[Federal Register Volume 63, Number 65 (Monday, April 6, 1998)]
[Notices]
[Pages 16849-16851]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-8924]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-39813; File No. SR-NYSE-98-08]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval to a Proposed Rule and Amendment No. 1 to
the Proposed Rule Change by the New York Stock Exchange, Inc., Relating
to Margin Requirements for Exempted Borrowers and Good Faith Accounts
March 27, 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 March 11, 1998, the New York Stock Exchange, Inc. (``NYSE'' 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 he
NYSE.\3\ The Commission is publishing this notice to solicit comments
on the proposed rule change from interested persons. As discussed
below, the Commission also is granting accelerated approval of the
proposal for 120 days, until July 27, 1998.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ On March 23, 1998, the NYSE amended its proposal. See Letter
from James E. Buck, Senior Vice President and Secretary, NYSE, to
Richard C. Strasser, Division of Market Regulation, Commission,
dated March 20, 1998 (``Amendment No. 1''). In Amendment No. 1, the
NYSE modified its proposal to request temporary approval of the
proposal for 120 days.
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I. Self Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The NYSE proposes to amend NYSE Rule 431, ``Margin Requirements,''
to apply the maintenance margin requirements of NYSE Rule 431 to good
faith accounts and to provide that the proprietary accounts of
introducing broker-dealers who are exempted borrowers under Regulation
T \4\ will continue to be subject to NYSE Rule 431(e)(6). The NYSE has
requested accelerated approval of the proposal for 120 days.\5\
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\4\ 12 CFR 220. Regulation T, ``Credit by Brokers and Dealers,''
is administered by the Board of Governors of the Federal Reserve
System (``FRB'') pursuant to Section 7 of the Act.
\5\ See Amendment No. 1, supra note 3.
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Proposed NYSE Rule 431, as amended, is attached as Exhibit A.
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 NYSE 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 V below. The NYSE 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
In December 1997, the FRB adopted amendments to Regulation T, which
governs initial extensions of credit to customers and broker-dealers.
One significant Regulation T change established a ``good faith''
account which can be used for transactions in non-equity securities.\6\
Unlike transactions in a cash or margin account, transactions in the
good faith account are not subject to the requirements of Regulation T
with respect to initial margin and payment and liquidation time frames.
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\6\ 12 CFR 220.6.
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The NYSE believes that transactions in a good faith account raise
the same safety and soundness concerns from a maintenance margin
perspective as cash and margin account transactions. Accordingly, the
NYSE proposes to amend NYSE Rule 431 so that transactions in all
accounts of customers (except for cash accounts, as discussed below),
including the new good faith account, will be subject to the current
applicable maintenance margin requirements of NYSE Rule 431(c).\7\ As
is currently the case, cash accounts subject to Regulation T will not
be subject to the overall NYSE Rule 431 requirements, but in certain
cases will be covered by specific rule provisions. In this regard, the
NYSE notes that NYSE Rule 431 requirements currently apply to cash
account transactions in exempted securities (NYSE Rule 341(e)(2)(F);
for certain options (NYSE Rule 431(f)(2)(M)); and for ``when issued''
and ``when distributed'' securities (NYSE rule 341(f)(3)(B)).
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\7\ NYSE Rule 431(c), as amended, will specify the margin that
must be maintained in all customer accounts, except for cash
accounts subject to Regulation T, unless a transaction in a cash
account is subject to other provisions of NYSE Rule 431.
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[[Page 16850]]
The FRB also established a classification of exempted borrowers
which are exempt from Regulation T. An ``exempted borrower,'' as
defined in Regulation T, is a broker-dealer ``a substantial portion of
whose business consists of transactions with persons other than brokers
or dealers.'' \8\ The NYSE currently does not apply the requirements of
NYSE Rule 431 to member organization accounts except for transactions
in the proprietary accounts of broker-dealers which are carried by a
member organization. Specifically, NYSE Rule 431(e)(6) states that a
member organization may carry the proprietary account of another
broker-dealer upon a margin basis which is satisfactory to both parties
provided the requirements of Regulation T are adhered to and the
account is not carried in a deficit equity condition.
