Self-Regulatory Organizations; New York Stock Exchange, Inc. (n/k/a New York Stock Exchange LLC); Order Approving 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, 43260-43263 [E6-12183]
Download as PDF
43260
Federal Register / Vol. 71, No. 146 / Monday, July 31, 2006 / Notices
Comments may be submitted by any of
the following methods:
SECURITIES AND EXCHANGE
COMMISSION
Electronic Comments
[Release No. 34–54195; File No. SR–NYSE–
2006–01]
• 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–NSX–2006–10 on the
subject line.
Paper Comments
• Send paper comments in triplicate
to Nancy M. Morris, Secretary,
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549–1090.
Self-Regulatory Organizations; New
York Stock Exchange, Inc. (n/k/a New
York Stock Exchange LLC); Order
Approving Proposed Rule Change to
Require Specialists to Publish a 100 x
100 Share Market to Suspend Direct+
for Exchange Rule 127 Block Cross
Transactions
July 24, 2006.
sroberts on PROD1PC70 with NOTICES
On January 17, 2006, the New York
Stock Exchange, Inc.1 (n/k/a New York
Stock Exchange LLC) (‘‘NYSE’’ or
‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’), pursuant to Section
All submissions should refer to File
19(b)(1) of the Securities Exchange Act
Number SR–NSX–2006–10. This file
of 1934 (‘‘Act’’) 2 and Rule 19b–4
number should be included on the
3
subject line if e-mail is used. To help the thereunder, a proposed rule change to
eliminate Exchange Rule 1000(v), which
Commission process and review your
suspends the Exchange’s Direct+ facility
comments more efficiently, please use
if the specialist publishes a bid and/or
only one method. The Commission will
offer that is more than five cents away
post all comments on the Commission’s
from the last reported transaction price
Internet Web site (https://www.sec.gov/
when an Exchange Rule 127 block cross
rules/ sro.shtml). Copies of the
transaction is being executed. The
submission, all subsequent
Exchange proposes to replace this
amendments, all written statements
procedure with a rule that requires the
with respect to the proposed rule
specialist to quote a 100 x 100 share
change that are filed with the
market when all Exchange Rule 127
Commission, and all written
block cross transactions are being
communications relating to the
executed, regardless of the amount the
proposed rule change between the
cross price is away from the last
Commission and any person, other than reported transaction price. The
proposed rule change was published for
those that may be withheld from the
comment in the Federal Register on
public in accordance with the
June 8, 2006.4 The Commission received
provisions of 5 U.S.C. 552, will be
no comments regarding the proposal.
available for inspection and copying in
The Commission finds that the
the Commission’s Public Reference
proposed rule change is consistent with
Room. Copies of such filing also will be
the requirements of the Act and the
available for inspection and copying at
rules and regulations thereunder
the principal office of NSX. All
applicable to a national securities
comments received will be posted
exchange, and, in particular, with the
without change; the Commission does
requirements of Section 6(b) of the Act.5
not edit personal identifying
Specifically, the Commission finds that
information from submissions. You
the proposed rule change is consistent
should submit only information that
with Section 6(b)(5) of the Act 6 in that
you wish to make available publicly. All it is designed to promote just and
submissions should refer to File
equitable principles of trade, to foster
Number SR–NSX–2006–10 and should
cooperation and coordination with
be submitted on or before August 21,
persons engaged in regulating, clearing,
2006.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.17
Jill M. Peterson,
Assistant Secretary.
[FR Doc. E6–12149 Filed 7–28–06; 8:45 am]
BILLING CODE 8010–01–P
17 17
CFR 200.30–3(a)(12).
VerDate Aug<31>2005
17:34 Jul 28, 2006
Jkt 208001
1 The Exchange is now known as the New York
Stock Exchange LLC. See Securities Exchange Act
Release No. 53382 (February 27, 2006), 71 FR 11251
(March 6, 2006).
2 15 U.S.C. 78s(b)(1).
3 17 CFR 240.19b–4.
4 See Securities Exchange Act Release No. 53932
(June 1, 2006), 71 FR 33328.
5 15 U.S.C. 78f(b). In approving this proposed rule
change, the Commission considered the proposed
rule’s impact on efficiency, competition, and capital
formation. 15 U.S.C. 78c(f).
6 15 U.S.C. 78f(b)(5).
PO 00000
Frm 00167
Fmt 4703
Sfmt 4703
settling, processing information with
respect to, and facilitating transactions
in securities, to remove impediments to
and perfect the mechanism of a free and
open market and a national market
system, and, in general, to protect
investors and the public interest.
The Commission believes that
eliminating the requirement that
specialists quote a price that is more
than five cents away from the last
reported transaction price when a Rule
127 transaction is being executed
should simplify the procedure for
suspending Direct+ while a Rule 127
block transaction is being executed.7
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,8 that the
proposed rule change (SR–NYSE–2006–
01) is hereby approved.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.9
Jill M. Peterson,
Assistant Secretary.
[FR Doc. E6–12147 Filed 7–28–06; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–54205; File No. SR–NYSE–
2005–38]
Self-Regulatory Organizations; New
York Stock Exchange, Inc. (n/k/a New
York Stock Exchange LLC); Order
Approving 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
July 25, 2006.
