[Federal Register Volume 62, Number 12 (Friday, January 17, 1997)]
[Notices]
[Pages 2708-2709]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-1219]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38154; File No. SR-PHLX-96-40]
Self-Regulatory Organizations; Philadelphia Stock Exchange,
Incorporated; Order Approving of Proposed Rule Change Relating to
Equity Margin Rules
January 10, 1997.
I. Introduction
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on November 1, 1996, the
Philadelphia Stock Exchange, Inc. (``PHLX'' or ``Exchange'') filed with
the Securities and Exchange Commission (``SEC'' or ``Commission'') a
proposed rule change relating to its equity margin rules. The proposal
was published for comment in the Federal Register on November 25,
1996.\2\ No comments were received on the proposed rule change. This
order approves the Exchange's proposal.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ Securities Exchange Act Release No. 37962 (November 19,
1996), 61 FR 59919.
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II. Description of the Proposal
The PHLX has proposed to amend Rules 721, 722, and 723 in order to
harmonize the PHLX's margin rules with those of the other self-
regulatory organizations (``SROs'').
Amended Rule 721 will now provide for initial customer margin
requirements that will be identical to the initial customer equity
margin requirements of the New York Stock Exchange (``NYSE''), the
American Stock Exchange (``AMEX'') and the Pacific Stock Exchange
(``PSE'').\3\ Specifically, a customer must deposit at least the
greater of the amount specified by Regulation T or $2,000 equity,
except that cash need not be deposited in excess of any security
purchased.
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\3\ See NYSE Rule 431(b); AMEX Rule 462; PSE Rules 2.15(e),
2.16(a).
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The PHLX has proposed to amend Rule 722 to provide for good faith
margin in instances where a member organization carries the proprietary
account of another broker-dealer in compliance with the requirements of
Regulation T. The rule will further provide that the member
organization may not carry the account in a deficit position and must
deduct from its own net capital the difference between the margin
required by other sections of this rule and the equity on deposit. The
PHLX proposed adding these provisions so as to parallel its margin rule
with that of the NYSE.\4\
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\4\ See NYSE Rule 431(e)(6).
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The PHLX has proposed to completely restate Rule 723. The pre-
amended version of Rule 723 applied to member and member firm trading
which is now governed by PHLX Rules 722 and 703.\5\ Exchange research
identified that the current text of Rule 723 has not been amended since
at least 1937.\6\ Accordingly, the arcane text predates all modern
margin and capital rules of the PHLX. In lieu of the outdated
provisions of Rule 723, the Exchange proposes replacing such text with
the current customer day-trading provisions and the prohibition against
free-riding which have been promulgated by the other major SROs.\7\
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\5\ Rule 722 concerns margin accounts, and Rule 703 concerns
financial responsibility and reporting.
\6\ In researching the history of Rule 723 the PHLX reviewed
Exchange guides from as far back as the 1930s, wherein, the rule
appeared exactly as it now reads. Furthermore, Rule 723 itself makes
no reference to ever having been amended. See PHLX Rule 723.
\7\ The PHLX proposes adopting the language promulgated by the
New York Stock Exchange. See NYSE Rule 431(f)(8)(B)-(C) and (f)(9).
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This rule will require a customer to have sufficient equity to meet
the margin required on either the long or short transaction, whichever
occurred first on an intra-day basis. For purposes of this rule, the
term ``customer'' will be defined, as it is in Rule 722(e)(2), to not
include ``a broker or dealer from whom a security has been purchased or
to whom a security has been sold for the account of a member
organization or its customers.''
In addition, a prohibition against free riding in a customer's cash
account has been included in order to preclude a customer from making a
practice of paying for a security by selling the same security on an
intra-day basis.
Other major SROs do not have any intra-day margin requirements
[[Page 2709]]
governing member trading.\8\ The ``daylight'' trading requirements of
the PHLX serve no current purposes other than to force PHLX members to
meet intra-day trading requirements on transactions which were not
specifically exempted by the obsolete rule. In addition, because other
major exchanges do not have these intra-day requirements, the PHLX has
been placed at a competitive disadvantage. Members are forced to
actively manage non-exempted transactions on an intra-day basis in
order to maintain compliance with the rule, while other exchanges'
margining and capital requirements are only imposed at the end of the
business day. Furthermore, the proposed day trading and free riding
provisions provide additional protection in the market where it is most
needed. Accordingly, the PHLX rules should be brought into harmony with
the other exchanges so as to relieve these competitive disadvantages.
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\8\ The NYSE, AMEX and the PSE do not have intra-day margining
requirements for members. The NYSE does however, have intra-day
margining requirements for customers.
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III. Discussion
The Commission finds that the proposed rule change is consistent
with the requirements of the Act and the rules and regulations
thereunder applicable to a national securities exchange and, in
particular, the requirements of Section 6(b)(5).\9\ The proposed rule
change is designed to remove impediments to and perfect the mechanism
of a national market system and to protect investors and the public
interest. The Commission believes that the proposed amendments to the
equity margin rules will result in the harmonization of the PHLX's
equity margin rules with those of other SROs.
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\9\ 15 U.S.C. Sec. 78f(b)(5).
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Specifically, the Commission finds appropriate the proposal to
amend Rule 721 to provide for initial customer margin requirements that
are identical to the initial customer equity margin requirements of the
NYSE, the AMEX, and the PSE. The rule will require that a customer must
deposit at least the greater of the amount specified by Regulation T or
$2,000 equity, except that cash need not be deposited in excess of any
security purchased.
The Commission also finds appropriate the PHLX proposal to amend
Rule 722 to parallel the NYSE margin rule, to provide for good faith
margin in instances where a member organization carries the proprietary
account of another broker-dealer in compliance with the requirements of
Regulation T. The PHLX rule will further provide that the member
organization may not carry the account in a deficit position and must
deduct from its own net capital the difference between the margin
required by other sections of this rule and the equity on deposit.
Rule 723 will be restated to require a customer to have sufficient
equity to meet the margin required on either the long or short
transaction, whichever occurred first on an intra-day basis. In
addition, a prohibition against free riding in a customer's cash
account has been included in order to preclude a customer from making a
practice of paying for a security by selling the same security on an
intra-day basis. The Commission finds these proposals appropriate in
light of their consistency with the rules of other SROs.\10\ The
Commission believes that it is appropriate for the PHLX to completely
restate Rule 723 to eliminate intra-day margin requirements governing
member trading, consistent with the requirements of other SROs. The
restatement of the rule also is appropriate in light of the fact that
other provisions of the pre-amendment version of Rule 723 are now
governed by other PHLX rules.\11\
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\10\ Surpa note 7.
\11\ Surpa note 5 and accompanying text.
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The Commission finds that these amendments will enhance financial
protections and, as a result, enhance the integrity of the Exchange's
markets by ensuring that members and customers maintain adequate margin
reserves. Because the amendments result in PHLX equity margin rules
that are identical to those of other SROs, they do not raise new
regulatory concerns.
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\12\ that the proposed rule change (File No. SR-PHLX-96-40) is
approved.
\12\ 15 U.S.C. 78s(b)(2).
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For the Commission by the Division of Market Regulation,
pursuant to delegated authority.\13\
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\13\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-1219 Filed 1-16-97; 8:45 am]
BILLING CODE 8010-01-M
