[Federal Register Volume 63, Number 233 (Friday, December 4, 1998)]
[Notices]
[Pages 67161-67163]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-32328]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40709; File No. SR-NYSE-97-28]
Self-Regulatory Organizations; Notice of Filing of Amendment Nos.
1 and 2 to Proposed Rule Change by the New York Stock Exchange, Inc.
Relating to Capital and Margin Requirements for Joint Back Office
Arrangements
November 25, 1998.
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 May 21, 1998, and September 28, 1998, the New York Stock Exchange,
Inc. (``Exchange'' or ``NYSE'') filed with the Securities and Exchange
Commission (``Commission'') Amendment Nos. 1 and 2, respectively, to
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 Amendment Nos. 1 and 2 to
the proposed rule change for interested parties.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The Exchange seeks to amend Exchange Rule 431, ``Margin
Requirements,'' to establish margin and net capital requirements for
Joint Back Office (``JBO'') arrangements among broker-dealers. The
proposed rule change also relates to: (i) net capital computations for
members carrying proprietary accounts of other broker-dealers; (ii) net
capital computations for members carrying the accounts of approved
specialists or market makers; and (iii) control and restricted
securities.
The text of the proposed rule change, as amended, is available at
the Office of the Secretary, the Exchange, and at the Commission.
[[Page 67162]]
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 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 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
On October 2, 1997, the Exchange filed its JBO proposal with the
Commission. Notice of the proposal was issued on December 29, 1997.\3\
The Exchange submitted Amendment No. 1 to the JBO filing on May 21,
1998, and Amendment No. 2 on September 28, 1998.
---------------------------------------------------------------------------
\3\ See Securities Exchange Act Release No. 39497 (Dec. 29,
1997), 63 FR 899 (Jan. 7, 1998).
---------------------------------------------------------------------------
a. The Original JBO Filing. The Exchange's proposed rule change
would amend Exchange Rule 431 to establish capital, margin, and other
requirements for JBO arrangements among broker-dealers. Regulation T,
issued by the Board of Governors of the Federal Reserve System
(``FRB''), permits a broker-dealer to ``effect or finance transactions
of any of its owners if the [broker-dealer] is a clearing and servicing
broker or dealer owned jointly or individually by other [broker-
dealers].'' \4\ The Exchange's proposal would provide regulatory
requirements for such JBO arrangements.
---------------------------------------------------------------------------
\4\ See 12 CFR 220.7(c). Regulation T is entitled ``Credit By
Brokers and Dealers'' and was issued by the FRB pursuant to the Act.
---------------------------------------------------------------------------
Under the Exchange's original proposal, a member organization
carrying and clearing, or carrying JBO accounts would be required to:
(i) provide written notification to the Exchange prior to establishing
a JBO arrangement, (ii) maintain minimum tentative net capital \5\ of
$25 million, or maintain minimum net capital of $10 million if engaged
in the primary business of clearing options market-maker accounts,\6\
(iii) maintain a written risk analysis methodology for assessing the
amount of credit extended to participating broker-dealers, and (iv)
deduct from net capital, the ``haircut'' requirements pursuant to the
Commission's net capital rule (Exchange Act Rule 15c3-1) \7\ in excess
of the equity maintained in the accounts of participating broker-
dealers.
---------------------------------------------------------------------------
\5\ As discussed in the Exchange's Interpretation Handbook, the
term ``tentative net capital'' generally refers to net capital
before the application of ``haircuts'' and undue concentration
charges on securities and options positions. See NYSE Interpretation
Handbook, Section I(c)(2)(vi)(M)(04), ``Tentative Net Capital.''
\6\ Under the proposed rule change, clearance of option market
maker accounts would be deemed a broker-dealer's primary business if
a minimum of 60% of the aggregate deductions in the ratio of gross
options market maker deductions to net capital (including gross
deductions for IBO participant accounts) are options market maker
deductions.
\7\ See 17 CFR 240.15c3-1, ``Net Capital Requirements for
Brokers or Dealers.''
---------------------------------------------------------------------------
Furthermore, JBO participants would be required to be registered
broker-dealers subject to Exchange Act Rule 15c3-1, and would be
required to maintain an ownership interest in the JBO pursuant to
Regulation T. Exclusive of their ownership interest in the JBO
arrangement, JBO participants would be required to maintain a minimum
liquidating equity of $1 million. If the liquidating equity fell below
$1 million, the JBO participant would be required to eliminate the
deficiency within five business days or would become subject to the
margin requirements under other provisions of Exchange Rule 431.
b. Amendment No. 1. Amendment No. 1 proposes revisions that are
designed to incorporate certain proposed maintenance margin
requirements for non-equity securities, which are the subject of
another recent Exchange filing, SR-NYSE-98-14 (``Related Filing'').\8\
The Exchange's proposed rule change, as originally filed, requires that
the Commission's net capital rule haircuts be used when a member
organization computes its capital charges for Rule 431 purposes.
However, in the Related Filing, the Exchange proposes margin
requirements for non-equity securities for broker-dealer proprietary
accounts which are less than the Commission's net capital rule haircut
requirements. The Exchange believes it is necessary to maintain
consistency between the Exchange's JBO filing and the Related Filing by
incorporating into the JBO filing the most recently proposed margin
requirements. Therefore, Amendment No. 1 incorporates the requirements
proposed in the Related Filing.
---------------------------------------------------------------------------
\8\ The Commission has published notice of the Related Filing
but has not taken any dispositive action on the proposal. See
Securities Exchange Act Release No. 40278 (July 29, 1998), 63 FR
41882 (Aug. 5, 1998).
