Self-Regulatory Organizations; New York Stock Exchange LLC; Order Approving a Proposed Rule Change to Rule 431 (“Margin Requirements”) and Rule 726 (“Delivery of Options Disclosure Document and Prospectus”), and Notice of Filing and Order Granting Accelerated Approval to Amendment No. 1 to the Proposed Rule Change Relating to Customer Portfolio Margining, 75790-75797 [E6-21474]
Download as PDF
75790
Federal Register / Vol. 71, No. 242 / Monday, December 18, 2006 / Notices
trade report modifiers provided in
NASD Rule 6130C(f) could not be
implemented as of December 1, 2006.
For that reason, NASD Rule 6130C(f)
prohibits NASD members from
reporting transactions covered by NASD
Rule 6130(f) to the NASD/NSX TRF
prior to December 15, 2006, and
requires them to use an alternative
electronic mechanism to satisfy their
reporting obligations prior to that date.
The Commission believes that
waiving the 30-day operative delay is
consistent with the protection of
investors and the public interest
because it will allow NASD members to
submit to the NASD/NSX TRF trade
reports for the transactions specified in
NASD Rule 6130C(f) on or after
December 15, 2006, thereby providing
NASD members with an additional
means to satisfy their obligation to
report these transactions.16 For this
reason, the Commission designates that
the proposal become operative on
December 1, 2006.
At any time within 60 days of the
filing of such proposed rule change, the
Commission may summarily abrogate
such rule change if it appears to the
Commission that such action is
necessary or appropriate in the public
interest, for the protection of investors,
or otherwise in furtherance of the
purposes of the Act.
VI. Solicitation of Comments
Interested persons are invited to
submit written data, views, and
arguments concerning the foregoing,
including whether the proposed rule
change is consistent with the Act.
Comments may be submitted by any of
the following methods:
Electronic Comments
• Use the Commission’s Internet
comment form (https://www.sec.gov/
rules/sro.shtml); or
• Send an e-mail to rulecomments@sec.gov. Please include File
Number SR–NASD–2006–129 on the
subject line.
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Paper Comments
• 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
Number SR–NASD–2006–129. This file
number should be included on the
subject line if e-mail is used. To help the
16 For purposes only of waiving the 30-day
operative delay, the Commission has considered the
proposed rule’s impact on efficiency, competition,
and capital formation. 15 U.S.C. 78c(f).
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Commission process and review your
comments more efficiently, please use
only one method. The Commission will
post all comments on the Commission’s
Internet Web site (https://www.sec.gov/
rules/sro.shtml). Copies of the
submission, all subsequent
amendments, all written statements
with respect to the proposed rule
change that are filed with the
Commission, and all written
communications relating to the
proposed rule change between the
Commission and any person, other than
those that may be withheld from the
public in accordance with the
provisions of 5 U.S.C. 552, will be
available for inspection and copying in
the Commission’s Public Reference
Room. Copies of such filing also will be
available for inspection and copying at
the principal office of the NASD. 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 publicly available. All
submissions should refer to File
Number SR–NASD–2006–129 and
should be submitted on or before
January 8, 2007.
For the Commission, by the Division of
Market Regulation, pursuant to delegated
authority.17
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E6–21452 Filed 12–15–06; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
Release No. 34–54918; File No. SR–NYSE–
2006–13]
Self-Regulatory Organizations; New
York Stock Exchange LLC; Order
Approving a Proposed Rule Change to
Rule 431 (‘‘Margin Requirements’’) and
Rule 726 (‘‘Delivery of Options
Disclosure Document and
Prospectus’’), and Notice of Filing and
Order Granting Accelerated Approval
to Amendment No. 1 to the Proposed
Rule Change Relating to Customer
Portfolio Margining
December 12, 2006.
I. Introduction
On March 2, 2006, the New York
Stock Exchange LLC (‘‘NYSE’’ or
‘‘Exchange’’) filed with the Securities
and Exchange Commission
(‘‘Commission’’), pursuant to Section
19(b)(1) of the Securities Exchange Act
17 17
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of 1934 (‘‘Act’’ or ‘‘Exchange Act’’) 1 and
Rule 19b–4 2 thereunder, a proposed
rule change seeking to amend NYSE
Rules 431 and 726 to expand the scope
of products that are eligible for
treatment as part of the NYSE’s
approved portfolio margin pilot program
and to eliminate the requirement for a
separate cross-margin account.3 The
proposed rule change would expand the
scope of eligible products in the pilot to
include margin equity securities and
unlisted derivatives. 4 The proposed
rule change was published in the
Federal Register on April 6, 2006.5 The
Commission subsequently extended the
comment period for the original
proposed rule filing until May 11,
2006.6 The Commission received 8
comment letters in response to the
Federal Register notice.7 On July 20,
1 15
U.S.C. 78s(b)(1).
CFR 240.19b–4.
3 See Exchange Act Release No. 52031 (July 14,
2005), 70 FR 42130 (July 21, 2005) (SR–NYSE–
2002–19). On July 14, 2005, the Commission
approved on a pilot basis expiring July 31, 2007,
amendments to Rule 431 that permit broker-dealers
to determine customer margin requirements for
portfolios of listed broad-based securities index
options, warrants, futures, futures options and
related exchange-traded funds using a specified
portfolio margin methodology. The Commission
also approved amendments to Rule 726 to require
disclosure to, and written acknowledgment from,
customers using a portfolio margin account. See
also NYSE Information Memo 05–56, dated August
18, 2005 (for additional information); and Exchange
Act Release No. 54125 (July 11, 2006), 71 FR 40766
(July 18, 2006) (SR–NYSE–2005–93) (approving
securities futures products and listed single stock
options as eligible products for portfolio
margining).
4 For purposes of the pilot, a margin equity
security is a security that meets the definition of a
‘‘margin equity security’’ under Regulation T of the
Federal Reserve Board (‘‘FRB’’). See 12 CFR 220.2.
An unlisted derivative means ‘‘any equity-based or
equity index-based unlisted option, forward
contract, or security-based swap that can be valued
by a theoretical pricing model approved by the
SEC.’’ See proposed Rule 431(g)(2)(I).
5 See Exchange Act Release No. 53577 (March 30,
2006), 71 FR 17539 (April 6, 2006) (SR–NYSE–
2006–13). The Chicago Board Options Exchange,
Incorporated (‘‘CBOE’’) also filed a similar proposed
rule filing seeking to expand the scope of eligible
products under its portfolio margin pilot program.
See Exchange Act Release No. 53576 (March 30,
2006), 71 FR 17519 (April 6, 2006) (SR–CBOE–
2006–14).
6 See Exchange Act Release No. 53728 (April 26,
2006), 71 FR 25878 (May 2, 2006).
7 See letter from Timothy H. Thompson, Senior
Vice President, Chief Regulatory Officer, Regulatory
Services Division, CBOE, to Nancy Morris,
Secretary, Commission, dated June 5, 2006 (‘‘CBOE
Letter’’); letter from William H. Navin, Executive
Vice President, General Counsel and Secretary, The
Options Clearing Corporation (‘‘OCC’’), to Nancy M.
Morris, Secretary, Commission, dated May 19, 2006
(‘‘OCC Letter’’); letter from James Barry, on behalf
of the Ad Hoc Portfolio Margin Committee, John
Vitha, Chair, Derivatives Product Committee and
Christopher Nagy, Chair, Options Committee,
Securities Industry Association, to Nancy M.
Morris, Secretary, dated May 16, 2006 (‘‘SIA
Letter’’); letter from Gary Alan DeWaal, Group
2 17
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Federal Register / Vol. 71, No. 242 / Monday, December 18, 2006 / Notices
2006, the Exchange filed a response to
these comments.8 The comment letters
and the Exchange’s responses to the
comments are summarized below. On
September 13, 2006, the Exchange filed
Amendment No. 1 to the proposed rule
change.9
This order approves the proposed rule
change. Simultaneously, the
Commission provides notice of filing of
Amendment No. 1, grants accelerated
approval of Amendment No. 1 and
solicits comments from interested
persons on Amendment No. 1.10
II. Description
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a. Portfolio Margining
The proposed rule change consists of
amendments to Rule 431 to include
margin equity securities (as defined in
Regulation T) and unlisted derivatives
as eligible products for the portfolio
margining pilot.11 The proposed rule
change also includes amendments to
eliminate the requirement of a separate
cross-margin account. Rule 431
prescribes specific margin requirements
for customers based on the type of
securities held in their accounts.12
Outside the existing pilot program, Rule
General Counsel and Director of Legal and
Compliance, Fimat USA, LLC, to Nancy M. Morris,
Secretary, Commission, dated May 11, 2006 (‘‘Fimat
Letter’’); letter from Stuart J. Kaswell, Partner,
Dechert LLP, Counsel for Federated Investors, Inc.,
to Nancy M. Morris, Secretary, Commission, dated
May 10, 2006 (‘‘Federated Letter’’); letter from Craig
S. Donohue, Chief Executive Officer, Chicago
Mercantile Exchange Inc., to Jonathan G. Katz,
Secretary, Commission, dated May 9, 2006 (‘‘CME
Letter’’); letter from Gerard J. Quinn, Vice President
and Associate General Counsel, SIA, to Nancy M.
Morris, Secretary, Commission, dated April 21,
2006 (‘‘SIA Extension Letter’’); and e-mail from
Stephen A. Kasprzak, Principal Counsel, Rule and
Interpretive Standards, NYSE, dated April 21, 2006
(‘‘Kasprzak e-mail’’).
8 See letter from Mary Yeager, Assistant Secretary,
NYSE, to Michael A. Macchiaroli, Associate
Director, Division of Market Regulation,
Commission, dated July 20, 2006 (‘‘NYSE
Response’’).
9 The NYSE filed Amendment No. 1 in response
to comments received and to make other clarifying
changes to the proposed rule filing. See Section II.
for a discussion of the changes in Amendment No.
1. A clean copy of the proposed rule, as amended
by Amendment No. 1, is attached to this order as
Appendix A.
10 By separate order, the Commission also is
approving a parallel rule filing by CBOE (SR–
CBOE–2006–14). Exchange Act Release No. 54919;
see also supra note 5.
11 The list of eligible products under the pilot
currently includes listed broad-based securities
index options, warrants, futures, futures options
and related exchange-traded funds, as well as single
stock options and securities futures products.
12 The margin rules specify the amount of equity
a customer must maintain in his or her margin
account with respect to securities positions
financed by the broker-dealer. The equity protects
the broker-dealer in the event the customer defaults
on the obligation to re-pay the financing and the
broker-dealer is forced to liquidate the position at
a loss.
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431 requires that margin be calculated
using fixed percentages, on a positionby-position basis. In contrast, the
current portfolio margin pilot program
permits a broker-dealer to calculate
customer margin requirements by
grouping all products in an account that
are based on the same index or issuer
into a single portfolio. For example,
futures, options and exchange traded
funds based on the S&P 500 would each
be grouped in a portfolio and products
based on IBM would be grouped into a
separate portfolio.
The broker-dealer then calculates a
customer’s margin requirement by
‘‘shocking’’ each portfolio at different
equidistant points along a range
representing a potential percentage
increase and decrease in the value of the
instrument or underlying instrument in
the case of a derivative product.
Currently, under the pilot, products of
portfolios based on high capitalization,
broad-based securities indexes are
shocked along a range spanning an
increase of 6% and a decrease of 8%.
Portfolios of products based on nonhigh capitalization, broad-based
securities indexes are shocked along a
range spanning an increase of 10% and
a decrease of 10%. Portfolios of
products based on an equity security are
shocked along a range spanning an
increase of 15% and a decrease of
15%.13 The proposed rule change
would continue to apply these shock
ranges. In addition, as with the current
pilot, a theoretical options pricing
model would continue to be used to
derive position values at each valuation
point for the purpose of determining the
gain or loss.14
The portfolio shocks described above
result in a gain or loss for each
instrument in a portfolio at each
calculation point along the range. These
gains and losses are netted to derive a
potential portfolio-wide gain or loss for
the point. The margin requirement for a
portfolio is the amount of the greatest
portfolio-wide loss among the
calculation points. The margin
requirements for each portfolio are
added together to calculate the total
margin requirement for the portfolio
margin account. This approach, in most
13 For example, under the pilot, a portfolio of
single stock futures and listed equity options would
be shocked at 10 equidistant points along a range
bounded on one end by a 15% increase in the
market value of the instrument and at the other end
by a 15% decrease (i.e., at +/¥3%, +/¥6%, +/
¥9%, +/¥12% and +/¥15%).
