Federal Register / Vol. 72, No. 53 / Tuesday, March 20, 2007 / Notices 13149 

9 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(1). 

2 17 CFR 240.19b–4. 

3 15 U.S.C. 78s(b)(3)(A). 

4 17 CFR 240.19b–4(f)(6). 

with respect to the proposed rule 

change that are filed with the 

Commission, and all written 

communications relating to the 

proposed rule change between the 

Commission and any person, other than 

those that may be withheld from the 

public in accordance with the 

provisions of 5 U.S.C. 552, will be 

available for inspection and copying in 

the Commission’s Public Reference 

Room. Copies of such filing also will be 

available for inspection and copying at 

the principal office of the BSE. 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–BSE–2007–11 and should 

be submitted on or before April 10, 

2007. 

For the Commission, by the Division of 

Market Regulation, pursuant to delegated 

authority.9

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. E7–4976 Filed 3–19–07; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–55471; File No. SR–NASD–

2007–013] 

Self-Regulatory Organizations; 

National Association of Securities 

Dealers, Inc.; Notice of Filing and 

Immediate Effectiveness of Proposed 

Rule Change Relating to Portfolio 

Margin 

March 14, 2007. 

Pursuant to Section 19(b)(1) of the 

Securities Exchange Act of 1934 (‘‘Act’’

or ‘‘Exchange Act’’) 1 and Rule 19b–4 

thereunder,2 notice is hereby given that 

on February 12, 2007, the National 

Association of Securities Dealers, Inc. 

(‘‘NASD’’) filed with the Securities and 

Exchange Commission (‘‘Commission’’) 

the proposed rule change as described 

in Items I, II, and III below, which Items 

have been prepared by NASD. NASD 

has filed the proposed rule as a ‘‘noncontroversial’’ rule change pursuant to 

Section 19(b)(3)(A) of the Act 3 and Rule 

19b–4(f)(6) thereunder,4 which renders 

it effective upon filing with the 

Commission. 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 

NASD proposes to amend NASD Rule 

2520 to permit members to margin 

certain products according to a 

prescribed portfolio margin 

methodology on a pilot basis. NASD 

further proposes to amend NASD Rule 

2860 to require that a disclosure 

statement and written acknowledgement 

for use with the proposed portfolio 

margin program be furnished to 

customers using a portfolio margin 

account. 

Below is the text of the proposed rule 

change. Proposed new rule language is 

in italics. 

* * * * * 

2520. Margin Requirements 

(a) through (f) No Change. 

(g) Portfolio Margin 

As an alternative to the ‘‘strategybased’’ margin requirements set forth in 

paragraphs (a) through (f) of this Rule, 

members may elect to apply the 

portfolio margin requirements set forth 

in this paragraph (g) to all margin equity 

securities,1 listed options, security 

futures products (as defined in Section 

3(a)(56) of the Exchange Act), unlisted 

derivatives, warrants, index warrants 

and related instruments, provided that 

the requirements of paragraph 

(g)(6)(B)(i) of this Rule are met. 

In addition, a member, provided that 

it is a Futures Commission Merchant 

(‘‘FCM’’) and is either a clearing 

member of a futures clearing 

organization or has an affiliate that is a 

clearing member of a futures clearing 

organization, is permitted under this 

paragraph (g) to combine an eligible 

participant’s related instruments as 

defined in paragraph (g)(2)(D), with 

listed index options, unlisted 

derivatives, options on exchange traded 

funds (‘‘ETF’’), index warrants and 

underlying instruments and compute a 

margin requirement for such combined 

products on a portfolio margin basis. 

The portfolio margin provisions of 

this Rule shall not apply to Individual 

Retirement Accounts (‘‘IRAs’’). 

(1) Monitoring.—Members must 

monitor the risk of portfolio margin 

accounts and maintain a comprehensive 

written risk analysis methodology for 

assessing the potential risk to the 

member’s capital over a specified range 

of possible market movements of 

positions maintained in such accounts. 

The risk analysis methodology shall 

specify the computations to be made, 

the frequency of computations, the 

records to be reviewed and maintained, 

and the person(s) within the 

organization responsible for the risk 

function. This risk analysis 

methodology must be filed with NASD, 

or the member’s designated examining 

authority (‘‘DEA’’) if other than NASD, 

and submitted to the Commission prior 

to the implementation of portfolio 

margining. In performing the risk 

analysis of portfolio margin accounts 

required by this Rule, each member 

shall include in the written risk analysis 

methodology procedures and guidelines 

for: 

(A) obtaining and reviewing the 

appropriate account documentation 

and financial information necessary for 

assessing the amount of credit to be 

extended to eligible participants; 

(B) the determination, review and 

approval of credit limits to each eligible 

participant, and across all eligible 

participants, utilizing a portfolio margin 

account; 

(C) monitoring credit risk exposure to 

the member from portfolio margin 

accounts, on both an intra-day and end 

of day basis, including the type, scope 

and frequency of reporting to senior 

management; 

(D) the use of stress testing of portfolio 

margin accounts in order to monitor 

market risk exposure from individual 

accounts and in the aggregate; 

(E) the regular review and testing of 

these risk analysis procedures by an 

independent unit such as internal audit 

or other comparable group; 

(F) managing the impact of credit 

extended related to portfolio margin 

accounts on the member’s overall risk 

exposure; 

(G) the appropriate response by 

management when limits on credit 

extensions related to portfolio margin 

accounts have been exceeded; and 

(H) determining the need to collect 

additional margin from a particular 

eligible participant, including whether 

that determination was based upon the 

creditworthiness of the participant and/ 

or the risk of the eligible product. 