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\8\ 12 CFR 220.2.
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The NYSE believes that exempted borrowers should remain exempt from
the requirements of NYSE Rule 431. However, under the new Regulation T
definition of exempted borrower, the proprietary transactions of an
introducing organization that qualifies as an exempted borrower (i.e.,
an organization that conducts a substantial public business) will not
be subject to Regulation T. The proposed amendments to NYSE Rule
431(a)(2) will exclude exempted borrowers from the definition of
customer. However, for safety and soundness purposes, proprietary
accounts that are carried or cleared by a member organization will
remain subject to the NYSE Rule 431 equity requirements. Accordingly,
NYSE Rule 431(a)(2), as amended, will state that the term ``customer''
will not include an ``exempted borrower'' as defined in Regulation T,
except for the proprietary account of a broker-dealer carried by a
member organization pursuant to NYSE Rule 431(e)(6).
2. Statutory Basis
The NYSE believes that the proposed rule change is consistent with
the requirements of Section 6(b)(5) of the Act in that it is designed
to promote just and equitable principles of trade and to protect the
investing public. The NYSE believes that the proposed rule change also
is consistent with the rules and regulations of the FRB in that it is
designed to prevent 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 on Burden on Competition
The NYSE 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
No written comments were solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing
for Commission Action
The NYSE has requested that the Commission find good cause pursuant
to Section 19(b)(2) of the Act for approving the proposed amendments to
NYSE Rule 431 for 120 days \9\ prior to the 30th day after publication
of the proposed rule change in the Federal Register. The NYSE states
that accelerated approval of the proposal will ensure that the
appropriate requirements under NYSE Rule 431 are in place when the
Regulation T amendments become effective on April 1, 1998. According to
the NYSE, approval of the proposed amendments to NYSE Rule 431 as of
April 1, 1998, is necessary so that transactions in the new good faith
account and in the proprietary accounts of non-carrying/clearing member
organizations will be subject to NYSE Rule 431 margin requirements.
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\9\ See Amendment No. 1, supra note 3.
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IV. Commission's Findings and Order Granting Accelerated Approval
of the Proposed Rule Change
After careful review of the NYSE's proposal and for the reasons
discussed below, 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, with the requirements of Section 6(b) of the
Act.\10\ Specifically, the Commission finds that the proposal is
consistent with the Section 6(b)(5) requirements that the rules of an
exchange be designed to remove impediments to and perfect the mechanism
of a free and open market and a national market system, and, in
general, to protect investors and the public interest.\11\
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\10\ 15 U.S.C. 78f(b).
\11\ In approving the rule, the Commission has considered the
proposed rule's impact on efficiency, competition, and capital
formation. 15 U.S.C. 78c(f).
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Specifically, the Commission finds that it is appropriate for the
NYSE to apply the existing maintenance margin requirements of NYSE Rule
431(c) to transactions in the new ``good faith'' account permitted
under Regulation T. The NYSE notes that the non-equity transactions
permitted in the good faith account will not be subject to the initial
margin requirements and payment and liquidation time frames of
Regulation T. However, as the NYSE notes, transactions in the good
faith account may raise the same safety and soundness concerns with
regard to maintenance margin as do transactions in cash and margin
accounts. Accordingly, the Commission believes that it is appropriate
for the NYSE to apply the existing maintenance margin requirements
specified in NYSE Rule 431(c) to transactions in the good faith
account. The Commission believes that applying the maintenance margin
requirements of NYSE Rule 431(c) to transactions in the good faith
account will protect investors and the public interest and help to
maintain fair and orderly markets by ensuring that good faith accounts
contain adequate margin reserves.