I. Introduction
On May 26, 2005, the New York Stock
Exchange, Inc. (n/k/a New York Stock
Exchange LLC) (the ‘‘Exchange’’ or
‘‘NYSE’’) filed with the Securities and
Exchange Commission (‘‘SEC’’ or the
‘‘Commission’’) a proposed rule change
to amend Rules 104 (‘‘Dealings by
Specialists’’) and 123E (‘‘Specialist
Combination Review Policy’’) in order
to change the Exchange’s capital
requirements for specialist organizations
pursuant to Section 19(b)(1) 1 of the
Securities Exchange Act of 1934 (the
7 The Commission notes that this rule will not be
in effect upon the implementation of the Hybrid
Market. See Securities Exchange Act Release No.
53539 (March 22, 2006), 71 FR 16353 (March 31,
2006).
8 15 U.S.C. 78s(b)(2).
9 17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
E:\FR\FM\31JYN1.SGM
31JYN1
Federal Register / Vol. 71, No. 146 / Monday, July 31, 2006 / Notices
‘‘Exchange Act’’) 2 and Rule 19b–4
thereunder.3 On November 22, 2005, the
NYSE amended the proposed rule
change, replacing it in its entirety
(‘‘Amendment No. 1’’). The proposed
rule change, as amended, was issued by
the Commission on December 16, 2005
and published for comment in the
Federal Register on December 23, 2005
(the ‘‘Proposing Release’’).4 In the
Proposing Release, the Commission
requested public comment on the
proposed rule change (the comment
period ended January 13, 2006). The
Commission received comments from
two commenters regarding the proposed
rule change.5 The NYSE responded
directly to the comments made by the
first commenter.6 The second
commenter raised no new issues and the
NYSE’s responses to the first commenter
addressed the comments made by the
second commenter. This order approves
the proposed rule change, as amended.
II. Description of Proposed Rule Change
Exchange Rule 104.20 (‘‘Regular
Specialists’’) presently requires a
specialist organization to maintain
sufficient financial resources to assume
certain specified positions in each stock
that it is allocated. Further, the rule
requires specialist organizations that
engage in certain types of business to
maintain specified levels of net liquid
assets. The rule also sets a minimum
capital requirement for specialist
organizations.
Exchange Rule 104.21 presently
requires that specialist organizations
maintain additional amounts of net
liquid assets to the extent the specialist
organization’s market share exceeds 5%
of certain ‘‘concentration measures’’
specified in the rule.
Exchange Rule 104.22 presently
requires that, when two or more
specialist organizations combine as the
result of a merger, consolidation,
acquisition or other combination of
assets, the combined specialist entity
must maintain the aggregate net liquid
assets of the respective specialist
entities prior to their combination. The
Exchange has indicated that this is
commonly referred to as the ‘‘marriage
penalty.’’ Similarly, Exchange Rule
2 15
U.S.C. 78a et seq.
CFR 240.19b–4.
4 See Securities Exchange Act Release No. 52969
(Dec. 16, 2005), 70 FR 76337 (Dec. 23, 2005).
5 Mr. George Rutherfurd (‘‘Rutherfurd’’), sent
three separate letters, dated January 13, 2006,
March 7, 2006 and April 12, 2006. Rutherfurd’s
subsequent letters re-iterated the arguments made
in his first letter and did not raise any additional
issues. Mr. Junius Peake (‘‘Peake’’), sent one letter
dated April 18, 2006.
6 The NYSE responded to comments by letters
dated February 28, 2006 and March 31, 2006.
sroberts on PROD1PC70 with NOTICES
3 17
VerDate Aug<31>2005
17:34 Jul 28, 2006
Jkt 208001
123E(f)(i) requires that combinations of
specialist organizations maintain the
higher capital requirement of the
combined unit, rather than allowing a
possible reduction of capital.
The Exchange has proposed to amend
Rules 104 and 123E to change the
capital requirement of specialist
organizations. The Exchange stated in
the proposal that the amendments to
Rule 104 are designed to more
accurately address market risks and
volatility. The Exchange also indicated
in the proposal that the amendments to
Rules 104.22 and 123E(f)(i) are intended
to eliminate the ‘‘marriage penalty’’
capital requirement for specialist
organization combinations.
The Exchange proposed that NYSE
Rule 104.20 (to be re-titled ‘‘Specialist
Organizations—Minimum Capital
Requirements’’) be amended to require a
specialist organization to maintain the
greater of $1,000,000 or an amount
calculated under the proposed
amendment to Rule 104.21 described
below. For ETFs, the Exchange
proposed amending Rule 104.20 to
clarify that a specialist organization
registered solely in ETFs maintain the
greater of $500,000 for each ETF or
$1,000,000. These new requirements
would replace the current financial
requirements, which are based on the
number of securities allocated to the
specialist organization.
