[Federal Register Volume 62, Number 57 (Tuesday, March 25, 1997)]
[Notices]
[Pages 14174-14176]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-7393]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38411; File No. SR-NYSE-97-01]
Self-Regulatory Organization; Notice of Filing of Proposed Rule
Change by New York Stock Exchange, Inc. Relating to Amendments to Rule
431 (``Margin Requirements'')
March 17, 1997.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of
1934, 15 U.S.C. 78s(b)(1), notice is hereby given that on January 9,
1997 the New York Stock Exchange, Inc. (``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 self-regulatory organization. The
Commission is publishing this notice to solicit comments on the
proposed rule change from interested parties.
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange has filed amendments to Rule 431 (``Margin
Requirements''). The change consists of amendments regarding permitted
market maker and specialist offset positions being eliminated from
Regulation T of the Federal Reserve Board (``FRB'') and to acknowledge
specific provisions of Rule 15c3-1 of the Securities Exchange Act of
1934 (``the Net Capital Rule''). The proposed rule change also
incorporates in Rule 431 cash account transactions permitted by the FRB
and SEC, as well as incorporating several definitions. Proposed new
language is italicized; proposed deletions are in brackets.
Proposed Amendment of Rule 431
Margin Requirements
Rule 431. (a) through (f)(2)(I) unchanged.
(J) Registered specialists, market makers or traders.--
Notwithstanding the other provisions of this sub-section (f)(2), a
member organization may clear and carry the listed option transactions
of one or more registered specialists, registered market makers or
registered traders in options (which registered traders are deemed
specialists for all purposes under the Securities Exchange Act of 1934
pursuant to the rules of a national exchange) (hereinafter referred to
as ``specialist(s)'', upon a ``Good Faith'' margin basis satisfactory
to the concerned parties, provided [that all real and potential risks
in accounts carried under such arrangements are at all times adequately
covered by the margin maintained in the account or in the absence
thereof, by the carrying
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member organization's excess Net Capital under Rule 325.] the ``Good
Faith'' margin requirement is not less than the Net Capital haircut
deduction of the member organization carrying the transaction pursuant
to Rule 325. In lieu of collecting the ``Good Faith'' margin
requirement, a carrying member organization may elect to deduct in
computing its Net Capital the amount of any deficiency between the
equity maintained in the account and the ``Good Faith'' margin
required.
For purposes of this paragraph (f)(2)(J), a permitted offset
position means, in the case of an option in which a specialist makes a
market, a position in the underlying asset or other related assets, and
in the case of other securities in which a specialist makes a market, a
position in options overlying the securities in which a specialist
makes a market. Accordingly, a specialist in options may establish, on
a share-for-share basis, a long or short position in the securities
underlying the options in which the specialist makes a market, and a
specialist in securities other than options may purchase or write
options overlying the securities in which the specialist makes a
market, if the account holds the following permitted offset positions:
(i) A short option position which is ``in or at the money'' and is
not offset by a long or short option position for an equal or greater
number of shares of the same underlying security which is ``in the
money'';
(ii) A long option position which is ``in or at the money'' and is
not offset by a long or short option position for an equal or greater
number of shares of the same underlying security which is ``in the
money'';
(iii) A short option position against which an exercise notice was
tendered;
(iv) A long option position which was exercised;
(v) A net long position in a security (other than an option) in
which a specialist makes a market;
(vi) A net short position in a security (other than an option) in
which the specialist makes a market; or
(vii) A specified portfolio type as referred to in SEC Rule 15c3-
1--Appendix A.
For purposes of this paragraph (f)(2)(J), the term ``in or at the
money'' means the current market price of the underlying security is
not more than two standard exercise intervals below (with respect to a
call option) or above (with respect to a put option) the exercise price
of the option; the term ``in the money'' means the current market price
of the underlying asset or index is not below (with respect to a call
option) or above (with respect to a put option) the exercise price of
the option; and, the term ``overlying option'' means a put option
purchased or a call option written against a long position in an
underlying asset; or a call option purchased or a put option written
against a short position in an underlying asset.
Securities, including options, in such accounts shall be valued
conservatively in the light of current market prices and the amount
which might be realized upon liquidation. Substantial additional margin
must be required or excess Net Capital maintained in all cases where
the securities carried: (i) are subject to unusually rapid or violent
changes in value including volatility in the expiration months of
options, (ii) do not have an active market, or (iii) in one or more or
all accounts, including proprietary accounts combined, are such that
they cannot be liquidated promptly or represent undue concentration of
risk in view of the carrying organization's Net Capital and its overall
exposure to material loss.
