[Federal Register Volume 60, Number 67 (Friday, April 7, 1995)]
[Notices]
[Pages 17831-17833]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-8546]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-35555; File No. SR-NYSE-95-10]
Self-Regulatory Organizations, Notice of Filing of Proposed Rule
Change by the New York Stock Exchange, Inc., Relating to Margin
Requirements for Over-the-Counter Options and Interest Rate Composites
March 31, 1995.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''), 15 U.S.C. 78s(b)(1), notice is hereby given that on March 9,
1995, 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 the self-regulatory
organization. The Commission is publishing this notice to solicit
comments on the proposed rule change from interested persons.
I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The NYSE proposes to amend Exchange Rule 431, ``Margins'' to
establish margin requirements for over-the-counter (``OTC'') options
and interest rate composites. Specifically, the NYSE proposes to
establish initial and/or maintenance margin requirements for short
positions in OTC options overlying certain instruments which are equal
to a specified percentage of the current value of the underlying
component and the applicable multiplier, if any, plus any in-the-money
amount. The required OTC option margin may be reduced by any out-of-
the-money amount, but may not be less than the minimum amount specified
for each option category. The percentages of the current value of the
underlying components are as follows: (1) For stock and convertible
corporate debt securities, 30%, with minimum margin of 10%; (2) for
industry index stock groups, 30%, with minimum margin of 10%; (3) for
broad index stock groups, 20%, with minimum margin of 10%; (4) for U.S.
Government or U.S. government agency debt securities other than those
exempted by Rule 3a12-7 under the Act,\1\ 5%, with minimum margin of
3%; (5) for corporate debt securities registered on a national
securities exchange and OTC margin bonds as defined in Section 220.2(t)
(1), (4), and (5)\2\ of Regulation T under the Act, 15% with minimum
margin of 5%; and (6) for all other OTC options, 45%, with minimum
margin of 20%.
\1\Rule 3a12-7 under the Act provides that options that are not
traded on a national securities exchange and which relate to
securities that are direct obligations of the U.S. or are issued or
guaranteed by a corporation in which the U.S. has a direct or
indirect interest as shall be designated for exemption pursuant to
Section 3(a)(12) of the Act are exempt from all provisions of the
Act which by their terms do not apply to ``exempted security'' or
``exempted securities,'' provided that the securities underlying the
option represent an obligation equal to or exceeding $250,000 in
principal amount.
\2\The NYSE clarified that category five of the proposal applies
to OTC margin bonds as defined in Section 220.2(t) (1), (4), and (5)
of Regulation T under the Act. Telephone conversation between
Richard Nowicki, NYSE, and Yvonne Fraticelli, Attorney, Options
Branch, Division of Market Regulation, on March 22, 1995 (``March 22
Conversation''). Section 220.2(t)(1) defines an OTC margin bond as
certain debt securities not traded on a national securities
exchange; Section 220.2(t)(4) defines an OTC margin bond as a debt
security issued or guaranteed as a general obligation by the
government of a foreign country, its provinces, states or cities, or
a supranational entity, provided that certain credit rating
requirements are satisfied; and Section 220.2(t)(5) defines an OTC
margin bond as a foreign security that is a nonconvertible debt
security that meets the requirements specified in Section
220.2(t)(5).
The text of the proposed rule change is available at the office of
the Secretary, NYSE, 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 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 self-regulatory organization
has prepared summaries, set forth in sections (A), (B), and (C) below,
of the most significant aspects of such statements. [[Page 17832]]
(A) Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
(a) Purpose
The NYSE proposes to amend Exchange Rule 431 to establish margin
requirements for OTC options and interest rate composites.
OTC options are not issued by the Options Clearing Corporation
(``OCC'') or listed on any national securities exchange. They are
individually tailored agreements between a customer and a broker-dealer
designed to reflect the customer's individual needs as to strike price
and expiration date. According to the Exchange, these contracts are
generally entered into by credit worthy domestic and foreign
institutions, mutual funds and insurance companies. The options are
usually written for periods of less than one year.
