[Federal Register Volume 72, Number 248 (Friday, December 28, 2007)]
[Notices]
[Pages 73947-73949]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-25183]
[[Page 73947]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-57000; File No. SR-NYSE-2007-101]
Self-Regulatory Organizations; New York Stock Exchange LLC;
Notice of Filing of a Proposed Amendment to NYSE Rule 104.21
(``Specialist Organizations--Additional Capital Requirements'')
December 20, 2007.
Pursuant to section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (the ``Exchange Act''),\2\ and Rule 19b-4 thereunder,\3\ notice is
hereby given that on November 2, 2007, the New York Stock Exchange LLC
(``NYSE'' or the ``Exchange'') filed with the Securities and Exchange
Commission (``SEC'' or the ``Commission'') the proposed rule change as
described in Items I, II, and III below, which items have been
substantially prepared by the Exchange. The Commission is publishing
this notice to solicit comments on the proposed rule changes from
interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 15 U.S.C. 78(a) et seq.
\3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The New York Stock Exchange LLC (``NYSE'' or ``Exchange'') is
filing with the Securities and Exchange Commission (``SEC'' or
``Commission'') a proposed rule change to amend NYSE Rule 104.21
(``Specialist Organizations--Additional Capital Requirements''), which
would reduce the net liquid asset requirements for specialist member
organizations. The text of the proposed rule change is set forth below.
Proposed new language is italicized; brackets indicate deletions.
* * * * *
Rule 104. Dealings by Specialists
(a)-(b)--No Change.
* * *
Supplementary Material:
Functions of Specialists
.10 through .20--No Change.
.21 Specialist Organizations--Additional Capital Requirements.--
(1) Each specialist organization subject to Rule 104.21 must
maintain minimum net liquid assets equal to:
(i) [$1,000,000] $250,000 for each one tenth of one percent (.1%)
of Exchange transaction dollar volume in its registered securities,
exclusive of Exchange Traded Funds, plus $500,000 for each Exchange
Traded Fund; and * * *
Remainder of Rule--No Change
* * * * *
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, the Exchange included statements
concerning the purpose of, and basis for, the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Exchange 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
Specialist member organizations must maintain net liquid assets as
required by NYSE Rule 104, and in addition, must satisfy the net
capital requirements prescribed in Rule 15c3-1,\4\ promulgated under
the Securities Exchange Act of 1934 (the ``Exchange Act'').\5\ NYSE
Rule 325 requires members and member organizations to comply with
Exchange Act Rule 15c3-1 and also requires notification to the Exchange
whenever tentative net capital has declined below defined levels. In
addition, Rule 325 gives the Exchange the authority, at any time, to
prescribe greater net capital or net worth requirements than those
explicitly prescribed by the rule, or to require more stringent
treatment of items when computing net capital, net worth and, by
implication, net liquid assets. Further, the NYSE can restrict the
business activities of specialist organizations consistent with good
business practices and its obligation to maintain a fair and orderly
market. Such restrictions may include prohibitions against business
expansion and business reduction requirements.
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\4\ 17 CFR 240.15c3-1.
\5\ 15 U.S.C. 78a et seq.
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The term ``net liquid assets'' refers to liquidity, in the form of
cash and cash equivalents, that is immediately available (within twenty
four hours) to a specialist organization for the continuing purchase
and sale of securities in which a specialist is registered, in support
of the specialist book, and market maintenance. It is a shorter-term
form of liquidity that is meant to be available to the specialist
organization to facilitate the performance of its affirmative duty to
maintain a fair and orderly market on the Exchange. In addition, it is
important for all specialist organizations and market participants to
know that specialists have sufficient liquidity to support the
specialist book and market maintenance activities.
Specialist member organizations' unique liquidity needs dictate the
general form of the net liquid asset requirement. Therefore, a
specialist organization's net liquid asset requirement functions to
ensure that the specialist is able to continue operations; whereas a
broker-dealer's net capital requirement functions to ensure that, if
the broker-dealer were liquidated, the broker-dealer's obligations to
its customers and creditors would be satisfied.
On July 25, 2006, the SEC approved amendments to NYSE Rule 104
(``Dealings by Specialists'') to change the net liquid asset
requirement for specialist member organizations.\6\ The amendments
restructured the net liquid asset requirement for specialist
organizations from an approach based on valuation of classes of
allocated securities (``concentration measures''), which included
penalties for mergers among specialists, to an approach based on
specialist market share that is measured by total dollar volume traded
combined with market stress and volatility risk analysis.
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\6\ See Release No. 34-54205 (July 25, 2006); 71 FR 43260 (July
31, 2006) File No. SR-NYSE-2005-38) (approving amendments to NYSE
Rules 104 and 123E (``Specialist Combination Review Policy'') which
change the capital requirements of specialist organizations). See
also NYSE Information Memo 06-56 (August 2, 2006).