14 Currently, the only model that qualifies is the
OCC’s Theoretical Intermarket Margining System
(TIMS).
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75791
cases, will generally lower customer
margin requirements.15
The amount of margin (initial and
maintenance) required with respect to a
given portfolio would be the larger of:
(1) The greatest portfolio-wide loss
amount among the valuation point
calculations; or (2) the sum of $.375 for
each option and future in the portfolio
multiplied by the contract’s or
instrument’s multiplier.16 The second
computation establishes a minimum
margin requirement to ensure that a
certain level of margin is required from
the customer in the event the greatest
portfolio-wide loss among the valuation
points is de minimis.
b. Expansion of Eligible Products
Under the Exchange’s proposed rule,
products eligible for portfolio margining
would be expanded to include margin
equity securities (as defined under
Regulation T),17 unlisted derivatives
and futures contracts on narrow-based
security indexes.18 The unlisted
derivatives would be included in a
portfolio based on the underlying
reference index or security. Individual
equities and narrow-based index futures
would be included in a portfolio
shocked at a range spanning an increase
of 15% and a decrease of 15% (as is the
case with listed single stock options and
securities futures).
c. Margin Deficiency
The current rule requires a customer
to satisfy a margin deficiency in a
portfolio margin account within three
business days by depositing additional
securities or cash or effecting an
offsetting hedge.19 The current pilot also
requires a broker-dealer to deduct from
its net capital the amount of any
portfolio margin call not met by the
close of business on T+1 and until the
15 For example, the current required initial and
maintenance margin requirements for an equity
security are 50% and 25%, respectively. The market
movement range to calculate the potential gains and
losses under the proposed portfolio margin rule for
equity securities is +/¥15%.
16 The multiplier for a standard listed option is
fixed by the options market on which the options
series is traded. For example, a cash settled equity
option generally has a multiplier of 100. Therefore,
the minimum margin for one options contract
would be $37.50. The multipliers for different
securities and futures products may vary.
17 Margin equity securities include certain foreign
equity securities and options on foreign equity
securities. See 12 CFR 220.2
18 The Commission approved listed single stock
options and securities futures products (excluding
narrow-based indexes) as eligible products on July
11, 2006. See supra note 3.
19 The original pilot required margin calls to be
met by T+1. The current requirement of meeting
margin calls within three business days was
approved in SR-NYSE–2005–93. See Exchange Act
Release No. 54125 (July 11, 2006), 71 FR 40766
(July 18, 2006).
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Federal Register / Vol. 71, No. 242 / Monday, December 18, 2006 / Notices
call is satisfied. The proposal would
now further require the broker-dealer to
have in place procedures to identify
accounts that periodically liquidate
positions to eliminate margin
deficiencies, and to take appropriate
action when warranted.20
indicated that maintaining and
monitoring two separate margin
accounts would be operationally
difficult and that it would be more
efficient to hold all positions in one
securities account.
d. $5 Million Equity Requirement
Under the pilot, an underlying
security in a portfolio margin account
must be removed from the account if it
is no longer offset by an option position.
The amendments propose to eliminate
the requirement to remove instruments
that are no longer offset by options
positions. The Exchange made this
change in response to comments that all
positions eligible for a portfolio margin
account, including underlying
securities, should receive equal
treatment. Moreover, the Exchange
noted that it would be operationally
difficult to move positions in and out of
the portfolio margin account based on
whether they are currently being offset.
The current pilot requires customers
that are not broker-dealers or futures
firms to maintain minimum account
equity of $5 million if they opt to
include portfolios of broad-based
securities index products in their
accounts.21 The proposed rule change
would eliminate the $5 million account
equity requirement for all portfolio
margin accounts, except those holding
unlisted derivatives.22
e. Risk Management Methodology
The pilot requires member brokerdealers to monitor the risk of portfolio
margin accounts and maintain a written
risk analysis methodology for assessing
potential risk to the firm’s capital. This
risk analysis methodology must be made
available to the Exchange upon request.
The proposed rule change strengthens
these requirements by providing that,
the member broker-dealer must file the
risk analysis methodology with the
Exchange (or the firm’s Designated
Examining Authority, if not the
Exchange) 23 and submit it to the
Commission prior to implementation.
The proposed rule change also requires
the inclusion of additional procedures
and guidelines as part of the
methodology.24
f. Cross-Margin Account
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The proposed rule change would
eliminate the requirement that
portfolios with futures positions be held
in a separate cross-margin account.
Under the proposal, a customer would
be permitted to use a single securities
margin account for all eligible products.
The Exchange and commenters have
20 The current pilot requires that member firms
not permit a customer to make a practice of meeting
a portfolio margin deficiency through liquidation.
21 The $5 million account equity requirement for
such customers was eliminated to the extent they
limited their accounts to portfolios of listed options
and securities futures. See SR–NYSE–2005–93,
supra note 3.
22 See proposed Rule 431(g)(4)(C).
23 Amendment No. 1 to the proposed rule
amended the rule language to state that the written
risk methodology must be filed with the Exchange,
rather than approved by the Exchange, as proposed,
in the March 2, 2006 rule filing.
24 The current pilot also requires member firms to
notify, and receive approval from the Exchange,
prior to opening portfolio margin accounts for
customers. The proposed rule modifies this
requirement by requiring approval from a member
firm’s DEA, if it is not the Exchange.
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g. Hedged Positions
h. Discussion of Changes to the
Proposed Rule Change in Amendment
No. 1
The Exchange filed Amendment No. 1
to the proposed rule change in response
to comments received, to make
conforming changes to the CBOE rule
filing 25 and to otherwise clarify certain
terms and definitions. The following
summarizes the changes made in
Amendment No. 1 to the proposed rule
change. In Amendment No. 1, the
Exchange:
• Clarifies certain definitions and
conforms others to the CBOE filing;
• Adds language allowing a customer
to use excess equity in a regular margin
account to meet a margin deficiency in
a portfolio margin account without
having to transfer any funds or
securities where the portfolio margin
account is a sub-account of the regular
margin account;
• Adds language allowing positions
not eligible for portfolio margin
treatment to be carried in the portfolio
margin account for their collateral
value, subject to the margin
requirements of a regular margin
account;
• Adds language permitting shares of
a money market mutual fund to be held
in a portfolio margin account (subject to
applicable margin requirements),
provided certain requirements are met;
• Clarifies the restrictions with
respect to day trading 26 in a portfolio
margin account; and
25 See
supra note 5.
proposed to amend the rule text to allow
a customer that establishes and maintains at least
$5 million in equity to engage in day trading
26 NYSE
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• Eliminates the sample risk
disclosure statement and
acknowledgement in the rule text.27
III. Summary of Comments Received
and NYSE Response
The Commission received a total of 8
comment letters to the proposed rule
change.28 The comments, in general,
were supportive. One commenter stated
that it strongly supports ‘‘the significant
step forward represented by the
currently proposed changes.’’ 29 Another
commenter stated that the portfolio
margining of securities products will
‘‘help U.S. brokers and exchanges
compete more effectively with their
overseas counterparts * * * and
thereby increase the strength and
liquidity of U.S. markets.’’ 30 Each
commenter, however, recommended
changes to specific provisions of the
proposed rule change.
Several commenters 31 submitted
comments regarding the ability to use
portfolio margin methodologies other
than the method prescribed in the rule
to calculate customer margin
requirements. One commenter stated
that the Commission has experience in
approving proprietary market risk
models for consolidated supervised
entities (CSEs) and OTC derivatives
dealers.32 In its response, the Exchange
acknowledged that proprietary models
may prove to be effective and efficient
in managing risk.33 The Exchange
stated, however, that initially, regulators
should gain experience with portfolio
margining through the rule’s specified
methodology and that in the longer
term, proprietary risk models could be
considered as alternatives.
One commenter suggested that futures
positions in a portfolio margin account
be held in a separate futures account,
while securities positions be held in a
securities account.34 The commenter
referred to this approach as the ‘‘two
without the restrictions of NYSE’s day trading rules,
if the member firm has the ability to monitor the
intra-day risk associated with day trading. Further,
if a participant has less than $5 million equity, the
day trading restrictions will apply, unless the
position or positions day traded were part of a
hedge strategy.
27 Instead the Exchange will send out an
Information Memo with the sample disclosure
language. The Exchange made this change to avoid
having to file a proposed rule change each time in
the risk disclosure document is changed.
28 See supra note 7. Two of these comment letters
related to the extension of the comment period for
the proposed rule change. See SIA Extension Letter
and Kasprzak e-mail.
29 See SIA Letter.
30 See Fimat Letter.
31 See SIA Letter and OCC Letter; see also CME
Letter (discussing SPAN).
32 See SIA Letter.
33 See NYSE Response, supra note 8.
34 See CME Letter.
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Federal Register / Vol. 71, No. 242 / Monday, December 18, 2006 / Notices
pot’’ model.35 The commenter stated
that it favors this ‘‘two pot’’ approach
because it believes that it more easily
accommodates differences in customer
protection and capital requirements of
the Commission and the Commodity
Futures Trading Commission
(‘‘CFTC’’).36 Commenters, in general,
favored a single portfolio margin
securities account (referred to as the
‘‘one pot’’ approach).37 One commenter
stated that the ‘‘disadvantages of a two
pot model outweigh its advantages.’’ 38
The Exchange stated that it believes that
a one pot approach will provide for
more efficient margining, reduce brokerdealer/FCM liquidity risk and reduce
operational inefficiencies.
Three commenters expressed the need
for the Commission and the CFTC to
continue working towards eliminating
the legal and regulatory impediments to
cross-margining futures and securities
products.39 In response, the Exchange
stated that it will continue to work with
the Commission and the CFTC on the
regulatory issues related to holding
securities and futures in a portfolio.
One commenter stated that portfolio
margining should be expanded to
include nonequity securities, interest
rate derivatives, collateralized debt
obligations and other similar non-equity
related products, and foreign currency
derivatives.40 This commenter also
requested that nonequity securities be
permitted to be held in the portfolio
margin account for collateral purposes
only, subject to the other margin
requirements of NYSE Rule 431.41 The
Exchange noted that it agrees with the
commenter to the extent that nonequity
securities may serve as collateral in the
portfolio margin account.42 The
Exchange also stated that once the SROs
and broker-dealers gain more experience
with portfolio margining, the Exchange
may consider whether nonequity
products should be eligible for portfolio
margining.
One commenter sought clarification
as to whether broker-dealers and their
customers could use shares of money
market funds as collateral for portfolio
margining.43 The Exchange noted that it
believes the rule currently permits the
use of money market funds in a
portfolio margin account, and clarified
this issue through changes to the rule
35 Id.
36 See
CME Letter.
OCC and CBOE Letters.
38 See CBOE Letter.
39 See SIA, Fimat and OCC Letters.
40 See SIA Letter.
41 See SIA Letter.
42 See Amendment No. 1.
43 See Federated Letter.
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37 See
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text in Amendment No. 1 to the
proposed rule change.44
One commenter objected to the $0.375
per contract minimum margin
requirement, and offered alternative
lower minimums.45 In response to this
comment, the Exchange noted that the
$.375 per contract minimum provides a
cushion against significant market
movements. The Exchange also noted
that it is concerned about potential
illiquidity in the market and the
creation of gap risk in the event both
sides of a hedge cannot be closed out
simultaneously.