Moreover, management must 

periodically review, in accordance with 

written procedures, the member’s credit 

extension activities for consistency with 

these guidelines. Management must 

periodically determine if the data 

necessary to apply this paragraph (g) is 

accessible on a timely basis and 

information systems are available to 

adequately capture, monitor, analyze 

and report relevant data. 

(2) Definitions.—For purposes of this 

paragraph (g), the following terms shall 

have the meanings specified below: 


pwalker on PROD1PC71 with NOTICES
13150 Federal Register / Vol. 72, No. 53 / Tuesday, March 20, 2007 / Notices 

(A) The term ‘‘listed option’’ means 

any equity-based or equity index-based 

option traded on a registered national 

securities exchange or automated 

facility of a registered national 

securities association. 

(B) The term ‘‘portfolio’’ means any 

eligible product, as defined in 

paragraph (g)(6)(B)(i), grouped with its 

underlying instruments and related 

instruments. 

(C) The term ‘‘product group’’ means 

two or more portfolios of the same type 

(see table in paragraph (g)(2)(F)below) 

for which it has been determined by SEC 

Rule 15c3–1a that a percentage of 

offsetting profits may be applied to 

losses at the same valuation point. 

(D) The term ‘‘related instrument’’

within a security class or product group 

means broad-based index futures and 

options on broad-based index futures 

covering the same underlying 

instrument. The term ‘‘related 

instrument’’ does not include security 

futures products. 

(E) The term ‘‘security class’’ refers to 

all listed options, security futures 

products, unlisted derivatives, and 

related instruments covering the same 

underlying instrument and the 

underlying instrument itself. 

(F) The term ‘‘theoretical gains and 

losses’’ means the gain and loss in the 

value of individual eligible products 

and related instruments at ten 

equidistant intervals (valuation points) 

ranging from an assumed movement 

(both up and down) in the current 

market value of the underlying 

instrument. The magnitude of the 

valuation point range shall be as 

follows: 

Portfolio type 

Up/down market 

move 

(high & low valuation 

points) 

High Capitalization, 

Broad-based Market Index 2.

+6% / ¥8% 

Non-High Capitalization, Broad-based 

Market Index 3.

±10% 

Any other eligible 

product that is, or is 

based on, an equity 

security or a narrow-based index.

± 15% 

(G) The term ‘‘underlying instrument’’

means a security or security index upon 

which any listed option, unlisted 

derivative, security future, or broadbased index future is based. 

(H) The term ‘‘unlisted derivative’’

means any equity-based or equity indexbased unlisted option, forward contract, 

or security-based swap that can be 

valued by a theoretical pricing model 

approved by the Commission. 

(3) Approved Theoretical Pricing 

Models.—Theoretical pricing models 

must be approved by the Commission. 

(4) Eligible Participants.—The 

application of the portfolio margin 

provisions of this paragraph (g) is 

limited to the following: 

(A) any broker or dealer registered 

pursuant to Section 15 of the Exchange 

Act; 

(B) any member of a national futures 

exchange to the extent that listed index 

options, unlisted derivatives, options on 

ETFs, index warrants or underlying 

instruments hedge the member’s index 

futures; and 

(C) any person or entity not included 

in paragraphs (g)(4)(A) and (g)(4)(B) 

above approved for uncovered options 

and, if transactions in security futures 

are to be included in the account, 

approval for such transactions is also 

required. However, an eligible 

participant under this paragraph 

(g)(4)(C) may not establish or maintain 

positions in unlisted derivatives unless 

minimum equity of at least five million 

dollars is established and maintained 

with the member. For purposes of this 

minimum equity requirement, all 

securities and futures accounts carried 

by the member for the same eligible 

participant may be combined provided 

ownership across the accounts is 

identical. A guarantee pursuant to 

paragraph (f)(4) of this Rule is not 

permitted for purposes of the minimum 

equity requirement. 

(5) Opening of Accounts 

(A) Members must notify and receive 

approval from NASD, or the member’s 

DEA if other than NASD, prior to 

establishing a portfolio margin 

methodology for eligible participants. 

(B) Only eligible participants that 

have been approved to engage in 

uncovered short option contracts 

pursuant to NASD Rule 2860, or the 

rules of the member’s DEA if other than 

NASD, are permitted to utilize a 

portfolio margin account. 

(C) On or before the date of the initial 

transaction in a portfolio margin 

account, a member shall: 

(i) furnish the eligible participant with 

a special written disclosure statement 

describing the nature and risks of 

portfolio margining which includes an 

acknowledgement for all portfolio 

margin account owners to sign, attesting 

that they have read and understood the 

disclosure statement, and agree to the 

terms under which a portfolio margin 

account is provided (see NASD Rule 

2860(c)); and 

(ii) obtain the signed 

acknowledgement noted above from the 

eligible participant and record the date 

of receipt. (6) Establishing Account and 

Eligible Positions. 

(A) For purposes of applying the 

portfolio margin requirements 

prescribed in this paragraph (g), 

members are to establish and utilize a 

specific securities margin account, or 

sub-account of a margin account, 

clearly identified as a portfolio margin 

account that is separate from any other 

securities account carried for an eligible 

participant. 

A margin deficit in the portfolio 

margin account of an eligible 

participant may not be considered as 

satisfied by excess equity in another 

account. Funds and/or securities must 

be transferred to the deficient account 

and a written record created and 

maintained. However, if a portfolio 

margin account is carried as a subaccount of a margin account, excess 

equity in the margin account 

(determined in accordance with the 

rules applicable to a margin account 

other than a portfolio margin account) 

may be used to satisfy a margin deficit 

in the portfolio margin sub-account 

without having to transfer any funds 

and/or securities. 

(B) Eligible Products 

(i) For eligible participants as 

described in paragraphs (g)(4)(A) 

through (g)(4)(C), a transaction in, or 

transfer of, an eligible product may be 

effected in the portfolio margin account. 