The Exchange proposed that NYSE
Rule 104.21 (to be re-titled ‘‘Specialist
Organizations—Additional Capital
Requirements’’) be amended to require a
specialist organization to meet, with its
own net liquid assets, a minimum
capital requirement determined by
adding two separately calculated
amounts. The first amount is equal to
$1,000,000 for each one tenth of one
percent (.1%) of Exchange transaction
dollar volume in the specialist
organization’s allocated securities, plus
$500,000 for each Exchange Traded
Fund. The second amount—an add-on
to the first amount—is calculated either
by multiplying by three the average
haircuts on the specialist organization’s
proprietary positions over the most
recent twenty days, or through the use
of an Exchange-approved value-at-risk
(VaR) model, which would include a
multiplier of between 3.0 and 4.0
depending on the accuracy of the model
(i.e., the number of exceptions to its
calculated VaR amount).
The Exchange also proposed
amending 104.21 to require that a
specialist organization’s net liquid
assets used to meet the proposed
requirements in Rules 104.20 and .21
must be dedicated exclusively to
specialist dealer activities, and must not
PO 00000
Frm 00168
Fmt 4703
Sfmt 4703
43261
be used for any other purpose without
the express written consent of the
Exchange.
The Exchange proposed that Rule
104.22 (to be re-titled ‘‘Definitions and
Model Approval Process’’) be amended
to specify certain qualitative
requirements with respect to a VaR
model a specialist organization uses to
meet the add-on requirement in the
proposed amendment to Rule 104.21.
Under the proposed amendment, the
VaR model would need, among other
things, to: (1) Be integrated into the
specialist organization’s internal risk
management system; (2) be reviewed
both periodically and annually; and (3)
adequately capture specific risk. The
proposed amendment also would
require a specialist organization that has
been granted approval by the Exchange
to use a VaR model to continue to
compute its net liquid asset requirement
using the model, unless a change is
approved upon application to the
Exchange.
The Exchange proposed amending
Rules 104.22 and 123E(f)(i) to eliminate
certain of the requirements that arise
when specialist organizations combine.
The Exchange stated the increased
requirements that apply after a
combination would not be appropriate
or necessary given the proposed
amendments to Rules 104.20 and .21.
However, the proposed amendments to
Rule 123E(f)(i) would provide the
Exchange with discretion to temporarily
revise the requirements after a specialist
organization combination.
The Exchange also proposed to
eliminate Rules 104.30 (‘‘Financing of
Specialists’’), 104.40 (‘‘Reports on Form
SPC’’) and 104.50 (‘‘Income Records’’),
which relate to the specialist
organization financing transactions. The
proposed elimination of Rule 104.30
would recognize that net liquid asset
requirements must be met by assets the
specialist organization holds free and
clear of any liens. The elimination of
Rule 104.30 would obviate the need for
Rule 104.40. Finally, the recordkeeping
requirements of Rule 104.50 also are no
longer necessary in light of Exchange
Rule 440 (‘‘Books and Records’’), which
incorporates, by reference, Securities
and Exchange Act Rules 17a–3 and 17a–
4.
The Exchange also proposed several
minor technical amendments to the
rules for purposes of clarity and
consistency.
III. Summary of Comments and NYSE’s
Responses
The Commission received comments
from two commenters regarding the
E:\FR\FM\31JYN1.SGM
31JYN1
43262
Federal Register / Vol. 71, No. 146 / Monday, July 31, 2006 / Notices
proposed rule change.7 The Exchange
responded directly to the comments
made by Rutherfurd,8 who raised six
distinct issues. Peake only commented
on one issue, which was substantially
the same as one of the issues raised by
Rutherfurd. Consequently, the
Exchange’s response to Rutherfurd
regarding that issue served to also
address Peake’s comments.
As noted previously, Rutherfurd
raised six issues: 1) The Exchange
should disclose in dollar amounts the
anticipated impact the proposed rule
amendments would have on the
aggregate capitalization of specialist
organizations; 2) the specialist
organizations are inadequately
capitalized at present; 3) the Exchange’s
analysis, set forth in the Proposing
Release, fails to address a severely
stressed market, 4) the existing
specialist organization combination
requirements are appropriate; 5) the
proposed amendments are premature in
light of the expansion of specialist
organization dealer activity as a
consequence of the Exchange’s new
‘‘hybrid market’’ rules; and 6) the
proposed reduced requirements would
make it easier for a specialist
organizations to leave the specialist
business. The issue raised by Peake was
substantially the same as the issue
raised by Rutherfurd regarding the
Exchange’s new ‘‘hybrid market’’ rules.
A. Material Information
Rutherfurd stated that the Exchange
failed to describe the impact of the
proposed rules on specialist
capitalization.9 The Exchange
responded that specialist organizations,
in the aggregate, are required to
maintain capital of $1.8 billion dollars,
but, in fact, generally maintain capital of
approximately $2.3 billion.10 The
Exchange stated that, under the
proposed rules, specialist organizations
would be required to maintain
minimum capital of $1.1 billion, but
that it is anticipated they would
maintain capital in excess of the
requirement.
sroberts on PROD1PC70 with NOTICES
B. Capitalization of the Specialist
System
Rutherfurd stated that the current
capital requirements for specialist
organizations are inadequate because
they do not address potential market
stresses or extreme events and,
therefore, the proposed reduction in
7 See
supra, note 5.
supra, note 6.
9 See Rutherfurd’s January 13, 2006, March 7,
2006 and April 12, 2006 letters.
