Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of Amendment No. 1 and Order Granting Accelerated Approval of Proposed Rule Change, as Modified by Amendment No. 1, Relating to FINRA Rule 4210 (Margin Requirements), 54636-54640 [2012-21761]
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Federal Register / Vol. 77, No. 172 / Wednesday, September 5, 2012 / Notices
need to avoid unnecessary proliferation
of options series.
In approving this proposal, the
Commission notes that Exchange has
represented that it and OPRA have the
necessary systems capacity to handle
the potential additional traffic
associated with trading STOs and
Related non-STOs at more granular
strike price intervals. The Commission
expects the Exchange to monitor the
trading volume associated with the
additional options series listed as a
result of this proposal and the effect of
these additional series on market
fragmentation and on the capacity of the
Exchange’s, OPRA’s, and vendors’
automated systems.
IV. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,12 that the
proposed rule change (SR–Phlx–2012–
78) be, and it hereby is, approved.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.13
Kevin M. O’Neill,
Deputy Secretary.
[FR Doc. 2012–21766 Filed 9–4–12; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–67751; File No. SR–FINRA–
2012–024]
Self-Regulatory Organizations;
Financial Industry Regulatory
Authority, Inc.; Notice of Filing of
Amendment No. 1 and Order Granting
Accelerated Approval of Proposed
Rule Change, as Modified by
Amendment No. 1, Relating to FINRA
Rule 4210 (Margin Requirements)
August 29, 2012.
tkelley on DSK3SPTVN1PROD with NOTICES
I. Introduction
On May 23, 2012, Financial Industry
Regulatory Authority, Inc. (‘‘FINRA’’)
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 a proposed rule
change to amend FINRA Rule 4210
(Margin Requirements). The proposed
rule was published for comment in the
Federal Register on June 6, 2012.3 The
Commission received one comment on
12 15
U.S.C. 78s(b)(2).
CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
3 Securities Exchange Act Release No. 67088 (May
31, 2012), 77 FR 33527 (‘‘Notice’’).
13 17
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the proposed rule change.4 On July 13,
2012, FINRA extended the time period
for Commission action until September
4, 2012.5 FINRA filed Amendment No.
1 to the proposed rule change and
responded to the comment letter on
August 13, 2012.6 The Commission is
publishing this notice and order to
solicit comment on Amendment No. 1
and to approve the proposed rule
change, as modified by Amendment No.
1, on an accelerated basis.
II. Description of the Proposal
FINRA has proposed 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.
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.7 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
4 Letter to Elizabeth M. Murphy, Secretary,
Commission from David Aman, Esq., Cleary
Gottlieb Steen & Hamilton LLP, dated June 27, 2012
(‘‘Aman Letter’’).
5 See https://www.finra.org/web/groups/industry/
@ip/@reg/@rulfil/documents/rulefilings/
p135885.pdf.
6 Amendment No. 1 and response to Aman Letter,
dated Aug. 13, 2012 (‘‘Amendment No. 1’’). The text
of Amendment No. 1 is available on FINRA’s Web
site at https://www.finra.org, at the principal office
of FINRA, and at the Commission’s Public
Reference Room. See section III. below (describing
Amendment No. 1).
7 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 proposed 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; 8
(3) all ‘‘long’’ and ‘‘short’’ option
contracts must be either all listed or all
over-the-counter (‘‘OTC’’); 9 (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 set forth in FINRA Rule
4210(f)(2)(H) 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
8 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.
9 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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guaranteed by the same carrying brokerdealer 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 brokerdealer, 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 proposed 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.10 FINRA Rule
4210(f)(2)(H)(v)g.11 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.
tkelley on DSK3SPTVN1PROD with NOTICES
Non-Margin Eligible Equity Securities
FINRA proposed 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 proposed 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.12
Consequently, non-margin eligible
equity securities would be excluded
from such margin treatment and the
10 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.
11 FINRA Rule 4210(f)(2)(H)(v)g. would be
renumbered as FINRA Rule 4210(f)(2)(H)(v)e.
12 See Federal Reserve Regulation T (‘‘Regulation
T’’) section 200.2 for the definition of margin
security.