Eligible products under this paragraph 

(g) consist of: 

(a) a margin equity security (including 

a foreign equity security and option on 

a foreign equity security, provided the 

foreign equity security is deemed to 

have a ‘‘ready market’’ under SEC Rule 

15c3–1 or a ‘‘no-action’’ position issued 

thereunder, and a control or restricted 

security, provided the security has met 

the requirements in a manner consistent 

with SEC Rule 144 or a Commission 

‘‘no-action’’ position issued thereunder, 

sufficient enough to permit the sale of 

the security, upon exercise or 

assignment of any listed option or 

unlisted derivative written or held 

against it, without restriction); 

(b) a listed option on an equity 

security or index of equity securities; 

(c) a security futures product; 

(d) an unlisted derivative on an equity 

security or index of equity securities; 

(e) a warrant on an equity security or 

index of equity securities; and 

(d) a related instrument as defined in 

paragraph (g)(2)(D). 

(7) Margin Required.—The amount of 

margin required under this paragraph 

(g) for each portfolio shall be the greater 

of: 


pwalker on PROD1PC71 with NOTICES
Federal Register / Vol. 72, No. 53 / Tuesday, March 20, 2007 / Notices 13151 

(A) the amount for any of the ten 

equidistant valuation points 

representing the largest theoretical loss 

as calculated pursuant to paragraph 

(g)(8) below; or 

(B) for eligible participants as 

described in paragraph (g)(4)(A) through 

(g)(4)(C), $.375 for each listed option, 

unlisted derivative, security future 

product, and related instrument, 

multiplied by the contract’s or 

instrument’s multiplier, not to exceed 

the market value in the case of long 

contracts in eligible products. 

(C) Account guarantees pursuant to 

paragraph (f)(4) of this Rule are not 

permitted for purposes of meeting 

margin requirements. 

(D) Positions other than those listed in 

Paragraph (g)(6)(B)(i) above are not 

eligible for portfolio margin treatment. 

However, positions not eligible for 

portfolio margin treatment (except for 

ineligible related instruments) may be 

carried in a portfolio margin account, 

provided the member has the ability to 

apply the applicable strategy-based 

margin requirements promulgated 

under this Rule. Shares of a money 

market mutual fund may be carried in 

a portfolio margin account, also subject 

to the applicable strategy-based margin 

requirement under this Rule provided 

that: 

(i) the customer waives any right to 

redeem shares without the member’s 

consent; 

(ii) the member (or, if the shares are 

deposited with a clearing organization, 

the clearing organization) obtains the 

right to redeem shares in cash upon 

request; 

(iii) the fund agrees to satisfy any 

conditions necessary or appropriate to 

ensure that the shares may be redeemed 

in cash, promptly upon request; and 

(iv) the member complies with the 

requirements of Section 11(d)(1) of the 

Exchange Act and SEC Rule 11d1–2 

thereunder. 

(8) Method of Calculation 

(A) Long and short positions in 

eligible products, including underlying 

instruments and related instruments, 

are to be grouped by security class; each 

security class group being a ‘‘portfolio.’’

Each portfolio is categorized as one of 

the portfolio types specified in 

paragraph (g)(2)(F) above, as applicable. 

(B) For each portfolio, theoretical 

gains and losses are calculated for each 

position as specified in paragraph 

(g)(2)(F) above. For purposes of 

determining the theoretical gains and 

losses at each valuation point, members 

shall obtain and utilize the theoretical 

values of eligible products as described 

in this paragraph (g) rendered by an 

approved theoretical pricing model. 

(C) Offsets. Within each portfolio, 

theoretical gains and losses may be 

netted fully at each valuation point. 

Offsets between portfolios within the 

eligible product groups, as described in 

paragraph (g)(2)(F), may then be applied 

as permitted by SEC Rule 15c3–1a. 

(D) After applying the offsets above, 

the sum of the greatest loss from each 

portfolio is computed to arrive at the 

total margin required for the account 

(subject to the per contract minimum). 

(E) In addition, if a security that is 

convertible, exchangeable, or 

exercisable into a security that is an 

underlying instrument requires the 

payment of money or would result in a 

loss if converted, exchanged, or 

exercised at the time when the security 

is deemed an underlying instrument, the 

full amount of the conversion loss is 

required. 

(9) Portfolio Margin Minimum Equity 

Deficiency 

(A) If, as of the close of business, the 

equity in the portfolio margin account of 

an eligible participant as described in 

paragraph (g)(4)(C), declines below the 

five million dollar minimum equity 

required, if applicable, and is not 

restored to at least five million dollars 

within three business days by a deposit 

of funds and/or securities or through 

favorable market action, members are 

prohibited from accepting new opening 

orders beginning on the fourth business 

day, except that new opening orders 

entered for the purpose of reducing 

market risk may be accepted if the result 

would be to lower margin requirements. 

This prohibition shall remain in effect 

until, 

(i) equity of five million dollars is 

established, or 

(ii) all unlisted derivatives are 

liquidated or transferred from the 

portfolio margin account to the 

appropriate securities account. 

(B) Members will not be permitted to 

deduct any portfolio margin minimum 

equity deficiency amount from Net 

Capital in lieu of collecting the 

minimum equity required. 

(10) Portfolio Margin Deficiency 

(A) If, as of the close of business, the 

equity in the portfolio margin account of 

an eligible participant, as described in 

paragraph (g)(4)(A) through (g)(4)(C), is 

less than the margin required, the 

eligible participant may deposit 

additional funds and/or securities or 

establish a hedge to meet the margin 

requirement within three business days. 

