Self-Regulatory Organizations; New York Stock Exchange LLC; Notice of Filing of Proposed Rule Change and Amendments Nos. 1 and 2 To Amend Exchange Rule 325 (Capital Requirements for Member Organizations), Rule 326 (Growth Capital Requirement, Business Reduction Capital Requirement, Unsecured Loans and Advances), and Rule 431 (Margin Requirement), 45086-45089 [E6-12841]
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45086
Federal Register / Vol. 71, No. 152 / Tuesday, August 8, 2006 / Notices
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 an e-mail to rulecomments@sec.gov. Please include File
No. SR–NASDAQ–2006–024 on the
subject line.
Paper Comments
jlentini on PROD1PC65 with NOTICES
• Send paper comments in triplicate
to Nancy M. Morris, Secretary,
Securities and Exchange Commission,
Station Place, 100 F Street, NE.,
Washington, DC 20549–1090.
All submissions should refer to File
No. SR–NASDAQ–2006–024. This file
number should be included on the
subject line if e-mail is used. 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 will also be
available for inspection and copying at
the principal office of Nasdaq. 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 No.
SR–NASDAQ–2006–024 and should be
submitted on or before August 29, 2006.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.19
Nancy M. Morris,
Secretary.
[FR Doc. E6–12840 Filed 8–7–06; 8:45 am]
BILLING CODE 8010–01–P
19 17
CFR 200.30–3(a)(12).
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SECURITIES AND EXCHANGE
COMMISSION
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
[Release No. 34–54255; File No. SR–NYSE–
2005–03]
The Exchange is proposing to amend
Rule 325, Rule 326, and Rule 431 to
reflect recent SEC rule amendments
under the Exchange Act, including
amendments to Exchange Act Rule
15c3–1 that established an alternative
method of computing net capital for
broker-dealers.
Self-Regulatory Organizations; New
York Stock Exchange LLC; Notice of
Filing of Proposed Rule Change and
Amendments Nos. 1 and 2 To Amend
Exchange Rule 325 (Capital
Requirements for Member
Organizations), Rule 326 (Growth
Capital Requirement, Business
Reduction Capital Requirement,
Unsecured Loans and Advances), and
Rule 431 (Margin Requirement)
July 31, 2006.
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 January 5, 2005, the New York Stock
Exchange LLC (‘‘NYSE’’ or the
‘‘Exchange’’) filed with the Securities
and Exchange Commission (‘‘SEC’’ or
the ‘‘Commission’’) the proposed rule
change as described in Items I, II, and
III below, which Items have been
prepared by the Exchange.4 The NYSE
filed Amendment No. 1 to the proposed
rule change on February 13, 2006.5 The
NYSE filed Amendment No. 2 to the
proposed rule change on March 17,
2006.6 The Commission is publishing
this notice to solicit comments on the
proposed rule change, as amended, from
interested persons.
1 15
U.S.C. 78s(b)(1).
U.S.C. 78a et seq.
3 17 CFR 240.19b–4.
4 Pursuant to discussions with the Commission
staff, the Exchange clarified the application of
proposed amendments to NYSE Rules 325, 326 and
431 to reflect the Exchange’s March 7, 2006 merger
with Archipelago Holdings, Inc. (‘‘Archipelago’’),
adjustments to capital levels in Rule 326 and other
general editorial changes. Telephone conversations
between William Jannace, Director, Exchange,
William Wollman, Vice President, Exchange and E.
David Hwa, Special Counsel, Division of Market
Regulation, Commission, on May 11, 2006, June 8,
2006, July 19, 2006 and email dated July 19, 2006.
5 In Amendment No. 1, the Exchange clarified the
application of proposed amendments to NYSE Rule
431(e)(9) solely to OTC derivatives transactions and
expanded upon elements of the written risk
analysis provided by the proposed rule for member
organizations utilizing the alternative method of
computing net capital.
6 In Amendment No. 2, the Exchange clarified the
application of proposed amendments to NYSE Rule
326 to make explicit the ability of the Exchange to
restrict the growth or business of a member
organization, respectively, when its tentative net
capital declines below the early warning
notification amount required by the Exchange Act
Rule 15c3–1(a)(7)(ii).
2 15
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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.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
Background
Exchange Act Rule 15c3–1 (the ‘‘net
capital rule’’) contains basic financial
responsibility standards for brokerdealers. The rule is intended to protect
customers and other market participants
from broker-dealer failures, and to
enable those firms that fall below the
minimum net capital requirements to
liquidate in an orderly fashion without
the need for a formal proceeding or
financial assistance from the Securities
Investor Protection Corporation. To help
insure that broker-dealers maintain
sufficient liquid assets to satisfy
promptly the claims of customers and
cover potential market and credit risks,
the net capital rule requires brokerdealers to maintain different minimum
levels of capital based upon the nature
of their business and whether they
handle customer funds or securities.