Several commenters objected to the
proposed prohibition on day trading in
a portfolio margin account.46 The
Exchange noted that the day trading
prohibition is not intended to prohibit
intraday trading in an account that
contains a large portfolio of hedged
instruments and, in response to the
comments, amended the day trading
rule language.47
Finally, the Exchange encouraged the
Commission to move forward in
approving the amendments.48
IV. Discussion and Commission
Findings and Accelerated Approval of
Amendment No. 1
The Commission finds that the
proposed rule change, as amended, is
consistent with the requirements of the
Act and the rules and regulations
thereunder applicable to a national
securities exchange.49 In particular, the
Commission believes that the proposed
rule change, as amended, is consistent
with Section 6(b)(5) of the Act 50 in that
it is designed to perfect the mechanism
of a free and open market and to protect
investors and the public interest. The
Commission notes that the proposed
portfolio margin rule change is intended
to promote greater reasonableness,
accuracy and efficiency with respect to
Exchange margin requirements and will
better align margin requirements with
actual risk.
Under a portfolio margin system,
offsets are fully realized, whereas under
the Exchange’s current margin rules,
positions are margined independent of
each other and offsets between them do
not figure into the total margin
44 See NYSE Response; see also Amendment No.
1 (adding language regarding use of money market
mutual funds in a portfolio margin account).
45 See SIA Letter.
46 See SIA and Fimat Letters.
47 See Amendment No. 1.
48 See NYSE Response.
49 In approving this proposed rule change, the
Commission notes that it has considered the
proposed rule’s impact on efficiency, competition,
and capital formation. 15 U.S.C. 78c(f).
50 15 U.S.C. 78f(b)(5).
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requirement. A portfolio margin system
recognizes the offsetting gains from
positions that react favorably in market
declines, while market rises are
tempered by offsetting losses from
positions that react negatively.
Consequently, a portfolio margin
approach can have a neutralizing effect
on the volatility of margin requirements.
Thus, a portfolio margin system may
better align a customer’s total margin
requirement with the actual risk
associated with the customer’s positions
taken as a whole. The Commission
further notes portfolio margining may
alleviate excessive margin calls,
improve cash flows and liquidity, and
reduce volatility.
Moreover, the Commission notes that
approving the proposed rule change
would enhance portfolio margining by
permitting more products to be
margined under this methodology. This
is consistent with the amendments to
Regulation T made by the FRB in 1998,
which sought to advance the use of
portfolio margining.51 The Commission
also believes that this expanded
program for portfolio margining will
serve to advance the development of
even more risk-sensitive approaches to
margining customer positions, including
the use of internal models as advocated
by commenters. The Commission
intends to work with the NYSE and
CBOE towards this objective after it
gains experience with the portfolio
margining system of this proposal.
The Commission believes that while
the portfolio margining system in the
proposed rule will have the effect of
reducing customer margin (in most
cases), the methodology is relatively
conservative in that it requires positions
to be shocked at specified market move
ranges (e.g., +/¥15% for individual
equities) that represent potential future
stress events. Essentially the same
portfolio methodology has been used by
broker-dealers to calculate haircuts on
options positions for net capital
purposes.52 Furthermore, the proposed
requirement that a firm receive preapproval from the Exchange prior to
offering portfolio margining to its
51 Federal Reserve System, ‘‘Securities Credit
Transactions; Borrowing by Brokers and Dealers,’’
63 FR 2806 (January 16, 1998); see also 12 CFR
220.1(b)(3)(i); see also letter from the FRB to James
E. Newsome, Acting Chairman, Commodity Futures
Trading Commission, and Laura S. Unger, Acting
Chairman, Commission, dated March 6, 2001. The
FRB concluded the letter by writing ‘‘the Board
anticipates that the creation of securities futures
products will provide another opportunity to
develop more risk-sensitive, portfolio-based
approaches for all securities, including securities
options and securities futures products.’’ Id.
52 See Exchange Act Release No. 38248 (February
6, 1997), 62 FR 6474 (February 12, 1997).
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customers, coupled with the
requirement for enhanced risk
management procedures, is designed to
ensure that only those firms with
adequate controls would be eligible to
implement a customer portfolio
margining program.53
Accelerated Approval of Amendment
No. 1
The Exchange also has requested that
the Commission approve Amendment
No. 1 to the proposed rule change prior
to the thirtieth day after publication of
notice of the filing in the Federal
Register. The Commission believes that
the changes in Amendment No. 1 to the
proposed rule change do not raise
significant new or unique issues from
those previously raised in the earlier
portfolio margin rule filings.54 The
changes proposed by the Exchange in
Amendment No. 1 are designed to
ensure consistency with the companion
CBOE proposed rule filing and to
respond to comments received as a
result of the Federal Register notice.55
The Commission believes that these
proposed changes strengthen the
proposed rule change.
Accordingly, the Commission finds
good cause for approving Amendment
No. 1 to the proposed rule change prior
to the thirtieth day after the date of
publication of notice thereof in the
Federal Register. Specifically, the
Commission believes that it is
consistent with Section 19(b)(2) of the
Act 56 to approve Amendment No. 1 to
the Exchange’s proposed rule change
prior to the thirtieth day after
publication of the notice of filing thereof
in the Federal Register.
Uniform Effective Date
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The Commission believes that
approving the amendment on an
accelerated basis will permit the NYSE
to begin the process of approving
broker-dealers to implement portfolio
margining and would allow firms to
begin to make the necessary changes
and upgrades to their systems, as well
as their policies and procedures, in
order to accommodate customer
portfolio. The Commission, however,
believes that if some firms receive NYSE
approval to begin offering customer
portfolio margining to customers before
53 The proposed rules also would continue to
require a minimum per contract charge of $.375.
The Commission also notes that the proposed rules
contain a leverage test under which a broker-dealer
cannot permit the amount of portfolio margin
required of its customers to exceed 10 times the
firm’s net capital.
54 See supra note 3.
55 See supra notes 5 and 7.
56 15 U.S.C. 78s(b)(2).
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other member firms, these other firms
would be at a competitive disadvantage.
Therefore, the Commission has
determined to set a uniform effective
date of April 2, 2007 for the proposed
rule change, as amended. As stated
above, the Commission believes that
setting a uniform effective date will
avoid placing some members firms at a
competitive disadvantage and reduce
confusion in the marketplace.
V. Solicitation of Comments of
Amendment No. 1
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–2006–13 on the
subject line.
you wish to make available publicly. All
submission should refer to File Number
SR–NYSE–2006–13 and should be
submitted on or before January 8, 2007.
VI. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,57 that the
proposed rule change (File No. SR–
NYSE–2006–13), is hereby approved,
and that Amendment No. 1 to the
proposed rule change be, and hereby is,
approved on an accelerated basis, both
on a pilot basis to expire on July 31,
2007. The effective date will be April 2,
2007.
By the Commission.
Florence E. Harmon,
Deputy Secretary.
Exhibit A—Margin Requirements
Rule 431. (a) through (f) unchanged.
Portfolio Margin
(g) As an alternative to the ‘‘strategybased’’ margin requirements set forth in
sections (a) through (f) of this Rule,
member organizations may elect to
apply the portfolio margin requirements
set forth in this section (g) to all margin
equity securities 1, listed options,
Paper Comments
unlisted derivatives, and security
• Send paper comments in triplicate
futures products (as defined in Section
to Nancy M. Morris, Secretary,
3(a)(56) of the Securities Exchange Act
Securities and Exchange Commission,
of 1934 (the ‘‘Exchange Act’’)), provided
100 F Street, NE., Washington, DC
that the requirements of section
20549–1090.
(g)(6)(B)(1) of this Rule are met.
All submissions should refer to File
In addition, a member organization,
Number SR–NYSE–2006–13. This file
provided that it is a Futures
number should be included on the
Commission Merchant (‘‘FCM’’) and is
subject line if e-mail is used. To help the either a clearing member of a futures
Commission process and review your
clearing organization or has an affiliate
comments more efficiently, please use
that is a clearing member of a futures
only one method. The Commission will clearing organization, is permitted
post all comments on the Commission’s under this section (g) to combine an
Internet Web site (https://www.sec.gov/
eligible participant’s related instruments
rules/sro/shtml). Copies of the
as defined in section (g)(2)(E), with
submission, all subsequent
listed index options, options on
amendments, all written statements
exchange traded funds (‘‘ETF’’), index
with respect to the proposed rule
warrants and underlying instruments
change that are filed with the
and compute a margin requirement for
Commission, and all written
such combined products on a portfolio
communications relating to the
margin basis.
The portfolio margin provisions of
proposed rule change between the
Commission and any person, other than this Rule shall not apply to Individual
Retirement Accounts (‘‘IRAs’’).
those that may be withheld from the
(1) Member organizations must
public in accordance with the
monitor the risk of portfolio margin
provisions of 5 U.S.C. 552, will be
accounts and maintain a comprehensive
available for inspection and copying in
written risk analysis methodology for
the Commission’s Public Reference
Room. Copies of such filing also will be assessing the potential risk to the
member organization’s capital over a
available for inspection and copying at
the principal office of the Exchange. All
57 15 U.S.C. 78s(b)(2).
comments received will be posted
1 For purposes of this section (g) of the Rule, the
without change; the Commission does
term ‘‘margin equity security’’ utilizes the
not edit personal identifying
definition at section 220.2 of Regulation T of the
information from submissions. You
Board of Governors of the Federal Reserve System,
excluding a nonequity security.
should submit only information that
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specified range of possible market
movements of positions maintained in
such accounts. The risk analysis
methodology shall specify the
computations to be made, the frequency
of computations, the records to be
reviewed and maintained, and the
person(s) within the organization
responsible for the risk function. This
risk analysis methodology must be filed
with the New York Stock Exchange
(‘‘Exchange’’), or the member
organization’s designated examining
authority (‘‘DEA’’), if other than the
Exchange, and submitted to the
Securities and Exchange Commission
(‘‘SEC’’) prior to the implementation of
portfolio margining. In performing the
risk analysis of portfolio margin
accounts required by this Rule, each
member organization shall include in
the written risk analysis methodology
procedures and guidelines for:
(A) Obtaining and reviewing the
appropriate account documentation and
financial information necessary for
assessing the amount of credit to be
extended to eligible participants.
(B) The determination, review and
approval of credit limits to each eligible
participant, and across all eligible
participants, utilizing a portfolio margin
account,
(C) Monitoring credit risk exposure to
the member organization from portfolio
margin accounts, on both an intra-day
and end of day basis, including the type,
scope and frequency of reporting to
senior management,
(D) The use of stress testing of
portfolio margin accounts in order to
monitor market risk exposure from
individual accounts and in the
aggregate,
(E) The regular review and testing of
these risk analysis procedures by an
independent unit such as internal audit
or other comparable group,
(F) Managing the impact of credit
extended related to portfolio margin
accounts on the member organization’s
overall risk exposure,
(G) The appropriate response by
management when limits on credit
extensions related to portfolio margin
accounts have been exceeded, and
(H) Determining the need to collect
additional margin from a particular
eligible participant, including whether
that determination was based upon the
creditworthiness of the participant and/
or the risk of the eligible product.
Moreover, management must
periodically review, in accordance with
written procedures, the member
organization’s credit extension activities
for consistency with these guidelines.
Management must periodically
determine if the data necessary to apply
this section (g) is accessible on a timely
basis and information systems are
available to adequately capture,
monitor, analyze and report relevant
data.
(2) Definitions.—For purposes of this
section (g), the following terms shall
have the meanings specified below:
(A) For purposes of portfolio margin
requirements the term ‘‘equity’’, as
defined in section (a)(4) of this Rule,
includes the market value of any long or
short positions held in an eligible
participant’s account.
(B) The term ‘‘listed option’’ means
any equity-based or equity index-based
option traded on a registered national
securities exchange or automated
facility of a registered national securities
association.
(C) The term ‘‘portfolio’’ means any
eligible product, as defined in section
(g)(6)(B)(1), grouped with its underlying
instruments and related instruments.
(D) The term ‘‘product group’’ means
two or more portfolios of the same type
(see table in section (g)(2)(G) below) for
which it has been determined by Rule
15c3–1a under the Exchange Act that a
percentage of offsetting profits may be
applied to losses at the same valuation
point.
