[Federal Register Volume 67, Number 220 (Thursday, November 14, 2002)]
[Notices]
[Pages 69052-69059]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-28897]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-46782; File No. SR-NYSE-2002-53]
Self-Regulatory Organizations; Notice of Filing and Order
Granting Accelerated Approval of a Proposed Rule Change and Amendment
No. 1 Thereto on a Pilot Basis by the New York Stock Exchange, Inc.
Amending NYSE Rule 431, Margin Requirements for Security Futures
November 7, 2002.
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 October 23, 2002, 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
Exchange. On November 6, 2002, the NYSE filed an amendment to the
proposed rule change.\3\ The Commission is publishing
[[Page 69053]]
this notice to solicit comments on the proposed rule change, as
amended, from interested persons and to grant accelerated approval of
the proposed rule change, as amended, on a pilot basis for sixty days
beginning on the date of this order.
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See letter from Darla C. Stuckey, Corporate Secretary, NYSE,
to Nancy Sanow, Assistant Director, Division of Market Regulation,
Commission, dated November 5, 2002 (``Amendment No. 1''). Amendment
No. 1 replaced the original rule filing in its entirety. Amendment
No. 1 also proposed that the changes be for a sixty-day pilot, and
requested accelerated approval of the proposed rule change.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange is proposing amendments to NYSE Rule 431 (``Margin
Requirements'') to establish margin requirements for security futures
contracts. The proposed amendments to the Exchange's existing margin
rule are intended to be consistent with the customer margin rules
already adopted by the SEC and the Commodity Futures Trading Commission
(``CFTC''), and those filed by other self-regulatory organizations
(``SROs'') regarding security futures.
The proposed amendments would: (1) Permit customer margining of
security futures contracts, and establish initial and maintenance
margin levels for security futures contracts; (2) allow initial and
maintenance margin levels for offsetting positions involving security
futures contracts to be lower than would be required if margined
separately; (3) allow for a Market Maker exclusion for proprietary
trades of a Security Futures Dealer (``SFD'') and allow for ``good
faith'' margin treatment for the accounts of approved options
specialists, market makers, and other specialists; (4) provide
definitions relative to security futures for the application of this
rule; (5) provide that security futures contracts transacted in a
futures account shall not be subject to any provisions of NYSE Rule
431; (6) provide that money market mutual funds, as defined in Rule 2a-
7\4\ under the Investment Company Act of 1940 (the ``ICA''),\5\ may be
used to satisfy margin requirements for security futures contracts
provided that certain conditions are met; (7) require that security
futures contracts transacted in a securities account be subject to all
other provisions of NYSE Rule 431, in particular NYSE Rule 431(f)(8)(B)
(``Day Trading''); and (8) permit members and member organizations for
which the Exchange is the Designated Examining Authority (``DEA'') to
participate in the trading of security futures contracts when trading
commences. Below is the text of the proposed rule change. Proposed new
language is italicized; proposed deletions are in brackets.
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\4\ 17 CFR 270.2a-7.
\5\ 15 U.S.C. 80a et seq.
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* * * * *
Rule 431 (``Margin Requirements'')
Rule 431. (a) For purposes of this Rule, the following terms shall
have the meanings specified below:
(1) The term ``current market value'' means the total cost or net
proceeds of a security on the day it was purchased or sold or at any
other time the preceding business day's closing price as shown by any
regularly published reporting or quotation service, except for security
futures contracts (see Section (f)(10) (C)(ii)). If there is no closing
price, a member organization may use a reasonable estimate of the
market value of the security as of the close of business on the
preceding business day.
Rule 431 (a)(2) through (a)(3) unchanged.
(4) The term ``equity'' means the customer's ownership interest in
the account, computed by adding the current market value of all
securities ``long'' and the amount of any credit balance and
subtracting the current market value of all securities ``short'' and
the amount of any debit balance. Any variation settlement received or
paid on a security futures contract shall be considered a credit or
debit to the account for purposes of equity.
(5) The term ``exempted security'' or ``exempted securities'' has
the meaning as in section 3(a)(12) of the Securities Exchange Act of
1934 (the ``Exchange Act'' or ``SEA'').
(6) The term ``margin'' means the amount of equity to be maintained
on a security position held or carried in an account.
(7) The term ``person'' has the meaning as in section 3(a)(9) of
the [Securities Exchange Act of 1934] Exchange Act.
(8) The term ``basket'' shall mean a group of stocks that the
Exchange or any national securities exchange designates as eligible for
execution in a single trade through its trading facilities and that
consists of stocks whose inclusion and relative representation in the
group are determined by the inclusion and relative representation of
their current market prices in a widely-disseminated stock index
reflecting the stock market as a whole.