On August 20, 2004, the SEC adopted
rule amendments under the Exchange
Act, including amendments to Exchange
Act Rule 15c3–1, that establish a
voluntary, alternative method of
computing net capital for certain large
broker-dealers that are part of
consolidated supervised groups referred
to as consolidated supervised entities
(‘‘CSEs’’). Under the SEC amendments,
a broker-dealer may use this
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Federal Register / Vol. 71, No. 152 / Tuesday, August 8, 2006 / Notices
‘‘alternative/CSE’’ method only if its
ultimate holding company agrees to
compute group-wide allowable capital
and allowances for market, credit, and
operational risk in accordance with the
standards adopted by the Basel
Committee on Banking Supervision, and
consents to group-wide SEC
supervision. The alternative method of
computing net capital permits a brokerdealer to use models, such as ‘‘value-atrisk’’ (‘‘VAR’’) models and scenario
analysis,7 that are already part of its
internal risk management control
system to calculate the market risk and
derivatives-related credit risk
components of its net capital
requirement. The deduction for market
risk calculated using internal models
replaces the traditional ‘‘haircut’’
approach to calculating net capital.8
When the Membership allow their net
capital to decline below certain levels,
they risk non-compliance with the net
capital and financial responsibility
requirements of Exchange Act Rule
15c3–1. NYSE Rules 325 and 326 are
designed to alert the Exchange before
such problems occur, and to enable the
Exchange to prevent Membership noncompliance by restricting the business
activities of any member organization
whose net capital falls below certain
defined levels.
jlentini on PROD1PC65 with NOTICES
Proposed Amendment to NYSE Rule
325
NYSE Rule 325, the Exchange’s
primary net capital rule, requires the
Membership to comply with Exchange
Act Rule 15c3–1 and imposes additional
prophylactic requirements to ensure
such compliance. Rule 325(b) requires a
member organization to notify the
Exchange if its net capital falls below
certain percentages. The proposed
amendment adds Rule 325(b)(3), which
would require a member organization to
provide concurrently to the Exchange a
copy of any report or notification made
to the SEC pursuant to Exchange Act
Rule 17a–11 9 or Commodities Exchange
Act (‘‘CEA’’) 10 Regulation 1.12.11
This new requirement is necessary to
help ensure that the Exchange continues
to receive timely notification of
potential violations of Exchange Act
Rule 15c3–1, including the rule’s new
7 Value-at risk models assess market risk based on
the probability distribution for a portfolio’s market
value. Scenario analysis is a method of assessing
market risk by testing various possible scenarios.
8 The ‘‘haircut’’ approach to computing net
capital involves reducing the value of firms’’
proprietary securities by pre-determined
percentages to allow for potential reductions in
market value.
9 17 CFR 240.17a–11.
10 7 U.S.C. 1 et seq.
11 17 CFR 1.12.
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CSE provisions. For example, as noted
above, Exchange Act Rule 15c3–1, in
conjunction with Exchange Act Rule
17a–11, now requires a broker-dealer
that elects to use the alternative method
of computing net capital to report to the
SEC whenever its tentative net capital
declines below $5 billion. Proposed
Rule 325(b)(3) would require a member
organization to provide the Exchange
with copies of every such report.
Language in Rule 325(b) regarding
notification to the Exchange relating to
CEA minimum capital requirements for
members or member organizations
acting as futures commission merchants
was rendered obsolete by amendments
to CEA Regulation 1.17 12 on September
30, 2004 13 and, therefore, has been
removed from the amended Rule 325(b).
The proposed new provisions of Rule
325(b)(3), however, would require a
member organization to provide the
Exchange with copies of any reports or
notifications it provides to the
Commodity Futures Trading
Commission (‘‘CFTC’’) under CEA
Regulation 1.12. Therefore, because CEA
Regulation 1.12 requires notification by
any futures commission merchant that
experiences a decline in net capital
below the CEA’s early warning levels,
the Exchange will continue to receive
notification if a member organization
acting as futures commission merchant
is in danger of violating CEA minimum
capital requirements.
The Exchange’s merger with
Archipelago rendered the Exchange’s
constitution obsolete so paragraphs (5)
and (6) of Rule 325(e) and all references
to the constitution were removed.
Other grammatical changes have been
made throughout Rule 325 for purposes
of clarity and stylistic consistency.
Proposed Amendment to NYSE Rule
326
NYSE Rule 326, which enables the
Exchange to restrict a member
organization’s business activities if its
net capital falls below certain defined
levels, uses a two-step approach to
preventing Membership noncompliance with Exchange Act Rule
15c3–1. First, Rule 326(a) allows the
Exchange to prohibit a member
organization from expanding its
business if its net capital falls below
specified levels. Second, if a member
organization’s net capital falls below
lower, specified levels, Rule 326(b)
allows the Exchange to compel it to
reduce its existing business. To enable
12 17
CFR 1.17.