(E) The term ‘‘related instrument’’
within a security class or product group
means broad-based index futures and
options on broad-based index futures
covering the same underlying
instrument. The term ‘‘related
instrument’’ does not include security
futures products.
(F) The term ‘‘security class’’ refers to
all listed options, security futures
products, unlisted derivatives, and
related instruments covering the same
underlying instrument and the
underlying instrument itself.
(G) The term ‘‘theoretical gains and
losses’’ means the gain and loss in the
value of individual eligible products
and related instruments at ten
equidistant intervals (valuation points)
ranging from an assumed movement
(both up and down) in the current
market value of the underlying
instrument. The magnitude of the
valuation point range shall be as
follows:
Up/down market
move (high & low
valuation points)
Portfolio type
High Capitalization, Broad-based Market Index 2 ............................................................................................................................
Non-High Capitalization, Broad-based Market Index 3 ....................................................................................................................
Any other eligible product that is, or is based on, an equity security or a narrow-based index ....................................................
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(H) The term ‘‘underlying instrument’’
means a security or security index upon
which any listed option, unlisted
derivative, security future, or broadbased index future is based.
(I) The term ‘‘unlisted derivative’’
means any equity-based or equity indexbased unlisted option, forward contract,
or security-based swap that can be
valued by a theoretical pricing model
approved by the SEC.
2 In accordance with section (b)(1)(i)(B) of Rule
15c3–1a (Appendix A to Rule 15c3–1) under the
Securities Exchange Act of 1934, 17 CFR 240.15c3–
1a(b)(1)(i)(B).
3 See footnote above.
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(3) Approved Theoretical Pricing
Models.—Theoretical pricing models
must be approved by the SEC.
(4) Eligible Participants.—The
application of the portfolio margin
provisions of this section (g) is limited
to the following:
(A) Any broker or dealer registered
pursuant to Section 15 of the Exchange
Act;
(B) Any member of a national futures
exchange to the extent that listed index
options hedge the member’s index
futures; and
(C) Any person or entity not included
in sections (g)(4)(A) and (g)(4)(B) above
approved for uncovered options and, if
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+6%/¥8%
+/¥10%
+/¥15%
transactions in security futures are to be
included in the account, approval for
such transactions is also required.
However, an eligible participant under
this section (g)(4)(C) may not establish
or maintain positions in unlisted
derivatives unless minimum equity of at
least five million dollars is established
and maintained with the member
organization. For purposes of this
minimum equity requirement, all
securities and futures accounts carried
by the member organization for the
same eligible participant may be
combined provided ownership across
the accounts is identical. A guarantee
pursuant to section (f)(4) of this Rule is
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not permitted for purposes of the
minimum equity requirement.
(5) Opening of Accounts.
(A) Member organizations must notify
and receive approval from the Exchange
or the member organization’s DEA, if
other than the Exchange, prior to
establishing a portfolio margin
methodology for eligible participants.
(B) Only eligible participants that
have been approved to engage in
uncovered short option contracts
pursuant to Exchange Rule 721, or the
rules of the member organization’s DEA,
if other than the Exchange, are
permitted to utilize a portfolio margin
account.
(C) On or before the date of the initial
transaction in a portfolio margin
account, a member organization shall:
(1) Furnish the eligible participant
with a special written disclosure
statement describing the nature and
risks of portfolio margining which
includes an acknowledgement for all
portfolio margin account owners to sign,
attesting that they have read and
understood the disclosure statement,
and agree to the terms under which a
portfolio margin account is provided
(see Exchange Rule 726(d)), and
(2) Obtain the signed
acknowledgement noted above from the
eligible participant and record the date
of receipt.
(6) Establishing Account and Eligible
Positions.
(A) For purposes of applying the
portfolio margin requirements
prescribed in this section (g), member
organizations are to establish and utilize
a specific securities margin account, or
sub-account of a margin account, clearly
identified as a portfolio margin account
that is separate from any other securities
account carried for an eligible
participant.
A margin deficit in the portfolio
margin account of an eligible participant
may not be considered as satisfied by
excess equity in another account. Funds
and/or securities must be transferred to
the deficient account and a written
record created and maintained.
However, if a portfolio margin account
is carried as a sub-account of a margin
account, excess equity in the margin
account (determined in accordance with
the rules applicable to a margin account
other than a portfolio margin account)
may be used to satisfy a margin deficit
in the portfolio margin sub-account
without having to transfer any funds
and/or securities.
(B) Eligible Products.
(1) For eligible participants as
described in sections (g)(4)(A) through
(g)(4)(C), a transaction in, or transfer of,
an eligible product may be effected in
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the portfolio margin account. Eligible
products under this section (g) consist
of:
(i) A margin equity security
(including a foreign equity security and
option on a foreign equity security,
provided the security is deemed to have
a ‘‘ready market’’ under SEC Rule 15c3–
1 or a ‘‘no-action’’ position issued
thereunder, and a control or restricted
security, provided the security has met
the requirements in a manner consistent
with SEC Rule 144 or an SEC ‘‘noaction’’ position issued thereunder,
sufficient to permit the sale of the
security, upon exercise or assignment of
any listed option or unlisted derivative
written or held against it, without
restriction).
(ii) A listed option on an equity
security or index of equity securities,
(iii) A security futures product,
(iv) An unlisted derivative on an
equity security or index of equity
securities,
(v) A warrant on an equity security or
index of equity securities,
(vi) A related instrument as defined in
section (g)(2)(E).
(7) Margin Required.—The amount of
margin required under this section (g)
for each portfolio shall be the greater of:
(A) the amount for any of the ten
equidistant valuation points
representing the largest theoretical loss
as calculated pursuant to section (g)(8)
below, or
(B) for eligible participants as
described in section (g)(4)(A) through
(g)(4)(C), $.375 for each listed option,
unlisted derivative, security future
product, and related instrument,
multiplied by the contract’s or
instrument’s multiplier, not to exceed
the market value in the case of long
contracts in eligible products.
(C) Account guarantees pursuant to
section (f)(4) of this Rule are not
permitted for purposes of meeting
margin requirements.
(D) Positions other than those listed in
section (g)(6)(B)(1) above are not eligible
for portfolio margin treatment. However,
positions not eligible for portfolio
margin treatment (except for ineligible
related instruments) may be carried in a
portfolio margin account, provided the
member organization has the ability to
apply the applicable strategy based
margin requirements promulgated under
this Rule. Shares of a money market
mutual fund may be carried in a
portfolio margin account, also subject to
the applicable strategy based margin
requirements under this Rule provided
that:
(1) The customer waives any right to
redeem shares without the member
organization’s consent, s
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(2) The member organization (or, if
the shares are deposited with a clearing
organization, the clearing organization)
obtains the right to redeem shares in
cash upon request,
(3) The fund agrees to satisfy any
conditions necessary or appropriate to
ensure that the shares may be redeemed
in cash, promptly upon request, and
(4) The member organization
complies with the requirements of
Section 11(d)(1) of the Exchange Act
and Rule 11d1–2 thereunder.
(8) Method of Calculation.
(A) Long and short positions in
eligible products including underlying
instruments and related instruments, are
to be grouped by security class; each
security class group being a ‘‘portfolio’’.
Each portfolio is categorized as one of
the portfolio types specified in section
(g)(2)(G) above as applicable.
(B) For each portfolio, theoretical
gains and losses are calculated for each
position as specified in section (g)(2)(G)
above. For purposes of determining the
theoretical gains and losses at each
valuation point, member organizations
shall obtain and utilize the theoretical
values of eligible products as described
in this section (g) rendered by an
approved theoretical pricing model.
(C) Offsets. Within each portfolio,
theoretical gains and losses may be
netted fully at each valuation point.
Offsets between portfolios within the
eligible product groups, as described in
section (g)(2)(G), may then be applied as
permitted by Rule 15c3–1a under the
Exchange Act.
(D) After applying the offsets above,
the sum of the greatest loss from each
portfolio is computed to arrive at the
total margin required for the account
(subject to the per contract minimum).
(9) Portfolio Margin Minimum Equity
Deficiency.
(A) If, as of the close of business, the
equity in the portfolio margin account of
an eligible participant as described in
section (g)(4)(C), declines below the five
million dollar minimum equity
required, if applicable, and is not
restored to at least five million dollars
within three business days by a deposit
of funds and/or securities, member
organizations are prohibited from
accepting new opening orders beginning
on the fourth business day, except that
new opening orders entered for the
purpose of reducing market risk may be
accepted if the result would be to lower
margin requirements. This prohibition
shall remain in effect until,
(1) Equity of five million dollars is
established or,
(2) All unlisted derivatives are
liquidated or transferred from the
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portfolio margin account to the
appropriate securities account.
(B) Member organizations will not be
permitted to deduct any portfolio
margin minimum equity deficiency
amount from Net Capital in lieu of
collecting the minimum equity required.
(10) Portfolio Margin Deficiency
(A) If, as of the close of business, the
equity in the portfolio margin account of
an eligible participant, as described in
section (g)(4)(A) through (g)(4)(C), is less
than the margin required, the eligible
participant may deposit additional
funds and/or securities or establish a
hedge to meet the margin requirement
within three business days. After the
three business day period, member
organizations are prohibited from
accepting new opening orders, except
that new opening orders entered for the
purpose of reducing market risk may be
accepted if the result would be to lower
margin requirements. In the event an
eligible participant fails to hedge
existing positions or deposit additional
funds and/or securities in an amount
sufficient to eliminate any margin
deficiency after three business days, the
member organization must liquidate
positions in an amount sufficient to, at
a minimum, lower the total margin
required to an amount less than or equal
to the account equity.
(B) If the portfolio margin deficiency
is not met by the close of business on
the next business day after the business
day on which such deficiency arises,
member organizations will be required
to deduct the amount of the deficiency
from Net Capital until such time as the
deficiency is satisfied.
(C) Member organizations will not be
permitted to deduct any portfolio
margin deficiency amount from Net
Capital in lieu of collecting the margin
required.
(D) The Exchange, or the member
organization’s DEA, if other than the
Exchange, may grant additional time for
an eligible participant to meet a
portfolio margin deficiency upon
written request, which is expected to be
granted in extraordinary circumstances
only.
(E) Member organizations should not
permit an eligible participant to make a
practice of meeting a portfolio margin
deficiency by liquidation. Member
organizations must have procedures in
place to identify accounts that
periodically liquidate positions to
eliminate margin deficiencies, and the
member organization is expected to take
appropriate action when warranted.
Liquidations to eliminate margin
deficiencies that are caused solely by
adverse price movements may be
disregarded.
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(11) Determination of Value for
Margin Purposes.—For the purposes of
this section (g), all eligible products
shall be valued at current market prices.
Account equity for the purposes of
sections (g)(9)(A) and (g)(10)(A) shall be
calculated separately for each portfolio
margin account.
(12) Net Capital Treatment of Portfolio
Margin Accounts.
(A) No member organization that
requires margin in any portfolio margin
account pursuant to section (g) of this
Rule shall permit the aggregate portfolio
margin requirements to exceed ten times
its Net Capital for any period exceeding
three business days. The member
organization shall, beginning on the
fourth business day, cease opening new
portfolio margin accounts until
compliance is achieved.
(B) If, at any time, a member
organization’s aggregate portfolio
margin requirements exceed ten times
its Net Capital the member organization
shall immediately transmit telegraphic
or facsimile notice of such deficiency to
the principal office of the Securities and
Exchange Commission in Washington,
D.C., the district or regional office of the
Securities and Exchange Commission
for the district or region in which the
member organization maintains its
principal place of business; and to the
Exchange, or the member organization’s
DEA, if other than the Exchange.
(13) Day Trading Requirements.—The
day trading restrictions promulgated
under section (f)(8)(B) of this Rule shall
not apply to portfolio margin accounts
that establish and maintain at least five
million dollars in equity, provided a
member organization has the ability to
monitor the intra-day risk associated
with day trading. Portfolio margin
accounts that do not establish and
maintain at least five million dollars in
equity will be subject to the day trading
restrictions under section (f)(8)(B),
provided the member organization has
the ability to apply the applicable day
trading requirements under this Rule.
