[Federal Register Volume 64, Number 154 (Wednesday, August 11, 1999)]
[Notices]
[Pages 43797-43802]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-20636]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-41704; File No. SR-NASD-99-05]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change and Amendment Nos. 1, 2 and 3 to the Proposed Rule Change by the
National Association of Securities Dealers, Inc. Relating to Margin for
Exempted Borrowers, Good Faith Accounts, Joint Back Office Arrangements
and Options Transactions
August 4, 1999.
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 January 19, 1999, the National Association of Securities Dealers,
Inc. (``NASD'' or ``Association''), through its wholly-owned
subsidiary, 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. NASD Regulation amended
its proposal on June 1, 1999, July 7, 1999, and July 15, 1999.\3\ The
Commission is publishing this notice to solicit comments on the
proposed rule change, as amended, from interested persons.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Letter from Alden S. Adkins, Senior Vice President and
General Counsel, NASD Regulation, to Katherine A. England, Assistant
Director, Division of Market Regulation (``Division''), Commission,
dated June 1, 1999 (``Amendment No. 1''); Letter from Alden S.
Adkins, Senior Vice President and General Counsel, NASD Regulation,
to Katherine A. England, Assistant Director, Division, Commission,
dated July 7, 1999 (``Amendment No. 2''); and Letter from Alden S.
Adkins, Senior Vice President and General Counsel, NASD Regulation,
to Richard C. Strasser, Assistant Director, Division, Commission,
dated July 15, 1999 (``Amendment No. 3''). Amendment No. 1 conforms
several provisions of NASD Rule 2520 to New York Stock Exchange
(``NYSE'') Rule 431. Among other things, Amendment No. 1 indicates
that, for purposes of the joint back office provisions of NASD Rule
2520, the NASD will interpret the terms ``carrying and clearing
member'' and ``carrying member'' in the same manner as NYSE.
Amendment No. 1 also provides additional information regarding the
proposed changes to the provisions of NASD Rule 2520 governing
control and restricted securities. Amendment Nos. 2 and 3 make
technical changes to the text of NASD Rule 2520.
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
NASD Regulation is proposing to amend NASD Rule 2520, ``Margin
Requirements,'' to revise the margin requirements for exempted
borrowers, good faith accounts, joint back office arrangements and
options transactions. The text of the proposed rule change is as
follows (additions are italicized; deletions are bracketed):
2520. Margin Requirements
(a) Definitions
For purposes of this paragraph, the following terms shall have the
meanings specified below:
* * * * *
(3) 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 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 or its customers [.], or (B) and
``exempted borrower'' as defined by Regulation T of the Board of
Governors of the Federal Reserve System (``Regulation T''), except for
the proprietary account of a broker-dealer carried by a member pursuant
to paragraph (e)(6) of this Rule.
(b) Initial Margin
For the purpose of effecting new securities transactions and
commitments, the customer shall be required to deposit margin in cash
and/or securities in the account which shall be at least the greater
of:
(1) the amount specified in Regulation T[of the Boad of Governors
of the Federal Reserve System]; or
* * * * *
Withdrawals of cash or securities may be made from any account
which has as debit balance, ``short'' position or commitments, provided
it is in compliance with Regulation T [of the Board of Governors of the
Federal Reserve System] and after such withdrawal the equity in the
account is at least the greater of $2,000 or an amount sufficient to
meet the maintenance margin requirements of this paragraph.
(c) Maintenance Margin
The margin which must be maintained in [margin] all \4\ accounts of
customers, except for cash accounts subject to other provisions of this
rule, shall be as follows:
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\4\ See Amendment No. 1, supra note 3.
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* * * * *
[(5) In the case of securities listed on the Emerging Company
Marketplace of the America Stock Exchange (AMEX), 100 percent of the
market value in cash, of each security held ``long'' in the account,
unless the AMEX determines that the security satisfies the criteria
enumerated in Sections 220.17(a) and (b) of Regulation T of the Board
of Governors of the Federal Reserve System for inclusion and continued
inclusion on the List of OTC Margin Stocks, except for the requirement
relating to the number of dealers in Sections 220.17(a)(1) and (b)(1)].
* * * * *
(e) Exceptions to Rule
The foregoing requirements of this [paragraph] Rule \5\ are subject
to the following exceptions:
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\5\ See Amendment No. 2, supra note 3.