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maintenance margin requirement for
non-margin eligible equity securities
would be 100% of the current market
value.13 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 noted 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
would allow a firm to extend credit on
a non-margin eligible security 14 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 nonmargin 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 would 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.
Similar to the treatment above, FINRA
also proposed 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.15
13 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).
14 The exception to permit firms to extend
maintenance loan value would apply to both equity
and non-equity non-margin eligible securities.
15 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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54637
In addition, FINRA proposed 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.16
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.17 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.18
FINRA also proposed 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 19
In the Notice, FINRA proposed 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
16 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.
17 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.
18 See Rule 4210(g)(7).
19 See section III. below (describing Amendment
No. 1).
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Federal Register / Vol. 77, No. 172 / Wednesday, September 5, 2012 / Notices
securities 20 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, in the Notice,
FINRA proposed 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’’ 21 while the
margin requirements in paragraph
(e)(2)(C) would apply to the specified
margin-eligible non-equity securities
held ‘‘short’’ or ‘‘long.’’ 22 FINRA also
proposed 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.’’ 23
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 proposed 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
tkelley on DSK3SPTVN1PROD with NOTICES
20 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).
21 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.
22 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.
23 See FINRA Rule 4210(a)(4) for the definition of
‘‘designated account.’’
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defined in FINRA Rule 4210(a)(13).24
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 Agency debt securities
retained an earlier definition of ‘‘exempt
account’’ that was not updated in 2003
when the New York Stock Exchange and
National Association of Securities
Dealers amended the definition of
‘‘exempt account’’ by raising the dollar
threshold in paragraph (a)(13) for all
other purposes in their respective
margin rules.25 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.26 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.
Portfolio Margin
FINRA proposed to eliminate the
monitoring requirement contained in
24 See
FINRA Rule 4210(e)(2)(F), (G) and (H).
Securities Exchange Act Release No. 48407
(August 25, 2003), 68 FR 52259 (September 2, 2003)
(Order Approving File No. SR–NASD–00–08)
(‘‘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’’).
26 See note 20, page 52261 of the NASD Order and
page 41676 of NYSE Notice of Filing.
25 See
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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
would amend FINRA Rule 4210 to make
non-substantive technical and stylistic
changes to encourage consistency
throughout the rule and enhance
readability.
FINRA stated that it would 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 would be no later than 90
days following publication of the
Regulatory Notice announcing
Commission approval.
III. Summary of Comment Received,
FINRA’s Response and Description of
Amendment No. 1
As stated above, the Commission
received one comment letter in response
to the proposed rule change generally
supporting the proposal, particularly the
modernization of the treatment of
option spread strategies.27 The
commenter stated, however, that the
consequences of the proposed changes
to the margin requirements for ‘‘nonmargin eligible, non-equity securities’’
have not been fully considered and
recommended that FINRA investigate
the extent to which FINRA members
presently extend credit against these
securities and withdraw or modify this
element of the proposed amendments.
The commenter stated that the securities
that would become unmarginable would
include any non-investment grade debt
securities that are not registered under
Section 5 of the Securities Act of 1933.
The commenter explained that since the
high-yield debt market is to a great
extent an institutional market, where it
is usual for debt to trade under Rule
144A, the proposal would cut off credit
to a substantial part of the high yield
debt market, and could have significant
adverse effects on FINRA members,
investors and issuers.
The commenter also recommended
technical changes to the proposal,
including: (1) That the 100%
maintenance margin requirement on
non-margin eligible equity securities be
27 Aman
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Federal Register / Vol. 77, No. 172 / Wednesday, September 5, 2012 / Notices
set forth in a new subsection to FINRA
Rule 4210; (2) that the margin
requirements for certain non-equity
securities be moved from FINRA Rule
4210(e) to FINRA Rule 4210(c); and (3)
that FINRA define ‘‘non-margin eligible,
non-equity security.’’
In response to the comment regarding
the 100% maintenance margin
requirement for non-margin eligible,
non-equity securities, FINRA proposes
to further analyze the impact of this
proposed change on member firms and
the market. Accordingly, Amendment
No. 1 would eliminate the requirements
applicable to non-margin eligible, nonequity securities from the proposed rule.