However, if the position or positions
day traded were part of a hedge strategy,
the day trading restrictions will not
apply. A ‘‘hedge strategy’’ for the
purpose of this rule means a transaction
or a series of transactions that reduces
or offsets a material portion of the risk
in a portfolio. Member organizations are
expected to monitor these portfolio
margin accounts to detect and prevent
circumvention of the day trading
requirements.
(14) Requirements to Liquidate
(A) A member organization is
required immediately either to
liquidate, or transfer to another brokerdealer eligible to carry portfolio margin
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75797
accounts, all portfolio margin accounts
with positions in related instruments, if
the member organization is:
(1) Insolvent as defined in section 101
of title 11 of the United
States Code, or is unable to meet its
obligations as they mature;
(2) the subject of a proceeding
pending in any court or before any
agency of the United States or any State
in which a receiver, trustee, or
liquidator for such debtor has been
appointed;
(3) not in compliance with applicable
requirements under the Exchange Act or
rules of the Securities and Exchange
Commission or any self-regulatory
organization with respect to financial
responsibility or hypothecation of
eligible participant’s securities; or
(4) unable to make such computations
as may be necessary to establish
compliance with such financial
responsibility or hypothecation rules.
(B) Nothing in this section (14) shall
be construed as limiting or restricting in
any way the exercise of any right of a
registered clearing agency to liquidate or
cause the liquidation of positions in
accordance with its by-laws and rules.
(15) Member organizations must
ensure that portfolio margin accounts
are in compliance with all other
applicable Exchange rules promulgated
in Rules 700 through 795.
*
*
*
*
*
Delivery of Options Disclosure
Document and Prospectus
Rule 726 (a) through (c) unchanged.
Portfolio Margining Disclosure
Statement and Acknowledgement
(d) The special written disclosure
statement describing the nature and
risks of portfolio margining, and
acknowledgement for an eligible
participant signature, required by Rule
431(g)(5)(C) shall be in a format
prescribed by the Exchange or in a
format developed by the member
organization, provided it contains
substantially similar information as in
the prescribed Exchange format and has
received the prior written approval of
the Exchange.
[FR Doc. E6–21474 Filed 12–15–06; 8:45 am]
BILLING CODE 8011–01–P
E:\FR\FM\18DEN1.SGM
18DEN1
Agencies
[Federal Register Volume 71, Number 242 (Monday, December 18, 2006)]
[Notices]
[Pages 75790-75797]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-21474]
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SECURITIES AND EXCHANGE COMMISSION
Release No. 34-54918; File No. SR-NYSE-2006-13]
Self-Regulatory Organizations; New York Stock Exchange LLC; Order
Approving a Proposed Rule Change to Rule 431 (``Margin Requirements'')
and Rule 726 (``Delivery of Options Disclosure Document and
Prospectus''), and Notice of Filing and Order Granting Accelerated
Approval to Amendment No. 1 to the Proposed Rule Change Relating to
Customer Portfolio Margining
December 12, 2006.
I. Introduction
On March 2, 2006, the New York Stock Exchange LLC (``NYSE'' or
``Exchange'') filed with the Securities and Exchange Commission
(``Commission''), pursuant to Section 19(b)(1) of the Securities
Exchange Act of 1934 (``Act'' or ``Exchange Act'') \1\ and Rule 19b-4
\2\ thereunder, a proposed rule change seeking to amend NYSE Rules 431
and 726 to expand the scope of products that are eligible for treatment
as part of the NYSE's approved portfolio margin pilot program and to
eliminate the requirement for a separate cross-margin account.\3\ The
proposed rule change would expand the scope of eligible products in the
pilot to include margin equity securities and unlisted derivatives. \4\
The proposed rule change was published in the Federal Register on April
6, 2006.\5\ The Commission subsequently extended the comment period for
the original proposed rule filing until May 11, 2006.\6\ The Commission
received 8 comment letters in response to the Federal Register
notice.\7\ On July 20,
[[Page 75791]]
2006, the Exchange filed a response to these comments.\8\ The comment
letters and the Exchange's responses to the comments are summarized
below. On September 13, 2006, the Exchange filed Amendment No. 1 to the
proposed rule change.\9\
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\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ See Exchange Act Release No. 52031 (July 14, 2005), 70 FR
42130 (July 21, 2005) (SR-NYSE-2002-19). On July 14, 2005, the
Commission approved on a pilot basis expiring July 31, 2007,
amendments to Rule 431 that permit broker-dealers to determine
customer margin requirements for portfolios of listed broad-based
securities index options, warrants, futures, futures options and
related exchange-traded funds using a specified portfolio margin
methodology. The Commission also approved amendments to Rule 726 to
require disclosure to, and written acknowledgment from, customers
using a portfolio margin account. See also NYSE Information Memo 05-
56, dated August 18, 2005 (for additional information); and Exchange
Act Release No. 54125 (July 11, 2006), 71 FR 40766 (July 18, 2006)
(SR-NYSE-2005-93) (approving securities futures products and listed
single stock options as eligible products for portfolio margining).
\4\ For purposes of the pilot, a margin equity security is a
security that meets the definition of a ``margin equity security''
under Regulation T of the Federal Reserve Board (``FRB''). See 12
CFR 220.2. An unlisted derivative means ``any equity-based or equity
index-based unlisted option, forward contract, or security-based
swap that can be valued by a theoretical pricing model approved by
the SEC.'' See proposed Rule 431(g)(2)(I).
\5\ See Exchange Act Release No. 53577 (March 30, 2006), 71 FR
17539 (April 6, 2006) (SR-NYSE-2006-13). The Chicago Board Options
Exchange, Incorporated (``CBOE'') also filed a similar proposed rule
filing seeking to expand the scope of eligible products under its
portfolio margin pilot program. See Exchange Act Release No. 53576
(March 30, 2006), 71 FR 17519 (April 6, 2006) (SR-CBOE-2006-14).
\6\ See Exchange Act Release No. 53728 (April 26, 2006), 71 FR
25878 (May 2, 2006).
\7\ See letter from Timothy H. Thompson, Senior Vice President,
Chief Regulatory Officer, Regulatory Services Division, CBOE, to
Nancy Morris, Secretary, Commission, dated June 5, 2006 (``CBOE
Letter''); letter from William H. Navin, Executive Vice President,
General Counsel and Secretary, The Options Clearing Corporation
(``OCC''), to Nancy M. Morris, Secretary, Commission, dated May 19,
2006 (``OCC Letter''); letter from James Barry, on behalf of the Ad
Hoc Portfolio Margin Committee, John Vitha, Chair, Derivatives
Product Committee and Christopher Nagy, Chair, Options Committee,
Securities Industry Association, to Nancy M. Morris, Secretary,
dated May 16, 2006 (``SIA Letter''); letter from Gary Alan DeWaal,
Group General Counsel and Director of Legal and Compliance, Fimat
USA, LLC, to Nancy M. Morris, Secretary, Commission, dated May 11,
2006 (``Fimat Letter''); letter from Stuart J. Kaswell, Partner,
Dechert LLP, Counsel for Federated Investors, Inc., to Nancy M.
Morris, Secretary, Commission, dated May 10, 2006 (``Federated
Letter''); letter from Craig S. Donohue, Chief Executive Officer,
Chicago Mercantile Exchange Inc., to Jonathan G. Katz, Secretary,
Commission, dated May 9, 2006 (``CME Letter''); letter from Gerard
J. Quinn, Vice President and Associate General Counsel, SIA, to
Nancy M. Morris, Secretary, Commission, dated April 21, 2006 (``SIA
Extension Letter''); and e-mail from Stephen A. Kasprzak, Principal
Counsel, Rule and Interpretive Standards, NYSE, dated April 21, 2006
(``Kasprzak e-mail'').
\8\ See letter from Mary Yeager, Assistant Secretary, NYSE, to
Michael A. Macchiaroli, Associate Director, Division of Market
Regulation, Commission, dated July 20, 2006 (``NYSE Response'').
\9\ The NYSE filed Amendment No. 1 in response to comments
received and to make other clarifying changes to the proposed rule
filing. See Section II. for a discussion of the changes in Amendment
No. 1. A clean copy of the proposed rule, as amended by Amendment
No. 1, is attached to this order as Appendix A.
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This order approves the proposed rule change. Simultaneously, the
Commission provides notice of filing of Amendment No. 1, grants
accelerated approval of Amendment No. 1 and solicits comments from
interested persons on Amendment No. 1.\10\
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\10\ By separate order, the Commission also is approving a
parallel rule filing by CBOE (SR-CBOE-2006-14). Exchange Act Release
No. 54919; see also supra note 5.
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II. Description
a. Portfolio Margining
The proposed rule change consists of amendments to Rule 431 to
include margin equity securities (as defined in Regulation T) and
unlisted derivatives as eligible products for the portfolio margining
pilot.\11\ The proposed rule change also includes amendments to
eliminate the requirement of a separate cross-margin account. Rule 431
prescribes specific margin requirements for customers based on the type
of securities held in their accounts.\12\ Outside the existing pilot
program, Rule 431 requires that margin be calculated using fixed
percentages, on a position-by-position basis. In contrast, the current
portfolio margin pilot program permits a broker-dealer to calculate
customer margin requirements by grouping all products in an account
that are based on the same index or issuer into a single portfolio. For
example, futures, options and exchange traded funds based on the S&P
500 would each be grouped in a portfolio and products based on IBM
would be grouped into a separate portfolio.
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\11\ The list of eligible products under the pilot currently
includes listed broad-based securities index options, warrants,
futures, futures options and related exchange-traded funds, as well
as single stock options and securities futures products.
\12\ The margin rules specify the amount of equity a customer
must maintain in his or her margin account with respect to
securities positions financed by the broker-dealer. The equity
protects the broker-dealer in the event the customer defaults on the
obligation to re-pay the financing and the broker-dealer is forced
to liquidate the position at a loss.
---------------------------------------------------------------------------
The broker-dealer then calculates a customer's margin requirement
by ``shocking'' each portfolio at different equidistant points along a
range representing a potential percentage increase and decrease in the
value of the instrument or underlying instrument in the case of a
derivative product. Currently, under the pilot, products of portfolios
based on high capitalization, broad-based securities indexes are
shocked along a range spanning an increase of 6% and a decrease of 8%.
Portfolios of products based on non-high capitalization, broad-based
securities indexes are shocked along a range spanning an increase of
10% and a decrease of 10%. Portfolios of products based on an equity
security are shocked along a range spanning an increase of 15% and a
decrease of 15%.\13\ The proposed rule change would continue to apply
these shock ranges. In addition, as with the current pilot, a
theoretical options pricing model would continue to be used to derive
position values at each valuation point for the purpose of determining
the gain or loss.\14\
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\13\ For example, under the pilot, a portfolio of single stock
futures and listed equity options would be shocked at 10 equidistant
points along a range bounded on one end by a 15% increase in the
market value of the instrument and at the other end by a 15%
decrease (i.e., at +/-3%, +/-6%, +/-9%, +/-12% and +/-15%).
\14\ Currently, the only model that qualifies is the OCC's
Theoretical Intermarket Margining System (TIMS).
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The portfolio shocks described above result in a gain or loss for
each instrument in a portfolio at each calculation point along the
range. These gains and losses are netted to derive a potential
portfolio-wide gain or loss for the point. The margin requirement for a
portfolio is the amount of the greatest portfolio-wide loss among the
calculation points. The margin requirements for each portfolio are
added together to calculate the total margin requirement for the
portfolio margin account. This approach, in most cases, will generally
lower customer margin requirements.\15\
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\15\ For example, the current required initial and maintenance
margin requirements for an equity security are 50% and 25%,
respectively. The market movement range to calculate the potential
gains and losses under the proposed portfolio margin rule for equity
securities is +/-15%.
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The amount of margin (initial and maintenance) required with
respect to a given portfolio would be the larger of: (1) The greatest
portfolio-wide loss amount among the valuation point calculations; or
(2) the sum of $.375 for each option and future in the portfolio
multiplied by the contract's or instrument's multiplier.\16\ The second
computation establishes a minimum margin requirement to ensure that a
certain level of margin is required from the customer in the event the
greatest portfolio-wide loss among the valuation points is de minimis.
