Self-Regulatory Organizations; New York Stock Exchange, Inc.; Notice of Filing of Proposed Rule Change and Amendment No. 1 Thereto to Rules 104 (“Dealings by Specialists”) and 123E (“Specialist Combination Review Policy”) To Change the Exchange's Capital Requirements for Specialist Organizations., 76337-76344 [E5-7769]
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Federal Register / Vol. 70, No. 246 / Friday, December 23, 2005 / Notices
currently exceed $1,000,000, the current
initiation fee for lessee members is the
$5,000 maximum.
On December 6, 2005, the members of
the Exchange and the shareholders of
Archipelago Holdings, Inc.
(‘‘Archipelago’’) voted to approve a
merger of the Exchange and
Archipelago. It is anticipated that the
merger will be consummated in early
2006 upon receipt of approval of the
transaction from the Division of Market
Regulation. Upon consummation of the
merger, the Exchange and Archipelago
will each become wholly owned
subsidiaries of a new publicly traded
company, NYSE Group, Inc., and
members of the Exchange will exchange
their membership interests for shares of
NYSE Group and cash.
The Exchange believes it is
appropriate to waive the initiation fees
currently charged to lessee members
who commence new leases on or after
December 13, 2005. The initiation fees
were established at a time when it was
assumed that most new lessee members
would lease a seat for a reasonable
period of time and would amortize the
cost of the initiation fee over that
period. As new leases at this time are
likely to have a duration of only a
matter of weeks, that will no longer be
the case. As such, the Exchange believes
that it is equitable to waive the
initiation fee at this time.
In addition to amending Exchange
Rule 301 in the manner described
above, the Exchange is making a
corresponding change to page 11 of the
Exchange 2005 Price List to indicate
that initiation fees will no longer be
charged in connection with the
commencement of new leases.
References in page 11 of the Exchange
2005 Price List to ‘‘transfer fees’’ are
intended as references to the initiation
fees established by Supplementary
Material .27 of Exchange Rule 301.
2. Statutory Basis
The basis under the Act for this
proposed rule change is the requirement
under Section 6(b)(4) 6 that an exchange
have rules that provide for the equitable
allocation of reasonable dues, fees and
other charges among its members and
other persons using its facilities.
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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 that is not
necessary or appropriate in furtherance
of the purposes of the Act.
6 15
U.S.C. 78f(b)(4).
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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. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
The foregoing rule change has become
effective pursuant to section 19(b)(3)(A)
of the Act 7 and Rule 19b–4(f)(2)
thereunder,8 because it establishes or
changes a due, fee or other charge
applicable only to a member.9 At any
time within 60 days of the filing of the
proposed rule change, the Commission
may summarily abrogate such rule
change if it appears to the Commission
that such action is necessary or
appropriate in the public interest, for
the protection of investors, or otherwise
in further of the purposes of the Act.10
IV. 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. Comments may be submitted by
any of the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number SR–NYSE–2005–88 on the
subject line.
Paper Comments
• Send paper comments in triplicate
to Jonathan G. Katz, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–9303.
All submissions should refer to File
Number SR–NYSE–2005–88. This file
number should be included on the
subject line if e-mail is used. To help the
Commission process and review your
7 15
U.S.C. 78s(b)(3)(A).
8 17 CFR 240.19b–4(f)(2).
9 At the request of the Exchange, the Commission
added ‘‘applicable only to a member.’’ Telephone
conversation between John Carey, Assistant General
Counsel, Exchange, and Kim Allen, Special
Counsel, Commission, Division of Market
Regulation, on December 16, 2005.
10 For purposes of calculating the 60-day period
within which the Commission may summarily
abrogate the proposed rule change under Section
19(b)(3)(C) of the Act, the Commission considers
that period to commence on December 14, 2005, the
date the Exchange filed Amendment No. 1 to the
proposed rule change. See 15 U.S.C. 78s(b)(3)(C).
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76337
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). 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 the filing also will be
available for inspection and copying at
the principal office of the Exchange. All
comments received will be posted
without change; the Commission does
not edit personal identifying
information from submissions. You
should submit only information that
you wish to make available publicly. All
submissions should refer to File
Number SR–NYSE–2005–88 and should
be submitted on or before January 13,
2006.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.11
Jonathan G. Katz,
Secretary.
[FR Doc. E5–7768 Filed 12–22–05; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–52969; File No. SR–NYSE–
2005–38]
Self-Regulatory Organizations; New
York Stock Exchange, Inc.; Notice of
Filing of Proposed Rule Change and
Amendment No. 1 Thereto to Rules 104
(‘‘Dealings by Specialists’’) and 123E
(‘‘Specialist Combination Review
Policy’’) To Change the Exchange’s
Capital Requirements for Specialist
Organizations.
December 16, 2005.
Pursuant to section 19(b)(1) 1 of the
Securities Exchange Act of 1934 (the
‘‘Exchange Act’’),2 and Rule 19b–4
thereunder,3 notice is hereby given that
on May 26, 2005, the New York Stock
Exchange, Inc. (‘‘NYSE’’ or the
‘‘Exchange’’) filed with the Securities
and Exchange Commission (‘‘SEC’’ or
11 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 15 U.S.C. 78a et seq.
3 17 CFR 240.19b–4.
1 15
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Federal Register / Vol. 70, No. 246 / Friday, December 23, 2005 / Notices
the ‘‘Commission’’) a proposed rule
change. On November 22, 2005, NYSE
amended the proposed rule change,
replacing it in its entirety (‘‘Amendment
No. 1’’). The amended proposed rule
change is described in Items I, II, and III
below, which have been substantially
prepared by the Exchange. The
Commission is publishing this notice to
solicit comments on the proposed rule
change from interested persons.
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
The New York Stock Exchange, Inc.
(‘‘NYSE’’ or the ‘‘Exchange’’) hereby
proposes amendments to Rules 104
(‘‘Dealings by Specialists’’) and 123E
(‘‘Specialist Combination Review
Policy’’) to change the capital
requirement of specialist organizations.
The text of the proposed rule change is
set forth below. Italics indicate
additions; brackets indicate deletions.
*
*
*
*
*
Rule 104. Dealings by Specialists
(a)–(b) No Change
* * *
Supplementary Material:
Functions of Specialists
.10 through .17 No Change
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Capital Requirements of Specialists
[(effective June 1, 1971.)]
.20 [Regular s]Specialist[s]
Organizations—Minimum Capital
Requirements.—
[(1) A member registered as a regular
specialist at an active post must be able
to assume maintain a position of 150
trading units in each common stock in
which he is registered.
(2) A member registered as a regular
specialist at an active post must be able
to assume a position of 30 trading units
in each convertible preferred stock, of
1200 shares in each of the 100 share
trading unit non-convertible preferred
stocks and of 300 shares in each of the
10 share unit non-convertible preferred
stocks in which he is registered.
(3) The position which a member
registered as a regular specialist at an
active post must be able to assume, for
each stock in which he is registered that
is not included in (1) or (2) above, shall
be determined by the Exchange. Such
determinations shall be based upon the
structure and characteristics of the
security and shall be the amount
prescribed in (1) or (2) above for the
type of stock with the most similar
structure and characteristics.
(4) A member registered as a regular
specialist at the inactive Post must have,
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at all times, net liquid assets of at least
$150,000.
(5) With respect to any Investment
Company Unit (as defined in paragraph
703.16 of the Listed Company Manual)
or a Trust Issued Receipt, a member
registered as a regular specialist [at an
active post] shall maintain net liquid
assets equivalent to $500,000 for each
such security in which the specialist is
registered.]
(1) A specialist organization that is
only registered in Exchange Traded
Funds shall maintain the greater of
$500,000 for each Exchange Traded
Fund or $1,000,000.
([6]2) [Notwithstanding .30 of this
Rule, e] Each [member registered as a
regular] specialist organization [at an
active post] must [be able to] maintain
net liquid assets which shall be the
greater of $1,000,000 or the
requirements set forth in Rule 104.21,
except for those specialist organizations
that are only registered in Exchange
Traded Funds, as set forth in 104.20(1)
above. [establish that he can meet, with
his own net liquid assets, a minimum
capital requirement which shall be the
greater of $1,000,000 or 25% of the
position requirements as set forth in
Paragraphs (1), (2) and (3) above, except
as determined by the Exchange in
unusual circumstances.]
(3) The Division of Member Firm
Regulation must be informed
immediately by a specialist organization
[, in each instance, of his inability]
whenever it is unable to comply with
the [provisions] requirements set forth
in [the above Paragraphs] Rules 104.20
or .21, as applicable.
([7]4) [For those members registered
as a regular specialist subject to the Net
Capital Rule (SEA Rule 15c3–1), t] The
term ‘‘net liquid assets’’ refers to excess
net capital computed in accordance
with Rule 15c3–1, promulgated under
the Securities Exchange Act of 1934 (the
‘‘Exchange Act’’) and the provisions of
Exchange Rule 325 (‘‘Capital
Requirements’’) with the following
adjustments:
(i) Additions for haircuts and undue
concentration charges taken pursuant to
Section (c)(2)(vi)(M) of Rule 15c3–1 on
specialty securities in dealer accounts;
[(ii) Additions for any other haircuts
on long positions which are deposited
or pledged as collateral for funds
borrowed to finance dealer transactions
or positions in specialist securities;]
([i]ii) Deductions for floor brokerage
and/or commissions receivable;
([iv]iii) Deductions for clearing
organization deposits; and
(iv) Deductions for any cash surrender
value of life insurance policies
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allowable under [the Net Capital Rule]
Rule 15c3–1, under the Exchange Act.
[(8) For members registered as a
regular specialist not subject to the Net
Capital Rule, ‘‘net liquid assets’’ is
defined as the excess of cash, net credit
balances at clearing broker(s), and
readily marketable securities over all
liabilities.]
(5) In the event that two or more
specialist[s] organizations are associated
with each other and deal for the same
specialist account, the [above] capital
requirements enumerated in Rules
104.20 and .21 shall apply to such
specialist[s] organizations as one unit,
rather than to each specialist
organization individually. Any joint
account must be approved by the
Divisions of Market Surveillance and
Member Firm Regulation.
.21 [Concentration Measure] Specialist
Organizations—Additional Capital
Requirements.—
Notwithstanding the provisions of (1)
through (5) in Rule 104.20 above, if a
regular specialist entity’s market share
exceeds 5% of any of the following
concentration measures:
(1) All listed common stock (current);
(2) The 250 most active listed
common stocks (over the previous 12
months);
(3) The total share volume of stock
trading on the Exchange (over the
previous 12 months); or
(4) The total dollar value of stock
trading on the Exchange (over the
previous 12 months)
such entity shall maintain net liquid
assets equivalent to the following
applicable requirements:
(i) $4 million for each specialist
security contained in the DJIA;
(ii) $2 million for each specialist
security contained in the S&P 100, not
contained in (i);
(iii) $1 million for each specialist
security contained in the S&P 500, not
contained in (i) or (ii);
(iv) $500 thousand for each specialist
common stock, excluding bond funds,
not contained in (i), (ii) or (iii);
(v) $100 thousand for each specialist
security not included in (i) through (iv),
excluding warrants.
