Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of Proposed Rule Change Relating to FINRA Rule 4210 Margin Requirements, 33527-33531 [2012-13698]

Download as PDF Federal Register / Vol. 77, No. 109 / Wednesday, June 6, 2012 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES provision, which remains substantively the same as the current standard in the Front Running Policy, is intended to make clear that a member need not know every detail of a potential block order for the front running prohibitions to attach. As SIFMA noted, FINRA has provided guidance in the past in the context of volume-weighted average price transactions. For example, in NASD Notice to Members 05–51, FINRA stated that a duty to refrain from trading may exist ‘‘before a member is awarded an order for execution [and] will turn on, among other factors, the type of order and the specifics of the order known by the member,’’ which may include the security, the size of the order, the side of the market, the weighting of a basket order, and the timing for completion of the order. As this guidance recognizes, exactly when the front running prohibitions may attach depends upon the facts and circumstances of the communications between the member and its customer. Finally, SIFMA commented on the proposed rule change’s potential effects on the trading of OTC equity derivatives. SIFMA believes the proposed rule change will require firms to substantially reorganize their OTC equity derivatives operations to set up unwarranted information barriers to accommodate their trading, given that customer-facing OTC equity derivatives trading desks can be the same desks that manage the risk of the firm’s overall OTC equity derivatives book. SIFMA asserts that the current regime of disclosure to sophisticated customers and counterparties works well for OTC equity derivatives (e.g., ISDA Master Agreements). FINRA does not believe that the proposed rule change would necessitate the imposition of unwarranted information barriers. FINRA believes that the provisions regarding permitted transactions in proposed Supplementary Material .04, as amended from the form proposed in Regulatory Notice 08–83 in response to comments, are broad enough to exclude appropriate trading activity from the scope of the rule, including trading activity that the member can demonstrate is unrelated to the material, non-public market information received in connection with an imminent customer block order. III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 45 days of the date of publication of this notice in the Federal Register or within such longer period (i) as the Commission may designate up to 90 days of such date if it finds such VerDate Mar<15>2010 17:24 Jun 05, 2012 Jkt 226001 longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will: (A) by order approve or disapprove such proposed rule change, or (B) institute proceedings to determine whether the proposed rule change should be disapproved. 33527 information that you wish to make available publicly. All submissions should refer to File Number SR–FINRA– 2012–025 and should be submitted on or before June 27, 2012. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.26 Kevin M. O’Neill, Deputy Secretary. IV. Solicitation of Comments Interested persons are invited to submit written data, views, and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: [FR Doc. 2012–13638 Filed 6–5–12; 8:45 am] Electronic Comments • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rulecomments@sec.gov. Please include File Number SR–FINRA–2012–025 on the subject line. Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of Proposed Rule Change Relating to FINRA Rule 4210 Margin Requirements Paper Comments • Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–FINRA–2012–025. This file number should be included on the subject line if email 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 Web site viewing and printing in the Commission’s Public Reference Room, 100 F Street NE., Washington, DC 20549, on official business days between the hours of 10:00 a.m. and 3:00 p.m. 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 PO 00000 Frm 00140 Fmt 4703 Sfmt 4703 BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION [Release No. 34–67088; File No. SR–FINRA– 2012–024] May 31, 2012. Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 notice is hereby given that on May 23, 2012, Financial Industry Regulatory Authority, Inc. (‘‘FINRA’’) filed with the Securities and Exchange Commission (‘‘SEC’’ or ‘‘Commission’’) the proposed rule change as described in Items I, II and III below, which Items have been prepared by FINRA. The Commission is publishing this notice to solicit comments on the proposed rule change from interested persons. I. Self-Regulatory Organization’s Statement of the Terms of Substance of the Proposed Rule Change FINRA is proposing to amend FINRA Rule 4210 (Margin Requirements) to: (1) Revise the definitions and margin treatment of option spread strategies; (2) clarify the maintenance margin requirement for non-margin eligible equity securities; (3) clarify the maintenance margin requirements for non-equity securities; (4) eliminate the current exemption from the free-riding prohibition for designated accounts; (5) conform the definition of ‘‘exempt account’’; and (6) eliminate the requirement to stress test portfolio margin accounts in the aggregate. In addition, the proposed rule change would amend FINRA Rule 4210 to make non-substantive technical and stylistic changes. The text of the proposed rule change is available on FINRA’s Web site at 26 17 CFR 200.30–3(a)(12). U.S.C. 78s(b)(1). 2 17 CFR 240.19b–4. 1 15 E:\FR\FM\06JNN1.SGM 06JNN1 33528 Federal Register / Vol. 77, No. 109 / Wednesday, June 6, 2012 / Notices https://www.finra.org, at the principal office of FINRA and at the Commission’s Public Reference Room. II. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change In its filing with the Commission, FINRA included statements concerning the purpose of and basis for the proposed rule change and discussed any comments it received on the proposed rule change. The text of these statements may be examined at the places specified in Item IV below. FINRA has prepared summaries, set forth in sections A, B, and C below, of the most significant aspects of such statements. A. Self-Regulatory Organization’s Statement of the Purpose of, and Statutory Basis for, the Proposed Rule Change mstockstill on DSK4VPTVN1PROD with NOTICES 1. Purpose The proposed rule change would amend FINRA Rule 4210 (Margin Requirements) to: (1) Revise the definitions and margin treatment of option spread strategies; (2) clarify the maintenance margin requirement for non-margin eligible equity securities; (3) clarify the maintenance margin requirements for non-equity securities; (4) eliminate the current exemption from the free-riding prohibition for designated accounts; (5) conform the definition of ‘‘exempt account’’; and (6) eliminate the requirement to stress test portfolio margin accounts in the aggregate. In addition, the proposed rule change would amend FINRA Rule 4210 to make non-substantive technical and stylistic changes. Option Spread Strategies Basic option spreads can be paired in such ways that they offset each other in terms of risk. The total risk of the combined spreads is less than the sum of the risk of both spread positions if viewed as stand-alone strategies. FINRA Rule 4210(f)(2) currently recognizes several specific option spread strategies.3 These strategies consist of either a ‘‘long’’ and a ‘‘short’’ option contract or two ‘‘long’’ and two ‘‘short’’ option contracts. The ‘‘long’’ and ‘‘short’’ option contracts have the same underlying security or instrument and the ‘‘long’’ option contracts must expire 3 See FINRA Rule 4210(f)(2)(A) that currently recognizes the following spread strategies: box spread, butterfly spread, calendar (or time) spread, ‘‘long’’ calendar butterfly spread, ‘‘long’’ calendar condor spread, ‘‘long’’ condor spread, ‘‘short’’ calendar iron butterfly spread, ‘‘short’’ calendar iron condor spread, ‘‘short’’ iron butterfly spread and ‘‘short’’ iron condor spread. VerDate Mar<15>2010 17:24 Jun 05, 2012 Jkt 226001 on or after the expiration of the ‘‘short’’ option contracts. While the strategies recognized under FINRA Rule 4210 are the most common types of option spread strategies used by investors, there are other combinations of calls and/or puts that are similar in terms of their risk profile. Accordingly, FINRA proposes a broader definition of a spread in FINRA Rule 4210(f)(2)(A)(xxxii) to mean a ‘‘long’’ and ‘‘short’’ position in different call option series, different put option series, or a combination of call and put option series, that collectively have a limited risk/reward profile, and meet the following conditions: (1) All options must have the same underlying security or instrument; (2) all ‘‘long’’ and ‘‘short’’ option contracts must be either all American-style or all European-style; 4 (3) all ‘‘long’’ and ‘‘short’’ option contracts must be either all listed or all OTC; 5 (4) the aggregate underlying contract value of ‘‘long’’ versus ‘‘short’’ contracts within option type(s) must be equal; and (5) the ‘‘short’’ option (s) must expire on or before the expiration date of the ‘‘long’’ option(s). The proposed revised margin requirements are set forth in FINRA Rule 4210(f)(2)(H) and would require that the ‘‘long’’ option contracts within such spreads must be paid for in full. The margin required for the ‘‘short’’ option contracts within such spreads would be the lesser of: (1) The margin required pursuant to FINRA Rule 4210(f)(2)(E); or (2) the maximum potential loss. The maximum potential loss would be determined by computing the intrinsic value of the options at price points for the underlying security or instrument that are set to correspond to every exercise price present in the spread. The intrinsic values are netted at each price point, and the maximum potential loss is the greatest loss, if any. The proceeds of the ‘‘short’’ options may be applied towards the cost of the ‘‘long’’ options and/or any margin requirement. FINRA Rule 4210(f)(2)(H)(iv) would also make clear that OTC option contracts that comprise a spread must be issued and guaranteed 4 American-style options can be exercised or assigned at any time during the life of the contract. European-style options can only be exercised or assigned at the time of expiration. 