Initial Margin
(b) 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 Board of Governors
of the Federal Reserve System or Rules 400 through 406 of the Exchange
Act or Rules 41.42 through 41.48 of The Commodity Exchange Act
(``CEA''), or
(2) The amount specified in section (c) of this Rule, or
(3) Such greater amount as the Exchange may from time to time
require for specific securities, or
(4) Equity of at least $2,000 except that cash need not be
deposited in excess of the cost of any security purchased (this equity
and cost of purchase provision shall not apply to ``when distributed''
securities in a cash account). The minimum equity requirement for a
``pattern day trader'' is $25,000 pursuant to paragraph
(f)(8)(B)(iv)(1) of this Rule.
Withdrawals of cash or securities may be made from any account
which has a 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 Rules 400 through 406 of the Exchange Act
and Rules 41.42 through 41.48 of the CEA and after such withdrawal the
equity in the account is at least the greater of $2,000 ($25,000 in the
case of ``pattern day traders'') or an amount sufficient to meet the
maintenance margin requirements of this Rule.
Maintenance Margin
(c) The margin which must be maintained in all accounts of
customers, except for cash accounts subject to Regulation T unless a
transaction in a cash account is subject to other provisions of this
rule, shall be as follows:
(1) 25% of the current market value of all securities except for
security futures contracts, ``long'' in the account; plus
(2) $2.50 per share or 100% of the current market value, whichever
amount is greater, of each stock ``short'' in the account selling at
less than $5.00 per share; plus
(3) $5.00 per share or 30% of the current market value, whichever
amount is greater, of each stock ``short'' in the account selling at
$5.00 per share or above; plus
(4) 5% of the principal amount or 30% of the current market value,
whichever amount is greater, of each bond ``short'' in the account.
(5) The minimum maintenance margin levels for security futures
contracts, long and short, shall be 20% of the current market value of
such contract. (See
[[Page 69054]]
paragraph (f) of this Rule for other provisions pertaining to security
futures contracts.)
Rule 431 (d) through (e)(5) unchanged.
(e)(6)(A) Broker/Dealer Accounts.--A member organization may carry
the proprietary account of another broker/dealer, which is registered
with the Securities and Exchange Commission, upon a margin basis which
is satisfactory to both parties, provided the requirements of
Regulation T of the Board of Governors of the Federal Reserve System
and Rules 400 through 406 under the Exchange Act and Rules 41.42
through 41.48 under the CEA 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 haircut
requirements pursuant to SEA Rule 15c3-1 (Net Capital) shall be
deducted in computing the Net Capital of the member organization under
the Exchange's Capital Requirements. However, when computing Net
Capital deductions for transactions in securities covered by paragraphs
(e)(2)(F) and (e)(2)(G) of this Rule, the respective requirements of
those paragraphs may be used, rather than the haircut requirements of
SEA Rule 15c3-1.
Rule 431(e)(6)(B) unchanged.
(e)(7) Nonpurpose Credit--In a nonsecurities credit account, a
member organization 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;
(B) The account is not used in any way for the purpose of evading
or circumventing any regulation of the Exchange or of the Board of
Governors of the Federal Reserve System and Rules 400 through 406 under
the Exchange Act and Rules 41.42 through 41.48 under the CEA; and
(C) The amount of any deficiency between the equity in the account
and the margin required by the other provisions of this Rule shall be
deducted by computing the Net Capital of the member organization under
the Exchange's Capital Requirements.
(The term ``nonpurpose credit'' means an extension of credit other than
``purpose credit,'' as defined in Section 220.2 of Regulation T of the
Board of Governors of the Federal Reserve System.)
Rule 431(e)(8) through (f)(9) unchanged.
(f) (10) Customer Margin Rules Relating to Security Futures.
(A) Applicability. No member or member organization may effect a
transaction involving, or carry an account containing, a security
futures contract with or for a customer in a margin account, without
obtaining proper and adequate margin as set forth in this section.
(B) Amount of customer margin.
(i) General Rule. As set forth in sections (b) and (c) of this
Rule, the minimum initial and maintenance margin levels for each
security futures contract, long and short, shall be twenty (20) percent
of the current market value of such contract.
(ii) Excluded from the rules' requirements are arrangements between
a member or member organization and a customer with respect to the
customer's financing of proprietary positions in security futures,
based on the member's or member organization's good faith determination
that the customer is an ``Exempted Person'', as defined in Rule
401(a)(9) under the Exchange Act, and Rule 41.43(a)(9) of the CEA,
except for the proprietary account of a broker-dealer carried by a
member organization pursuant to Section (e)(6)(A) of this Rule. Once a
registered broker or dealer, or member of a national securities
exchange ceases to qualify as an exempted person, it shall notify the
member or member organization of this fact before establishing any new
security futures positions. Any new security futures positions will be
subject to the provisions of this part.