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* * * * *
(2) Exempted Securities, Marginable Corporate Debt Securities and
Baskets
* * * * *
(C) Non-Convertible Corporate Debt Securities
On any positions in non-convertible corporate debt securities,
which are listed or traded on a registered national securities exchange
or quality as an ``OTC margin bond,'' as defined in Section 220.2(t) of
Regulation T [of the Board of Governors of the Federal Reserve System],
the margin to be maintained shall be 20 percent of the current market
value or 7 percent of the principal amount, whichever amount is
greater, except on mortgage related securities as defined in Section
3(a)(41) of the Act the margin to be maintained for an exempt account
shall be 5 percent of the current market value. For purposes of this
subparagraph, and exempt account shall be defined as a member, non-
member broker/dealer, ``designated account'' or any person having net
tangible assets of at least sixteen million dollars.
* * * * *
(3) Joint Accounts in Which the Carrying Member or a Partner or
Stockholder Therein Has an Interest
In the case of a joint account carried by a member in which such
member, or
[[Page 43798]]
any partner, or stockholder (other than a holder of freely transferable
stock) of such member participates with others, each participant other
than the carrying members shall maintain an equity with respect to such
interest pursuant to the margin provisions of this paragraph as if such
interest were in a separate account.
Pursuant to the Rule 9600 Series, the Association may grant an
exemption from the provisions of paragraph (e)(3), if the account is[:]
[(A)] confined exclusively to transactions and positions in
exempted securities[;].
[(B) maintained as a Market Functions Account conforming to the
conditions of Section 220.12(e) (Odd-lot dealers) of Regulation T of
the Board of Governors of the Federal Reserve System; or]
[C) maintained as a Market Functions Account conforming to the
conditions of Section 220.12(c) (Underwritings and Distributions) of
Regulation T of the Board of Governors of the Federal Reserve System
and each other participant margins his share of such account on such
basis as the Association may prescribe.] \6\
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\6\ See Amendment No. 1, supra note 3.
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* * * * *
(5) Specialists' and Market Makers' Accounts
(A) A member many carry the account of an ``approved specialist or
market maker,'' which account is limited to specialist or market making
transactions, upon a margin basis which is satisfactory to both
parties. The amount of any deficiency between the equity in the account
and the [margin required by the other provisions of this paragraph and
the] haircut requirements pursuant to SEC Rule 15c3-1 shall be charged
against the member's net capital when computing net capital under SEC
Rule 15c3-1.
For the purpose of this subparagraph, the term ``approved
specialist or market maker'' means either:
(i) a specialist or market maker, who is deemed a specialist for
all purposes under the Act and who is registered pursuant to the rules
of a national securities exchange; or
(ii) an OTC market maker or third market maker, who meets the
requirements of Section 220.7.(g)(5)[12(d) of Regulation T [of the
Board of Governors of the Federal Reserve System].
(B) In the case of joint account carried by a member in accordance
with subparagraph (i) above in which the member participates, the
equity maintained in the account by the other participants may be in
any amount which is mutually satisfactory. The amount of any deficiency
between the equity maintained in the account by the other participants
and their proportionate share of the [margin required by the other
provisions of this paragraph] the haircut requirements pursuant to SEC
Rule 15c3-1 shall be charged against the member's net capital when
computing net capital under SEC Rule 15c3-1.
(6) Broker/Dealer Accounts
(A) A member may carry the proprietary account to another broker/
dealer, which is registered with the Commission, upon a margin basis
which is satisfactory to both parties, provided the requirements of
Regulation T [of the Board Governors of the Federal Reserve System] are
adhered to and the account is not carried in a deficit equity
condition. The amount of any deficiency between the equity maintained
in the account and the [margin required by the other provisions of this
paragraph] haircut requirements pursuant to SEC Rule 15c3-1 shall be
charged against the member's net capital when computing net capital
under SEC Rule 15c3-1.
(B) Joint Back Office Arrangements
An arrangement may be established between two or more registered
broker-dealers pursuant to Regulation T Section 220.7, to form a joint
back office (``JBO'') arrangement for carrying and clearing or carrying
accounts or participating broker-dealers. Members must provide written
notification to the Association prior to establishing a JBO
arrangement.