13 The CEA amendments eliminated capital
requirement calculations based on the concept of
‘‘segregated funds.’’
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45087
the Exchange to regulate its Membership
proactively (that is, to act if a member
or member organization is in danger of
violating Exchange Act Rule 15c3–1,
rather than waiting until Exchange Act
Rule 15c3–1 has been violated), the
levels specified in NYSE Rule 326 are
higher than those contained in
Exchange Act Rule 15c3–1.
The proposed amendments would
add Rule 326(a)(4) to provide minimum
tentative net capital 14 and net capital
levels for the Exchange to use when
prohibiting, under Rule 326(a), the
expansion of business by a member
organization using the alternative
method computing net capital under the
CSE rules. The levels proposed in Rule
326(a)(1)(d) (50 percent of the tentative
net capital level that triggers SEC
notification or the net capital level is
less than $1.25 billion) will not unduly
restrict a member organization’s
business, but will allow the Exchange,
after evaluating a member organization’s
financial condition, to use the
disincentive of restricted business
expansion to encourage a member
organization whose net capital has
fallen to levels that risk violation of
Exchange Act Rule 15c3–1 to take
necessary corrective action.
Language in Rule 326(a) regarding
limiting a member organization’s
expansion of business due to CEA
minimum capital requirements for a
member organization acting as futures
commission merchant was rendered
obsolete by the aforementioned
amendments to CEA Regulation 1.17,
and, therefore, has been removed from
the amended Rule 326(a).
The proposed amendment would add
Rule 326(b)(1)(d) to provide minimum
tentative net capital and net capital
levels for the Exchange to use in
requiring a member organization that
uses the alternative method of
computing net capital to reduce its
business pursuant to Rule 326(b). The
levels proposed in Rule 326(b)(1)(d) (40
percent of the tentative net capital level
that triggers SEC notification or net
capital less than $1 billion) would not
unduly restrict a member organization’s
business, but would allow the
Exchange, after evaluating a member
organization’s financial condition, to
use the disincentive of mandatory
business reduction to encourage
necessary corrective action by a member
organization whose net capital has
fallen to levels that risk violation of
Exchange Act Rule 15c3–1.
14 The term ‘‘tentative net capital,’’ as it pertains
to the new regulations regarding broker-dealers
using the ‘‘alternative/CSE’’ method, is defined in
Exchange Act Rule 15c3–1(c)(15), part of the SEC’s
new CSE regulations.
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Federal Register / Vol. 71, No. 152 / Tuesday, August 8, 2006 / Notices
Language in Rule 326(b) regarding the
reduction of a member organization’s
business due to CEA minimum capital
requirements for a member organization
acting as futures commission merchant
was rendered obsolete by the
aforementioned amendments to CEA
Regulation 1.17, and, therefore, has been
removed from the amended Rule 326(b).
The proposed new provisions of Rule
326(b)(1)(e), however, would require a
member organization to reduce its
business if its net capital falls below 110
percent of the minimum capital
requirements of CEA Regulation 1.17
(the same level that triggers notification
to the CFTC under CEA Regulation
1.12). Therefore, the Exchange will
retain the ability to compel a member
organization to reduce its business if its
net capital falls to levels that may
violate CEA minimum capital
requirements.
Other grammatical changes have been
made throughout Rule 326 for purposes
of accuracy, clarity, and stylistic
consistency.
jlentini on PROD1PC65 with NOTICES
Proposed Amendment to NYSE Rule
431
Section 7(a) 15 of the Exchange Act
empowers the Board of Governors of the
Federal Reserve System to prescribe the
rules and regulations regarding the
credit that may be extended by brokerdealers on securities (Regulation T 16).
NYSE Rule 431 prescribes specific
margin requirements that must be
maintained in all of a member
organization’s customer accounts, based
on the type of securities products held
in such accounts.
Exchange Act Rule 15c3–1e(c),17 one
of the recent SEC amendments related to
the alternative method of computing net
capital for CSE broker-dealers,
prescribes deductions to net capital for
credit risk on transactions in certain
derivative instruments for brokerdealers using the alternative method (for
example, VAR models), provided the
broker-dealers have in place
comprehensive internal risk
management procedures that address
market, credit, liquidity, legal, and
operational risk at the firm.
The proposed amendment to Rule 431
would add Rule 431(e)(9). This new
paragraph would exempt a member
organization using the alternative
method of computing net capital from
Rule 431 for certain exposures arising
from transactions in over-the-counter
U.S.C. 78g(a).
16 12 CFR 220 et seq.
17 17 CFR 240.15c3–1e(c).