(vi) $500,000 for each specialist
security that is an Investment Company
Unit (as defined in paragraph 703.16 of
the Listed Company Manual) or a Trust
Issued Receipt.]
(1) Each specialist organization
subject to Rule 104.21 must maintain
minimum net liquid assets equal to:
(i) $1,000,000 for each one tenth of
one percent (.1%) of Exchange
transaction dollar volume in its
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Federal Register / Vol. 70, No. 246 / Friday, December 23, 2005 / Notices
registered securities, exclusive of
Exchange Traded Funds, plus $500,000
for each Exchange Traded Fund; and
(ii) A market risk add-on, which shall
be calculated as follows:
(a) The specialist organization may
use an Exchange-approved value-at-risk
(VaR) model to calculate its market risk
add-on. The VaR model must have a
99%, one-tailed confidence level with
price changes equivalent to a ten
business day movement in rates and
prices. To calculate the market risk addon, the specialist organization
multiplies the VaR of specialist dealer
and related positions by the appropriate
multiplication factor, which is set at a
minimum of three. The results of
quarterly backtesting determine which
of the multiplication factors contained
in Table 1 of Rule 104.22 a specialist
organization must use; or
(b) For those specialist organizations
not utilizing VaR or whose models have
not been approved by the NYSE, three
times the average of the prior twenty
business days’ securities haircuts on its
specialist dealer’s positions computed
pursuant to Rule 15c3–1(c)(2)(vi),
exclusive of paragraph (N), under the
Exchange Act.
(2) A specialist organization may
apply to the Exchange for authorization
to use a VaR model to calculate its
market risk add-on, in lieu of
calculating the average of the prior
twenty business days’ capital
requirement for securities haircuts
under Exchange Act Rule 15c3–
1(c)(2)(vi), exclusive of paragraph (N).
Once a specialist organization has been
granted approval by the Exchange to use
a VaR model, it shall continue to
compute its net liquid asset market risk
add-on using VaR, unless a change is
approved upon application to the
Exchange. To apply for authorization to
use a VaR model pursuant to NYSE
Rule 104.21(1)(ii)(a), a specialist must
submit in writing the following
information to Member Firm Regulation
with its application:
(a) A description of the mathematical
models to be used to compute its market
risk add-on;
(b) A description of the requirements
as set forth in Exchange Rule 104.22;
and
(c) Any other material the Exchange
may request.
(3) Notwithstanding the requirements
of Rule 98(b)(vii) (Capital Requirements
Met Separately), the specialist
organization’s net liquid assets needed
to meet the requirements in Rules
104.20 and .21 must be dedicated
exclusively to specialist dealer
activities, and must not be used for any
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76339
period as may be appropriate for the
first year of its use;
(B) On the last business day of each
.22 [Combinations of Specialist
quarter, the specialist organization must
Entities]Definitions and Model Approval identify the number of backtesting
Process
exceptions of the VaR model, that is, the
[A specialist entity resulting from the
number of business days in the past 250
merger, consolidation, acquisition, or
business days, or other period as may be
other combination of specialist assets:
appropriate for the first year of its use,
(i) subject to the concentration
for which the actual net trading loss, if
measure requirements of Rule 104.21,
any, exceeds the corresponding VaR
shall maintain net liquid assets in
measure; and
accordance with those provisions, or
(C) The specialist organization must
equivalent to the aggregate net liquid
use the multiplication factor indicated
assets of the specialist entities prior to
in Table 1 below in determining its
their combination, whichever is greater; market risk add-on until it obtains the
(ii) not subject to the concentration
next quarter’s backtesting results;
measure requirements of Rule 104.21,
shall maintain net liquid assets
Table 1.—Multiplication Factor Based
according to the provisions of Rule
on the Number of Backtesting Ex104.20, or equivalent to the aggregate
ceptions of the VaR Model
net liquid assets of the specialist entities
prior to their combination, whichever is
Multiplication
Number of exceptions
greater.]
factor
(1) For purposes of this Rule 104,
3.00
specialist organizations must define the 4 or fewer .............................
5 ............................................
3.40
term ‘‘Exchange transaction dollar
3.50
volume’’ consistent with the most recent 6 ............................................
7 ............................................
3.65
Statistical Data, calculated and
8 ............................................
3.75
provided by the NYSE on a monthly
9 ............................................
3.85
basis.
10 or more ............................
4.00
(2) For a specialist organization’s VaR
model to be approved, it must meet the
(iv) For purposes of incorporating
following minimum qualitative and
specific risk into a VaR model, a
quantitative requirements:
specialist organization must
(a) Qualitative Requirements.
demonstrate that it has methodologies
(i) The VaR model used to calculate
in place to capture liquidity, event, and
the market risk add-on for a position,
default risk adequately for each
along with a system of internal risk
position. Furthermore, the models used
management controls to assist the
to calculate deductions for specific risk
specialist organization in managing the
must:
risks associated with its business
(A) Explain the historical price
activities, must be integrated into the
variation in the portfolio;
daily internal risk management system
(B) Capture concentration (magnitude
of the specialist organization;
and changes in composition);
(ii) The VaR model must be reviewed
(C) Be robust to an adverse
both periodically and annually by
environment; and
qualified independent member
(D) Be validated through backtesting.
organization personnel or a qualified
(b) Quantitative Requirements.
(i) For purposes of determining
third party; and
(iii) For purposes of computing the
market risk add-on, the VaR model must
market risk add-on, the specialist
use a 99 percent, one-tailed confidence
organization must determine the
level with price changes equivalent to a
appropriate multiplication factor as
ten-business day movement in rates and
follows:
prices;
(A) As soon as possible, but no later
(ii) The VaR model must use an
than three months after the specialist
effective historical observation period of
organization begins using the VaR
at least one year. The specialist
model to calculate their market risk
organization must consider the effects of
add-on, the specialist organization must market stress in its construction of the
conduct backtesting of the model by
model. Historical data sets must be
comparing its actual daily net trading
updated at least monthly and
profit or loss with the corresponding
reassessed whenever market prices or
VaR measure generated by the VaR
volatilities change significantly; and
(iii) The VaR model must take into
model, using a 99 percent, one-tailed
account and incorporate all significant,
confidence level with price changes
identifiable market risk factors
equivalent to a one business day
applicable to positions in the accounts
movement in rates and prices, for each
of the specialist organization, including:
of the past 250 business days, or other
other purpose without the express
written consent of the Exchange.
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Federal Register / Vol. 70, No. 246 / Friday, December 23, 2005 / Notices
(A) Risks arising from the non-linear
price characteristics of derivatives and
the sensitivity of the market value of
those positions to changes in the
volatility of the derivatives’ underlying
rates and prices;
(B) Empirical correlations with and
across risk factors or, alternatively, risk
factors sufficient to cover all the market
risk inherent in the positions in the
dealer accounts of the specialist
organization; and
(C) Specific risk for individual
positions.
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.23 Maintaining a Fair and Orderly
Market.—
Solely for the purpose of maintaining
a fair and orderly market, the Exchange
may, for a period not to exceed 5
business days, allow a specialist entity
to continue to operate despite such
specialist entity’s non-compliance with
the provisions of Rules 104.2[1]0 [and]
or 104.2[2]1.
.24 Relief specialists.—
(1) The requirements with respect to
a member registered as a full time relief
specialist, i.e., one who may be called
upon to act as a relief specialist for an
entire business day, shall be, net liquid
assets of $150,000. [or a joint account
with the regular specialist in the stock.
Any joint account must be approved by
Regulation & Surveillance.]
(2) There is no requirement with
respect to a member registered as a parttime relief specialist, i.e., one who may
be called upon to act as a relief
specialist for less than the entire
business day, usually for lunch periods,
etc. Dealings effected by a part-time
relief specialist while relieving the
regular specialist must be made for the
account of the regular specialist whom
he is relieving.
[Specialists may meet the above
requirements either with their own
capital or by availing themselves of the
financing privileges provided by
§ 220.04(g) of Regulation T or § 221.3(o)
of Regulation U of the Board of Directors
of the Federal Reserve System ¶ 8121,
8218 which are explained at .30, below.]
[.30 Financing of specialists.—Under
§ 220.04(g) of Regulation T and
§ 221.3(o) Regulation U of the Board of
Directors of the Federal Reserve System
¶ 8121, 8218, a member may have his
transactions as a specialist financed on
a basis which is mutually satisfactory to
the specialist and the creditor. He may
finance such transactions by borrowing
from a bank on terms which are
mutually agreeable; he may have a
member organization finance such
transactions in a special account on a
margin basis which is mutually
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satisfactory to the specialist and the
carrying organization; or he may have a
joint account with the carrying
organization for the purpose of having
his specialist transactions financed on a
margin basis which is mutually
satisfactory.]
[Each specialist who makes such an
arrangement must inform The Market
Surveillance Division of the name of the
creditor and the terms of the
arrangement. The Market Surveillance
Division must be informed immediately
by telephone of the intention: (1) To
terminate or change an existing
financing arrangement (confirmed
subsequently in writing); or (2) to issue
a margin call. (This Rule does not in any
manner alter a member’s notification
requirements to Regulation &
Surveillance.) The specialist is required
to submit to that Department on Form
SPC (see .40 below) an initial report at
such time as the arrangement becomes
operative, and monthly reports
thereafter.]
[.40 Reports on Form SPC.—Each
specialist who arranges to have his
specialist transactions carried by a
member organization on a margin basis
lower than that required by the Board of
Directors of the Federal Reserve System
for regular margin accounts, must file
with The Market Surveillance Division
a report of Form SPC, (1) as of the first
date that such arrangement becomes
operative, i.e., when the margin in the
specialist’s account first fails to meet the
requirements of the Board of Directors
of the Federal Reserve System for
regular margin accounts, (2) as of the
date previous to the first date that the
arrangement becomes operative, and (3)
monthly thereafter, as of the last ledger
date of the month, including the month
in which the arrangement first becomes
operative.
Similar reports must be filed by each
specialist who, for the purpose of
financing his transactions as a
specialist, arranges with a bank to have
a loan value extended to him in an
amount greater than that permitted for
the financing of his non-specialist
transactions.
General Instructions
The report of a joint account may be
prepared and forwarded by any
participant. Forms may be obtained
from Market Surveillance Division.