To effectuate this change, FINRA
proposes to delete the exclusion of nonequity securities from FINRA Rule
4210(c)(1) as originally proposed in the
Notice. In addition, FINRA proposes to
delete in FINRA Rule 4210(c)(4) the
reference to non-margin eligible, nonequity securities as originally proposed
in the Notice. The margin requirement
for non-equities held ‘‘long’’ in an
account would be margined as provided
in FINRA Rule 4210(c)(1) unless they
otherwise meet an exception for the
type of non-equity security provided in
FINRA Rule 4210(e).
In response to the technical comments
in the Aman Letter, FINRA agrees that
amending the proposed rule further to
clarify the 100% maintenance margin
requirement for non-margin eligible
equity securities held ‘‘long’’ would be
beneficial. In Amendment No. 1, FINRA
proposes to add a new subparagraph (6)
to FINRA Rule 4210(c) to effectuate this
clarification. Also in response to
technical comments, with regard to the
margin requirements for non-equity
securities and the exceptions provided
in FINRA Rule 4210(e), FINRA proposes
in Amendment No. 1 to modify Rule
4210(c) by prefacing that the margin
provisions are as stated except as set
forth in Rule 4210(e) as well as Rule
4210(f) (the margin requirements for
options and warrants) and Rule 4210(g)
(portfolio margin requirements).
In response to the comment that
FINRA define ‘‘non-margin eligible,
non-equity securities,’’ Amendment No.
1 would delete that term in FINRA Rule
4210(c)(4) in light of the elimination of
the proposal to amend the margin
requirements for such securities.
Finally, and unrelated to any specific
comment, Amendment No. 1 would
make certain clarifying changes to Rule
4210(c) to eliminate the reference to
‘‘plus’’ as the maintenance margin
provisions are not additive.
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IV. Discussion and Commission’s
Findings
After careful review of the proposed
rule change, the comment received, and
Amendment No. 1, the Commission
finds that the proposed rule change, as
modified by Amendment No. 1, is
consistent with the requirements of the
Act and the rules and regulations
thereunder applicable to a national
securities association.28 In particular,
the Commission finds that the proposed
rule change is consistent with Section
15A(b)(6) of the Act, which requires,
among other things, that FINRA rules 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.29 More
specifically, the Commission believes
that the proposed rule change
modernizes the treatment of option
spread strategies while maintaining
margin requirements that are
commensurate with the risk of those
strategies. Further, because it is
consistent with changes being approved
to Chicago Board Options Exchange,
Incorporated, Rule 12.3,30 the proposed
rule change will provide for a more
uniform application of margin
requirements for similar products. The
Commission believes that FINRA has
adequately responded to the concerns
raised in the Aman Letter by deleting
the 100% maintenance margin
requirement for non-margin eligible,
non-equity securities until such time as
FINRA has had additional opportunity
to more fully evaluate the effects of such
a change. In addition, the Commission
believes that FINRA has adequately
responded to the technical comments by
making the changes described in
Amendment No. 1.
V. Accelerated Approval
The Commission finds good cause,
pursuant to Section 19(b)(2) of the
Act,31 for approving the proposed rule
change, as modified by Amendment No.
1, prior to the 30th day after publication
of Amendment No. 1 in the Federal
Register. In response to certain concerns
raised in the Aman Letter, FINRA
proposed in Amendment No. 1 to
eliminate the increase in the margin
requirement applicable to long positions
28 In approving this rule change, the Commission
notes that it has considered the proposed rule’s
impact on efficiency, competition, and capital
formation. See 15 U.S.C. 78c(f).
29 15 U.S.C. 78o–3(b)(6).
30 See Securities Exchange Act Release No. 67752
(Aug. 29, 2012) (SR–CBOE–2012–043) (order
approving changes to CBOE Rule 12.3 relating to
spread margin rules).
31 15 U.S.C. 78s(b)(2).
PO 00000
Frm 00086
Fmt 4703
Sfmt 4703
54639
in non-margin eligible, non-equity
securities to 100%. In Amendment No.