(iii) Permissible Offsets.--Notwithstanding the minimum margin
levels specified in paragraph (f)(10)(B)(i) of this Rule, customers
with offset positions involving security futures and related positions
may have initial or maintenance margin levels (pursuant to the offset
table below) that are lower than the levels specified in paragraph
(f)(10)(B)(i) of this Rule.
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Security underlying the Initial margin Maintenance margin
Description of offset security future requirement requirement
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1 Long security future (or Individual stock or 20% of the current market The lower of: (1) 10% of
basket of security narrow-based security value of the long the aggregate exercise
futures representing index. security future, plus price of the put plus
each component of a pay for the long put in the aggregate put out-
narrow-based securities full. of-the-money amount, if
index) and long put any; or (2) 20% of the
option on the same current market value of
underlying security (or the long security
index). future.
2 Short security future (or Individual stock or 20% of the current market 20% of the current
basket of security narrow-based security value of the short market value of the
futures representing index. security future, plus short security future,
each component of a the aggregate put in-the- plus the aggregate put
narrow-based securities money amount, if any. in-the-money amount, if
index) and short put Proceeds from the put any.
option on the same sale may be applied.
underlying security (or
index).
3 Long security future and Individual stock or The initial margin 5% of the current market
Short position in the narrow-based security required under value as defined in
same security (or index. Regulation T for the Regulation T of the
securities basket) short stock or stocks. stock or stocks
underlying the security underlying the security
future. future.
4 Long security future (or Individual stock or 20% of the current market 20% of the current
basket of security narrow-based security value of the long market value of the
futures representing index. security future, plus long security future,
each component of a the aggregate call in- plus the aggregate call
narrow-based securities the-money amount, if in-the-money amount, if
index) and short call any. Proceeds from the any.
option on the same call sale may be applied.
underlying security (or
index).
[[Page 69055]]
5 Long a basket of narrow- Narrow-based security 20% of the current market 20% of the current
based security futures index. value of the long basket market value of the
that together tracks a of narrow-based security long basket of narrow-
broad based index and futures, plus the based security futures,
short a broad-based aggregate call in-the- plus the aggregate call
security index call money amount, if any. in-the-money amount, if
option contract on the Proceeds from the call any.
same index. sale may be applied.
6 Short a basket of narrow- Narrow-based security 20% of the current market 20% of the current
based security futures index. value of the short market value of the
that together tracks a basket of narrow-based short basket of narrow-
broad-based security security futures, plus based security futures,
index and short a broad- the aggregate put in-the- plus the aggregate put
based security index put money amount, if any. in-the-money amount, if
option contract on the Proceeds from the put any.
same index. sale may be applied.
7 Long a basket of narrow- Narrow-based security 20% of the current market The lower of: (1) 10% of
based security futures index. value of the long basket the aggregate exercise
that together tracks a of narrow-based security price of the put, plus
broad-based security futures, plus pay for the aggregate put out-
index and long a broad- the long put in full. of-the-money amount, if
based security index put any; or (2) 20% of the
option contract on the current market value of
same index. the long basket of
security futures.
8 Short a basket of narrow- Narrow-based security 20% of the current market The lower of: (1) 10% of
based security futures index. value of the short the aggregate exercise
that together tracks a basket of narrow-based price of the call, plus
broad-based security security futures, plus the aggregate call out-
index and long a broad- pay for the long call in of-the-money amount, if
based security index full. any; or (2) 20% of the
call option contract on current market value of
the same index. the short basket of
security futures.
9 Long security future and Individual stock or The greater of: (1) 5% of The greater of: 5% of
short security future on narrow-based security the current market value the current market
the same underlying index. of the long security value of the long
security (or index). future; or (2) 5% of the security future; or (2)
current market value of 5% of the current
the short security market value of the
future. short security future.
10 Long security future, Individual stock or 20% of the current market 10% of the aggregate
long put option and narrow-based security value of the long exercise price, plus
short call option. The index. security future, plus the aggregate call in-
long security future, the aggregate call in- the-money amount, if
long put and short call the-money amount, if any.
must be on the same any, plus pay for the
underlying security and put in full. Proceeds
the put and call must from the call sale may
have the same exercise be applied.
price. (Conversion).
11 Long security future, Individual stock or 20% of the current market The lower of: (1) 10% of
long put option and narrow-based security value of the long the aggregate exercise
short call option. The index. security future, plus price of the put plus
long security future, the aggregate call in- the aggregate put out-
long put and short call the-money amount, if of-the-money amount, if
must be on the same any, plus pay for the any; or (2) 20% of the
underlying security and put in full. Proceeds aggregate exercise
the put exercise price from call sale may be price of the call, plus
must be below the call applied. the aggregate call in-
exercise price. (Collar). the-money amount, if
any.