5 See FINRA Rule 4210(f)(2)(A)(xxvi) (renumbered as 4210(f)(2)(A)(xxiv)) that defines a listed option as an option contract that is traded on a national securities exchange and is issued and guaranteed by a registered clearing agency. See also FINRA Rule 4210(f)(2)(A)(xxxii) (renumbered as 4210(f)(2)(A)(xxvii)) that defines an OTC option as an over-the-counter option contract that is not traded on a national securities exchange and is issued and guaranteed by the carrying brokerdealer. PO 00000 Frm 00141 Fmt 4703 Sfmt 4703 by the same carrying broker-dealer and the carrying broker-dealer must also be a FINRA member. If the OTC option contracts are not issued and guaranteed by the same carrying broker-dealer, or if the carrying broker-dealer is not a FINRA member, then the ‘‘short’’ option contracts must be margined separately pursuant to FINRA Rule 4210(f)(2)(E)(iii) or (E)(iv). In addition, FINRA proposes to amend FINRA Rule 4210(f)(2)(N) to similarly conform the margin requirements for spreads that are permitted in a cash account. FINRA proposes to eliminate the definitions for the option spread strategies currently recognized within the rule, along with the specific margin requirements associated with each spread, with the exception of a ‘‘long’’ box spread consisting of European-style options.6 FINRA Rule 4210(f)(2)(H)(v)g.7 currently allows a margin requirement equal to 50% of the aggregate difference in the exercise prices. This is the only spread strategy that allows loan value, and FINRA believes that retaining this provision is appropriate. Non-Margin Eligible Equity Securities FINRA proposes to clarify the maintenance margin requirement for non-margin eligible equity securities. FINRA Rule 4210(c)(1) prescribes a maintenance margin requirement of 25% of the current market value of all securities (except for security futures contracts) held ‘‘long’’ in an account. FINRA believes that non-margin eligible equity securities should be subject to more stringent margin requirements in light of the nature of such securities. Accordingly, FINRA proposes to amend FINRA Rule 4210(c)(1) regarding securities held ‘‘long’’ to clarify that the maintenance margin requirement of 25% of the current market value would apply only to margin securities as defined in Regulation T.8 Consequently, non-margin eligible equity securities would be excluded from such margin treatment and the maintenance margin requirement for non-margin eligible equity securities would be 100% of the 6 See FINRA Rule 4210(f)(2)(A)(vi). A box spread means an aggregation of positions in a ‘‘long’’ call and ‘‘short’’ put with the same exercise price (‘‘buy side’’) coupled with a ‘‘long’’ put and ‘‘short’’ call with the same exercise price (‘‘sell side’’) structured as: (1) a ‘‘long’’ box spread in which the sell side exercise price exceeds the buy side exercise price; or (2) a ‘‘short’’ box spread in which the buy side exercise price exceeds the sell side exercise price, all of which have the same contract size, underlying component or index and time of expiration, and are based on the same aggregate current underlying value. 7 FINRA Rule 4210(f)(2)(H)(v)g. would be renumbered as FINRA Rule 4210(f)(2)(H)(v)e. 8 See Regulation T section 200.2 for the definition of margin security. E:\FR\FM\06JNN1.SGM 06JNN1 Federal Register / Vol. 77, No. 109 / Wednesday, June 6, 2012 / Notices mstockstill on DSK4VPTVN1PROD with NOTICES current market value.9 This maintenance margin requirement of 100% for non-margin eligible equity securities is consistent with the requirement outlined in Regulatory Notice 11–16. However, FINRA notes that two provisions of Regulatory Notice 11–16 would be superseded. Firms may no longer extend maintenance loan value on non-margin eligible equity securities either to satisfy maintenance margin deficiencies or when used to collateralize non-purpose loans, except as otherwise provided by FINRA in writing. To this end, FINRA intends to allow a firm to extend credit on a nonmargin eligible security 10 only to the extent: (1) The security is collateralizing a non-purpose loan debit; and (2) such security can be liquidated in a period not exceeding 20 business days, based on a rolling 20 business day median trading volume. The maintenance loan value for the non-margin eligible security would be calculated based on the applicable maintenance margin requirements for a margin eligible security. If the security fails to meet the trading volume requirement, then the security would no longer be entitled to maintenance loan value, and a 100% maintenance margin requirement would be applied together with a deduction to net capital pursuant to Rule 15c3–1 and, if applicable, FINRA Rule 4110(a). Notwithstanding the foregoing, FINRA intends to allow that in the case of offshore mutual funds, a firm may extend maintenance loan value, based on a 25% maintenance margin requirement, to collateralize a nonpurpose loan, provided that the fund has an affiliation with a U.S.-based fund registered with the SEC under the Investment Company Act of 1940, and the fund shares can be liquidated or redeemed daily. Similar to the treatment above, FINRA also proposes to amend Rule 4210(f)(8)(B)(iii) to clarify that the special maintenance margin requirement for day traders, based on the cost of all day trades made during the day, would be 25% for margin eligible equity securities, and 100% for non-margin eligible equity securities.11 In addition, FINRA proposes to adopt new paragraph (g)(7)(E) of FINRA Rule 4210 regarding the margin requirements 9 See Regulatory Notice 11–16 (April 2011) and Regulatory Notice 11–30 (June 2011) (Regulatory Notice 11–30 delayed the effective date of Regulatory Notice 11–16 until October 3, 2011). 10 The exception to permit firms to extend maintenance loan value would apply to both equity and non-equity non-margin eligible securities. 11 The special maintenance margin requirement for non-margin eligible equity securities for day traders is consistent with the margin requirements outlined in Regulatory Notice 11–16. VerDate Mar<15>2010 17:24 Jun 05, 2012 Jkt 226001 for non-margin eligible equity securities held in a portfolio margin account. Consistent with the margin treatment above, the provision would clarify that non-margin eligible equity securities held ‘‘long’’ in a portfolio margin account would have a maintenance margin requirement equal to 100% of the current market value at all times.12 Paragraph (g)(7)(E) would also provide that non-margin eligible equity securities held ‘‘short’’ in a portfolio margin account would have a maintenance margin requirement equal to 50% of the current market value at all times.13 FINRA believes that setting this specific requirement is necessary to help ensure that customers do not attempt to circumvent the initial margin requirements of Regulation T and place all short sales in a portfolio margin account to obtain lower margin requirements.14 FINRA also proposes to amend paragraph (g)(7)(D) of FINRA Rule 4210 to clarify that although non-margin eligible equity securities are not eligible for portfolio margin treatment, they may be carried in a portfolio margin account, provided that the member uses strategybased margin requirements unless such securities are subject to other provisions of paragraph (g). For example, nonmargin eligible equity securities may be carried in a portfolio margin account, but the amendment would clarify that they would be subject to the margin treatment set forth in FINRA Rule 4210(g)(7)(E), rather than FINRA Rule 4210(c). Non-Equity Securities FINRA proposes to further amend FINRA Rule 4210 to clarify the appropriate maintenance margin requirement for non-equity securities in a margin account. Paragraph (c)(4) stipulates a maintenance margin requirement for each bond held ‘‘short’’ in a margin account. Paragraph (e)(2)(C) stipulates the maintenance margin requirements on any positions in specified non-equity securities 15 that are inconsistent with the requirements in paragraph (c)(4). FINRA received 12 The maintenance margin requirement for nonmargin eligible equity securities held ‘‘long’’ in a portfolio margin account is consistent with the margin requirements outlined in Regulatory Notice 11–16. 