1, FINRA also proposed other technical
changes responsive to the comments
made in the Aman Letter. Accordingly,
the Commission finds that good cause
exists to approve the proposal, as
modified by Amendment No. 1, on an
accelerated basis.
VI. Solicitation of Comments
Interested persons are invited to
submit written data, views and
arguments concerning the foregoing,
including whether Amendment No. 1 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
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
E:\FR\FM\05SEN1.SGM
05SEN1
54640
Federal Register / Vol. 77, No. 172 / Wednesday, September 5, 2012 / Notices
The text of the proposed rule change
is available at https://nasdaq.
cchwallstreet.com/, at Nasdaq’s
principal office, and at the
Commission’s Public Reference Room.
submissions should refer to File
Number SR–FINRA–2012–024 and
should be submitted on or before
September 26, 2012.
VII. Conclusion
It is therefore ordered, pursuant to
Section 19(b)(2) of the Act,32 that the
proposed rule change (SR–FINRA–
2012–024), as modified by Amendment
No. 1, be and hereby is, approved on an
accelerated basis.
For the Commission, by the Division of
Trading and Markets, pursuant to delegated
authority.33
Kevin M. O’Neill,
Deputy Secretary.
A. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
[FR Doc. 2012–21761 Filed 9–4–12; 8:45 am]
BILLING CODE 8011–01–P
SECURITIES AND EXCHANGE
COMMISSION
[Release No. 34–67750; File No. SR–
NASDAQ–2012–098]
Self-Regulatory Organizations; The
NASDAQ Stock Market LLC; Notice of
Filing of Proposed Rule Change
Relating to the Listing and Trading of
Shares of the WisdomTree Global
Corporate Bond Fund of the
WisdomTree Trust
August 29, 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 August
15, 2012, The NASDAQ Stock Market
LLC (‘‘Nasdaq’’ or ‘‘Exchange’’) filed
with the Securities and Exchange
Commission (‘‘Commission’’) the
proposed rule change as described in
Items I, II, and III below, which Items
have been substantially prepared by
Nasdaq. The Commission is publishing
this notice to solicit comments on the
proposed rule change from interested
persons.
tkelley on DSK3SPTVN1PROD with NOTICES
I. Self-Regulatory Organization’s
Statement of the Terms of Substance of
the Proposed Rule Change
Nasdaq proposes to list and trade the
shares of the WisdomTree Global
Corporate Bond Fund (‘‘Fund’’) of the
WisdomTree Trust (‘‘Trust’’) under
Nasdaq Rule 5735 (‘‘Managed Fund
Shares’’). The shares of the Fund are
collectively referred to herein as the
‘‘Shares.’’
32 15
U.S.C. 78s(b)(2).
CFR 200.30–3(a)(12).
1 15 U.S.C. 78s(b)(1).
2 17 CFR 240.19b–4.
33 17
VerDate Mar<15>2010
19:14 Sep 04, 2012
Jkt 226001
II. Self-Regulatory Organization’s
Statement of the Purpose of, and
Statutory Basis for, the Proposed Rule
Change
In its filing with the Commission,
Nasdaq included statements concerning
the purpose of, and basis for, the
proposed rule change. The text of these
statements may be examined at the
places specified in Item IV below, and
is set forth in Sections A, B, and C
below.
1. Purpose
The Exchange proposes to list and
trade the Shares of the Fund under
Nasdaq Rule 5735, which governs the
listing and trading of Managed Fund
Shares on the Exchange.3 The Fund will
be an actively managed exchange traded
fund (‘‘ETF’’). The Shares will be
offered by the Trust, which was
established as a Delaware statutory trust
on December 15, 2005. The Fund is
registered with the Commission as an
investment company and has filed a
registration statement on Form N–1A
(‘‘Registration Statement’’) with the
Commission.4
3 The Commission approved Nasdaq Rule 5735 in
Securities Exchange Act Release No. 57962 (June
13, 2008) 73 FR 35175 (June 20, 2008) (SR–
NASDAQ–2008–039). The Fund would not be the
first actively-managed fund listed on the Exchange.