12 Short security future and Individual stock or The initial margin 5% of the current market
long position in the narrow-based security required under value, as defined in
same security (or index. Regulation T for the Regulation T, of the
securities basket) long security or long stock or stocks.
underlying the security securities.
future.
13 Short security future and Individual stock or The initial margin 10% of the current
long position in a narrow-based security required under market value, as
security immediately index. Regulation T for the defined in Regulation
convertible into the long security or T, of the long stock or
same security underlying securities. stocks.
the security future,
without restriction,
including the payment of
money.
14 Short security future (or Individual stock or 20% of the current market The lower of: (1) 10% of
basket of security narrow-based security value of the short the aggregate exercise
futures representing index. security future, plus price of the call, plus
each component of a pay for the call in full. the aggregate call out-
narrow-based securities of-the-money amount, if
index) and Long call any; or (2) 20% of the
option or warrant on the current market value of
same underlying security the short security
(or index). future.
15 Short security future, Individual stock or 20% of the current market 10% of the aggregate
short put option and narrow-based security value of the short exercise price, plus
long call option. The index. security future, plus the aggregate put in-
short security future, the aggregate put in-the- the-money amount, if
short put and long call money amount, if any, any.
must be on the same plus pay for the call in
underlying security and full. Proceeds from put
the put and call must sale may be applied.
have the same exercise
price. (Reverse
Conversion).
16 Long (short) a security Individual stock and The greater of: (1) 3% of The greater of: (1) 3%
future and short (long) narrow-based security the current market value of the current market
an identical \6\ index. of the long security value of the long
security future traded future(s); or (2) 3% of security future(s); or
on a different market. the current market value (2) 3% of the current
of the short security market value of the
future(s). short security
future(s).
[[Page 69056]]
17 Long (short) a basket of Individual stock and The greater of: (1) 5% of The greater of: (1) 5%
security futures that narrow-based security the current market value of the current market
together tracks a narrow- index. of the long security value of the long
based index and short future(s); or (2) 5% of security future(s); or
(long) a narrow based the current market value (2) 5% of the current
index future. of the short security market value of the
future(s). short security
future(s).
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\6\ Two security futures contracts will be considered
``identical'' for this purpose if they are issued by the same
clearing agency or cleared and contracts guaranteed by the same
derivatives clearing organization, have identical specifications,
and would offset each other at the clearing level.
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(C) Definitions. For the purposes of section (f)(10) of this Rule
and the offset table noted above, with respect to the term ``security
futures contracts,'' the following terms shall have the meanings
specified below:
(i) The term ``security futures contract'' means a ``security
future'' as defined in Section 3(a)(55) of the Exchange Act.
(ii) The term ``current market value'' has the same meaning as it
is as defined in Rule 401(4) under the Exchange Act and Rule
41.43(a)(4) of the CEA.
(iii) The term ``underlying security'' means, in the case of
physically settled security futures contracts, the security that is
delivered upon expiration of the contract, and, in the case of cash
settled security futures contracts, the security or securities index
the price or level of which determines the final settlement price for
the security futures contract upon its expiration.
(iv) The term ``underlying basket'' means, in the case of a
securities index, a group of security futures contracts where the
underlying securities as defined in paragraph (iii) above include each
of the component securities of the applicable index and which meets the
following conditions: (1) The quantity of each underlying security is
proportional to its representation in the index, (2) the total market
value of the underlying securities is equal to the aggregate value of
the applicable index, (3) the basket cannot be used to offset more than
the number of contracts or warrants represented by its total market
value, and (4) the security futures contracts shall be unavailable to
support any other contract or warrant transaction in the account.
(v) The term ``underlying stock basket'' means a group of
securities which includes each of the component securities of the
applicable index and which meets the following conditions: (1) The
quantity of each stock in the basket is proportional to its
representation in the index, (2) the total market value of the basket
is equal to the underlying index value of the index options or warrants
to be covered (3) the securities in the basket cannot be used to cover
more than the number of index options or warrants represented by that
value, and (4) the securities in the basket shall be unavailable to
support any other option or warrant transaction in the account.
(vi) The term ``variation settlement'' has the same meaning as it
is defined in Rule 401(a) of the Exchange Act and Rule 41.43(a)(32) of
the CEA.