(i) A carrying and clearing, or carrying member must:
a. maintain a minimum tentative net capital of $25 million as
computed pursuant to SEC Rule 15c3-1, except that a member whose
primary business consists of the clearance of options market-maker
accounts may carry JBO accounts provided that it maintains a minimum
net capital of $7 million as computed pursuant to SEC Rule 15c3-1. In
addition, the member must include in its ratio of gross options market
maker haircuts required by the provisions of SEC Rule 15c3-1 gross
deductions for JBO participant accounts. Clearance of option market
maker accounts shall be deemed a broker-dealer's primary business if a
minimum of 60% of the aggregate deductions in the above ratio are
options market maker deductions. In the event that a carrying and
clearing, or a carrying member's tentative net capital, or net capital,
respectively, has fallen below the above requirements, the firm shall:
(a) promptly notify the Association in writing of such deficiency, (b)
take appropriate action to resolve such deficiency within three
consecutive business days, or not permit any new transactions to be
entered into pursuant to the JBO arrangement;
b. maintain a written risk analysis methodology for assessing the
amount of credit extended to participating broker/dealers which shall
be made available to the Association on request; and
c. deduct from net capital haircut requirements pursuant to SEC
Rule 15c3-1 amounts in excess of the equity maintained in the accounts
of participating broker/dealers.
(ii) A participating broker/dealer must:
a. be a registered broker/dealer subject to the SEC's net capital
requirements;
b. maintain an ownership interest in the carrying/clearing member
organization pursuant to Regulation T of the Federal Reserve Board,
section 220.11; and
c. maintain a minimum liquidating equity of $1 million in the JBO
arrangement exclusive of the ownership interest established in (ii)(b)
above. When the minimum liquidating equity decreases below the $1
million requirement, the participant must deposit an amount sufficient
to eliminate this deficiency within 5 business days or be subject to
margin requirements pursuant to the other provisions of this Rule.\7\
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\1\ NASD Regulation agreed to revise NASD Rule 2520(e)(6)(B) to:
(1) Replace a period at the end of NASD Rule 2520(e)(6)(B)(i)(a)
with a semi-colon; and (2) revise NASD Rule 2520(e)(6)(B)(ii)(c) to
refer to the preceding paragraph as (ii)(b) rather than (2).
Telephone conservation between Elliott R. Curzon, Assistant General
Counsel, NASD Regulation, and Yvonne Fraticelli, Special Counsel,
Division, Commission, on July 19, 1999.
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(7) Nonpurpose Credit
In a nonsecurities credit account, a member may extend and maintain
nonpurpose credit to or for any customer without collateral or on any
collateral whatever, provided,
(A) the account is recorded separately and confined to the
transactions and relations specifically authorized by Regulation T [of
the Board of Governors of the Federal Reserve System];
* * * * *
The term ``nonpurpose credit'' means an extension of credit other
than ``purpose credit'' as defined in Section 220.2[(u)] of Regulation
T [of the Board of Governors of the Federal Reserve System].
[[Page 43799]]
(8) Shelf-Registered, Control and Restricted Securities
* * * * *
(B) Control and Restricted Securities--The equity in accounts of
customers for control securities and other restricted securities of
issuers who continue to maintain a consistent history of filing annual
and periodic reports in timely fashion pursuant to the formal
continuous disclosure system under the Act, which are subject to Rule
144 or 145(d) under the Securities Act of 1933, shall be 40 percent of
the current market value of such securities ``long'' in the account,
provided the member:
(i) in computing net capital, deducts any margin deficiencies in
customers' accounts based upon a margin requirement as specified in
subparagraph (c)(ii) below for such securities and values only that
amount of such securities which are then salable under Rule 144 or
145(d) under the Securities Act of 1933 in conformity with all of the
applicable terms and conditions thereof, for purposes of determining
such deficiencies; and
* * * * *
(C) Additional Requirements on Shelf-Registered Securities and
Control and Restrict Securities--A member extending credit on shelf-
registered, control and other restricted securities in margin accounts
of customers shall be subject to the following additional requirements:
(i) The Association may at any time require reports from members
showing relevant information as to the amount of credit extended on
shelf-registered, control and restricted securities and the amount, if
any, deducted from net capital due to such security positions.
(ii) Concentration Reduction. A concentration exists whenever the
aggregate position in control and restricted securities of any one
issue, excluding excess securities (as defined below), \8\ exceeds:
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\8\ See Amendment No. 1, supra note 3.