10 See Exchange letter dated March 31, 2006.
8 See
VerDate Aug<31>2005
17:34 Jul 28, 2006
Jkt 208001
requirements would be inappropriate.11
The Exchange responded that the
proposed requirements establish
comprehensive and prudent
capitalization requirements that address
the specialist system in the context of
contemporary market realities,
including realities attendant to severe
market downturns.12 The Exchange
stated further that the proposed
capitalization levels are more than
adequate to buttress the specialist
system when considered in conjunction
with: (1) Margining and financing
arrangements currently available to
specialist organizations; (2) the ability of
specialist organizations to hedge risk;
and (3) the access, in most instances,
that specialist organizations have to the
capital of their parent companies.
C. VaR Models
Rutherfurd stated that a VaR
methodology is inappropriate for
calculating the proposed capital
requirement add-on because, while
useful for day-to-day management
purposes, it would not capture the
potential impacts of severe market
events.13 The Exchange responded by
acknowledging the limits of VaR
methodologies and noting that the
proposed rules require, as an initial
matter, that a specialist organization
maintain capital equal to $1,000,000 for
0.1% transaction dollar volume.14 The
Exchange further responded that the
VaR calculated add-on is determined by
multiplying the VaR amount by, at least,
three times. The Exchange stated that
the transaction-based requirement and
the VaR multiplier are designed to
address extreme market events.
D. Specialist Organization Combination
Requirements
Rutherfurd stated that the current
specialist organization combination
requirements are appropriate because
they are intended to maintain the
aggregate capitalization of the specialist
organizations after a merger.15 The
Exchange responded that the current
requirements arbitrarily raise capital
requirements without regard for the
actual risks faced by the combined
entity.16 The Exchange responded
further that its proposed requirements
would more closely align the capital
11 See Rutherfurd’s January 13, 2006, March 7,
2006 and April 12, 2006 letters.
12 See Exchange’s February 28, 2006 and March
31, 2006 letters.
13 See Rutherfurd’s January 13, 2006, March 7,
2006 and April 12, 2006 letters.
14 See Exchange letter dated February 28, 2006.
15 See Rutherfurd’s January 13, 2006 and March
7, 2006 letters.
16 See Exchange letter dated February 28, 2006.
PO 00000
Frm 00169
Fmt 4703
Sfmt 4703
requirements of merged specialist
organizations with the amount of risk
they take on and the dollar value and
volatility of their portfolios.
E. Hybrid Market
Both commenters expressed their
belief that the proposed rules are
premature in light of the expansion of
specialist dealer activity under the
Exchange’s new ‘‘Hybrid Market’’
rules.17 The Exchange responded that
any withdrawals of additional excess
net liquid assets resulting from the
proposed requirement would be
gradually phased in, on a measured
basis, over a nine-month period to allow
for an orderly and carefully considered
transition.18 The Exchange further
responded that it considered the impact
of other rules, policies, procedures, and
systems on the proposed rules. In
addition, the Exchange responded that it
would, on an ongoing basis, continue to
consider the impact of the Hybrid
Market rules have on the proposed
rules.
F. Specialist Organization Withdrawals
Finally, Rutherfurd stated that the
proposed rules would make it easier for
existing specialist organizations to exit
the specialist business.19 The Exchange
responded that it is unaware of any data
to support this contention.20 Further,
the Exchange responded that the
proposed rules may attract new
specialist organizations.
The Commission believes that the
Exchange has responded sufficiently to
the issues raised by the Commenters.
IV. Discussion and Commission
Findings
After careful review of the proposed
rule changes, comments and the
Exchange responses to the comments,
the Commission finds that the proposed
rule changes, as amended, are consistent
with the requirements of the Exchange
Act and the rules and regulations
thereunder applicable to a national
securities exchange in that they are
designed to recognize contemporary
approaches to managing risk and recent
developments involving the structure of
the Exchange.21
17 See Rutherfurd’s January 13, 2006 and March
7, 2006 letters and Peake’s April 18, 2006 letter. The
Exchange’s Hybrid Market rules were approved by
the Commission in Exchange Act Release No. 53539
(March 22, 2006).
18 See Exchange letter dated February 28, 2006.
19 See Rutherfurd’s January 13, 2006 letter.
20 See Exchange letter dated February 28, 2006.
21 In approving this proposed rule change, the
Commission notes that it has considered the
proposed rule change’s impact on efficiency,
competition, and capital formation. 15 U.S.C. 78c(f).
E:\FR\FM\31JYN1.SGM
31JYN1
Federal Register / Vol. 71, No. 146 / Monday, July 31, 2006 / Notices
In particular, the Commission
believes that the proposed rule changes
are consistent with Section 6(b)(5) of the
Exchange Act,22 which requires that the
rules of the exchange be designed,
among other things, to remove
impediments to and perfect the
mechanisms of a free and open market,
and, in general, to protect investors and
the public interest. The Commission
finds that amending Exchange Rules 104
and 123E is consistent with the
requirements of Section 6(b)(5) because
the amendments are designed to more
closely align net liquid asset
requirements with a specialist
organization’s risks.
IV. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Exchange Act,23
that the proposed rule change (File No.
SR–NYSE–2005–38), as amended, be,
and it hereby is, approved.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.24
Jill M. Peterson,
Assistant Secretary.