See Securities Exchange Act Release No. 66175
(February 29, 2012), 77 FR 13379 (March 6, 2012)
(SR–NASDAQ–2012–004) (order approving listing
and trading of WisdomTree Emerging Markets
Corporate Bond Fund). Additionally, the
Commission has previously approved the listing
and trading of a number of actively managed
WisdomTree funds on NYSE Arca, Inc. pursuant to
Rule 8.600 of that exchange. See, e.g., Securities
Exchange Act Release Nos. 64643 (June 10, 2011),
76 FR 35062 (June 15, 2011) (SR–NYSEArca–2011–
21) (order approving listing and trading of
WisdomTree Global Real Return Fund); 65458
(September 30, 2011), 76 FR 62112 (October 6,
2011) (SR–NYSE–Arca–2011–54) (order approving
listing and trading of WisdomTree Dreyfus
Australia and New Zealand Debt Fund); 66342
(February 7, 2012), 77 FR 7623 (February 13, 2012)
(SR–NYSEArca–2011–82) (order approving listing
and trading of WisdomTree Emerging Markets
Inflation Protection Bond Fund); and 67054 (May
24, 2012), 77 FR 32161 (May 31, 2012) (SR–
NYSEArca–2012–25) (order approving listing and
trading of WisdomTree Brazil Bond Fund). The
Exchange believes the proposed rule change raises
no significant issues not previously addressed in
those prior Commission orders.
4 See Post-Effective Amendment No. 56 to
Registration Statement on Form N–1A for the Trust,
dated July 1, 2011 (File Nos. 333–132380 and 811–
PO 00000
Frm 00087
Fmt 4703
Sfmt 4703
Description of the Shares and the Fund
WisdomTree Asset Management, Inc.
(‘‘WisdomTree Asset Management’’) is
the investment adviser (‘‘Adviser’’) to
the Fund.5 Western Asset Management
Company serves as sub-adviser for the
Fund (‘‘Sub-Adviser’’).6 The Bank of
New York Mellon is the administrator,
custodian, and transfer agent for the
Trust. ALPS Distributors, Inc.
(‘‘Distributor’’) serves as the distributor
for the Trust.7
Paragraph (g) of Rule 5735 provides
that, if the investment adviser to the
investment company issuing Managed
Fund Shares is affiliated with a brokerdealer, such investment adviser shall
erect a ‘‘fire wall’’ between the
investment adviser and the brokerdealer with respect to access to
information concerning the composition
and/or changes to such investment
company portfolio.8 In addition,
21864). The descriptions of the Fund and the
Shares contained herein are based, in part, on
information in the Registration Statement.
5 WisdomTree Investments, Inc. (‘‘WisdomTree
Investments’’) is the parent company of
WisdomTree Asset Management.
6 The Sub-Adviser is responsible for day-to-day
management of the Fund and, as such, typically
makes all decisions with respect to portfolio
holdings. The Adviser has ongoing oversight
responsibility.
7 The Commission has issued an order granting
certain exemptive relief to the Trust under the
Investment Company Act of 1940 (15 U.S.C. 80a–
1) (‘‘1940 Act’’). See Investment Company Act
Release No. 28171 [sic] (October 27, 2008) (File No.
812–13458). In compliance with NASDAQ Rule
5735(b)(5), which applies to Managed Fund Shares
based on an international or global portfolio, the
Trust’s application for exemptive relief under the
1940 Act states that the Fund will comply with the
federal securities laws in accepting securities for
deposits and satisfying redemptions with
redemption securities, including that the securities
accepted for deposits and the securities used to
satisfy redemption requests are sold in transactions
that would be exempt from registration under the
Securities Act of 1933 (15 U.S.C. 77a).
8 An investment adviser to an open-end fund is
required to be registered under the Investment
Advisers Act of 1940 (‘‘Advisers Act’’). As a result,
the Adviser and Sub-Adviser and their related
personnel are subject to the provisions of Rule
204A–1 under the Advisers Act relating to codes of
ethics. This Rule requires investment advisers to
adopt a code of ethics that reflects the fiduciary
nature of the relationship to clients as well as
compliance with other applicable securities laws.