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\16\ The multiplier for a standard listed option is fixed by the
options market on which the options series is traded. For example, a
cash settled equity option generally has a multiplier of 100.
Therefore, the minimum margin for one options contract would be
$37.50. The multipliers for different securities and futures
products may vary.
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b. Expansion of Eligible Products
Under the Exchange's proposed rule, products eligible for portfolio
margining would be expanded to include margin equity securities (as
defined under Regulation T),\17\ unlisted derivatives and futures
contracts on narrow-based security indexes.\18\ The unlisted
derivatives would be included in a portfolio based on the underlying
reference index or security. Individual equities and narrow-based index
futures would be included in a portfolio shocked at a range spanning an
increase of 15% and a decrease of 15% (as is the case with listed
single stock options and securities futures).
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\17\ Margin equity securities include certain foreign equity
securities and options on foreign equity securities. See 12 CFR
220.2
\18\ The Commission approved listed single stock options and
securities futures products (excluding narrow-based indexes) as
eligible products on July 11, 2006. See supra note 3.
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c. Margin Deficiency
The current rule requires a customer to satisfy a margin deficiency
in a portfolio margin account within three business days by depositing
additional securities or cash or effecting an offsetting hedge.\19\ The
current pilot also requires a broker-dealer to deduct from its net
capital the amount of any portfolio margin call not met by the close of
business on T+1 and until the
[[Page 75792]]
call is satisfied. The proposal would now further require the broker-
dealer to have in place procedures to identify accounts that
periodically liquidate positions to eliminate margin deficiencies, and
to take appropriate action when warranted.\20\
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\19\ The original pilot required margin calls to be met by T+1.
The current requirement of meeting margin calls within three
business days was approved in SR-NYSE-2005-93. See Exchange Act
Release No. 54125 (July 11, 2006), 71 FR 40766 (July 18, 2006).
\20\ The current pilot requires that member firms not permit a
customer to make a practice of meeting a portfolio margin deficiency
through liquidation.
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d. $5 Million Equity Requirement
The current pilot requires customers that are not broker-dealers or
futures firms to maintain minimum account equity of $5 million if they
opt to include portfolios of broad-based securities index products in
their accounts.\21\ The proposed rule change would eliminate the $5
million account equity requirement for all portfolio margin accounts,
except those holding unlisted derivatives.\22\
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\21\ The $5 million account equity requirement for such
customers was eliminated to the extent they limited their accounts
to portfolios of listed options and securities futures. See SR-NYSE-
2005-93, supra note 3.
\22\ See proposed Rule 431(g)(4)(C).
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e. Risk Management Methodology
The pilot requires member broker-dealers to monitor the risk of
portfolio margin accounts and maintain a written risk analysis
methodology for assessing potential risk to the firm's capital. This
risk analysis methodology must be made available to the Exchange upon
request. The proposed rule change strengthens these requirements by
providing that, the member broker-dealer must file the risk analysis
methodology with the Exchange (or the firm's Designated Examining
Authority, if not the Exchange) \23\ and submit it to the Commission
prior to implementation. The proposed rule change also requires the
inclusion of additional procedures and guidelines as part of the
methodology.\24\
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\23\ Amendment No. 1 to the proposed rule amended the rule
language to state that the written risk methodology must be filed
with the Exchange, rather than approved by the Exchange, as
proposed, in the March 2, 2006 rule filing.
\24\ The current pilot also requires member firms to notify, and
receive approval from the Exchange, prior to opening portfolio
margin accounts for customers. The proposed rule modifies this
requirement by requiring approval from a member firm's DEA, if it is
not the Exchange.
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f. Cross-Margin Account
The proposed rule change would eliminate the requirement that
portfolios with futures positions be held in a separate cross-margin
account. Under the proposal, a customer would be permitted to use a
single securities margin account for all eligible products. The
Exchange and commenters have indicated that maintaining and monitoring
two separate margin accounts would be operationally difficult and that
it would be more efficient to hold all positions in one securities
account.
g. Hedged Positions
Under the pilot, an underlying security in a portfolio margin
account must be removed from the account if it is no longer offset by
an option position. The amendments propose to eliminate the requirement
to remove instruments that are no longer offset by options positions.
The Exchange made this change in response to comments that all
positions eligible for a portfolio margin account, including underlying
securities, should receive equal treatment. Moreover, the Exchange
noted that it would be operationally difficult to move positions in and
out of the portfolio margin account based on whether they are currently
being offset.
h. Discussion of Changes to the Proposed Rule Change in Amendment No. 1
The Exchange filed Amendment No. 1 to the proposed rule change in
response to comments received, to make conforming changes to the CBOE
rule filing \25\ and to otherwise clarify certain terms and
definitions. The following summarizes the changes made in Amendment No.
1 to the proposed rule change. In Amendment No. 1, the Exchange:
---------------------------------------------------------------------------
\25\ See supra note 5.
---------------------------------------------------------------------------
Clarifies certain definitions and conforms others to the
CBOE filing;
Adds language allowing a customer to use excess equity in
a regular margin account to meet a margin deficiency in a portfolio
margin account without having to transfer any funds or securities where
the portfolio margin account is a sub-account of the regular margin
account;
Adds language allowing positions not eligible for
portfolio margin treatment to be carried in the portfolio margin
account for their collateral value, subject to the margin requirements
of a regular margin account;
Adds language permitting shares of a money market mutual
fund to be held in a portfolio margin account (subject to applicable
margin requirements), provided certain requirements are met;
Clarifies the restrictions with respect to day trading
\26\ in a portfolio margin account; and
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\26\ NYSE proposed to amend the rule text to allow a customer
that establishes and maintains at least $5 million in equity to
engage in day trading without the restrictions of NYSE's day trading
rules, if the member firm has the ability to monitor the intra-day
risk associated with day trading. Further, if a participant has less
than $5 million equity, the day trading restrictions will apply,
unless the position or positions day traded were part of a hedge
strategy.
---------------------------------------------------------------------------
Eliminates the sample risk disclosure statement and
acknowledgement in the rule text.\27\
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\27\ Instead the Exchange will send out an Information Memo with
the sample disclosure language. The Exchange made this change to
avoid having to file a proposed rule change each time in the risk
disclosure document is changed.
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III. Summary of Comments Received and NYSE Response
The Commission received a total of 8 comment letters to the
proposed rule change.\28\ The comments, in general, were supportive.
One commenter stated that it strongly supports ``the significant step
forward represented by the currently proposed changes.'' \29\ Another
commenter stated that the portfolio margining of securities products
will ``help U.S. brokers and exchanges compete more effectively with
their overseas counterparts * * * and thereby increase the strength and
liquidity of U.S. markets.'' \30\ Each commenter, however, recommended
changes to specific provisions of the proposed rule change.
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\28\ See supra note 7. Two of these comment letters related to
the extension of the comment period for the proposed rule change.
See SIA Extension Letter and Kasprzak e-mail.
\29\ See SIA Letter.
\30\ See Fimat Letter.
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Several commenters \31\ submitted comments regarding the ability to
use portfolio margin methodologies other than the method prescribed in
the rule to calculate customer margin requirements. One commenter
stated that the Commission has experience in approving proprietary
market risk models for consolidated supervised entities (CSEs) and OTC
derivatives dealers.\32\ In its response, the Exchange acknowledged
that proprietary models may prove to be effective and efficient in
managing risk.\33\ The Exchange stated, however, that initially,
regulators should gain experience with portfolio margining through the
rule's specified methodology and that in the longer term, proprietary
risk models could be considered as alternatives.
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\31\ See SIA Letter and OCC Letter; see also CME Letter
(discussing SPAN).
\32\ See SIA Letter.
\33\ See NYSE Response, supra note 8.
---------------------------------------------------------------------------
One commenter suggested that futures positions in a portfolio
margin account be held in a separate futures account, while securities
positions be held in a securities account.\34\ The commenter referred
to this approach as the ``two
[[Page 75793]]
pot'' model.\35\ The commenter stated that it favors this ``two pot''
approach because it believes that it more easily accommodates
differences in customer protection and capital requirements of the
Commission and the Commodity Futures Trading Commission (``CFTC'').\36\
Commenters, in general, favored a single portfolio margin securities
account (referred to as the ``one pot'' approach).\37\ One commenter
stated that the ``disadvantages of a two pot model outweigh its
advantages.'' \38\ The Exchange stated that it believes that a one pot
approach will provide for more efficient margining, reduce broker-
dealer/FCM liquidity risk and reduce operational inefficiencies.
---------------------------------------------------------------------------
\34\ See CME Letter.
\35\ Id.
\36\ See CME Letter.
\37\ See OCC and CBOE Letters.
\38\ See CBOE Letter.
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Three commenters expressed the need for the Commission and the CFTC
to continue working towards eliminating the legal and regulatory
impediments to cross-margining futures and securities products.\39\ In
response, the Exchange stated that it will continue to work with the
Commission and the CFTC on the regulatory issues related to holding
securities and futures in a portfolio.
---------------------------------------------------------------------------
\39\ See SIA, Fimat and OCC Letters.
---------------------------------------------------------------------------
One commenter stated that portfolio margining should be expanded to
include nonequity securities, interest rate derivatives, collateralized
debt obligations and other similar non-equity related products, and
foreign currency derivatives.\40\ This commenter also requested that
nonequity securities be permitted to be held in the portfolio margin
account for collateral purposes only, subject to the other margin
requirements of NYSE Rule 431.\41\ The Exchange noted that it agrees
with the commenter to the extent that nonequity securities may serve as
collateral in the portfolio margin account.\42\ The Exchange also
stated that once the SROs and broker-dealers gain more experience with
portfolio margining, the Exchange may consider whether nonequity
products should be eligible for portfolio margining.
---------------------------------------------------------------------------
\40\ See SIA Letter.
\41\ See SIA Letter.
\42\ See Amendment No. 1.
---------------------------------------------------------------------------
One commenter sought clarification as to whether broker-dealers and
their customers could use shares of money market funds as collateral
for portfolio margining.\43\ The Exchange noted that it believes the
rule currently permits the use of money market funds in a portfolio
margin account, and clarified this issue through changes to the rule
text in Amendment No. 1 to the proposed rule change.\44\
---------------------------------------------------------------------------
\43\ See Federated Letter.
\44\ See NYSE Response; see also Amendment No. 1 (adding
language regarding use of money market mutual funds in a portfolio
margin account).
---------------------------------------------------------------------------
One commenter objected to the $0.375 per contract minimum margin
requirement, and offered alternative lower minimums.\45\ In response to
this comment, the Exchange noted that the $.375 per contract minimum
provides a cushion against significant market movements. The Exchange
also noted that it is concerned about potential illiquidity in the
market and the creation of gap risk in the event both sides of a hedge
cannot be closed out simultaneously.
---------------------------------------------------------------------------
\45\ See SIA Letter.
---------------------------------------------------------------------------
Several commenters objected to the proposed prohibition on day
trading in a portfolio margin account.\46\ The Exchange noted that the
day trading prohibition is not intended to prohibit intraday trading in
an account that contains a large portfolio of hedged instruments and,
in response to the comments, amended the day trading rule language.\47\
---------------------------------------------------------------------------
\46\ See SIA and Fimat Letters.
\47\ See Amendment No. 1.
---------------------------------------------------------------------------
Finally, the Exchange encouraged the Commission to move forward in
approving the amendments.\48\
---------------------------------------------------------------------------
\48\ See NYSE Response.
---------------------------------------------------------------------------
IV. Discussion and Commission Findings and Accelerated Approval of
Amendment No. 1
The Commission finds that the proposed rule change, as amended, is
consistent with the requirements of the Act and the rules and
regulations thereunder applicable to a national securities
exchange.\49\ In particular, the Commission believes that the proposed
rule change, as amended, is consistent with Section 6(b)(5) of the Act
\50\ in that it is designed to perfect the mechanism of a free and open
market and to protect investors and the public interest. The Commission
notes that the proposed portfolio margin rule change is intended to
promote greater reasonableness, accuracy and efficiency with respect to
Exchange margin requirements and will better align margin requirements
with actual risk.