[FR Doc. E6–12183 Filed 7–28–06; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–54189; File No. SR–
NYSEArca–2006–17]
Self-Regulatory Organizations; NYSE
Arca, Inc.; Notice of Filing and Order
Granting Accelerated Approval of
Proposed Rule Change and
Amendment No. 1 Thereto Relating to
the Trading of the Index-Linked
Securities of Barclays Bank PLC
Linked to the Performance of the Dow
Jones—AIG Commodity Index Total
Return Pursuant to Unlisted Trading
Privileges
sroberts on PROD1PC70 with NOTICES
July 21, 2006.
Pursuant to Section 19(b)(1) of the
Securities Exchange Act of 1934
(‘‘Act’’),1 and Rule 19b–4 thereunder,2
notice is hereby given that on May 16,
2006, NYSE Arca, Inc. (the ‘‘Exchange’’),
through its wholly owned subsidiary,
NYSE Arca Equities, Inc. (‘‘NYSE Arca
Equities’’ or the ‘‘Corporation’’), filed
with the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change as described in
Items I and II below, which Items have
22 15
U.S.C. 78f(b)(5).
U.S.C. 78s(b)(2).
24 17 CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
23 15
VerDate Aug<31>2005
17:34 Jul 28, 2006
Jkt 208001
43263
Market Maker, or affiliate of such
Market Maker, engages in Other
Business Activities. For purposes of
Commodity Index-Linked Securities,
Other Business Activities shall include
acting as a Market Maker or functioning
in any capacity involving marketmaking responsibilities in the Index
components, the commodities
underlying the Index components, or
I. Self-Regulatory Organization’s
options, futures or options on futures on
Statement of the Terms of Substance of
the Index, or any other derivatives
the Proposed Rule Change
(collectively, ‘‘derivative instruments’’)
Through NYSE Arca Equities, the
based on the Index or based on any
Exchange proposes to amend its rules
Index component or any physical
governing NYSE Arca, LLC (also
commodity underlying an Index
referred to as the ‘‘NYSE Arca
component. However, an approved
Marketplace’’), the equities trading
person of an ETP Holder acting as a
facility of NYSE Arca Equities. Pursuant registered Market Maker in Commodity
to NYSE Arca Equities Rule 5.2(j)(6), the Index-Linked Securities that has
Exchange proposes to trade pursuant to
established and obtained Corporation
unlisted trading privileges (‘‘UTP’’) the
approval of procedures restricting the
Index-Linked Securities (‘‘Securities’’)
flow of material, non-public market
of Barclays Bank PLC (‘‘Barclays’’),
information between itself and the ETP
which are linked to the performance of
Holder pursuant to Rule 7.26, and any
the Dow Jones—AIG Commodity Index
member, officer or employee associated
Total Return (‘‘Index’’). The Exchange
therewith, may act in a market making
also proposes new Commentary .01 to
capacity, other than as a Market Maker
NYSE Arca Equities Rule 5.2(j)(6) to
in the Commodity Index-Linked
accommodate the trading of the
Securities on another market center, in
Securities. The text of the proposed rule the Index components, the commodities
change is included below. Proposed
underlying the Index components, or
new language is italicized.
any derivative instruments based on the
*
*
*
*
*
Index or based on any Index component
or any physical commodity underlying
Rule 5.2(j)(6)
an Index component.
Index-Linked Securities
(b) The ETP Holder acting as a
Introductory Paragraph and Sections
registered Market Maker in Commodity
(a)–(k)—No change.
Index-Linked Securities must file with
Commentary:
the Corporation, in a manner prescribed
.01 The provisions of this
by the Corporation, and keep current a
Commentary apply only to Index-Linked list identifying all accounts for trading
Securities listed and/or traded under
in the Index components, the
this Rule where the price of such Index- commodities underlying the Index
Linked Securities is based in whole or
components, or any derivative
part on the price of (i) a commodity or
instruments based on the Index or based
commodities; (ii) any futures contracts
on any Index component or any
or other derivatives based on a
physical commodity underlying an
commodity or commodities; or (iii) any
Index component, which the ETP
index based on either (i) or (ii) above (an Holder acting as registered Market
‘‘Index’’) (‘‘Commodity Index-Linked
Maker may have or over which it may
Securities’’). Commodity Index-Linked
exercise investment discretion. No ETP
Securities listed and/or traded under
Holder acting as registered Market
this Rule may have a term of up to 30
Maker in the Commodity Index-Linked
years.
Securities shall trade in the Index
(a) An ETP Holder acting as a
components, the commodities
registered Market Maker in Commodity
underlying the Index components, or
Index-Linked Securities is obligated to
any derivative instruments based on the
comply with Rule 7.26 pertaining to
Index or based on any Index component
limitations on dealings when such
or any physical commodity underlying
an Index component, in an account in
3 In Amendment No. 1, the Exchange revised the
which an ETP Holder acting as a
proposed rule text and amended the purpose
registered Market Maker, directly or
section to provide (i) that the Securities have a term
of 30 years; (ii) that the Information Bulletin will
indirectly, controls trading activities, or
include a description of the Commission’s no-action has a direct interest in the profits or
relief; and (iii) an amended description of the
losses thereof, which has not been
Exchange’s surveillance procedures regarding the
reported to the Corporation as required
Securities. The changes in Amendment No. 1 have
been incorporated into this Notice and Order.
by this Rule.
been prepared by the Exchange. On July
20, 2006, the Exchange filed
Amendment No. 1 to the proposed rule
change.3 The Commission is publishing
this notice and order to solicit
comments on the proposed rule change,
as amended, from interested persons
and is approving the proposal on an
accelerated basis.