Accordingly, procedures designed to prevent the
communication and misuse of non-public
information by an investment adviser must be
consistent with Rule 204A–1 under the Advisers
Act. In addition, Rule 206(4)–7 under the Advisers
Act makes it unlawful for an investment adviser to
provide investment advice to clients unless such
investment adviser has (i) adopted and
implemented written policies and procedures
reasonably designed to prevent violation, by the
investment adviser and its supervised persons, of
the Advisers Act and the Commission rules adopted
thereunder; (ii) implemented, at a minimum, an
annual review regarding the adequacy of the
policies and procedures established pursuant to
subparagraph (i) above and the effectiveness of their
implementation; and (iii) designated an individual
E:\FR\FM\05SEN1.SGM
05SEN1
]]>Agencies
[Federal Register Volume 77, Number 172 (Wednesday, September 5, 2012)]
[Notices]
[Pages 54636-54640]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-21761]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Release No. 34-67751; File No. SR-FINRA-2012-024]
Self-Regulatory Organizations; Financial Industry Regulatory
Authority, Inc.; Notice of Filing of Amendment No. 1 and Order Granting
Accelerated Approval of Proposed Rule Change, as Modified by Amendment
No. 1, Relating to FINRA Rule 4210 (Margin Requirements)
August 29, 2012.
I. Introduction
On May 23, 2012, Financial Industry Regulatory Authority, Inc.
(``FINRA'') 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\ a
proposed rule change to amend FINRA Rule 4210 (Margin Requirements).
The proposed rule was published for comment in the Federal Register on
June 6, 2012.\3\ The Commission received one comment on the proposed
rule change.\4\ On July 13, 2012, FINRA extended the time period for
Commission action until September 4, 2012.\5\ FINRA filed Amendment No.
1 to the proposed rule change and responded to the comment letter on
August 13, 2012.\6\ The Commission is publishing this notice and order
to solicit comment on Amendment No. 1 and to approve the proposed rule
change, as modified by Amendment No. 1, on an accelerated basis.
---------------------------------------------------------------------------
\1\ 15 U.S.C. 78s(b)(1).
\2\ 17 CFR 240.19b-4.
\3\ Securities Exchange Act Release No. 67088 (May 31, 2012), 77
FR 33527 (``Notice'').
\4\ Letter to Elizabeth M. Murphy, Secretary, Commission from
David Aman, Esq., Cleary Gottlieb Steen & Hamilton LLP, dated June
27, 2012 (``Aman Letter'').
\5\ See https://www.finra.org/web/groups/industry/@ip/@reg/@rulfil/documents/rulefilings/p135885.pdf.
\6\ Amendment No. 1 and response to Aman Letter, dated Aug. 13,
2012 (``Amendment No. 1''). The text of Amendment No. 1 is available
on FINRA's Web site at https://www.finra.org, at the principal office
of FINRA, and at the Commission's Public Reference Room. See section
III. below (describing Amendment No. 1).
---------------------------------------------------------------------------
II. Description of the Proposal
FINRA has proposed 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.
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.\7\ 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.
---------------------------------------------------------------------------
\7\ 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 proposed 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; \8\ (3) all ``long''
and ``short'' option contracts must be either all listed or all over-
the-counter (``OTC''); \9\ (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).
---------------------------------------------------------------------------
\8\ 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.
\9\ 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 set forth in FINRA Rule
4210(f)(2)(H) 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
[[Page 54637]]
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 proposed 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.\10\ FINRA Rule 4210(f)(2)(H)(v)g.\11\ 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.
---------------------------------------------------------------------------
\10\ 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.
\11\ 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 proposed 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 proposed 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.\12\
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 current
market value.\13\ 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 noted 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 would allow a firm to extend
credit on a non-margin eligible security \14\ 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 would 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.
---------------------------------------------------------------------------
\12\ See Federal Reserve Regulation T (``Regulation T'') section
200.2 for the definition of margin security.
\13\ 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).
\14\ 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 proposed 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.\15\
---------------------------------------------------------------------------
\15\ 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 proposed 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.\16\ 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.\17\
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.\18\
---------------------------------------------------------------------------
\16\ 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.
\17\ 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.
\18\ See Rule 4210(g)(7).
---------------------------------------------------------------------------
FINRA also proposed 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 \19\
---------------------------------------------------------------------------
\19\ See section III. below (describing Amendment No. 1).