20:06 Aug 07, 2006
2. Statutory Basis
The proposed amendments to NYSE
Rules 325, 326, and 431 are consistent
with the requirements of Section
6(b)(5) 19 of the Exchange Act, which
requires that the rules of the Exchange
be designed to promote just and
equitable principles of trade, 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 in that they incorporate
into the Exchange’s rules recent SEC
amendments to Exchange Act Rule
15c3–1 regarding the alternative method
of computing net capital for brokerdealers that are part of a CSE.
B. Self-Regulatory Organization’s
Statement on Burden on Competition
The Exchange believes that the
proposal does not impose any burden
on competition that is not necessary or
18 These instruments are described in Exchange
Act Rule 15c3–1e(c)(vi)(E), 17 CFR 240.15c3–
1e(c)(vi)(E).
19 15 U.S.C. 78f(b)(5).
15 15
VerDate Aug<31>2005
(‘‘OTC’’) derivative instruments 18 for
which the member organization may
compute a deduction to net capital for
credit risk using the methods contained
in Rule 15c3–1e(c).
A member organization that applies
Rule 431(e)(9) must maintain a written
risk analysis methodology for assessing
the amount of credit that may be
extended with respect to OTC
derivatives transactions and the
methodology must include at least those
procedures and guidelines enumerated
in paragraph (e)(9). The procedures and
guidelines relate to reviewing customer
account documentation and financial
information; establishing credit limits
for customers; monitoring the member
organization’s credit risk exposure to its
customers; management reporting on
credit extension exposure; managing the
impact of credit extension on the
member organization’s overall risk
exposure; the appropriate management
response to violations of credit
extension limits; stress testing customer
accounts individually and in the
aggregate; and determining whether to
collect margin from a particular
customer. The member organization
must establish a method for period
review of these procedures by an
independent unit of the organization,
such as internal audit or risk
management. Management also must
review periodically the member
organization’s credit extension activities
for consistency with the guidelines.
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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
Written comments were neither
solicited nor received.
III. Date of Effectiveness of the
Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of
publication of this notice in the Federal
Register or within such longer period (i)
As the Commission may designate up to
90 days of such date if it finds such
longer period to be appropriate and
publishes its reasons for so finding or
(ii) as to which the 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, as amended, is consistent with
the Exchange 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 rulecomments@sec.gov. Please include File
Number SR–NYSE–2005–03 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.
All submissions should refer to File
Number SR–NYSE–2005–03. This file
number should be included on the
subject line if e-mail is used. 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
E:\FR\FM\08AUN1.SGM
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Federal Register / Vol. 71, No. 152 / Tuesday, August 8, 2006 / Notices
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for inspection and copying in
the Commission’s Public Reference
Room. Copies of such filing will also be
available for inspection and copying at
the principal office of the NYSE. All
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–2005–03 and should be
submitted on or before August 29, 2006.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.20
Nancy M. Morris,
Secretary.
[FR Doc. E6–12841 Filed 8–7–06; 8:45 am]
BILLING CODE 8010–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–54257; File No. SR–Phlx–
2006–46]
Self-Regulatory Organizations;
Philadelphia Stock Exchange, Inc.;
Notice of Filing and Immediate
Effectiveness of Proposed Rule
Change Extending the Specialist
Option Transaction Charge Credit Pilot
Program
August 1, 2006.
jlentini on PROD1PC65 with NOTICES
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 July 21,
2006, the Philadelphia Stock Exchange,
Inc. (‘‘Phlx’’ or ‘‘Exchange’’) filed with
the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change as described in
Items I, II and III below, which Items
have been prepared by the Exchange.
The Exchange has designated this
proposal as one establishing or changing
a due, fee, or other charge imposed by
a self-regulatory organization pursuant
to Section 19(b)(3)(A)(ii) of the Act 3 and
Rule 19b–4(f)(2) thereunder,4 which
renders the proposal effective upon
filing with the Commission. The
Commission is publishing this notice to
20 17
CFR 200.30–3(a)(12).
U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 15 U.S.C. 78s(b)(3)(A)(ii).
4 17 CFR 240.19b–4(f)(2).
1 15
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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 Exchange proposes to extend for
a one-year period, until July 31, 2007,
its current pilot program that provides
for an option transaction charge credit
of $0.21 per contract for Exchange
options specialist units 5 that incur Phlx
option transaction charges when a
customer order is delivered to the limit
order book via the Exchange’s Options
Floor Broker Management System
(‘‘FBMS’’) 6 and is then sent to an away
market and executed via the Intermarket
Option Linkage (‘‘Linkage’’) under the
Plan for the Purpose of Creating and
Operating an Intermarket Option
Linkage (‘‘Plan’’) 7 as a Principal Acting
as Agent Order (‘‘P/A Order’’).8
The pilot program in effect is
currently scheduled to expire on July
31, 2006.9 The text of the proposed rule
change is available at the Commission’s
Public Reference Room, at the Office of
the Secretary of the Exchange, and on
the Exchange’s Web site at https://
www.Phlx.com.