PO 00000
Frm 00170
Fmt 4703
Sfmt 4703
E:\FR\FM\31JYN1.SGM
31JYN1
Agencies
[Federal Register Volume 71, Number 146 (Monday, July 31, 2006)]
[Notices]
[Pages 43260-43263]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-12183]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-54205; File No. SR-NYSE-2005-38]
Self-Regulatory Organizations; New York Stock Exchange, Inc. (n/
k/a New York Stock Exchange LLC); Order Approving 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
July 25, 2006.
I. Introduction
On May 26, 2005, the New York Stock Exchange, Inc. (n/k/a New York
Stock Exchange LLC) (the ``Exchange'' or ``NYSE'') filed with the
Securities and Exchange Commission (``SEC'' or the ``Commission'') a
proposed rule change to amend Rules 104 (``Dealings by Specialists'')
and 123E (``Specialist Combination Review Policy'') in order to change
the Exchange's capital requirements for specialist organizations
pursuant to Section 19(b)(1) \1\ of the Securities Exchange Act of 1934
(the
[[Page 43261]]
``Exchange Act'') \2\ and Rule 19b-4 thereunder.\3\ On November 22,
2005, the NYSE amended the proposed rule change, replacing it in its
entirety (``Amendment No. 1''). The proposed rule change, as amended,
was issued by the Commission on December 16, 2005 and published for
comment in the Federal Register on December 23, 2005 (the ``Proposing
Release'').\4\ In the Proposing Release, the Commission requested
public comment on the proposed rule change (the comment period ended
January 13, 2006). The Commission received comments from two commenters
regarding the proposed rule change.\5\ The NYSE responded directly to
the comments made by the first commenter.\6\ The second commenter
raised no new issues and the NYSE's responses to the first commenter
addressed the comments made by the second commenter. This order
approves the proposed rule change, as amended.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 15 U.S.C. 78a et seq.
\3\ 17 CFR 240.19b-4.
\4\ See Securities Exchange Act Release No. 52969 (Dec. 16,
2005), 70 FR 76337 (Dec. 23, 2005).
\5\ Mr. George Rutherfurd (``Rutherfurd''), sent three separate
letters, dated January 13, 2006, March 7, 2006 and April 12, 2006.
Rutherfurd's subsequent letters re-iterated the arguments made in
his first letter and did not raise any additional issues. Mr. Junius
Peake (``Peake''), sent one letter dated April 18, 2006.
\6\ The NYSE responded to comments by letters dated February 28,
2006 and March 31, 2006.
---------------------------------------------------------------------------
II. Description of Proposed Rule Change
Exchange Rule 104.20 (``Regular Specialists'') presently requires a
specialist organization to maintain sufficient financial resources to
assume certain specified positions in each stock that it is allocated.
Further, the rule requires specialist organizations that engage in
certain types of business to maintain specified levels of net liquid
assets. The rule also sets a minimum capital requirement for specialist
organizations.
Exchange Rule 104.21 presently requires that specialist
organizations maintain additional amounts of net liquid assets to the
extent the specialist organization's market share exceeds 5% of certain
``concentration measures'' specified in the rule.
Exchange Rule 104.22 presently requires that, when two or more
specialist organizations combine as the result of a merger,
consolidation, acquisition or other combination of assets, the combined
specialist entity must maintain the aggregate net liquid assets of the
respective specialist entities prior to their combination. The Exchange
has indicated that this is commonly referred to as the ``marriage
penalty.'' Similarly, Exchange Rule 123E(f)(i) requires that
combinations of specialist organizations maintain the higher capital
requirement of the combined unit, rather than allowing a possible
reduction of capital.
The Exchange has proposed to amend Rules 104 and 123E to change the
capital requirement of specialist organizations. The Exchange stated in
the proposal that the amendments to Rule 104 are designed to more
accurately address market risks and volatility. The Exchange also
indicated in the proposal that the amendments to Rules 104.22 and
123E(f)(i) are intended to eliminate the ``marriage penalty'' capital
requirement for specialist organization combinations.
The Exchange proposed that NYSE Rule 104.20 (to be re-titled
``Specialist Organizations--Minimum Capital Requirements'') be amended
to require a specialist organization to maintain the greater of
$1,000,000 or an amount calculated under the proposed amendment to Rule
104.21 described below. For ETFs, the Exchange proposed amending Rule
104.20 to clarify that a specialist organization registered solely in
ETFs maintain the greater of $500,000 for each ETF or $1,000,000. These
new requirements would replace the current financial requirements,
which are based on the number of securities allocated to the specialist
organization.