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Pursuant to the 2006 amendments, NYSE Rule 104.21 (``Specialist
Organizations--Additional Capital Requirements'') currently requires,
in part, that each specialist organization subject to the provision
maintain minimum net liquid assets equal to $1,000,000 for each one
tenth of one percent (.1%) of the Exchange transaction dollar volume in
its registered securities, exclusive of Exchange Traded Funds, plus
$500,000 for each Exchange Traded Fund, in addition to the market risk
add-on under Rule 104.21(2). Additionally, the filing noted that, as a
result of the changes to the structure of the marketplace, NYSE would
be assessing market risks annually to determine the continuing adequacy
of the net liquid asset requirements.
[[Page 73948]]
Proposed Rule Change
The proposed rule change would reduce the total base capital
requirement that must be maintained as net liquid assets for all
specialists from $1 billion to $250 million. NYSE believes this amount
will adequately protect specialist organizations during periods of
market stress. Further, each of the specialist organizations have
sources of funding that will provide necessary liquidity during a
period of market stress. It is no longer necessary for this liquidity
to be maintained as capital, as specialist positions and the likelihood
of losses have been reduced dramatically due to changes in the
structure of the market.
Analysis
The role of specialists has changed significantly as increased
electronic trading and the Exchange's ``Hybrid Market'' \7\ have
contributed to lower participation by, and therefore less risk being
assumed by, specialist organizations. In light of the reduced
participation, NYSE is proposing a reduction in the minimum net liquid
asset requirement under Rule 104.21(1) for specialist organizations.
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\7\ See Release No. 34-53539 (March 22, 2006); 71 FR 16353
(March 31, 2006) File No. SR-NYSE-2004-05) (approving amendments to
NYSE Rules (approving the proposed rule change to establish the NYSE
Hybrid Market). The rule change created a ``Hybrid Market'' by,
among other things, increasing the availability of automatic
executions in its existing automatic execution facility, NYSE
Direct+, and providing a means for participation in the expanded
automated market by its floor members. The change altered the way
NYSE's market operates by allowing more orders to be executed
directly in Direct+, which in essence moves NYSE from a floor-based
auction market with limited automation order interaction to a more
automated market with limited floor-based auction market
availability.
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The proposed net liquid asset reduction for specialist
organizations is consistent with the current dealer position levels,
the profitability results during the volatile periods of July and
August 2007, as well as specialist participation statistics. FINRA, on
behalf of the Exchange, undertook an assessment for the periods of: (1)
July 2, 2007 through August 17, 2007, selected due to the volatility in
the marketplace during this period; and (2) February 27, 2007, when the
Dow Jones Industrial Averages, DJIA, declined by 416.02 points to test
levels of specialist trading on the Exchange. The assessment focused on
position levels, daily dealer account profit and loss, and market
volatility. In addition, FINRA compared participation by equity
specialists in trading on the Exchange pre and post Hybrid Market.
Generally, during periods of volatility there were no
material net losses by specialists. Also, there were no material drops
in specialist Net Liquid Assets during these periods.
The participation by specialist firms in trading on the
Exchange has declined along with the proliferation of electronic
trading and the significant change in the Exchange's trading system
introduced by the Hybrid Market. The increased efficiency with which
others can access the Exchange's market has increased liquidity and
decreased the market's reliance on the specialist to provide the contra
side in our continuous auction. While the NYSE considers specialist
participation to still be an important feature of its Hybrid Market,
that participation can be and is at a significantly lower level. For
example, specialists participated in 15.1% of all shares bought and
sold on the Exchange in August 2002, but consistent with the evolution
of trading styles and our market model, the participation rate dropped
to 8.5% in November 2005, and to approximately 3.9% today.
Pro-forma daily net liquid asset positions with the
proposed requirement for the week ending September 14, 2007 were
prepared using actual computations submitted by each of the seven
equity specialist firms.\8\ The first summary of calculations reflects
the $1 billion requirement, whereas, the second set of calculations
reflects the proposed $250 million requirement. Each of the
calculations includes a market risk add on amounting to three times the
average of the twenty prior business days securities haircuts on its
specialist dealer positions computed pursuant to SEA Rule 15c3-
1(c)(2)(vi) exclusive of paragraph (N) or three times VaR, if approved
to calculate under this methodology:
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\8\ Effective at the close of business on November 30, 2007, one
equity specialist firm resigned from the NYSE and its stocks will be
reassigned to one of the six remaining firms. Further consolidation
and/or reallocation of specialist books is possible in the future.