13 The maintenance margin requirement for ‘‘short’’ non-margin eligible equity securities held in a portfolio margin account would supersede the maintenance margin requirement for such securities specified in Regulatory Notice 11–16. 14 See Rule 4210(g)(7). 15 Paragraph (e)(2)(C) provides the maintenance margin requirements for (1) investment grade debt securities and (2) all other listed non-equity securities and all other margin eligible non-equity securities as defined in FINRA Rule 4210(a)(16). PO 00000 Frm 00142 Fmt 4703 Sfmt 4703 33529 several inquiries as to the appropriate maintenance margin requirement for any ‘‘short’’ non-equity security. Accordingly, FINRA proposes to amend FINRA Rule 4210 to clarify that the margin requirements in paragraph (c)(4) would apply to non-margin eligible, non-equity securities held ‘‘short’’ 16 while the margin requirements in paragraph (e)(2)(C) would apply to the specified margin-eligible non-equity securities held ‘‘short’’ or ‘‘long.’’ 17 FINRA also proposes to add a reference to ‘‘short’’ or ‘‘long’’ to each of paragraphs (e)(2)(B), (F) and (G) to further clarify that such provisions apply to securities held short or long. ‘‘Free-Riding’’ ‘‘Free-riding’’ is the purchase of a security and the selling of the same security in the cash account, using the proceeds of the sale to satisfy the purchase. Such activity is prohibited under section 220.8(a)(1)(ii) of Regulation T. FINRA Rule 4210(f)(9) addresses free-riding in the cash account and currently exempts brokerdealers and ‘‘designated accounts.’’ 18 While the term ‘‘designated account’’ generally includes banks, savings associations, insurance companies, investment companies, states or political subdivisions, and ERISA pension or profit sharing plans, FINRA believes that it is appropriate to treat such accounts as any other customer regarding this activity. Accordingly, FINRA proposes to eliminate this exemption for designated accounts consistent with Regulation T. ‘‘Exempt Account’’ Certain non-equity securities such as exempted securities, mortgage related securities, highly rated foreign sovereign debt securities, and investment grade debt securities may be subject to reduced maintenance margin requirements (or require no margin be deposited) for an ‘‘exempt account,’’ as defined in FINRA Rule 4210(a)(13).19 FINRA notes that FINRA Rule 4210(f)(2)(E)(iv) regarding reduced maintenance margin requirements for OTC put and call options on certain U.S. Government and U.S. Government 16 Non-margin eligible non-equity securities held ‘‘long’’ would be excluded from such margin treatment, and the maintenance margin requirement for such securities would be 100% of the current market value. 17 See also FINRA Rule 4210(e)(2)(A), which establishes the maintenance margin requirements for long or short positions on obligations issued or guaranteed by the United States or obligations that are highly rated foreign sovereign debt securities. 18 See FINRA Rule 4210(a)(4) for the definition of ‘‘designated account.’’ 19 See FINRA Rule 4210(e)(2)(F), (G) and (H). E:\FR\FM\06JNN1.SGM 06JNN1 33530 Federal Register / Vol. 77, No. 109 / Wednesday, June 6, 2012 / Notices Agency debt securities retained an earlier definition of ‘‘exempt account’’ that was not updated in 2003 when the NYSE and NASD amended the definition of ‘‘exempt account’’ by raising the dollar threshold in paragraph (a)(13) for all other purposes in their respective margin rules.20 The definition of ‘‘exempt account’’ currently referenced in paragraph (f)(2)(E)(iv) was retained as a result of comment letters received by the SEC in 2003, expressing concern that customers who no longer qualified as ‘‘exempt accounts’’ in the amended paragraph (a)(13) definition would be subject to higher maintenance margin requirements for the securities addressed in paragraph (f)(2)(E)(iv). Therefore, such definition was maintained only for the provision in paragraph (f)(2)(E)(iv) to allow existing customers to continue to avail themselves of the reduced margin requirements. However, the SEC noted that exempt accounts that met the requirements for exempt account status would be ‘‘grandfathered’’ on the existing credit transactions but that the new requirements (the current paragraph (a)(13) ‘‘exempt account’’ requirements) would apply to any new credit transactions or roll-overs of existing transactions.21 In light of the application of the 2003 exempt account definition to new and roll-over transactions and the significant passage of time, FINRA believes that maintaining these separate definitions is no longer necessary and proposes to delete the definition of ‘‘exempt account’’ contained in paragraph (f)(2)(E)(iv) and require an exempt account to satisfy the definition of ‘‘exempt account’’ in paragraph (a)(13) to qualify for the reduced margin on such options. mstockstill on DSK4VPTVN1PROD with NOTICES Portfolio Margin FINRA proposes to eliminate the monitoring requirement contained in FINRA Rule 4210(g)(1)(D) that stress testing of accounts must be done in the aggregate for portfolio margin accounts. The rule would continue to require firms to stress test portfolio margin accounts on an individual account basis. FINRA has been reviewing the 20 See Securities Exchange Act Release No. 48407 (August 25, 2003), 68 FR 52259 (September 2, 2003) (Order Approving File No. SR–NASD–2000–08) (‘‘NASD Order’’); Securities Exchange Act Release No. 48365 (August 19, 2003), 68 FR 51314 (August 26, 2003) (Order Approving File No. SR–NYSE–98– 14); and Securities Exchange Act Release No. 48133 (July 7, 2003), 68 FR 41672 (July 14, 2003) (Notice of Filing of File No. SR–NYSE–98–14) (‘‘NYSE Notice of Filing’’). 21 See note 20, page 52261 of the NASD Order and page 41676 of NYSE Notice of Filing. VerDate Mar<15>2010 17:24 Jun 05, 2012 Jkt 226001 portfolio margin program and believes that the stress testing on an individual account basis is sufficient from a risk perspective. C. Self-Regulatory Organization’s Statement on Comments on the Proposed Rule Change Received From Members, Participants, or Others Technical Changes Finally, the proposed rule change amends FINRA Rule 4210 to make nonsubstantive technical and stylistic changes to encourage consistency throughout the rule and enhance readability. FINRA will announce the effective date of the proposed rule change in a Regulatory Notice to be published no later than 60 days following Commission approval. The effective date will be no later than 90 days following publication of the Regulatory Notice announcing Commission approval. Written comments were neither solicited nor received. 2. Statutory Basis FINRA believes that the proposed rule change is consistent with the provisions of Section 15A(b)(6) of the Act,22 which requires, among other things, that FINRA rules must be designed to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, and, in general, to protect investors and the public interest. FINRA believes that the proposed rule change regarding the options spread strategies would set margin requirements commensurate with the risk of options spread strategies. FINRA further believes that the proposed rule change would clarify the margin requirements for non-margin eligible equity securities and non-equity securities to ensure consistent regulation regarding the margin treatment for such securities and strategies. FINRA also believes that the proposed rule change regarding conforming the definition of ‘‘exempt accounts’’ would ensure consistent regulation regarding such accounts. In addition, FINRA believes that the proposed rule change regarding eliminating the exemption from the ‘‘free-riding’’ provision for ‘‘designated accounts’’ is consistent with Regulation T. Finally, FINRA believes that the proposed rule change regarding stress testing of individual portfolio margin accounts is reflective of the risk of such accounts. B. Self-Regulatory Organization’s Statement on Burden on Competition FINRA does not believe that the proposed rule change will result in any burden on competition that is not necessary or appropriate in furtherance of the purposes of the Act. 22 15 PO 00000 U.S.C. 78o–3(b)(6). Frm 00143 Fmt 4703 Sfmt 4703 III. Date of Effectiveness of the Proposed Rule Change and Timing for Commission Action Within 45 days of the date of publication of this notice in the Federal Register or within such longer period (i) as the Commission may designate up to 90 days of such date if it finds such longer period to be appropriate and publishes its reasons for so finding or (ii) as to which the self-regulatory organization consents, the Commission will: (A) By