After the three business day period, 

members are prohibited from accepting 

new opening orders, except that new 

opening orders entered for the purpose 

of reducing market risk may be accepted 

if the result would be to lower margin 

requirements. In the event an eligible 

participant fails to hedge existing 

positions or deposit additional funds 

and/or securities in an amount 

sufficient to eliminate any margin 

deficiency after three business days, the 

member must liquidate positions in an 

amount sufficient to, at a minimum, 

lower the total margin required to an 

amount less than or equal to the 

account equity. 

(B) If the portfolio margin deficiency 

is not met by the close of business on 

the next business day after the business 

day on which such deficiency arises, 

members will be required to deduct the 

amount of the deficiency from Net 

Capital until such time the deficiency is 

satisfied or positions are liquidated 

pursuant to paragraph (g)(10)(A) above. 

(C) Members will not be permitted to 

deduct any portfolio margin deficiency 

amount from Net Capital in lieu of 

collecting the margin required. 

(D) NASD, or the member’s DEA if 

other than NASD, may grant additional 

time for an eligible participant to meet 

a portfolio margin deficiency upon 

written request, which is expected to be 

granted in extraordinary circumstances 

only. 

(E) Notwithstanding the provisions of 

subparagraph (B) above, members 

should not permit an eligible participant 

to make a practice of meeting a portfolio 

margin deficiency by liquidation. 

Members must have procedures in place 

to identify accounts that periodically 

liquidate positions to eliminate margin 

deficiencies, and the member is 

expected to take appropriate action 

when warranted. Liquidation to 

eliminate margin deficiencies that are 

caused solely by adverse price 

movements may be disregarded. 

(11) Determination of Value for 

Margin Purposes.—For the purposes of 

this paragraph (g), all eligible products 

shall be valued at current market prices. 

Account equity for the purposes of 

paragraphs (g)(9)(A) and (g)(10)(A) shall 

be calculated separately for each 

portfolio margin account by adding the 

current market value of all long 

positions, subtracting current market 

value of all short positions, and adding 

the credit (or subtracting the debit) 

balance in the account. 

(12) Net Capital Treatment of 

Portfolio Margin Accounts 

(A) No member that requires margin 

in any portfolio account pursuant to 

paragraph (g) of this Rule shall permit 

the aggregate portfolio margin 

requirements to exceed ten times its Net 

Capital for any period exceeding three 

business days. The member shall, 

beginning on the fourth business day, 


pwalker on PROD1PC71 with NOTICES
13152 Federal Register / Vol. 72, No. 53 / Tuesday, March 20, 2007 / Notices 

5 15 U.S.C. 78g. 

6See Federal Reserve System, ‘‘Securities Credit 

Transactions; Borrowing by Broker and Dealers’’; 

Regulations G, T, U and X; Dockets Nos. R–0905, 

R–0923 and R–0944, 63 FR 2806 (January 16, 1998). 

7For purposes of the rule, the term ‘‘margin 

equity security’’ uses the definition at Section 220.2 

of Regulation T of the Board of Governors of the 

Federal Reserve System. 

8For purposes of the rule, ‘‘security futures 

product’’ uses the definition at Section 3(a)(56) of 

the Act. 

9For purposes of the rule, the term ‘‘unlisted 

derivatives’’ is defined in Rule 2520(g)(2)(H). 

10For purposes of the rule, the term ‘‘related 

instrument’’ is defined in Rule 2520(g)(2)(D). 

11For purposes of the rule, the term ‘‘underlying 

instrument’’ is defined in Rule 2520(g)(2)(G). 

cease opening new portfolio margin 

accounts until compliance is achieved. 

(B) If, at any time, a member’s 

aggregate portfolio margin requirements 

exceed ten times its Net Capital, the 

member shall immediately transmit 

telegraphic or facsimile notice of such 

deficiency to the principal office of the 

Commission in Washington, D.C., the 

district or regional office of the 

Commission for the district or region in 

which the member maintains its 

principal place of business; and to 

NASD, or the member’s DEA if other 

than NASD. Notice to NASD shall be in 

such form as NASD may prescribe. 

(13) Day Trading Requirements.—The 

day trading restrictions promulgated 

under paragraph (f)(8)(B) of this Rule 

shall not apply to portfolio margin 

accounts that establish and maintain at 

least five million dollars in equity, 

provided that a member has the ability 

to monitor the intra-day risk associated 

with day trading. Portfolio margin 

accounts that do not establish and 

maintain at least five million dollars in 

equity will be subject to the day trading 

restrictions under paragraph (f)(8)(B) of 

this Rule, provided the member has the 

ability to apply the applicable day 

trading requirement under this Rule. 

However, if the position or positions day 

traded were part of a hedge strategy, the 

day trading restrictions will not apply. 

A ‘‘hedge strategy’’ for purposes of this 

Rule means a transaction or a series of 

transactions that reduces or offsets a 

material portion of the risk in a 

portfolio. Members are expected to 

monitor these portfolio margin accounts 

to detect and prevent circumvention of 

the day trading requirements. 

(14) Requirements to Liquidate 

(A) A member is required immediately 

either to liquidate, or transfer to another 

broker-dealer eligible to carry portfolio 

margin accounts, all portfolio margin 

accounts with positions in related 

instruments if the member is: 

(i) insolvent as defined in section 101 

of title 11 of the United States Code, or 

is unable to meet its obligations as they 

mature; 

(ii) the subject of a proceeding 

pending in any court or before any 

agency of the United States or any State 

in which a receiver, trustee, or 

liquidator for such debtor has been 

appointed; 

(iii) not in compliance with applicable 

requirements under the Exchange Act or 

rules of the Commission or any selfregulatory organization with respect to 

financial responsibility or 

hypothecation of eligible participant’s 

securities; or 

(iv) unable to make such 

computations as may be necessary to 

establish compliance with such 

financial responsibility or 

hypothecation rules. 

