[Federal Register Volume 62, Number 168 (Friday, August 29, 1997)]
[Notices]
[Pages 45893-45894]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-23011]
[[Page 45893]]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-38956; File No. SR-CSE-97-09]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the Cincinnati Stock Exchange, Inc., Relating to Net Capital
Requirements
August 21, 1997.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
\1\ (``Exchange Act'' or ``Act''), notice is hereby given that on July
29, 1997, the Cincinnati Stock Exchange, Incorporated (``CSE'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission'') the proposed rule change as described in Items I, II,
and III below, which Items have been prepared by the CSE. 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).
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The Exchange hereby proposes to amend Exchange Article II, Section
5.1 and Exchange Rule 11.9(a) to increase the net capital requirements
for members and Designated Dealers.
The text of the proposed rule change is available at the Office of
the Secretary, CSE 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 CSE 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 CSE has prepared summaries, set forth in sections A,
B, and C below, of the most significant parts of such statements.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
(1) Purpose. The Exchange is proposing to increase its net capital
requirements for member firms. The CSE notes that several smaller,
introducing broker-dealers have recently encountered financial trouble,
endangering the investing public. In this increasingly volatile and
uncertain marketplace, the Exchange believes that increased net capital
levels are justified. Specifically, the proposed rule change would
increase the net capital requirement for Exchange specialists, called
Designated Dealers, to $500,000 from the current requirement of
$100,000, and the net capital requirement for other members to $250,000
from the current requirement of $25,000.
The Exchange Act, as amended, and Commission Rules require
specialists to undertake certain responsibilities and obligations in
return for the privilege of trading for their own accounts. These
include a requirement to maintain adequate minimum capital levels, as
set forth in exchange rules, and a responsibility to engage in a course
of dealings for the specialist's own account to assist in the
maintenance of a fair and orderly market. Specialists are thus required
to provide liquidity and depth in times of market stress or volatility.
Minimum net capital requirements are intended to help ensure that
specialists have the financial resources necessary to perform this
function.
Prior to 1984, the CSE's net capital rules required a Designated
Dealer to maintain at least $500,000 in net capital.\2\ The Exchange
has subsequently amended the net capital requirement from time to time,
as market conditions have warranted. Exchange Rule 11.9(a) currently
requires Designated Dealers to maintain net capital of at least the
greater of $100,000 or the amount required under Commission Rule 15c3-
1. When implemented in 1989, the $100,000 minimum was determined by the
Exchange to be a level of capital sufficient to ensure that the
Exchange's Designated Dealers would possess sufficient financial
resources to enable them to provide liquidity and depth in times of
market stress.\3\ Subsequent growth in the United States' capital
markets generally, and in the CSE's market in particular have
outstripped this requirement. Record price and volume levels have
created a need for greater capital levels on the CSE. These greater
levels of capital will help to ensure that Designated Dealers are
adequately prepared to provide depth and liquidity to the Exchange's
markets in times of market stress or volatility. The Exchange believes
that the previous net capital requirement for Designated Dealers of at
least the greater of $500,000 or the amount required under Commission
Rule 15c3-1 will better protect the integrity and quality of the
Exchange's markets, and therefore the investors whose orders are
executed on the Exchange.
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\2\ See Securities Exchange Act Rel. No. 20766 (Mar. 20, 1984),
49 FR 11274 (Mar. 26, 1984).
\3\ See Securities Exchange Act Rel. No. 27458 (Nov. 21, 1989),
54 FR 49376 (Nov. 30, 1989).
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Article II, Section 5.1 of the CSE By-Laws imposes a minimum net
capital level on non-specialist Exchange members equal to the greater
of the net capital level required by Commission Rule 15c3-1 or $25,000.
The proposed rule change would increase that requirement from $25,000
to 250,000. Members would, of course, still be subject to any higher
net capital requirements imposed by Commission Rule 15c3-1. Commission
Rule 15c3-1 distinguishes minimum net capital levels among dealer firms
that trade for their own account and between brokerage firms that carry
accounts and those that introduce customers to other firms. The
Exchange believes, however, that a higher, uniform minimum requirement
is appropriate because each of these types of firms may pose a risk to
the financial integrity of the Exchange, as well as to the investing
public generally, if permitted to operate with inadequate
capitalization.