Reports should be filed with that
Department as promptly as possible
after the ledger date as of which the
report is prepared.
Specific Instructions
For specific instruction see the
reverse side of Form SPC.]
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[.50 Income records.—Each specialist
and specialist organization shall submit,
for the confidential use of the Exchange,
such information relating to his or its
specialty business as may be requested
by the Exchange.
Each specialist and specialist
organization shall keep its records
showing the data set forth below so that
they will be readily available when the
Exchange requests them for its
confidential use for the purpose of
surveillance and study of specialists’
operations:
(i) total ‘‘actual’’ commission income
earned in all specialty stock;
(ii) share volume executed as agent by
specialty stock; and
(iii) dealer profit and loss by specialty
stock.
Dealer profit and loss data must
reflect, by specialty stock, any gain or
loss occurring within an investment
account.]
* * *
Rule 123E. Specialist Combination
Review Policy
(a)—(e) No Change
(f) [Proponents of a] A specialist unit
combination subject to review by either
the Quality of Markets Committee or the
Market Performance Committee under
this policy must [agree that] result in:
(i) [the] total [amount of] capital
[which each unit had separately prior to
the proposed combination shall not be
reduced, regardless of whether it would
exceed the combined unit’s new capital
requirement] of the combined unit
meeting, at a minimum: (a) the
requirements of Rules 104.20–104.21, (b)
be acceptable to the Exchange, and (c)
the combined unit’s capital requirement
may be temporarily revised at the
discretion of the Exchange; and
(ii) all required specialist capital be
accounted for separately from any other
capital, and be used solely for the
specialist business.
*
*
*
*
*
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 IV below. The
Exchange has prepared summaries, set
forth in Sections (A), (B), and (C) below,
of the most significant aspects of such
statements.
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A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
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(1) Purpose
Exchange specialist organizations
must maintain net liquid assets as
required by NYSE Rule 104, and in
addition, must satisfy the net capital
requirements prescribed in Rule 15c3–
1,4 promulgated under the Securities
Exchange Act of 1934 (the ‘‘Exchange
Act’’).5 NYSE Rule 325 requires
members and member organizations to
comply with Exchange Act Rule 15c3–
1 and also requires notification to the
Exchange whenever tentative net capital
has declined below defined levels. In
addition, Rule 325 gives the Exchange
the authority, at any time, to prescribe
greater net capital or net worth
requirements than those explicitly
prescribed by the rule, or to require
more stringent treatment of items when
computing net capital, net worth and,
by implication, net liquid assets.
Further, the NYSE can restrict the
business activities of specialist
organizations consistent with good
business practices and its obligation to
maintain a fair and orderly market. Such
restrictions may include prohibitions
against business expansion and business
reduction requirements.
The Exchange proposes to amend
Rules 104 and 123E to change the
capital requirement of specialist
organizations. The Exchange believes
that if the proposed amendments are
adopted, Rule 104 would more
accurately address market risks and
volatility. Further, the changes to Rule
123E would eliminate the ‘‘marriage
penalty’’ capital requirement for
specialist organization combinations.
(i) Difference Between Net Capital and
Net Liquid Assets. According to the
Exchange, ‘‘Net capital’’ is a regulatory
measure of the prudent level of liquid
assets required for a broker-dealer.
However, the Exchange contends that
the term ‘‘net liquid assets’’ refers to
liquidity in the form of cash and cash
equivalents that is immediately
available (or within twenty four hours)
to a specialist organization for the
continuing purchase and sale of
securities in which a specialist is
registered, in support of the specialist
book, and market maintenance. The
Exchange believes that net liquid assets
are a shorter-term form of liquidity that
is meant to be available to the specialist
organization pursuant to its daily
4 17
5 15
CFR 240.15c3–1.
U.S.C. 78a et seq.
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activities of maintaining a fair and
orderly market on the Exchange.
The Exchange believes that specialist
organizations’ unique liquidity needs
dictate the general form of the net liquid
asset requirement. Further, the
Exchange believes that it is important
for all specialist organizations and
market participants to know that
specialists have sufficient liquidity to
support the specialist book and market
maintenance activities. Therefore, the
Exchange contends that a specialist
organization’s net liquid asset
requirement functions to ensure that the
specialist continues to operate; whereas
a broker-dealer’s net capital requirement
functions to ensure that, if the brokerdealer were liquidated, the brokerdealer’s obligations to its customers and
creditors would be satisfied.
(ii) Background. (a) Position-Based
Capital Requirements (Rule 104.20).
Exchange Rule 104.20 (‘‘Regular
Specialists’’) sets position requirements
a specialist organization must be able to
assume in each stock that it is allocated.
For each Investment Company Unit or
Trust Issued Receipt for which a
specialist organization is registered, it
must maintain net liquid assets
equivalent to $500,000. The rule also
sets a minimum capital requirement,
which is the greater of $1,000,000 or
25% of the current position
requirements.
(b) Concentration Requirements (Rule
104.21). Specialist organizations are also
subject to NYSE Rule 104.21
(‘‘Concentration Measure
Requirements’’) if a specialist
organization’s market share exceeds 5%
of certain ‘‘concentration measures.’’ 6
Further, a specialist organization must
maintain the following net liquid assets:
(i) $4 million for each specialist security
contained in the Dow Jones Industrial
Average; (ii) $2 million for each
specialist security contained in the S&P
100, not contained in (i); (iii) $1 million
for each specialist security contained in
the S&P 500, not contained in (i) or (ii);
(iv) $500,000 for each specialist
common stock, Investment Company
Unit (including Exchange Traded
Funds) or a Trust Issued Receipt,
excluding bond funds, not contained in
(i), (ii) or (iii); and (v) $100,000 for each
specialist security not included in (i)
through (iv), excluding warrants.
(c) Combinations of Specialist Entities
(Rule 104.22). When two or more
specialist organizations combine as the
6 (1) All listed common stock; (2) The 250 most
active listed common stocks (over the previous
twelve months); (3) Total share volume of stock
trading on the Exchange (over the previous twelve
months); or (4) Total dollar value of stock trading
on the Exchange (over the previous twelve months).
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result of a merger, consolidation,
acquisition or other combination of
assets, NYSE Rule 104.22
(‘‘Combinations of Specialists Entities’’),
commonly referred to as the ‘‘marriage
penalty,’’ generally requires the
maintenance of:
(a) net liquid assets in accordance
with Rule 104.21, or equivalent to the
aggregate net liquid assets of the
respective specialist entities prior to
their combination, whichever is greater;
or
(b) for those combinations not subject
to Rule 104.21, net liquid assets
pursuant to Rule 104.20, or the
equivalent of the aggregate net liquid
assets of the respective specialist
entities prior to their combination,
whichever is greater.
(d) Specialist Combination Review
Policy (Rule 123E(f)(i)). Exchange Rule
123E(f) currently requires proponents of
a specialist unit combination to agree
that: (i) The total amount of capital
which each unit had separately prior to
the proposed combination shall not be
reduced regardless of whether it would
exceed the combined unit’s new capital
requirement; and (ii) all required
specialist capital be accounted for
separately from any other capital and be
used solely for the specialist business.
NYSE Rule 123E(f)(i) applies a
‘‘marriage penalty,’’ similar to that set
forth in Exchange Rule 104.22, to a
combination of specialist organizations
by requiring a higher capital
requirement of the combined unit,
rather than allowing a possible
reduction of capital, in line with the
new combined specialist organization’s
capital requirement. Rule 123E(f)(i) does
not recognize the benefits derived from
such combinations, nor does it
compensate for excess capital that may
have been in each specialist
organization prior to the merger.
(iii) Issues/Concerns With the Current
Capital Requirements. In mid December
1987—soon after the 1987 major stock
market correction—there were 55
specialist organizations on the Floor of
the Exchange. By the year 2000, when
Exchange Rule 104.22 was adopted,
those specialist organizations had
merged, consolidated, acquired or
combined to reduce that number to 25.
By April 2005, further consolidation
had reduced the number of specialist
organizations to seven.7
7 Because of the marriage penalty the capital
requirements for the remaining seven specalist
organizations represent the combined amount of
capital requirements of the 25 specialist
organizations that since 2000 were merged,
consolidated, acquired or combined. The Exchange
believes that the current capital requirement does
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The Exchange believes that the
position-based requirement
methodology set forth in NYSE Rule
104.20 is no longer appropriate in a
marketplace where there are seven
specialist organizations with sizeable
capital bases and sophisticated risk
management systems. The Exchange
contends that concentration
requirements set forth currently in
Exchange Rule 104.21 significantly
increase specialist organizations’ capital
requirements: However, there is no
gradual increase in the requirement.
Once a specialist organization’s market
share exceeds 5% of any of the
concentration measures they
immediately are subject to the rule. The
Exchange believes that this creates an
unintended disincentive for a specialist
organization to increase its market
share.
The marriage penalty imposed by
Rules 104.22 and 123E(f)(i) effectively
subjects specialist organizations that
have merged to the combined net liquid
asset requirements of the two entities,
although the Exchange contends that the
incremental risk assumed may not be
commensurate with the amount of net
liquid assets required to be maintained.
The Exchange believes that the current
net liquid assets requirement for such
specialist organizations is based neither
upon the amount of risk a specialist
organization is taking, nor upon the
dollar value or volatility of its portfolio.
(iv) Proposed Amendments. The
Exchange is proposing that NYSE Rule
104.20 (to be re-titled ‘‘Specialist
Organizations—Minimum Capital
Requirements’’) be amended to adopt
risk-based requirements in lieu of the
outdated and irrelevant position
requirements, with the exception of
Exchange Traded Funds (‘‘ETFs’’). For
ETFs, the Exchange is proposing to
amend Rule 104.20 to clarify that
specialist organizations that are
registered solely in ETFs maintain the
greater of $500,000 for each ETF or
$1,000,000.
Proposed amendments to NYSE Rule
104.21 (to be re-titled ‘‘Specialist
Organizations—Additional Capital
Requirements’’) would require a
specialist organization to meet, with its
own net liquid assets, a minimum
capital requirement equal to:
(i) $1,000,000 for each one tenth of
one percent (.1%) of Exchange
transaction dollar volume in its
specialty securities, plus $500,000 for
each Exchange Traded Fund; and
(ii) A market risk add-on, which is
calculated as either:
not recognize the benefits derived from such
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(a) An Exchange-approved value-atrisk (VaR) 8 model to calculate its
requirement for market risk; or
(b) For those not utilizing VaR or
whose models have not been approved
by the NYSE, three times the average of
the prior twenty business day’s
securities haircuts on its specialist
dealer’s positions.
The Exchange believes this proposal
utilizes the more generally recognized
and, effective risk measurement tools
employed by financial services firms,
and increasingly by the Commission
with particular respect to larger
organizations, such as Consolidated
Supervised Entities (‘‘CSE’’),9 whose
financial impact upon the market is
significant.