(D) Security Futures Dealers' Accounts. Notwithstanding the other
provisions of this section (f)(10), a member organization may carry and
clear the market maker permitted offset positions (as defined below) of
one or more security future dealers in an account which is limited to
bonafide market maker transactions, upon a ``Good Faith'' margin basis
which is satisfactory to the concerned parties, provided the ``Good
Faith'' margin requirement is not less than the Net Capital haircut
deduction of the member organization carrying the transaction pursuant
to Rule 325. In lieu of collecting the ``Good Faith'' margin
requirement, a carrying member organization may elect to deduct in
computing its Net Capital the amount of any deficiency between the
equity maintained in the account and the ``Good Faith'' margin
required.
For the purpose of this paragraph (f)(10)(D), the term ``security
futures dealer'' means a security futures dealer as defined in Rule 400
(c)(2)(v) of the Exchange Act and Rule 41.42(c)(2)(v) of the CEA.
For purposes of this paragraph (f)(10)(D), a permitted offset
position means in the case of a security futures contract in which a
security futures dealer makes a market, a position in the underlying
asset or other related assets, or positions in options overlying the
asset or other related assets. Accordingly, a security futures dealer
may establish a long or short position in the assets underlying the
security futures contracts in which the security futures dealer makes a
market, and may purchase or write options overlying those assets, if
the account holds the following permitted offset positions:
(i) A long position in the security futures contract or underlying
asset offset by a short option position which is ``in or at the
money'';
(ii) A short position in the security futures contract or
underlying asset offset by a long option position which is ``in or at
the money'';
(ii) A position in the underlying asset resulting from the
assignment of a market-maker short option position or making delivery
in respect of a short security futures contract;
(iv) A position in the underlying asset resulting from the
assignment of a market-maker long option position or taking delivery in
respect of a long security futures contract;
(v) A net long position in a security futures contract in which a
security futures dealer makes a market or the underlying asset;
(vi) A net short position in a security future contract in which a
security futures dealer makes a market or the underlying asset; or
(vii) An offset position as defined in SEC Rule 15c3-1, including
its appendices, or any applicable SEC staff interpretation or no-action
position.
(E) Approved Options Specialists' or Market Makers' Accounts.
Notwithstanding the other provisions of (f)(10) and (f)(2)(j), a member
organization may carry and clear the market maker permitted offset
positions (as defined below) of one or more approved options
specialists or market makers in an account which is limited to bonafide
approved options specialist or market maker transactions, upon a ``Good
Faith'' margin basis which is satisfactory to the concerned parties,
provided the ``Good Faith'' margin requirement is not less than the Net
Capital haircut deduction of the member organization carrying the
transaction pursuant to Rule 325. In lieu of collecting the ``Good
Faith'' margin requirement, a carrying member organization may elect to
deduct in computing its Net Capital the amount of any deficiency
between the equity maintained in the account and the ``Good Faith''
margin required. For the purpose of this paragraph (f)(10)(E), the term
``approved options specialist or market maker'' means a specialist,
market maker, or registered trader in
[[Page 69057]]
options as referenced in paragraph (f)(2)(j) of this Rule, who is
deemed a specialist for all purposes under the Exchange Act and who is
registered pursuant to the rules of a national securities exchange.
For purposes of this paragraph (f)(10)(E), a permitted offset
position means a position in the underlying asset or other related
assets. Accordingly, a specialist or market maker may establish a long
or short position in the assets underlying the options in which the
specialist or market maker makes a market, or a security futures
contract thereon, if the account holds the following permitted offset
positions:
(i) A long position in the underlying instrument or security
futures contract offset by a short option position which is ``in or at
the money'';
(ii) A short position in the underlying instrument or security
futures contracts offset by a long option position which is ``in or at
the money'';
(iii) A stock position resulting from the assignment of a market
maker short option position or delivery in respect of a short security
futures contract;
(iv) A stock position resulting from the exercise of a market maker
long option position or taking delivery in respect of a long security
futures contract;
(v) A net long position in a security (other than an option) in
which a market maker makes a market;
(vi) A net short position in a security (other than an option) in
which the market maker makes a market; or
(vii) An offset position as defined in SEC Rule 15c3-1, including
the appendices, or any applicable SEC staff interpretation or no-action
position.
For purposes of paragraphs (f)(10)(D) and (E), the term ``in or at
the money'' means the current market price of the underlying security
is not more than the two standard exercise intervals below (with
respect to a call option) or above (with respect to a put option) the
exercise price of the option; the term ``in the money'' means the
current market price of the underlying asset or index is not below
(with respect to a call option) or above (with respect to a put option)
the exercise price of the option; and the term ``overlying option''
means a put option purchased or a call option written against a long
position in an underlying asset; or a call option purchased or a put
option written against a short position in an underlying asset.
Securities, including options and security futures contracts, in
such accounts shall be valued conservatively in the light of current
market prices and the amount which might be realized upon liquidation.