Commission Rule 15c3-1 currently requires minimum net capital of
$100,000 for any broker or dealer that effects more than 10
transactions in any one calendar year for its own investment
account.\4\ CSE members that trade for their own accounts on the
Exchange often effect more than 10 trades per day. Because proprietary
trading places member firm capital directly at risk, the Exchange
believes the higher net capital requirement of $250,000 is appropriate
for member firms that trade for their proprietary accounts on the
Exchange.
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\4\ 17 CFR 240.15c3-1.
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Commission Rule 15c3-1 currently imposes a similar $250,000 minimum
net capital requirement for any broker-dealer that carries customer
accounts.\5\ The proposed rule change would bring the CSE's net capital
requirement for brokerage firms that carry accounts in line with the
Commission's requirements.
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\5\ 17 CFR 240.15c3-1.
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The Exchange also believes that a uniform net capital requirement
should apply to introducing brokerage firms. The CSE notes that the
Commission examined this issue in revising Commission Rule 15c3-1 in
1992. The Commission noted in proposing to raise the minimum net
capital level for introducing brokers under Commission Rule 15c3-1 that
customers are placed at risk by brokers that do not receive or hold
customer funds or securities because such brokers have indirect
[[Page 45894]]
access to customer funds and securities, and can direct the movement of
such assets by placing orders with clearing firms.\6\ Customers are
often unaware of or unable to distinguish between introducing and
clearing firms, and tend to rely heavily upon the representations of
brokers at introducing firms. A higher net capital requirement will
help ensure the financial integrity of such introducing firms and
thereby help to protect investors.
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\6\ Securities Exchange Act Rel. No. 31512 (Nov. 24, 1991), 57
FR 57027 (Dec. 2, 1992).
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Similarly, better capitalized introducing firms are less likely to
become insolvent. In the event that such a firm does become insolvent,
customers will be better protected by higher minimum net capital
requirements. The failure of an introducing firm can strand an
investor, who may be unable to place orders directly with a clearing
firm because the clearing firm regards the investor as the customer of
the introducing firm. Such a customer would be unable either to
liquidate or open new positions until the introducing firm is wound up
or the customer opens a new account with a different broker. Higher net
capital levels would likely result in a quicker, easier sale of the
introducing firm and would help to minimize the impact of such a
failure on the investing public.
Finally, the Exchange believes that raising the minimum net capital
level for members will further the antifraud provisions of the federal
securities laws. Members have access to customer securities and funds
either directly, as in the case of a clearing firm, or indirectly, as
in the case of an introducing firm that places orders with a clearing
firm on behalf of its customers. In either case, member firms are
presented with an opportunity to convert customer assets for personal
or other inappropriate use. Higher net capital levels will help ensure
adequate firm resources to address such problems. In addition, higher
net capital levels may create a disincentive toward such activity by
ensuring sufficient operating capital. That is, a firm with sufficient
net capital may be less likely to attempt to convert customer funds for
the firm's use.
(2) Basis. The proposed rule change is consistent with Section 6(b)
of the Act in general, and furthers the objectives of Section 6(b)(5)
in particular in that it is designed to promote just and equitable
principles of trade and 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. Specifically,
the proposed rule change will help ensure greater financial stability
of the Exchange's members by requiring those members to maintain higher
capital levels. In the event of adverse market movements, these capital
reserves will help protect members and their customers by helping to
ensure that funds are available to cover securities positions.
B. Self-Regulatory Organization's Statement on Burden on Competition
The CSE does not believe that the proposed rule change will impose
any inappropriate burden on competition.
C. Self-Regulatory Organization's Statement on Comments on the Proposed
Rule Change Received From Members, Participants or Others
No comments were solicited in connection with the proposed rule
change.
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 Section, 450 Fifth Street, N.W.,
Washington, D.C. 20549. Copies of such filings will also be available
for inspection and copying at the principal office of the CSE. All
submissions should refer to File No. SR-CSE-97-09 and should be
submitted by September 19, 1997.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\7\
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\7\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-23011 Filed 8-28-97; 8:45 am]
BILLING CODE 8010-01-M