The Exchange is proposing definitions
and guidelines for the model approval
process in proposed Rule 104.22 (to be
re-titled ‘‘Definitions and Model
Approval Process’’). The model
approval process is designed after the
SEC’s rules for consolidated supervised
entities and includes qualitative and
quantitative requirements for a
specialist organization’s VaR model.
Some of these requirements include: (1)
the VaR model must be integrated into
the specialist organization’s internal risk
management system; (2) the VaR model
must be reviewed both periodically and
annually; and (3) methodologies to
capture liquidity, event and default risk
adequately for each position.
Specialists’ internal risk management
systems must generally be consistent
with standards outlined in the
Commission’s CSE rules, particularly
SEA Rule 15c3–4. Once a specialist
organization has been granted approval
by the Exchange to use a VaR model, it
may continue to compute its net liquid
asset requirement using VaR, unless a
change is approved upon application to
the Exchange. The Exchange will, from
time to time, revisit and examine
approved net liquid asset models and
may, for good cause and consistent with
8 The Exchange believes that value-at-risk is a
generally accepted method of measuring risk for
financial organizations and notes that it is primarily
used to establish trading limits and to stress test
models and limits. It uses standard statistical
techniques to design trading strategies and to
correlate past risks with future risks to set trading
limimts and thereby to minimize potential losses.
Value-at-risk models assess market risk based on
the probability distribution for a portfolio’s market
value.
9 See Exchange Act Rule 15c3–1(c)(15) which, as
part of the SEC’s Consolidated Supervised Entity
(‘‘CSE’’) rules, establishes a voluntary method of
computing net capital for large broker-dealers that
are part of a CSE. Eligibility to use the alternative/
CSE method is conditioned upon a broker-dealer’s
compliance with several requirements, including
comprehensive internal risk management
procedures that address the firm’s market, credit,
liquidity and operations risk.
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standards set forth in the Commission’s
CSE rules, increase or decrease the
market risk add-on requirement. The
Exchange will provide prompt
subsequent notice to the Commission of
any such adjustments.
The Exchange is proposing to add a
section requiring that a specialist
organization’s net liquid assets needed
to meet the requirements in NYSE Rules
104.20 and .21 must be dedicated
exclusively to specialist dealer
activities, and must not be used for any
other purpose without the express
written consent of the Exchange. This is
currently required under Rule 123(f)(ii)
when specialist organizations combine,
and the Exchange believes it should be
expanded to all specialist organizations’
required net liquid assets.
The Exchange is proposing to
eliminate the marriage penalty of NYSE
Rule 104.22 in its entirety. With a net
liquid assets requirement based upon a
specialist organization’s traded volume
on the Floor of the Exchange combined
with an add-on for market risk
requirement, the Exchange believes that
it is not appropriate or necessary to
arbitrarily increase a specialist
organization’s requirement when it
combines with another.
The Exchange is also proposing to
eliminate the marriage penalty of NYSE
Rule 123E(f)(i) by requiring the
specialist organization to maintain net
liquid assets in accordance with the
specialist capital requirements of
Exchange Rule 104.20 to .21, and
granting the Exchange discretion to
temporarily revise the combined unit’s
requirements.
The Exchange is also proposing to
delete specialist organization financing
sections 104.30 (‘‘Financing of
Specialists’’), 104.40 (‘‘Reports on Form
SPC’’) and 104.50 (‘‘Income Records’’).
The deletion of Rule 104.30 is proposed
to reflect the current reality that net
liquid asset requirements must be met
from specialists’ own books and records
and not from an account carried by a
third party. The deletion of Rule 104.30
would render Rule 104.40 irrelevant.
The recordkeeping requirements of Rule
104.50 have been rendered irrelevant in
light of NYSE Rule 440 (‘‘Books and
Records’’) which incorporates, by
reference, Securities and Exchange Act
Rules 17a–3 and 17a–4.
Finally, the filing includes several
minor technical amendments to the
rules for purposes of clarity and
consistency.
(v) Discussion. The Exchange believes
that current net liquid asset
requirements impose excessively high
capital requirements on specialists that
are not based upon the amount of risk
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a specialist takes or the volatility of its
portfolio. As a result, the Exchange
believes that the rules impose
unjustified costs on existing specialists
and discourage new entrants to the
market. The Exchange contends that
under this proposal, current rules based
on classes of allocated securities and
capital penalties for mergers among
specialists would be replaced by rules
that focus on market stress and
volatility, and market share measured
by total dollar volume traded. The
Exchange further contends that the new
rules may encourage new specialist
organizations to begin operations on the
Floor of the Exchange.
(a) Correlation Between Specialist
Organization Inventory Positions and
the Market. The Exchange contends that
changes in specialist organizations’
inventory positions are highly
correlated to changes in price
movements in the broader market. They
base their conclusion on data, compiled
from September 1998 through October
2004, that compares aggregate long and
short specialist position data with
market movements, as represented by
the S&P 500.10 The Exchange found
that, on average, specialist organizations
bought $75 million of securities for each
1% decline in prices and sold $75
million in securities for each 1%
increase in prices. The greatest price
decline in one day over this six year
period was 6.2% on the S&P 500, which
occurred on April 14, 2000. Total
specialist net liquid assets decreased
$16 million as a result of this market
move.
(b) Worst-Case Market Risk Scenario
for Specialist Organizations. Utilizing
the historical worst-case scenario,11 and
assuming specialist organizations open
the trading day with a $100 million net
long position and incur a non-stop 30%
market decline, the Exchange
determined that a cumulative loss of
10 The NYSE performed an analysis of specialist
risk exposure in volatile trading scenarios over a
period of years with its member specialist
organizations, including simulations of how
specialist capital levels would fare if faced with
extremely volatile situations similar to the October
19, 1987 market correction, and other ‘‘worst case’’
consecutive day price declines.
11 A prime example of a worst-case scenario is the
consecutive day declines that occurred in October
1987 when the DJIA dropped 31% and the S&P lost
29%. On October 16, 1987, 55 NYSE specialist
organizations had net liquid assets totaling $808
million. These assets dropped by $196 million to
$612 million at the close on October 19, 1987.
Buying power decreased from $2.3 billion to $1.1
billion. One half of this buying power was
concentrated in eight specialist organizations.
Twenty-three specialist organizations had less than
$5 million of buying power and thirteen specialist
organizations had no buying power. In comparison,
the 1929 crash resulted in a four consecutive day
decline in the DJIA of 16%.
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$377 million would result (assuming
specialist organizations’ purchases of
$75 million for each 1% decline in the
market). Consequently, the Exchange
believes that if specialist organizations
started with $1.1 billion of net liquid
assets, they should have sufficient
capital and liquidity during normal
markets and be able to withstand worst
case market shocks without interruption
to their businesses. The Exchange
believes that the remaining net liquid
assets of $723 million provides buying
power 12 of $2.9 billion, which should
provide adequate liquidity in a normal
market.13
(c) Market Risk/Net Liquid Asset
Requirements. Therefore, based on the
above analysis, the Exchange believes
that maintaining a minimum of
approximately $1.1 billion of net liquid
assets across all specialist organizations
would provide a prudent level of
capitalization for normal business
operations with sufficient reserve in the
event of severe shocks to the market.
The Exchange intends to reassess this
proposed requirement annually based
upon market volatility as well as the
dollar volume of total shares traded by
all specialist organizations to determine
its continuing adequacy.
The Exchange contends that this
proposal also encompasses a
methodology whereby a specialist
organization’s risk measurement system
is considered in determining required
capital standards. In order to use a VaR
model to calculate the specialist
organization’s net liquid asset
requirement, the specialist must
incorporate the VaR methodology into
its risk management practices. The
Exchange will be required to evaluate
those risk management practices at
specialist organizations, including a
review of each firm’s infrastructure for
monitoring and controlling market risk,
before they will be allowed to utilize
VaR model requirements.
As the proposal is based on dollar
volumes traded and average inventory
positions, as well as average haircuts,
the Exchange believes it does not
unduly penalize a specialist
organization for taking on larger
positions in adverse market conditions.
The Exchange believes that utilizing
value-at-risk modeling as a component
12 Buying power is the total market value of
securities in which a specialist is registered that can
be purchased and/or sold on margin by the
specialist organization, without depositing
additional funds into the specialist organization’s
dealer account carried by another broker-dealer.
13 In such a scenario, the Exchange would have
the flexibility under Exchange Rules 325 and 326
to prescribe greater net capital or net worth
requirements, and/or restricting a specialist
organization’s business activities.
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of the net liquid asset requirement
creates an incentive for specialist
organizations to develop state of the art
risk measurement systems, as well as
hedge their positions, thereby limiting
potential losses.
d. Financing of Specialists. Under
current Rule 104.30, specialist
organizations can finance their
transactions pursuant to Regulations T
and U of the Federal Reserve System.
Pursuant to the section, a specialist
organization must notify the Market
Surveillance Department of the name of
the creditor and the terms of the
arrangement. The Exchange proposes to
delete the section in its entirety since it
is no longer relevant as specialist
organizations can currently arrange for
credit under other existing Exchange
rules.
e. Reports on Form SPC. Under
current Rule 104.40, specialist
organizations that finance their
transactions on a margin basis lower
than that required by the Federal
Reserve for regular margin accounts,
must file Form SPC with the Market
Surveillance Department. Similar
reports must be filed by specialist
organizations that arrange for a bank to
have a loan value extended to the nonspecialist organization in an amount
greater than that permitted for the
financing of the non-specialist
transactions. The Exchange purposes to
delete the section in its entirety as it
would no longer be applicable in the
absence of Rule 104.30.
f. Income Records. Under current Rule
104.50, specialist organizations must
keep and produce, at the request of the
Exchange, information on commission
income, share volume, and dealer profit
and loss. The Exchange proposes to
delete the section in its entirety as it is
no longer applicable with the adoption
of Rule 440 (Books and Records), which
incorporates by reference Rules 17a–3
and 17a–4, under the Exchange Act.
2. Statutory Basis
The statutory basis for this proposed
rule change is section 6(b)(5) 14 of the
Exchange Act. The proposed
amendments to Exchange Rules 104 and
123E are consistent with the
requirements of section 6(b)(5), which
requires that the rules of the Exchange
must be designed, among other things,
to promote just and equitable principles
of trade, to remove impediments to and
perfect the mechanism of a free and
open market and national market
system, and, in general, to protect
investors and the public interest. The
proposed amendments are consistent
14 15
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Federal Register / Vol. 70, No. 246 / Friday, December 23, 2005 / Notices
with the Section in that they encompass
a methodology whereby risk
management is considered in
determining required capital
standards—similar to recent
Commission amendments to Exchange
Act Rule 15c3–1 regarding the
alternative method for computing net
capital for broker-dealers that are part of
a consolidated supervised entity.15
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 Exchange 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. 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 Exchange 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,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any
of the following methods:
Electronic Comments
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• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send e-mail to rulecomments@sec.gov. Please include File
Number SR–NYSE–2005–38 on the
subject line.