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
5 The terms ‘‘specialist’’ and ‘‘specialist unit’’ are
used interchangeably.
6 The FBMS is a component of the Exchange’s
Automated Options Market (AUTOM) System
designed to enable Floor Brokers and/or their
employees to enter, route and report transactions
stemming from options orders received on the
Exchange. The FBMS also is designed to establish
an electronic audit trail for options orders
represented and executed by Floor Brokers on the
Exchange, such that the audit trail provides an
accurate, time-sequenced record of electronic and
other orders, quotations and transactions on the
Exchange, beginning with the receipt of an order by
the Exchange, and further documenting the life of
the order through the process of execution, partial
execution, or cancellation of that order. See Phlx
Rule 1080, Commentary .06.
7 See Securities Exchange Act Release Nos. 43086
(July 28, 2000), 65 FR 48023 (August 4, 2000); and
43573 (November 16, 2000), 65 FR 70851
(November 28, 2000) (order approving Phlx as a
participant in the Plan).
8 A P/A order is an order for the principal account
of a specialist (or equivalent entity on another
participant exchange that is authorized to represent
public customer orders), reflecting the terms of a
related unexecuted public customer order for which
the specialist is acting as agent. See Phlx Rule
1083(k)(i).
9 See Securities Exchange Act Release No. 53761
(May 5, 2006), 71 FR 27768 (May 12, 2006) (SR–
Phlx–2006–20). This proposal is scheduled to be in
effect for the same time period as fees for Linkage
Principal Orders (‘‘P Orders’’) and P/A Orders. See
Securities Exchange Act Release No. 54233 (July 27,
2006) (SR–Phlx–2006–44).
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45089
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.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
1. Purpose
Currently, the Exchange provides an
option transaction charge credit of $0.21
per contract for Exchange options
specialist units that incur Phlx option
transaction charges when a customer
order is delivered to the limit order
book via FBMS and is then sent to an
away market and executed via Linkage
under the Plan as a P/A Order.
The purpose of this proposal is to
continue to alleviate the potential
economic burden of multiple
transaction charges imposed on
Exchange specialist units by
establishing a credit for Exchange
option transaction charges incurred by
an Exchange specialist unit when a
customer limit order placed on the limit
order book by a Floor Broker 10 results
in an execution of a P/A Order that is
sent to another exchange via Linkage.
The Exchange believes that continuing
to give an options transaction charge
credit of $0.21 per contract should
encourage the use of Linkage and
should allow the Exchange to remain
competitive with other exchanges with
respect to the assessment of Linkagerelated fees.11
This proposal is to remain in effect as
a pilot program until July 31, 2007.12
10 A Floor Broker who wishes to place a limit
order on the limit order book must submit such a
limit order electronically through the FBMS. See
Phlx Rule 1063, Commentary .01. See also Phlx
Rule 1080, Commentary .02(b).
11 See Securities Exchange Act Release Nos.
53372 (February 24, 2006), 71 FR 11003 (March 3,
2006) (SR–CBOE–2006–10) (rebate of certain
transaction fees to Designated Primary Market
Makers related to the execution of outbound P/A
orders) and 53526 (March 21, 2006), 71 FR 15794
(March 29, 2006) (SR–PCX–2006–19) (creating a
credit associated with the fees a Market Maker is
charged for executions that result from P/A Orders
sent to and executed at away market centers). See
also Securities Exchange Act Release No. 54064
(June 28, 2006), 71 FR 38438 (July 6, 2006) (SR–
CBOE–2006–59).
12 This proposal is in connection with an existing
pilot program for Linkage P and P/A Orders and is
in effect for the same time period as the pilot
program for Linkage P and P/A Orders. The
Exchange filed a separate proposed rule change to
extend the fees for Linkage P and P/A orders for a
E:\FR\FM\08AUN1.SGM
Continued
08AUN1
Agencies
[Federal Register Volume 71, Number 152 (Tuesday, August 8, 2006)]
[Notices]
[Pages 45086-45089]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-12841]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-54255; File No. SR-NYSE-2005-03]
Self-Regulatory Organizations; New York Stock Exchange LLC;
Notice of Filing of Proposed Rule Change and Amendments Nos. 1 and 2 To
Amend Exchange Rule 325 (Capital Requirements for Member
Organizations), Rule 326 (Growth Capital Requirement, Business
Reduction Capital Requirement, Unsecured Loans and Advances), and Rule
431 (Margin Requirement)
July 31, 2006.
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 January 5, 2005, the New York Stock Exchange LLC
(``NYSE'' or the ``Exchange'') filed with the Securities and Exchange
Commission (``SEC'' or the ``Commission'') the proposed rule change as
described in Items I, II, and III below, which Items have been prepared
by the Exchange.\4\ The NYSE filed Amendment No. 1 to the proposed rule
change on February 13, 2006.\5\ The NYSE filed Amendment No. 2 to the
proposed rule change on March 17, 2006.\6\ The Commission is publishing
this notice to solicit comments on the proposed rule change, as
amended, 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.