Aggregate Specialist Data Current Requirement: $1 Billion Plus Market Risk Add-Ons
[000 Omitted]
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NLA
Trade date LMV SMV NLA required Excess NLA
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9/10/2007>..................................... $183,841 $49,955 $1,380,063 $1,117,106 $262,957
9/11/2007>..................................... 122,939 128,276 1,381,871 1,112,180 269,692
9/12/2007>..................................... 162,047 121,583 1,379,123 1,109,360 269,763
9/13/2007>..................................... 148,012 181,734 1,378,222 1,108,381 269,841
9/14/2007>..................................... 135,832 164,699 1,378,537 1,106,220 272,317
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Aggregate Specialist Data Pro-Forma Requirement: $250 Million Plus Market Risk Add-Ons
[000 Omitted]
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Proposed
Trade date LMV SMV NLA NLA Proposed
required excess NLA
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9/10/2007>..................................... $183,841 $49,955 $1,380,063 $367,106 $1,012,957
9/11/2007>..................................... 122,939 128,276 1,381,871 362,180 1,019,692
9/12/2007>..................................... 162,047 121,583 1,379,123 359,360 1,019,763
9/13/2007>..................................... 148,012 181,734 1,378,222 358,381 1,019,841
9/14/2007>..................................... 135,832 164,699 1,378,537 356,220 1,022,317
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[[Page 73949]]
Based on the foregoing assessment, the proposed amendments would
require a specialist organization to meet, with its own assets, a net
liquid asset requirement equal to $250,000 for each one tenth of one
percent (.1%) of the Exchange transaction dollar volume in its
registered securities, exclusive of Exchange Traded Funds, plus
$500,000 for each Exchange Traded Fund, in addition to the market risk
add-on under Rule 104.21(2), amounting to three times the average of
the prior twenty business days securities haircut on its specialist
dealer positions computed pursuant to SEA Rule 15c3-1(2)(vi) exclusive
of paragraph (N) or three times VaR, if approved to calculate under
this methodology.
Finally, the proposal takes into consideration the circuit breakers
in effect to prevent a market freefall included in NYSE Rule 80B. NYSE
Rule 80B provides for trading halts that are triggered when the DJIA
declines below its closing value on the previous trading day by: 10%
(level 1), 20% (level 2), and 30% (level 3). At level 3, trading shall
halt and not resume for the rest of the day. The intent of the halts is
to allow buyers and sellers an opportunity to regroup and objectively
assess the marketplace.
FINRA, on behalf of NYSE, will continue to assess the specialists'
net liquid asset requirements in relationship to the Hybrid Market and
monitor their net liquid assets on a daily basis. NYSE and FINRA
require notification for all withdrawals of capital, and approval for
any withdrawal being made on less than six months advance notice to the
Exchange.
(2) Statutory Basis
The statutory basis for the proposed rule change is section 6(b)(5)
of the Exchange Act \9\ which requires, among other things, that the
rules of the Exchange are designed to prevent fraudulent and
manipulative acts and practices, to promote just and equitable
principles of trade, to foster cooperation and coordination with
persons engaged in regulating, clearing, settling, processing
information with respect to, and facilitating transactions in
securities, to remove impediments to perfect the mechanism of a free
and open market and national market system, and in general to protect
investors and the public interest. The Exchange believes that the
proposed rule change will reduce the burden on specialist member
organizations to maintain net liquidity while still ensuring adequate
protection of specialist organizations during periods of market stress.
Each of the specialist organizations have sources of funding that will
provide necessary liquidity during a period of market stress and thus,
it is no longer necessary for this liquidity to be maintained as
capital, as specialist positions and the likelihood of losses have been
reduced dramatically due to changes in the structure of the market.
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\9\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition not necessary or appropriate in
furtherance of the purposes of the 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 Exchange consents, the Commission will:
(A) By order approve such proposed rule change, or
(B) 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 the proposed rule
change is consistent with the Act. Comments may be submitted by any of
the following methods:
Electronic Comments
Use the Commission's Internet comment form (http://www.sec.gov/rules/sro.shtml); or
Send an e mail to [email protected]. Please include
File Number SR-NYSE-2007-101 on the subject line.
Paper Comments
Send paper comments in triplicate to Nancy M. Morris,
Secretary, Securities and Exchange Commission, 100 F Street, NE.,
Washington, DC 20549-1090.
All submissions should refer to File Number SR-NYSE-2007-101. This
file number should be included on the subject line if e-mail is used.
To help the Commission process and review your comments more
efficiently, please use only one method. The Commission will post all
comments on the Commission's Internet Web site (http://www.sec.gov/rules/sro.shtml). 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, 100 F Street,
NE., Washington, DC 20549, on official business days between the hours
of 10 a.m. and 3 p.m. Copies of such filing also will be available for
inspection and copying at the principal office of the NYSE. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submissions should refer to File number SR-NYSE-2007-101 and should be
submitted on or before January 18, 2008.
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\10\
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\10\ 17 CFR 200.30-3(a)(12).
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Florence E. Harmon,
Deputy Secretary.
[FR Doc. E7-25183 Filed 12-27-07; 8:45 am]
BILLING CODE 8011-01-P