Paper Comments
Send paper comments in triplicate to
Jonathan G. Katz, Secretary, Securities
and Exchange Commission, 100 F
15 See
Release No. 34–49830 (S7–21–03).
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18:14 Dec 22, 2005
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Street, NE., Washington, DC 20549–
9303. All submissions should refer to
File Number SR–NYSE–2005–38.
To help the Commission process and
review your comments more efficiently,
please use only one method.
The Commission will post all
comments on the Commission’s Internet
Web site (https://www.sec.gov/rules/sro/
shtml). 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 also will be
available for inspection and copying at
the principal office of the NYSE. All
comments received will be posted
without change; the Commission does
not edit personal identifying
information from submissions. You
should submit only information that
you wish to make available publicly. All
submission should refer to File Number
SR–NYSE–2005–38 and should be
submitted on or before January 13, 2006.
imported from abroad for temporary
exhibition within the United States, are
of cultural significance. The objects are
imported pursuant to loan agreements
with the foreign owners. I also
determine that the exhibition or display
of the exhibit objects at The Museum of
Modern Art, from on or about February
19, 2006, until on or about May 8, 2006,
and at possible additional venues yet to
be determined, is in the national
interest. Public Notice of these
Determinations is ordered to be
published in the Federal Register.
FOR FURTHER INFORMATION CONTACT: For
further information, including a list of
the exhibit objects, contact Richard
Lahne, Attorney-Adviser, Office of the
Legal Adviser, U.S. Department of State
(telephone: 202–453–8058). The address
is U.S. Department of State, SA–44, 301
4th Street, SW., Room 700, Washington,
DC 20547–0001.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.16
Jonathan G. Katz,
Secretary.
[FR Doc. E5–7769 Filed 12–22–05; 8:45 am]
Federal Aviation Administration
BILLING CODE 8010–01–P
DEPARTMENT OF STATE
[Public Notice 5254]
Culturally Significant Objects Imported
for Exhibition Determinations: ‘‘Edvard
Munch: The Modern Life of the Soul’’
SUMMARY: Notice is hereby given of the
following determinations: Pursuant to
the authority vested in me by the Act of
October 19, 1965 (79 Stat. 985; 22 U.S.C.
2459), Executive Order 12047 of March
27, 1978, the Foreign Affairs Reform and
Restructuring Act of 1998 (112 Stat.
2681, et seq.; 22 U.S.C. 6501 note, et
seq.), Delegation of Authority No. 234 of
October 1, 1999, Delegation of Authority
No. 236 of October 19, 1999, as
amended, and Delegation of Authority
No. 257 of April 15, 2003 [68 FR 19875],
I hereby determine that the objects to be
included in the exhibition ‘‘Edvard
Munch: The Modern Life of the Soul’’,
16 17
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Dated: December 18, 2005.
C. Miller Crouch,
Principal Deputy Assistant Secretary for
Educational and Cultural Affairs, Department
of State.
[FR Doc. E5–7791 Filed 12–22–05; 8:45 am]
BILLING CODE 4710–05–P
DEPARTMENT OF TRANSPORTATION
Notice of Passenger Facility Charger
(PFC) Approvals and Disapprovals
Federal Aviation
Administration (FAA), DOT.
ACTION: Monthly Notice of PFC
Approvals and Disapprovals. In August
2005, there were 14 applications
approved. This notice also includes
information on two applications, one
approved in April 2005 and the other in
July 2005, inadvertently left off the
April 2005 and July 2005 notices,
respectively. Additionally, 22 approved
amendments to previously approved
applications are listed.
AGENCY:
SUMMARY: The FAA publishes a monthly
notice, as appropriate, of PFC approvals
and disapprovals under the provisions
of the Aviation Safety and Capacity
Expansion Act of 1990 (Title IX of the
Omnibus Budget Reconciliation Act of
1990) (Pub. L. 101–508) and Part 158 of
the Federal Aviation Regulations (14
CFR Part 158). This notice is published
pursuant to paragraph d of § 158.29.
PFC Applications Approved
Public Agency: Monroe County Board
of Commissioners, Key West, Florida.
Application Number: 05–09–C–00–
EYW.
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]]>Agencies
[Federal Register Volume 70, Number 246 (Friday, December 23, 2005)]
[Notices]
[Pages 76337-76344]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E5-7769]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-52969; File No. SR-NYSE-2005-38]
Self-Regulatory Organizations; New York Stock Exchange, Inc.;
Notice of Filing of Proposed Rule Change and Amendment No. 1 Thereto to
Rules 104 (``Dealings by Specialists'') and 123E (``Specialist
Combination Review Policy'') To Change the Exchange's Capital
Requirements for Specialist Organizations.
December 16, 2005.
Pursuant to section 19(b)(1) \1\ of the Securities Exchange Act of
1934 (the ``Exchange Act''),\2\ and Rule 19b-4 thereunder,\3\ notice is
hereby given that on May 26, 2005, the New York Stock Exchange, Inc.
(``NYSE'' or the ``Exchange'') filed with the Securities and Exchange
Commission (``SEC'' or
[[Page 76338]]
the ``Commission'') a proposed rule change. On November 22, 2005, NYSE
amended the proposed rule change, replacing it in its entirety
(``Amendment No. 1''). The amended proposed rule change is described in
Items I, II, and III below, which have been substantially prepared by
the Exchange. 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).
\2\ 15 U.S.C. 78a et seq.
\3\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The New York Stock Exchange, Inc. (``NYSE'' or the ``Exchange'')
hereby proposes amendments to Rules 104 (``Dealings by Specialists'')
and 123E (``Specialist Combination Review Policy'') to change the
capital requirement of specialist organizations. The text of the
proposed rule change is set forth below. Italics indicate additions;
brackets indicate deletions.
* * * * *
Rule 104. Dealings by Specialists
(a)-(b) No Change
* * *
Supplementary Material:
Functions of Specialists
.10 through .17 No Change
Capital Requirements of Specialists [(effective June 1, 1971.)]
.20 [Regular s]Specialist[s] Organizations--Minimum Capital
Requirements.--
[(1) A member registered as a regular specialist at an active post
must be able to assume maintain a position of 150 trading units in each
common stock in which he is registered.
(2) A member registered as a regular specialist at an active post
must be able to assume a position of 30 trading units in each
convertible preferred stock, of 1200 shares in each of the 100 share
trading unit non-convertible preferred stocks and of 300 shares in each
of the 10 share unit non-convertible preferred stocks in which he is
registered.
(3) The position which a member registered as a regular specialist
at an active post must be able to assume, for each stock in which he is
registered that is not included in (1) or (2) above, shall be
determined by the Exchange. Such determinations shall be based upon the
structure and characteristics of the security and shall be the amount
prescribed in (1) or (2) above for the type of stock with the most
similar structure and characteristics.
(4) A member registered as a regular specialist at the inactive
Post must have, at all times, net liquid assets of at least $150,000.
(5) With respect to any Investment Company Unit (as defined in
paragraph 703.16 of the Listed Company Manual) or a Trust Issued
Receipt, a member registered as a regular specialist [at an active
post] shall maintain net liquid assets equivalent to $500,000 for each
such security in which the specialist is registered.]
(1) A specialist organization that is only registered in Exchange
Traded Funds shall maintain the greater of $500,000 for each Exchange
Traded Fund or $1,000,000.
([6]2) [Notwithstanding .30 of this Rule, e] Each [member
registered as a regular] specialist organization [at an active post]
must [be able to] maintain net liquid assets which shall be the greater
of $1,000,000 or the requirements set forth in Rule 104.21, except for
those specialist organizations that are only registered in Exchange
Traded Funds, as set forth in 104.20(1) above. [establish that he can
meet, with his own net liquid assets, a minimum capital requirement
which shall be the greater of $1,000,000 or 25% of the position
requirements as set forth in Paragraphs (1), (2) and (3) above, except
as determined by the Exchange in unusual circumstances.]
(3) The Division of Member Firm Regulation must be informed
immediately by a specialist organization [, in each instance, of his
inability] whenever it is unable to comply with the [provisions]
requirements set forth in [the above Paragraphs] Rules 104.20 or .21,
as applicable.
([7]4) [For those members registered as a regular specialist
subject to the Net Capital Rule (SEA Rule 15c3-1), t] The term ``net
liquid assets'' refers to excess net capital computed in accordance
with Rule 15c3-1, promulgated under the Securities Exchange Act of 1934
(the ``Exchange Act'') and the provisions of Exchange Rule 325
(``Capital Requirements'') with the following adjustments:
(i) Additions for haircuts and undue concentration charges taken
pursuant to Section (c)(2)(vi)(M) of Rule 15c3-1 on specialty
securities in dealer accounts;
[(ii) Additions for any other haircuts on long positions which are
deposited or pledged as collateral for funds borrowed to finance dealer
transactions or positions in specialist securities;]
([i]ii) Deductions for floor brokerage and/or commissions
receivable;
([iv]iii) Deductions for clearing organization deposits; and
(iv) Deductions for any cash surrender value of life insurance
policies allowable under [the Net Capital Rule] Rule 15c3-1, under the
Exchange Act.
[(8) For members registered as a regular specialist not subject to
the Net Capital Rule, ``net liquid assets'' is defined as the excess of
cash, net credit balances at clearing broker(s), and readily marketable
securities over all liabilities.]
(5) In the event that two or more specialist[s] organizations are
associated with each other and deal for the same specialist account,
the [above] capital requirements enumerated in Rules 104.20 and .21
shall apply to such specialist[s] organizations as one unit, rather
than to each specialist organization individually. Any joint account
must be approved by the Divisions of Market Surveillance and Member
Firm Regulation.
.21 [Concentration Measure] Specialist Organizations--Additional
Capital Requirements.--
Notwithstanding the provisions of (1) through (5) in Rule 104.20 above,
if a regular specialist entity's market share exceeds 5% of any of the
following concentration measures:
(1) All listed common stock (current);
(2) The 250 most active listed common stocks (over the previous 12
months);
(3) The total share volume of stock trading on the Exchange (over
the previous 12 months); or
(4) The total dollar value of stock trading on the Exchange (over
the previous 12 months)
such entity shall maintain net liquid assets equivalent to the
following applicable requirements:
(i) $4 million for each specialist security contained in the DJIA;
(ii) $2 million for each specialist security contained in the S&P
100, not contained in (i);
(iii) $1 million for each specialist security contained in the S&P
500, not contained in (i) or (ii);
(iv) $500 thousand for each specialist common stock, excluding bond
funds, not contained in (i), (ii) or (iii);
(v) $100 thousand for each specialist security not included in (i)
through (iv), excluding warrants.