The Exchange proposed that NYSE Rule 104.21 (to be re-titled
``Specialist Organizations--Additional Capital Requirements'') be
amended to require a specialist organization to meet, with its own net
liquid assets, a minimum capital requirement determined by adding two
separately calculated amounts. The first amount is equal to $1,000,000
for each one tenth of one percent (.1%) of Exchange transaction dollar
volume in the specialist organization's allocated securities, plus
$500,000 for each Exchange Traded Fund. The second amount--an add-on to
the first amount--is calculated either by multiplying by three the
average haircuts on the specialist organization's proprietary positions
over the most recent twenty days, or through the use of an Exchange-
approved value-at-risk (VaR) model, which would include a multiplier of
between 3.0 and 4.0 depending on the accuracy of the model (i.e., the
number of exceptions to its calculated VaR amount).
The Exchange also proposed amending 104.21 to require that a
specialist organization's net liquid assets used to meet the proposed
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.
The Exchange proposed that Rule 104.22 (to be re-titled
``Definitions and Model Approval Process'') be amended to specify
certain qualitative requirements with respect to a VaR model a
specialist organization uses to meet the add-on requirement in the
proposed amendment to Rule 104.21. Under the proposed amendment, the
VaR model would need, among other things, to: (1) Be integrated into
the specialist organization's internal risk management system; (2) be
reviewed both periodically and annually; and (3) adequately capture
specific risk. The proposed amendment also would require a specialist
organization that has been granted approval by the Exchange to use a
VaR model to continue to compute its net liquid asset requirement using
the model, unless a change is approved upon application to the
Exchange.
The Exchange proposed amending Rules 104.22 and 123E(f)(i) to
eliminate certain of the requirements that arise when specialist
organizations combine. The Exchange stated the increased requirements
that apply after a combination would not be appropriate or necessary
given the proposed amendments to Rules 104.20 and .21. However, the
proposed amendments to Rule 123E(f)(i) would provide the Exchange with
discretion to temporarily revise the requirements after a specialist
organization combination.
The Exchange also proposed to eliminate Rules 104.30 (``Financing
of Specialists''), 104.40 (``Reports on Form SPC'') and 104.50
(``Income Records''), which relate to the specialist organization
financing transactions. The proposed elimination of Rule 104.30 would
recognize that net liquid asset requirements must be met by assets the
specialist organization holds free and clear of any liens. The
elimination of Rule 104.30 would obviate the need for Rule 104.40.
Finally, the recordkeeping requirements of Rule 104.50 also are no
longer necessary in light of Exchange Rule 440 (``Books and Records''),
which incorporates, by reference, Securities and Exchange Act Rules
17a-3 and 17a-4.
The Exchange also proposed several minor technical amendments to
the rules for purposes of clarity and consistency.
III. Summary of Comments and NYSE's Responses
The Commission received comments from two commenters regarding the
[[Page 43262]]
proposed rule change.\7\ The Exchange responded directly to the
comments made by Rutherfurd,\8\ who raised six distinct issues. Peake
only commented on one issue, which was substantially the same as one of
the issues raised by Rutherfurd. Consequently, the Exchange's response
to Rutherfurd regarding that issue served to also address Peake's
comments.
---------------------------------------------------------------------------
\7\ See supra, note 5.
\8\ See supra, note 6.
---------------------------------------------------------------------------
As noted previously, Rutherfurd raised six issues: 1) The Exchange
should disclose in dollar amounts the anticipated impact the proposed
rule amendments would have on the aggregate capitalization of
specialist organizations; 2) the specialist organizations are
inadequately capitalized at present; 3) the Exchange's analysis, set
forth in the Proposing Release, fails to address a severely stressed
market, 4) the existing specialist organization combination
requirements are appropriate; 5) the proposed amendments are premature
in light of the expansion of specialist organization dealer activity as
a consequence of the Exchange's new ``hybrid market'' rules; and 6) the
proposed reduced requirements would make it easier for a specialist
organizations to leave the specialist business. The issue raised by
Peake was substantially the same as the issue raised by Rutherfurd
regarding the Exchange's new ``hybrid market'' rules.
A. Material Information
Rutherfurd stated that the Exchange failed to describe the impact
of the proposed rules on specialist capitalization.\9\ The Exchange
responded that specialist organizations, in the aggregate, are required
to maintain capital of $1.8 billion dollars, but, in fact, generally
maintain capital of approximately $2.3 billion.\10\ The Exchange stated
that, under the proposed rules, specialist organizations would be
required to maintain minimum capital of $1.1 billion, but that it is
anticipated they would maintain capital in excess of the requirement.
---------------------------------------------------------------------------
\9\ See Rutherfurd's January 13, 2006, March 7, 2006 and April
12, 2006 letters.
\10\ See Exchange letter dated March 31, 2006.
---------------------------------------------------------------------------
B. Capitalization of the Specialist System
Rutherfurd stated that the current capital requirements for
specialist organizations are inadequate because they do not address
potential market stresses or extreme events and, therefore, the
proposed reduction in requirements would be inappropriate.\11\ The
Exchange responded that the proposed requirements establish
comprehensive and prudent capitalization requirements that address the
specialist system in the context of contemporary market realities,
including realities attendant to severe market downturns.\12\ The
Exchange stated further that the proposed capitalization levels are
more than adequate to buttress the specialist system when considered in
conjunction with: (1) Margining and financing arrangements currently
available to specialist organizations; (2) the ability of specialist
organizations to hedge risk; and (3) the access, in most instances,
that specialist organizations have to the capital of their parent
companies.