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a. 10 percent of the outstanding shares or
b. 100 percent of the average weekly volume during the preceding
three-month period. Where a concentration exists, for purposes of
computing subparagraph (B)(i) above, the margin requirement on such
securities shall be, based on the greater of (ii) a or b, above, as
specified below:
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or, Percent of
Percent of outstanding shares average weekly Margin requirement
volume
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Up to 10 percent............... Up to 100 percent. 25 percent.
Over 10 percent and under 15 Over 100 percent 30 percent.
percent. and under 200
percent.
15 percent and under 20 percent Over 200 percent 45 percent.
and under 300
percent.
20 percent and under 25 percent 300 percent and 60 percent.
under 400 percent.
25 percent and under 30 percent 400 percent and 75 percent.
under 500 percent.
30 percent and above........... 500 percent and 100 percent.
above.
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For purposes of this sub-paragraph (e)(8)(C)(ii), ``excess
securities'' shall mean the amount of securities, if any, by which the
aggregate position in control and restricted securities of any one
issue exceeds the aggregate amount of securities that would be required
to support the aggregate credit extended on such control and restricted
securities if the applicable margin requirement were 50%.
(D) Restricted Securities--Securities either:
(i) [held by non-affiliates of the issuer which are] then salable
[by non-affiliate] pursuant to the terms and conditions of Rule 144(k)
under the Securities Act of 1993, or
(ii) [which have been acquired by non-affiliates of the issuer in
connection with Rule 145(a) transaction under the Securities Act of
1933 which are] then salable [by such non-affiliate] pursuant to the
terms and conditions of Rule 145 (d)(2) or (d)(3) under such Act,
shall not be subject to the provisions of this subparagraph [H] (e)(8),
provided that the issuer continues to maintain a consistent history of
filing annual and periodic reports in timely fashion pursuant to the
formal continuous disclosure system under the Act.\9\
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\9\ See Amendment No. 1, supra note 3.
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(f) Other Provisions
* * * * *
(2) Puts, Calls and Other Options
* * * * *
(H)
* * * * *
(iv)
* * * * *
In the case of a put on an option contract (including a put on a
broad index stock group), the letter of guarantee must certify that the
guarantor holds for the account of the customer as security for the
letter, cash or cash equivalents which have an aggregate market value,
computed as at the close of business on the day the put is written, of
not less than 100 percent of the aggregate exercise price of the put
and that the guarantor will promptly pay the member the exercise
settlement amount (in the case of a put on a broad index stock group)
or the aggregate exercise price (in the case of any other put on an
option contract) in the event the account is assigned an exercise
notice. Cash equivalents shall mean those instruments referred to in
Section 220.2 of Regulation T [of the Board of Governors of the Federal
Reserve System.]
* * * * *
(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; or the customer may have a standing agreement with the
member 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 may make option
transactions in a customer's cash account, providing:
(i) The transaction is permissible under Regulation T, Section
220.8; 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
[[Page 43800]]
the long put(s) exceed the strike price of the short put(s).
* * * * *
(3) ``When Issued'' and ``When Distributed'' Securities
(A) Margin Accounts
* * * * *
When an account has a ``short'' position in a ``when issued''
security and there are held in the account securities upon which the
``when issued'' security may be issued, such ``short'' position shall
be marked to the market and the balance in the account shall for the
purpose of this [paragraph (c)] Rule \10\ be adjusted for any
unrealized loss in such ``short'' position.
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\10\ See Amendment No. 3, supra note 3.
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(B) Cash Accounts
* * * * *
The provisions of this subparagraph [(B)](f)(3) shall not apply to
any position resulting from contracts on a ``when issued'' basis in a
security:
* * * * *
(6) Time Within Which Margin or ``Mark to Market'' Must Be Obtained
The amount of margin or ``mark to market'' required by any
provision of [this paragraph (c)] this Rule shall be obtained as
promptly as possible and in any event within fifteen business days from
the date such deficiency occurred, unless the Association has
specifically granted the member additional time.
(7) Practice of Meeting Regulation T Margin Calls by Liquidation
Prohibited
When a ``margin call,'' as defined in Section 220.2[(1)] of
Regulation T [of the Board of Governors of the Federal Reserve System],
is required in a customer's account, no member shall permit a customer
to make a practice of either deferring the deposit of cash or
securities beyond the time when such transactions would ordinarily be
settled or cleared, or meeting the margin required by the liquidation
of the same or other commitments in the account.