(vi) $500,000 for each specialist security that is an Investment
Company Unit (as defined in paragraph 703.16 of the Listed Company
Manual) or a Trust Issued Receipt.]
(1) Each specialist organization subject to Rule 104.21 must
maintain minimum net liquid assets equal to:
(i) $1,000,000 for each one tenth of one percent (.1%) of Exchange
transaction dollar volume in its
[[Page 76339]]
registered securities, exclusive of Exchange Traded Funds, plus
$500,000 for each Exchange Traded Fund; and
(ii) A market risk add-on, which shall be calculated as follows:
(a) The specialist organization may use an Exchange-approved value-
at-risk (VaR) model to calculate its market risk add-on. The VaR model
must have a 99%, one-tailed confidence level with price changes
equivalent to a ten business day movement in rates and prices. To
calculate the market risk add-on, the specialist organization
multiplies the VaR of specialist dealer and related positions by the
appropriate multiplication factor, which is set at a minimum of three.
The results of quarterly backtesting determine which of the
multiplication factors contained in Table 1 of Rule 104.22 a specialist
organization must use; or
(b) For those specialist organizations not utilizing VaR or whose
models have not been approved by the NYSE, three times the average of
the prior twenty business days' securities haircuts on its specialist
dealer's positions computed pursuant to Rule 15c3-1(c)(2)(vi),
exclusive of paragraph (N), under the Exchange Act.
(2) A specialist organization may apply to the Exchange for
authorization to use a VaR model to calculate its market risk add-on,
in lieu of calculating the average of the prior twenty business days'
capital requirement for securities haircuts under Exchange Act Rule
15c3-1(c)(2)(vi), exclusive of paragraph (N). Once a specialist
organization has been granted approval by the Exchange to use a VaR
model, it shall continue to compute its net liquid asset market risk
add-on using VaR, unless a change is approved upon application to the
Exchange. To apply for authorization to use a VaR model pursuant to
NYSE Rule 104.21(1)(ii)(a), a specialist must submit in writing the
following information to Member Firm Regulation with its application:
(a) A description of the mathematical models to be used to compute
its market risk add-on;
(b) A description of the requirements as set forth in Exchange Rule
104.22; and
(c) Any other material the Exchange may request.
(3) Notwithstanding the requirements of Rule 98(b)(vii) (Capital
Requirements Met Separately), the specialist organization's net liquid
assets needed to meet the requirements in Rules 104.20 and .21 must be
dedicated exclusively to specialist dealer activities, and must not be
used for any other purpose without the express written consent of the
Exchange.
.22 [Combinations of Specialist Entities]Definitions and Model Approval
Process
[A specialist entity resulting from the merger, consolidation,
acquisition, or other combination of specialist assets:
(i) subject to the concentration measure requirements of Rule
104.21, shall maintain net liquid assets in accordance with those
provisions, or equivalent to the aggregate net liquid assets of the
specialist entities prior to their combination, whichever is greater;
(ii) not subject to the concentration measure requirements of Rule
104.21, shall maintain net liquid assets according to the provisions of
Rule 104.20, or equivalent to the aggregate net liquid assets of the
specialist entities prior to their combination, whichever is greater.]
(1) For purposes of this Rule 104, specialist organizations must
define the term ``Exchange transaction dollar volume'' consistent with
the most recent Statistical Data, calculated and provided by the NYSE
on a monthly basis.
(2) For a specialist organization's VaR model to be approved, it
must meet the following minimum qualitative and quantitative
requirements:
(a) Qualitative Requirements.
(i) The VaR model used to calculate the market risk add-on for a
position, along with a system of internal risk management controls to
assist the specialist organization in managing the risks associated
with its business activities, must be integrated into the daily
internal risk management system of the specialist organization;
(ii) The VaR model must be reviewed both periodically and annually
by qualified independent member organization personnel or a qualified
third party; and
(iii) For purposes of computing the market risk add-on, the
specialist organization must determine the appropriate multiplication
factor as follows:
(A) As soon as possible, but no later than three months after the
specialist organization begins using the VaR model to calculate their
market risk add-on, the specialist organization must conduct
backtesting of the model by comparing its actual daily net trading
profit or loss with the corresponding VaR measure generated by the VaR
model, using a 99 percent, one-tailed confidence level with price
changes equivalent to a one business day movement in rates and prices,
for each of the past 250 business days, or other period as may be
appropriate for the first year of its use;
(B) On the last business day of each quarter, the specialist
organization must identify the number of backtesting exceptions of the
VaR model, that is, the number of business days in the past 250
business days, or other period as may be appropriate for the first year
of its use, for which the actual net trading loss, if any, exceeds the
corresponding VaR measure; and
(C) The specialist organization must use the multiplication factor
indicated in Table 1 below in determining its market risk add-on until
it obtains the next quarter's backtesting results;
Table 1.--Multiplication Factor Based on the Number of Backtesting
Exceptions of the VaR Model
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Multiplication
Number of exceptions factor
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4 or fewer.............................................. 3.00
5....................................................... 3.40
6....................................................... 3.50
7....................................................... 3.65
8....................................................... 3.75
9....................................................... 3.85
10 or more.............................................. 4.00
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(iv) For purposes of incorporating specific risk into a VaR model,
a specialist organization must demonstrate that it has methodologies in
place to capture liquidity, event, and default risk adequately for each
position. Furthermore, the models used to calculate deductions for
specific risk must:
(A) Explain the historical price variation in the portfolio;
(B) Capture concentration (magnitude and changes in composition);
(C) Be robust to an adverse environment; and
(D) Be validated through backtesting.
(b) Quantitative Requirements.
(i) For purposes of determining market risk add-on, the VaR model
must use a 99 percent, one-tailed confidence level with price changes
equivalent to a ten-business day movement in rates and prices;
(ii) The VaR model must use an effective historical observation
period of at least one year. The specialist organization must consider
the effects of market stress in its construction of the model.
Historical data sets must be updated at least monthly and reassessed
whenever market prices or volatilities change significantly; and
(iii) The VaR model must take into account and incorporate all
significant, identifiable market risk factors applicable to positions
in the accounts of the specialist organization, including:
[[Page 76340]]
(A) Risks arising from the non-linear price characteristics of
derivatives and the sensitivity of the market value of those positions
to changes in the volatility of the derivatives' underlying rates and
prices;
(B) Empirical correlations with and across risk factors or,
alternatively, risk factors sufficient to cover all the market risk
inherent in the positions in the dealer accounts of the specialist
organization; and
(C) Specific risk for individual positions.
.23 Maintaining a Fair and Orderly Market.--
Solely for the purpose of maintaining a fair and orderly market,
the Exchange may, for a period not to exceed 5 business days, allow a
specialist entity to continue to operate despite such specialist
entity's non-compliance with the provisions of Rules 104.2[1]0 [and] or
104.2[2]1.
.24 Relief specialists.--
(1) The requirements with respect to a member registered as a full
time relief specialist, i.e., one who may be called upon to act as a
relief specialist for an entire business day, shall be, net liquid
assets of $150,000. [or a joint account with the regular specialist in
the stock. Any joint account must be approved by Regulation &
Surveillance.]
(2) There is no requirement with respect to a member registered as
a part-time relief specialist, i.e., one who may be called upon to act
as a relief specialist for less than the entire business day, usually
for lunch periods, etc. Dealings effected by a part-time relief
specialist while relieving the regular specialist must be made for the
account of the regular specialist whom he is relieving.
[Specialists may meet the above requirements either with their own
capital or by availing themselves of the financing privileges provided
by Sec. 220.04(g) of Regulation T or Sec. 221.3(o) of Regulation U of
the Board of Directors of the Federal Reserve System ] 8121, 8218 which
are explained at .30, below.]
[.30 Financing of specialists.--Under Sec. 220.04(g) of Regulation
T and Sec. 221.3(o) Regulation U of the Board of Directors of the
Federal Reserve System ] 8121, 8218, a member may have his transactions
as a specialist financed on a basis which is mutually satisfactory to
the specialist and the creditor. He may finance such transactions by
borrowing from a bank on terms which are mutually agreeable; he may
have a member organization finance such transactions in a special
account on a margin basis which is mutually satisfactory to the
specialist and the carrying organization; or he may have a joint
account with the carrying organization for the purpose of having his
specialist transactions financed on a margin basis which is mutually
satisfactory.]
[Each specialist who makes such an arrangement must inform The
Market Surveillance Division of the name of the creditor and the terms
of the arrangement. The Market Surveillance Division must be informed
immediately by telephone of the intention: (1) To terminate or change
an existing financing arrangement (confirmed subsequently in writing);
or (2) to issue a margin call. (This Rule does not in any manner alter
a member's notification requirements to Regulation & Surveillance.) The
specialist is required to submit to that Department on Form SPC (see
.40 below) an initial report at such time as the arrangement becomes
operative, and monthly reports thereafter.]
[.40 Reports on Form SPC.--Each specialist who arranges to have his
specialist transactions carried by a member organization on a margin
basis lower than that required by the Board of Directors of the Federal
Reserve System for regular margin accounts, must file with The Market
Surveillance Division a report of Form SPC, (1) as of the first date
that such arrangement becomes operative, i.e., when the margin in the
specialist's account first fails to meet the requirements of the Board
of Directors of the Federal Reserve System for regular margin accounts,
(2) as of the date previous to the first date that the arrangement
becomes operative, and (3) monthly thereafter, as of the last ledger
date of the month, including the month in which the arrangement first
becomes operative.
Similar reports must be filed by each specialist who, for the
purpose of financing his transactions as a specialist, arranges with a
bank to have a loan value extended to him in an amount greater than
that permitted for the financing of his non-specialist transactions.
General Instructions
The report of a joint account may be prepared and forwarded by any
participant. Forms may be obtained from Market Surveillance Division.
Reports should be filed with that Department as promptly as possible
after the ledger date as of which the report is prepared.
Specific Instructions
For specific instruction see the reverse side of Form SPC.]
[.50 Income records.--Each specialist and specialist organization
shall submit, for the confidential use of the Exchange, such
information relating to his or its specialty business as may be
requested by the Exchange.
Each specialist and specialist organization shall keep its records
showing the data set forth below so that they will be readily available
when the Exchange requests them for its confidential use for the
purpose of surveillance and study of specialists' operations:
(i) total ``actual'' commission income earned in all specialty
stock;
(ii) share volume executed as agent by specialty stock; and
(iii) dealer profit and loss by specialty stock.