(B) Nothing in this paragraph (g)(14) 

shall be construed as limiting or 

restricting in any way the exercise of 

any right of a registered clearing agency 

to liquidate or cause the liquidation of 

positions in accordance with its by-laws 

and rules. 

(15) Members must ensure that 

portfolio accounts are in compliance 

with Rule 2860. 

llllllll 

1 For purposes of this paragraph (g) of the 

Rule, the term ‘‘margin equity security’’

utilizes the definition at Section 220.2 of 

Regulation T of the Board of Governors of the 

Federal Reserve System. 2 In accordance with paragraph (b)(1)(i)(B) 

of SEC Rule 15c3–1a (Appendix A to SEC 

Rule 15c3–1), 17 CFR 240.15c3–1a(b)(1)(i)(B). 3See footnote 2. 

* * * * * 

2860. Options 

(a) through (b) No Change. 

(c) Portfolio Margining Disclosure 

Statement and Acknowledgement 

The special written disclosure 

statement describing the nature and 

risks of portfolio margining, and 

acknowledgement for an eligible 

participant signature, required by Rule 

2520(g)(5)(C) shall be in a format 

prescribed by NASD or in a format 

developed by the member, provided it 

contains substantially similar 

information as in the prescribed NASD 

format and has received the prior 

written approval of NASD. 

* * * * * 

II. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

In its filing with the Commission, 

NASD 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. NASD has prepared 

summaries, set forth in sections A, B, 

and C below, of the most significant 

aspects of such statements. 

A. Self-Regulatory Organization’s 

Statement of the Purpose of, and 

Statutory Basis for, the Proposed Rule 

Change 

1. Purpose 

Background. Section 7(a) of the Act 5

authorizes the Board of Governors of the 

Federal Reserve System to prescribe the 

rules and regulations regarding credit 

that may be extended by broker-dealers 

on securities to their customers as set 

forth in Regulation T. Currently, Rule 

2520 (Margin Requirements) prescribes 

minimum maintenance margin 

requirements for customer accounts 

held by members based on position or 

strategy-based margin requirements. 

This methodology applies prescribed 

margin percentage requirements to each 

security position and/or strategy, either 

long or short, held in a customer’s 

account. 

The Board of Governors of the Federal 

Reserve System in its amendments to 

Regulation T in 1998 permitted selfregulatory organizations to implement 

portfolio margin rules, subject to 

Commission approval.6 Accordingly, 

NASD is filing the proposed rule change 

to allow members to extend a portfolio 

margin methodology to eligible 

participants as an alternative to the 

current margin requirements. 

As further detailed herein, the 

proposed rule change would amend 

NASD Rule 2520 on a pilot basis to 

allow members, subject to specified 

conditions, to elect to apply a portfolio 

margin methodology to all margin 

equity securities,7 listed options, 

security futures products,8 unlisted 

derivatives,9 warrants, index warrants, 

and related instruments.10 In addition, a 

member, provided that it is a futures 

commission merchant (‘‘FCM’’) and is 

either a clearing member of a futures 

clearing organization or has an affiliate 

that is a clearing member of a futures 

clearing organization, would be 

permitted to combine an eligible 

participant’s related instruments with 

listed index options, unlisted 

derivatives, options on exchange traded 

funds (‘‘ETF’’), index warrants, and 

underlying instruments 11 and compute 

a margin requirement for such 

combined products on a portfolio 

margin basis. 

The proposed rule change is 

substantially similar to recent margin 


pwalker on PROD1PC71 with NOTICES
Federal Register / Vol. 72, No. 53 / Tuesday, March 20, 2007 / Notices 13153 

12See Securities Exchange Act Release No. 54918 

(December 12, 2006), 71 FR 75790 (December 18, 

2006) (SR–NYSE–2006–13, relating to further 

amendments to the NYSE’s portfolio margin pilot 

program); Securities Exchange Act Release No. 

54125 (July 11, 2006), 71 FR 40766 (July 18, 2006) 

(SR–NYSE–2005–93, relating to amendments to the 

NYSE’s portfolio margin pilot program); Securities 

Exchange Act Release No. 52031 (July 14, 2005), 70 

FR 42130 (July 21, 2005) (SR–NYSE–2002–19, 

relating to the NYSE’s original portfolio margin 

pilot). See also Securities Exchange Act Release No. 

54919 (December 12, 2006), 71 FR 75781 (December 

18, 2006) (SR–CBOE–2006–014, relating to 

amendments to the CBOE’s portfolio margin pilot); 

Securities Exchange Act Release No. 52032 (July 14, 

2005), 70 FR 42118 (July 21, 2005) (SR–CBOE–

2002–03, relating to the CBOE’s original portfolio 

margin pilot). 

13Products would be grouped into a single 

portfolio that is based on the same index or issuer. 

14Currently, the only model that is approved by 

the Commission is The Options Clearing 

Corporation’s Theoretical Intermarket Margining 

System (TIMS). 

rule amendments by the New York 

Stock Exchange (‘‘NYSE’’) and the 

Chicago Board Options Exchange 

(‘‘CBOE’’), which were approved by the 

Commission.12 Consistent with the 

NYSE and CBOE programs, the 

proposed rule change would be 

available as a pilot beginning on April 

2, 2007 and ending on July 31, 2007, 

unless the Commission approves an 

extension of the pilot or adoption of the 

program on a permanent basis. 

Portfolio Margin. Portfolio margining 

is a margin methodology that sets 

margin requirements for an account 

based on the greatest projected net loss 

of all positions in a product class or 

group 13 using computer modeling to 

perform risk analysis using multiple 

pricing scenarios. These scenarios are 

designed to measure the theoretical loss 

of the positions given changes in both 

the underlying price and implied 

volatility inputs to the model. 

