[Federal Register Volume 62, Number 111 (Tuesday, June 10, 1997)]
[Notices]
[Pages 31650-31652]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-15156]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38708; File No. SR-NYSE-97-01]
Self-Regulatory Organizations; Order Granting Approval to
Proposed Rule Change by the New York Stock Exchange, Incorporated
Regarding Changes in its Margin Rules
June 2, 1997.
I. Introduction
On January 9, 1997, the New York Stock Exchange, Incorporated
(``NYSE'' or the ``Exchange'') submitted to the Securities and Exchange
Commission (``SEC'' or ``Commission''), pursuant to Section 19(b)(1) of
the Securities Exchange Act of 1934 (``Act'') \1\ and Rule 19b-4
thereunder,\2\ a proposed rule change to amend certain sections of the
Exchange's rules to comply with changes to Regulation T which became
effective June 1, 1997.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
The proposed rule change was published for comment in Securities
Exchange Act Release No. 38411 (March 17, 1997), 62 FR 14174 (March 25,
1997). The NYSE submitted a written clarification regarding its filing
to the Commission on May 29, 1997.\3\ No comments were received on the
proposal.
---------------------------------------------------------------------------
\3\ See Letter from Donald van Weezel, Managing Director,
Regulatory Affairs, NYSE, to Michael Walinskas, Senior Special
Counsel, Division of Market Regulation (``Market Regulation''),
Commission, dated May 29, 1997, clarifying requirement relating to
the proposed permitted market-maker offset provisions.
---------------------------------------------------------------------------
This order approves the proposed rule change.
II. Description of the Proposal
The NYSE proposes to make revisions to its rules governing margin
that will establish NYSE rules to govern areas of margin regulation
that will no longer be addressed by Regulation T (``Regulation T'') \4\
of the Board of Governors of the Federal Reserve System (``Federal
Reserve Board,'' ``FRB'' or ``Board''). The Federal Reserve System's
Regulation T, which covers the extensions of credit by and to brokers
and dealers, currently prescribes margin requirements for options
transactions. In April 1996, the Federal Reserve Board amended
Regulation T to delete certain rules regarding options transactions in
favor of rules to be adopted by the options exchanges and approved by
the
[[Page 31651]]
Commission.\5\ This amendment to Regulation T became effective June 1,
1997.
---------------------------------------------------------------------------
\4\ 12 CFR 220.1 through 19 (1996).
\5\ See 61 FR 20386 (May 6, 1996) (Federal Reserve Board's
release adopting certain changes to Regulation T).
---------------------------------------------------------------------------
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
offset positions as recognized under Exchange Act Rule 15c3-1, the
``Net Capital Rule.''
Specifically, a permitted offset position will be defined to mean,
in the case of an option in which a specialist or market-maker makes a
market, a position in the underlying instrument or other related
instrument, and in the case of other securities in which a specialist
or market-maker makes a market, a position in options overlying the
securities in which a market-maker makes a market, if the account holds
the following 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 Exchange Act Rule 15c3-1--Appendix A.\6\
---------------------------------------------------------------------------
\6\ See Securities Exchange Act Release No. 38248 (February 6,
1997) 62 FR 6474 (February 12, 1997) (Final rule adopting changes to
Exchange Act Rule 15c3-1) (the ``Net Capital Rule'').
---------------------------------------------------------------------------
These 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 has been 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- and at-the-money'' definition have been expanded from one to two
``standard exercise intervals.''
The ``Good Faith'' margin requirements in Section (f)(2)(J) of Rule
431 as proposed to be amended shall be applicable for registered
options specialists' and market-makers' transactions in listed options
in which the specialist or market-maker makes a market, and registered
options specialists' or options market-makers' permitted offset
transactions as defined in Section (f)(2)(J) (i)-(vii) of Rule 431,
when such transactions are effected for market-making purposes. This
requirement will ensure that permitted offset transactions are in fact
reasonably related to the specialist's market-making function and are
not effected for the purpose of speculation on a margin basis which is
applicable only to market-makers and specialists.
Section (f)(2)(J) of Rule 431 has been revised in order to clarify
the existing definition of ``good faith'' margin requirements.
A new provision has been added (Section (f)(2)(L) of Rule 431) 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) of Rule 431 has been added to
incorporate the current provisions of Regulation T that allow certain
defined options-related transactions to be maintained in a cash account
and incorporate a debit put spread provision involving European-style
broad-based index options that is consistent with a similar Chicago
Board Options Exchange provision.