\4\ Pursuant to discussions with the Commission staff, the
Exchange clarified the application of proposed amendments to NYSE
Rules 325, 326 and 431 to reflect the Exchange's March 7, 2006
merger with Archipelago Holdings, Inc. (``Archipelago''),
adjustments to capital levels in Rule 326 and other general
editorial changes. Telephone conversations between William Jannace,
Director, Exchange, William Wollman, Vice President, Exchange and E.
David Hwa, Special Counsel, Division of Market Regulation,
Commission, on May 11, 2006, June 8, 2006, July 19, 2006 and email
dated July 19, 2006.
\5\ In Amendment No. 1, the Exchange clarified the application
of proposed amendments to NYSE Rule 431(e)(9) solely to OTC
derivatives transactions and expanded upon elements of the written
risk analysis provided by the proposed rule for member organizations
utilizing the alternative method of computing net capital.
\6\ In Amendment No. 2, the Exchange clarified the application
of proposed amendments to NYSE Rule 326 to make explicit the ability
of the Exchange to restrict the growth or business of a member
organization, respectively, when its tentative net capital declines
below the early warning notification amount required by the Exchange
Act Rule 15c3-1(a)(7)(ii).
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I. Self-Regulatory Organization's Statement of the Terms of Substance
of the Proposed Rule Change
The Exchange is proposing to amend Rule 325, Rule 326, and Rule 431
to reflect recent SEC rule amendments under the Exchange Act, including
amendments to Exchange Act Rule 15c3-1 that established an alternative
method of computing net capital for broker-dealers.
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.
A. Self-Regulatory Organization's Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule Change
1. Purpose
Background
Exchange Act Rule 15c3-1 (the ``net capital rule'') contains basic
financial responsibility standards for broker-dealers. The rule is
intended to protect customers and other market participants from
broker-dealer failures, and to enable those firms that fall below the
minimum net capital requirements to liquidate in an orderly fashion
without the need for a formal proceeding or financial assistance from
the Securities Investor Protection Corporation. To help insure that
broker-dealers maintain sufficient liquid assets to satisfy promptly
the claims of customers and cover potential market and credit risks,
the net capital rule requires broker-dealers to maintain different
minimum levels of capital based upon the nature of their business and
whether they handle customer funds or securities.
On August 20, 2004, the SEC adopted rule amendments under the
Exchange Act, including amendments to Exchange Act Rule 15c3-1, that
establish a voluntary, alternative method of computing net capital for
certain large broker-dealers that are part of consolidated supervised
groups referred to as consolidated supervised entities (``CSEs'').
Under the SEC amendments, a broker-dealer may use this
[[Page 45087]]
``alternative/CSE'' method only if its ultimate holding company agrees
to compute group-wide allowable capital and allowances for market,
credit, and operational risk in accordance with the standards adopted
by the Basel Committee on Banking Supervision, and consents to group-
wide SEC supervision. The alternative method of computing net capital
permits a broker-dealer to use models, such as ``value-at-risk''
(``VAR'') models and scenario analysis,\7\ that are already part of its
internal risk management control system to calculate the market risk
and derivatives-related credit risk components of its net capital
requirement. The deduction for market risk calculated using internal
models replaces the traditional ``haircut'' approach to calculating net
capital.\8\
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\7\ Value-at risk models assess market risk based on the
probability distribution for a portfolio's market value. Scenario
analysis is a method of assessing market risk by testing various
possible scenarios.
\8\ The ``haircut'' approach to computing net capital involves
reducing the value of firms'' proprietary securities by pre-
determined percentages to allow for potential reductions in market
value.
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When the Membership allow their net capital to decline below
certain levels, they risk non-compliance with the net capital and
financial responsibility requirements of Exchange Act Rule 15c3-1. NYSE
Rules 325 and 326 are designed to alert the Exchange before such
problems occur, and to enable the Exchange to prevent Membership non-
compliance by restricting the business activities of any member
organization whose net capital falls below certain defined levels.
Proposed Amendment to NYSE Rule 325
NYSE Rule 325, the Exchange's primary net capital rule, requires
the Membership to comply with Exchange Act Rule 15c3-1 and imposes
additional prophylactic requirements to ensure such compliance. Rule
325(b) requires a member organization to notify the Exchange if its net
capital falls below certain percentages. The proposed amendment adds
Rule 325(b)(3), which would require a member organization to provide
concurrently to the Exchange a copy of any report or notification made
to the SEC pursuant to Exchange Act Rule 17a-11 \9\ or Commodities
Exchange Act (``CEA'') \10\ Regulation 1.12.\11\
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\9\ 17 CFR 240.17a-11.