Accordingly, the margin required is 

based on the greatest loss that would be 

incurred in a portfolio if the value of its 

components move up or down by a 

predetermined amount. 

Margin Calculation. Under the 

proposed rule change, a gain or loss on 

each position in the portfolio would be 

calculated on each of ten equidistant 

points along a range representing a 

potential percentage increase and 

decrease in the value of the instrument 

or underlying instrument in the case of 

a derivative product. For portfolios of 

only highly capitalized broad-based 

indexes, the range would be between a 

market increase of 6% and a decrease of 

8%. For non-highly capitalized broadbased indexes the range would be +/ 

¥10%. For portfolios of equity options, 

narrow-based index options and/or 

security futures, the risk-array for 

computing the portfolio margin 

requirement would be up/down market 

moves of +/¥15%. 

Options having the same underlying 

security (or index in the case of an 

index option), the underlying security 

itself, and any related futures, options 

on futures or security futures products 

could be combined as a portfolio for 

purposes of computing a portfolio 

margin requirement. The Commission 

approved theoretical options pricing 

model would be used to derive position 

values at each valuation point for the 

purpose of determining the gain or 

loss.14 The gains and losses are netted 

to derive a potential portfolio gain or 

loss for the point. The margin 

requirement for the portfolio is the 

amount of the greatest loss among the 

calculation points. Certain portfolios 

would be allowed offsets such that, at 

the same valuation point, a gain in one 

portfolio may reduce or offset the loss 

in another portfolio. The amount of 

offset allowed between portfolios would 

be the same as permitted under SEC 

Rule 15c3–1a for computing a brokerdealer’s net capital. The margin 

requirement for each portfolio would 

then be added together to calculate the 

total margin requirement for the 

portfolio margin account. 

In addition, the proposed rule change 

prescribes a minimum margin 

requirement of $.375 for each listed 

option, unlisted derivative, security 

futures product, and related instrument 

multiplied by the contract or 

instrument’s multiplier. This minimum 

amount of margin ensures that a certain 

level of margin is required from the 

customer in the event that the greatest 

loss among the valuation points is a de 

minimis amount. 

Generally, a customer benefits from 

portfolio margining in that margin 

requirements calculated on net position 

risk are generally lower than strategybased margin methodologies currently 

in place. In permitting margin 

computation based on actual net risk, 

members would no longer be required to 

compute a margin requirement for each 

individual position or strategy in a 

customer’s account. 

Monitoring and Risk Management. 

However, as a pre-condition to 

permitting portfolio margining, the 

member would be required to establish 

comprehensive written risk analysis 

methodology to assess the potential risk 

to the member’s capital over a specified 

range of possible market movements. In 

performing the risk analysis, the 

member would be required to include in 

the written risk analysis methodology 

procedures and guidelines for (1) 

obtaining and reviewing account 

documentation and financial 

information to assess the amount of 

credit to be extended to eligible 

participants; (2) the determination, 

review, and approval of credit limits to 

each eligible participant, and across all 

eligible participants, utilizing a portfolio 

margin account; (3) monitoring credit 

risk exposure to the member’s capital, 

on both a intra-day and end of day basis, 

including the type, scope and frequency 

of reporting to senior management; (4) 

the use of stress testing of portfolio 

margin accounts in order to monitor 

market risk exposure from individual 

accounts and in the aggregate; (5) the 

regular review and testing of the 

procedures by an independent unit; (6) 

managing the impact of credit extended 

related to portfolio margin accounts on 

the member’s overall risk exposure; (7) 

the appropriate response by 

management when credit extensions 

have been exceeded; and (8) 

determining when additional margin 

may need to be collected. 

Members would be required to 

periodically review their credit 

extension activities for consistency with 

their guidelines and determine if the 

data necessary to apply portfolio 

margining is accessible on a timely basis 

and information systems are available to 

adequately capture, monitor, analyze 

and report relevant data. The risk 

analysis methodology must be filed with 

NASD, or the member’s designated 

examining authority (‘‘DEA’’) if other 

than NASD, and submitted to the 

Commission prior to implementation of 

portfolio margining. The proposed rule 

change also requires members to notify 

and receive approval from NASD or the 

member’s DEA if other than NASD, 

prior to establishing a portfolio margin 

methodology for eligible participants. 

Eligible Participants. The proposed 

rule change would permit the following 

persons to engage in portfolio 

margining: (1) Any broker or dealer 

registered pursuant to Section 15 of the 

Act; (2) any member of a national 

futures exchange to the extent that listed 

index options, unlisted derivatives, 

options on ETFs, index warrants or 

underlying instruments hedge the 

member’s index futures; and (3) any 

person approved to engage in uncovered 

option contracts, and if security futures 

are to be included in the account, 

approval for such transactions is also 

required. However, an eligible 

participant under category (3) may not 

establish or maintain positions in 

unlisted derivatives unless minimum 

equity of at least five million dollars is 

established and maintained with the 

member. If the account of a participant 

subject to the five million dollar 


pwalker on PROD1PC71 with NOTICES
13154 Federal Register / Vol. 72, No. 53 / Tuesday, March 20, 2007 / Notices 

15See supra note 12. 

16 15 U.S.C. 78o–3(b)(6). 

17 15 U.S.C. 78s(b)(3)(A)(iii). 

18 17 CFR 240.19b–4(f)(6). 

19NASD has satisfied the five day pre-filing 

requirement. 

requirement falls below such minimum 

requirement, it must be restored within 

three business days. A member would 

be prohibited from accepting new 

opening orders beginning on the fourth 

business day, except for new opening 

orders entered solely for the purpose of 

reducing market risk, where the result 

would be to lower margin requirements. 

