 
which are regulated by the CFTC, may clear SFPs. Consistent with these 
provisions, the Commission is amending Exchange Act Rule 15c3-3a by 
redesignating Item 14 as Item 15, adding new Item 14 and new Note G, 
amending Item B and amending newly redesignated Item 15. We did not 
receive any comments on the cost-benefit analysis contained in the 
Proposal.
---------------------------------------------------------------------------

    \60\ Exchange Act sections 3(a)(10) and (11) (15 U.S.C. 
78c(a)(10) and (11)).
---------------------------------------------------------------------------

B. Benefits

    The final amendments to Rule 15c3-3a are intended to enhance the 
customer protection function of Rule 15c3-3. In particular, Note G is 
drafted to help protect customer property by requiring that a broker-
dealer, if it wishes to include customer SFP margin as a debit item in 
the Reserve Formula, clear and settle its customer SFP transactions 
only through a Clearing Organization that has significant financial 
resources. Note G is further intended to protect customer property by 
permitting the debit treatment only if a broker-dealer uses a Clearing 
Organization that meets requirements related to the identification and 
segregation of customer property. This requirement is intended to 
prevent use of customer property for non-customer purposes. The 
internal risk management system mandated under Note G seeks to protect 
a broker-dealer and its customers by helping its Clearing Organization 
to monitor whether customer margin is protected from both default and 
use in other areas of the entity's business. These enhanced customer 
protections decrease the likelihood of a SIPC liquidation.
    Amended Note B, new Item 14, and new Note G are intended to help a 
broker-dealer that clears and carries SFPs in securities accounts on 
behalf of customers calculate the appropriate customer reserve 
requirement under the Reserve Formula. Without amended Note B, a 
broker-dealer's Reserve Formula computation would not include a credit 
to reflect the firm's use of customer assets to secure a letter of 
credit, which is then used as customer SFP margin deposit with a 
Clearing Organization. Similarly, without Item 14 and Note G, a broker-
dealer's Reserve Formula computation would not include a debit to 
reflect the firm's use of its own assets for customer purposes to meet 
its customer SFP margin deposit requirements. In that case, a broker-
dealer's regulatory costs would be higher.
    Amended Note B, new Item 14 and new Note G permit a broker-dealer 
to include the amount of customer SFP margin required and on deposit at 
a Clearing Organization as a debit in the Reserve Formula. Without 
these changes to Rule15c3-3a, the broker-dealer would be required to 
fund its customer reserve requirement at least in part with proprietary 
assets, which would require the broker-dealer to maintain two reserves 
to cover the same customer property, one reserve in the Reserve Bank 
Account and the second with the Clearing Organization. Consequently, 
the costs of engaging in a customer SFP business would increase. Thus, 
amended Note B, new Item 14 and new Note G should lower the costs of 
clearing and carrying SFPs in customer securities accounts.

C. Costs

    The amendments were drafted to reduce the burden of the Reserve 
Formula on broker-dealers by allowing a broker-dealer to include the 
amount of customer SFP margin required and on deposit at a Clearing 
Organization as a debit in the Reserve Formula. This treatment permits 
a broker-dealer that clears and carries SFPs in securities accounts on 
behalf of customers to calculate the appropriate customer reserve 
requirement.
    Amended Note B requires a broker-dealer to include certain customer 
SFP margin required and on deposit with a Clearing Organization as a 
credit item in the Reserve Formula. New Item 14 permits a broker-dealer 
to include customer SFP margin required and on deposit with a Clearing 
Organization as a debit item. The Commission staff has updated costs 
estimates delineated below to reflect the most recent statistics 
available from the SIA. A broker-dealer will incur a one-time cost to 
re-program software that performs Reserve Formula calculations to 
include Note B and Item 14 in those calculations. Based on the 
paperwork costs described above, the Commission staff estimates total 
reprogramming costs will be $29,172.\61\
---------------------------------------------------------------------------

    \61\ Security Industry Association's (``SIA'') Report on 
Management and Professional Earnings in the Securities Industry 2003 
(``2003 Report''). According to the 2003 Report, the hourly cost of 
a programmer is approximately $55 and the hourly cost of a senior 
programmer is approximately $66. These hourly wage costs, and all 
other hourly wage costs in this document, include a 35% increase 
above the SIA wage figures to account for overhead costs. The staff 
estimates that a programmer would spend approximately four hours to 
modify software to meet the requirements of proposed Note B and 
Items 14 and 15. Further, the Staff estimates that a senior 
programmer would spend approximately one hour on the project. Total 
cost: ((4 hours x $55 per hour x 102 broker-dealers) + (1 hour x $66 
per hour x 102 broker-dealers)) = $29,172.
---------------------------------------------------------------------------