\10\ 7 U.S.C. 1 et seq.
\11\ 17 CFR 1.12.
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This new requirement is necessary to help ensure that the Exchange
continues to receive timely notification of potential violations of
Exchange Act Rule 15c3-1, including the rule's new CSE provisions. For
example, as noted above, Exchange Act Rule 15c3-1, in conjunction with
Exchange Act Rule 17a-11, now requires a broker-dealer that elects to
use the alternative method of computing net capital to report to the
SEC whenever its tentative net capital declines below $5 billion.
Proposed Rule 325(b)(3) would require a member organization to provide
the Exchange with copies of every such report.
Language in Rule 325(b) regarding notification to the Exchange
relating to CEA minimum capital requirements for members or member
organizations acting as futures commission merchants was rendered
obsolete by amendments to CEA Regulation 1.17 \12\ on September 30,
2004 \13\ and, therefore, has been removed from the amended Rule
325(b). The proposed new provisions of Rule 325(b)(3), however, would
require a member organization to provide the Exchange with copies of
any reports or notifications it provides to the Commodity Futures
Trading Commission (``CFTC'') under CEA Regulation 1.12. Therefore,
because CEA Regulation 1.12 requires notification by any futures
commission merchant that experiences a decline in net capital below the
CEA's early warning levels, the Exchange will continue to receive
notification if a member organization acting as futures commission
merchant is in danger of violating CEA minimum capital requirements.
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\12\ 17 CFR 1.17.
\13\ The CEA amendments eliminated capital requirement
calculations based on the concept of ``segregated funds.''
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The Exchange's merger with Archipelago rendered the Exchange's
constitution obsolete so paragraphs (5) and (6) of Rule 325(e) and all
references to the constitution were removed.
Other grammatical changes have been made throughout Rule 325 for
purposes of clarity and stylistic consistency.
Proposed Amendment to NYSE Rule 326
NYSE Rule 326, which enables the Exchange to restrict a member
organization's business activities if its net capital falls below
certain defined levels, uses a two-step approach to preventing
Membership non-compliance with Exchange Act Rule 15c3-1. First, Rule
326(a) allows the Exchange to prohibit a member organization from
expanding its business if its net capital falls below specified levels.
Second, if a member organization's net capital falls below lower,
specified levels, Rule 326(b) allows the Exchange to compel it to
reduce its existing business. To enable the Exchange to regulate its
Membership proactively (that is, to act if a member or member
organization is in danger of violating Exchange Act Rule 15c3-1, rather
than waiting until Exchange Act Rule 15c3-1 has been violated), the
levels specified in NYSE Rule 326 are higher than those contained in
Exchange Act Rule 15c3-1.
The proposed amendments would add Rule 326(a)(4) to provide minimum
tentative net capital \14\ and net capital levels for the Exchange to
use when prohibiting, under Rule 326(a), the expansion of business by a
member organization using the alternative method computing net capital
under the CSE rules. The levels proposed in Rule 326(a)(1)(d) (50
percent of the tentative net capital level that triggers SEC
notification or the net capital level is less than $1.25 billion) will
not unduly restrict a member organization's business, but will allow
the Exchange, after evaluating a member organization's financial
condition, to use the disincentive of restricted business expansion to
encourage a member organization whose net capital has fallen to levels
that risk violation of Exchange Act Rule 15c3-1 to take necessary
corrective action.
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\14\ The term ``tentative net capital,'' as it pertains to the
new regulations regarding broker-dealers using the ``alternative/
CSE'' method, is defined in Exchange Act Rule 15c3-1(c)(15), part of
the SEC's new CSE regulations.
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Language in Rule 326(a) regarding limiting a member organization's
expansion of business due to CEA minimum capital requirements for a
member organization acting as futures commission merchant was rendered
obsolete by the aforementioned amendments to CEA Regulation 1.17, and,
therefore, has been removed from the amended Rule 326(a).
The proposed amendment would add Rule 326(b)(1)(d) to provide
minimum tentative net capital and net capital levels for the Exchange
to use in requiring a member organization that uses the alternative
method of computing net capital to reduce its business pursuant to Rule
326(b). The levels proposed in Rule 326(b)(1)(d) (40 percent of the
tentative net capital level that triggers SEC notification or net
capital less than $1 billion) would not unduly restrict a member
organization's business, but would allow the Exchange, after evaluating
a member organization's financial condition, to use the disincentive of
mandatory business reduction to encourage necessary corrective action
by a member organization whose net capital has fallen to levels that
risk violation of Exchange Act Rule 15c3-1.