Margin Deficiencies. Under the 

proposed rule change, participants 

would be required to satisfy a margin 

deficiency in a portfolio margin account 

within three business days by the 

deposit of additional funds and/or 

securities or by the establishment of a 

hedge that would reduce margin 

requirements. In the event the 

deficiency is not satisfied after three 

business days, the member must 

liquidate positions to eliminate the 

deficiency. A member would be 

required to deduct from its net capital 

the amount of any margin deficiency not 

satisfied by the close of business on the 

next business day after the business day 

on which the deficiency arises and 

continuing until the deficiency is 

satisfied. Members should not permit an 

eligible participant to make a practice of 

meeting a portfolio margin deficiency by 

liquidation and would be required to 

identify accounts that periodically 

liquidate positions to eliminate margin 

deficiencies. 

Establishing Account. Members 

would be permitted to use a specific 

securities margin account or a subaccount of a margin account clearly 

identified as a portfolio margin account. 

The account must be separate from any 

other securities account. In the event a 

portfolio margin account is a 

subaccount of a regular margin account, 

a member would be allowed to use 

excess equity in the regular margin 

account to meet a margin deficiency in 

the portfolio margin account. In 

addition, securities, including money 

market funds, that are not eligible for 

portfolio margin treatment would be 

allowed to be carried in a portfolio 

margin account for their collateral 

value, subject to the margin requirement 

applicable in a regular securities margin 

account. 

Day Trading. The day trading 

restrictions in Rule 2520 would not 

apply to portfolio margin accounts that 

establish and maintain at least five 

million dollars in equity, provided that 

a member has the ability to monitor the 

intra-day risk associated with day 

trading. Portfolio margin accounts that 

do not establish and maintain at least 

five million dollars in equity would 

otherwise be subject to the day trading 

restrictions. However, if the position or 

positions day traded were part of a 

hedge strategy, the day trading 

restrictions would not apply. A ‘‘hedge 

strategy’’ for purposes of the rule means 

a transaction or a series of transactions 

that reduces or offsets a material portion 

of the risk in a portfolio. Members 

would be expected to monitor portfolio 

accounts to detect and prevent 

circumvention of the day trading 

requirements. 

Net Capital Treatment. The proposed 

rule change would provide that the 

aggregate portfolio margin and 

maintenance requirements may not 

exceed ten times the member’s net 

capital, as computed under SEC Rule 

15c3–1. This requirement places a 

ceiling on the amount of portfolio 

margin a broker-dealer can extend to its 

customers. 

Disclosure Document. NASD Rule 

2860(b)(11) prescribes requirements for 

the delivery of options disclosure 

documents concerning the opening of 

customer accounts. Under the proposed 

rule change, members would be 

required to provide every portfolio 

margin customer with a written risk 

disclosure statement at or prior to the 

initial transaction in a portfolio margin 

account. The disclosure would be in a 

format prescribed by NASD or in a 

format developed by the member, 

provided it contains substantially 

similar information as in the prescribed 

NASD format and has received the prior 

written approval of NASD. NASD will 

issue a Notice to Members to set forth 

the language required in the written 

disclosure statement. 

NASD has filed the proposed rule 

change for immediate effectiveness. As 

noted above, the proposed rule change 

would establish a pilot program that 

would begin on April 2, 2007 and end 

on July 31, 2007 to conform to the time 

periods of the similar portfolio margin 

pilot programs of the NYSE and 

CBOE.15

2. Statutory Basis 

NASD believes that the proposed rule 

change is consistent with the provisions 

of Section 15A(b)(6) of the Act,16 which 

requires, among other things, that NASD 

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. NASD 

believes that the proposed rule change 

will better align the margin 

requirements with actual risk. 

B. Self-Regulatory Organization’s 

Statement on Burden on Competition 

NASD 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 

The foregoing proposed rule change is 

subject to Section 19(b)(3)(A)(iii) of the 

Act 17 and Rule 19b–4(f)(6) 18 because 

the proposal: (i) Does not significantly 

affect the protection of investors or the 

public interest; (ii) does not impose any 

significant burden on competition; and 

(iii) does not become operative prior to 

30 days after the date of filing or such 

shorter time as the Commission may 

designate if consistent with the 

protection of investors and the public 

interest; provided that NASD has given 

the Commission notice of its intent to 

file the proposed rule change, along 

with a brief description and text of the 

proposed rule change, or such shorter 

time as designated by the 

Commission.19

At any time within 60 days of the 

filing of such proposed rule change, the 

Commission may summarily abrogate 

such rule change if it appears to the 

Commission that such action is 

necessary or appropriate in the public 

interest, for the protection of investors, 

or otherwise in furtherance of the 

purposes of the Act. 

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 (http://www.sec.gov/ 

rules/sro.shtml); or 

• Send an e-mail to rulecomments@sec.gov. Please include File 

Number SR–NASD–2007–013 on the 

subject line. 


pwalker on PROD1PC71 with NOTICES
Federal Register / Vol. 72, No. 53 / Tuesday, March 20, 2007 / Notices 13155 

20 17 CFR 200.30–3(a)(12). 

1 15 U.S.C. 78s(b)(l). 

2 17 CFR 240.19b–4. 

3See Securities Exchange Act Release No. 55215 

(January 31, 2007), 72 FR 5783 (February 7, 2007). 

4See NYSE Arca Rule 1.1(q). 

5See NYSE Arca Rule 1.1(r). 

6See Securities Exchange Act Release No. 54238 

(July 28, 2006), 71 FR 44758 (August 7, 2006) (SR–

NYSEArca–2006–13). 