In File No. SR-NYSE-90-25, the NYSE proposed to amend Exchange Rule
431 to establish margin requirements for OTC options developed in
conjunction with industry representatives and the Securities Industry
Associations's Credit Division on (1) U.S. government securities, and
(2) convertible and non-convertible corporate debt securities,
including mortgage related securities, and to reduce the existing
margin requirements for stocks and for narrow- and broad-based index
groups.\3\ Since filing the proposal in 1990, the Exchange staff has
permitted member organizations to enter into option agreements on a
pilot basis utilizing the proposed margin requirements. According to
the NYSE, 31 member organizations have been granted Exchange approval
to participate in the pilot program.
\3\See Securities Exchange Act Release No. 28219 (July 18,
1990), 55 FR 30348 (July 25, 1990).
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On October 7, 1994, the Exchange withdrew File No. SR-NYSE-90-25
because pilot participants had not provided volatility data sufficient
for Commission staff to consider the appropriateness of the proposed
margin levels. The Commission indicated that the Exchange should refile
its proposal when the NYSE obtained supporting documentation. The price
volatility data has now been provided to the NYSE and is being provided
to the Commission for review.
The proposed amendments to NYSE Rule 431 are the same as those
filed previously with the Commission in File No. SR-NYSE-90-25, except
with respect to the requirements for Treasury bonds, when margin levels
were increased as a result of the Commission's review of volatility
data. In addition, the Exchange is not proposing to establish margin
requirements for mortgage related debt securities (qualified under
Section 3(a)(41) under the Act) because volatility data sufficient to
assess the adequacy of the requirements on an ongoing basis is not
available.
Under the proposal, the NYSE proposes to establish initial and/or
maintenance margin requirements for short positions in OTC options
overlying certain instruments which are equal to a specified percentage
of the current value of the underlying component and the applicable
multiplier, if any, plus any in-the-money amount. The required margin
may be reduced by any out-of-the-money amount, but may not be less than
the minimum amounts specified for each option category. The percentages
of the current value of the underlying components\4\ are as follows:
(1) For stock and convertible corporate debt securities, 30%, with
minimum margin of 10%; (2) for industry index stock groups, 30%, with
minimum margin of 10%; (3) for broad index stock groups, 20%, with
minimum margin of 10% (4) for U.S. government or U.S. government agency
debt securities other than those exempted by Rule 3a12-7 under the Act,
5%, with minimum margin of 3%;\5\ (5) for corporate debt securities
registered on a national securities exchange and OTC margin bonds as
defined in Section 220.2(r) of Regulation T under the Act, 15%, with
minimum margin of 5%;\6\ and (6) for all other OTC options, 45%, with
minimum margin of 20%.
\4\The proposal defines the ``underlying component'' as follows:
for stocks, the equivalent number for shares; for industry and broad
index stock groups, the current index group value and the applicable
index multiplier; for U.S. Treasury bills, notes and bonds, the
underlying principal amount; for foreign currencies, the units per
foreign currency contract; and for interest rate contracts, the
interest rate measure based on the yield of U.S. Treasury bills,
notes, or bonds and the applicable multiplier. The ``interest rate
measure'' for short-term U.S. Treasury bills represents the
annualized discount yield of a specific issue multiplied by 10 or,
for long-term U.S. Treasury notes and bonds, the average of the
yield to maturity of the specific issues multiplied by 10.
\5\Option contracts in this category must be for a principal
amount of not less than $500,000.
\6\Options transactions on private mortgage pass-through
securities and mortgage-related debt securities qualified under
Section 3(a)(41) under the Act are not eligible for the margin
requirements contained in this provision. Margin requirements for
such securities must be computed pursuant to the requirements in
category six for all other OTC options.
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OTC options on U.S. government and U.S. government agency debt
securities that qualify for exemption pursuant to Rule 3a12-7 under the
Act must be for a principal amount of not less than $500,000 and the
margin for such securities for exempt accounts\7\ will be 3% of the
current value of the underlying principal amount on 30-year U.S.
