[Federal Register Volume 63, Number 148 (Monday, August 3, 1998)]
[Notices]
[Pages 41310-41312]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-20559]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-40266; File No. SR-NYSE-98-16]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Partial Accelerated Approval of a Proposed Rule Change and
Amendment No. 1 to the Proposed Rule Change by the New York Stock
Exchange, Inc., Relating to Margin Requirements for Exempted Borrowers
and Good Faith Accounts
July 27, 1998.
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 June 30, 1998, the New York Stock Exchange, Inc. (``NYSE'' or
``Exchange'') filed with the Securities Exchange Commission (``SEC'' or
``Commission'') a proposed rule change to amend NYSE Rule 431, ``Margin
Requirements,'' to accommodate certain recent changes to the federal
margin requirements. The proposal, which is described in Items I, II,
and III below, which Items have been prepared by the NYSE, originally
was approved by the Commission on a temporary basis until July 27,
1998.\3\ On July 24, 1998, the NYSE amended its proposal to request
that the Commission approve the NYSE's proposal for six months on an
accelerated bases.\4\ The Commission is publishing this notice and
order to solicit comments from interested persons on the proposed rule
change and to grant accelerated approval to the portion of the proposal
that requests an extension of the proposal for six months, until
January 27, 1999, or until the Commission approves the proposal
permanently, whichever occurs first.\5\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Securities Exchange Act Release No. 39813 (March 27,
1998), 63 FR 16849 (April 6, 1998) (order approving File No. SR-
NYSE-98-08) (``March Approval Order'').
\4\ See Letter from James E. Buck, Senior Vice President and
Secretary, NYSE, to Richard C. Strasser, Assistant Director,
Division of Market Regulation, Commission, dated July 23, 1998
(``Amendment No. 1''). In addition, Amendment No. 1 modifies the
proposal to: (1) clarify that the proposal amends the definition of
``customer'' in NYSE Rule 431(a)(2) to codify the Exchange's
position that exempted borrowers will remain exempt from the
provisions of NYSE Rule 431; and (2) correct a reference in NYSE
Rule 431(a)(2) to the Board of Governors of the Federal Reserve
System (``FRB'').
\5\ The NYSE confirmed that the Exchange is seeking to extend
the changes to NYSE Rule 431 that were approved in the March
Approval Order for six months or until the Commission approves the
changes on a permanent basis, whichever occurs first. Telephone
conversation between Mary Anne Furlong, Attorney, NYSE, and Yvonne
Fraticelli, Attorney, Division of Market Regulation, Commission, on
July 27, 1998 (``July 27 Conversation'').
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I. Self-Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
On March 27, 1998, the Commission approved until July 27, 1998, an
NYSE proposal to apply the maintenance margin requirements of NYSE Rule
431 to good faith accounts and to provide that the proprietary accounts
of introducing broker-dealers that are ``exempted borrowers'' as that
term is defined in Regulation T \6\ will continue to be subject to NYSE
Rule 431(e)(6) as applicable.\7\ The NYSE requests permanent approval
of the changes to NYSE Rule 431 that were approved on a temporary basis
in the March Approval Order. In addition, the NYSE requests that the
Commission extend the changes to NYSE Rule 431 that were approved in
the March Approval Order for six months, until January 27, 1999, or
until the Commission approves the changes to NYSE Rule 431 on a
permanent basis, whichever occurs first.\8\
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\6\ 12 CFR 220. Regulation T, ``Credit by Brokers and Dealers,''
is administered by the FRB pursuant to section 7 of the Act.
\7\ See March Approval Order, supra note 3.
\8\ See Amendment No. 1, supra note 4, and July 27 Conversation,
supra note 5.