---------------------------------------------------------------------------
In the Notice, FINRA proposed 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
[[Page 54638]]
securities \20\ 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, in the Notice, FINRA proposed 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'' \21\ while the margin requirements in paragraph (e)(2)(C)
would apply to the specified margin-eligible non-equity securities held
``short'' or ``long.'' \22\ FINRA also proposed 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.
---------------------------------------------------------------------------
\20\ 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).
\21\ 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.
\22\ 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.'' \23\ 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 proposed to eliminate this exemption for designated
accounts consistent with Regulation T.
---------------------------------------------------------------------------
\23\ 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).\24\ 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
Agency debt securities retained an earlier definition of ``exempt
account'' that was not updated in 2003 when the New York Stock Exchange
and National Association of Securities Dealers amended the definition
of ``exempt account'' by raising the dollar threshold in paragraph
(a)(13) for all other purposes in their respective margin rules.\25\
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.\26\ 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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\24\ See FINRA Rule 4210(e)(2)(F), (G) and (H).
\25\ See Securities Exchange Act Release No. 48407 (August 25,
2003), 68 FR 52259 (September 2, 2003) (Order Approving File No. SR-
NASD-00-08) (``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'').
\26\ See note 20, page 52261 of the NASD Order and page 41676 of
NYSE Notice of Filing.
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Portfolio Margin
FINRA proposed 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 would amend FINRA Rule 4210 to
make non-substantive technical and stylistic changes to encourage
consistency throughout the rule and enhance readability.
FINRA stated that it would 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 would be
no later than 90 days following publication of the Regulatory Notice
announcing Commission approval.
III. Summary of Comment Received, FINRA's Response and Description of
Amendment No. 1
As stated above, the Commission received one comment letter in
response to the proposed rule change generally supporting the proposal,
particularly the modernization of the treatment of option spread
strategies.\27\ The commenter stated, however, that the consequences of
the proposed changes to the margin requirements for ``non-margin
eligible, non-equity securities'' have not been fully considered and
recommended that FINRA investigate the extent to which FINRA members
presently extend credit against these securities and withdraw or modify
this element of the proposed amendments. The commenter stated that the
securities that would become unmarginable would include any non-
investment grade debt securities that are not registered under Section
5 of the Securities Act of 1933. The commenter explained that since the
high-yield debt market is to a great extent an institutional market,
where it is usual for debt to trade under Rule 144A, the proposal would
cut off credit to a substantial part of the high yield debt market, and
could have significant adverse effects on FINRA members, investors and
issuers.
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\27\ Aman Letter, supra note 4.
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The commenter also recommended technical changes to the proposal,
including: (1) That the 100% maintenance margin requirement on non-
margin eligible equity securities be
[[Page 54639]]
set forth in a new subsection to FINRA Rule 4210; (2) that the margin
requirements for certain non-equity securities be moved from FINRA Rule
4210(e) to FINRA Rule 4210(c); and (3) that FINRA define ``non-margin
eligible, non-equity security.''
In response to the comment regarding the 100% maintenance margin
requirement for non-margin eligible, non-equity securities, FINRA
proposes to further analyze the impact of this proposed change on
member firms and the market. Accordingly, Amendment No. 1 would
eliminate the requirements applicable to non-margin eligible, non-
equity securities from the proposed rule. To effectuate this change,
FINRA proposes to delete the exclusion of non-equity securities from
FINRA Rule 4210(c)(1) as originally proposed in the Notice. In
addition, FINRA proposes to delete in FINRA Rule 4210(c)(4) the
reference to non-margin eligible, non-equity securities as originally
proposed in the Notice. The margin requirement for non-equities held
``long'' in an account would be margined as provided in FINRA Rule
4210(c)(1) unless they otherwise meet an exception for the type of non-
equity security provided in FINRA Rule 4210(e).