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\49\ In approving this proposed rule change, the Commission
notes that it has considered the proposed rule's impact on
efficiency, competition, and capital formation. 15 U.S.C. 78c(f).
\50\ 15 U.S.C. 78f(b)(5).
---------------------------------------------------------------------------
Under a portfolio margin system, offsets are fully realized,
whereas under the Exchange's current margin rules, positions are
margined independent of each other and offsets between them do not
figure into the total margin requirement. A portfolio margin system
recognizes the offsetting gains from positions that react favorably in
market declines, while market rises are tempered by offsetting losses
from positions that react negatively. Consequently, a portfolio margin
approach can have a neutralizing effect on the volatility of margin
requirements. Thus, a portfolio margin system may better align a
customer's total margin requirement with the actual risk associated
with the customer's positions taken as a whole. The Commission further
notes portfolio margining may alleviate excessive margin calls, improve
cash flows and liquidity, and reduce volatility.
Moreover, the Commission notes that approving the proposed rule
change would enhance portfolio margining by permitting more products to
be margined under this methodology. This is consistent with the
amendments to Regulation T made by the FRB in 1998, which sought to
advance the use of portfolio margining.\51\ The Commission also
believes that this expanded program for portfolio margining will serve
to advance the development of even more risk-sensitive approaches to
margining customer positions, including the use of internal models as
advocated by commenters. The Commission intends to work with the NYSE
and CBOE towards this objective after it gains experience with the
portfolio margining system of this proposal.
---------------------------------------------------------------------------
\51\ Federal Reserve System, ``Securities Credit Transactions;
Borrowing by Brokers and Dealers,'' 63 FR 2806 (January 16, 1998);
see also 12 CFR 220.1(b)(3)(i); see also letter from the FRB to
James E. Newsome, Acting Chairman, Commodity Futures Trading
Commission, and Laura S. Unger, Acting Chairman, Commission, dated
March 6, 2001. The FRB concluded the letter by writing ``the Board
anticipates that the creation of securities futures products will
provide another opportunity to develop more risk-sensitive,
portfolio-based approaches for all securities, including securities
options and securities futures products.'' Id.
---------------------------------------------------------------------------
The Commission believes that while the portfolio margining system
in the proposed rule will have the effect of reducing customer margin
(in most cases), the methodology is relatively conservative in that it
requires positions to be shocked at specified market move ranges (e.g.,
+/-15% for individual equities) that represent potential future stress
events. Essentially the same portfolio methodology has been used by
broker-dealers to calculate haircuts on options positions for net
capital purposes.\52\ Furthermore, the proposed requirement that a firm
receive pre-approval from the Exchange prior to offering portfolio
margining to its
[[Page 75794]]
customers, coupled with the requirement for enhanced risk management
procedures, is designed to ensure that only those firms with adequate
controls would be eligible to implement a customer portfolio margining
program.\53\
---------------------------------------------------------------------------
\52\ See Exchange Act Release No. 38248 (February 6, 1997), 62
FR 6474 (February 12, 1997).
\53\ The proposed rules also would continue to require a minimum
per contract charge of $.375. The Commission also notes that the
proposed rules contain a leverage test under which a broker-dealer
cannot permit the amount of portfolio margin required of its
customers to exceed 10 times the firm's net capital.
---------------------------------------------------------------------------
Accelerated Approval of Amendment No. 1
The Exchange also has requested that the Commission approve
Amendment No. 1 to the proposed rule change prior to the thirtieth day
after publication of notice of the filing in the Federal Register. The
Commission believes that the changes in Amendment No. 1 to the proposed
rule change do not raise significant new or unique issues from those
previously raised in the earlier portfolio margin rule filings.\54\ The
changes proposed by the Exchange in Amendment No. 1 are designed to
ensure consistency with the companion CBOE proposed rule filing and to
respond to comments received as a result of the Federal Register
notice.\55\ The Commission believes that these proposed changes
strengthen the proposed rule change.
---------------------------------------------------------------------------
\54\ See supra note 3.
\55\ See supra notes 5 and 7.
---------------------------------------------------------------------------
Accordingly, the Commission finds good cause for approving
Amendment No. 1 to the proposed rule change prior to the thirtieth day
after the date of publication of notice thereof in the Federal
Register. Specifically, the Commission believes that it is consistent
with Section 19(b)(2) of the Act \56\ to approve Amendment No. 1 to the
Exchange's proposed rule change prior to the thirtieth day after
publication of the notice of filing thereof in the Federal Register.
---------------------------------------------------------------------------
\56\ 15 U.S.C. 78s(b)(2).
---------------------------------------------------------------------------
Uniform Effective Date
The Commission believes that approving the amendment on an
accelerated basis will permit the NYSE to begin the process of
approving broker-dealers to implement portfolio margining and would
allow firms to begin to make the necessary changes and upgrades to
their systems, as well as their policies and procedures, in order to
accommodate customer portfolio. The Commission, however, believes that
if some firms receive NYSE approval to begin offering customer
portfolio margining to customers before other member firms, these other
firms would be at a competitive disadvantage. Therefore, the Commission
has determined to set a uniform effective date of April 2, 2007 for the
proposed rule change, as amended. As stated above, the Commission
believes that setting a uniform effective date will avoid placing some
members firms at a competitive disadvantage and reduce confusion in the
marketplace.
V. Solicitation of Comments of Amendment No. 1
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-2006-13 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-2006-13. 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 also will be available for inspection and copying at the
principal office of the Exchange. All comments received will be posted
without change; the Commission does not edit personal identifying
information from submissions. You should submit only information that
you wish to make available publicly. All submission should refer to
File Number SR-NYSE-2006-13 and should be submitted on or before
January 8, 2007.
VI. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\57\ that the proposed rule change (File No. SR-NYSE-2006-13), is
hereby approved, and that Amendment No. 1 to the proposed rule change
be, and hereby is, approved on an accelerated basis, both on a pilot
basis to expire on July 31, 2007. The effective date will be April 2,
2007.
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\57\ 15 U.S.C. 78s(b)(2).
By the Commission.
Florence E. Harmon,
Deputy Secretary.
Exhibit A--Margin Requirements
Rule 431. (a) through (f) unchanged.
Portfolio Margin
(g) As an alternative to the ``strategy-based'' margin requirements
set forth in sections (a) through (f) of this Rule, member
organizations may elect to apply the portfolio margin requirements set
forth in this section (g) to all margin equity securities \1\, listed
options, unlisted derivatives, and security futures products (as
defined in Section 3(a)(56) of the Securities Exchange Act of 1934 (the
``Exchange Act'')), provided that the requirements of section
(g)(6)(B)(1) of this Rule are met.
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\1\ For purposes of this section (g) of the Rule, the term
``margin equity security'' utilizes the definition at section 220.2
of Regulation T of the Board of Governors of the Federal Reserve
System, excluding a nonequity security.
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In addition, a member organization, provided that it is a Futures
Commission Merchant (``FCM'') and is either a clearing member of a
futures clearing organization or has an affiliate that is a clearing
member of a futures clearing organization, is permitted under this
section (g) to combine an eligible participant's related instruments as
defined in section (g)(2)(E), with listed index options, options on
exchange traded funds (``ETF''), index warrants and underlying
instruments and compute a margin requirement for such combined products
on a portfolio margin basis.
The portfolio margin provisions of this Rule shall not apply to
Individual Retirement Accounts (``IRAs'').
(1) Member organizations must monitor the risk of portfolio margin
accounts and maintain a comprehensive written risk analysis methodology
for assessing the potential risk to the member organization's capital
over a
[[Page 75795]]
specified range of possible market movements of positions maintained in
such accounts. The risk analysis methodology shall specify the
computations to be made, the frequency of computations, the records to
be reviewed and maintained, and the person(s) within the organization
responsible for the risk function. This risk analysis methodology must
be filed with the New York Stock Exchange (``Exchange''), or the member
organization's designated examining authority (``DEA''), if other than
the Exchange, and submitted to the Securities and Exchange Commission
(``SEC'') prior to the implementation of portfolio margining. In
performing the risk analysis of portfolio margin accounts required by
this Rule, each member organization shall include in the written risk
analysis methodology procedures and guidelines for:
(A) Obtaining and reviewing the appropriate account documentation
and financial information necessary for assessing the amount of credit
to be extended to eligible participants.
(B) The determination, review and approval of credit limits to each
eligible participant, and across all eligible participants, utilizing a
portfolio margin account,
(C) Monitoring credit risk exposure to the member organization from
portfolio margin accounts, on both an intra-day and end of day basis,
including the type, scope and frequency of reporting to senior
management,
(D) The use of stress testing of portfolio margin accounts in order
to monitor market risk exposure from individual accounts and in the
aggregate,
(E) The regular review and testing of these risk analysis
procedures by an independent unit such as internal audit or other
comparable group,
(F) Managing the impact of credit extended related to portfolio
margin accounts on the member organization's overall risk exposure,
(G) The appropriate response by management when limits on credit
extensions related to portfolio margin accounts have been exceeded, and
(H) Determining the need to collect additional margin from a
particular eligible participant, including whether that determination
was based upon the creditworthiness of the participant and/or the risk
of the eligible product.
Moreover, management must periodically review, in accordance with
written procedures, the member organization's credit extension
activities for consistency with these guidelines. Management must
periodically determine if the data necessary to apply this section (g)
is accessible on a timely basis and information systems are available
to adequately capture, monitor, analyze and report relevant data.
(2) Definitions.--For purposes of this section (g), the following
terms shall have the meanings specified below:
(A) For purposes of portfolio margin requirements the term
``equity'', as defined in section (a)(4) of this Rule, includes the
market value of any long or short positions held in an eligible
participant's account.
(B) The term ``listed option'' means any equity-based or equity
index-based option traded on a registered national securities exchange
or automated facility of a registered national securities association.
(C) The term ``portfolio'' means any eligible product, as defined
in section (g)(6)(B)(1), grouped with its underlying instruments and
related instruments.
(D) The term ``product group'' means two or more portfolios of the
same type (see table in section (g)(2)(G) below) for which it has been
determined by Rule 15c3-1a under the Exchange Act that a percentage of
offsetting profits may be applied to losses at the same valuation
point.
(E) The term ``related instrument'' within a security class or
product group means broad-based index futures and options on broad-
based index futures covering the same underlying instrument. The term
``related instrument'' does not include security futures products.
(F) The term ``security class'' refers to all listed options,
security futures products, unlisted derivatives, and related
instruments covering the same underlying instrument and the underlying
instrument itself.
(G) The term ``theoretical gains and losses'' means the gain and
loss in the value of individual eligible products and related
instruments at ten equidistant intervals (valuation points) ranging
from an assumed movement (both up and down) in the current market value
of the underlying instrument. The magnitude of the valuation point
range shall be as follows:
------------------------------------------------------------------------
Up/down market
move (high & low
Portfolio type valuation
points)
------------------------------------------------------------------------
High Capitalization, Broad-based Market Index \2\..... +6%/-8%
Non-High Capitalization, Broad-based Market Index \3\. +/-10%
Any other eligible product that is, or is based on, an +/-15%
equity security or a narrow-based index..............
------------------------------------------------------------------------
(H) The term ``underlying instrument'' means a security or security
index upon which any listed option, unlisted derivative, security
future, or broad-based index future is based.
(I) The term ``unlisted derivative'' means any equity-based or
equity index-based unlisted option, forward contract, or security-based
swap that can be valued by a theoretical pricing model approved by the
SEC.
(3) Approved Theoretical Pricing Models.--Theoretical pricing
models must be approved by the SEC.