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Copies of the proposed rule change are available at the 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 NYSE included statements
concerning the purpose of and basis for the proposed rule change and
discussed any comments it received on the proposal. The text of these
statements maybe examined at the places specified in Item V below. The
NYSE has prepared summaries, set forth in Section 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
In January 1998 the FRB amended Regulation T, which governs initial
extensions of credit to customers and broker-dealers.\9\ Among other
things, these amendments established a ``good faith'' account, which
can be used for transactions in non-equity securities.\10\
[[Page 41311]]
Unlike transactions in a cash or margin account, transactions in the
good faith account are not subject to the requirements of Regulation T
with respect to initial margin and payment and liquidation time frames.
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\9\ See Docket Nos. R-905, R-0923, and R-0944, 63 FR 2806
(January 16, 1998).
\10\ 12 CFR 220.6.
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The NYSE believes that transactions in a good faith account raise
the same safety and soundness concerns from a maintenance margin
perspective as cash and margin account transactions. Accordingly, the
NYSE proposes to amend NYSE Rule-431 so that transactions in all
accounts of customers (except for cash accounts, as discussed below),
including the new good faith account, will be subject to the current
applicable maintenance margin requirements of NYSE Rule 431(c).\11\ As
is currently the case, cash accounts subject to Regulation T will not
be subject to the overall NYSE Rule 431 requirements, but in certain
cases will be covered by specific rule provisions. In this regard, the
NYSE notes that NYSE Rule 431 requirements currently apply to cash
account transactions in exempted securities (NYSE Rule 431(e)(2)(F));
for certain options (NYSE Rule 431(f)(2)(M)); and for ``when issued''
and ``when distributed'' securities (NYSE Rule 431(f)(3)(B)).
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\11\ NYSE Rule 431(c), as amended, will specify the margin that
must be maintained in all customer accounts, except for cash
accounts subject to Regulation T, unless a transaction in a cash
account is subject to other provisions of NYSE Rule 431.
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In the Regulation T amendments adopted in January 1998, the FRB
also established a class of borrowers that is exempt from Regulation T.
An ``exempted borrower,'' as defined in Regulation T, is a broker-
dealer '' a substantial portion of whose business consists of
transactions with persons other than brokers or dealers.'' \12\ The
NYSE historically has not applied the requirements of NYSE Rule 431 to
member organization accounts, except for transactions in the
proprietary accounts of registered broker-dealers that are carried by a
member organization. In this regard, NYSE Rule 431(e)(6) provides that
a member organization may carry the proprietary account of another
registered broker-dealer upon a margin basis that is satisfactory to
both parties, provided the requirements of Regulation T are adhered to
and the account is not carried in a deficit equity condition. In
addition, NYSE Rule 431(e)(6) requires that the amount of any
deficiency between the equity in the proprietary account and the margin
required under NYSE Rule 431 be deducted in computing the net capital
of the member carrying the proprietary account.
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\12\ 12 CFR 220.2.
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The NYSE believes that exempted borrowers would remain exempt from
the requirements of NYSE Rule 431, and the Exchange proposes to amend
the definition of ``customer'' in NYSE Rule 431(a)(2) to codify the
Exchange's position that such borrowers are exempt from NYSE Rule
431.\13\ Specially, the NYSE proposes to amend NYSE Rule 431(a)(2) to
exclude from the definition of ``customer'' and ``exempted borrower''
as defined by Regulation T of the FRB, except for the proprietary
accounts of a broker-dealer carried by a member pursuant to NYSE Rule
431(e)(6).\14\
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\13\ See Amendment No. 1, supra note 3.
\14\ Specifically, NYSE Rule 431(a)(2), as amended, excluded
from the definition of ``customer'' (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 organization or its customers, or (b)
an ``exempted borrower'' as defined by Regulation T, except for the
proprietary account of a broker-dealer carried by a member
organization pursuant to NYSE Rule 431(e)(6).
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Under the new Regulation T definition of exempted borrower, the
proprietary transactions of an introducing organization that qualifies
as an exempted borrower (i.e., an organization that conducts a
substantial public business) will not be subject to Regulation T.