---------------------------------------------------------------------------
The Exchange's JBO filing specifies certain regulatory requirements
for establishing and maintaining JBO arrangements. Among them is the
requirement that each JBO participant maintain in its account minimum
net liquidating equity of $1 million. Amendment No. 1 clarifies the
margin requirements that become operative when the equity in the
account of a JBO participant falls below the prescribed levels.
Specifically, if the amount of equity in a JBO participant's account
drops below the $1 million minimum, the participant no longer will be
an eligible JBO participant unless the necessary minimum equity is
reestablished in the JBO account within the required number of days
(i.e., 5 business days). Amendment No. 1 clarifies that JBO
participants who lose their JBO eligibility would not be considered
``exempted borrowers'' (as defined in Regulation T) and therefore would
be subject to the margin account requirements for customers set forth
in Regulation T. In addition, such participants would be subject to the
maintenance requirements pursuant to the other provisions of Rule 431.
Amendment No. 1 also requests that the revisions relating to
Control and Restricted Securities be subject to separate consideration
and review by the Commission, apart from the broader proposal relating
to JBO arrangements and broker-dealer accounts, as well as the changes
proposed in Amendment No. 1. The Exchange believes that bifurcating the
consideration of the revisions regarding Control and Restricted
Securities, on which no comments were received, would allow them to
become effective more quickly than if they were considered together
with all of the other modifications proposed in the JBO filing and
Amendment No. 1.
c. Amendment No. 2. The Exchange notes that the Chicago Board
Options Exchange, Incorporated (``CBOE'') has also submitted a proposed
rule change to establish margin and net capital requirements for JBO
clearing firms and participants.\9\ The CBOE's proposal, which is
similar to the Exchange's JBO filing, originally proposed capital
requirements of $25 million and $10 million. In response to the
publication of the CBOE's JBO filing in the Federal Register, the
Commission received several comment letters from members
[[Page 67163]]
of the CBOE. The CBOE members contended that the proposed $10 million
net capital requirement for certain JBO clearing firms, whose primary
business consists of clearance of options market makers' accounts, was
too high.
---------------------------------------------------------------------------
\9\ The CBOE's JBO filing, SR-CBOE-97-58, was filed with the
Commission on October 27, 1997, and notice of its filing was issued
on December 10, 1997. See Securities Exchange Act Release No. 39418
(Dec. 10, 1997), 62 FR 66154 (Dec. 17, 1997). The CBOE filed
Amendment No. 1 to its JBO filing on July 27, 1998. Notice of
Amendment No. 1 was issued on November 25, 1998. See Securities
Exchange Act Release No. 40708 (Nov. 25, 1998).
---------------------------------------------------------------------------
As a result of discussions with other self-regulatory organizations
such as the CBOE, as well as deliberations among the JBO subcommittee
of the Exchange's Rule 431 Committee, the Exchange seeks to lower the
proposed net capital requirement for member organizations carrying and
clearing, or carrying JBO accounts from $10 million to $7 million. This
modification is consistent with the revisions which the CBOE recently
proposed for its JBO filing.\10\ Under Amendment No. 2, the $7 million
net capital requirement only would be available to member organizations
whose primary business consists of the clearance of options market
maker accounts. Consequently, the proposal's $25 million tentative net
capital requirement would continue to apply to all other member
organizations carrying and clearing, or carrying JBO accounts. The
Exchange believes the revised level of $7 million will continue to
require capital sufficient to satisfy safety and soundness concerns.
---------------------------------------------------------------------------
\10\ Id.
---------------------------------------------------------------------------
Amendment No. 2 also includes new provisions relating to member
organizations that carry and clear, or carry JBO accounts that will
require: (i) prompt written notification to the Exchange when such a
member organization's tentative net capital or net capital, whichever
may apply, falls below prescribed standards; and (ii) that appropriate
action be taken, within three business days, to resolve any such
capital deficiency. Failure to correct such deficiencies within the
allotted period will preclude the JBO carrying and clearing, or
carrying member organization from accepting new transactions pursuant
to the JBO arrangement. The Exchange believes these requirements are
consistent with provisions of the Commission's net capital rule that
generally deal with net capital deficiencies.
2. Statutory Basis
The Exchange believes the proposed rule change, as amended, is
consistent with the requirements of Section 6(b)(5) of the Act \11\ in
that it is designed to promote just and equitable principles of trade,
and protect the investing public. The Exchange further believes the
proposed rule change is consistent with the rules and regulations of
the Board of Governors of the Federal Reserve System that are intended
to prevent the excessive use of credit for the purchase or carrying of
securities, in accordance with Section 7(a) of the Act.\12\
---------------------------------------------------------------------------
\11\ 15 U.S.C. 78f(b)(5).
\12\ 15 U.S.C. 78g(a).
---------------------------------------------------------------------------
B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange believes 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 did not solicit or receive written comments with
respect to the proposed rule change. The Exchange notes, however, that
the CBOE received written comments regarding its companion JBO filing.
Item II(A)(1)(c) above includes the Exchange's response to the issues
raised in the comment letters submitted to the CBOE.
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 Amendment Nos. 1 and 2, including whether the
proposed rule change, as modified by Amendment Nos. 1 and 2, is
consistent with the Act. Persons making written submissions should file
six copies thereof with the Secretary, Securities and Exchange
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549. 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 in the Commission's
Public Reference Section, 450 Fifth Street, N.W., Washington, D.C.
20549. 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-NYSE-97-28 and should be submitted by December 28,
1998.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\13\
---------------------------------------------------------------------------
\13\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-32328 Filed 12-3-98; 8:45 am]
BILLING CODE 8010-01-M