(4) Eligible Participants.--The application of the portfolio margin
provisions of this section (g) is limited to the following:
(A) Any broker or dealer registered pursuant to Section 15 of the
Exchange Act;
(B) Any member of a national futures exchange to the extent that
listed index options hedge the member's index futures; and
(C) Any person or entity not included in sections (g)(4)(A) and
(g)(4)(B) above approved for uncovered options and, if transactions in
security futures are to be included in the account, approval for such
transactions is also required. However, an eligible participant under
this section (g)(4)(C) may not establish or maintain positions in
unlisted derivatives unless minimum equity of at least five million
dollars is established and maintained with the member organization. For
purposes of this minimum equity requirement, all securities and futures
accounts carried by the member organization for the same eligible
participant may be combined provided ownership across the accounts is
identical. A guarantee pursuant to section (f)(4) of this Rule is
[[Page 75796]]
not permitted for purposes of the minimum equity requirement.
(5) Opening of Accounts.
(A) Member organizations must notify and receive approval from the
Exchange or the member organization's DEA, if other than the Exchange,
prior to establishing a portfolio margin methodology for eligible
participants.
(B) Only eligible participants that have been approved to engage in
uncovered short option contracts pursuant to Exchange Rule 721, or the
rules of the member organization's DEA, if other than the Exchange, are
permitted to utilize a portfolio margin account.
(C) On or before the date of the initial transaction in a portfolio
margin account, a member organization shall:
(1) Furnish the eligible participant with a special written
disclosure statement describing the nature and risks of portfolio
margining which includes an acknowledgement for all portfolio margin
account owners to sign, attesting that they have read and understood
the disclosure statement, and agree to the terms under which a
portfolio margin account is provided (see Exchange Rule 726(d)), and
(2) Obtain the signed acknowledgement noted above from the eligible
participant and record the date of receipt.
(6) Establishing Account and Eligible Positions.
(A) For purposes of applying the portfolio margin requirements
prescribed in this section (g), member organizations are to establish
and utilize a specific securities margin account, or sub-account of a
margin account, clearly identified as a portfolio margin account that
is separate from any other securities account carried for an eligible
participant.
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\2\ In accordance with section (b)(1)(i)(B) of Rule 15c3-1a
(Appendix A to Rule 15c3-1) under the Securities Exchange Act of
1934, 17 CFR 240.15c3-1a(b)(1)(i)(B).
\3\ See footnote above.
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A margin deficit in the portfolio margin account of an eligible
participant may not be considered as satisfied by excess equity in
another account. Funds and/or securities must be transferred to the
deficient account and a written record created and maintained. However,
if a portfolio margin account is carried as a sub-account of a margin
account, excess equity in the margin account (determined in accordance
with the rules applicable to a margin account other than a portfolio
margin account) may be used to satisfy a margin deficit in the
portfolio margin sub-account without having to transfer any funds and/
or securities.
(B) Eligible Products.
(1) For eligible participants as described in sections (g)(4)(A)
through (g)(4)(C), a transaction in, or transfer of, an eligible
product may be effected in the portfolio margin account. Eligible
products under this section (g) consist of:
(i) A margin equity security (including a foreign equity security
and option on a foreign equity security, provided the security is
deemed to have a ``ready market'' under SEC Rule 15c3-1 or a ``no-
action'' position issued thereunder, and a control or restricted
security, provided the security has met the requirements in a manner
consistent with SEC Rule 144 or an SEC ``no-action'' position issued
thereunder, sufficient to permit the sale of the security, upon
exercise or assignment of any listed option or unlisted derivative
written or held against it, without restriction).
(ii) A listed option on an equity security or index of equity
securities,
(iii) A security futures product,
(iv) An unlisted derivative on an equity security or index of
equity securities,
(v) A warrant on an equity security or index of equity securities,
(vi) A related instrument as defined in section (g)(2)(E).
(7) Margin Required.--The amount of margin required under this
section (g) for each portfolio shall be the greater of:
(A) the amount for any of the ten equidistant valuation points
representing the largest theoretical loss as calculated pursuant to
section (g)(8) below, or
(B) for eligible participants as described in section (g)(4)(A)
through (g)(4)(C), $.375 for each listed option, unlisted derivative,
security future product, and related instrument, multiplied by the
contract's or instrument's multiplier, not to exceed the market value
in the case of long contracts in eligible products.
(C) Account guarantees pursuant to section (f)(4) of this Rule are
not permitted for purposes of meeting margin requirements.
(D) Positions other than those listed in section (g)(6)(B)(1) above
are not eligible for portfolio margin treatment. However, positions not
eligible for portfolio margin treatment (except for ineligible related
instruments) may be carried in a portfolio margin account, provided the
member organization has the ability to apply the applicable strategy
based margin requirements promulgated under this Rule. Shares of a
money market mutual fund may be carried in a portfolio margin account,
also subject to the applicable strategy based margin requirements under
this Rule provided that:
(1) The customer waives any right to redeem shares without the
member organization's consent, s
(2) The member organization (or, if the shares are deposited with a
clearing organization, the clearing organization) obtains the right to
redeem shares in cash upon request,
(3) The fund agrees to satisfy any conditions necessary or
appropriate to ensure that the shares may be redeemed in cash, promptly
upon request, and
(4) The member organization complies with the requirements of
Section 11(d)(1) of the Exchange Act and Rule 11d1-2 thereunder.
(8) Method of Calculation.
(A) Long and short positions in eligible products including
underlying instruments and related instruments, are to be grouped by
security class; each security class group being a ``portfolio''. Each
portfolio is categorized as one of the portfolio types specified in
section (g)(2)(G) above as applicable.
(B) For each portfolio, theoretical gains and losses are calculated
for each position as specified in section (g)(2)(G) above. For purposes
of determining the theoretical gains and losses at each valuation
point, member organizations shall obtain and utilize the theoretical
values of eligible products as described in this section (g) rendered
by an approved theoretical pricing model.
(C) Offsets. Within each portfolio, theoretical gains and losses
may be netted fully at each valuation point. Offsets between portfolios
within the eligible product groups, as described in section (g)(2)(G),
may then be applied as permitted by Rule 15c3-1a under the Exchange
Act.
(D) After applying the offsets above, the sum of the greatest loss
from each portfolio is computed to arrive at the total margin required
for the account (subject to the per contract minimum).
(9) Portfolio Margin Minimum Equity Deficiency.
(A) If, as of the close of business, the equity in the portfolio
margin account of an eligible participant as described in section
(g)(4)(C), declines below the five million dollar minimum equity
required, if applicable, and is not restored to at least five million
dollars within three business days by a deposit of funds and/or
securities, member organizations are prohibited from accepting new
opening orders beginning on the fourth business day, except that new
opening orders entered for the purpose of reducing market risk may be
accepted if the result would be to lower margin requirements. This
prohibition shall remain in effect until,
(1) Equity of five million dollars is established or,
(2) All unlisted derivatives are liquidated or transferred from the
[[Page 75797]]
portfolio margin account to the appropriate securities account.
(B) Member organizations will not be permitted to deduct any
portfolio margin minimum equity deficiency amount from Net Capital in
lieu of collecting the minimum equity required.
(10) Portfolio Margin Deficiency
(A) If, as of the close of business, the equity in the portfolio
margin account of an eligible participant, as described in section
(g)(4)(A) through (g)(4)(C), is less than the margin required, the
eligible participant may deposit additional funds and/or securities or
establish a hedge to meet the margin requirement within three business
days. After the three business day period, member organizations are
prohibited from accepting new opening orders, except that new opening
orders entered for the purpose of reducing market risk may be accepted
if the result would be to lower margin requirements. In the event an
eligible participant fails to hedge existing positions or deposit
additional funds and/or securities in an amount sufficient to eliminate
any margin deficiency after three business days, the member
organization must liquidate positions in an amount sufficient to, at a
minimum, lower the total margin required to an amount less than or
equal to the account equity.
(B) If the portfolio margin deficiency is not met by the close of
business on the next business day after the business day on which such
deficiency arises, member organizations will be required to deduct the
amount of the deficiency from Net Capital until such time as the
deficiency is satisfied.
(C) Member organizations will not be permitted to deduct any
portfolio margin deficiency amount from Net Capital in lieu of
collecting the margin required.
(D) The Exchange, or the member organization's DEA, if other than
the Exchange, may grant additional time for an eligible participant to
meet a portfolio margin deficiency upon written request, which is
expected to be granted in extraordinary circumstances only.
(E) Member organizations should not permit an eligible participant
to make a practice of meeting a portfolio margin deficiency by
liquidation. Member organizations must have procedures in place to
identify accounts that periodically liquidate positions to eliminate
margin deficiencies, and the member organization is expected to take
appropriate action when warranted. Liquidations to eliminate margin
deficiencies that are caused solely by adverse price movements may be
disregarded.
(11) Determination of Value for Margin Purposes.--For the purposes
of this section (g), all eligible products shall be valued at current
market prices. Account equity for the purposes of sections (g)(9)(A)
and (g)(10)(A) shall be calculated separately for each portfolio margin
account.
(12) Net Capital Treatment of Portfolio Margin Accounts.
(A) No member organization that requires margin in any portfolio
margin account pursuant to section (g) of this Rule shall permit the
aggregate portfolio margin requirements to exceed ten times its Net
Capital for any period exceeding three business days. The member
organization shall, beginning on the fourth business day, cease opening
new portfolio margin accounts until compliance is achieved.
(B) If, at any time, a member organization's aggregate portfolio
margin requirements exceed ten times its Net Capital the member
organization shall immediately transmit telegraphic or facsimile notice
of such deficiency to the principal office of the Securities and
Exchange Commission in Washington, D.C., the district or regional
office of the Securities and Exchange Commission for the district or
region in which the member organization maintains its principal place
of business; and to the Exchange, or the member organization's DEA, if
other than the Exchange.
(13) Day Trading Requirements.--The day trading restrictions
promulgated under section (f)(8)(B) of this Rule shall not apply to
portfolio margin accounts that establish and maintain at least five
million dollars in equity, provided a member organization has the
ability to monitor the intra-day risk associated with day trading.
Portfolio margin accounts that do not establish and maintain at least
five million dollars in equity will be subject to the day trading
restrictions under section (f)(8)(B), provided the member organization
has the ability to apply the applicable day trading requirements under
this Rule. However, if the position or positions day traded were part
of a hedge strategy, the day trading restrictions will not apply. A
``hedge strategy'' for the purpose of this rule means a transaction or
a series of transactions that reduces or offsets a material portion of
the risk in a portfolio. Member organizations are expected to monitor
these portfolio margin accounts to detect and prevent circumvention of
the day trading requirements.
(14) Requirements to Liquidate
(A) A member organization is required immediately either to
liquidate, or transfer to another broker-dealer eligible to carry
portfolio margin accounts, all portfolio margin accounts with positions
in related instruments, if the member organization is:
(1) Insolvent as defined in section 101 of title 11 of the United
States Code, or is unable to meet its obligations as they mature;
(2) the subject of a proceeding pending in any court or before any
agency of the United States or any State in which a receiver, trustee,
or liquidator for such debtor has been appointed;
(3) not in compliance with applicable requirements under the
Exchange Act or rules of the Securities and Exchange Commission or any
self-regulatory organization with respect to financial responsibility
or hypothecation of eligible participant's securities; or
(4) unable to make such computations as may be necessary to
establish compliance with such financial responsibility or
hypothecation rules.
(B) Nothing in this section (14) shall be construed as limiting or
restricting in any way the exercise of any right of a registered
clearing agency to liquidate or cause the liquidation of positions in
accordance with its by-laws and rules.
(15) Member organizations must ensure that portfolio margin
accounts are in compliance with all other applicable Exchange rules
promulgated in Rules 700 through 795.
* * * * *
Delivery of Options Disclosure Document and Prospectus
Rule 726 (a) through (c) unchanged.
Portfolio Margining Disclosure Statement and Acknowledgement
(d) The special written disclosure statement describing the nature
and risks of portfolio margining, and acknowledgement for an eligible
participant signature, required by Rule 431(g)(5)(C) shall be in a
format prescribed by the Exchange or in a format developed by the
member organization, provided it contains substantially similar
information as in the prescribed Exchange format and has received the
prior written approval of the Exchange.
[FR Doc. E6-21474 Filed 12-15-06; 8:45 am]
BILLING CODE 8011-01-P