* * * * *
(8) Special Initial and Maintenance Margin Requirements
* * * * *
(B) Day-Trading
The term ``day-trading'' means the purchasing and selling of the
same security on the same day. A ``day-trader'' is any customer whose
trading shows a pattern of day-trading. Whenever day-trading occurs in
a customer's margin account the margin to be maintained shall be the
margin on the ``long'' or ``short'' transaction, whichever occurred
first, as required pursuant to the other provisions of this Rule. When
day-trading occurs in the account of a ``day-trader'' the margin to be
maintained shall be the margin on the ``long'' or ``short''
transaction, whichever occurred first, as required by Regulation T [of
the Board of Governors of the Federal Reserve System] or as required
pursuant to the other provisions of this Rule, whichever amount is
greater.
* * * * *
(9) Free-Riding in Cash Accounts Prohibited
No member shall permit a customer (other than a broker/dealer or a
``designated account'') to make a practice, directly or indirectly, of
effecting transactions in a cash account where the cost of securities
purchased is met by the sale of the same securities. No member shall
permit a customer to make a practice of selling securities with them in
a cash account which are to be received against payment from another
broker/dealer where such securities were purchased and are not yet paid
for. A member transferring an account which is subject to a Regulation
T 90-day freeze to another member firm shall inform the receiving
member of such 90-day freeze. The provisions of Section 220.8(c) of
Regulation T [of the Board of Governors of the Federal Reserve System]
dictate the prohibitions and exceptions against customers' free-riding.
Members may apply to the Association in writing for waiver of a 90-day
freeze not exempted by Regulation T.
* * * * *
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 Association 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 Association 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
NASD Regulation is proposing to adopt amendments to the provisions
of NASD Rule 2520 relating to exempted borrowers, good faith accounts,
joint back office (``JBO'') arrangements and options transactions to
conform NASD Rule 2520 to recent changes to NYSE Rule 431 and recently
adopted changes to Regulation T promulgated by the Board of Governors
of the Federal Reserve System (``Federal Reserve Board''). NASD
Regulation is also proposing other minor changes to eliminate obsolete
provisions and correct errors in the text of NASD Rule 2520.
Margin Requirements for Exempted Borrowers and Good Faith Accounts.
Under the recent changes to Regulation T, the Federal Reserve Board has
created a new category of account called the ``good faith account'' to
replace the ``non-purpose,'' ``arbitrage,'' and ``government
securities'' accounts. In the good faith account, a customer can
purchase certain securities (exempted and non-equity securities, and
money market and exempted securities mutual funds) on ``good faith''
margin (the amount of margin specified by the creditor in the exercise
of sound credit judgment) or the margin specified by the regulatory
authority, whichever is greater. Regulation T no longer specifies
initial margin, payment and liquidation time frames for transactions in
these securities in a good faith account. NASD Regulation believes that
these changes to Regulation T represent a continuing philosophical
shift away from government mandated credit regulation and toward
greater reliance on industry self-regulation and risk assessment.
NASD Regulation believes that transactions in good faith accounts
raise the same safety and soundness questions as transactions in cash
and margin accounts. Accordingly, the proposed amendments require all
accounts (except for cash accounts) to maintain margin as required by
NASD Rule 2520. Cash accounts will continue to be subject only to
certain specific requirements, not to the overall requirements of the
rule.
In addition, NASD Regulation states that the Federal Reserve Board
exempted a class of borrowers called ``exempted borrowers'' (broker-
dealers that do substantial public business) from the requirements of
Regulation T. The proposed amendments to NASD Rule 2520 will recognize
the exemption
[[Page 43801]]
adopted by the Federal Reserve Board by codifying the exemption in the
definition of ``customer'' in paragraph 2520(a)(3). However, the
proposed amendments will require that the proprietary accounts of an
introducing member that are carried or cleared by another member remain
subject to the equity requirements of 2520(e)(6), which prohibit a
member from carrying a proprietary account in a deficit equity
condition and require the difference between the account equity and the
margin required by NASD Rule 2520 to be deducted from the member's net
capital.\11\
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\11\ According to NASD Regulation, under the National Securities
Markets Improvement Act of 1996 (``NSMIA''), the Federal Reserve
Board no longer has the authority to regulate credit for the market
making transactions of a registered market maker (transactional
exemption); however, broker-dealers that are not market makers and
that do not qualify as exempted borrowers because they do not meet
the Regulation T definition are treated like ordinary customers for
purposes of Regulation T initial margin. Currently, NASD Rule 2520
permits good faith maintenance margin for broker-dealer's market
making and proprietary accounts. See Rule 2520(e)(5) and (e)(6).