Substantial additional margin must be required or excess Net Capital
maintained in all cases where the securities carried: (i) Are subject
to unusually rapid or violent changes in value including volatility in
the expiration months of options or security futures products, (ii) do
not have an active market, or (iii) in one or more or all accounts,
including proprietary accounts combined, are such that they cannot be
liquidated promptly or represent undue concentration of risk in view of
the carrying member or member organization's Net Capital and its
overall exposure to material loss.
(F) Approved Specialists' Accounts--others. Notwithstanding the
other provisions of (f)(10) and (f)(2)(j), a member organization may
carry the account of an ``approved specialist,'' which account is
limited to bonafide specialist transactions including hedge
transactions with security futures contracts upon a margin basis which
is satisfactory to both parties. The amount of any deficiency between
the equity in the account and haircut requirements pursuant to SEA Rule
15c3-1 (Net Capital) shall be deducted in computing the Net Capital of
the member organization under the Exchange's Capital Requirements.
For purposes of this paragraph F (10)(F) the term ``approved
specialist'' means a specialist who is deemed a specialist for all
purposes under the Exchange Act and who is registered pursuant to the
rules of a national securities exchange.
.70 Money market mutual funds, as defined under Rule 2a-7 of the
Investment Company Act of 1940, can be used for satisfying margin
requirements under this subsection (f)(10), provided that the
requirements of Rule 404(b) of the Exchange Act and Rule 46(b)(2) under
the CEA are satisfied.
.80 Day-trading of security futures is subject to the minimum
requirements of this Rule. If deemed a pattern day-trader, the customer
must maintain equity of $25,000. The 20% requirement, for security
futures contracts, should be calculated based on the greater of the
initial or closing transaction and any amount exceeding NYSE excess
must be collected. The creation of a customer call subjects the account
to all the restrictions contained in Rule 431(f)(8)(B).
.90 The use of the ``time and tick'' method is based on the
member's or member organization's ability to substantiate the validity
of the system used. Lacking this ability dictates the use of the
aggregate method.
.100 Security futures contracts transacted or held in a futures
account shall not be subject to any provision of this Rule.
* * * * *
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 Exchange 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 III below and is set forth in Sections A, B, and C below.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Background
The CFTC and SEC have adopted customer margin requirements for the
trading of futures on narrow-based indices and single stocks
(collectively referred to as ``security futures contracts'' or
``SFCs'') (``SEC/CFTC Margin Regulations'')\7\ pursuant to authority
delegated to them by the Federal Reserve Board (``FRB'') under Section
7(c)(2)(B) of Act.\8\ As noted in the adopting release,\9\ Section
7(c)(2) of the Act provides that the customer margin requirements for
SFCs must satisfy four requirements: (1) They must preserve the
financial integrity of markets trading security futures contracts; (2)
they must prevent systemic risk; (3) they must (a) be consistent with
the margin requirements for comparable options traded on an exchange
registered pursuant to Section 6(a) of the Act,\10\ and (b) provide for
initial and maintenance margin that are not lower than the lowest level
of margin, exclusive of premium, required for comparable exchange
traded options; and (4) they must be and remain consistent with the
margin requirements established by the FRB under Regulation T.\11\ The
regulations on customer margin for security futures became effective on
September 13, 2002. The Exchange believes that the proposed amendments
discussed below
[[Page 69058]]
conform NYSE margin rules to these new requirements.
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\7\ 17 CFR 240.400 through 406; 17 CFR 41.41 through 41.48.
\8\ 15 U.S.C. 78g(c)(2)(B).
\9\ See Securities Exchange Act Release No. 46292 (August 1,
2002), 67 FR 53146 (August 14, 2002).
\10\ 15 U.S.C. 78f.
\11\ 12 CFR 220.
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Proposed Amendments
NYSE Rule 431 prescribes specific margin requirements for members
and member organizations of the Exchange, which must be maintained in
all accounts of their customers, based on the type of securities
products held in such accounts.
The Exchange proposes to amend NYSE Rule 431(b) and (c) to provide
that the amount of initial and maintenance margin required for long and
short SFCs held in a securities account must be 20% of the current
market value of such SFC. The Exchange believes that this amendment
would essentially make margin requirements for SFCs consistent with the
margin requirements for comparable exchange-traded options contracts,
which are premium plus 20% of the underlying securities.
In addition, the Exchange proposes to amend NYSE Rule 431(e)(6)(A)
(``Broker/Dealer Accounts'') to permit introducing broker-dealers
trading SFCs to deduct from their proprietary accounts any deficiency
between the equity in the account and the haircut requirements pursuant
to Rule 15c3-1 of the Exchange Act (``Net Capital Rule'')\12\ in
computing the net capital of the member or member organization, in lieu
of collecting margin.