    Under amended Note B and new Item 14, broker-dealers also will 
incur minimal, annual costs to verify and input debit item amounts into 
its customer reserve requirement calculation. We estimate the yearly 
paperwork burden will be 1,326 hours to complete these tasks. 
Therefore, the Commission staff estimates the annual paperwork cost to 
broker-dealers will be $55,739 (1,326 hours x $37 per hour for an 
operations specialist).\62\
---------------------------------------------------------------------------

    \62\ 2003 Report.
---------------------------------------------------------------------------

    Moreover, broker-dealers that clear SFP transactions through a DCO 
will incur costs to obtain an undertaking from the DCO, as Note G 
requires. The Commission staff estimates the paperwork cost to broker-
dealers of obtaining the undertaking required under Note G will be 
$2,097.63.\63\ The costs will be recurring only if the broker-dealer 
changes its clearing DCO.
---------------------------------------------------------------------------

    \63\ The SIA's 2003 Report's survey on attorney salaries in the 
securities industry contained only one response, which was 
unrealistically low. Consequently, we used the salary data from the 
SIA's Report on Management and Professional Earnings in the 
Securities Industry 2002 (``2002 Report''). According to the 2002 
Report, the hourly cost of an attorney is approximately $82.26. The 
Staff estimates that an attorney would spend approximately 15 
minutes obtaining the undertaking. Total cost: (0.25 x 102 broker-
dealers x $82.26 per hour) = $2,097.63.
---------------------------------------------------------------------------

    Finally, under subparagraph (c) to Note G, broker-dealers will 
incur costs each year to verify that Clearing Organizations through 
which they clear SFP transactions meet the conditions of Note G. The 
Commission staff estimates that the annual cost of making this 
verification will be $2097.63 (0.25 hours x 102 broker-dealers x $82.26 
per hour for an attorney).\64\ Only clearing and carrying broker-
dealers that engage in customer SFP transactions will incur any of the 
costs described above.
---------------------------------------------------------------------------

    \64\ 2002 Report.

---------------------------------------------------------------------------

[[Page 54190]]

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

    Section 3(f) of the Exchange Act \65\ requires the Commission, 
whenever it engages in rulemaking and must consider or determine if an 
action is necessary or appropriate in the public interest, to consider 
if the action will promote efficiency, competition, and capital 
formation. Section 23(a)(2) of the Exchange Act \66\ requires the 
Commission, in making rules under the Exchange Act, to consider the 
impact that any such rule would have on competition. Exchange Act 
Section 23(a)(2) prohibits the Commission from adopting any rule that 
would impose a burden on competition not necessary or appropriate in 
furtherance of the purposes of the Exchange Act.
---------------------------------------------------------------------------

    \65\ 15 U.S.C. 78c(f).
    \66\ 15 U.S.C. 78w(a)(2).
---------------------------------------------------------------------------

    In the Proposal, the Commission solicited comments on the effect of 
the proposed amendments on competition, efficiency, and capital 
formation. The Commission did not receive any comments that addressed 
this issue.
    The final amendments to Rule 15c3-3a clarify the treatment of 
customer SFP margin required and on deposit with a Clearing 
Organization for purposes of calculating a broker-dealer's customer 
reserve requirement under the Reserve Formula. We believe that 
clarification of the debit treatment of customer SFP margin for Reserve 
Formula purposes will serve as an efficient and cost-effective means 
for broker-dealers to determine how they will calculate their customer 
reserve requirements if they clear and carry SFPs in securities 
accounts for the benefit of customers. We expect the final amendments 
to Rule 15c3-3a to promote efficiency because firms still may use their 
present systems for computation of customer reserve requirements under 
the Reserve Formula, after they make the required adjustments, rather 
than build new Reserve Formula systems.
    Furthermore, the final amendments to Rule 15c3-3a are intended to 
allow a broker-dealer to avoid depositing proprietary assets 
unnecessarily in the Reserve Bank Account to meet its obligations under 
the Reserve Formula. We believe that the amendments will permit a 
broker-dealer to direct a greater portion of its assets to its 
businesses and, therefore, promote capital formation.
    As discussed, the final amendments to Rule 15c3-3a permit a broker-
dealer that clears and carries SFPs in securities accounts on behalf of 
customers to include customer SFP margin required and on deposit with a 
Clearing Organization as a debit item for purposes of calculating its 
customer reserve requirement under the Reserve Formula. The final 
amendments permit this treatment regardless of whether the broker-
dealer clears customer SFP transactions through a Clearing Agency or 
DCO, if the Clearing Agency or DCO meets certain minimum financial 
standards and segregates customer SFP margin funds. Thus, we believe 
that the final amendments to Rule 15c3-3a will not impose any 
competitive burden that is not necessary or appropriate in furtherance 
of the purposes of the Exchange Act.