order approve or disapprove such proposed rule change, or (B) Institute proceedings to determine whether the proposed rule change should be disapproved. IV. Solicitation of Comments Interested persons are invited to submit written data, views and arguments concerning the foregoing, including whether the proposed rule change is consistent with the Act. Comments may be submitted by any of the following methods: Electronic Comments • Use the Commission’s Internet comment form (https://www.sec.gov/ rules/sro.shtml); or • Send an email to rulecomments@sec.gov. Please include File Number SR–FINRA 2012–024 on the subject line. Paper Comments • Send paper comments in triplicate to Elizabeth M. Murphy, Secretary, Securities and Exchange Commission, 100 F Street NE., Washington, DC 20549–1090. All submissions should refer to File Number SR–FINRA–2012–024. This file number should be included on the subject line if email 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 E:\FR\FM\06JNN1.SGM 06JNN1 Federal Register / Vol. 77, No. 109 / Wednesday, June 6, 2012 / Notices those that may be withheld from the public in accordance with the provisions of 5 U.S.C. 552, will be available for Web site viewing and printing in the Commission’s Public Reference Room, 100 F Street NE., Washington, DC 20549, on official business days between the hours of 10 a.m. and 3 p.m. Copies of such filing also will be available for inspection and copying at the principal office of FINRA. All comments received will be posted without change; the Commission does not edit personal identifying information from submissions. You should submit only information that you wish to make available publicly. All submissions should refer to File Number SR–FINRA–2012–024 and should be submitted on or before June 27, 2012. For the Commission, by the Division of Trading and Markets, pursuant to delegated authority.23 Kevin M. O’Neill, Deputy Secretary. [FR Doc. 2012–13698 Filed 6–5–12; 8:45 am] BILLING CODE 8011–01–P SECURITIES AND EXCHANGE COMMISSION mstockstill on DSK4VPTVN1PROD with NOTICES [Release No. 34–67090; File Nos. SR–BATS– 2011–038; SR–BYX–2011–025; SR–BX– 2011–068; SR–CBOE–2011–087; SR–C2– 2011–024; SR–CHX–2011–30; SR–EDGA– 2011–31; SR–EDGX–2011–30; SR–FINRA– 2011–054; SR–ISE–2011–61; SR–NASDAQ– 2011–131; SR–NSX–2011–11; SR–NYSE– 2011–48; SR–NYSEAmex–2011–73; SR– NYSEArca–2011–68; SR–Phlx–2011–129] Self-Regulatory Organizations; BATS Exchange, Inc.; BATS Y–Exchange, Inc.; NASDAQ OMX BX, Inc.; Chicago Board Options Exchange, Incorporated; C2 Options Exchange, Incorporated; Chicago Stock Exchange, Inc.; EDGA Exchange, Inc.; EDGX Exchange, Inc.; Financial Industry Regulatory Authority, Inc.; International Securities Exchange LLC; The NASDAQ Stock Market LLC; New York Stock Exchange LLC; NYSE Amex LLC; NYSE Arca, Inc.; National Stock Exchange, Inc.; NASDAQ OMX PHLX LLC; Notice of Filing of Amendments No. 1 and Order Granting Accelerated Approval of Proposed Rule Changes as Modified by Amendments No. 1, Relating to Trading Halts Due to Extraordinary Market Volatility May 31, 2012. On September 27, 2011, each of BATS Exchange, Inc. (‘‘BATS’’), BATS Y– 23 17 CFR 200.30–3(a)(12). VerDate Mar<15>2010 17:24 Jun 05, 2012 Jkt 226001 Exchange, Inc. (‘‘BYX’’), NASDAQ OMX BX, Inc. (‘‘BX’’), Chicago Board Options Exchange, Incorporated (‘‘CBOE’’), C2 Options Exchange, Incorporated (‘‘C2’’), Chicago Stock Exchange, Inc. (‘‘CHX’’), EDGA Exchange, Inc. (‘‘EDGA’’), EDGX Exchange, Inc. (‘‘EDGX’’), International Securities Exchange LLC (‘‘ISE’’), The NASDAQ Stock Market LLC (‘‘Nasdaq’’), National Stock Exchange, Inc. (‘‘NSX’’), New York Stock Exchange LLC (‘‘NYSE’’), NYSE Amex LLC (‘‘NYSE Amex’’), NYSE Arca, Inc. (‘‘NYSE Arca’’), NASDAQ OMX PHLX LLC (‘‘Phlx’’) (collectively, the ‘‘Exchanges’’) and the Financial Regulatory Industry Authority, Inc. (‘‘FINRA’’) (together, with the Exchanges, the ‘‘SROs’’) filed with the Securities and Exchange Commission (‘‘Commission’’), pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 (‘‘Act’’) 1 and Rule 19b–4 thereunder,2 proposed rule changes (the ‘‘SRO Proposals’’) to amend certain of their respective rules relating to trading halts due to extraordinary market volatility. The SRO Proposals were published for comment in the Federal Register on October 4, 2011.3 The Commission received seven comment letters on the SRO Proposals.4 1 15 U.S.C. 78s(b)(1). CFR 240.19b–4. 3 See Securities Exchange Act Release Nos. 65437 (September 28, 2011), 76 FR 61466 (October 4, 2011); 65428 (September 28, 2011), 76 FR 61453 (October 4, 2011); 65429 (September 28, 2011), 76 FR 61432 (October 4, 2011); 65433 (September 28, 2011), 76 FR 61453 (October 4, 2011); 65438 (September 28, 2011), 76 FR 61447 (October 4, 2011); 65426 (September 28, 2011), 76 FR 61460 (October 4, 2011); 65431 (September 28, 2011), 76 FR 61425 (May 12, 2011); 65440 (September 28, 2011), 76 FR 61444 (October 4, 2011); 65430 (September 28, 2011), 76 FR 61429 (October 4, 2011); 65425 (September 28, 2011), 76 FR 61438 (October 4, 2011); 65435 (May 6, 2011), 76 FR 61416 (October 4, 2011); 65436 (September 28, 2011), 76 FR 61450 (October 4, 2011); 65427 (September 28, 2011), 76 FR 61457 (October 4, 2011); 65432 (September 28, 2011), 76 FR 61422 (October 4, 2011); 65439 (September 28, 2011), 76 FR 61463 (October 4, 2011); 65434 (September 28, 2011), 76 FR 61419 (October 4, 2011) (collectively, the ‘‘Notices’’). 4 See letter to Elizabeth M. Murphy, Secretary, Commission, from Ann L. Vlcek, Managing Director and Associate General Counsel, the Securities Industry and Financial Markets Association, dated October 27, 2011 (‘‘SIFMA Letter I’’); letter to Commission, from James J. Angel, Ph.D., CFA, Associate Professor of Finance, Georgetown University, McDonough School of Business, dated October 25, 2011 (‘‘Angel Letter’’); letter to Elizabeth M. Murphy, Secretary, Commission, from Craig S. Donohue, CME Group, Inc., dated October 25, 2011 (‘‘CME Group Letter I’’); letter to Elizabeth M. Murphy, Secretary, Commission, from Commissioner Bart Chilton, Commodity Futures Trading Commission, dated October 25, 2011 (‘‘Commissioner Chilton Letter’’); letter to Elizabeth M. Murphy, Secretary, Commission, from Richard H. Baker, President and CEO, Managed Funds Association, dated October 25, 2011 (‘‘MFA Letter’’); letter to Commission from Suzanne H. 2 17 PO 00000 Frm 00144 Fmt 4703 Sfmt 4703 33531 On November 17, 2011, the Commission extended the time period in which to approve the SRO Proposals, disapprove the SRO Proposals, or institute proceedings to determine whether to disapprove the SRO Proposals, to December 30, 2011.5 On December 28, 2011, the Commission instituted proceedings to determine whether to disapprove the SRO Proposals.6 The Commission thereafter received an additional three comment letters on the SRO Proposals.7 On May 10, 2012, NYSE Euronext, on behalf of the three U.S. exchanges it operates, NYSE, NYSE Amex, and NYSE Arca, filed a response to comments (the ‘‘Response’’).8 On May 23, 2012 and May 24, 2012, the SROs each submitted Amendment No. 1 to their respective proposed rule change (the ‘‘Amendments’’). In the Amendments, the SROs propose to make the SRO Proposals operative on a pilot basis scheduled to end on the same date that the pilot period for the Limit Up-Limit Down Plan (as defined below) ends.9 The Commission is publishing this notice to solicit comments on the SRO Proposals, as modified by the Amendments, from interested persons and is approving the SRO Proposals, as modified by the Amendments, on an accelerated basis. I. Description of the Proposals In the SRO Proposals, the Exchanges and FINRA propose to revise the existing market-wide circuit breakers, which halt trading in all NMS securities (as defined in Rule 600(b)(47) of Regulation NMS under the Act 10) in the event of extraordinary market volatility, in order to make them more meaningful in today’s high-speed electronic Shatto, dated October 20, 2011 (‘‘Shatto Letter’’); letter to Commission from Mark Roszak, dated October 4, 2011 (‘‘Roszak Letter’’). 5 See Securities Exchange Act Release No. 65770 (November 17, 2011), 76 FR 72492 (November 23, 2011). 6 See Securities Exchange Act Release No. 66065 (December 28, 2011), 77 FR 316 (January 4, 2012). 7 See letters to Elizabeth Murphy, Secretary, Commission, from Timothy Quast, Managing Director, ModernIR, dated January 20, 2012 (‘‘ModernIR Letter’’); Craig S. Donohue, Chief Executive Officer, CME Group, Inc., dated January 25, 2012 (‘‘CME Group Letter II’’), and Ann L. Vlcek, Managing Director and Associate General Counsel, the Securities Industry and Financial Markets Association, dated February 7, 2012 (‘‘SIFMA Letter II’’). 8 See letter to Elizabeth M. Murphy, Secretary, Commission, from Janet McGinness, EVP & Corporate Secretary, General Counsel, NYSE Markets, dated May 10, 2012. 9 See, e.g., SR–NYSE–2011–48, Amendment No. 1. The text of proposed Amendment No. 1 is available on the NYSE’s Web site at https:// www.nyse.com, at the principal office of NYSE and at the Commission’s Public Reference Room. 10 17 CFR 242.600(b)(47). E:\FR\FM\06JNN1.SGM 06JNN1