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\12\ 17 CFR 240.15c3-1.
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The Exchange is proposing a new provision, NYSE Rule 431(f)(10)
(``Customer Margin Rules Relating to Security Futures'') to provide
that SFCs transacted in a securities account will be subject to all
other provisions of NYSE Rule 431, including NYSE Rule
431(f)(8)(B)(``Day Trading''). Excluded from the Exchange's margin
requirements are arrangements between a member or member organization
and a borrower, whereby the borrower is defined as an ``Exempted
Person,'' under Rule 401(a)(9) of the Act,\13\ and Rule 41.43(a)(9)\14\
of the Commodity Exchange Act. Further, SFCs transacted in a futures
account would not be subject to NYSE Rule 431.
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\13\ 17 CFR 240.401(a)(9).
\14\ 17 CFR 41.43(a)(9).
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NYSE Rule 431(f)(10)(B)(4) (``Permissible Offsets'') is also a new
provision that permits margin requirements to be lower than the 20%
general requirement, and recognizes the hedged nature of certain
offsetting positions involving SFCs and related positions. Margin
levels for offsetting positions involving SFCs and related positions
would thus be lower than would be required if those positions were
margined separately. Further, the Exchange believes that the proposed
amendment makes the Exchange's rule consistent with the table of
offsets included in the recently adopted SEC/CFTC margin regulations
noted above.
Proposed NYSE Rule 431(f)(10)(C) is a new provision that would
provide certain definitions applicable specifically to SFCs, including,
among other things, the definitions of ``security futures contract,''
``current market value,'' and ``underlying security.''
Proposed NYSE Rule 431(f)(10)(D) (``Security Futures Dealers''
Accounts''), NYSE Rule 431(f)(10)(E) (``Approved Options Specialists''
or Market Makers' Accounts'') and NYSE Rule 431(f)(10)(F) (``Approved
Specialists'' Accounts-others'') are new rule provisions. As proposed,
the new provisions would permit ``good faith'' margin treatment for
specified hedged offset positions carried in the accounts noted above.
However, unlike the amendments proposed by other SROs on SFCs, \15\ the
Exchange believes that its proposal will permit member organizations to
accord offset treatment in accounts carried for such specialists,
market makers and security futures dealers only when their activity is
limited to bona fide specialist or market making transactions.
According to the Exchange, the limitations imposed are consistent with
its belief that market makers bear the primary responsibility and
obligation to maintain fair and orderly markets, and provide liquidity
to the marketplace. Were a revenue or other test substituted for the
affirmative obligation standard proposed, the Exchange believes that
entities other than qualified market makers would be permitted to act
as market makers. The Exchange believes that this was not the intent of
the Commission or CFTC when adopting margin regulations for security
futures.
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\15\ See e.g., Securities Exchange Act Release No. 46555
(September 26, 2002), 67 FR 61707 (October 1, 2002) (SR-OC-2002-01).
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Proposed .70 of NYSE Rule 431(f)(10) is a new provision that will
permit money market mutual funds as defined in Rule 2a-7 under the ICA
to be used for satisfying margin requirements for security futures
contracts, provided that the requirements of Rule 404(b) under the
Act,\16\ and Rule 41.46(b)(2) under the CEA \17\ are satisfied.
Presently, money market mutual funds may be used as collateral to
satisfy margin requirements under Regulation T in a securities margin
account. The proposed amendments to NYSE Rule 431 permit the use of
such funds as collateral for SFCs as is required by the new SEC/CFTC
Margin Regulations described above.
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\16\ 17 CFR 240.404(b).
\17\ 17 CFR 41.46(b)(2).
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Except as otherwise intended, the Exchange believes that these
proposed amendments are consistent with other SRO rule amendments
recently filed with the SEC for approval.
2. Statutory Basis
The statutory basis for the proposed rule change is section 6(b)(5)
of the Act,\18\ which requires, among other things, that the rules of
the Exchange are designed to prevent fraudulent and manipulative acts
and practices, to promote just and equitable principles of trade, to
foster cooperation and coordination with persons engaged in regulating,
clearing, settling, processing information with respect to, and
facilitating transactions in securities, to remove impediments to
perfect the mechanism of a free and open market and national market
system, and in general to protect investors and the public interest.
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\18\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange does not believe that the proposed rule change will
impose any burden on competition 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
The Exchange has neither solicited nor received written comments on
the proposed rule change.
III. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether the proposed rule
change, as amended, 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 20549-0609. 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
[[Page 69059]]
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 above-mentioned
self-regulatory organization. All submissions should refer to File No.
SR-NYSE-2002-53 and should be submitted by December 5, 2002.