VIII. Regulatory Flexibility Act Certification

    The Commission has certified, pursuant to 5 U.S.C. section 605(b), 
that the amendments to Rule 15c3-3a will not have a significant 
economic impact on a substantial number of small entities. This 
certification was incorporated into the Proposal. The Commission did 
not receive any comments about the impact on small entities or the 
Regulatory Flexibility Act certification.

IX. Statutory Authority

    The Commission is amending Rule 15c3-3a under the Exchange Act 
pursuant to the authority conferred by the Exchange Act, including 
Sections 15, 17, 23(a), and 36.\67\
---------------------------------------------------------------------------

    \67\ 15 U.S.C. 78o, 78q, 78w(a), and 78mm.
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List of Subjects

17 CFR Part 200

    Administrative practice and procedure, Authority delegations 
(Government agencies), Organization and functions (Government 
agencies).

17 CFR Part 240

    Brokers, Reporting and recordkeeping requirements, Securities.

Text of Final Rule Amendments

0
In accordance with the foregoing, the Commission hereby amends Title 
17, Chapter II of the Code of Federal Regulation as follows.

PART 200--ORGANIZATION; CONDUCT AND ETHICS; AND INFORMATION AND 
REQUESTS

Subpart A--Organization and Program Management

0
1. The authority section for Part 200, subpart A, continues to read, in 
part, as follows:

    Authority: 15 U.S.C. 77s, 77o, 77sss, 78d, 78d-1, 78d-2, 78w, 
78ll(d), 78mm, 79t, 80a-37, 80b-11, and 7202, unless otherwise 
noted.
* * * * *

0
2. Section 200.30-3 is amended by adding paragraph (a)(10)(iii) to read 
as follows:


Sec.  200.30-3  Delegation of authority to Director of Division of 
Market Regulation.

* * * * *
    (a) * * *
    (10) * * *
    (iii) Pursuant to section 36(a) of the Act (15 U.S.C. 78mm(a)), to 
review and grant written applications for an exemption, unconditionally 
or subject to specified terms and conditions, for a broker or dealer to 
utilize a clearing agency registered with the Commission under section 
17A of the Act (15 U.S.C. 78q-1) or a derivatives clearing organization 
registered with the Commodity Futures Trading Commission under section 
5b of the Commodity Exchange Act (7 U.S.C. 7a-1) that does not meet the 
requirements of 17 CFR 240.15c3-3a, Note G.(b)(1)(i) through (iii).
* * * * *

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

0
3. The authority citation for Part 240 continues to read, in part, as 
follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 
78j, 78j-l, 78k, 78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 
78w, 78x, 78ll, 78mm, 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-37, 80b-
3, 80b-4, 80b-11, and 7201 et seq.; and 18 U.S.C. 1350, unless 
otherwise noted.
* * * * *

0
4. Section 240.15c3-3a is amended by:
0
a. In the chart, redesignating Item No. 14 as Item No. 15;
0
b. Adding new Item No. 14;
0
c. Revising newly redesignated Item No. 15;
0
d. Revising Note B; and
0
e. Adding Note G.
    The revisions and additions read as follows:


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

* * * * *

[[Page 54191]]



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

* * * * *

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

* * * * *

    Note G. (a) Item 14 shall include the amount of margin required 
and on deposit with a clearing agency registered with the Commission 
under section 17A of the Act (15 U.S.C. 78q-1) or a derivatives 
clearing organization registered with the Commodity Futures Trading 
Commission under section 5b of the Commodity Exchange Act (7 U.S.C. 
7a-1) for customer accounts to the extent that the margin is 
represented by cash, proprietary qualified securities, and letters 
of credit collateralized by customers' securities.