[[Page 45088]]
Language in Rule 326(b) regarding the reduction of a member
organization's business due to CEA minimum capital requirements for a
member organization acting as futures commission merchant was rendered
obsolete by the aforementioned amendments to CEA Regulation 1.17, and,
therefore, has been removed from the amended Rule 326(b). The proposed
new provisions of Rule 326(b)(1)(e), however, would require a member
organization to reduce its business if its net capital falls below 110
percent of the minimum capital requirements of CEA Regulation 1.17 (the
same level that triggers notification to the CFTC under CEA Regulation
1.12). Therefore, the Exchange will retain the ability to compel a
member organization to reduce its business if its net capital falls to
levels that may violate CEA minimum capital requirements.
Other grammatical changes have been made throughout Rule 326 for
purposes of accuracy, clarity, and stylistic consistency.
Proposed Amendment to NYSE Rule 431
Section 7(a) \15\ of the Exchange Act empowers the Board of
Governors of the Federal Reserve System to prescribe the rules and
regulations regarding the credit that may be extended by broker-dealers
on securities (Regulation T \16\). NYSE Rule 431 prescribes specific
margin requirements that must be maintained in all of a member
organization's customer accounts, based on the type of securities
products held in such accounts.
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\15\ 15 U.S.C. 78g(a).
\16\ 12 CFR 220 et seq.
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Exchange Act Rule 15c3-1e(c),\17\ one of the recent SEC amendments
related to the alternative method of computing net capital for CSE
broker-dealers, prescribes deductions to net capital for credit risk on
transactions in certain derivative instruments for broker-dealers using
the alternative method (for example, VAR models), provided the broker-
dealers have in place comprehensive internal risk management procedures
that address market, credit, liquidity, legal, and operational risk at
the firm.
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\17\ 17 CFR 240.15c3-1e(c).
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The proposed amendment to Rule 431 would add Rule 431(e)(9). This
new paragraph would exempt a member organization using the alternative
method of computing net capital from Rule 431 for certain exposures
arising from transactions in over-the-counter (``OTC'') derivative
instruments \18\ for which the member organization may compute a
deduction to net capital for credit risk using the methods contained in
Rule 15c3-1e(c).
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\18\ These instruments are described in Exchange Act Rule 15c3-
1e(c)(vi)(E), 17 CFR 240.15c3-1e(c)(vi)(E).
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A member organization that applies Rule 431(e)(9) must maintain a
written risk analysis methodology for assessing the amount of credit
that may be extended with respect to OTC derivatives transactions and
the methodology must include at least those procedures and guidelines
enumerated in paragraph (e)(9). The procedures and guidelines relate to
reviewing customer account documentation and financial information;
establishing credit limits for customers; monitoring the member
organization's credit risk exposure to its customers; management
reporting on credit extension exposure; managing the impact of credit
extension on the member organization's overall risk exposure; the
appropriate management response to violations of credit extension
limits; stress testing customer accounts individually and in the
aggregate; and determining whether to collect margin from a particular
customer. The member organization must establish a method for period
review of these procedures by an independent unit of the organization,
such as internal audit or risk management. Management also must review
periodically the member organization's credit extension activities for
consistency with the guidelines.
2. Statutory Basis
The proposed amendments to NYSE Rules 325, 326, and 431 are
consistent with the requirements of Section 6(b)(5) \19\ of the
Exchange Act, which requires that the rules of the Exchange be designed
to promote just and equitable principles of trade, 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 in that they incorporate into the Exchange's rules
recent SEC amendments to Exchange Act Rule 15c3-1 regarding the
alternative method of computing net capital for broker-dealers that are
part of a CSE.
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\19\ 15 U.S.C. 78f(b)(5).
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B. Self-Regulatory Organization's Statement on Burden on Competition
The Exchange believes that the proposal does not impose any burden
on competition that is 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
Written comments were neither solicited nor received.
III. Date of Effectiveness of the Proposed Rule Change and Timing for
Commission Action
Within 35 days of the date of publication of this notice in the
Federal Register or within such longer period (i) As the Commission may
designate up to 90 days of such date if it finds such longer period to
be appropriate and publishes its reasons for so finding or (ii) as to
which the 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, as amended, is consistent with the Exchange 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-2005-03 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.
All submissions should refer to File Number SR-NYSE-2005-03. This file
number should be included on the subject line if e-mail is used. 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
[[Page 45089]]
proposed rule change between the Commission and any person, other than
those that may be withheld from the public in accordance with the
provisions of 5 U.S.C. 552, will be available for inspection and
copying in the Commission's Public Reference Room. Copies of such
filing will also be available for inspection and copying at the
principal office of the NYSE. All 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-2005-03 and should be submitted on or before August
29, 2006.
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\20\ 17 CFR 200.30-3(a)(12).
For the Commission, by the Division of Market Regulation,
pursuant to delegated authority.\20\
Nancy M. Morris,
Secretary.
[FR Doc. E6-12841 Filed 8-7-06; 8:45 am]
BILLING CODE 8010-01-P