IV. Commission's Findings and Order Granting Accelerated Approval of
Proposed Rule Change
The NYSE has asked the Commission to approve the proposed rule
change and Amendment No. 1 thereto prior to the thirtieth day after the
date of publication of notice of the filing to accommodate the
timetable for the trading of security futures.
The Commission finds that the proposed rule change, as amended, is
consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities
exchange.\19\ In particular, the Commission believes that the proposed
rule change is consistent with the requirements of section 6(b)(5) of
the Act,\20\ which requires, among other things, to promote just and
equitable principles of trade and, in general, to protect investors and
the public interest.\21\ In addition, the Commission believes that the
proposed rule change is consistent with section 7(c)(2)(B) of the
Act,\22\ which provides, among other things, that the margin
requirements for security futures must preserve the financial integrity
of markets trading security futures, prevent systemic risk, be
consistent with the margin requirements for comparable exchange-traded
options, and provides that the margin levels for security futures may
be no lower than the lowest level of margin, exclusive of premium,
required for any comparable exchange-traded option.
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\19\ 15 U.S.C. 78s(b)(2).
\20\ 15 U.S.C. 78f(b)(5).
\21\ In approving the proposed rule, the Commission has
considered the proposed rule's impact on efficiency, competition,
and capital formation. 15 U.S.C. 78c(f).
\22\ 15 U.S.C. 78g(c)(2)(B).
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The Commission believes that the rule change is generally
consistent with the customer margin rules for security futures adopted
by the Commission and the CFTC. In particular, the Commission notes
that, consistent with Rule 403 under the Act, NYSE's proposed rule
provides for a minimum margin level of 20% of current market value for
all positions in security futures carried in a securities account. The
Commission believes that 20% is the minimum margin level necessary to
satisfy the requirements of section 7(c)(2)(B) of the Act. Rule 403
under the Act \23\ also provides that a national securities exchange
may set margin levels lower than 20% of the current market value of the
security future for an offsetting position involving security futures
and related positions, provided that an exchange's margin levels for
offsetting positions meet the criteria set forth in section 7(c)(2)(B)
of the Act. The offsets proposed by NYSE are consistent with the
strategy-based offsets permitted for comparable offset positions
involving exchange-traded options and therefore consistent with section
7(c)(2)(B) of the Act.
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\23\ 17 CFR 240.403(b)(2).
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The Commission also believes that the treatment proposed by NYSE
for security futures dealers under Rule 431 is consistent with the Act,
and Rule 400(c)(2)(v) thereunder.\24\ Specifically, the rule would
permit NYSE member organizations to accord ``good faith'' margin
treatment to specified offsetting positions involving security futures,
carried in a securities account for a security futures dealer,
consistent with the customer margin rules for security futures adopted
by the Commission and the CFTC.
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\24\ 17 CFR 200.400(c)(2)(v).
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Finally, the Commission believes it is consistent with the Act for
the NYSE to exclude from its margin requirements positions in SFCs
carried in a futures account. The Commission believes that by choosing
to exclude such positions from the scope of Rule 431, the NYSE's
proposal will make compliance by members with the regulatory
requirements of several SROs easier.
The Commission finds good cause for approving the proposed rule
change, as amended, prior to the thirtieth day after the date of
publication of notice of filing thereof in the Federal Register. The
Commission believes that accelerated approval of the proposed rule
change should enable NYSE members to trade security futures in
securities accounts from the outset of security futures trading.\25\ In
addition, the Commission believes that granting accelerated approval to
the proposed rule change and Amendment No. 1 thereto should clarify
NYSE members' obligations under NYSE Rule 431 with respect to their
trading in security futures. The Commission notes that the NYSE has
filed the proposed rule change as a temporary pilot to give members of
the public an opportunity to comment on the substance of the proposed
rule change before it requests permanent approval.
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\25\ The Commission understands that trading in security futures
is scheduled to begin on November 8, 2002.
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Accordingly, the Commission finds good cause, consistent with
section 19(b)(2) of the Act,\26\ to approve the proposed rule change,
as amended, prior to the thirtieth day after publication of the notice
of filing on a pilot basis for sixty days beginning on the date of this
order.
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\26\ 15 U.S.C. 78f(b)(5); 15 U.S.C. 78s(b)(2).
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V. Conclusion
It is therefore ordered, pursuant to section 19(b)(2) of the
Act,\27\ that the proposed rule change, as amended (File No. SR-NYSE-
2002-53), be, approved until January 6, 2003.
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\27\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation, pursuant
to delegated authority.\28\
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\28\ 17 CFR 200.30-3(a)(12).
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Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-28897 Filed 11-13-02; 8:45 am]
BILLING CODE 8010-01-P