Dealer profit and loss data must reflect, by specialty stock, any
gain or loss occurring within an investment account.]
* * *
Rule 123E. Specialist Combination Review Policy
(a)--(e) No Change
(f) [Proponents of a] A specialist unit combination subject to
review by either the Quality of Markets Committee or the Market
Performance Committee under this policy must [agree that] result in:
(i) [the] total [amount of] capital [which each unit had separately
prior to the proposed combination shall not be reduced, regardless of
whether it would exceed the combined unit's new capital requirement] of
the combined unit meeting, at a minimum: (a) the requirements of Rules
104.20-104.21, (b) be acceptable to the Exchange, and (c) the combined
unit's capital requirement may be temporarily revised at the discretion
of the Exchange; and
(ii) all required specialist capital be accounted for separately
from any other capital, and be used solely for the specialist business.
* * * * *
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 IV below. The Exchange has prepared summaries, set forth in
Sections (A), (B), and (C) below, of the most significant aspects of
such statements.
[[Page 76341]]
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
(1) Purpose
Exchange specialist organizations must maintain net liquid assets
as required by NYSE Rule 104, and in addition, must satisfy the net
capital requirements prescribed in Rule 15c3-1,\4\ promulgated under
the Securities Exchange Act of 1934 (the ``Exchange Act'').\5\ NYSE
Rule 325 requires members and member organizations to comply with
Exchange Act Rule 15c3-1 and also requires notification to the Exchange
whenever tentative net capital has declined below defined levels. In
addition, Rule 325 gives the Exchange the authority, at any time, to
prescribe greater net capital or net worth requirements than those
explicitly prescribed by the rule, or to require more stringent
treatment of items when computing net capital, net worth and, by
implication, net liquid assets. Further, the NYSE can restrict the
business activities of specialist organizations consistent with good
business practices and its obligation to maintain a fair and orderly
market. Such restrictions may include prohibitions against business
expansion and business reduction requirements.
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\4\ 17 CFR 240.15c3-1.
\5\ 15 U.S.C. 78a et seq.
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The Exchange proposes to amend Rules 104 and 123E to change the
capital requirement of specialist organizations. The Exchange believes
that if the proposed amendments are adopted, Rule 104 would more
accurately address market risks and volatility. Further, the changes to
Rule 123E would eliminate the ``marriage penalty'' capital requirement
for specialist organization combinations.
(i) Difference Between Net Capital and Net Liquid Assets. According
to the Exchange, ``Net capital'' is a regulatory measure of the prudent
level of liquid assets required for a broker-dealer.
However, the Exchange contends that the term ``net liquid assets''
refers to liquidity in the form of cash and cash equivalents that is
immediately available (or within twenty four hours) to a specialist
organization for the continuing purchase and sale of securities in
which a specialist is registered, in support of the specialist book,
and market maintenance. The Exchange believes that net liquid assets
are a shorter-term form of liquidity that is meant to be available to
the specialist organization pursuant to its daily activities of
maintaining a fair and orderly market on the Exchange.
The Exchange believes that specialist organizations' unique
liquidity needs dictate the general form of the net liquid asset
requirement. Further, the Exchange believes that it is important for
all specialist organizations and market participants to know that
specialists have sufficient liquidity to support the specialist book
and market maintenance activities. Therefore, the Exchange contends
that a specialist organization's net liquid asset requirement functions
to ensure that the specialist continues to operate; whereas a broker-
dealer's net capital requirement functions to ensure that, if the
broker-dealer were liquidated, the broker-dealer's obligations to its
customers and creditors would be satisfied.
(ii) Background. (a) Position-Based Capital Requirements (Rule
104.20). Exchange Rule 104.20 (``Regular Specialists'') sets position
requirements a specialist organization must be able to assume in each
stock that it is allocated. For each Investment Company Unit or Trust
Issued Receipt for which a specialist organization is registered, it
must maintain net liquid assets equivalent to $500,000. The rule also
sets a minimum capital requirement, which is the greater of $1,000,000
or 25% of the current position requirements.
(b) Concentration Requirements (Rule 104.21). Specialist
organizations are also subject to NYSE Rule 104.21 (``Concentration
Measure Requirements'') if a specialist organization's market share
exceeds 5% of certain ``concentration measures.'' \6\
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\6\ (1) All listed common stock; (2) The 250 most active listed
common stocks (over the previous twelve months); (3) Total share
volume of stock trading on the Exchange (over the previous twelve
months); or (4) Total dollar value of stock trading on the Exchange
(over the previous twelve months).
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Further, a specialist organization must maintain the following net
liquid assets: (i) $4 million for each specialist security contained in
the Dow Jones Industrial Average; (ii) $2 million for each specialist
security contained in the S&P 100, not contained in (i); (iii) $1
million for each specialist security contained in the S&P 500, not
contained in (i) or (ii); (iv) $500,000 for each specialist common
stock, Investment Company Unit (including Exchange Traded Funds) or a
Trust Issued Receipt, excluding bond funds, not contained in (i), (ii)
or (iii); and (v) $100,000 for each specialist security not included in
(i) through (iv), excluding warrants.
(c) Combinations of Specialist Entities (Rule 104.22). When two or
more specialist organizations combine as the result of a merger,
consolidation, acquisition or other combination of assets, NYSE Rule
104.22 (``Combinations of Specialists Entities''), commonly referred to
as the ``marriage penalty,'' generally requires the maintenance of:
(a) net liquid assets in accordance with Rule 104.21, or equivalent
to the aggregate net liquid assets of the respective specialist
entities prior to their combination, whichever is greater; or
(b) for those combinations not subject to Rule 104.21, net liquid
assets pursuant to Rule 104.20, or the equivalent of the aggregate net
liquid assets of the respective specialist entities prior to their
combination, whichever is greater.
(d) Specialist Combination Review Policy (Rule 123E(f)(i)).
Exchange Rule 123E(f) currently requires proponents of a specialist
unit combination to agree that: (i) The total amount of capital which
each unit had separately prior to the proposed combination shall not be
reduced regardless of whether it would exceed the combined unit's new
capital requirement; and (ii) all required specialist capital be
accounted for separately from any other capital and be used solely for
the specialist business.
NYSE Rule 123E(f)(i) applies a ``marriage penalty,'' similar to
that set forth in Exchange Rule 104.22, to a combination of specialist
organizations by requiring a higher capital requirement of the combined
unit, rather than allowing a possible reduction of capital, in line
with the new combined specialist organization's capital requirement.
Rule 123E(f)(i) does not recognize the benefits derived from such
combinations, nor does it compensate for excess capital that may have
been in each specialist organization prior to the merger.
(iii) Issues/Concerns With the Current Capital Requirements. In mid
December 1987--soon after the 1987 major stock market correction--there
were 55 specialist organizations on the Floor of the Exchange. By the
year 2000, when Exchange Rule 104.22 was adopted, those specialist
organizations had merged, consolidated, acquired or combined to reduce
that number to 25. By April 2005, further consolidation had reduced the
number of specialist organizations to seven.\7\
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\7\ Because of the marriage penalty the capital requirements for
the remaining seven specalist organizations represent the combined
amount of capital requirements of the 25 specialist organizations
that since 2000 were merged, consolidated, acquired or combined. The
Exchange believes that the current capital requirement does not
recognize the benefits derived from such consolidation.
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[[Page 76342]]
The Exchange believes that the position-based requirement
methodology set forth in NYSE Rule 104.20 is no longer appropriate in a
marketplace where there are seven specialist organizations with
sizeable capital bases and sophisticated risk management systems. The
Exchange contends that concentration requirements set forth currently
in Exchange Rule 104.21 significantly increase specialist
organizations' capital requirements: However, there is no gradual
increase in the requirement. Once a specialist organization's market
share exceeds 5% of any of the concentration measures they immediately
are subject to the rule. The Exchange believes that this creates an
unintended disincentive for a specialist organization to increase its
market share.
The marriage penalty imposed by Rules 104.22 and 123E(f)(i)
effectively subjects specialist organizations that have merged to the
combined net liquid asset requirements of the two entities, although
the Exchange contends that the incremental risk assumed may not be
commensurate with the amount of net liquid assets required to be
maintained. The Exchange believes that the current net liquid assets
requirement for such specialist organizations is based neither upon the
amount of risk a specialist organization is taking, nor upon the dollar
value or volatility of its portfolio.
(iv) Proposed Amendments. The Exchange is proposing that NYSE Rule
104.20 (to be re-titled ``Specialist Organizations--Minimum Capital
Requirements'') be amended to adopt risk-based requirements in lieu of
the outdated and irrelevant position requirements, with the exception
of Exchange Traded Funds (``ETFs''). For ETFs, the Exchange is
proposing to amend Rule 104.20 to clarify that specialist organizations
that are registered solely in ETFs maintain the greater of $500,000 for
each ETF or $1,000,000.
Proposed amendments to NYSE Rule 104.21 (to be re-titled
``Specialist Organizations--Additional Capital Requirements'') would
require a specialist organization to meet, with its own net liquid
assets, a minimum capital requirement equal to:
(i) $1,000,000 for each one tenth of one percent (.1%) of Exchange
transaction dollar volume in its specialty securities, plus $500,000
for each Exchange Traded Fund; and
(ii) A market risk add-on, which is calculated as either:
(a) An Exchange-approved value-at-risk (VaR) \8\ model to calculate
its requirement for market risk; or
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\8\ The Exchange believes that value-at-risk is a generally
accepted method of measuring risk for financial organizations and
notes that it is primarily used to establish trading limits and to
stress test models and limits. It uses standard statistical
techniques to design trading strategies and to correlate past risks
with future risks to set trading limimts and thereby to minimize
potential losses. Value-at-risk models assess market risk based on
the probability distribution for a portfolio's market value.
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(b) For those not utilizing VaR or whose models have not been
approved by the NYSE, three times the average of the prior twenty
business day's securities haircuts on its specialist dealer's
positions.
The Exchange believes this proposal utilizes the more generally
recognized and, effective risk measurement tools employed by financial
services firms, and increasingly by the Commission with particular
respect to larger organizations, such as Consolidated Supervised
Entities (``CSE''),\9\ whose financial impact upon the market is
significant.
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\9\ See Exchange Act Rule 15c3-1(c)(15) which, as part of the
SEC's Consolidated Supervised Entity (``CSE'') rules, establishes a
voluntary method of computing net capital for large broker-dealers
that are part of a CSE. Eligibility to use the alternative/CSE
method is conditioned upon a broker-dealer's compliance with several
requirements, including comprehensive internal risk management
procedures that address the firm's market, credit, liquidity and
operations risk.
