[Federal Register Volume 63, Number 150 (Wednesday, August 5, 1998)]
[Notices]
[Pages 41882-41884]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-20870]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[(Release No. 34-40278; File No. SR-NYSE-98-14)]
Self-Regulatory Organizations; Notice of Filing of Proposed Rule
Change by the New York Stock Exchange, Inc. Relating to Margin
Requirements
July 29, 1998.
Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934
(``Act''),\1\ notice is hereby given that on April 28, 1998, the New
York Stock Exchange, Inc. (``NYSE'' or ``Exchange'') 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 the NYSE. The Commission is publishing this
notice to solicit comments on the proposed rule change from interested
persons.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
---------------------------------------------------------------------------
I. Self Regulatory Organization's Statement of the Terms of
Substance of the Proposed Rule Change
The NYSE proposes to amend NYSE Rule 431, ``Margin Requirements,''
to revise the margin requirements for non-equity securities and to
expand the types of non-equity securities eligible for exempt account
treatment. Specifically, the NYSE proposes to revise NYSE Rule 431 to:
(1) provide that the margin requirement for highly rated foreign
sovereign debt securities will be the amounts specified currently in
NYSE Rule 431(e)(2)(A) for U.S. debt securities,\2\ (2) reduce the
margin for exempted securities other than U.S. debt securities from 15%
to 7% of the current market value (NYSE Rule 431(e)(2)(B)); and (3)
reduce the margin for investment grade debt securities from 20% to 10%
of the current market value (NYSE Rule 431(e)(2)(C)(i)). The margin for
all other listed non-equity securities, and for all other marginable
non-equity securities, will remain at 20% of the current market value
or 7% of the principal amount, whichever is greater. In addition, the
NYSE proposes several changes with regard to exempt accounts.
Specifically, the NYSE proposes to: (1) modify the definition of
``exempt account;'' (2) require no margin for exempt account
transactions involving mortgage-related securities and major foreign
sovereign debt securities (NYSE Rule 431(e)(2)(F)); and (3) require
margin equal to 0.5% of current market value for exempt account
transactions involving highly rated foreign debt securities and margin
equal to 3% of current market value for exempt account transactions
involving all other investment grade debt securities (proposed NYSE
Rule 431(e)(2)(G)).\3\ The NYSE also proposes to adopt NYSE Rule
431(e)(2)(H), which will limit the amount of uncollected marked to
market losses which may be deducted from a member organization's net
capital.
---------------------------------------------------------------------------
\2\ The margin required for U.S. government obligations under
NYSE Rule 431(e)(2)(A) varies according to the length of time to
maturity.
\3\ The text of proposed NYSE Rule 431(e)(2)(G)(i) indicates
that the required margin for exempt account transactions involving
highly rated foreign sovereign debt will be .5% of current market
value. However, in the portion of the filing describing the proposed
rule change, the NYSE indicates that the proposed margin level for
exempt account transactions involving highly rated foreign sovereign
debt will be .05% of current market value. The NYSE clarified that
the proposed margin requirement for these securities is .5% of
current market value. Telephone conversation between Donald van
Weezel, Managing Director, Regulatory Affairs, NYSE, and Yvonne
Fraticelli, Attorney, Division of Market Regulation, Commission, on
May 20, 1998.
---------------------------------------------------------------------------
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 proposed rule change. The
text of these statements may be examined at the places specified in
Item IV below. The NYSE has prepared summaries, set forth in Sections
A, B, the 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
The NYSE proposes to amend NYSE Rule 431 to revise the margin
requirements for non-equity securities and to expand the types of non-
equity securities eligible for exempt account treatment. According to
the NYSE, Regulation T of the Board of Governors of the Federal Reserve
System (``FRB''), which establishes initial margin requirements,
currently provides that transactions in non-equity securities are
subject to ``good faith'' requirements when done in a margin account
and have no FRB margin requirements when done in a ``good faith''
account. Therefore, the maintenance margin requirements of NYSE Rule
431 are particularly important because they provide ongoing safety and
soundness levels for positions maintained in customers' accounts.
The NYSE proposes to revise NYSE Rule 431 to: (1) provide that the
margin for highly rated foreign sovereign debt securities \4\ will
equal the margin required for U.S. debt secuties under NYSE Rule
431(e)(2)(A); \5\ (2) reduce the margin for exempted securities other
than U.S. debt securities from 15% to 7% of the current market value
(NYSE Rule 431(e)(2)(B)); and (3) reduce the margin for investment
grade debt securities \6\ from 20% to 10% of the
[[Page 41883]]
current market value (NYSE Rule 431(e)(2)(C)(i)). The margin for all
other listed non-equity securities,\7\ and for all other marginable
non-equity securities \8\ will remain at 20% of the current market
value or 7% of the principal amount, whichever is greater (NYSE Rule
431(e)(2)(C)(ii).