III. Discussion
After careful review of the Exchange's proposed amendment to its
margin rules, and for the reasons discussed below, the Commission
believes that the proposed rule change is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to national securities exchanges, and, in particular, with
the requirements of Section 6(b) of the Act.\7\ Specifically, the
Commission believes the proposal is consistent with the Section 6(b)(5)
requirements that the rules of an exchange be designed to promote just
and equitable principles of trade, to remove impediments to and perfect
the mechanism of a free and open market and a national market system,
to prevent fraudulent and manipulative acts, and, in general, to
protect investors and the public interest.\8\
---------------------------------------------------------------------------
\7\ 15 U.S.C. 78f(b).
\8\ In approving these rules, the Commission has considered the
proposed rules' impact on efficiency, competition, and capital
formation. 15 U.S.C. 78c(f).
---------------------------------------------------------------------------
The Commission believes that the portions of the proposal that
revise the applicable standard governing option market-maker and option
specialist permitted offsets are reasonable. The revised standards
serve to maintain the requirement that good faith margin may only be
extended for bona fide market making related transactions, including
hedging transactions that are reasonably related to a market-maker's
assigned responsibility. The permitted offsets listed in proposed
Section (f)(2)(J) (i)-(vi) of Rule 431 simply incorporate the formerly
``permitted'' Regulation T offsets which have been deleted in favor of
exchange rules. The incorporation of these offsets does not raise any
new regulatory issues and, accordingly, is reasonable. The permitted
offsets listed in proposed Section (f)(2)(J)(vii) of Rule 431
incorporate those permitted offsets allowed under Exchange Act Rule
15c3-1 for purposes of determining broker-dealer net capital
requirements. Incorporating these same offsets for the related purpose
of determining applicable options market-maker and specialist offsets
constitutes a reasonable effort to coordinate risk management
requirements that serve similar purposes.
The Commission believes that the proposal is a reasonable effort by
the NYSE to accommodate the needs of options market-makers and
specialists in undertaking their market-making responsibilities as it
recognizes the occasional need for these entities to effect
transactions in their course of dealing in options classes for which
the options market-maker or specialist is not registered. The
Commission believes that this approach will not adversely affect the
depth and liquidity necessary to maintain fair and orderly markets. The
Commission expects that those clearing firms and other broker-dealers
that are bound to comply with the NYSE's margin rules, in extending
margin to options market-makers and specialists, will implement
adequate procedures to ensure that offsets elected by options market-
makers and specialists are recorded accurately and
[[Page 31652]]
cleared into appropriate accounts. The Commission believes that these
requirements will ensure that transactions effected by options market-
makers and specialists are in fact reasonably related to their market-
making function and are not effected for speculative purposes on a
margin basis which should be available only for bona fide market-making
activity.
The Exchange's proposed definition of ``in- or at-the-money,'' for
purposes of permitted offset transactions, represents a codification of
a long standing practice among the options markets, of permitting the
financing of options specialists and market-makers underlying stock
positions on a good faith basis when offset on a share-for-share basis
by options which are ``in-or at-the-money,'' i.e., where the current
market price of the underlying security is not more than two standard
exercise price intervals below (with respect to a call option) or above
(with respect to a put option) the exercise price of the option. The
Commission believes it is appropriate for the NYSE to codify this
longstanding practice. This practice is also being codified today by
the Chicago Board Options Exchange.\9\
---------------------------------------------------------------------------
\9\ The Commission notes that the Chicago Board Options Exchange
asserts that it has received oral no-action relief from the Federal
Reserve Board permitting the two standard exercise price interval
interpretation. See Securities Exchange Act Release No. 38709 (June
2, 1997).
---------------------------------------------------------------------------
The Exchange has also revised existing Section (f)(2)(J) of Rule
431 to clarify the existing definition of ``good faith'' margin
requirements. The change in the definition of ``good faith'' margin
requirements effectively creates a minimum good faith margin
requirement, and, accordingly, is reasonable.
The Exchange has also added a new Section (f)(2)(L) of Rule 431
which incorporates 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. This section merely
incorporates existing provisions of Regulation T into the Exchange's
rules, and, accordingly, is reasonable.
The Exchange's proposed new Section (f)(2)(M)(i) of Rule 431 merely
incorporates those provisions of Regulation T that allow certain
defined options-related transactions to be maintained in a cash account
and, accordingly, does not raise new regulatory issues. The other part
of this proposed section incorporates a debit put spread provision
involving European-style broad-based index options that is consistent
with a similar Chicago Board Options Exchange provision. Accordingly,
the Commission finds it reasonable for the NYSE to adopt this similar
provision.
It is therefore ordered, pursuant to section 19(b)(2) of the
Act,\10\ that the proposed rule change (NYSE 97-01) is approved.
\10\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\11\
---------------------------------------------------------------------------
\11\ 17 CFR 200.30-3(a)(12).
---------------------------------------------------------------------------
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-15156 Filed 6-9-97; 8:45 am]
BILLING CODE 8010-01-M