This good faith maintenance margin standard will not be changed
under the proposed amendments.
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Amendments to Provide for Joint Back Office Arrangements.\12\ NASD
Regulation is also proposing amendments to provide for JBO arrangements
established pursuant to Section 220.7 of Regulation T. A JBO
arrangement is one in which the creditor is a carrying and clearing
broker-dealer or a carrying broker-dealer \13\ owned jointly or
individually by other creditors. The amendments would require members,
prior to establishing a JBO arrangement, to notify the Association. In
addition, a carrying and clearing broker-dealer or a carrying broker-
dealer in a JBO arrangement must maintain minimum net capital of $25
million. If a carrying and clearing broker-dealer or a clearing broker-
dealer only clears options market-maker accounts, it must maintain
minimum net capital of $7 million.
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\12\ The Chicago Board Options Exchange, the Chicago Stock
Exchange, the NYSE, the Philadelphia Stock Exchange, and the Pacific
Exchange have filed similar proposed rule changes with the
Commission relating to JBOs. Notices of the exchanges' JBO proposals
have been published for comment. See Securities Exchange Act Release
Nos. 39418 (December 10, 1997), 62 FR 66154 (December 17, 1997)
(File No. SR-CBOE-97-58); 40384 (August 31, 1998), 63 FR 48286
(September 9, 1998) (File No. SR-CHX-98-12); 39497 (December 29,
1997), 63 FR 899 (January 7, 1998) (File No. SR-NYSE-97-28); 39680
(February 18, 1998), 63 FR 9622 (February 25, 1998) (File No. SR-
PCX-97-49); and 39419 (December 10, 1997), 62 FR 66169 (December 17,
1997) (File No. SR-PHLX-97-56).
\13\ Like the NASD's current proposal, the NYSE's JBO proposal
permits ``carrying and clearing'' broker-dealers and ``carrying''
broker-dealers to establish JBOs. The NYSE sought and obtained
interpretative guidance from the Federal Reserve Board of Governors
indicating that a broker-dealer that would carry the accounts of JBO
participants on its books but would not itself clear the JBO
participants' accounts would be a ``clearing and servicing broker''
for purposes of Section 220.7(c) of Regulation T and, accordingly,
would be permitted to establish a JBO. See Letter from Scott Holz,
Counsel, Federal Reserve Board of Governors, to Raymond J. Hennessy,
Vice President, Member Firm Regulation, NYSE, dated April 16, 1999
(``April 16 Letter''). NASD Regulation understands that the NYSE
uses the terms ``clearing member'' and ``carrying member'' to refer
to two distinct forms of activity engaged in by certain firms. In
addition, NASD Regulation agrees with the interpretation set forth
in the April 16 Letter and intends for the terms ``carrying and
clearing member'' and ``clearing member'' to have the same meaning
in NASD Rule 2520 as they have in NYSE Rule 431. NASD Regulation
states that it intends for NASD Rule 2520 to be substantially
identical to NYSE Rule 431 to minimize confusion regarding margin
requirements for NASD members who are also NYSE members.
Accordingly, NASD Regulation intends that, unless otherwise
specifically noted or where the language of NASD Rule 2520 differs
substantively from NYSE Rule 431, the two rules are to be read and
interpreted in the same manner. See Amendment No. 1, supra note 3.
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A carrying and clearing broker-dealer or a carrying broker-dealer
in a JBO arrangement must include in its ratio of gross options market
maker haircuts for net capital purposes the gross deductions of JBO
participant accounts. In the event that a carrying and clearing broker-
dealer or a carrying broker-dealer's tentative net capital or net
capital falls below the requirements, the broker-dealer must notify the
Association of the deficiency and resolve the deficiency within three
business days. If the deficiency is not resolved, the broker-dealer may
not permit any new transactions under the JBO arrangement. In addition,
a carrying and clearing broker-dealer or a carrying broker-dealer in a
JBO arrangement must maintain a written risk analysis methodology for
assessing credit extensions and deduct the excess equity of
participating broker-dealers from its net capital haircuts.