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The Exchange is proposing definitions and guidelines for the model
approval process in proposed Rule 104.22 (to be re-titled ``Definitions
and Model Approval Process''). The model approval process is designed
after the SEC's rules for consolidated supervised entities and includes
qualitative and quantitative requirements for a specialist
organization's VaR model. Some of these requirements include: (1) the
VaR model must be integrated into the specialist organization's
internal risk management system; (2) the VaR model must be reviewed
both periodically and annually; and (3) methodologies to capture
liquidity, event and default risk adequately for each position.
Specialists' internal risk management systems must generally be
consistent with standards outlined in the Commission's CSE rules,
particularly SEA Rule 15c3-4. Once a specialist organization has been
granted approval by the Exchange to use a VaR model, it may continue to
compute its net liquid asset requirement using VaR, unless a change is
approved upon application to the Exchange. The Exchange will, from time
to time, revisit and examine approved net liquid asset models and may,
for good cause and consistent with standards set forth in the
Commission's CSE rules, increase or decrease the market risk add-on
requirement. The Exchange will provide prompt subsequent notice to the
Commission of any such adjustments.
The Exchange is proposing to add a section requiring that a
specialist organization's net liquid assets needed to meet the
requirements in NYSE Rules 104.20 and .21 must be dedicated exclusively
to specialist dealer activities, and must not be used for any other
purpose without the express written consent of the Exchange. This is
currently required under Rule 123(f)(ii) when specialist organizations
combine, and the Exchange believes it should be expanded to all
specialist organizations' required net liquid assets.
The Exchange is proposing to eliminate the marriage penalty of NYSE
Rule 104.22 in its entirety. With a net liquid assets requirement based
upon a specialist organization's traded volume on the Floor of the
Exchange combined with an add-on for market risk requirement, the
Exchange believes that it is not appropriate or necessary to
arbitrarily increase a specialist organization's requirement when it
combines with another.
The Exchange is also proposing to eliminate the marriage penalty of
NYSE Rule 123E(f)(i) by requiring the specialist organization to
maintain net liquid assets in accordance with the specialist capital
requirements of Exchange Rule 104.20 to .21, and granting the Exchange
discretion to temporarily revise the combined unit's requirements.
The Exchange is also proposing to delete specialist organization
financing sections 104.30 (``Financing of Specialists''), 104.40
(``Reports on Form SPC'') and 104.50 (``Income Records''). The deletion
of Rule 104.30 is proposed to reflect the current reality that net
liquid asset requirements must be met from specialists' own books and
records and not from an account carried by a third party. The deletion
of Rule 104.30 would render Rule 104.40 irrelevant. The recordkeeping
requirements of Rule 104.50 have been rendered irrelevant in light of
NYSE Rule 440 (``Books and Records'') which incorporates, by reference,
Securities and Exchange Act Rules 17a-3 and 17a-4.
Finally, the filing includes several minor technical amendments to
the rules for purposes of clarity and consistency.
(v) Discussion. The Exchange believes that current net liquid asset
requirements impose excessively high capital requirements on
specialists that are not based upon the amount of risk
[[Page 76343]]
a specialist takes or the volatility of its portfolio. As a result, the
Exchange believes that the rules impose unjustified costs on existing
specialists and discourage new entrants to the market. The Exchange
contends that under this proposal, current rules based on classes of
allocated securities and capital penalties for mergers among
specialists would be replaced by rules that focus on market stress and
volatility, and market share measured by total dollar volume traded.
The Exchange further contends that the new rules may encourage new
specialist organizations to begin operations on the Floor of the
Exchange.
(a) Correlation Between Specialist Organization Inventory Positions
and the Market. The Exchange contends that changes in specialist
organizations' inventory positions are highly correlated to changes in
price movements in the broader market. They base their conclusion on
data, compiled from September 1998 through October 2004, that compares
aggregate long and short specialist position data with market
movements, as represented by the S&P 500.\10\ The Exchange found that,
on average, specialist organizations bought $75 million of securities
for each 1% decline in prices and sold $75 million in securities for
each 1% increase in prices. The greatest price decline in one day over
this six year period was 6.2% on the S&P 500, which occurred on April
14, 2000. Total specialist net liquid assets decreased $16 million as a
result of this market move.
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\10\ The NYSE performed an analysis of specialist risk exposure
in volatile trading scenarios over a period of years with its member
specialist organizations, including simulations of how specialist
capital levels would fare if faced with extremely volatile
situations similar to the October 19, 1987 market correction, and
other ``worst case'' consecutive day price declines.
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(b) Worst-Case Market Risk Scenario for Specialist Organizations.
Utilizing the historical worst-case scenario,\11\ and assuming
specialist organizations open the trading day with a $100 million net
long position and incur a non-stop 30% market decline, the Exchange
determined that a cumulative loss of $377 million would result
(assuming specialist organizations' purchases of $75 million for each
1% decline in the market). Consequently, the Exchange believes that if
specialist organizations started with $1.1 billion of net liquid
assets, they should have sufficient capital and liquidity during normal
markets and be able to withstand worst case market shocks without
interruption to their businesses. The Exchange believes that the
remaining net liquid assets of $723 million provides buying power \12\
of $2.9 billion, which should provide adequate liquidity in a normal
market.\13\
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\11\ A prime example of a worst-case scenario is the consecutive
day declines that occurred in October 1987 when the DJIA dropped 31%
and the S&P lost 29%. On October 16, 1987, 55 NYSE specialist
organizations had net liquid assets totaling $808 million. These
assets dropped by $196 million to $612 million at the close on
October 19, 1987. Buying power decreased from $2.3 billion to $1.1
billion. One half of this buying power was concentrated in eight
specialist organizations. Twenty-three specialist organizations had
less than $5 million of buying power and thirteen specialist
organizations had no buying power. In comparison, the 1929 crash
resulted in a four consecutive day decline in the DJIA of 16%.
\12\ Buying power is the total market value of securities in
which a specialist is registered that can be purchased and/or sold
on margin by the specialist organization, without depositing
additional funds into the specialist organization's dealer account
carried by another broker-dealer.
\13\ In such a scenario, the Exchange would have the flexibility
under Exchange Rules 325 and 326 to prescribe greater net capital or
net worth requirements, and/or restricting a specialist
organization's business activities.
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(c) Market Risk/Net Liquid Asset Requirements. Therefore, based on
the above analysis, the Exchange believes that maintaining a minimum of
approximately $1.1 billion of net liquid assets across all specialist
organizations would provide a prudent level of capitalization for
normal business operations with sufficient reserve in the event of
severe shocks to the market. The Exchange intends to reassess this
proposed requirement annually based upon market volatility as well as
the dollar volume of total shares traded by all specialist
organizations to determine its continuing adequacy.
The Exchange contends that this proposal also encompasses a
methodology whereby a specialist organization's risk measurement system
is considered in determining required capital standards. In order to
use a VaR model to calculate the specialist organization's net liquid
asset requirement, the specialist must incorporate the VaR methodology
into its risk management practices. The Exchange will be required to
evaluate those risk management practices at specialist organizations,
including a review of each firm's infrastructure for monitoring and
controlling market risk, before they will be allowed to utilize VaR
model requirements.
As the proposal is based on dollar volumes traded and average
inventory positions, as well as average haircuts, the Exchange believes
it does not unduly penalize a specialist organization for taking on
larger positions in adverse market conditions. The Exchange believes
that utilizing value-at-risk modeling as a component of the net liquid
asset requirement creates an incentive for specialist organizations to
develop state of the art risk measurement systems, as well as hedge
their positions, thereby limiting potential losses.
d. Financing of Specialists. Under current Rule 104.30, specialist
organizations can finance their transactions pursuant to Regulations T
and U of the Federal Reserve System. Pursuant to the section, a
specialist organization must notify the Market Surveillance Department
of the name of the creditor and the terms of the arrangement. The
Exchange proposes to delete the section in its entirety since it is no
longer relevant as specialist organizations can currently arrange for
credit under other existing Exchange rules.
e. Reports on Form SPC. Under current Rule 104.40, specialist
organizations that finance their transactions on a margin basis lower
than that required by the Federal Reserve for regular margin accounts,
must file Form SPC with the Market Surveillance Department. Similar
reports must be filed by specialist organizations that arrange for a
bank to have a loan value extended to the non-specialist organization
in an amount greater than that permitted for the financing of the non-
specialist transactions. The Exchange purposes to delete the section in
its entirety as it would no longer be applicable in the absence of Rule
104.30.
f. Income Records. Under current Rule 104.50, specialist
organizations must keep and produce, at the request of the Exchange,
information on commission income, share volume, and dealer profit and
loss. The Exchange proposes to delete the section in its entirety as it
is no longer applicable with the adoption of Rule 440 (Books and
Records), which incorporates by reference Rules 17a-3 and 17a-4, under
the Exchange Act.
2. Statutory Basis
The statutory basis for this proposed rule change is section
6(b)(5) \14\ of the Exchange Act. The proposed amendments to Exchange
Rules 104 and 123E are consistent with the requirements of section
6(b)(5), which requires that the rules of the Exchange must be
designed, among other things, to promote just and equitable principles
of trade, to remove impediments to and perfect the mechanism of a free
and open market and national market system, and, in general, to protect
investors and the public interest. The proposed amendments are
consistent
[[Page 76344]]
with the Section in that they encompass a methodology whereby risk
management is considered in determining required capital standards--
similar to recent Commission amendments to Exchange Act Rule 15c3-1
regarding the alternative method for computing net capital for broker-
dealers that are part of a consolidated supervised entity.\15\
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\14\ 15 U.S.C. 78f(b)(5).
\15\ See Release No. 34-49830 (S7-21-03).
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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 Exchange 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. 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 Exchange 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, including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of the following methods:
Electronic Comments
Use the Commission's Internet comment form (https://
www.sec.gov/rules/sro.shtml); or
Send e-mail to rule-comments@sec.gov. Please include File
Number SR-NYSE-2005-38 on the subject line.
Paper Comments
Send paper comments in triplicate to Jonathan G. Katz, Secretary,
Securities and Exchange Commission, 100 F Street, NE., Washington, DC
20549-9303. All submissions should refer to File Number SR-NYSE-2005-
38.
To help the Commission process and review your comments more
efficiently, please use only one method.
The Commission will post all comments on the Commission's Internet
Web site (https://www.sec.gov/rules/sro/shtml). 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 also will be available for
inspection and copying at the principal office of the NYSE. All
comments received will be posted without change; the Commission does
not edit personal identifying information from submissions. You should
submit only information that you wish to make available publicly. All
submission should refer to File Number SR-NYSE-2005-38 and should be
submitted on or before January 13, 2006.
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\16\
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\16\ 17 CFR 200.30-3(a)(12).
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Jonathan G. Katz,
Secretary.
[FR Doc. E5-7769 Filed 12-22-05; 8:45 am]
BILLING CODE 8010-01-P
