[Federal Register Volume 64, Number 224 (Monday, November 22, 1999)]
[Notices]
[Pages 63834-63836]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-30319]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-42129; File No. SR-Amex-99-26]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the American Stock Exchange LLC Relating to Margin and Net
Capital Requirements for Members and Clearing Members Participating in
Joint Back Office Arrangements
November 10, 1999.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that
on July 16, 1999, the American Stock Exchange LLC (``Amex'' or
``Exchange'') filed with the Securities and Exchange Commission
(``SEC'' or ``Commission'') the proposed rule change as described in
Items I, II and III below, which Items have been prepared by the
Exchange. The Commission is publishing this notice to solicit comments
on the proposed rule change from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The Amex proposes to amend Exchange Rule 462, ``Minimum Margins,''
to establish margin and net capital requirements for Amex members and
clearing members participating in joint back office (``JBO'')
arrangements. The test of the proposed rule change is available at the
Exchange and at the Commission.
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 Amex included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The Amex 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
The Exchange proposes to revise Exchange Rule 462 to establish
margin and net capital requirements for JBO participants \3\ and
clearing members. JBO arrangements permit a participating broker-dealer
to be deemed self-clearing \4\ for margin purposes and entitle the
participating broker-dealer to receive credit on a good faith margin
basis.\5\
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\3\ The proposed rule change would apply to Amex members and
member organizations that participate in JBO arrangements with JBO
clearing members (``JBO participants'').
\4\ Under the proposal, JBO participants would not be considered
self-clearing for any purpose other than for the extension of credit
under Exchange Rule 462, as revised, or under the comparable rules
of another self-regulatory organization.
\5\ ``Good faith'' with respect to margin means, ``the amount of
margin which a creditor would require in exercising sound credit
judgment.'' See 12 CFR 220.2.
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In a 1996 release discussing amendments to Regulation T,\6\ the
Board of Governors of the Federal Reserve System (``FRB'') placed its
reliance on the authority of self-regulatory organizations (``SROs'')
to ensure the reasonableness of JBO arrangements.\7\ When the
Regulation T provision that permits JBO arrangements was first adopted,
the FRB assumed there would be a reasonable relationship between the
good faith credit a JBO clearing member extended to a JBO participant
and the participant's ownership interest in the clearing member.
Consequently, the FRB did not establish any explicit requirement for
the amount of ownership that each JBO participant should have in the
JBO clearing member. However, because Regulation T does not provide a
precise ownership standard,\8\ good faith credit has been extended to
some ``owners'' that hold merely a nominal interest in a JBO clearing
member.
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\6\ Regulation T is entitled ``Credit by Brokers and Dealers.''
The FRB issued Regulation T pursuant to Section 7(a) of the Act. See
12 CFR 220, et seq.
\7\ See Board of Governors of the Federal Reserve System Docket
No. R-0772 (April 26, 1996), 61 FR 20386 (May 6, 1996).
\8\ Section 220.7(c) of Regulation T only requires that a JBO
clearing firm be ``a clearing and servicing broker or dealer owned
jointly or individually by other [broker-dealers].'' 12 CFR
220.7(c).
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In conjunction with other SROs and representatives from the
securities industry, the Exchange seeks to establish prudent ownership
standards for JBO participants and clearing members. These standards
would permit the extension of good faith credit to clearing member
``owners'' only when the owners maintain meaningful assets on deposit
with the JBO clearing member, and the clearing member maintains
sufficient net capital and risk control procedures to carry the JBO
accounts.
a. Requirements for JBO Participants. Under the proposal, each JBO
participant would be required to be a registered broker-dealer subject
to the net capital requirements prescribed by Commission Rule 15c3-1
(``Rule 15c3-1'').\9\ JBO participants could not claim the net capital
exemption available to option market makers under Commission Rule 15c3-
1(b)(1).\10\ Instead, JBO participants would be required to deposit and
maintain minimum account equity of $1 million and would be subject to
Financial and Operational Combined Uniform Single Report (``FOCUS'')
filings and certified audits. If the equity in a JBO participant's
account fell below $1 million, the JBO clearing firm would be
[[Page 63835]]
required to issue a margin call for additional funds or securities to
be satisfied within five business days. Additionally, each JBO
participant would be required to satisfy the ownership standards
established by the JBO clearing member. To ensure that adequate
procedures existed for complying with these requirements, JBO
participants would be required to employ or have access to qualified
Series 27 principal.\11\
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\9\ 17 CFR 240.15c3-1.
\10\ 17 CFR 240.15c3-1(b)(1).
\11\ The Commission notes that certain broker-dealers subject to
Rule 15c3-1(a)(2) (i.e., broker-dealers that carry customer accounts
and broker-dealers that introduce customer accounts and receive
securities) are eligible for an exemption from NASD Rule 1022(b),
which requires such broker-dealers to employ a Series 27 principal.
The Exchange's proposal recognizes this class of broker-dealers by
providing that broker-dealers participating in JBO arrangements must
either employ ``or have access to'' a qualified Series 27 principal.