    (b) Item 14 shall apply only if the broker or dealer has the 
margin related to security futures products on deposit with:
    (1) A registered clearing agency or derivatives clearing 
organization that:
    (i) Maintains the highest investment-grade rating from a 
nationally recognized statistical rating organization; or
    (ii) Maintains security deposits from clearing members in 
connection with regulated options or futures transactions and 
assessment power over member firms that equal a combined total of at 
least $2 billion, at least $500 million of which must be in the form 
of security deposits. For purposes of this Note G, the term 
``security deposits'' refers to a general fund, other than margin 
deposits or their equivalent, that consists of cash or securities 
held by a registered clearing agency or derivative clearing 
organization; or
    (iii) Maintains at least $3 billion in margin deposits; or
    (iv) Does not meet the requirements of paragraphs (b)(1)(i) 
through (b)(1)(iii) of this Note G, if the Commission has 
determined, upon a written request for exemption by or for the 
benefit of the broker or dealer, that the broker or dealer may 
utilize such a registered clearing agency or derivatives clearing 
organization. The Commission may, in its sole discretion, grant such 
an exemption subject to such conditions as are appropriate under the 
circumstances, if the Commission determines that such conditional or 
unconditional exemption is necessary or appropriate in the public 
interest, and is consistent with the protection of investors; and
    (2) A registered clearing agency or derivatives clearing 
organization that, if it holds funds or securities deposited as 
margin for security futures products in a bank, as defined in 
section 3(a)(6) of the Act (15 U.S.C. 78c(a)(6)), obtains and 
preserves written notification from the bank at which it holds such 
funds and securities or at which such funds and securities are held 
on its behalf. The written notification shall state that all funds 
and/or securities deposited with the bank as margin (including 
customer security futures products margin), or held by the bank and 
pledged to such registered clearing agency or derivatives clearing 
agency as margin, are being held by the bank for the exclusive 
benefit of clearing members of the registered clearing agency or 
derivatives clearing organization (subject to the interest of such 
registered clearing agency or derivatives clearing organization 
therein), and are being kept separate from any other accounts 
maintained by the registered clearing agency or derivatives clearing 
organization with the bank. The written notification also shall 
provide that such funds and/or securities shall at no time be used 
directly or indirectly as security for a loan to the registered 
clearing agency or derivatives clearing organization by the bank, 
and shall be subject to no right, charge, security interest, lien, 
or claim of any kind in favor of the bank or any person claiming 
through the bank. This provision, however, shall not prohibit a 
registered clearing agency or derivatives clearing organization from 
pledging customer funds or securities as collateral to a bank for 
any purpose that the rules of the Commission or the registered 
clearing agency or derivatives clearing organization otherwise 
permit; and
    (3) A registered clearing agency or derivatives clearing 
organization that establishes, documents, and maintains:
    (i) Safeguards in the handling, transfer, and delivery of cash 
and securities;
    (ii) Fidelity bond coverage for its employees and agents who 
handle customer funds or securities. In the case of agents of a 
registered clearing agency or derivatives clearing organization, the 
agent may provide the fidelity bond coverage; and
    (iii) Provisions for periodic examination by independent public 
accountants; and
    (4) A derivatives clearing organization that, if it is not 
otherwise registered with the Commission, has provided the 
Commission with a written undertaking, in a form acceptable to the 
Commission, executed by a duly authorized person at the derivatives 
clearing organization, to the effect that, with respect to the 
clearance and settlement of the customer security futures products 
of the broker-dealer, the derivatives clearing organization will 
permit the Commission to examine the books and records of the 
derivatives clearing organization for compliance with the 
requirements set forth in Sec.  240.15c3-3a, Note G. (b)(1) through 
(3).
    (c) Item 14 shall apply only if a broker or dealer determines, 
at least annually, that the registered clearing agency or 
derivatives clearing organization with which the broker or dealer 
has on deposit margin related to securities future products meets 
the conditions of this Note G.

    Dated: August 31, 2004.

    By the Commission.

Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 04-20188 Filed 9-3-04; 8:45 am]
BILLING CODE 8010-01-P