(K) unchanged.
(L) Exclusive designation.--A customer may designate at the time an
option order is entered which security position held in the account is
to serve in lieu of the required margin, if such service is offered by
the member organization; or the customer may have a standing agreement
with the member organization as to the method to be used for
determining on any given day which security position will be used in
lieu of the margin to support an option transaction. Any security held
in the account which serves in lieu of the required margin for a short
put or short call shall be unavailable to support any other option
transaction in the account.
(M) Cash account transactions.--A member organization may make
option transactions in a customer's cash account, providing:
(i) The transaction is permissible under Section 220.8 of
Regulation T of the Board of Governors of the Federal Reserve System;
or
(ii) The transaction is a debit put spread in listed broad-based
index options with European-style exercise comprised of a long put(s)
coupled with a short put(s) overlying the same broad-based index with
an equivalent underlying aggregate index value and the short put(s) and
long put(s) expire simultaneously, and the strike price of the long
put(s) exceed the strike price of the short put(s).
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 self-regulatory organization
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
Regulation T of the FRB currently prescribes option margin
requirements. In April 1996, the FRB amended Regulation T to
effectively delegate margin requirements for options transactions for
both customers and market makers/specialists, shifting responsibility
for establishing margin requirements for such transactions to the self-
regulatory organizations. This amendment to Regulation T will become
effective June 1, 1997.
Accordingly, the proposed amendments incorporate the current FRB
requirements into Exchange Rule 431 so that they may remain in effect
after June 1, 1997. The proposed amendments also incorporate certain
treatments of positions recognized under the Net Capital Rule.
Specifically, the proposed amendments to Rule 431 adopt provisions
regarding permitted market maker and specialist offset positions from
Regulation T and the Net Capital Rule. These offset positions would be
subject to the same ``good faith'' margin treatment as currently
accorded under Regulation T and would require the clearing/carrying
firm to comply with the applicable haircut requirements of the Net
Capital Rule for any cash margin deficiency (e.g., the difference
between the margin required under Rule 431 and the amount received from
the specialist/market maker). The proposal also incorporates the
current Regulation T definitions of the terms ``in or at the money,''
``in the money'' and ``overlying options.'' The parameters for
permitted offsets within the ``in or at the money'' definition have
been expanded from one to two ``standard exercise intervals.''
Section (f)(2)(J) of the rule has been revised in order to clarify
the existing
[[Page 14176]]
definition of ``good faith'' margin requirements.
A new provision has been added (Section (f)(2)(L)) to incorporate
the provisions currently contained in Regulation T regarding
``exclusive designation'' that allow a customer to designate which
security position in an account is to be utilized to cover the required
margin at the time an option order is entered; provided the member
organization offers such a service.
Further, Section (f)(2)(M) has been added to incorporate those cash
account transactions currently permitted under Regulation T and the
debit put spread currently allowed pursuant to the Commission's no-
action letter on ``theoretical pricing.''\1\
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\1\ Letter dated March 15, 1994 from Brandon Becker, Director,
Division of Market Regulation addressed to Ms. Mary L. Bender (CBOE)
and Mr. Timothy Hinkas (OCC).
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(2) Statutory Basis
The proposed rule change is consistent with the requirements of
Section (6)(b)(5) of the Securities Exchange Act of 1934 (the ``Act``)
which provides that the rules of the Exchange be designed to promote
just and equitable principles of trade and to protect the investing
public. The proposed rule change is also consistent with the rules and
regulations of the Board of Governors of the Federal Reserve System for
the purpose of preventing the excessive use of credit for the purchase
or carrying of securities, pursuant to Section 7(a) of the Act.
(B) Self-Regulatory Organization's Statement of 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
Comments were neither solicited nor received.
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 reason for so finding or (ii) as to
which the self-regulatory organization consents, the Commission will:
(A) By order approve such proposed rule change, or
(B) Institute proceedings to determine whether the proposed rule
change be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing. 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 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 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 above-
mentioned self-regulatory organization. All submissions should refer to
the File No. SR-NYSE-97-01 and should be submitted by April 15, 1997.
For the Commission by the Division of Market Regulation,
pursuant to delegated authority
Jonathan G. Katz,
Secretary.
[FR Doc. 97-7393 Filed 3-24-97; 8:45 am]
BILLING CODE 8010-01-M