Agencies

[Federal Register Volume 77, Number 109 (Wednesday, June 6, 2012)]
[Notices]
[Pages 33527-33531]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-13698]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. 34-67088; File No. SR-FINRA-2012-024]


Self-Regulatory Organizations; Financial Industry Regulatory 
Authority, Inc.; Notice of Filing of Proposed Rule Change Relating to 
FINRA Rule 4210 Margin Requirements

May 31, 2012.
    Pursuant to Section 19(b)(1) of the Securities Exchange Act of 1934 
(``Act'') \1\ and Rule 19b-4 thereunder,\2\ notice is hereby given that 
on May 23, 2012, Financial Industry Regulatory Authority, Inc. 
(``FINRA'') filed with the Securities and Exchange Commission (``SEC'' 
or ``Commission'') the proposed rule change as described in Items I, II 
and III below, which Items have been prepared by FINRA. The Commission 
is publishing this notice to solicit comments on the proposed rule 
change from interested persons.
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    \1\ 15 U.S.C. 78s(b)(1).
    \2\ 17 CFR 240.19b-4.
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I. Self-Regulatory Organization's Statement of the Terms of Substance 
of the Proposed Rule Change

    FINRA is proposing to amend FINRA Rule 4210 (Margin Requirements) 
to: (1) Revise the definitions and margin treatment of option spread 
strategies; (2) clarify the maintenance margin requirement for non-
margin eligible equity securities; (3) clarify the maintenance margin 
requirements for non-equity securities; (4) eliminate the current 
exemption from the free-riding prohibition for designated accounts; (5) 
conform the definition of ``exempt account''; and (6) eliminate the 
requirement to stress test portfolio margin accounts in the aggregate. 
In addition, the proposed rule change would amend FINRA Rule 4210 to 
make non-substantive technical and stylistic changes.
    The text of the proposed rule change is available on FINRA's Web 
site at

[[Page 33528]]

https://www.finra.org, at the principal office of FINRA and at the 
Commission's Public Reference Room.

II. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

    In its filing with the Commission, FINRA included statements 
concerning the purpose of and basis for the proposed rule change and 
discussed any comments it received on the proposed rule change. The 
text of these statements may be examined at the places specified in 
Item IV below. FINRA has prepared summaries, set forth in sections A, 
B, and C below, of the most significant aspects of such statements.

A. Self-Regulatory Organization's Statement of the Purpose of, and 
Statutory Basis for, the Proposed Rule Change

1. Purpose
    The proposed rule change would amend FINRA Rule 4210 (Margin 
Requirements) to: (1) Revise the definitions and margin treatment of 
option spread strategies; (2) clarify the maintenance margin 
requirement for non-margin eligible equity securities; (3) clarify the 
maintenance margin requirements for non-equity securities; (4) 
eliminate the current exemption from the free-riding prohibition for 
designated accounts; (5) conform the definition of ``exempt account''; 
and (6) eliminate the requirement to stress test portfolio margin 
accounts in the aggregate. In addition, the proposed rule change would 
amend FINRA Rule 4210 to make non-substantive technical and stylistic 
changes.
Option Spread Strategies
    Basic option spreads can be paired in such ways that they offset 
each other in terms of risk. The total risk of the combined spreads is 
less than the sum of the risk of both spread positions if viewed as 
stand-alone strategies. FINRA Rule 4210(f)(2) currently recognizes 
several specific option spread strategies.\3\ These strategies consist 
of either a ``long'' and a ``short'' option contract or two ``long'' 
and two ``short'' option contracts. The ``long'' and ``short'' option 
contracts have the same underlying security or instrument and the 
``long'' option contracts must expire on or after the expiration of the 
``short'' option contracts.
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    \3\ See FINRA Rule 4210(f)(2)(A) that currently recognizes the 
following spread strategies: box spread, butterfly spread, calendar 
(or time) spread, ``long'' calendar butterfly spread, ``long'' 
calendar condor spread, ``long'' condor spread, ``short'' calendar 
iron butterfly spread, ``short'' calendar iron condor spread, 
``short'' iron butterfly spread and ``short'' iron condor spread.
---------------------------------------------------------------------------

    While the strategies recognized under FINRA Rule 4210 are the most 
common types of option spread strategies used by investors, there are 
other combinations of calls and/or puts that are similar in terms of 
their risk profile. Accordingly, FINRA proposes a broader definition of 
a spread in FINRA Rule 4210(f)(2)(A)(xxxii) to mean a ``long'' and 
``short'' position in different call option series, different put 
option series, or a combination of call and put option series, that 
collectively have a limited risk/reward profile, and meet the following 
conditions: (1) All options must have the same underlying security or 
instrument; (2) all ``long'' and ``short'' option contracts must be 
either all American-style or all European-style; \4\ (3) all ``long'' 
and ``short'' option contracts must be either all listed or all OTC; 
\5\ (4) the aggregate underlying contract value of ``long'' versus 
``short'' contracts within option type(s) must be equal; and (5) the 
``short'' option (s) must expire on or before the expiration date of 
the ``long'' option(s).
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    \4\ American-style options can be exercised or assigned at any 
time during the life of the contract. European-style options can 
only be exercised or assigned at the time of expiration.
    \5\ See FINRA Rule 4210(f)(2)(A)(xxvi) (renumbered as 
4210(f)(2)(A)(xxiv)) that defines a listed option as an option 
contract that is traded on a national securities exchange and is 
issued and guaranteed by a registered clearing agency. See also 
FINRA Rule 4210(f)(2)(A)(xxxii) (renumbered as 4210(f)(2)(A)(xxvii)) 
that defines an OTC option as an over-the-counter option contract 
that is not traded on a national securities exchange and is issued 
and guaranteed by the carrying broker-dealer.
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    The proposed revised margin requirements are set forth in FINRA 
Rule 4210(f)(2)(H) and would require that the ``long'' option contracts 
within such spreads must be paid for in full. The margin required for 
the ``short'' option contracts within such spreads would be the lesser 
of: (1) The margin required pursuant to FINRA Rule 4210(f)(2)(E); or 
(2) the maximum potential loss. The maximum potential loss would be 
determined by computing the intrinsic value of the options at price 
points for the underlying security or instrument that are set to 
correspond to every exercise price present in the spread. The intrinsic 
values are netted at each price point, and the maximum potential loss 
is the greatest loss, if any. The proceeds of the ``short'' options may 
be applied towards the cost of the ``long'' options and/or any margin 
requirement. FINRA Rule 4210(f)(2)(H)(iv) would also make clear that 
OTC option contracts that comprise a spread must be issued and 
guaranteed by the same carrying broker-dealer and the carrying broker-
dealer must also be a FINRA member. If the OTC option contracts are not 
issued and guaranteed by the same carrying broker-dealer, or if the 
carrying broker-dealer is not a FINRA member, then the ``short'' option 
contracts must be margined separately pursuant to FINRA Rule 
4210(f)(2)(E)(iii) or (E)(iv). In addition, FINRA proposes to amend 
FINRA Rule 4210(f)(2)(N) to similarly conform the margin requirements 
for spreads that are permitted in a cash account.
    FINRA proposes to eliminate the definitions for the option spread 
strategies currently recognized within the rule, along with the 
specific margin requirements associated with each spread, with the 
exception of a ``long'' box spread consisting of European-style 
options.\6\ FINRA Rule 4210(f)(2)(H)(v)g.\7\ currently allows a margin 
requirement equal to 50% of the aggregate difference in the exercise 
prices. This is the only spread strategy that allows loan value, and 
FINRA believes that retaining this provision is appropriate.
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    \6\ See FINRA Rule 4210(f)(2)(A)(vi). A box spread means an 
aggregation of positions in a ``long'' call and ``short'' put with 
the same exercise price (``buy side'') coupled with a ``long'' put 
and ``short'' call with the same exercise price (``sell side'') 
structured as: (1) a ``long'' box spread in which the sell side 
exercise price exceeds the buy side exercise price; or (2) a 
``short'' box spread in which the buy side exercise price exceeds 
the sell side exercise price, all of which have the same contract 
size, underlying component or index and time of expiration, and are 
based on the same aggregate current underlying value.
    \7\ FINRA Rule 4210(f)(2)(H)(v)g. would be renumbered as FINRA 
Rule 4210(f)(2)(H)(v)e.
---------------------------------------------------------------------------

Non-Margin Eligible Equity Securities
    FINRA proposes to clarify the maintenance margin requirement for 
non-margin eligible equity securities. FINRA Rule 4210(c)(1) prescribes 
a maintenance margin requirement of 25% of the current market value of 
all securities (except for security futures contracts) held ``long'' in 
an account. FINRA believes that non-margin eligible equity securities 
should be subject to more stringent margin requirements in light of the 
nature of such securities. Accordingly, FINRA proposes to amend FINRA 
Rule 4210(c)(1) regarding securities held ``long'' to clarify that the 
maintenance margin requirement of 25% of the current market value would 
apply only to margin securities as defined in Regulation T.\8\ 
Consequently, non-margin eligible equity securities would be excluded 
from such margin treatment and the maintenance margin requirement for 
non-margin eligible equity securities would be 100% of the