Accordingly, the requirement in NYSE Rule 431(e)(6) that member adhere
to the requirements of Regulation T will not apply to the proprietary
accounts of exempted borrowers. However, for safety and soundness
purposes, the proprietary account of a broker-dealer that are carried
or cleared by another broker-dealer member organization will remain
subject to the NYSE Rule 431(e)(6) equity requirements, which prohibit
a member from carrying a proprietary account in a deficit equity
condition and require that the amount of any deficiency between the
equity maintained in the proprietary account and the margin required by
NYSE Rule 431 be deducted in computing the net capital of the member
carrying the proprietary account.
2. Statutory Basis
The NYSE believes that the proposed rule change is consistent with
the requirements of Section 6(b)(5) of the Act in that it is designed
to promote just and equitable principles of trade and to protect the
investing public. The NYSE believes that the proposed rule change also
is consistent with the rules and regulations of the FRB in that it is
designed to prevent the excessive use of credit for the purchase or
carrying of securities, pursuant to Section 7(a) of the Act.
B. Self-Regulatory Organization's Statement on Burden on Competition
The NYSE believes that the purpose rule change will not impose any
burden on competition that is not necessary or appropriate in
furtherance of the purpose 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 solicited or received.
III. Date of Effectiveness of the Proposed Rule Change and Timing
for Commission Action.
The NYSE has requested that the Commission find good cause pursuant
to Section 19(b)(2) of the Act for approving the portion of the
proposal that requests a six-month extension of the changes to NYSE
Rule 431 that were approved in the March Approval Order prior to the
30th day after publication of the proposed rule change in the Federal
Register.\15\ Accelerated approval, until January 27, 1999, will ensure
the uninterrupted effectiveness of the changes to NYSE Rule 431 that
were approved in the March Approval Order, so that transactions in good
faith accounts and in the proprietary accounts of non-carrying/clearing
member organizations will continue to be subject to NYSE Rule
431(e)(6).
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\15\ See Amendment No. 1, supra note 4.
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With regard to the portion of the proposal requesting permanent
approval of the changes to NYSE Rule 431 that were approved in the
March Approval Order, 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 by order approve such proposed rule change, or
institute proceedings to determine whether the proposed rule change
should be disapproved.
IV. Commission's Findings and Order Granting Partial Accelerated
Approval of the Proposed Rule Change
After careful review of the NYSE's proposal and for the reasons
discussed below, the Commission finds that the portion of the current
proposal that extends through January 27, 1999, the effectiveness of
the changes to NYSE
[[Page 41312]]
Rule 431 that originally were approved in the March Approval Order is
consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities exchange
and, in particular, this portion of the proposal is consistent with
Section 6(b)(5) of the Act,\16\ in that it is designed 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.\17\
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\16\ 15 U.S.C. 78f(b)(5).
\17\ In approving this potion of the proposal, the Commission
has considered the proposed rule's impact on efficiency,
competition, and capital formation. 15 U.S.C. 78c(f).
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Specifically, the Commission finds, as it has concluded
previously,\18\ that it is appropriate for the NYSE to apply the
existing maintenance margin requirements of NYSE Rule 431(c) to
transactions in the new ``good faith'' account adopted under Regulation
T. Although non-equity transactions permitted in the good faith account
will not be subject to the initial margin requirements and payment and
liquidation time frames of Regulation T, as the NYSE notes,
transactions in the good faith account may raise the same safety and
soundness concerns with regard to maintenance margin as do transactions
in cash and margin accounts. Accordingly, the Commission believes that
it is appropriate for the NYSE to apply the existing maintenance margin
requirements specified in NYSE Rule 431(c) to transactions in the good
faith account. The Commission believes that applying the maintenance
margin requirements of NYSE rule 431(c) to transactions in the good
faith account will protect investors and the public interest and help
to maintain fair and orderly markets by ensuring that good faith
accounts contain adequate margin reserves.