According to the Exchange, the phrase ``or have access to'' means
that a JBO participant may employ a Series 27 principal on a part-
time basis or as a consultant. Telephone conversation between Scott
Van Hatten, Legal Counsel, Exchange, and Michael Loftus, Special
Counsel, Division of Market Regulation, Commission (November 10,
1999).
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b. Requirements for JBO Clearing Members. The proposed rule change
would require each member clearing JBO accounts to notify its
Designated Examining Authority in writing of its intention to clear JBO
accounts and to comply with additional net capital requirements
prescribed by the Exchange. Specifically, a JBO clearing member must
maintain either: (1) tentative net capital of $25 million; \12\ or (2)
net capital of $7 million, if the clearing member's primary business is
clearing option market maker accounts.\13\ A JBO clearing member that
primarily conducts an options market maker clearing business would be
required to include the gross deductions calculated for all JBO
participant accounts in its ratio of gross options market maker
deductions to adjusted net capital.
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\12\ The term ``tentative net capital'' generally refers to a
clearing member's net capital before the application of haircuts and
undue concentration deductions.
\13\ A clearing member would be deemed to be primarily
conducting an options market maker clearing business if at least 60%
of the gross haircuts calculated for all options market maker and
JBO participant accounts, in aggregate, could be attributed to
options market maker transactions.
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Under the proposal, a JBO clearing member would be required to
adjust its net worth each day by deducting any deficiency between a JBO
participant's account equity and the proprietary haircut calculated
pursuant to Rule 15c3-1 for the positions maintained in the JBO
account. Additionally, clearing members that maintained JBO accounts
would be required to ensure that each JBO participant maintained equity
of $1 million over all related funds. The JBO clearing member would be
required to issue a margin call if the JBO participant's account equity
fell below the $1 million threshold. Each JBO clearing member also
would be required to establish and maintain written ownership standards
for its JBO accounts.\14\ Finally, JBO clearing members would be
required to develop acceptable risk analysis standards and comply with
the requirements of Amex Rule 462.
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\14\ The Exchange would not require JBO clearing members to
establish ownership standards that meet any minimum guidelines in
addition to the rules of the Exchange. As a result, clearing members
would possess the discretion to develop the ownership criteria
governing their JBO accounts. However, should the Exchange learn of
any inappropriate ownership standards through its audit and
surveillance activities, the Exchange would move to correct the
impropriety.
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c. Margin Requirements for Broker-Dealer Accounts. Currently, any
deficiency between the equity maintained in a proprietary account
carried for a broker-dealer and the maintenance margin required by
Exchange Rule 462(b)(1)(i.e., 25% of the current market value of
securities held ``long'' in the account) is deducted in computing the
net capital of the clearing member organization. To treat introducing
broker-dealers and JBO participants similarly, the proposed rule change
predicates the deduction to a clearing member organization's net
capital upon the haircut requirements of Rule 15c3-1 (i.e., 15% of the
current market value for long positions) \15\ rather than the 25%
maintenance margin requirement under Exchange Rule 462(b)(1).
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\15\ 17 CFR 240.15c3-1.
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d. Margin Requirements for Specialist and Market Maker Accounts.
The proposal would likewise change the manner in which deductions to a
clearing member organization's net capital are computed for specialist
and market maker accounts. Presently, the amount of any deficiency
between the equity in the account carried for a specialist or market
maker and the 25% maintenance margin required by Exchange Rule
462(b)(1) is deducted in computing the net capital of the clearing
member organization. Under the proposed rule change, the deduction
would be based upon the haircut requirements of Rule 15c3-1 (i.e., 15%)
rather than the margin requirements under Exchange Rule 462(b)(1)(i.e.,
25%).
The same modification would be made to the margin provision
governing joint accounts carried by member organizations in which the
member organizations also participate. If the equity maintained in the
joint account by other participants is deficient, the proposal would
require the clearing member organization to compute the deduction to
its net capital based upon the haircut requirements of Rule 15c3-1
rather than the margin requirements of Exchange Rule 462(b)(1).
2. Statutory Basis
The Exchange believes that the proposed rule change is consistent
with the requirements of Section 6(b) of the Act,\16\ in general, and
further the objectives of Section 6(b)(5) of the Act,\17\ in
particular, in that it is designed to prevent fraudulent and
manipulative acts and practices, promote just and equitable principles
of trade, foster cooperation and coordination with persons engaged in
facilitating transactions in securities, and remove impediments to and
perfect the mechanism of a free and open market and a national market
system.
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\16\ 15 U.S.C. 78f(b).
\17\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange believes that the proposed rule change will not impose
any burden on competition that is not necessary or appropriate in
furtherance of the purposes of the Act.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
The Exchange 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 the 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
[[Page 63836]]
change is consistent with the Act. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609.
Copies of the submissions, 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 persons, 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 at the
Commission's Public Reference Room, 450 Fifth Street, NW, Washington,
DC 20549-0609. Copies of such filing will also be available for
inspection and copying at the principal office of the Exchange. All
submissions should refer to File No. SR-Amex-99-26 and should be
submitted by December 13, 1999.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\18\
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\18\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-30319 Filed 11-19-99; 8:45 am]
BILLING CODE 8010-01-M
