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]
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Federal Register / Vol. 77, No. 109 / Wednesday, June 6, 2012 / Notices
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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
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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
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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
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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
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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.
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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.
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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.
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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.
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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).
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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).
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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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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.
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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
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U.S.C. 78o–3(b)(6).
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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]
-----------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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).
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\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\
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
\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.
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\22\ 15 U.S.C. 78o-3(b)(6).
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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