---------------------------------------------------------------------------
\4\ The NYSE's proposal defines ``highly rated foreign sovereign
debt securities'' as debt securities (including major foreign
sovereign debt securities) issued or guaranteed by the government of
a foreign country, its provinces, states or cities, or a
supranational entity, if at the time of the extension of credit
[regarding] (sic) the issue, the issuer or guarantor, or any other
outstanding obligation of the issuer or guarantor ranked junior to
or on a parity with the issue or the guarantee is assigned a rating
(implicitly or explicitly) in one of the top two rating categories
by at least one nationally recognized statistical rating
organization. See proposed NYSE Rule 431(a)(9).
\5\ NYSE Rule 431(e)(2)(A) establishes the following margin
requirements for U.S. government debt: (1) 1% of the current market
value for obligations with less than one year to maturity; (2) 2% of
the current market value for obligations with one year but less than
three years to maturity; (3) 3% of the current market value for
obligations with three years but less than five years to maturity;
(4) 4% of the current market value for obligations with five years
but less ten years to maturity; (5) 5% of the current market value
for obligations with ten years but less than 20 years to maturity;
and (6) 6% of the current market value for obligations with 20 years
or more to maturity.
\6\ The proposal defines investment grade debt securities as any
debt securities (including those issued by the government of a
foreign country, its provinces, states or cities, or a supranational
entity), if at the time of the extension of credit [regarding] (sic)
the issue, the issuer or guarantor, or any other outstanding
obligation of the issuer or guarantor ranked junior to or on a
parity with the issue or the guarantee is assigned a rating
(implicitly or explicity) in one of the top four rating categories
by at least one nationally recognized statistical rating
organization.
\7\ The proposal defines listed non-equity securities to mean
any non-equity securities that: (1) are listed on a national
securities exchange; or (2) have unlisted trading privileges on a
national securities exchange. See proposed NYSE Rule 431(a)(15).
\8\The proposal defines other marginable non-equity secuities as
(1) any debt securities not traded on a national securities exchange
that meet all of the following requirements: (a) at the time of the
original issue, a principal amount of not less than $25,000,000 of
the issue was outstanding; (b) the issue was registered under
Section 5 of the Securities Act of 1933 and the issuer either files
periodic reports pursuant to the Act or is an insurance company
under Section 12(g)(2)(G) of the Act; and (c) at the time of the
extension of credit, the creditor has a reasonable basis for
believing that the issuer is not in default on interest or principal
payments; or (2) any private pass-through securities (not guaranteed
by a U.S. government agency) that meet all of the following
requirements: (a) an aggregate principal amount of not less than
$25,000,000 was issued pursuant to a registration statement filed
with the Commission under Section 5 of the Securities Act of 1933;
(b) current reports relating to the issue have been filed with the
Commission; and (c) at the time of the credit extension, the
creditor has a reasonable basis for believing that mortgage
interest, principal payments, and other distributions are being
passed through as required and that the servicing agent is meeting
its material obligations under the terms of the offering. See
proposed NYSE Rule 431(a)(16).
---------------------------------------------------------------------------
The NYSE states that the proposed amendments to NYSE Rule 431 will
provide for margin requirements on non-equity securities commensurate
with the risks associated with positions in such securities held by
customers. According to the NYSE, the proposed margin percentages for
retail customers for investment grade debt securities and municipal
securities will be comparable to the highest haircut percentages
provided in the SEC's net capital rule \9\ for proprietary positions in
similar securities.
---------------------------------------------------------------------------
\9\ See SEC Rule 15c3-1.
---------------------------------------------------------------------------
The NYSE notes that NYSE Rule 431 currently contains margin
requirements specifically addressing transactions with exempt accounts
involving exempt securities and mortgage-related securities. These
requirements are lower than those applicable to transactions in such
securities with accounts other than exempt accounts. In NYSE Rule
431(a)(13), the NYSE proposes to define ``exempt account'' to mean a
member organization, non-member broker-dealer, ``designated account,''
or any person having a net worth of at least $40 million. The proposal
increases the financial threshold for a customer to be considered an
exempt account from $16 to $40 million. The NYSE also proposes to
revise its definition of designated account.\10\
---------------------------------------------------------------------------
\10\ Specifically, the NYSE proposes to revise the current
definition of ``designated account'' in NYSE Rule 431(a)(3) to
indicate that a designated account means the account of: (1) a bank,
as defined in Section 3(a)(6) of the Act; (2) a savings association,
as defined in Section 3(b) of the Federal Deposit Insurance Act, the
deposits of which are insured by the Federal Deposit Insurance
Corporation; (3) an insurance company, as defined in Section
2(a)(17) of the Investment Company Act of 1940; (4) an investment
company registered with the SEC under the Investment Company Act of
1940; (5) a state or a political subdivision thereof; or (6) a
pension or profit sharing plan subject to ERISA or of an agency of
the United States or of a state or a political subdivision thereof.