Treasury bonds and 2% of the current value of the underlying principal
amount on all other U.S. government and U.S. government agency debt
securities, plus any in-the-money amount or minus any out-of-the-money
amount. The amount of any deficiency between the equity in the account
and the margin required shall be deducted in computing the net capital
of the member organization under the NYSE's capital requirements on the
following basis: (a) On any account or group of commonly controlled
accounts to the extent the deficiency exceeds 5% of the member
organization's tentative net capital (net capital before deductions on
securities), 100% of such excess amount; and (b) on all accounts
combined to the extent such deficiency exceeds 25% of a member
organization's tentative net capital, 100% of such excess amount,
reduced by any amount already deducted pursuant to paragraph (a).
\7\Under the proposal, an ``exempt account'' is a member
organization, non-member broker/dealer, ``designated account,'' as
defined in NYSE Rule 431(a)(3), any person having net tangible
assets of at least $16 million, or in the case of mortgage-related
debt securities transactions, an independently audited mortgage
banker with both more than $1.5 million of net current assets (which
may include \3/4\ of 1% maximum allowance on loan servicing
portfolios) and with more than $1.5 million of net worth.
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For non-exempt accounts, the required margin will be 5% of the
current value of the underlying principal amount on 30-year U.S.
Treasury bonds and 3% of the current value of the underlying principal
amount on all other U.S. government and U.S. government agency debt
securities, plus any in-the-money amount or minus any out-of-the-money
amount, provided the minimum margin shall not be less than 1% of the
current value of the underlying principal amount.
In addition, the NYSE proposes to incorporate into NYSE Rule 431
the margin requirements for interest rate composites which were
proposed by the Chicago Board Options Exchange, Inc. (``CBOE'') and
approved by the Commission.\8\ Specifically, for interest rate
contracts, the initial and/or maintenance margin will be 10% of the
underlying component value (i.e., the product of the current interest
rate measure and the applicable multiplier), [[Page 17833]] and the
minimum required margin will be 5% of the underlying component value.
\8\See Securities Exchange Act Release No. 26938 (June 15,
1989), 54 FR 26285 (June 22, 1989) (ordering approving File No. SR-
CBOE-87-30).
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The Exchange has agreed to a system for periodic review to ensure
the adequacy of the proposed margin requirements and for increasing the
requirements on an expedited basis if necessary. The NYSE's monitoring
plan will consist of the following:
Semi-annual reviews of the seven-day price\9\ movements
will be done. These volatility reviews will cover both the last six
months and the last three years.
\9\Because the Exchange will submit data covering seven-day
price movements, the Exchange agreed to delete references to seven-
day price/yield movements in order to clarify the proposal. March 22
conversation, supra note 2.
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The semi-annual review must indicate a 97.5% confidence
level (i.e., the required margin level is adequate for seven-day price
movements 97.5% of the time).
For each option category, reports must be done by two
member organizations using their own pricing data or by one member
organization using an independent pricing source acceptable to the
Exchange. These reports must be submitted to the Exchange.
If one semi-annual review indicates the margin level is
inadequate for an option category, the Exchange will increase the
margin requirements by filing a proposal pursuant to Section
19(b)(3)(A) under the Act for immediate effectiveness.
In order to lower the margin requirements, two consecutive
six-month reviews must demonstrate that the lower requirement meets the
97.5% confidence level. Amendments to lower the requirement will be
made by filing a proposed rule change pursuant to Section 19(b)(2)
under the Act.
In addition, before lowering the margin requirements, the
Exchange will take into consideration other relevant factors, such as
current market conditions, member organization views, and margin levels
implied from other options products (where similar OCC-issued options
exist).
(b) Basis
The NYSE believes that the proposed rule change is consistent with
the requirements of the Act and, in particular, furthers the objectives
of Section 6(b)(5), 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 NYSE believes that 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) under the Act.
(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
No written comments were either solicited or 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 should be disapproved.
IV. Solicitation of Comments
Interested persons are invited to submit written date, 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 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. 552, will be available for inspection and copying at the
Commission's Public Reference Section, 450 Fifth Street, N.W.,
Washington, D.C. 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
number in the caption above and should be submitted by April 28, 1995.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\10\
\10\17 CFR 200.30-3(a)(12) (1994).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-8546 Filed 4-6-95; 8:45 am]
BILLING CODE 8010-01-M