[[Page 33529]]

current market value.\9\ This maintenance margin requirement of 100% 
for non-margin eligible equity securities is consistent with the 
requirement outlined in Regulatory Notice 11-16. However, FINRA notes 
that two provisions of Regulatory Notice 11-16 would be superseded. 
Firms may no longer extend maintenance loan value on non-margin 
eligible equity securities either to satisfy maintenance margin 
deficiencies or when used to collateralize non-purpose loans, except as 
otherwise provided by FINRA in writing. To this end, FINRA intends to 
allow a firm to extend credit on a non-margin eligible security \10\ 
only to the extent: (1) The security is collateralizing a non-purpose 
loan debit; and (2) such security can be liquidated in a period not 
exceeding 20 business days, based on a rolling 20 business day median 
trading volume. The maintenance loan value for the non-margin eligible 
security would be calculated based on the applicable maintenance margin 
requirements for a margin eligible security. If the security fails to 
meet the trading volume requirement, then the security would no longer 
be entitled to maintenance loan value, and a 100% maintenance margin 
requirement would be applied together with a deduction to net capital 
pursuant to Rule 15c3-1 and, if applicable, FINRA Rule 4110(a). 
Notwithstanding the foregoing, FINRA intends to allow that in the case 
of offshore mutual funds, a firm may extend maintenance loan value, 
based on a 25% maintenance margin requirement, to collateralize a non-
purpose loan, provided that the fund has an affiliation with a U.S.-
based fund registered with the SEC under the Investment Company Act of 
1940, and the fund shares can be liquidated or redeemed daily.
---------------------------------------------------------------------------

    \8\ See Regulation T section 200.2 for the definition of margin 
security.
    \9\ See Regulatory Notice 11-16 (April 2011) and Regulatory 
Notice 11-30 (June 2011) (Regulatory Notice 11-30 delayed the 
effective date of Regulatory Notice 11-16 until October 3, 2011).
    \10\ The exception to permit firms to extend maintenance loan 
value would apply to both equity and non-equity non-margin eligible 
securities.
---------------------------------------------------------------------------

    Similar to the treatment above, FINRA also proposes to amend Rule 
4210(f)(8)(B)(iii) to clarify that the special maintenance margin 
requirement for day traders, based on the cost of all day trades made 
during the day, would be 25% for margin eligible equity securities, and 
100% for non-margin eligible equity securities.\11\
---------------------------------------------------------------------------

    \11\ The special maintenance margin requirement for non-margin 
eligible equity securities for day traders is consistent with the 
margin requirements outlined in Regulatory Notice 11-16.
---------------------------------------------------------------------------

    In addition, FINRA proposes to adopt new paragraph (g)(7)(E) of 
FINRA Rule 4210 regarding the margin requirements for non-margin 
eligible equity securities held in a portfolio margin account. 
Consistent with the margin treatment above, the provision would clarify 
that non-margin eligible equity securities held ``long'' in a portfolio 
margin account would have a maintenance margin requirement equal to 
100% of the current market value at all times.\12\ Paragraph (g)(7)(E) 
would also provide that non-margin eligible equity securities held 
``short'' in a portfolio margin account would have a maintenance margin 
requirement equal to 50% of the current market value at all times.\13\ 
FINRA believes that setting this specific requirement is necessary to 
help ensure that customers do not attempt to circumvent the initial 
margin requirements of Regulation T and place all short sales in a 
portfolio margin account to obtain lower margin requirements.\14\
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    \12\ The maintenance margin requirement for non-margin eligible 
equity securities held ``long'' in a portfolio margin account is 
consistent with the margin requirements outlined in Regulatory 
Notice 11-16.
    \13\ The maintenance margin requirement for ``short'' non-margin 
eligible equity securities held in a portfolio margin account would 
supersede the maintenance margin requirement for such securities 
specified in Regulatory Notice 11-16.
    \14\ See Rule 4210(g)(7).
---------------------------------------------------------------------------

    FINRA also proposes to amend paragraph (g)(7)(D) of FINRA Rule 4210 
to clarify that although non-margin eligible equity securities are not 
eligible for portfolio margin treatment, they may be carried in a 
portfolio margin account, provided that the member uses strategy-based 
margin requirements unless such securities are subject to other 
provisions of paragraph (g). For example, non-margin eligible equity 
securities may be carried in a portfolio margin account, but the 
amendment would clarify that they would be subject to the margin 
treatment set forth in FINRA Rule 4210(g)(7)(E), rather than FINRA Rule 
4210(c).
Non-Equity Securities
    FINRA proposes to further amend FINRA Rule 4210 to clarify the 
appropriate maintenance margin requirement for non-equity securities in 
a margin account. Paragraph (c)(4) stipulates a maintenance margin 
requirement for each bond held ``short'' in a margin account. Paragraph 
(e)(2)(C) stipulates the maintenance margin requirements on any 
positions in specified non-equity securities \15\ that are inconsistent 
with the requirements in paragraph (c)(4). FINRA received several 
inquiries as to the appropriate maintenance margin requirement for any 
``short'' non-equity security. Accordingly, FINRA proposes to amend 
FINRA Rule 4210 to clarify that the margin requirements in paragraph 
(c)(4) would apply to non-margin eligible, non-equity securities held 
``short'' \16\ while the margin requirements in paragraph (e)(2)(C) 
would apply to the specified margin-eligible non-equity securities held 
``short'' or ``long.'' \17\ FINRA also proposes to add a reference to 
``short'' or ``long'' to each of paragraphs (e)(2)(B), (F) and (G) to 
further clarify that such provisions apply to securities held short or 
long.
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    \15\ Paragraph (e)(2)(C) provides the maintenance margin 
requirements for (1) investment grade debt securities and (2) all 
other listed non-equity securities and all other margin eligible 
non-equity securities as defined in FINRA Rule 4210(a)(16).
    \16\ Non-margin eligible non-equity securities held ``long'' 
would be excluded from such margin treatment, and the maintenance 
margin requirement for such securities would be 100% of the current 
market value.
    \17\ See also FINRA Rule 4210(e)(2)(A), which establishes the 
maintenance margin requirements for long or short positions on 
obligations issued or guaranteed by the United States or obligations 
that are highly rated foreign sovereign debt securities.
---------------------------------------------------------------------------

``Free-Riding''
    ``Free-riding'' is the purchase of a security and the selling of 
the same security in the cash account, using the proceeds of the sale 
to satisfy the purchase. Such activity is prohibited under section 
220.8(a)(1)(ii) of Regulation T. FINRA Rule 4210(f)(9) addresses free-
riding in the cash account and currently exempts broker-dealers and 
``designated accounts.'' \18\ While the term ``designated account'' 
generally includes banks, savings associations, insurance companies, 
investment companies, states or political subdivisions, and ERISA 
pension or profit sharing plans, FINRA believes that it is appropriate 
to treat such accounts as any other customer regarding this activity. 
Accordingly, FINRA proposes to eliminate this exemption for designated 
accounts consistent with Regulation T.
---------------------------------------------------------------------------

    \18\ See FINRA Rule 4210(a)(4) for the definition of 
``designated account.''
---------------------------------------------------------------------------