In response to the technical comments in the Aman Letter, FINRA
agrees that amending the proposed rule further to clarify the 100%
maintenance margin requirement for non-margin eligible equity
securities held ``long'' would be beneficial. In Amendment No. 1, FINRA
proposes to add a new subparagraph (6) to FINRA Rule 4210(c) to
effectuate this clarification. Also in response to technical comments,
with regard to the margin requirements for non-equity securities and
the exceptions provided in FINRA Rule 4210(e), FINRA proposes in
Amendment No. 1 to modify Rule 4210(c) by prefacing that the margin
provisions are as stated except as set forth in Rule 4210(e) as well as
Rule 4210(f) (the margin requirements for options and warrants) and
Rule 4210(g) (portfolio margin requirements).
In response to the comment that FINRA define ``non-margin eligible,
non-equity securities,'' Amendment No. 1 would delete that term in
FINRA Rule 4210(c)(4) in light of the elimination of the proposal to
amend the margin requirements for such securities. Finally, and
unrelated to any specific comment, Amendment No. 1 would make certain
clarifying changes to Rule 4210(c) to eliminate the reference to
``plus'' as the maintenance margin provisions are not additive.
IV. Discussion and Commission's Findings
After careful review of the proposed rule change, the comment
received, and Amendment No. 1, the Commission finds that the proposed
rule change, as modified by Amendment No. 1, is consistent with the
requirements of the Act and the rules and regulations thereunder
applicable to a national securities association.\28\ In particular, the
Commission finds that the proposed rule change is consistent with
Section 15A(b)(6) of the Act, which requires, among other things, that
FINRA rules 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.\29\ More
specifically, the Commission believes that the proposed rule change
modernizes the treatment of option spread strategies while maintaining
margin requirements that are commensurate with the risk of those
strategies. Further, because it is consistent with changes being
approved to Chicago Board Options Exchange, Incorporated, Rule
12.3,\30\ the proposed rule change will provide for a more uniform
application of margin requirements for similar products. The Commission
believes that FINRA has adequately responded to the concerns raised in
the Aman Letter by deleting the 100% maintenance margin requirement for
non-margin eligible, non-equity securities until such time as FINRA has
had additional opportunity to more fully evaluate the effects of such a
change. In addition, the Commission believes that FINRA has adequately
responded to the technical comments by making the changes described in
Amendment No. 1.
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\28\ In approving this rule change, the Commission notes that it
has considered the proposed rule's impact on efficiency,
competition, and capital formation. See 15 U.S.C. 78c(f).
\29\ 15 U.S.C. 78o-3(b)(6).
\30\ See Securities Exchange Act Release No. 67752 (Aug. 29,
2012) (SR-CBOE-2012-043) (order approving changes to CBOE Rule 12.3
relating to spread margin rules).
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V. Accelerated Approval
The Commission finds good cause, pursuant to Section 19(b)(2) of
the Act,\31\ for approving the proposed rule change, as modified by
Amendment No. 1, prior to the 30th day after publication of Amendment
No. 1 in the Federal Register. In response to certain concerns raised
in the Aman Letter, FINRA proposed in Amendment No. 1 to eliminate the
increase in the margin requirement applicable to long positions in non-
margin eligible, non-equity securities to 100%. In Amendment No. 1,
FINRA also proposed other technical changes responsive to the comments
made in the Aman Letter. Accordingly, the Commission finds that good
cause exists to approve the proposal, as modified by Amendment No. 1,
on an accelerated basis.
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\31\ 15 U.S.C. 78s(b)(2).
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VI. Solicitation of Comments
Interested persons are invited to submit written data, views and
arguments concerning the foregoing, including whether Amendment No. 1
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 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
[[Page 54640]]
submissions should refer to File Number SR-FINRA-2012-024 and should be
submitted on or before September 26, 2012.
VII. Conclusion
It is therefore ordered, pursuant to Section 19(b)(2) of the
Act,\32\ that the proposed rule change (SR-FINRA-2012-024), as modified
by Amendment No. 1, be and hereby is, approved on an accelerated basis.
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\32\ 15 U.S.C. 78s(b)(2).
For the Commission, by the Division of Trading and Markets,
pursuant to delegated authority.\33\
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\33\ 17 CFR 200.30-3(a)(12).
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Kevin M. O'Neill,
Deputy Secretary.
[FR Doc. 2012-21761 Filed 9-4-12; 8:45 am]
BILLING CODE 8011-01-P
