[Federal Register Volume 62, Number 68 (Wednesday, April 9, 1997)]
[Notices]
[Pages 17260-17261]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-8998]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38463; File No. SR-NASD-97-14]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the National Association of Securities Dealers, Inc.,
Relating to the Amendment of its Margin Rules
April 1, 1997.
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 February 26, 1997, NASD Regulation, Inc. (``NASD Regulation'') 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 NASD Regulation. 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
NASD Regulation proposes to amend the margin rules, Rule 2520 of
the Conduct Rules, of the National Association of Securities Dealers,
Inc. (``NASD'' or ``Association''). Specifically, NASD Regulation is
proposing to amend Rule 2520 (``old Rule 2520'') to: (1) Renumber
paragraphs (a) and (b) as Rules 2521 and 2522, respectively; and
renumber paragraph (c) as Rule 2520 (referred to herein as ``Rule
2520'') to facilitate the use and comparison of the Rule in relation to
the New York Stock Exchange's (``NYSE'') margin rule; (2) conform Rule
2520 to recent amendments to Federal Reserve Board Regulation T; and
(3) add margin requirements for various over-the-counter (``OTC'')
options and interest rate composite securities. The text of the
proposed rule change is attached to NASD Regulation's rule filing as
Exhibit 2.
II. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
In its filing with the Commission, NASD Regulation 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. NASD Regulation 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
As a result of the Federal Reserve Board of Governor's recent
amendments to Regulation T, which governs the extension of credit by
broker/dealers, and the NYSE's recent proposed amendments to its margin
rule, NYSE Rule 431,\3\ NASD Regulation is proposing to renumber old
Rule 2520 to permit its members and others to more easily use and
compare the provisions of the rule to NYSE Rule 431. In addition, NASD
Regulation is proposing amendments to Rule 2520, the NASD's margin
rule, to conform the NASD's margin requirements to Regulation T and
NYSE Rule 431.
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\3\ See Securities Exchange Act Release No. 38411 (March 17,
1997) 62 FR 14174.
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Numbering. At one time, former Article III, Section 30 of the NASD
Rules of Fair Practice had substantially the same margin requirements
as NYSE Rule 431.\4\ Several years ago Section 30 was amended to adopt
the same numbering scheme as NYSE Rule 431 in order to facilitate the
use and comparison of the two rules. For example, old Section
30.3(f)(2) relates to margin requirements for puts, calls and other
options. The same provisions appear in NYSE Rule 431(f)(2). Thus, any
member could find the provisions in both the NASD and NYSE's rules
under the same subsection number ``(f)(2).'' When the NASD Manual was
reorganized in 1996, new rule numbering conventions were adopted that
resulted in the renumbering of Article III, Section 30 as old Rule
2520. Under the 1996 numbering scheme, old Section 303.(f)(2), for
example, became old Rule 2520(c)(6)(B). As a result of these numbering
changes, comparison between old Rule 2520 and NYSE Rule 431 became much
more problematic.
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\4\ There were a few minor differences in the two Rules related
to the fact that the NASD regulates the over-the-counter market and
that certain requirements in the respective rules relate only to
exchange specialists or dealers.
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NASD Regulation is proposing to renumber old Rule 2520 by: (1)
Renumbering paragraphs (a) and (b) as Rules 2521 and 2522,
respectively; and (2) renumbering paragraph (c) as Rule 2520. This
renumbering will cause most of the paragraphs and subparagraphs of Rule
2520 to have the same numbering as those of NYSE Rule 431, thereby
facilitating comparison and use of the two rules. The renumbered Rule
2520 is set forth in Exhibit 2 to the rule filing; however, the former
numbering of each subsection is not shown.
Amendments to Conform Rule 2520 to Regulation T. NASD Regulation is
proposing two technical changes to Rule 2520 (as renumbered) to correct
references to recently-repealed or renumbered provisions of Regulation
T:
1. Definition of OTC margin bond. Rule 2520 (e)(2)(C), referring to
the definition of OTC margin bond as stated in Regulation T, Section
220.2(t),\5\ is proposed to be amended to eliminate the ``(t).''
Section 220.2 has been amended to eliminate subsection numbering.
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\5\ The definition of OTC margin bond in Regulation T, Section
220.2 refers to several types of debt securities with specifically
defined characteristics, all of which are sold or traded over-the-
counter, not on an exchange.