NYSE Rule 431(e)(6) states that a member may carry the proprietary
account of another registered broker-dealer upon a margin basis
satisfactory to both parties, provided the requirements of Regulation T
are adhered to and the account is not carried in a deficit equity
condition. The Commission believes that it is appropriate for the NYSE
to amend the definition of ``customer'' in NYSE Rule 431(a)(2) so that
NYSE Rule 431(e)(6) will continue to apply to the proprietary accounts
of introducing broker-dealers that qualify as `'exempted borrowers''
under Regulation T. By continuing to apply NYSE Rule 431(e)(6) to these
accounts, the Commission believes that the proposal will help to ensure
that these accounts contain adequate margin, thereby protecting
investors and the public interest.
The Commission finds good cause for approving the proposed rule
change prior to the thirtieth day after the date of publication of the
notice thereof in the Federal Register in order to ensure that the
proposed changes are effective by April 1, 1998, when the Regulation T
amendments concerning good faith accounts and exempted borrowers become
effective. The Commission believes that the proposed changes will help
to ensure adequate margin requirements for good faith accounts and for
introducing broker-dealers that qualify as exempted borrowers.
Accordingly, the Commission finds that
[[Page 16851]]
it is consistent with Sections 6(b) and 19(b)(2) of the Act to approve
the proposal on an accelerated basis.
The Commission also finds good cause for approving Amendment No. 1
to the proposal on an accelerated basis. In Amendment No. 1, the NYSE
modified its proposal to provide that the proposal will be effective
for 120 days. The Commission believes that it is appropriate to provide
for temporary approval of the proposal for 120 days in order to provide
for a full notice and comment period when the NYSE requests permanent
approval of the changes to NYSE Rule 431. Therefore, the Commission
believes that Amendments No. 1 is consistent with Sections 6(b) and
19(b)(2) of the Act and Amendment No. 1 is approved on an accelerated
basis.
V. 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. 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 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. Sec. 552, will be available for inspection and copying in
the Commission's Public Reference Room. Copies of such filing will also
be available for inspection and copying at the principal office of the
NYSE. All submissions should refer to File No. SR-HYSE-98-08 and should
be submitted by April 27, 1998.
VI. Conclusion
It Is Therefore Ordered, pursuant to Section 19(b)(2) of the
Act,\12\ that the proposed rule change (SR-NYSE-98-08) is approved for
120 days, until July 27, 1998.
\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.
Exhibit A
Additions are italicized; deletions are bracketed.
Proposed Amendments to NYSE Rule 431
Rule 431(a)(1) unchanged.
(a)(2) The term ``customer'' means any person for whom securities
are purchased or sold or to whom securities are purchased or sold
whether on a regular way, when issued, delayed or future delivery
basis. It will also include any person for whom securities are held or
carried and to or for whom a member organization extends, arranges or
maintains any credit. The term will not include the following: (a) a
broker or dealer from whom a security has been purchased or to whom a
security has been sold for the account of the member organization or
its customers[.], or (b) an ``exempted borrower'' as defined by
Regulation T of the Board of Governors of the Federal Reserve Board
(``Regulation T''), except for the proprietary account of a broker-
dealer carried by a member organization pursuant to Section (e)(6) of
this Rule.
(a)(3) through (b)(4) unchanged.
(c) Maintenance Margin.
The margin which must be maintained in [margin] all accounts of
customers, except for cash account subject to Regulation T unless a
transaction in a cash account is subject to other provisions of this
rule, shall be as follows:
(1) 25% of the current market value of all securities ``long'' in
the account; plus
(2) $2.50 per share or 100% of the current market value, whichever
among is greater, of each stock ``short'' in the account selling at
less than $5.00 per share; plus
(3) $5.00 per share or 30% of the current market value, whichever
amount is greater, or each stock ``short'' in the account selling at
$5.00 per share or above; plus
(4) 5% of the principal amount or 30% of the current market value,
whichever amount is greater, of each bond ``short'' in the account.
[FR Doc. 98-8924 Filed 4-3-98; 8:45 am]
BILLING CODE 8010-01-M