---------------------------------------------------------------------------
\11\ See Rutherfurd's January 13, 2006, March 7, 2006 and April
12, 2006 letters.
\12\ See Exchange's February 28, 2006 and March 31, 2006
letters.
---------------------------------------------------------------------------
C. VaR Models
Rutherfurd stated that a VaR methodology is inappropriate for
calculating the proposed capital requirement add-on because, while
useful for day-to-day management purposes, it would not capture the
potential impacts of severe market events.\13\ The Exchange responded
by acknowledging the limits of VaR methodologies and noting that the
proposed rules require, as an initial matter, that a specialist
organization maintain capital equal to $1,000,000 for 0.1% transaction
dollar volume.\14\ The Exchange further responded that the VaR
calculated add-on is determined by multiplying the VaR amount by, at
least, three times. The Exchange stated that the transaction-based
requirement and the VaR multiplier are designed to address extreme
market events.
---------------------------------------------------------------------------
\13\ See Rutherfurd's January 13, 2006, March 7, 2006 and April
12, 2006 letters.
\14\ See Exchange letter dated February 28, 2006.
---------------------------------------------------------------------------
D. Specialist Organization Combination Requirements
Rutherfurd stated that the current specialist organization
combination requirements are appropriate because they are intended to
maintain the aggregate capitalization of the specialist organizations
after a merger.\15\ The Exchange responded that the current
requirements arbitrarily raise capital requirements without regard for
the actual risks faced by the combined entity.\16\ The Exchange
responded further that its proposed requirements would more closely
align the capital requirements of merged specialist organizations with
the amount of risk they take on and the dollar value and volatility of
their portfolios.
---------------------------------------------------------------------------
\15\ See Rutherfurd's January 13, 2006 and March 7, 2006
letters.
\16\ See Exchange letter dated February 28, 2006.
---------------------------------------------------------------------------
E. Hybrid Market
Both commenters expressed their belief that the proposed rules are
premature in light of the expansion of specialist dealer activity under
the Exchange's new ``Hybrid Market'' rules.\17\ The Exchange responded
that any withdrawals of additional excess net liquid assets resulting
from the proposed requirement would be gradually phased in, on a
measured basis, over a nine-month period to allow for an orderly and
carefully considered transition.\18\ The Exchange further responded
that it considered the impact of other rules, policies, procedures, and
systems on the proposed rules. In addition, the Exchange responded that
it would, on an ongoing basis, continue to consider the impact of the
Hybrid Market rules have on the proposed rules.
---------------------------------------------------------------------------
\17\ See Rutherfurd's January 13, 2006 and March 7, 2006 letters
and Peake's April 18, 2006 letter. The Exchange's Hybrid Market
rules were approved by the Commission in Exchange Act Release No.
53539 (March 22, 2006).
\18\ See Exchange letter dated February 28, 2006.
---------------------------------------------------------------------------
F. Specialist Organization Withdrawals
Finally, Rutherfurd stated that the proposed rules would make it
easier for existing specialist organizations to exit the specialist
business.\19\ The Exchange responded that it is unaware of any data to
support this contention.\20\ Further, the Exchange responded that the
proposed rules may attract new specialist organizations.
---------------------------------------------------------------------------
\19\ See Rutherfurd's January 13, 2006 letter.
\20\ See Exchange letter dated February 28, 2006.
---------------------------------------------------------------------------
The Commission believes that the Exchange has responded
sufficiently to the issues raised by the Commenters.
IV. Discussion and Commission Findings
After careful review of the proposed rule changes, comments and the
Exchange responses to the comments, the Commission finds that the
proposed rule changes, as amended, are consistent with the requirements
of the Exchange Act and the rules and regulations thereunder applicable
to a national securities exchange in that they are designed to
recognize contemporary approaches to managing risk and recent
developments involving the structure of the Exchange.\21\
---------------------------------------------------------------------------
\21\ In approving this proposed rule change, the Commission
notes that it has considered the proposed rule change's impact on
efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
---------------------------------------------------------------------------
[[Page 43263]]
In particular, the Commission believes that the proposed rule
changes are consistent with Section 6(b)(5) of the Exchange Act,\22\
which requires that the rules of the exchange be designed, among other
things, to remove impediments to and perfect the mechanisms of a free
and open market, and, in general, to protect investors and the public
interest. The Commission finds that amending Exchange Rules 104 and
123E is consistent with the requirements of Section 6(b)(5) because the
amendments are designed to more closely align net liquid asset
requirements with a specialist organization's risks.
---------------------------------------------------------------------------
\22\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
IV. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Exchange Act,\23\ that the proposed rule change (File No. SR-NYSE-2005-
38), as amended, be, and it hereby is, approved.
---------------------------------------------------------------------------
\23\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\24\
---------------------------------------------------------------------------
\24\ 17 CFR 200.30-3(a)(12).
Jill M. Peterson,
Assistant Secretary.
[FR Doc. E6-12183 Filed 7-28-06; 8:45 am]
BILLING CODE 8010-01-P