A participating broker-dealer must be registered as a broker-
dealer, maintain an ownership interest in the carrying and clearing
broker-dealer or the carrying broker-dealer, and have a liquidating
equity of $1 million in the JBO arrangement, exclusive of its ownership
interest in the carrying and clearing broker-dealer or the carrying
broker-dealer.
Control and Restricted Securities. Currently, the ``Concentration
Reduction'' provision in NASD Rule 2520(e)(8)(C)(ii) is designed to
impose increasing margin requirements for customer positions in control
and restricted securities based upon the percent of outstanding shares
or the percent of average weekly volume that the position represents.
The effect of the provision, however, is to impose a margin requirement
on the entire position, rather than on part of the position that
actually collateralizes the loan extended to the customer. Thus, the
customer is penalized for maintaining a position that exceeds the
collateral necessary to cover his margin loan. To eliminate this
unintended penalty, the proposed rule change adds language excluding
``excess securities'' from the concentration reduction calculation. The
proposal defines ``excess securities'' as the amount of securities by
which the aggregate position in control and restricted securities of
any one issue would be required to support the aggregate credit
extended on such control and restricted securities if the applicable
margin requirement was 50% percent. Thus, under the proposed rule
change, the concentration reduction calculation will be performed on an
aggregate position that is only as large as the collateral necessary to
support a margin loan of 50% percent.
In addition, the proposed rule change expands the exception in
paragraph (e)(8) to include all restricted securities that can be sold
pursuant to SEC Rules 144(k), 145(d)(2), or 145(d)(3). Currently, only
those restricted securities that can be sold by non-affiliates of the
issuer pursuant to SEC Rules 144(k), 145(d)(2), or 145(d)(3) are
excepted from paragraph (e)(8). Thus, in the event of a customer
default, members will be permitted to sell certain restricted
securities pursuant to SEC Rule 144(k) without being subject to the
requirements of NASD Rule 2520. Accordingly, those customer-owned,
restricted securities that can be sold under SEC Rule 144(k) would be
subject to the same maintenance margin requirements that presently
apply to ordinary stock (25%).
Amendments to Margin Rules governing Options Transactions. NASD
Regulation is proposing to amend paragraph (f)(2) to add subparagraphs
(L) and (M), which are identical to current provisions in NYSE Rule
431, to permit customers to designate securities positions to margin
options trades, and to permit options transactions in customer cash
accounts to the extent the transaction is permissible under Regulation
T, or that has certain other specific characteristics.
Amendments to Conform to Changes to Regulation T. NASD Regulation
is also proposing to amend NASD Rule 2520 to conform references to
Regulation T to the amendment to
[[Page 43802]]
Regulation T recently adopted by the Federal Reserve Board.
Miscellaneous Amendments. NASD Regulation is proposing to eliminate
paragraph (c)(5) prescribing maintenance margin for American Stock
Exchange Emerging Company Marketplace securities because the Emerging
Company Marketplace no longer exists. NASD Regulation is also proposing
to eliminate paragraphs (e)(3)(B) and (C) because Section 220.12 of
Regulation T was deleted under the recent amendments to Regulation
T.\14\
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\14\ Telephone conversation between Elliott R. Curzon, Assistant
General Counsel, NASD Regulation, and Anitra Casssas, Division,
Commission, on July 8, 1999.
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2. Statutory Basis
The Association believes that the proposed rule change is
consistent with the provisions of Section 15A(b)(6) of the Act, which
requires, among other things, that the rules of an Association be
designed to prevent fraudulent and manipulative acts and practices, to
promote just and equitable principles of trade and, in general, to
protect investors and the public interest.
B. Self-Regulatory Organization's Statement on Burden on Competition
The Association does not believe that the proposed rule change will
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
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 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 it reasons for so finding or (ii) as to
which the NASD consents, the Commission will:
(A) By order approve the 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, including whether the proposal 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. 20549-0609. 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 Room. Copies of such filing will also be
available for inspection and copying a the principal office of the
NASD. All submissions should refer to File No. SR-NASD-99-05 and should
be submitted by September 1, 1999.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\15\
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\15\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-20636 Filed 8-10-99; 8:45 am]
BILLING CODE 8010-01-M