NYSE Rule 431(a)(3) currently defines ``designated account'' as the
account of a bank, trust company, insurance company, investment
trust, state or political subdivision thereof, charitable or
nonprofit educational institution regulated under the laws of the
United States or any state, or pension or profit sharing plan
subject to ERISA or of an agency of the United States or of a state
or a political subdivision thereof.
---------------------------------------------------------------------------
In proposed NYSE Rule 431(e)(2)(G), ``Transactions with Exempt
Accounts Involving Highly Rated Foreign Sovereign Debt Securities and
Investment Grade Debt Securities,'' the NYSE proposes to provide lower
margin requirements for exempt account transactions in highly rated
foreign sovereign debt, investment grade foreign sovereign debt, and
other investment grade non-equity securities. According to the NYSE,
the proposed margin requirements recognize both the quality of the
securities and the creditworthiness of the customer and, accordingly,
are intended to maintain reasonable safety and soundness standards. For
transactions in these types of securities by exempt accounts, member
organizations will be required to either take net capital charges or to
collect margin equal to marked to market losses and any percentage
requirements under the rule. The percentage requirements will be:
3% of current market value for all investment grade corporate debt and
for foreign sovereign debt in the lower two investment grade
categories; and
.5% of current market value for foreign sovereign debt in the second
highest investment grade category (i.e., highly rated foreign sovereign
debt securities).
Under revised NYSE Rule 431(e)(2)(F), ``Transactions with Exempt
Accounts Involving Certain `Good Faith' Securities,'' the highest grade
foreign sovereign debt security (i.e., major foreign sovereign debt
securities) \11\ and mortgage-related securities will be accorded the
same treatment as U.S. Government securities in that no margin will be
required and marked to the market losses need not be collected, subject
to the limits in proposed NYSE Rule 431(e)(2)(H), ``Limits on Net
Capital Deductions for Exempt Accounts.'' Currently, investment grade
foreign sovereign debt is treated the same as marginable corporate
debt, which requires 20% margin.
---------------------------------------------------------------------------
\11\ The proposal defines ``major foreign sovereign debt
securities'' a any debt securities issued or guaranteed by the
government of a foreign country or a supranational entity, if, at
the time of the extension of credit [regarding] (sic) the issuer or
guarantor, or any other outstanding obligation of the issuer or
guarantor ranked junior to or on a parity with the issue or the
guarantee is assigned a rating (implicitly or explicitly) in one of
the top four rating categories by at least one nationally recognized
statistical rating organization. See proposed NYSE Rule 431(a)(11).
---------------------------------------------------------------------------
Proposed NYSE Rule 431(e)(2)(H) will impose limitations on the
amount of any uncollected marked to market losses which are being
deducted from a member organizations' net capital under proposed NYSE
Rule 431(e)(2)(F) and 431(e)(2)(G). The limits will be established at
5% of Tentative Net Capital (Net Capital before deductions on
securities) for each exempt account, and 25% of Tentative Net Capital
for all exempt accounts combined. When marked to market losses
exceeding these limits continue to exist on the fifth business day
after they were incurred, the member organization must provide the
Exchange with written notification and may not enter into any new
transactions that would result in an increase in the amount of the
excess.
Finally, the NYSE's proposal contains a new definition section,
which, among other things, specifically defines the following types of
non-equity securities:
``highly rated foreign sovereign debt securities'' (proposed NYSE Rule
431(a)(9));
``investment grade debt securities'' (proposed NYSE Rule 431(a)(10));
``major foreign sovereign debt securities'' (proposed NYSE Rule
431(a)(11));
``listed non-equity securities'' (proposed NYSE Rule 431(a)(15)); and
``other marginable non-equity securities'' (proposed NYSE Rule
431(a)(16)).
The defined terms categorize certain types of non-equity securities
for purposes of prescribing the applicable margin requirements.
(2) Statutory Basis
The NYSE believes that the proposed rule change is consistent with
the requirements of Section 6(b)(5) of the Act, which provides that the
rules of the
[[Page 41884]]
Exchange must be designed to promote just and equitable principles of
trade and to protect the investing public. The NYSE believes that the
proposed rule change is also consistent with the rules and regulations
of the FRB for the purpose of preventing 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 Exchange believes that the proposed rule change will not impose
any burden on competition that is not necessary or appropriate in
furthermore 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
No written comments were solicited or 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 by
order approve such proposed rule change, or 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 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 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
NYSE. All submission should refer to file number SR-NYSE-98-14 and
should be submitted by August 26, 1998.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\12\
---------------------------------------------------------------------------
\12\ 17 CFR 200.30-(a)(12).
---------------------------------------------------------------------------
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-20870 Filed 8-4-98 8:45am]
BILLING CODE 8010-01-M