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\18\ See March Approval Order, supra note 3.
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In addition, the Commission believes that it is appropriate for the
NYSE to revise the definition of ``customer'' in NYSE Rule 431(a)(2) to
codify the Exchange's position that exempt borrowers will remain exempt
from the requirements of NYSE Rule 431, except for the proprietary
account of a broker-dealer carried by a member pursuant to NYSE Rule
431(e)(6). The Commission believes that it is appropriate for the NYSE
to continue to apply the equity requirements of NYSE Rule 431(e)(6) to
the proprietary accounts of introducing broker-dealers that qualify as
``exempted borrowers'' under Regulation T if these accounts are carried
by another Exchange member. By continuing to apply the equity
requirements of NYSE Rule 431(e)(6) to these proprietary accounts, the
Commission believes that the proposal will help to ensure that these
accounts contain adequate margin, thereby protecting investors and the
public interest.\19\
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\19\ As noted above, because exempted borrowers are exempt from
Regulation T, the provision in NYSE Rule 431(e)(6) requiring
adherence to Regulation T will not apply to the proprietary accounts
of exempted borrowers.
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The Commission finds good cause for approving the portion of the
proposed rule change requesting approval for six months, until January
27, 1999, of the changes to NYSE Rule 431 that were approved in the
March Approval Order prior to the thirtieth day after the date of
publication of notice in the Federal Register to ensure that the
changes to NYSE Rule 431 that were approved in the March Approval Order
remain in effect without interruption. The Commission continues to
believe that the changes to NYSE rule 431 that were approved in the
March Approval Order should help to ensure appropriate margin
requirements for good faith accounts and for the proprietary accounts
of introducing broker-dealers that qualify as exempted borrowers which
accounts are carried by Exchange members. Accordingly, the Commission
finds that it is consistent with Sections 6(b) and 19(b)(2) of the Act
to grant accelerated approval to the portion of the NYSE's proposal
that extends for six months, until January 27, 1999, or until the
Commission approves the proposal permanently, whichever occurs first,
the changes to NYSE Rule 431 that were approved in the March Approval
Order.
The Commission also finds good cause for approving Amendment No. 1
to the proposal on an accelerated basis. In Amendment No. 1, the NYSE
clarified several provisions in its proposal and requested accelerated
approval of a six-month extension, through January 27, 1999, of the
changes to NYSE Rule 431 that were approved in the March Approval
Order. The Commission believes that it is appropriate to approve
Amendment No. 1 on an accelerated basis to permit the changes to NYSE
Rule 431 that were approved in the March Approval Order to continue to
apply without interruption. Therefore, the Commission believes that
Amendment No. 1 is consistent with Sections 6(b) and 19(b)(2) of the
Act.
V. Solicitation of Comments
Interested persons are invited to submit written data, views, and
arguments concerning the foregoing, including whether the proposed rule
change is consistent with the Act. Persons making written submissions
should file six copies thereof with the Secretary, Securities and
Exchange Commission, 450 Fifth Street, NW., Washington, DC 20549.
Copies of the submission, all subsequent amendments, all written
statements with request to the proposed rule change that are filed with
the Commission, and all written communications relating to the proposed
rule change between the Commission any 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
NYSE. All submissions should refer to File No. SR-NYSE-98-16 and should
be submitted by August 24, 1998.
VI. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\20\ that the portion of the NYSE's proposal (SR-NYSE-98-16), as
amended, to extend the changes approved by the Commission in the March
Approval Order on an accelerated basis until January 27, 1999, or until
the Commission approves the proposal permanently, whichever occurs
first, is approved.
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\20\ 15 U.S.C. 78s(b)(2).
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For the Commission, by the Division of Market Regulation, pursuant
to delegated authority.\21\
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\20\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-20559 Filed 7-31-98; 8:45 am]
BILLING CODE 8010-01-M