7 In approving this proposed rule change, the 

Commission has considered the proposed rule’s 

impact on efficiency, competition, and capital 

formation. See 15 U.S.C. 78c(f). 8 15 U.S.C. 78f(b)(5). 

Paper Comments 

• Send paper comments in triplicate 

to Nancy M. Morris, Secretary, 

Securities and Exchange Commission, 

100 F Street, NE., Washington, DC 

20549–1090. 

All submissions should refer to File 

Number SR–NASD–2007–013. This file 

number should be included on the 

subject line if e-mail is used. To help the 

Commission process and review your 

comments more efficiently, please use 

only one method. The Commission will 

post all comments on the Commission’s 

Internet Web site (http://www.sec.gov/ 

rules/sro.shtml). Copies of the 

submission, all subsequent 

amendments, all written statements 

with respect to the proposed rule 

change that are filed with the 

Commission, and all written 

communications relating to the 

proposed rule change between the 

Commission and any person, other than 

those that may be withheld from the 

public in accordance with the 

provisions of 5 U.S.C. 552, will be 

available for inspection and copying in 

the Commission’s Public Reference 

Room. Copies of such filing also will be 

available for inspection and copying at 

the principal office of NASD. All 

comments received will be posted 

without change; the Commission does 

not edit personal identifying 

information from submissions. You 

should submit only information that 

you wish to make available publicly. All 

submissions should refer to File 

Number SR–NASD–2007–013 and 

should be submitted on or before April 

10, 2007. 

For the Commission, by the Division of 

Market Regulation, pursuant to delegated 

authority.20

Florence E. Harmon, 

Deputy Secretary. 

[FR Doc. E7–4973 Filed 3–19–07; 8:45 am] 

BILLING CODE 8010–01–P 

SECURITIES AND EXCHANGE 

COMMISSION 

[Release No. 34–55446; File No. SR–

NYSEArca-2006–51] 

Self-Regulatory Organizations; NYSE 

Arca, Inc.; Order Granting Approval of 

Proposed Rule Change Relating to 

Amendments to Registration Rules of 

NYSE Arca, Inc 

March 12, 2007. 

I. Introduction 

On November 14, 2006, NYSE Arca, 

Inc. (‘‘NYSE Arca’’ or ‘‘Exchange’’) 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 relating to amendments to 

registration rules of the Exchange. NYSE 

Arca filed Amendment No. 1 to the 

proposed rule change on January 12, 

2007. The proposed rule change, as 

amended, was published for comment 

in the Federal Register on February 7, 

2007.3 The Commission received no 

comments on the proposal. This order 

approves the proposed rule change, as 

amended. 

II. Description of the Proposal 

The Exchange proposed to amend 

certain NYSE Arca Rules governing 

registration procedures and ongoing 

compliance obligations for Options 

Trading Permit (‘‘OTP’’) Holders 4 and 

employees of OTP Firms 5 in order to (i) 

clarify registration procedures and make 

them consistent with the procedures of 

other self-regulatory organizations 

(‘‘SROs’’) and with the operation of the 

Central Registration Depository (‘‘CRD’’) 

system maintained by the National 

Association of Securities Dealers, Inc. 

(‘‘NASD’’) and (ii) include an additional 

registration category in connection with 

the Exchange’s new options trading 

platform, OX.6

Specifically, the Exchange proposed 

to amend Rule 2.5(b)(10)(A) to provide 

for a new category, the Market Maker 

Authorized Trader, for individuals who 

perform market making activity on 

behalf of an OTP Firm on the OX 

trading facility. The amendment to that 

Rule also includes certain exceptions to 

the examination requirements. The 

Exchange also proposed to amend Rule 

2.5(c), its waiver standards, so that the 

Exchange’s practices are generally 

consistent with the criterion in NASD 

Rule 1070(d) and Supplementary 

Material .15(1)(b) to NYSE Rule 345. 

The Exchange also proposed to amend 

Rule 2.23 to provide manual registration 

procedures for registration categories 

(e.g., floor clerk) for which CRD does 

not provide electronic registration. In 

addition, the Exchange is consolidating 

its continuing education requirements 

in paragraph (d) of Rule 2.23 and 

deleting the continuing education 

requirements in Rule 9.27(c) and (d) to 

avoid needless repetition and risk of 

inconsistencies. Finally, the Exchange 

proposes to amend Rules 6.33 and 

6.34A(b)(2) to require Market Maker and 

Market Maker Authorized Trader 

applicants who have previously 

successfully completed the required 

examination but who have not been 

registered with the Exchange for six 

months or more to complete an 

orientation program prescribed by the 

Exchange. 

III. Discussion and Commission 

Findings 

The Commission has reviewed 

carefully the proposed rule change and 

finds that it is consistent with the 

requirements of the Act and the rules 

and regulations thereunder applicable to 

a national securities exchange.7 In 

particular, the Commission finds that 

the proposed rule change is consistent 

with Section 6(b)(5) of the Act,8 which, 

among other things, requires that the 

rules of a national securities exchange 

be designed to promote just and 

equitable principles of trade, to foster 

cooperation and coordination with 

persons engaged in regulating 

transactions in securities, to remove 

impediments to and perfect the 

mechanism of a free and open market 

and a national market system and, in 

general, to protect investors and the 

public interest. 

The Commission believes that 

clarifying the registration procedures 

and ongoing compliance obligations and 

making the registration procedures 

consistent with the procedures of the 

other SROs will benefit OTP Holders 

and employees of OTP Firms by making 

the registration process easier and more 

efficient. Furthermore, amending 

Exchange rules to be generally 

consistent with the rules of other SROs, 

market practices, and the operation of 


pwalker on PROD1PC71 with NOTICES