``Exempt Account''
    Certain non-equity securities such as exempted securities, mortgage 
related securities, highly rated foreign sovereign debt securities, and 
investment grade debt securities may be subject to reduced maintenance 
margin requirements (or require no margin be deposited) for an ``exempt 
account,'' as defined in FINRA Rule 4210(a)(13).\19\ FINRA notes that 
FINRA Rule 4210(f)(2)(E)(iv) regarding reduced maintenance margin 
requirements for OTC put and call options on certain U.S. Government 
and U.S. Government

[[Page 33530]]

Agency debt securities retained an earlier definition of ``exempt 
account'' that was not updated in 2003 when the NYSE and NASD amended 
the definition of ``exempt account'' by raising the dollar threshold in 
paragraph (a)(13) for all other purposes in their respective margin 
rules.\20\ The definition of ``exempt account'' currently referenced in 
paragraph (f)(2)(E)(iv) was retained as a result of comment letters 
received by the SEC in 2003, expressing concern that customers who no 
longer qualified as ``exempt accounts'' in the amended paragraph 
(a)(13) definition would be subject to higher maintenance margin 
requirements for the securities addressed in paragraph (f)(2)(E)(iv). 
Therefore, such definition was maintained only for the provision in 
paragraph (f)(2)(E)(iv) to allow existing customers to continue to 
avail themselves of the reduced margin requirements. However, the SEC 
noted that exempt accounts that met the requirements for exempt account 
status would be ``grandfathered'' on the existing credit transactions 
but that the new requirements (the current paragraph (a)(13) ``exempt 
account'' requirements) would apply to any new credit transactions or 
roll-overs of existing transactions.\21\ In light of the application of 
the 2003 exempt account definition to new and roll-over transactions 
and the significant passage of time, FINRA believes that maintaining 
these separate definitions is no longer necessary and proposes to 
delete the definition of ``exempt account'' contained in paragraph 
(f)(2)(E)(iv) and require an exempt account to satisfy the definition 
of ``exempt account'' in paragraph (a)(13) to qualify for the reduced 
margin on such options.
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    \19\ See FINRA Rule 4210(e)(2)(F), (G) and (H).
    \20\ See Securities Exchange Act Release No. 48407 (August 25, 
2003), 68 FR 52259 (September 2, 2003) (Order Approving File No. SR-
NASD-2000-08) (``NASD Order''); Securities Exchange Act Release No. 
48365 (August 19, 2003), 68 FR 51314 (August 26, 2003) (Order 
Approving File No. SR-NYSE-98-14); and Securities Exchange Act 
Release No. 48133 (July 7, 2003), 68 FR 41672 (July 14, 2003) 
(Notice of Filing of File No. SR-NYSE-98-14) (``NYSE Notice of 
Filing'').
    \21\ See note 20, page 52261 of the NASD Order and page 41676 of 
NYSE Notice of Filing.
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Portfolio Margin
    FINRA proposes to eliminate the monitoring requirement contained in 
FINRA Rule 4210(g)(1)(D) that stress testing of accounts must be done 
in the aggregate for portfolio margin accounts. The rule would continue 
to require firms to stress test portfolio margin accounts on an 
individual account basis. FINRA has been reviewing the portfolio margin 
program and believes that the stress testing on an individual account 
basis is sufficient from a risk perspective.
Technical Changes
    Finally, the proposed rule change amends FINRA Rule 4210 to make 
non-substantive technical and stylistic changes to encourage 
consistency throughout the rule and enhance readability.
    FINRA will announce the effective date of the proposed rule change 
in a Regulatory Notice to be published no later than 60 days following 
Commission approval. The effective date will be no later than 90 days 
following publication of the Regulatory Notice announcing Commission 
approval.
2. Statutory Basis
    FINRA believes that the proposed rule change is consistent with the 
provisions of Section 15A(b)(6) of the Act,\22\ which requires, among 
other things, that FINRA rules must be designed to prevent fraudulent 
and manipulative acts and practices, to promote just and equitable 
principles of trade, and, in general, to protect investors and the 
public interest. FINRA believes that the proposed rule change regarding 
the options spread strategies would set margin requirements 
commensurate with the risk of options spread strategies. FINRA further 
believes that the proposed rule change would clarify the margin 
requirements for non-margin eligible equity securities and non-equity 
securities to ensure consistent regulation regarding the margin 
treatment for such securities and strategies. FINRA also believes that 
the proposed rule change regarding conforming the definition of 
``exempt accounts'' would ensure consistent regulation regarding such 
accounts. In addition, FINRA believes that the proposed rule change 
regarding eliminating the exemption from the ``free-riding'' provision 
for ``designated accounts'' is consistent with Regulation T. Finally, 
FINRA believes that the proposed rule change regarding stress testing 
of individual portfolio margin accounts is reflective of the risk of 
such accounts.
---------------------------------------------------------------------------

    \22\ 15 U.S.C. 78o-3(b)(6).
---------------------------------------------------------------------------

B. Self-Regulatory Organization's Statement on Burden on Competition

    FINRA does not believe that the proposed rule change will result in 
any burden on competition that is not necessary or appropriate in 
furtherance of the purposes of the Act.

C. Self-Regulatory Organization's Statement on Comments on the Proposed 
Rule Change Received From Members, Participants, or Others

    Written comments were neither solicited nor received.

III. Date of Effectiveness of the Proposed Rule Change and Timing for 
Commission Action

    Within 45 days of the date of publication of this notice in the 
Federal Register or within such longer period (i) as the Commission may 
designate up to 90 days of such date if it finds such longer period to 
be appropriate and publishes its reasons for so finding or (ii) as to 
which the self-regulatory organization consents, the Commission will:
    (A) By order approve or disapprove such proposed rule change, or
    (B) Institute proceedings to determine whether the proposed rule 
change should be disapproved.

IV. Solicitation of Comments

    Interested persons are invited to submit written data, views and 
arguments concerning the foregoing, including whether the proposed rule 
change is consistent with the Act. Comments may be submitted by any of 
the following methods:

Electronic Comments

     Use the Commission's Internet comment form (https://www.sec.gov/rules/sro.shtml); or
     Send an email to rule-comments@sec.gov. Please include 
File Number SR-FINRA 2012-024 on the subject line.

Paper Comments

     Send paper comments in triplicate to Elizabeth M. Murphy, 
Secretary, Securities and Exchange Commission, 100 F Street NE., 
Washington, DC 20549-1090.

All submissions should refer to File Number SR-FINRA-2012-024. This 
file number should be included on the subject line if email 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

[[Page 33531]]

those that may be withheld from the public in accordance with the 
provisions of 5 U.S.C. 552, will be available for Web site viewing and 
printing in the Commission's Public Reference Room, 100 F Street NE., 
Washington, DC 20549, on official business days between the hours of 10 
a.m. and 3 p.m. Copies of such filing also will be available for 
inspection and copying at the principal office of FINRA. All comments 
received will be posted without change; the Commission does not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make available publicly. All 
submissions should refer to File Number SR-FINRA-2012-024 and should be 
submitted on or before June 27, 2012.
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    \23\ 17 CFR 200.30-3(a)(12).

    For the Commission, by the Division of Trading and Markets, 
pursuant to delegated authority.\23\
Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-13698 Filed 6-5-12; 8:45 am]
BILLING CODE 8011-01-P
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