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2. Cash equivalent. Rule 2520(f)(2)(H)(iv), referring to cash
equivalents as ``those instruments referred to in Section
220.8(a)(3)(ii) of Regulation T,'' is proposed to be amended to change
the reference to Section 220.2 of Regulation T. When Regulation T was
amended, Section
[[Page 17261]]
220.8(a)(3)(ii) was amended to eliminate conditions relating to cash
equivalents and Section 220.2 was amended by adding a definition of
cash equivalents.
Amendments to Conform Rule 2520 to Recent Amendments to NYSE Rule
431. Option Products and Interest Rate Composites. The NYSE recently
proposed amending its Rule 431 to establish new margin requirements for
various OTC option products and interest rate campsite securities.\6\
Rule 2520, paragraphs (f)(2)(D) and (F), which currently requires
customer margin for short OTC stock and index options of 100% of the
option premium plus 45% of the current market value of the underlying
security, are proposed to be amended by adding specific margin
requirements for OTC options equal to a specific percentage of the
current value of the underlying component to conform these paragraphs
with the corresponding paragraphs of NYSE Rule 431. In addition, a new
definition of the term ``underlying component'' is being added as
paragraph 2522(a)(66) to replace more complex references to
``underlying security or the product of the current index group value
of the underlying index stock group.''
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\6\ See supra note 3.
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The principal amendments to Rule 2520, paragraphs (f)(2)(D) and (F)
include new initial and maintenance margin requirements (including
provisions for reduced margin requirements under certain circumstances)
for:
--OTC options on stock and convertible corporate debt (30%), industry
index stock groups (30%) and broad index stock groups (20%).
--OTC options on 30-year U.S. Treasury bonds and non-mortgage backed
U.S. Government agency debt securities that qualify for exemption
pursuant to SEC Rule 3a12-7 (3%).\7\
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\7\ The text of the rule filing indicates that the initial and/
or maintenance margin for U.S. Government or U.S. Government Agency
debt securities other than those exempted by Rule 3a12-7 under the
Act is 5%.
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--OTC options on all other U.S. Government securities including agency
debt (5%),\8\ and marginable corporate debt securities (15%). OTC
options on all other securities including CMO's remain subject to the
current 45% general OTC option margin requirement.
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\8\ Id.
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--Interest rate contracts (10%) to be consistent with other
exchanges.\9\
\9\ There is currently no margin requirement for interest rate
contracts in the Rule. The NYSE added the requirement to Rule 431 in
order to be consistent with other exchanges.
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In addition, the proposed amendments recognize certain spread and
straddle positions for margin purposes between listed and OTC options
when a customer's long and short positions are controlled by the same
broker-dealer.
Specialist and Market Maker Options Margin. The amendments to
Regulation T that are scheduled to take effect on July 1, 1997,
eliminate margin requirements for options transactions for customers
and market markers/specialists and shift responsibility for setting
such margin requirements to the self-regulatory organizations. The NYSE
has proposed adding new provisions establishing such margin
requirements to Rule 431,\10\ and NASD Regulation is proposing to make
substantially identical changes to subparagraph (f)(2)(J) of Rule 2520.
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\10\ See supra note 3.
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2. Statutory Basis
The basis under the Act for this proposed rule change is the
requirement under Section 15A(b)(6) \11\ that an association have rules
that are designed to prevent fraudulent and manipulative acts and
practices, to promote just and equitable principles of trade, to foster
cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities, to remove impediments to
protect and perfect the mechanism of free and open market and a
national market system, and in general, to protect investors and the
public interest.
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\11\ 15 U.S.C. 78o-3.
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NASD Regulation believes that the proposed rule change is
consistent with the provisions of Section 15A(b)(6) of the Act in that
conforming the margin rules of the self-regulatory organizations will
prevent inconsistent requirements from being imposed upon broker/
dealers who are members of more than one self-regulatory organization.
B. Self-Regulatory Organization's Statement on Burden on Competition
NASD Regulation does not believe that the proposed rule change will
result in any burden on competition that is not necessary or
appropriate in furtherance of the purposes of the Act, as amended.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants, or Others
Written 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 reasons 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 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 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 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
NASD Regulation. All submissions should refer to the file number SR-
NASD-97-14 and should be submitted by April 30, 1997.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\12\
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\12\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-8998 Filed 4-8-97; 8:45 am]
BILLING CODE 8010-01-M
